Introducing telecommunications competition through a wireless license : lessons from Morocco

Privatesector P U B L I C P O L I C Y F O R T H E Note No. 199 November 1999 Introducing Telecommunications Competition through a Wireless License Lessons from Morocco Björn Wellenius In August 1999 the Moroccan government awarded a second mobile telecommunications license and Carlo through international tender. All bidders made commitments on quality, coverage, and tariffs that Maria Rossotto would significantly expand and improve telecommunications services. The winning bidder was Medi Telecom, a consortium of Telefónica of Spain, Portugal Telecom, and Moroccan investors. Medi Telecom paid about US$1.1 billion for the fifteen-year license to operate under relatively unfettered competition—one of the highest prices ever paid for a mobile license relative to population size. Just as impressive is that the price was offered in a country not usually on the radar screen of foreign investors. The fiscal and development impact will be far reaching. The strong competition from reputable bidders was the payoff to Morocco’s decision to set up a credible, pro-competitive regulatory environment before the transaction and to conduct open, professional bidding for the license. This Note examines why Morocco was able to reap these big rewards. The liberalization of Morocco’s telecommunica- tions sector formally began with the Parliament’s FIGURE 1 PRICES PAID FOR SECOND GSM LICENSES IN passage in 1996 of a telecommunications law RECENT TRANSACTIONS, 1994–99 (effective June 1997) that lay the foundations for GDP per capita (US$ thousands) an increasingly competitive, private-led sector. 30 The law enabled competition in all segments of Netherlands Belgium Austria the market and set up an independent regulatory 25 agency, Agence Nationale de Réglementation Italy des Télécommunications (ANRT). The law also 20 envisaged privatizing Itissalat-al-Maghrib (IAM), Spain 15 the incumbent state-owned telecommunications monopoly, but set no timetable. IAM operates 10 fixed and mobile services, including the first Chad Hungary Global System for Mobile Communications 5 Cameroon Turkeya Turkey MOROCCO (GSM) network. Egypt 0 0 10 20 30 40 50 The award of a GSM license to a second opera- License price per inhabitant (US$) tor in August 1999 was the first major step in a. Net present value. introducing competition in the telecommunica- Source: ANRT and World Bank data. tions market. As the process of tendering and awarding the license unfolded, the agenda for The World Bank Group ▪ Finance, Private Sector, and Infrastructur e Network Introducing Telecommunications Competition through a Wireless License TABLE 1 THE BIDDERS AND THEIR BIDS Financial offer Bidding consortium Composition (US$ millions) Medi Telecom Telefónica, Portugal Telecom, and others 1,140 Badil Com France Telecom, Motorola, and others 915 TIM Maroc Telecom Italia Mobile 634 Orange Communications Maroc Orange Plc. and others 529 Marphone Vivendi (CGSAT), SBC International, and others 526 Vodafone Maroc Vodafone, Air Touch, and others 441 Maghreb Cell GTE, Bell Atlantic, and others 296 Source: Press releases. privatizing IAM accelerated. By the time the defined a dispute resolution mechanism, speci- license was issued, the government had set the fied the essential elements of the interconnec- first quarter of 2000 as the target for opening IAM tion contract, and provided technical and cost to private capital and had hired financial advis- principles for interconnection. Another estab- ers to prepare the transaction. lished the legal regime for leased lines. Preparation ANRT sought expressions of interest from pro- spective investors once it had drafted the second The successful issue of the second GSM license license and IAM had published a default inter- can be attributed largely to three features: a cred- connection offer. These elements helped investors ible regulatory framework, the transparent tender forecast the net cash flow and the breakeven process, and the attractive terms of the license. point, the main drivers of the financial offer. Clear rules and roles Transparent tender A legal and regulatory framework, including ANRT, which was responsible for conducting the ANRT, was in place before the tendering of the licensing process, asked qualified bidders to second license started. The framework could have offer commitments matching or exceeding tar- used improvements, such as simplified licensing, gets for service quality, coverage, and tariff the addition of modular penalties, and ex post plans. These three elements form the core of the rather than ex ante financial control of ANRT. technical offer; the financial offer, the amount Nevertheless, coupled with the government’s the bidder intends to pay for the license, is sep- sustained commitment to telecommunications arate. Seven bidders made offers (table 1). In reform, it gave investors sufficient confidence and determining the best bid, ANRT weighted the a basis for reliable business decisions. price 60 percent and the