Least-Cost Subsidy Auctions for

Universal Access Telecom Projects:

A Practical Implementation Guide

Hank Intven & Curt HowardEBRD, IDRC, JICA, Keio University ICT Seminar

Tokyo, August 25, 2004

Summary

Purpose of Presentation

Universal Access Strategy

Least-Cost Subsidy Auctions

Auction Process & Documents

Project Implementation Plan

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

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

real access

gap

market efficiency

gapaccess

today

Customerhousehold penetration

access targets

Po

vert

y

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…”

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

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

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

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 SubsidiesSource: Adapted from World Bank Data

Chile Colombia Dominican Republic

Peru Nepal

Projects 200 6 1 7 1

Bidders - 2 to 7 2 2 to 5 2

Subsidy per town

$3,600 $4,600 $6,800 $9,500 $9,365

Towns served

6,059 7,415 500 4,420 1,064

Population served

2.2m 3.7m 1m 1.6m 4m

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)

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

0

1

2

3

4

5

6

7

0 10,000 20,000 30,000 40,000

GDP per Capita (US$)

Telec

oms R

even

ue a

s % G

DP

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

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) 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’) 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 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 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

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)

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

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)

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)

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)

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 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

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: hintven@mccarthy.ca

Curt Howard: choward@mccarthy.ca

McCarthy Tétrault LLPSuite 4700, TD Bank Tower, 66 Wellington St. West

Toronto, ON Canada M5K 1E6Tel: +1 (416) 601-7878Fax: +1 (416) 868-0673