Chapter 4: Institutional and Associated Financial Considerations ¹

I. Introduction

Dramatic cost declines of ICT products and services in comparator small and developing economies indicate that such costs could also drop in the Pacific. New infrastructure is achievable. New entrants are interested in providing service.² New benefits in jobs, services, and quality of life for residents of other countries can be brought to the Pacific, if supportive conditions can be put into place.

Now is an excellent time to pursue progress. However, the need is not for a once-and-for-all technical solution – since telecommunications is far too dynamic an industry for that. Rather the need is for an institutional and management arrangement (or support system) capable of fostering good decision-making, and strong Pacific telecommunications infrastructure, services and opportunities.

A defence of the current telecommunications situation could be that it is not possible, given the economies of scale in telecommunications, for scattered and sparsely populated Pacific islands to finance state-of-the-art participation in the new information economy. This study indicates that the situation is much better than many people may realize.

There remain the questions: “Which Pacific States are truly motivated to solve this problem?” and “What improvements in progress can be achieved through joining forces and sharing resources/expertise, and which ones might best be done with opportunities available at local levels?” Some States (in the Pacific, and in somewhat parallel situations) are making changes, and beginning to see good results.

With new regulatory and corporate structures, possible catalytic assistance from development banks or others, and importantly through declining costs, stakeholders in the Pacific should be able to support operations of a Pacific telecommunication authority, or mechanism, (e.g. “PACITEL”)³ and a contracted platform operator (e.g. “PACSAT”),⁴ or other means of cooperating on decision-maker support, policy and systems toward beneficial connectivity improvements.

Catalytic efforts by development banks, donors and (most importantly) Pacific governments can be invaluable in fostering an expanding array of telecommunications entities and ICT service providers. These can drive expansion of services and eventually enable a self-sustaining telecommunications sector. Financing an enhanced satellite and cable “backbone” should deliver capacities for existing and new services. Though initial costs might be slightly higher than in larger markets, current cost gaps can be narrowed, allowing the Pacific’s economical but educated workforce to create jobs and other opportunities.

A multi-State Pacific telecommunication authority could serve to expand capacity to be used by private and public sector firms that critically need better telecommunications. Such an authority could derive from existing institutions, or from logical extensions of them. By working with governments and public and private parties to implement an institutional and financial framework for progress, such an authority would greatly benefit the business/service plans for telecommunications in all the participating Pacific States.

While there is no need to mimic others, Pacific connectivity enhancements might benefit from leveraging recent experiences in the Caribbean, circum-Africa, Scandinavia, China and southern Asia. Mobile phones in the Bangladeshi Grameen example have been in part self-financed, at affordable rates, helping to transform local economies and social connectivity. Grameen is an example of a new financing methodology showing the way for the spreading of new technology to the poor. Indeed, with mobile telephones now reaching 33 million (22% market penetration) in Bangladesh, the Grameen business model is being utilized less than previously – but may be an invaluable transitional model for Pacific States that have yet to realize widespread access to telephones. Low-cost computer initiatives are growing. Bandwidth demands from less-educated or low income people are potentially larger, not smaller than in better-educated or richer economies, as more multimedia-intensive content may be needed for development-oriented services and applications, as well as for entertainment – as “the message may be in the medium” more than “in the content” than for some technical or business applications. A challenge may be to leverage such experiences to create content relevant to all in the Pacific.⁵ Appropriately placed e-centres could be designed on a community or clan/family service model, to provide connectivity, entertainment, and beneficial services.

While estimated benefits from expanding multi-sectoral connectivity are huge – of the order of US$60+ million per year as summarized in Chapter 1– we do not really need detailed cost-benefit analyses when the costs of not having sound institutions and technologies in the telecommunications sector are most likely to be far in excess of the annualized direct costs of appropriate technologies. The benefits to markets and society of a sound and dynamic communications and information system have tended to be much greater than anticipated over the past 15 years. They also add dignity and vitality to living in often remote communities. The new technologies also have the real prospect of attracting people both from the “Pacific diasporas” and natives of more developed countries, i.e. people who would like the mix of a Pacific life and reliable communications.

The main objective of this study is not to further debate or document the new ICT revolutions – beyond what appears elsewhere in this report and appendices, that task is for others, and indeed it is well-understood in general terms across the media.