technical offer 40 per- cent. Medi Telecom submitted the highest finan- The law set out the principles for licensing and cial offer and the second highest technical one. competitive award. It also ensured that through- out the process the bidders had a clearly The process for awarding the license was trans- identified, independent counterpart, ANRT, parent and conducted fairly and professionally by with explicit responsibilities and functions. And ANRT, and it stayed on schedule. The criteria for by giving ANRT a broad mandate and clear evaluating bids were set out in the tender docu- authority (putting it in charge of managing and ments, including the weights to be given each part allocating spectrum, for example), the law of the technical offers. How marks would be helped reduce regulatory risk. assigned within each part to reflect offers above minimum requirements, however, was left to the The law was complemented by several subse- evaluating committee. This balance between pre- quent implementation decrees. One of these dictability and uncertainty is consistent with prac- established general interconnection principles, tice in some European countries, and ANRT  The World Bank Group 3 believes it encouraged bidders to offer better than at marginal cost, and to develop potential sources minimum performance. To enhance transparency, of additional revenue in industrial areas where ANRT published a bid evaluation report on its advanced applications (such as wireless) can be Website disclosing the marks given to each part. launched. These features enable Medi Telecom to But at the bidders’ request the offers were not dis- position itself well for building up a wide range of closed, so as to protect commercial information. services once IAM’s exclusive rights expire. Nor have the technical offers of the winning bid The last feature, which establishes a duopoly in been made public or reflected in the license. In mobile communications for four years, is more some countries, such as Italy and the United controversial. Hindsight suggests that restricting Kingdom, the license includes the main technical entry was unnecessary to attract serious investors. parameters in the winner’s bid, since their disclo- Moreover, it added little to the price paid for the sure is not judged a violation of confidentiality. license. The three highest bids came from con- Other countries, such as Belgium, follow the sortia led by major European companies that had same approach that Morocco has. If Medi a strategic rather than a purely financial interest in Telecom fails to meet the minimum requirements the Mediterranean Basin. Whether the somewhat published in the tender, anybody can complain higher bid price justifies slowing the liberalization to ANRT, including IAM or consumers. But if it of mobile services is questionable. Experience in fails to meet the technical commitments in its bid, other countries suggests that a third operator is it will be up to ANRT to enforce compliance. needed for competition to bring further big cuts in retail prices and innovations in service. Commercially attractive license Impact The license was particularly appealing to investors because, in addition to the usual fea- The new license has already prompted the tures of a mobile license, it conferred embedded incumbent to improve service and reduce prices. rights that mitigated the risks posed by IAM’s ini- It also promises to deliver big benefits to cus- tial market dominance, enhanced the expected tomers and new revenues to the government. cash flow, and signaled the authorities’ willing- ness to allow effective competition. In particu- The bid evaluation report shows that the bidders’ lar, the license allowed the new operator to: average growth forecasts for the mobile market ▪ Build its own long-distance infrastructure, in Morocco envision it expanding from 170,000 bypassing the network of the incumbent oper- customers today to about 5 million in 2010. While ator, or build its own infrastructure up to the the technical commitments of the winning bid- point of interconnection. der are confidential, the average commitments ▪ Build and, after January 1, 2002, operate its bid greatly exceed the minimum targets for the own international gateway to provide services population share and road length to be covered to its clients. in the first five years. Service is expected to reach ▪ Offer fixed wireless services in rural, suburban, 90 percent of Morocco’s population during the and industrial areas, subject to ANRT approval. fourth year, compared with the minimum ▪ Serve as the sole licensed cellular communica- requirement of 60 percent by the end of year tions operator, other than IAM, for four years. three and 75 percent by year five. Moreover, because the winner committed to matching IAM’s The first two features give Medi Telecom much mobile coverage when it launches the new ser- flexibility to invest in and develop its network and vice, all current customers will have a choice to overcome possible capacity and pricing bottle- from the start. These commitments