By some estimates, telecommunications development plans in approximately 150 developing countries will require more than $200 billion by the end of the 20th century. Much of this investment demand is needed simply to fund expansion of the most basic infrastructure to large segments of the world that have absolutely no service. Whatever the estimate, it is clear that the demand for investment capital will exceed presently foreseeable sources. As a result, there will be keen competition for funds, placing a premium on creativity and on the development of proposals that appeal to the needs and interests of potential investors.
At the same time, it should be recognized that social and political objectives do not always align with the needs and interests of investors. Accord-ingly, the process of pursuing investment may compel policy makers to examine their convictions and priorities in great detail. Funding that does not support socially and politically desirable development may prove counter productive in the long term.
Where should governments be looking for funding to finance telecoms development?
In general, private enterprise must be expected to generate the lion's share of funds needed to drive investment. Proponents of development must face the fact that stark financial realities require restructuring of the telecoms sector to attract substantial new private investment.
According to a World Bank analysis, operating companies will have to generate approximately 85% of the funds for development of the telecommunications sector. The balance may be available from (1) governments, (2) multilateral institutions such as the World Bank or the European Bank for Reconstruction and Development, or (3) other miscellaneous sources.
The 85% of necessary funding to be provided by operating companies consists principally (70%) of internally generated funds, including profits and debt and equity investments supported by earnings. The balance of the funds (30%) is expected from bilateral and multilateral commercial arrangements, including commercial bank and institutional lending, supplier credits, and similar commercial arrangements.
These "hard" facts should make it clear that development almost certainly will require some degree of privatization of the telecommunications sector, so that new investors can contribute capital to existing operating companies. As part of the privatization process, governments probably will have to confront foreign investment considerations directly; domestic investment sources are not likely to be sufficient, particularly in countries with underdeveloped capital markets and private investment practices. In addition, substantial competitive entry may be essential. Finally, existing arrangements that use telephone company profits to support less profitable public institutions, such as post offices or general national debt obligations, must be curtailed significantly or terminated altogether. Because of the huge self-financing burden imposed by development, a telephone company forced to contribute to these other funding needs as well is doomed to underdevelopment and, ultimately, to commercial failure. For the same reason, payments from the telephone company to the state should be limited to economically sensible amounts, such as reasonable dividends based on the state's equity interest in the company, interest payments on loans, or generally applicable taxes. These matters should be considered in overall rationalization of the relationship between the government and the telecommunications business, whether privatization is going to occur or not.85
What are some of the fundamental characteristics of private sector and public sector funding for telecoms development?
Public sector financing may require action from a slow, relatively unresponsive bureaucracy that must be consulted before funds are released. Therefore, companies cannot often rely upon public sector funding to respond to fast-changing market developments. Multilateral funding typically is not -- and cannot be -- tied to a specific sector or program. For example, only about 7% of the development funds provided by the United Nations specifically support telecommunications activities. Finally, even when funds are available from public sector sources or multilateral institutions, the recipient may not have sufficient managerial expertise to exploit the financing.
Of course, the private sector is no river of flowing funds. The private sector can impose stringent requirements on markets and companies before providing financing. These requirements may include:
This last condition, which often is imposed by investors as a way of ensuring the fastest return on their investment, can be one of the most controversial aspects of private financing.
A country that commits itself to a more competitive market structure may face demands from potential investors for pockets of noncompetitive service to create businesses assuring the investor of a quick and substantial profit. The need for investment can make this a powerful demand. Under these circumstances, insisting upon investment in a fair, open market is a challenge for policy makers. Opportunities for profit may be enhanced by reducing the risk of unexpected problems, such as arbitrary rule changes, drastic alterations of market structure or operating conditions, or political volatility, that will affect the market. Recent experience, as in Mexico, indicates that movement toward a competitive market with concurrent efforts to limit risk can attract significant investment.
Three issues that contribute substantially to perceptions of market risk are:
Investors also are likely to require an understanding of the distinction between investment decisions and management control. Some financial investors may be interested in making passive equity and/or debt investments in operating companies; but passive investors are not likely to be plentiful, particularly in less developed markets. The managerial weaknesses of many existing companies, particularly in developing markets, may prompt many investors to try to condition their financial commitments on improvements in managerial resources. Some strategic investors may insist on management control (or at least substantial managerial involvement) before undertaking any financial commitment. In some cases, financial and strategic investors may jointly form an investment entity that provides both economic and managerial resources. Accordingly, government attempts to divorce investment and management control can frustrate the desire to attract investment.
What are some of the steps that an operating company can take to increase its own financing capabilities, as well as to make itself more attractive for potential third-party investors?
Much depends on the structure of the company and its past history. In general terms, however, the following steps might be considered:
Many of these steps, as well as others, have been used by state-owned monopoly telephone companies that were either sold to private investors or converted from noncommercial public organizations to government-owned commercial corporations.
What do U.S. companies perceive as some of the chief economic impediments to foreign investment in the telecoms sectors of Eastern and Central Europe?
According to a variety of sources,87 the chief obstacles to foreign investment include the following:
These factors do not address purely legal impediments like restrictive licensing policies and limitations on important interconnection and network feature access. Such direct limitations will inhibit both investment and development.
Is there an ideal set of market conditions that will attract outside investment into the communications sector?
It is virtually impossible to identify conditions that will attract all investors. However, one large U.S. telecommunications company involved in making investments outside of the United States has cited the following conditions, which are likely to be appealing to many investors:
Some investors will want to enter a market on their own. Others will want to work with existing companies, including the former national monopoly operator. Most knowledgeable investors view entry into the telecommunications sector of a developing country as a long-term prospect; no knowledgeable or realistic potential investor anticipates any short-term gain.
Can the government try to attract investment in other ways?
One possibility is that the government can use its purchasing power to alter market conditions. In the United States, for example, the State of Maine tried to attract investment in the state's telecommunications sector by entering into agreements with highway authorities to secure rights-of-way for the installation of fiber optic cable. The state's public university system purchased extensive digital network facilities, which increased the invested base in digital technology. State government offices in rural areas demanded additional services as well, which helped drive the development of improved networks to more remote areas of the state.
This approach is predicated on the government's having funds available. In most cases, however, governments will be consuming communications services in markets where they do not own the telecommunications companies. Accordingly, the government may not be required to increase its spending. Given fiscal constraints, the government will have to evaluate the strategic importance of these expenditures that it does incur. Governments may plan expenditures for telecommunications more carefully to advance the objective of driving other developments within the market.
Another possibility presently emerging in the United States is an altered relationship between the government and the regulated telephone company. Instead of being adversaries, the regulator and the industry may move toward a partnership. In the state of Vermont, for example, the government agreed to limit its regulation of at least one large telephone company in exchange for that company's agreement to increase its investment in telecommunications infrastructure and services within the state and to limit price increases on certain essential services.90
The foregoing concepts merely suggest the many challenges and possibilities that face decision makers seeking to attract investment into the telecommunications business. The importance of this aspect of sectoral restructuring cannot be understated. Infrastructure development, even in developed countries, is critical. Such development requires massive funding and generates competition among the many companies and countries competing for scarce investment funds.