What is sought is to facilitate sustainable and ultimately self-financing access across the Pacific to improved and cheaper telecommunications services, including mobile phones and broadband Internet. As manifest in the Pacific Regional Digital Strategy,⁶ there is a desire to use and possibly piggy-back on new technology being developed and applied elsewhere – satellites, cables and wireless systems – so that living, working, investing and holidaying in the Pacific can be an attractive option for all people. New technologies can make residence in such Pacific island locations compatible with being fully in communication with the rest of the world, but the costs and convenience to date are a problem – and this is the challenge.

While there is a bewildering range of new technical possibilities, there is a risk of wasting considerable public sector resources on unsustainable approaches to infrastructure and services. If a proposal calls for large direct governmental investments, or of governmental commitments to build and main infrastructure, that proposal should be looked at with caution, even suspicion. A truly sustainable process should be commercially viable, and should have the backing of reputable commercial providers. However, governments have a critical role: they need individually to support the creation of a predictable policy environment if new investments within their countries are to be feasible and less risky than investments of the past. A predictable policy environment will lower capital costs by lowering risk, making such risk easier to predict, with the result that lower-cost funds will be available for such projects - enabling services to be more affordable to final customers. A harmonization/coherence of approaches by Pacific States, to enable providers to work similarly and predictably in several Pacific States, is likely to attract more successful partnerships – than if each Pacific State separately creates regulatory and business regimes that lack such regional harmony/coherence.

Finally, on the need for aid finance, there are many external benefits from what is proposed, in terms of educational, health, weather and disaster-management facilities based on new telecommunications. Poverty, isolation, and a shortage of opportunity in the Pacific is also a breeding ground for disaffected groups. All of this makes a case for development bank and official governmental development assistance (ODA) seed capital. The development banks have been active in such reform space, despite long setbacks. It would seem essential that they continue their support of the process, particularly of regulatory and institutional reform, and support for good decision-making, seeking to bring the benefits of competitive telecommunications. It was such support (from the World Bank) that helped trigger the beneficial ECTEL reform on telecommunications in the Caribbean. One way of summarizing the emerging opportunities is that a case can be made for a trans-Pacific telecommunications authority reporting to and supporting Pacific island economies, which would have a structure and legal capacity to negotiate contracts for a platform entity. The platform service entity would structure and finance the backbone system, which probably would be a mix of existing satellite, relocated cable and new dedicated/shared satellite and terrestrial wireless capacity, which could be serviced competitively to expanding and competitive telecommunications entities in Pacific island economies. Illustrative sample options are sketched out elsewhere in this document – as discussion points for the Pacific to consider as it crafts its strategy and implementation agenda. We note that it is by no means essential that the authority facilitate Pacific ownership of satellite capacity, as even one of the largest telecommunications entities in the Pacific, Telstra in Australia, owns no satellites and contracts for all capacity on a purely commercial basis.⁷

II. Institutional Support: Considerations

With the right organizational and investment structures the framework for delivering new low-cost services can become clearer and stronger. The established authority could have a charter for facilitating service delivery by private entities now active, or potentially active, in the satellite, cable and terrestrial wireless arena. There will, however, be a need for expertise, training and incentives in any new Pacific regulatory structure and in the member governments and agencies, so that officials and their advisers are capable of matching the dynamic and well-financed private sector participants and competitors. The need for a new telecommunications authority is highlighted by the following considerations:

(a) When the identity and legal status of the consortium managing the investment is uncertain;

(b) Where the technology to be used is rapidly evolving, so that competitive modes of provision of service make demand and thus revenue projections difficult.

Put in other words, there is a need to choose the best charter, form and financial structure for a Pacific telecommunications authority, which may in turn attract, negotiate and arrange partnerships, provisions and finance for an expanded capacity to provide telecommunications services. Existing stakeholders in Pacific telecommunications will have a diversity of suggestions for such an authority – which could be harmonized to guide the formation of the actual body.

In summary, the suggestion is that a there be formed a cooperative Pacific regional authority with all⁸ Pacific governments as members, a clear charter, and a management charged with implementation of the charter free of day-to-day political interference. The ECTEL documentation provides a guide to what would no doubt be adapted to the situation in the Pacific.

