Least cost subsidy auctions for universal access telecom projects a practical implementation guide
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Hank Intven & Curt Howard EBRD, IDRC, JICA, Keio University ICT Seminar Tokyo, August 25, 2004 - PowerPoint PPT Presentation

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Least-Cost Subsidy Auctions for Universal Access Telecom Projects : A Practical Implementation Guide. Hank Intven & Curt Howard EBRD, IDRC, JICA, Keio University ICT Seminar Tokyo, August 25, 2004. Summary. Purpose of Presentation Universal Access Strategy Least-Cost Subsidy Auctions

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Least cost subsidy auctions for universal access telecom projects a practical implementation guide

Least-Cost Subsidy Auctions forUniversal Access Telecom Projects:A Practical Implementation Guide

Hank Intven & Curt Howard

EBRD, IDRC, JICA, Keio University ICT Seminar

Tokyo, August 25, 2004


  • Purpose of Presentation

  • Universal Access Strategy

  • Least-Cost Subsidy Auctions

  • Auction Process & Documents

  • Project Implementation Plan

Purpose of presentation
Purpose of Presentation

  • A “big picture” summary of the least-cost subsidy auction approach to expanding telecom network access

  • Review of process & documents to implement an auction

  • Review of practical implementation issues

Universal access strategy
Universal Access Strategy

  • Regulators and government policy makers to develop Universal Access (UA) strategy to meet specific national or regional needs

    • Take stock of current and projected

      • telecom infrastructure and services

      • demand for services

    • Identify “gap” in infrastructure & services

    • Make policy to help fill gap

    • Least-cost subsidy auctions can use small subsidies to stimulate private sector investment to fill the gap & meet UA policy goals

market efficiencygap

real access gap

access targets

access today


Commercially feasible

Needs intervention

Customerhousehold penetration

Geographic isolation

►Subsidy required to fill ‘real access gap’

►The ‘Two Gaps’ Source: World Bank Discussion Paper No. 432, “Telecommunications & Information Services for the Poor…”

Least cost subsidy auctions
Least-cost Subsidy Auctions

  • Recognizes that a subsidy may be required to make network expansion economic in rural and high cost areas

  • Subsidy is efficiently targeted and auctioned to ensure least cost to funding agency

  • Proven approach for expansion of UA to telecommunications networks

    • Successful pioneer projects in South America (Chile, Peru, Colombia)

    • We advised Nepal NTA on implementing large rural UA project; and are currently advising Sri Lanka, Nigeria, Uganda and Burkina Faso

    • Other subsidy auction projects underway in Eastern Caucasus, Russia, Nicaragua, Bolivia, etc.

Basics of subsidy auction approach
Basics of Subsidy Auction Approach

  • Define network expansion requirements - e.g. network with X capacity and Y performance criteria in Z locations

  • Run a transparent auction process for private operators to expand network

  • Qualify all interested bidders technically and financially capable of expanding network

  • Provide subsidy to the qualified bidder that requires lowest subsidy

Advantages of subsidy auctions
Advantages of Subsidy Auctions

  • Auctions usually provide a one-time investment subsidy for private operators willing to expand network and provide required service

  • Well-run auction reduces size of subsidy and need for government financing

  • Market forces rather than the government determine the level of subsidy required

  • Auctions are competitively neutral and thus compliant with WTO rules for UA

  • Small subsidies can mobilize substantial private investment for UA

Financing the subsidies
Financing the Subsidies

  • Subsidies may be financed by a UA Fund or by other sources, such as International Financial Institutions (IFIs) or international development agencies

  • UA Funds may be funded by :

    • Mandatory contributions from all telecom service providers (e.g. a specified percentage of revenue)

    • National budgets (tax revenues)

    • Contributions from IFIs?

Size of rural subsidies source adapted from world bank data
Size of Rural SubsidiesSource: Adapted from World Bank Data

Designing the project
Designing the Project

  • Properly designing the infrastructure and services to be supplied is key to success in meeting UA needs

  • National UA policy/strategy

    • Usually defines general UA goals - generally does not specify network gaps to be filled or economic implications

  • Technical and service requirements

    • Network specs. – fixed, mobile, broadband – mixed

    • Services – e.g. public telephones, Internet access, call centres

    • Geographical coverage areas, rollout schedule

Designing the project 2
Designing the Project (2)

  • Market demand study

    • Review population dispersion, income, available services, unserved areas, etc.

    • Can assist in identifying demand for:

      • Network expansion

      • Types of services required and financially feasible (e.g. telephone, low or high speed Internet, shared telecentres, etc.)

      • Estimated revenues & subsidy requirements

    • Subsidy should cover net cost of network expansion – i.e. after deducting projected revenues from area to be served

    • Rule of thumb: Public will pay 2-3% of income for telecom services (next slide)

Designing the project 3 telecom revenues as of gdp
Designing the Project (3)Telecom Revenues as % of GDP

Implementing the project subsidy auction documents
Implementing the Project:Subsidy Auction Documents

  • Key documents often include:

    • a Request for Applications to Pre-Qualify (‘RFPQ’)

    • a Request for Proposals (‘RFP’)

    • a contract for the provision of the services and payment of the subsidy (the ‘Service Agreement’)

    • a licence to operate the new network and provide the services (the ‘Licence’)

    • ‘Ancillary documents’ (bid bonds, performance guarantees, etc.)

