Infrastructure Sharing: proposed new paradigm for Pacific island states

Richard Keck, Partner

MACMILLAN KECK

Attorneys & Solicitors1120 Avenue of the Americas, 4th Floor

New York, New York 10036, USA

richard@macmillankeck.pro

www.macmillankeck.pro

23 January 2018

@PTCouncil #PTC18

Beware of mainlander advice for the islands . . . .

“There you have it – reforms on unprepared ground, and

copied from foreign institutions as well – nothing but harm!”

The Devil

From Fyodor Dostoevsky, The Brothers Karamazov, Book 11, Chapter 9, “The Devil. Ivan Fyodorovich's Nightmare,” quoted in R. Pittman, Vertical Restructuring of the Infrastructure Sectors of Transition Economies (2002)

23 January 2018

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Genesis, rise and fall of natural monopoly paradigm

• Telecom access networks treated as natural monopolies (mid-1800s through late 1900s)• Many telegraph, telephone and cable television networks were nationalized under Post Offices

• Larger network operators often manufactured all network and customer equipment

• Early competitors encroached vertical integration of wireline access network monopolies• Long distance (1960s onward)

• Business data services (1960s onward)

• Customer premises equipment (1980s onward)

• Introduction of Internet eroded scope of monopolies over soft layers of wireline access networks• Digital telephone systems introduced (1962 onward)

• ARPANET developed packet-switched network (1969)

• ISDN service introduced by network operators over their over copper telephone networks (late 1980s)

• Commercial dial-up Internet access introduced (1992)

• Asymmetric cable modem service introduced over cable networks (1993)

• DSL introduced by telephone network operators as competitive response to cable modem (early 1993)

• ADSL introduced over telephone networks in response to superior cable modem throughput (1998)

23 January 2018

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Wireless disrupts natural monopoly paradigm

Meanwhile, wireless technology and services also began to erode scope of wireline monopolies while also introducing competition within new mobile markets

• Analog commercial cellular mobile radio telephone service (1G) introduced (1980s)

• Competition in mobile access networks introduced (1985 onward)

• Digital commercial cellular mobile radio service (2G) introduced (1991)

• Mobile Internet service introduced (1999)

• 3G introduced (2001 onward)

• 4G/LTE introduced (2009 onward)

• 5G beginning to be introduced (2018 or 2019?)

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Wireline access markets opened to competition

• State monopolies corporatized (1980s onward) and often privatized (1990s onward)

• Legal exclusivity of incumbent franchises eliminated (1990s onward)

• New entrants licensed and provided asymmetric access rights to essential facilities of incumbents (1990s onward)

• Internet popularity and technology convergence led telephone and cable companies to enter and compete in Internet access markets with duplicate facilities (1990s) and later to compete in provision of voice and video services

• Very little new access network facilities overbuilding outside dense central business districts, with most investment focused on upgrading legacy copper and cable networks

• FTTP rollout has been slow except in dense and rich geographic markets or where undertaken by SOEs

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Current findings and policies from the mainland• What has been learned in the mainland wireline access markets

• Telephone-cable legacy-facilities-based competition in Internet access is not replicable for fiber

• Fiber replacements of legacy facilities are slow except in very dense and rich geographic markets

• Asymmetric access regulation of legacy facilities reduces prices

• But asymmetric access regulation suppresses investment by incumbents and new entrants in fiber

• Policymakers now seek to retain service-based competition while improving NGN investment incentives

• One approach is to encourage co-investment by competing operators in NGNs (e.g., EU)

• Another approach is for SOE to develop a shared national open access network (e.g., New Zealand)

• What has been learned in the mainland wireless access markets• Some infrastructure competition is often both viable and efficient in many geographic markets

• But maximum efficient number of fully independent networks decreases in moving from 2G to 3G to 4G

• Tower companies have entered the market and reduced network operator costs through tower sharing

• Policymakers and regulators are allowing some active network sharing or consolidation by small operators

• The cost-efficiency and flat-revenue crunch is not over, and is growing worse

• More challenges lie ahead, especially in improving 4G coverage and rolling out 5G

23 January 2018

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Current best practice dogma from the mainland

• Wireline fiber networks are often natural monopoly

• Competition is better than monopoly but seek service-based rather than facilities-based competition

• Prefer symmetric over asymmetric infrastructure sharing methods to incentivize investment

• Wireless networks are inherently capable of facilities-based competition

• Maximize number of fully independent networks

• Sharing passive infrastructure OK if competitively neutral

• Consolidation and/or active network sharing OK if reduced duplication necessary to reach optimal number of fully independent networks

• Avoid too much sharing or consolidation – which can undermine dynamic efficiency benefits of infrastructure competition – but the open issue is how much sharing is too much

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Impact of inefficient mobile infrastructure duplication

• Increased unit costs (and hence unit prices) where duplication is viable but not efficient

• Smaller radius of first mover buildout due to sharing voice revenue in duplicated areas

• Increased motivation for first mover strategic behavior

• Delayed network buildouts and upgrades due to market uncertainty

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Can infrastructure competition in mobile markets ever be efficient?