A significant aspect of institutional design will be enabling sound contracts to be written and enforced by the new regional mechanism, so that funding can be obtained by platform/service entities. If risks are mitigated through sound allocations and incentives, this will also enable the costs of capital to be minimized for the class of activity.

Platform operators should operate for the benefit of all Pacific island economies, and should be barred from having any restrictive political, diplomatic, social, economic or other agenda. The ability to abide by transparent and agreed-to financial and governance criteria should be the only prerequisites for States to participate as partners in co-management of the regional cooperative mechanism, to benefit member States with sustainable and enabling platforms, products and services.

A. Convergence of Telecommunications Services

The fact that there is convergence of information and communication technologies, applications and services indicates that it no longer makes sense to think of excluding service providers from some of the wired, wireless, television, radio, Internet and mobile services – as increasingly the technologies overlap and converge. The latest mobile phones embody all of these technologies and more, and they will be relevant devices and become relatively cheap over the time frame of the satellite investments.

While it can be meaningful to define and auction spectrum ranges, many questions can be raised about the virtue of defining technical boundaries for regulatory purposes. There may be merit in having limited geographical franchises and so facilitate benchmark competition, yet it may be useful to reconsider the restrictions that prevent Internet service providers, mobile phone companies and land line companies from competing with each other. Companies such as Alcatel and Motorola will argue for removing cross-technology boundaries, within regional franchise models. Because of small numbers across some parts of the Pacific, it is an interesting question as to how many full-range service providers would prove economic and viable, and how many of these might come from the incumbents (or perhaps alliances/consortia of such incumbents – perhaps in the future acting regionally rather than merely in one State). However, that number should be adequate, if providers are rewarded for being efficient.

B. Tender Processes

One priority for development is the process by which the regional authority would call for tenders to meet desired investment and service goals. Preparation of such process will require substantial inputs of a complex nature – technical, legal and financial. The need for, and definition of, such a tender process, and the goals to be delivered, might be part of the charter of any cooperative mechanism.

The development of financing options for Pacific telecommunications will be made easier if the required goals are clear and private parties/consortia can make conforming tenders, albeit with the right to suggest modifications. What we know from extensive experience with private sector financing of infrastructure across the globe, is that governments and their agencies (including international bodies) can (and should) create a climate of trustworthiness and income predictability for investors that makes such investments attractive to those ultimate lenders with long-term funds available at acceptable rates – e.g. pension funds.⁹

The term “income predictability” includes factors such as agreement on access charges, user charges, lease fees and processes for setting user charges, for example. In general there should be only direct national or supra-national regulation of such charges where it is not possible to achieve genuine competition. In such cases the tender process for a monopolistic¹⁰ element (competition for the market) is a preferred direction to go, with clear processes for tariff adjustment over time.

C. Institutional Influence on Financing Issues

The reason debt finance for regulated monopoly infrastructure services (e.g. pipelines, transmission lines, ports) in Australia and the United Kingdom is available from pension funds at rates well below 10 per cent (often ~ 6 per cent) but that low-income countries such as Indonesia, say, face costs of debt finance for essential infrastructure at over 20 per cent, is that there is little confidence to date that tariffs and other determinants of income flows over the duration of contracts (say 15-30 years) will be free of political constraints and intervention. It is the government that is the source of this risk, and the need is for regulatory certainty, believable assurances and enforced laws that make sure that tariffs and income-affecting policies are within the boundaries defined by contracts, which need also to be competitively tendered. While often “comfort letters” are sought from, and offered by such high-risk governments to investors, what is really sought by lenders is confidence that contract terms will be respected and enforced. That confidence can lower capital costs by around 10 per cent, as it brings in the class of long-term investors such as pension funds that are happy with a real (post-inflation) rate of around 5 per cent on secure, asset-delivering essential services. When income streams are “political”, through intervention re tariffs and contracts, this creates risk and drives the weighted average cost of capital for infrastructure to very high levels – e.g. 25 per cent. It may even make it impossible to obtain funds at all. In turn, this political risk element can push costs to consumers or government upwards, despite the fact that the infrastructure services are essential and often (at least temporarily) monopoly¹¹ based, thus making them a secure use of funds. Although in the current era telecommunications are far from being monopoly services – indeed the competitive and technology change element is extreme in many cases – the point still applies: it requires sound governance over contracts and their enforcement in order to obtain the lowest cost of capital and thus the most affordable service charges.

