Special considerations regarding the development of cost models in small countries IIR‘s Telecoms Cost Accounting Conference 2009, Dubai 25th – 29th October.

Special considerations regarding the development of cost

models in small countries

IIR‘s Telecoms Cost Accounting Conference 2009, Dubai

25th – 29th October 2009

SBR

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SBR Juconomy Consulting AG offers sound business, technical, regulatory and legal advice on regulated markets in the telecoms sector and other network industries (post, electricity, gas, railways), as well as the media and information technology (ICT) segments

Established 1st March 2004

Practices in Düsseldorf and Vienna

SBR

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Afghanistan, Austria, Bahrain, China, Czech Republic, France, Germany, Ghana, Greece, Italy, Kosovo, Madagascar, Namibia, Netherlands, Norway, Oman, Poland,

Romania, Samoa, Saudi Arabia, Slovenia, Spain, Switzerland, Tunisia, UAE, UK

Broad international project experience in Europe, the Middle East, Asia, Africa and the Pacific

SBR‘s experiences from cost modelling

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Top-down and bottom-up cost models

Models for regulators, operators and industry organisations

Cost models provided in e.g. Germany, Austria, Afghanistan, Samoa etc.

Projects on regulatory cost issues in Germany, Austria, Bahrain, UAE, Madagascar etc.

Content

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IntroductionIntroduction

Establishing Cost Models in Small CountriesEstablishing Cost Models in Small Countries

Doing Cost Assessments in Small CountriesDoing Cost Assessments in Small Countries

SummarySummary

Introduction

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Aspects

Cost models (CM)

Small countries

CM are required for both operators and regulators.

Aims of CM are e.g. to set prices (through regulator or

operator), decide on investments and acquisitions.

Operators and regulators in small countries faces some

different considerations e.g. smaller networks, smaller

and/or less operators, less economies of scale.

Definition of a small country: one with less than 1-2 Mio.

inhabitants.

Introduction

Modelling decisions to be made are including a large set of aspects:

Cost of capital (WACC

CAPM or current costs)

Identification of cost

drivers

Identification of CVRs

(cost volume relationships)

Definition of services

Definition of business

units

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Cost Base (LRIC/LRIC+/

FAC/Marginal Costs)

HCA vs. CCA (w/o FL)

Bottom-up or top-down

Special issues regarding CM in small countries

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Low economies of

scale

Limited ressources for

economic modelling

Low transmission costs

but high OH costs

Centralized

organisations

Network design Economical issues Issues for regulators

Simple backbone network structures and traffic modelling

Small territory No geographical deaveraging possible

More detailled modelling required

Large proportion of international traffic

Few and/or small

operators

Challenging

competition situation

Less anonymous and

more direct

communication (?)

Limited resources

Cost modelling in small countries

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Situation in small countries

Smaller networks but more detailled

modelling

Small or no backbone / simple

backhaul

Low transmission costs but high

proportion of OPEX

Cost constraints on modelling

Challenging market situation for

regulators

Direct communication

Development of the models

Top-down vs. Bottom-up

FAC/FDC vs. LRIC

HCA vs. CCA

Definition of services and cost centers

Designing the network

Cost assessments

Operator to be modelled

Data gathering

Decisions to be made

Content

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IntroductionIntroduction

Establishing Cost Models in Small CountriesEstablishing Cost Models in Small Countries

Doing Cost Assessments in Small CountriesDoing Cost Assessments in Small Countries

SummarySummary

Cost base: FAC/FDC vs. LRIC

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Pro

s

Implies low costs for the regulator

Lower requirements on the know-how of the regulator

Low risk of underestimating the costs

The pros and cons of FAC/FDC

Co

ns

Information asymmetries in combination with principal-agency problems makes it hardly possible for the regulator to approve the data delivery from the operators

Difficulties to define and quantify the allocation keys

Difficulties to exclude inefficiencies

Implies high costs for the operators

Updates of the cost models implies extensive work

Intransparent regulation as most data is not public

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Cost base: FAC/FDC vs. LRIC

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Pro

s

Incentives for operators to minimize costs

Excludes historic developments and sunk costs

Excludes inefficiencies

The pros and cons of LRIC

Co

ns

Enables bottom-up modelling Less principle-agency problems

Implies low costs for the operators (due to limited data gathering)

Updating the cost models is relatively easy at a low cost

Requires extensive knowledge for the establishment of the cost models in order to assess all relevant costs

Implies high costs for the regulator

Difficult to assess the incremental cost and to exclude inefficiencies in a top-down model

Risk of underestimating the costs

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Cost base: FAC/FDC vs. LRIC

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* High setup costs but low costs of operation of the cost model

Characteristics of modelling in small countries FAC/FDC LRIC

Smaller networks but more detailled modelling - ++

Small or no backbone / simple backhaul + ++

Low transmission costs + ++

High proportion of OPEX ++ --

Cost constraints on modelling -- -*

Challenging market situation for regulators +/- +/-

Direct communication ++ ++

Small capacities at regulated operators -- -

Top-down vs. Bottom-up and HCA vs. CCA

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FAC/FDC

Top-down as bottom-up is hardly possible

Both HCA and CCA are available (Decision should depend on the age of the networks, historic development and development of equipment prices etc.)

