Concessions, BOTs and Similar Arrangements

A licence is a grant by a public authority of a right to operate a service, subject to the terms and conditions specified in the Licence or in other regulatory instruments. The issuance and enforcement of a licence is therefore always, to some extent, a matter of public or administrative law. As indicated above, licences, concessions and other types of government permits to operate telecommunications facilities and services have more in common than not.

However, in some cases, private sector investors have entered into business arrangements with governments or state-owned operators that are more in the nature of joint ventures with government entities than independent rights to operate telecommunications facilities or provide services.

Before describing these arrangements, the term "concession" should be discussed. In most countries, this term is used to refer to a document that establishes a commercial agreement between a government and the private builder, owner or operator of an element of public infrastructure (such as a toll road, power plant or telecommunications network) or a business located on public property. Contractual remedies, such as money damages, are available for breach of a concession through civil courts or arbitration. Government can fine tune concession terms to establish the protections and incentives necessary to attract investors and to guarantee performance by the concession holder.

Some licences have both regulatory and concession features. It is important to distinguish between the two. A good approach is to deal with the concession features in a concession contract between the host government (not the regulator) and the investor would be called a government support agreement.

It should be noted that the term concession has different meanings in different countries. For example, in some Latin American countries, such as Mexico, the term concession is used to refer to a document (e.g. the Telmex Concession) that is essentially a licence, not a commercial agreement, although it is signed by the government and the concession holder.

Some countries, particularly in Asia, have granted concessions that are in the nature of joint venture agreements rather than grating full licences to operate telecommunications network independent of the government.

Many variations are possible on the theme of "joint ventures" between private sector investors on the one hand and government or PTTs on the other. These include Build-operate-transfer (BOT), Build- Transfer- Operate (BTO), Build-Operate-Own (BOO), and an “alphabet soup” full of alternatives limited only by the imagination of project finance lawyers and bankers. Some examples of countries where such arrangements have been implemented are listed below:

• BTO: Thailand, Philippine
  
• BOT: Lebanon, India, Indonesia (Joint Operating Schemes or KSOs)
  
• BOO: Malaysia, Solomon Islands

In general, these are all project finance structures aimed at attracting investment and management expertise required to develop telecommunications infrastructure. A variation on such structures involves contracts where an investor does not build or own any facilities, but shares in revenues from a state-owned operator in return for proving financing, management or both. Financing contracts of this type have been entered into in China and Indonesia. An example of a management contract with revenue sharing is the Vietnamese "Business Cooperation Contract".

Most of the types of structures discussed in this section have experienced initial success in promoting network expansion. In part this was because they were not characterized as licences to private operators but rather as contracts under which private contractors would build and operate telecommunications services "owned" by the government or by a state-owned operator. This arrangement allowed for private sector participation in telecommunications operators without breaching laws or policies that prevented private sector ownership of operators.

However, experience in Lebanon, Indonesia and elsewhere suggests that these models are not viable in the long term. Investors in BOT projects lack the long-term security and equity interests of a licensee. They are therefore motivated to maximise short-term profitability at the expense of long term network or service development. BOT must either terminate, with the resulting withdrawal of the private investor, or it must be converted into a true licence. If the investor withdraws, the operator may or may not be able to continue to expand and manage the service on its own. If the concession is converted to a licence, serious questions may arise regarding the fairness and transparency of the licensing process.

Service Areas

The definition of geographic service areas to be covered by a new licence presents unique challenges. Different approaches have been taken in different countries. In some cases, national licences are issued, while in others, a distinction is made between regions or between rural and urban areas. In some cases, national licences are offered in parallel with competing regional licences for the same service.

There is no one right approach to designating service areas. However, some approaches are likely to be less successful than others. One approach that has experienced limited success in a number of countries is to preserve the profitable urban markets for a state-owned PTT, and to invite private sector operators to serve only financially less viable rural areas. In some cases, the failure of the private sector operators to perform well is such areas have been used as evidence to argue against further sector liberalisation.

The following points are relevant in selecting licensed service areas:

• Financial viability must be a key factor. If financially non-viable rural or high cost areas are licensed, a universality fund, or similar mechanism should be established. A preferred approach in such cases is to select a licensee from among competing applicants, based on the lowest requested subsidy. Universality funding mechanisms and approaches for measuring financial viability are discussed in Module 6.
  
• Experience shows that regional licensees often merge with, or are acquired by, other regional licensees to serve larger regions or form national operators. Examples range from the Colombian cellular operators tot he U.S. regional Bell Operating Companies. These moves are often driven by economies of scale. Regulators may want to keep this trend in mind, and license several competing national operators at the outset, rather than numerous financially weaker regional operators. The result will be lower transaction costs for the sector and less disruption due to integration of different operating systems.
  
• Licensing operators to serve larger areas will permit them to cross subsidize from more profitable areas to less profitable ones. This approach can be used to extend service to less profitable areas. However, it can lead to anti-competitive conduct where an incumbent operator retains the right to serve profitable urban markets as well as less profitable rural ones, while new entrant can serve only the rural markets. Problems of anti-competitive cross-subsidy are discussed in detail in Module 5.
  
• National licences and large service areas are consistent with the consumer interest in obtained seamless "one stop shopping" service from a single service provider. This is particularly true where technical or other barriers to efficient interconnection or roaming are present.