What needs also to be stressed, given the private sector nature of satellites and most telecommunications services in the 21^st century, is that the whole governmental mechanism for handling public-private partnerships and private sector involvement in infrastructure needs to be upgraded, as is in process in some Pacific countries.

Financing telecommunications may be difficult, given government budget constraints, and a lack of private sector appetite for funding Pacific telecommunications investments. But the situation gets even more complex owing to new yet uncertain technologies – e.g. WiMax. There is much debate about which standards and models will prove viable in terms of wireless systems, and just how far they can go in replacing the need for land lines. From telecommunications systems once being deemed natural monopolies, owing to the monopoly status of the copper connections to the home and business, new wireless technologies are now making virtually all elements of telecommunications open to competition at great potential benefit to consumers. For the service providers, however, the commercial risks are expanding, not contracting, with these new and disruptive technologies.

A key priority is the reduction in policy and in other government-sourced risks, a major challenge going well beyond telecommunications policies. Creating a regional telecommunications authority, with a sound corporate structure, and free of day-to-day political interference as per its charter, with management by an expert team, is one way of stepping into a new financing arrangement. In sum, there may be development bank seed capital and co-finance, supplier finance, and most critically, market demand-based finance from those who will be on-selling the capacity and thus will be able to enter into contracts for use of satellite and cable capacity.

D. Regulatory Issues

Pacific land lines and charges, Internet access and costs, and penetration and roaming options for mobile phone services are all documented as lagging well behind normal requirements of market economies. The good news is that new technologies – wireless, satellite and Internet – are increasingly likely to be cost-effective at low scale, as suits the Pacific. But for investors to sustain interest in provision of a range of telecommunication services across a range of jurisdictions, the cooperation agreements, a relevant regulatory framework, and sound governance arrangements need to be in place and to be contractually supportive of those investments while delivering fair and ideally competitive outcomes.

This pattern of technical and social change also means that the regional communications authority will need high levels of technical, financial and commercial expertise. Given that the expanding and overlapping services from wireless and land line technologies, causing Internet, television and voice communications to reach out in new ways and on small platforms such as mobile phones, there will be pressure on the regulatory process for allowing systems of provision that enable one provider to cover all systems of delivery – and to argue that this may be the most efficient system. Thus while we do not believe there is a case for tolerating barriers to entry, we should also not create, through regulation, barriers to realizing the economies of scale and scope that exist.

E. New Entrants

The recent activity of Digicel in Samoa, Papua New Guinea, the Cook Islands and other Pacific countries, and the expansion of the Virgin group in Pacific aviation, all suggest that this connectivity project is timely. Financing groups of island telecommunications investments, possibly in tandem or as adjuncts to larger external investments, would seem now to be deemed feasible and profitable.

An issue that has been a problem in attracting investment in infrastructure generally in the Pacific is that governance arrangements in most Pacific countries make foreign and private sector investors wary of such investment. Globalization often means that the poorer performing economies, and economies deemed to have poor economic governance, attract less interest from the investment community. This suggests that for telecommunications, as for all other investment, the most basic financing challenge is to respond to the fact that political risks in the Pacific (and other country and group risks) are judged substantial, such that if capital is obtained it may be at premium rates of interest.

The world has recently seen a new breed of international technology service provider and investor, such as Orascom Telecom. Often based in developing countries and working primarily in other developing countries, a regional telecommunications authority might consider engaging their interest. For example, when some companies such as Malaysia Telekom,¹² AsiaNetcom¹³ or VSNL¹⁴ consider new systems that may contribute to enhanced Pacific connectivity, the regional authority would serve the Pacific well if it would engage them on partnering.

F. Some Key Risks Related to Institutional Setup and Operations

1. Setup and Initiation Risks

• Will the technology be appropriate to the likely time span of operations, and to the hopefully competitive environment?

• Will it work in the jurisdiction, given other possible changes?

• Is the regulatory structure on related activities consistent with the development?

• Will the contractor have the ability to install, maintain and update the technology in this rapidly changing field?

• Will legal clearances be delivered?

• Will land rights facilitate the necessary physical access?

• Will there be delays due to unforeseen or expected new uses of spectrum?