Yes, but much less so in most

Pacific island states, which present economic edge cases . . . .

23 January 2018

Pacific island

market conditions

Source: Richard Keck

@PTCouncil #PTC18

Comparing market share trends in 3 mobile markets

23 January 2018

Vigorous

competition

by 3 operators

Weak

competition

by 2 operatorsFailed

competition by

2/3 operators

Source: Richard Keck with publicly available market share data

How much does market

hospitability for

facilities duplication

have to do with these

different outcomes?

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Proposed new Pacific island paradigm: maximize sharing

• Competition should be introduced and promoted where viable, but . . .

• Viable infrastructure competition is challenging or non-existent in many Pacific markets

• Viable service-based competition (using shared infrastructure) is limited to narrow range around market share parity

• Efficient number of mobile networks is typically less than 2, and sometimes less than 1

• Multi-island operators can achieve only limited efficiency gains on infrastructure

• Cost savings possible by centralizing core network and through aggregated purchasing power

• Cost savings not achievable for works and O&M, which are inherently subscale on most islands

• Policy should permit passive and active network sharing in wireline and mobile markets

• Policymakers and regulators should promote maximum network sharing

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Potential savings from mobile infrastructure sharing

23 January 2018

Source: Vodafone

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Economic classifications for infrastructure sharing

Infrastructure sharing business/institutional structures fall into 3 economic categories:

1) Asymmetric access between rivals

2) Standalone wholesale services

3) Mutualized wholesale services

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Pacific island policy: asymmetric access between rivals

• Asymmetric access involves the provision of wholesale services by a vertically integrated provider to its rivals in downstream markets

• Voluntary asymmetric access should be permitted unless clearly anticompetitive

• Compelling asymmetric access to legacy facilities can level the playing field for new entrants to compete with incumbents

• But policymakers and regulators should commit in advance not to compel asymmetric access to new facilities in order not to undermine investment incentives

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Pacific island policy: standalone wholesale services

• Standalone wholesale services involve the provision of wholesale services by an enterprise which does not compete in the downstream markets which use its services

• Voluntary standalone wholesale activities should be permitted and encouraged

• Utilities and other cross-sector infrastructure owners should be encouraged and compelled to share with telecom network operators on reasonable terms and conditions

• Pacific islands have limited potential to attract investors such as tower companies due scale and scope challenges on each island which cannot be overcome through multi-island operations

• Policymakers can structure special purpose vehicles (Open Access Entities) to serve as standalone wholesale providers using infrastructure funded with 100% public investment, but should invite downstream operators to participate in governance to ensure vertical alignment

• Policymakers can structure ownership and governance of new infrastructure funded with a mix of public and private investment so PPP functions as standalone wholesale operator (for profit), but this creates an potential monopoly rent bottleneck requiring rate regulation

23 January 2018

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Pacific island policy: mutualized wholesale services

• Mutualized wholesale services involve symmetric wholesale service privision among rivals in downstream markets, and can be provided through multiple structures, e.g.:

• Incorporated or unincorporated operator-owned cooperatives (e.g., shared wholesale network operator)

• Reciprocal sharing arrangements among operators (e.g., tower space swaps and fiber swaps)

• Voluntary mutualized wholesale arrangements should be permitted and encouraged, possibly through compulsory mutual rights of first offer to co-invest before a licensed operator may invest in new infrastructure on a standalone basis (e.g., as a condition to new tower permits)

• Policymakers can reposition any remaining telecom SOEs to serve as mutualized wholesale network operators and grant new entrants joint concession rights over attractive infrastructure

• Policymakers can structure ownership and governance of new infrastructure funded with a mix of public and private investment so PPP functions as mutualized wholesale operator (not-for-profit), and thereby avoid creating a monopoly rent bottleneck

• Policymakers can similarly structure special purpose vehicles to serve as mutualized wholesale network operators of new infrastructure acquired with universal service funds

• Any and all of the above methods may be combined to improve institutional efficiency

23 January 2018

Infrastructure Sharing: proposed new paradigm for Pacific island states

Richard Keck, Partner

MACMILLAN KECK

Attorneys & Solicitors1120 Avenue of the Americas, 4th Floor

New York, New York 10036, USA

richard@macmillankeck.pro

www.macmillankeck.pro

23 January 2018