Booz Allen Hamilton: Towards more effective regulation

The success or failure of telecom sectors often hinges on the presence of effective regulatory frameworks and practices. Empirical evidence demonstrates that effective regulation encourages growth and investment in the telecom sector, promotes technological and service innovation, and is correlated with lower prices and greater consumer choice, leading to greater service penetration.

Issues surrounding telecom regulation are particularly important for countries in the Middle East and North Africa (MENA). "Most countries in the region have made real strides in gradually liberalizing their telecom markets and introducing new technologies, but as a general rule, the observed approach to policy and regulation could still improve" says Bahjat El-Darwiche, a principal with Booz Allen Communication and Technology practice, based in the firm's Riyadh office. "This would help reduce the regulatory uncertainty that can dampen investments and inhibit telecom sector development in the region."

"One case study in an emerging environment showed that mobile investments were 25 percent lower, total cost of ownership 10 percent higher, and mobile market penetration 30 percent lower than they would have been had this market adopted a more effective regulatory framework," adds El-Darwiche. "Numerous other examples of tactical or mis-adapted regulatory management destroying market value can be found around the world."

"Effective regulatory management aims to establish adequate regulatory frameworks and mature regulatory practices that drive market development and optimize value creation in the long-term," notes El-Darwiche. He explains that effective regulatory management is characterized by a holistic and strategic approach to policy and regulatory issues, long-term regulatory planning, and clear assignment and separation of policy and regulatory responsibilities. In other words, the effectiveness of regulatory management can be evaluated based on the extent to which it is strategic rather than tactical and customized to market conditions at hand rather than copied and pasted from other markets without due adaptation.

"All of the key stakeholders involved in the telecom sector—government, regulators, and operators—have distinct and important roles to play, and must embrace them fully," says El-Darwiche. In examining the roles of these three main players, nine key regulation development levers are identified that can help enhance the growth of the telecom sector in the MENA region. Ultimately, it is the end-user who, if not the target of effective regulatory management, is the player most positively impacted by it, in the form of lower prices, more advanced technologies, and greater service variety.

The Role of Government

Ensure Regulatory Independence
Government works on the macro level to advance the telecom sector, the national economy, and society as a whole. "To fulfill their legal mandate more effectively," says Fady Elias, a Booz Allen associate, based in the firm's Beirut office, "governments typically empower regulators to achieve structural and financial independence. To achieve this end, government does not only issue a policy decision to create an independent regulatory agency, but also empower the agency to act independently and effectively." The MENA region has achieved sensible progress; however, regulators in the region could further advance their political and financial independence.

Reduce Government Ownership of Incumbents
"On the other hand," explains Elias, "regional governments could consider further reducing their ownership of incumbents to promote telecom sector investments." Lower ownership does not prevent the government from guiding the sector toward a healthy development path. Although MENA countries began the liberalization of their telecommunications markets in the last decade, most have yet to reduce government ownership levels.

Identify Appropriate Financial Obligations for Operators
"The third key action that the government could take toward setting a favorable environment for telecom sector development is to identify an appropriate level of financial obligations to impose on operators," adds Elias. Some degree of financial obligations is necessary, for example in the form of corporate taxes; contributions raised can be used to finance regulatory oversight activities, research programs, and Universal Service Funds. The key is that financial obligations must be robust enough to fully finance these activities, but modest enough to promote the sector attractiveness and increase reinvestments. Indeed, the general trend worldwide is toward imposing lower financial obligations on telecom operators; nonetheless, many MENA countries continue to impose higher financial obligations on corporations than do many of their contemporaries.

The Role of Regulators

The Regulator acts as a guardian for the sector. It implements national policies, develops regulations, monitors and reports sector growth, and referees disputes between competing stakeholders, including consumers.

Abide by Four Key Driving Values
To ensure market growth and overall sector development, regulatory authorities must abide by four key driving values: transparency, efficiency, independence, and non-discrimination. These values represent best practices in modern regulation. "Achieving these goals is not always simple, particularly as MENA countries transition from entrenched monopoly-based systems to more liberalized market structures," says Chady Smayra, a Booz Allen associate, based in the firm's Beirut office. Many of these issues will be addressed over time as markets in the MENA region mature and regulatory practices correspondingly evolve.

Adopt Service- and Technology-Neutral Licensing and Regulatory Frameworks
Regulators should also make sure that the licensing framework is not constraining telecom sector development. In general, advanced telecom sectors tend to adopt service- and technology-neutral licensing and regulatory frameworks. The benefits of neutrality are numerous, as it removes regulatory preference from competitive technology choices and allows operators to increase service variety, increase revenue streams, and reduce inefficiencies. "Jordan has also adopted a neutral licensing regime," says Smayra, "enabling the deployment of a wide variety of technologies and services by licensed operators, without obtaining further approval—WiFi, WiMax, OnePhone, VoIP, Triple Play, Mobile TV, IPTV, and Blackberry."