2. Ongoing Risks

• Technology risks: Will, for instance, GSM or wireless standards change and render the standard uneconomic? Is the technology speculative and “bleeding-edge” or, at the opposite extreme, obsolete?

• Will the operator be able to sustain the network and service effectively?

• Will conflicts of interest emerge?

• Will market risk prove a problem, e.g. VoIP (Skype) driving out other investment?

• Will project revenue be at risk from other challenges, related to subscriber numbers, airtime per consumer call, tariff pressures and interference, other competition?

• Regulatory risks: These include the extension of the licence period and access charges and interconnect policies.

• Availability of other radio spectrum may change and alter competitive conditions

3. Interconnection Risks

• Access risks relating to cross-network system connections and transit risks arise where efficient arrangements involve using other networks. In both cases, a sound regulatory and legal system is necessary for these risks to be effectively managed.

G. Risk Mitigation

There is sufficient evidence of market-based risk that the presumption should generally be that most ongoing and new investments in satellite and cable telecommunications are best managed through private sector investment. While such investments will need to be facilitated by improved governance and regulatory reforms in the Pacific countries, there should be a major caution against creating a new public sector body, other than a regional cooperative authority (which, as noted at the top of the chapter, may be formed from an existing body). Almost all the activities should be contracted for, with management and financing a largely private-sector matter, under rules set by the authority as per its charter. While shareholders in the service providers or operators could include signatory economies, it would be advisable not to have the investments directly owned by governments. Further, the boards of the regional authority and the consortium of operators would respectively be appointed for their expertise (the board of the former through Pacific island economies and Pacific Island Forum Secretariat; the board of the operators, in this latter case by and partially from the shareholders, and perhaps partially from stakeholders in Pacific island economies).¹⁵ The management team would report to the board as per the chart in Figure 4-2.

Most of the risks that will arise in provision of a new generation of services will best be mitigated by private parties, with the exception of the regulatory and political risks and land allocation and legal clearance risks, which the Pacific island economies can best deal with.

H. Recommendations on Institutional Options

1. The key to securing finance and the resulting investment is that potential investors have confidence in the organization and structure, as well as in the resulting income stream. An initial suggestion is that Pacific island economies be invited to endorse a Commission, made up of persons of relevant expertise and eminence, under a charter to expand sustainable telecommunications services in the Pacific. The endorsement process and subsequent appointment of the initial commissioners is a matter that could be overseen by ESCAP and the Pacific Islands Forum, for example. The suggestion is also that (say, seven) commissioners be appointed for terms of four years, renewable once, and that they be independent of individual governments and responsible for performance as set down in the charter of the regional authority and associated contracts.

2. Implicit in the formation of cooperative mechanism is that the Commission would develop expansion plans for telecommunications, including satellite capacity, both leased and ideally a special-purpose satellite with beams targeted on the Pacific island economies, reflective of the market and expansion plans. The authority would need members and staff with technical, financial, legal and regulatory expertise.

3. As cabling serving the Pacific has recently become an inventive set of modest one- or two-country initiatives, the regional cooperative mechanism could perhaps help by developing for and with Pacific island economies a strategic framework and tactics for promoting affordable cable projects, perhaps along the lines outlined in Chapter 3. Whether it should oversee all such projects, or merely help promote them, would be left to a decision by its members.

4. The respective service providers (such as fixed and mobile phones, Internet and television) and key user groups (education, weather, health and so forth) would, along with the new private satellite group of service providers to be commissioned, have inputs to the commission through a Service Provider Advisory Group, but policy and decisions would be made by the Commission as executed by the management team.

5. It is envisaged that the authority would call for tenders for a company to be charged with providing expanded backbone communications capacities, including satellite services and potential fibre-optic cable connections. To the extent that there is equity and loan capital available from development banks, ODA and other sources that will assist more rapid development of capacity; to the extent it is intended to subsidize some initial use of expanded communications; and to the extent that there is scope for attracting philanthropic support, there will be scope for those funds to be provided and managed via rules administered through the regional cooperative mechanism.

6. Figure 4-1 sketches a conceptual example of possible relationships proposed once the authority is established by the Pacific community. As noted, it is envisaged that, as with ECTEL in the

Figure 4-1. Possible organizational chart for a regional cooperative mechanism or authority

Caribbean, there should be a technical assistance grant along the lines the World Bank successfully made available to the Caribbean countries to start the process.