are in line necks in IAM’s network. The third allows Medi with the aggressive rollout programs in other Telecom to extend access outside the core markets countries. In Turkey, for example, Telsim agreed  Introducing Telecommunications Competition through a Wireless License to cover 50 percent of the population in two years The US$1.1 billion license fee increased and 90 percent in five. Morocco’s fiscal revenue for 1999 by about 13 per- cent. The government could use the proceeds— From the start of service, tariffs are likely to fall equal to about half a year’s public capital about 30 percent below those at the time of bid- expenditures or two years’ capital inflows (port- ding, or to less than half what they had been before folio and direct foreign investment)—to finance the tender was issued. That will bring retail prices new public sector investments or to reduce the within the range for the region, but still 20 to 30 foreign debt stock by about 6 percent.World Bank percent higher than the best international prices, estimates suggest that the total fiscal impact of the about US$50 for 360 minutes of GSM service. second license (including future taxes and research and development) will be much larger— Performance of the incumbent in present value terms, more than US$2 billion by 2008, and perhaps as much as US$3.5 billion. As in other countries, the imminence of compe- Moreover, Medi Telecom expects to employ about tition alone prompted big improvements in the 3,000 people, and its operations may generate incumbent’s service: 20,000 additional jobs, mainly in sales, distribu- ▪ Between March and November 1998, as the tion, and network installation and maintenance. tender was being prepared and expressions of interest were being sought, IAM reduced Conclusion mobile service prices by about 25 percent, par- Viewpoint is an open tially rebalanced tariffs for fixed telephone ser- The 1990s have seen an unprecedented pace of forum intended to vice, and committed publicly to expanding telecommunications reform around the world, but encourage mobile and fixed networks. some developing countries have moved more cau- dissemination of and debate on ideas, ▪ In December 1998, shortly after the tender was tiously. Reform has been particularly slow in the innovations, and best issued, IAM again reduced its mobile charges Middle East and North Africa, where such coun- practices for expanding by about 25 percent and introduced the abil- tries as Algeria, Syria, and Tunisia have maintained the private sector. The views published in this ity to receive short text messages. closed markets. Elsewhere, as in parts of Africa and series are those of the ▪ Although IAM introduced GSM service in 1994, South Asia, unclear regulatory frameworks, lack of authors and should not it connected most of its customers (and con- process transparency, and indefinite reform time- be attributed to the World Bank or any of its siderably improved service quality) while the tables have made private investors hesitant and affiliated organizations. second license was being processed. Its cus- prevented end users from getting the full benefits Nor do any of the tomers increased by 57 percent in 1998 and by of competition. Morocco shows that a middle- conclusions represent official policy of the another 30 percent in the first half of 1999, income developing country can quickly become World Bank or of its reaching more than 170,000 in July 1999. attractive to major international investors. Its Executive Directors or reform sets a quality benchmark for the region and the countries they represent. Fiscal impact and jobs the effects are thus likely to extend beyond Morocco to many of its neighbors. To order additional copies please call At about US$40 per inhabitant, the license price In the 1980s and early 1990s the World Bank financed modernization 202 458 1111 or contact exceeds by 50 percent or more what operators and expansion of IAM’s network. An April 1999 telecommunications Suzanne Smith, editor, recently paid for mobile licenses in most other sector adjustment loan of US$100 million supported initial liberaliza- Room F11K-208, The tion, including the issuing of the second GSM license. World Bank, 1818 H countries (figure 1). These include other middle- 1 Revenue sharing in Lebanon probably has a higher present value Street, NW, Washington, income countries in the region (Egypt, Turkey) but is not readily comparable, as mobile replaced the destroyed D.C. 20433, or Internet address ssmith7@ and elsewhere (Hungary), mature economies fixed network and the future was more uncertain. worldbank.org. The where operators expect to build up large cus- series is also available tomer bases with high purchasing power (Italy, on-line (www.worldbank. org/html/fpd/notes/). Spain), and small but very high-income markets Björn Wellenius (bwellenius@worldbank.org) Printed on recycled (Belgium, the Netherlands). Among recent trans- and Carlo Maria Rossotto (crossotto@ paper. actions, only Austria did better than Morocco.1 worldbank.org), Telecommunications Division