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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.

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Presentation on theme: "Least-Cost Subsidy Auctions for Universal Access Telecom Projects: A Practical Implementation Guide Hank Intven & Curt Howard EBRD, IDRC, JICA, Keio University."— Presentation transcript:

1 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

2 Summary â Purpose of Presentation â Universal Access Strategy â Least-Cost Subsidy Auctions â Auction Process & Documents â Project Implementation Plan

3 Purpose of Presentation â A “big picture” summary of the least-cost subsidy auction approach to expanding telecom network access â Review of process & documents to implement an auction â Review of practical implementation issues

4 Universal Access Strategy â Regulators and government policy makers to develop Universal Access (UA) strategy to meet specific national or regional needs â Take stock of current and projected â telecom infrastructure and services â demand for services â Identify “gap” in infrastructure & services â Make policy to help fill gap â Least-cost subsidy auctions can use small subsidies to stimulate private sector investment to fill the gap & meet UA policy goals

5 real access gap market efficiency gap access today Customer household penetration access targets Poverty Geographic isolation Commercially feasible Needs intervention ► Subsidy required to fill ‘real access gap’ ► The ‘Two Gaps’ Source: World Bank Discussion Paper No. 432, “Telecommunications & Information Services for the Poor…”

6 Least-cost Subsidy Auctions â Recognizes that a subsidy may be required to make network expansion economic in rural and high cost areas â Subsidy is efficiently targeted and auctioned to ensure least cost to funding agency â Proven approach for expansion of UA to telecommunications networks â Successful pioneer projects in South America (Chile, Peru, Colombia) â We advised Nepal NTA on implementing large rural UA project; and are currently advising Sri Lanka, Nigeria, Uganda and Burkina Faso â Other subsidy auction projects underway in Eastern Caucasus, Russia, Nicaragua, Bolivia, etc.

7 Basics of Subsidy Auction Approach â Define network expansion requirements - e.g. network with X capacity and Y performance criteria in Z locations â Run a transparent auction process for private operators to expand network â Qualify all interested bidders technically and financially capable of expanding network â Provide subsidy to the qualified bidder that requires lowest subsidy

8 Advantages of Subsidy Auctions â Auctions usually provide a one-time investment subsidy for private operators willing to expand network and provide required service â Well-run auction reduces size of subsidy and need for government financing â Market forces rather than the government determine the level of subsidy required â Auctions are competitively neutral and thus compliant with WTO rules for UA â Small subsidies can mobilize substantial private investment for UA

9 Financing the Subsidies â Subsidies may be financed by a UA Fund or by other sources, such as International Financial Institutions (IFIs) or international development agencies â UA Funds may be funded by : â Mandatory contributions from all telecom service providers (e.g. a specified percentage of revenue) â National budgets (tax revenues) â Contributions from IFIs?

10 Size of Rural Subsidies Source: Adapted from World Bank Data ChileColombiaDominican Republic PeruNepal Projects2006171 Bidders-2 to 722 to 52 Subsidy per town $3,600$4,600$6,800$9,500$9,365 Towns served 6,0597,4155004,4201,064 Population served 2.2m3.7m1m1.6m4m

11 Designing the Project â Properly designing the infrastructure and services to be supplied is key to success in meeting UA needs â National UA policy/strategy â Usually defines general UA goals - generally does not specify network gaps to be filled or economic implications â Technical and service requirements â Network specs. – fixed, mobile, broadband – mixed â Services – e.g. public telephones, Internet access, call centres â Geographical coverage areas, rollout schedule

12 Designing the Project (2) â Market demand study â Review population dispersion, income, available services, unserved areas, etc. â Can assist in identifying demand for: â Network expansion â Types of services required and financially feasible (e.g. telephone, low or high speed Internet, shared telecentres, etc.) â Estimated revenues & subsidy requirements â Subsidy should cover net cost of network expansion – i.e. after deducting projected revenues from area to be served â Rule of thumb: Public will pay 2-3% of income for telecom services (next slide)

13 Designing the Project (3) Telecom Revenues as % of GDP

14 Implementing the Project: Subsidy Auction Documents â Key documents often include: â a Request for Applications to Pre- Qualify (‘RFPQ’) â a Request for Proposals (‘RFP’) â a contract for the provision of the services and payment of the subsidy (the ‘Service Agreement’) â a licence to operate the new network and provide the services (the ‘Licence’) â ‘Ancillary documents’ (bid bonds, performance guarantees, etc.)