Identify and Sanction Anti-Competitive Practices
In addition to embracing the four "best practice" values of telecom regulation, regulatory authorities must have the capacity to identify anti-competitive practices and the power to sanction them when they occur. "To guard against these practices, regulators should begin by implementing and publishing regulations outlining fair competitive practices and pricing frameworks," adds Smayra. This should be done in consultation with key stakeholders to encourage buy-in from all parties affected by the regulations. Regulators should also clearly define the key telecom markets in which competitive regulation will be implemented, define and identify the holders of significant market power in those key markets, and define anti-competitive practices.

Ensure Access to Resources
The final key role for regulators is to ensure that all operators in the telecom marketplace have adequate access to necessary resources—both infrastructure and customers. On one hand, regulators need to decide upon the right approach to managing the country's telecom infrastructure. Infrastructure models generally fall into one of two camps: a virtual separation model, in which the incumbent retains control of its infrastructure, and a full structural separation model, in which the incumbent's infrastructure is managed by a structurally and operationally separate company. The latter model may gain increasing relevance in the future. "Full structural separation is considerably more complex to implement than virtual separation, and incumbents often resist its adoption," adds Smayra. "Moreover, the benefits of this type of system cannot be fully realized until after the complete liberalization of the telecom market." In the long run, however, adopting a full structural separation will attract investment in the sector and encourage the infrastructure company to keep infrastructure modernized, so as to best attract clients.

On the other hand, for new entrants in the telecom market to succeed, they must be able to access not only infrastructure, but also customers. Effective customer access regulation can be subject to four key principles: fair and timely interconnection, number portability, unbundling, and carrier selection.

The Role of Operators

The final stakeholders in the regulatory environment are, of course, the telecom operators themselves. "Having operators actively involved in the regulatory process is critical," says Smayra. "They bring to the table a practical understanding of market operations and current technologies, and provide needed access to infrastructure resources and customers." To this end, they should focus on (1) building effective regulatory management capabilities within their organizations, and (2) communicating proactively and intensively with regulatory authorities.

Build Effective Regulatory Management Capabilities
Six key factors can help operators build effective regulatory management capabilities within their organizations—corporate positioning, strategic integration, robust analytics, proactive lobbying, aligned culture and capabilities, and enabling operating model.
As their markets develop, operators should increase the scope and impact of their regulatory function. Although most regulatory functions are concentrated around transactional operations, as markets mature, functions are added on top of the transactional regulatory operation, including strategic planning, regulatory analyses and public affairs.
Regulatory Management Functions Evolution

Communicate Proactively and Intensively with Regulatory Authorities
To successfully drive the development of a fair regulatory environment and a healthy telecom sector, operators must adopt a proactive, communication-intensive approach to dealing with emerging regulatory challenges and interacting with regulatory authorities.
To this end, they should strive to develop positive, professional relationships with regulatory authorities that are assertive and at the same time receptive to change. Smayra notes that, "doing so will allow operators to comfortably engage with regulators and other key stakeholders on a variety of topics, from specific decisions to the overarching strategic vision for the sector."

Potential for Growth in the Middle East

"Significant potential now exists for fully developing the region's telecom sector, unleashing its full market value and, accordingly, increasing the sector's overall contribution to the regional economy," says Dubai-based Booz Allen vice president Karim Sabbagh who leads the firm's Communication, Technology, and Media engagements in the Middle East. In 2006, real GDP growth in the MENA region surpassed that of the rest of the world by nearly 2 percent. And from 2000 to 2005, average population growth rates in MENA countries consistently exceeded those of the rest of the world. Additionally, low penetration rates are observed throughout the MENA region (especially for internet and broadband), which again, translate into significant room for growth.

Overall, says Sabbagh, "private participation in infrastructure in the region is increasing, jumping from around US$1.6 billion in 2002 to US$6.7 billion in 2005." He also notes that "a lack of effective regulatory management in MENA countries—and its effect on the risk calculations of potential investors—may raise major roadblocks to new investment." Encouraging this trend toward private participation and market liberalization will require careful action on the part of the three main players in the telecom sector—governments, regulators, and operators.

"Ultimately," Sabbagh says, "as stakeholders work together to institutionalize effective regulatory frameworks and practices, the environment will be ripe for increased investment, innovation, and higher adoption and usage rates." The end result will be a higher contribution to the MENA region's overall economic and social development.