7. Alternative design proposals and suggestions could, in the meantime, be sought from interested parties with the relevant expertise.

8. The regional cooperative mechanism will need to have a sound corporate structure that enables it to prepare and sign contracts, and must have a top-quality professional staff.

9. The incomes earned by any such body from satellite and cable services, for instance, will need to be backed by enforceable contracts, so that any debt commitments that may be obtainable can have reasonable levels of risk and thus attract funds at a reasonable weighted average cost of capital.

10. The charter could be prepared based on best practices from comparator bodies, and in consultation with key players – e.g. Intelsat, ECTEL, cable entities, and mobile phone operators. This could be part of a technical assistance process for the Pacific, as was done for the Eastern Caribbean states that formed ECTEL.

III. Financial Issues

A. Stakeholder Issues:

The Development of Pacific Connectivity

1. Governments

Concurrent with the globalization of the world economy, which has been partly enabled and stimulated by rapid ICT penetration and applications, there has been concern among other countries that Pacific island economies also benefit from this process. Those countries have expressed interest in enhancing the effectiveness of their cooperation with Pacific island economies, to help ensure improved sustainability of the latter. In addition to the geographically neighbouring countries of Australia and New Zealand, the United States of America, Japan, European Union, and France have been major donors to Pacific island economies. Other countries, including China and India, have begun engaging with the Pacific on possible cooperation in development. Figure 4-2 shows the relative contributions to Pacific island economies studied by the World Bank¹⁶ between 1998 and 2002.

Although telecommunication infrastructure has been a major topic in such assistance and cooperation, the connectivity issue is difficult to solve with bilateral frameworks, or within a small group of some Pacific island economies and donors, owing to the economic scale and the dispersed population. With the stated intentions of Pacific island economies to build such infrastructure collectively under the Pacific Plan, partner governments’ ODA may be leveraged collectively with resources from development banks, other donors, and investors, through the regional authority and the service providers and operators.

Member governments of the Pacific island economies all have an interest in expanding the quality of, and access to, communications. Tourism and business locations in any country become more attractive with better communications, since more people wish to have ready access to wireless communications – whether at work or leisure. Therefore, we take it that all potential countries within the footprint of expanded satellite and terrestrial expansion will be keen to see the cooperative mechanism develop and will commission expanded services. In terms of their ODA budgets, it is hard to think of an area for aid where there would be larger external and flow-on benefits.

The major challenge for some governments will come from the deregulatory thrust of a new wave of telecommunications competition that should now arise. Since the existing telecommunications entities in the Pacific are primarily monopolies, one challenge for Pacific island economies will be to take steps to allow competition. It is interesting to note how this was accomplished by Caribbean members of ECTEL (see Appendix B). It is also worth noting that the incumbents should likewise benefit from expanded access to capacity and the disciplines of competition.

Figure 4-2. Aid donors to Pacific island economies covered in a World Bank study
Source: World Bank: Defining features of Pacific island countries

With the current renewed interest in building infrastructure and services, this is an opportune time for potential donors to be proactive, and to partner with the Pacific.

2. International Agencies

The international development banks (World Bank and Asian Development Bank) and the various ODA entities (including AusAID, NZAid and the European Union for example) all understand the pivotal role communications can play in facilitating improved governance and economic and social performance in the Pacific. USAID assisted the ECTEL effort in the Caribbean, and it might also find benefits in leveraging that investment for the Pacific. In terms of money spent to date, arguably the highest per capita aid in the world, the sums needed to kick start a telecommunications expansion are modest. But we believe that those funds will come only if there are signs of improved governance in relation to telecommunications and communications entities. The agencies have considerable experience in funding both telecommunications and regulatory bodies.

International organizations such as the United Nations (and its regional commission ESCAP), the International Telecommunication Union, the United Nations Development Programme, and specialized agencies such as UNESCO, WHO, UNICEF, WMO and ICAO all could pursue their visions more effectively with better Pacific telecommunications in place, and may be able to provide policy-making forums, advice and technical support for such work. Similarly, Pacific island regional organizations, such as the Pacific Island Forum (PIF), South Pacific Applied Geoscience Consortium (SOPAC), Asia-Pacific Telecommunity (APT), Asia-Pacific Economic Cooperation (APEC), including those in the fields of telecommunications such as the Asia-Pacific Satellite Communications Council (APSCC), Asia-Pacific Broadcasting Union (ABU), Pacific Islands Telecommunication Association (PITA), and the Pacific Islands Chapter of the Internet Society (ISOC) should be valuable stakeholders in a successful effort. The Pacific Disaster Centre might be a motivated partner in Pacific telecoms improvements, and the East-West Centre might be a valuable venue and partner for forum discussions on this topic.