15 Request to Pre-Qualify â RFPQs are often the initial document to ‘kick- off’ the process to award the Service Agreement and Licence to the lowest bidder â The RFPQ will often: â Introduce potential bidders to the project â Provide some background information on the national or regional telecom sector â Serve as an initial screening process for parties that will be permitted to participate in the full competition process initiated by the RFP

16 Request to Pre-Qualify (2) â Is prequalification process necessary? â Eliminating it can speed up process â However, a pre-qualification process can â Significantly reduce the number of bidders that participate in the full auction process (in some of our processes, 50+ bidders have applied) â place the focus on the best qualified bidders, and reduce problems and litigation from technically or financially unqualified bidders â Significantly reduce costs incurred by â less ‘serious’/qualified bidders who must otherwise prepare full proposals â funding agencies and their advisors that must fairly review and evaluate all proposals

17 Request for Proposals (‘RFP’) â Different terminology: RFP, Request for Applications, Tender document, etc. â Defines steps in competition process, and award of subsidy and Licence. â Should detail procedures for: â filing of proposals, opportunities for clarification questions, bidders conferences, revisions of RFP, and basic rules of competition â format and contents of proposal and information to be submitted â the evaluation of proposals – ‘licensing criteria’ must be provided under WTO Reference Paper â the selection of the successful bidder â the award of the Service Agreement and Licence

18 Service Agreement â Agreement is a good basis for governing payment of the subsidy – provides contractual certainty to permit financing of project – and service requirements â Alternate approaches can include licence conditions and letter of credit from UA Fund â Service Agreement specifies: â Network construction milestones, and service rollout â Technical performance requirements, including services to be provided, quality of service, etc. (similar to commercial telecom service agreements) â Penalties and remedies for failure to perform…

19 Service Agreement (2) â Service Agreements should also provide: â Procedures for certifying completion of phases of project & subsidy payments â Dispute resolution procedures â Other commercial provisions â Representations & Warranties â Performance guarantees â Term, termination & amendment rules â Force majeure and non-performance â Insurance, indemnity, etc. â Other standard commercial agreement terms

20 Telecom Operating Licence â Most countries’ laws require a licence to construct and operate networks and to provide basic telecom services â Licences typically contain main operational rights and obligations of telecom service providers â The operating rights and obligations of a licence are usually supplemented by â the subsidy-specific requirements of the Service Agreement (i.e. regarding construction and operation of the expanded network), and â general telecom laws and regulations

21 Licence to Operate New Network (2) â Various licensing approaches: â New licence designed for UA project â Adapt standard form of licence issued by Regulatory Authority â Amend licence of an existing operator, if an existing operator should win the competition for the subsidy contract â Spectrum licences â may be required in addition to operating licence â should be granted as part of initial licensing process without further cost or delay

22 Possible Implementation Plan â Develop or revise UA Policy â Amend any laws or policies to facilitate least- cost auction process â Undertake demand study/financial analysis of specific project(s) to be subsidized â Determine outputs: services & infrastructure - technical design and performance requirements â Prepare auction process documents â Identify possible bidders, issue RFPQ and commence marketing activities

23 Possible Implementation Plan (2) â Evaluate applications to pre-qualify â Issue RFP document to pre-qualified parties â Questions of clarification from bidders (and entertain proposed changes?) â Conduct pre-bid meeting with pre- qualified parties â Answer questions of clarification and make necessary changes to process to meet market requirements

24 Possible Implementation Plan (3) â Deadline for submission of proposals â Evaluate proposals â 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) â Winning bidder(s) comply with preconditions (e.g. incorporation of local company, submission of performance guarantee, etc.) â Execute Service Agreement and issue Licence

25 Possible Implementation Plan (4) â Winning bidder(s) begin network rollout â Subsidy payments made in accordance with service rollout milestones â Ongoing monitoring and reporting requirements â Network rollout and subsidy payments completed in accordance with schedule in Service Agreement

26 Role of Professional Advisors â Assist with â design of UA policy/strategy â demand studies, technical and financial analysis to define network ‘gap’ to be filled â designing technical & service requirements â preparing auction process documents â running auction process – marketing, bidder conferences, Q&A, revising structures to meet market demands, problem-solving â Advise on best international practices and their application to the local environment â Expedite implementation through use of proven precedents and problem-solving approaches

27 Keys to a Successful Auction ã Assess market demand and business requirements of service suppliers; match both to develop a financially realistic project ã Establish key regulatory conditions (e.g. tariff policies, interconnection rates, market exclusivity, etc.) to reduce financial risk ã Reduce unnecessary regulation and government impediments to investment ã Develop a clear and transparent auction process – use standard commercial and regulatory approaches that will promote regulatory and business success

28 For Further Information: Hank Intven: hintven@mccarthy.ca Curt Howard: choward@mccarthy.ca McCarthy Tétrault LLP Suite 4700, TD Bank Tower, 66 Wellington St. West Toronto, ON Canada M5K 1E6 Tel: +1 (416) 601-7878 Fax: +1 (416) 868-0673hintven@mccarthy.cachoward@mccarthy.ca


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