Download This consultation seeks to establish:

JORDAN TELECOMS’ RESPONSE TO
THE TRC NOTICE REQUESTING COMMENTS
ON FINANCIAL GUARANTEES
Amman
December 8th 2005
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EXECUTIVE SUMMARY
JT welcomes the opportunity to participate in a further TRC consultation on measures to
contribute to the establishment of fair and effective competition in the Kingdom. The
TRC notice requesting comments on financial guarantees represents an appropriate
consumer protection measure that requires a more carefully considered implementation
plan than that presented in the consultation document. JT favours the protection of
Jordanian consumers from irresponsible, fraudulent and risky licensees and recognises
the threat that such licensees present to the brand image of JT and other reputable
operators in the kingdom and is keen to protect the welfare benefits provided to the
nation by the industry.
However, whilst JT has considered the threat of absconding licensees, JT would wish to
direct the attention of the TRC at operators facing financial distress generally as well.
The scenario whereby a failed operator leaves consumers without service is increasingly
likely if the market is to deselect inefficient operators and one that deserves as much
attention as the possibility of rogue operators.
It is also crucial to recognise that operators who face financial distress are likely to do so
for one or more reasons which might include not only inefficient allocation resources as
perceived by customers, but also by investors and even that implied by the regulatory
regime. As such, the selection of these licensees for extinction is a natural and necessary
process that must be executed by market forces in a competitive market and not by
burdensome regulations or unfair competition.
JT is of the opinion that direct regulation to protect consumers under these circumstances
is inappropriate whilst the market has not been permitted a chance to determine its own
solution. To this extent, the TRC’s role is best determined as arbitrator and disseminator
of information which encourages efficient economic decisions by all stakeholders. On
this occasion JT is of the firm opinion that, whilst the sentiment behind the proposals are
ones shared without reservation, the proposed solution is ill-considered. The solution lies
in the first instance in self-regulation by the industry.
As a conclusion, JT would like to encourage a solution based on TRC early warning
system discussed further in this response. This solution would avoid any undue increase
the cost of telecoms services would recognise the market mechanism and the opportunity
for customers to adopt post-paid solutions.
CONSUMER PROTECTION CONCERNS
Jordanians have good reason to be concerned at the prospect of absconding or financially
distressed licensees given the culture of prepayment for services. Indeed the recent
examples of Alo and JPP demonstrate the precariousness of some licensees and the
potential threat to consumers. Today, prepaid card licensees are required to provide a
financial guarantee under the terms of their existing licenses, though it is unclear that the
TRC returned the value of these guarantees to those consumers who had unused prepaid
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credits from these licensees when they failed. The reality of these corporate failures
results in increasing the cost of telecommunication services and therefore the corporate
failures became a cost to the entire industry and consequently increased the prices of
telecoms services without any direct increase in consumer benefits.
Furthermore, the TRC has presented neither any prima facie evidence of consumer’s
views on this perceived risk and the measures they believe are appropriate to address the
issue nor has any evidence of any weaknesses in the law to bring fraudsters to justice
should they abscond from their license obligations been presented. At the very least, JT is
of the opinion that prior to considering further regulation on this matter, the TRC should
consider the extent of the net welfare gains which might be achieved by a combination of
an increase in market size or a reduction in inefficient consumer decisions.
For JT management, who spend little time considering the option of absconding with
subscriber prepayments, the main concern is the prospect of operators in financial distress
and the lack of any orderly procedures to protect the interests of consumers who may not
have had the necessary access to information to have avoided suffering the consequences
of being a customer of the licensee at the point of failure. JT would support a socially
responsible approach to ensuring continuity of service to consumers in the event that a
licensee cannot meet its customer obligations. Such a scenario is a natural phenomenon in
a competitive market where many entities compete deploying different asset allocation
strategies, some of which are, inevitably, inefficient.
JT also continues to be concerned at the somewhat naïve statement that; “effective
competition lowers prices”. This statement fails to recognise that cross-subsidies borne
out of legacy market structures contradict this view as do the type of consumer protection
measures currently being proposed which would inevitably raise the costs of licensees.