3. Private-Sector Funding Sources (Pension Funds, Private Equity, Communications Entities)

The larger Pacific States, such as Papua New Guinea and Fiji, have superannuation and other funds that should create investor interest in quality telecommunications and satellite investments, if properly structured so that the income stream is made predictable. This means the funds will be concerned with the nature of both the contracts and the regulatory environment that is put in place in regard to contracts with the service provider parties as governed by the regional authority. While the gap between likely broadband and mobile phone costs and capacity to pay suggests that incentives may be required for operators and service providers in the early days, so long as such incentives are securely funded, this should enable the balance of funding to be provided by private funds, which can then make competitive returns for the superannuation contributors and beneficiaries.

Pacific banks, such as ANZ and Westpac, have strong interests in improved telecommunications, not least for ATMs and other service provision. Hence it is reasonable to project that loan funds will be available both for investment in the backbone and satellite assets, and crucially, in the terrestrial service investments – VSATs, mobile phone infrastructure and broadband.

Companies in the broadband and mobile phone businesses (e.g. Digicel, Voda, and Telkom PNG) have already flagged their willingness to invest in terrestrial infrastructure – and this interest can be enhanced only by sound investment in satellite and related technology.

4. Customers: Residential, Educational and Business (Current and Potential)

A new and positive factor in financing any new communications technology in the Pacific is that it is possible to monitor usage (of phones or services) and extract contributions from customers in small amounts, with new mobile phone, prepayment cards and computer technology enabling service providers to accumulate revenue from large numbers of small transactions. In this sense, telecommunications is one of the more readily financed items of infrastructure.

The above means there are significant emerging external benefits from the introduction of low-cost mobile phone systems. Recent advances in pre-payment techniques and associated developments in relation to the functionality and cost of “smart cards” also indicate that new financing possibilities via mobile phones, but for other services, will continue to emerge with great relevance to the Pacific. This capacity to extract large numbers of small payments at low or zero transaction costs helps account for the explosion of investment in telecoms and mobile phone usage in most countries over recent years – it has become a technology for all. But in terms of payment processes and location-based charging, the revolution is just starting.

An underpinning source of telecommunications and other infrastructure finance has connections to the micro-finance innovation (recently rewarded with a Nobel Peace Prize to its founder, Muhammad Yunus). One indicative new opportunity could be the capacity for mobile phones to be used to debit users of infrastructure services to pay for use by debits (say against pre-paid cards), which could be smart cards, that could be replenished or even implemented through mobile phones. The GPS and cellular locational capacity of mobile phones also enables the possibility of location-specific charges (like transponder-based charges for using roads, bridges, ports or even parking spaces, as well as for low-cost transactions charges for other services such as training courses, medical and finance), and these could be for road, port, bus and even water and electricity charges. The point is that mobile phone services introduce a new payments mechanism possibilities and this creates new user-pays systems for financing infrastructure. It also is an example of how expanding telecommunications and mobile phone usage raises new infrastructure funding capacity in member governments. This also adds to the arguments for ODA subsidizing of access to communications and the backbone such as satellites and cable spurs, as the economic and social spin-offs are likely to be substantial.

It has also been demonstrated that small-scale loan programmes to sequences of borrowers can play a major role in spreading telecommunications in poor village economies, setting the stage for the broader range of services that can in turn be enabled by mobile phones. Thus we see scope for an associated telephony project financed by one of the international aid and development agencies, so as to promote the extension of mobile phones, Internet and broadband communications across the Pacific.

Educational and health institutions in the Pacific have more than the usual reasons for wishing to co-invest in telecommunications, since island locations create special needs and opportunities. Therefore, the health and education budgets of Pacific island economies should be cast with one eye on allocations for enhanced communications.

