TRA sets regulated rate of return applicable to regulated telecommunications services of Batelco and Zain at 9.5%

TRA's General Director Mr. Alan Horne said, "Reducing the cost of capital, currently set for Batelco at 12.2%, allows lower cost inputs to services and should facilitate lower prices for the retail customer as the cost reduction is passed through to the end-user creating heightened competition and improved value for money."

It has been almost four years since TRA last reviewed and determined the appropriate cost of capital for Batelco. During these four years there have been many changes in the industry and global environment and it is important that the cost of capital is adjusted to appropriately reflect the current environment. In setting this revised cost of capital, which is to be applied to both Batelco and Zain - Bahrain, TRA has been assisted by internationally recognised specialist consultants who have undertaken a rigorous study and analysis.

Alan Horne further explained that, "TRA has been both cautious and conservative in its approach to determine 9.5% to be appropriate, fair and reasonable. It balances incentives to invest with regulatory stability and takes into account the ongoing current economic uncertainty."

The cost of capital is the rate of return required by investors for investing in specific activities. An assessment of investment risk is a major contributing factor in the cost of capital calculation. Since risk varies by sectors so does the cost of capital of companies operating in different economic sectors. For example the cost of capital of a construction company can be expected to be different from that of a telecommunications company: whereas the construction sector is cyclical and subject to ups and downs, the telecommunications sector is more stable and less prone to fluctuations. Telecommunications has become more like a public utility: even in difficult economic time, people make phone calls and use electricity but they can postpone the construction of their dream house.

The regulated rate of return is a very important parameter that affects the cost base of operators and ultimately the price paid by consumers for telecommunications services. It represents the return earned on capital invested. Setting the cost of capital at an inappropriate level may deter efficient investment (risk of under investment) or encourage inefficient investment (risk of over investment), which would be detrimental to consumers and the sector more generally. It could also lead to unjustifiably high prices. Thus it is essential to set the cost of capital at a fair and reasonable level in line with the underlying risk of the business.

To estimate the cost of capital, TRA has had regard to international best practice, latest available market information, regulatory precedents and the current economic environment. TRA considers that this rate provides the right investment incentives while preventing excessive profits.

At present only certain of Batelco's services are regulated. Without prejudice to the on-going consultation on mobile termination rate (the charge paid by an operator to terminate traffic on a mobile network) Zain termination rate will be regulated. A change to the cost of capital impacts the regulated cost of operators in different ways. For example lower network cost means than Batelco retail can pass on to consumers the cost savings. Similarly, other operators who rely on wholesale products to provide broadband or terminate traffic, can compete more aggressively and lower their retail prices. Through the competitive process lower cost at the network level can be expected to flow through retail prices. As lower prices generally stimulate demand, overall revenues may further increase.