LRIC

Top-Down or bottom-up decision depends on aspects like the support from the operators and their accounting departments, certainties about inefficiencies and the definition of cost centers and services etc.

Based on the simplier network design in small countries, a bottom-up approach is often more appropriate for small countries

LRIC as cost standard is generally to be used with CCA

Decision on top-down vs. Bottom-up as well as HCA vs. CCA depends inter alia on the decision on

FAC vs. LRIC

„Building the network“ within the model

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1-3 core sites (switches and MSCs) – limited backbone

Simple star-formed backhaul network

Low traffic volumes

Short distances

Characteristics of networks in small

countries

More detailed models required as the „law

of large numbers“ does not apply.

Importance to downsize the networks

(including number of nodes) in order to

increase utilization.

Redundancy problems have high impact on

costs

Compression is no large issue

Implications for the network modelling

Modelling must be aligned with available data

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Garbage in – garbage out

A cost assessment based on modelling can never be better than the quality of the inputs.

If the model is more detailed than the availbale input variables, the outcome has no

quality!

1. The cost modelling must be aligned with the data gathering process

2. Cost models must be adapted to each country

3. Tailormade cost models have a higher quality

Content

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IntroductionIntroduction

Establishing Cost Models in Small CountriesEstablishing Cost Models in Small Countries

Doing Cost Assessments in Small CountriesDoing Cost Assessments in Small Countries

SummarySummary

Definition of the „operator“ to be modelled

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Multiple real operators

The costs are modelled for

all regulated operators

Assessment is time

consuming as all operators

must deliver input data

Benchmarks are less

required as multiple input

are delivered nationally

One real operator

The costs are modelled for

one operator and results

are used for all market

participants

Assessment quality and

time needed rely on the

one operator

Benchmark data can be

used to a limited extent

Hypothetical operator

The cost models are fed

with input data for a virtual

hypothetical operator

Enables easy use of

benchmark data

Assessment effort is relativ

low as only one operator

is modelled

Decision depends on national conditions, e.g. the number of operators, legal situation, market

situation, aims of the regulator, age of the networks etc.

General quality aspects of data gathering

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Garbage in – garbage out

Understanding the deliverables

Cross checking of the data

Quality aspects

Interaction with the operators has a large

impact on quality.

National adaptation of cost models

required.

Standardized cost models have the risk of

lower quality.

International benchmarking and

triangulation in the data gathering required.

Implications for the network modelling

International benchmarks

Challenge to adjust data from large countries to small

countries i.e.for network equipment, OPEX ratios and

other mark-ups

International benchmarks

Challenge to adjust data from large countries to small

countries i.e.for network equipment, OPEX ratios and

other mark-ups

Challanges regarding the data gathering in small countries

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Miscellanious

3rd party resources (consultancy studies, white papers, ITU sources)

mostly done for large countries

Miscellanious

3rd party resources (consultancy studies, white papers, ITU sources)

mostly done for large countries

Data Gathering from operators

a) Small countries have few operators Heavy dependency on existing operators and

difficulties to assess the quality of data.

b) Distance to operators is limited enabling intense contact with operators as long as

these are managed nationally

c) As operators and regulator are relatively small, the resources are limited

Data Gathering from operators

a) Small countries have few operators Heavy dependency on existing operators and

difficulties to assess the quality of data.

b) Distance to operators is limited enabling intense contact with operators as long as

these are managed nationally

c) As operators and regulator are relatively small, the resources are limited

Content

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IntroductionIntroduction

Establishing Cost Models in Small CountriesEstablishing Cost Models in Small Countries

Doing Cost Assessments in Small CountriesDoing Cost Assessments in Small Countries

SummarySummary

Summary

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Small networks and regulators accompanied by limited resources

Required detailled modelling of networks (but therefore less modelling of backbone networks)

Dependancy on a small number of operators to deliver input data

Larger importance of OPEX relative to CAPEX than in bigger countries

Cost modells in small countries

Summary

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High proportion of fixed costs due to low volumes and less economies of scale Traffic

sensitive models and costs

Relatively high transmission costs due to low economies of scale

Network quality drives costs to a large extent The degree of redundancy rapidly leads to low

utilization

Relatively high OPEX due to low volumes

No or low backbone costs

Expected results from the cost assessment in small countries

Contact

SBR JUCONOMY Consulting AG

Vienna Office: Düsseldorf Office:Parkring 10/1/10 Nordstrasse 1161010 Vienna 40477 DüsseldorfAustria GermanyTel: + 43-1-513 514 0-0 Tel: + 49-211-68 78 88-0Fax: + 43-1-513 514 0-95 Fax: + 49-211-68 78 88-33

[email protected]