Tourism across the Pacific can be enhanced by availability of improved mobile phones and Internet service, including broadband and television. The prospect of persons increasingly choosing to live and run businesses from Pacific islands is also a real prospect, should telecommunications be improved as planned. The customer base for mobile phones, broadband and tourism generally should be seen as one of the financing underpinnings of the telecommunications financing strategy.

B. Pricing of Service Access

As already noted above, the principles governing the pricing, and any subsidy element, of access charges and user costs for telecommunications, satellites and mobile phones are not unlike those that should apply for other utilities such as water and electricity. We note that the general principle for sound and fair finance is that there should be cost recovery on a commercially sustainable basis, with access and usage tariffs that recoup competitive levels of costs, including capital, in an efficient manner. Subsidizing all users is generally inappropriate if the goal is to assist only the poor. Across-the-board subsidies mean that affluent persons and those able to pay reasonable charges will also be subsidized, and then the overall revenue situation and indeed the viability of service will be undermined. And subsidizing users of telecommunications and satellite services is considered a grossly unfair use of scarce government revenues – given that usage will (at least initially) be heavily biased towards more affluent members of the communities. Rather, there should be processes by which persons and sectors in need, or whom the government seeks to target (education and health, for instance), may apply for rebates or preferential rates, which should be separately funded through the Ministry of Finance. The Ministry can then consider the least distorting means of finance of the subsidy element, considerations which should include licence fees and charges for service providers.

In place of subsidies, authorities may wish to consider modalities that reduce individual costs, such as through shared access in Internet cafés, e-centres, Grameen Phone-like services, and sharing individual accounts among households or neighbourhoods.

C. Financing Risks

• Will the government act in a predictable manner so that lenders and investors feel comfortable?

• Will contract commitments be honoured and enforced, notably in relation to setting tariffs?

• Will the regulatory and judicial processes allow tariffs and other income-affecting matters to proceed as planned and contracted?

• Will international (FCC-type) pressures on international rates create revenue risk?

• Will private and public sector participants in telecommunications be treated equally and consistently?

• Competition between different elements of telecommunications systems brings risks – will policy makers allow all participants to enter all sectors of the telecommunications business, on the grounds that there are no longer valid natural monopoly arguments for protecting the backbone service?

D. Commitments from Pacific Island Economies

1. Commitments from Pacific States to the formation and the charter of the regional cooperative mechanism may be incremental – i.e. not all will need to commit immediately,¹⁷ but there will be a need for critical mass to achieve credibility. One issue that may be perceived as difficult relates to existing franchisees, typically monopoly telecommunications companies. Indeed, all telecommunications licences may need to be reviewed (see draft lists in Appendix C). However, since existing companies should benefit from expanded capacity via the cooperative mechanism, it should prove possible to negotiate improved and competitive outcomes.

2. There should be an agreement from signatory Pacific island economies that they will open their borders to telecommunications competition across all modes, to enable critical mass to telecommunications entities needing to operate across countries.

3. There will be a need to harmonize legislation, regulatory and enforcement policies across the Pacific. A list of relevant laws and regulations is presented in Appendix C.

E. Financing Mechanisms

1. Contributory Organizations

A crucial commitment from the development banks and ODA will be to support the formation of a regional telecommunications authority and preparation of the charter. If total capital costs are roughly US$200 million for the organization of operators and service providers, then seed capital of 20 per cent of this sum, plus funds adequate to sustain the formation of the regional mechanism, may be required, possibly US$25-$40 million all up. There may be scope to attract financial and technical support from countries noted in Figure 4-1, as well as China, India and others that have a strategic interest in the Pacific plus space expertise. There should also be meetings arranged with development banks and agencies.

2. Private Sector

What is critical in obtaining private sector funds for reasonable maturities is clarity of the commercial opportunities and the likely income stream from selling capacity. Tenderers for operators and service providers should have a clear perspective on the issues involved. This creates a major responsibility for the regional authority and the member States, to create a market environment of relative certainty in terms of access and other charges and conditions. Hence the capacity to supplement any seed capital available will depend on the new regulatory environment established jointly by the regional cooperative authority and the respective telecommunications authorities and policies in the Pacific.

3. Service providers

There is a need to consult on technical and commercial issues and alternatives with a range of companies. Companies with experience providing mobile phones, broadband, satellite phones and other services and technologies may be interested in the opportunities arising from satellite and expanded telecommunications systems in the Pacific.