Qualification Criteria

It is important to distinguish between criteria relating tot he qualification of an applicant to participate in a licensing process and criteria for the selection of a successful licensee from among the qualified applicants.

In the case of a general authorization, only the qualification criteria are relevant because there is no selection to be made. In the case of a selection process for an individual licence, both qualification and selection criteria are normally developed. It is generally advisable to conduct a licensing process in at least two phases. The qualification phase is completed first. Only qualified applicants participate in the second phase - the licensee selection process.

Qualification criteria are minimum requirements for the right to participate in the selection process. Generally, qualification criteria are limited to ensuring applicants have the financial and technical resources and experience to successfully operate the licensed service.

Some countries impose foreign ownership restrictions that establish minimum levels of local ownership for licensed operators. Foreign ownership restrictions are generally contrary tot he spirit, if not the letter of foreigner trade agreements, including the GATS. However, various WTO signatory countries have registered exceptions permitting them to continue to apply foreign ownership restrictions. Over time, such restrictions are likely to be phased out in most countries.

The importance of establishing clear and rigorous qualification criteria is related to the level of competition in the applicable service. In the case of individual licensees that will enjoy monopoly or other exclusive rights, it is critical important to ensure that the licensed operator is financially and technically able to meet its license obligations. Otherwise, the licensee may fail to meet important licence conditions, such as those related to network rollout, service coverage and quality. The process of enforcing Licence compliance or revoking and re-tendering a licence in the case of default is time consuming, costly and disruptive for consumers.

In the case of competitive services, competition will generally discipline the market. If a market is sufficiently competitive, consumers will switch from an operator that fails to provide adequate service to another operator tat does provide it. A qualification process is therefore less important.

Recent experience in spectrum auctions demonstrates, however, that even in relatively competitive markets, such as mobile services in Brazil and the US, it is important to establish some minimum qualification requirements. These requirements will ensure that valuable spectrum and other scarce resource are awarded to applicants who are financially and technically capable of providing the public with service using such resources.

Some licensing processes involve more than one qualification phase. In issuing a large individual licence, a pre-qualification requirement is often established. This limits the eligibility of applicants who can participate in the final qualification process. It is justified, for example, where there are high costs incurred by the regulator (and applicants) in conducting a detailed qualification process or where confidential access to information or facilities is granted to applicants.

In those circumstances it makes sense to discourage participation in the process by applicants who are unlikely to meet the qualification criteria or to submit a competitive application. Various pre-qualification operations exist. These include:

• Payment of a substantial registration fee
  
• A substantial document purchase fee
  
• Use of a proxy indicator of experience and resources (e.g. minimum number of customers or lines in service for similar services in other markets)

It is important to specify whether qualification criteria are in any way relevant to selection. Transparency requires that applicants be told whether minimum compliance with qualification criteria is sufficient. There has been litigation against regulators in some countries where certain qualification criteria were specified, and then some qualified applicants were rejected on the basis that they were less qualified than others.

Table 2-3 sets out possible qualification criteria for a variety of different services.

Selection Criteria

There are two basic types of selection processes:

1. Competitive selection based on a single quantitative criterion. Examples include:
   • An auction where the highest bidder wins
     
   • A subsidized rural service competition, where the operator that bids the lowest subsidy win
2. Comparative evaluation where based on a more subjective evaluation of one or more quantitative or qualitative criteria.

Advantages and disadvantages of both approaches are discussed above under the heading Spectrum Auctions, Lotteries and Comparative Evaluation Processes. The single criterion approach is clearly the most transparent and simplest to use. It is the most consistent with international trade agreements, and the most frequently recommended approach of international financial institutions and international development organizations that promote telecommunications sector reform. However, it may not always result in the selection of the best qualified applicant, and, in the case of an auction, it may result in the imposition of excessive costs on the sector.

There are many variations on these two basic approaches. For example, in some cases, there is more than one quantitative criterion, with a weighting scheme for the various criteria that will result in a single "score". In other cases, numerical scores are given for essentially subjective measures, such as the experience record of an applicant, or the quality of its management.

Several observations can be made about the choice of selection criteria:

• Qualified applicants are motivated to devote financial and other resources to those aspects of their applicants that will form the basis of the selection decision. Licensing selection is a zero-sum game. Each applicant has a finite amount of cash and other resources to devote tot he proposed service. Resources which are allocated to one aspect of an application on which selection is based) i.e. the financial offer or accelerated roll-out commitments) are not available to fund other aspects of the operation which are not related t selection criteria) i.e. universal service, lower prices, introduction of enhanced services).
  
• Transparency is increased by use of simple quantitative selection criteria. A competitive selection process that is based on subjective or qualitative criteria will be less transparent. The same is true of multiple criteria that cannot easily be compared. A lack of transparency undermines the credibility of the process and of the regulator. It also opens the door for complaints of bias, corruption or incompetence. To maximise transparency, a single financial or other quantitative selection criterion should be used. This can be derived by use of a formula which combines a number of selection criteria into a single numeric factor if desired.
  Use of a single financial criterion does not mean other service factors or licensing objectives are irrelevant. Important factors and objectives not used as selection criteria can be indirectly included in the qualification process. For example, coverage, rollout and universal service commitments can be specifically incorporated as licence conditions that any successful applicant will have to comply with. All applicants will then incorporate these minimum requirements into the calculation of their financial bid.

Table 2-4 describes possible types of selection criteria and summarises their advantages and disadvantages.