Request to pre qualify
Request to Pre-Qualify

  • RFPQs are often the initial document to ‘kick-off’ the process to award the Service Agreement and Licence to the lowest bidder

  • The RFPQ will often:

    • Introduce potential bidders to the project

    • Provide some background information on the national or regional telecom sector

    • Serve as an initial screening process for parties that will be permitted to participate in the full competition process initiated by the RFP

Request to pre qualify 2
Request to Pre-Qualify (2)

  • Is prequalification process necessary?

    • Eliminating it can speed up process

  • However, a pre-qualification process can

    • Significantly reduce the number of bidders that participate in the full auction process (in some of our processes, 50+ bidders have applied)

    • place the focus on the best qualified bidders, and reduce problems and litigation from technically or financially unqualified bidders

    • Significantly reduce costs incurred by

      • less ‘serious’/qualified bidders who must otherwise prepare full proposals

      • funding agencies and their advisors that must fairly review and evaluate all proposals

Request for proposals rfp
Request for Proposals (‘RFP’)

  • Different terminology: RFP, Request for Applications, Tender document, etc.

  • Defines steps in competition process, and award of subsidy and Licence.

    • Should detail procedures for:

      • filing of proposals, opportunities for clarification questions, bidders conferences, revisions of RFP, and basic rules of competition

      • format and contents of proposal and information to be submitted

      • the evaluation of proposals – ‘licensing criteria’ must be provided under WTO Reference Paper

      • the selection of the successful bidder

      • the award of the Service Agreement and Licence

Service agreement
Service Agreement

  • Agreement is a good basis for governing payment of the subsidy – provides contractual certainty to permit financing of project – and service requirements

  • Alternate approaches can include licence conditions and letter of credit from UA Fund

  • Service Agreement specifies:

    • Network construction milestones, and service rollout

    • Technical performance requirements, including services to be provided, quality of service, etc. (similar to commercial telecom service agreements)

    • Penalties and remedies for failure to perform…

Service agreement 2
Service Agreement (2)

  • Service Agreements should also provide:

    • Procedures for certifying completion of phases of project & subsidy payments

    • Dispute resolution procedures

    • Other commercial provisions

      • Representations & Warranties

      • Performance guarantees

      • Term, termination & amendment rules

      • Force majeure and non-performance

      • Insurance, indemnity, etc.

      • Other standard commercial agreement terms

Telecom operating licence
Telecom Operating Licence

  • Most countries’ laws require a licence to construct and operate networks and to provide basic telecom services

  • Licences typically contain main operational rights and obligations of telecom service providers

  • The operating rights and obligations of a licence are usually supplemented by

    • the subsidy-specific requirements of the Service Agreement (i.e. regarding construction and operation of the expanded network), and

    • general telecom laws and regulations

Licence to operate new network 2
Licence to Operate New Network (2)

  • Various licensing approaches:

    • New licence designed for UA project

    • Adapt standard form of licence issued by Regulatory Authority

    • Amend licence of an existing operator, if an existing operator should win the competition for the subsidy contract

  • Spectrum licences

    • may be required in addition to operating licence

    • should be granted as part of initial licensing process without further cost or delay

Possible implementation plan
Possible Implementation Plan

  • Develop or revise UA Policy

  • Amend any laws or policies to facilitate least-cost auction process

  • Undertake demand study/financial analysis of specific project(s) to be subsidized

  • Determine outputs: services & infrastructure - technical design and performance requirements

  • Prepare auction process documents

  • Identify possible bidders, issue RFPQ and commence marketing activities

Possible implementation plan 2
Possible Implementation Plan (2)

  • Evaluate applications to pre-qualify

  • Issue RFP document to pre-qualified parties

  • Questions of clarification from bidders (and entertain proposed changes?)

  • Conduct pre-bid meeting with pre-qualified parties

  • Answer questions of clarification and make necessary changes to process to meet market requirements

Possible implementation plan 3
Possible Implementation Plan (3)

  • Deadline for submission of proposals

  • Evaluate proposals

  • Option: Issue of Letter of Intent to the qualified bidder(s) with lowest subsidy bid; (i.e. intent to award subsidy once any necessary preconditions are met)

  • Winning bidder(s) comply with preconditions (e.g. incorporation of local company, submission of performance guarantee, etc.)

  • Execute Service Agreement and issue Licence

Possible implementation plan 4
Possible Implementation Plan (4)

  • Winning bidder(s) begin network rollout

  • Subsidy payments made in accordance with service rollout milestones

  • Ongoing monitoring and reporting requirements

  • Network rollout and subsidy payments completed in accordance with schedule in Service Agreement

Role of professional advisors
Role of Professional Advisors

  • Assist with

    • design of UA policy/strategy

    • demand studies, technical and financial analysis to define network ‘gap’ to be filled

    • designing technical & service requirements

    • preparing auction process documents

    • running auction process – marketing, bidder conferences, Q&A, revising structures to meet market demands, problem-solving

  • Advise on best international practices and their application to the local environment

  • Expedite implementation through use of proven precedents and problem-solving approaches

Keys to a successful auction
Keys to a Successful Auction

  • Assess market demand and business requirements of service suppliers; match both to develop a financially realistic project

  • Establish key regulatory conditions (e.g. tariff policies, interconnection rates, market exclusivity, etc.) to reduce financial risk

  • Reduce unnecessary regulation and government impediments to investment

  • Develop a clear and transparent auction process – use standard commercial and regulatory approaches that will promote regulatory and business success

For Further Information:Hank Intven: [email protected] Howard: [email protected] Tétrault LLPSuite 4700, TD Bank Tower, 66 Wellington St. WestToronto, ON Canada M5K 1E6Tel: +1 (416) 601-7878Fax: +1 (416) 868-0673