Market liberalisation is an expensive process which, if a market equilibrium is to be
maintained adequately requires consumers to pay for the costs of introducing
competition. One of the consumer costs is the failure of licensees and the consequences
of recovering debt and switching to a new service provider. In summary, if price is the
main, or only consideration, then accepting the risks of service failure may well be
acceptable to consumers, but this would be at the cost of service quality and choice.
Before proceeding further with the proposals outlined in the consultation, JT would
propose that the TRC determine through primary market research, the extent to which
Jordanian consumers are equipped to make efficient purchasing decisions and the price
they are willing to pay for consumer protection measures. Without this, the TRC is
proposing a measure that would not be replicated by a competitive market and should
therefore be regarded as a distortion.
JORDANIAN LAW
JT has expressed its concerns previously that the Telecoms Law should be perceived not
simply as a source of primary legislation but that in certain circumstances it should take
precedence over other legislation. This is a legal stance which is the reserve of the
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Jordanian judiciary and its consequences are therefore legally challengeable, removing
the desired certainty from any such financial guarantee scheme the TRC may devise.
Specifically, if the scheme is considered unconstitutional or illegal, then the legal title to
the financial asset placed under the control of the TRC may revert to the licensee in the
event that the bankruptcy provisions of the Companies Law No. 22 (1997) are
successfully prosecuted by the licensees’ creditors.
Specifically; “The liquidator shall settle the Company debts in accordance with the
following order, after deducting liquidation expenses, including the remuneration of the
liquidator, and any violation of this order shall be considered null and void: (1) Amounts
due to the Company employees. (2) Amounts due to the Public Treasury and the
municipalities. (3) Rents due to the owner of any real estate leased to the Company. (4)
Other amounts due in accordance with the order of their priority in accordance with the
Laws in force.” It would seem inappropriate for the TRC to effectively deny employee
wages in favour of repaying customers’ prepaid credits and of grave concern to JT if a
licensee’s customers were to be given priority over payment for wholesale services to
financially exposed wholesale suppliers.
The TRC’s proposals also threaten to overturn the principle of caveat emptor, or buyer
beware, such that consumers who make inefficient decisions are protected – quite the
opposite of the consequences of inefficient decisions made by companies in a competitive
market. Although there are clearly issues concerning access to information which shall be
dealt with below, it is inappropriate for a sector regulator to seek to change a fundamental
legal principle, normally the role of the legislature. Indeed, the consultations’ reference to
the revisions to the UK’s insolvency laws, and presumably to the Enterprise Act (2002),
demonstrate this point as ‘Acts’ are ‘enacted’ by parliament, the UK legislative body.
Considering the various examples provided by the consultation as to how other regulators
address this issue, it is noticeable that the Indian and Mexican examples represent
performance bonds against an operators license as a whole and not solely as a consumer
protection measure. Indeed, the cynic might conclude that the performance bond’s
primary purpose is to assure the regulators future revenues.
PROPORTIONALITY AND ADMINISTRATIVE COSTS
Considering the examples of international best practice set out in the consultation
document further, it is worth considering the Singapore example further. Singapore had
1,482,500 prepaid subscribers in September of this year. Assuming a very prudent
average prepaid credit balance per subscriber of say S$5, this represents S$7.5 million in
forward sales across 3 mobile operators who have provided a total of S$300,000 in
financial guarantees. Assuming that the proceeds are not treated as a fund for all three
operators, this represents only 4% of the total market prepayment – based upon very
prudent assumptions – of advanced sales by mobile operators only. Clearly this scheme
may have some impact on smaller operators if the financial guarantee remains at the level
of S$100,000, but for larger operators this requirement will barely cover the
administrative costs of reimbursing consumers in the event of failure, an issue JT has
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raised previously in connection with the proposed Universal Service Fund, while an
efficient operator might use the capital to increase the likelihood of recovery from
financial distress.
The Hong Kong example demonstrates the point of view expressed by JT in the licensing
consultations of 2004 in which we argued that a simple licensing regime of class and
individual licenses failed to address the specific variety of regulatory requirements which
different operators should be placed under. The current regime is a blunt weapon that
inappropriately regulates operators to the lowest common denominator – e.g. financial
guarantees on established operators with assets deployed in Jordan far greater than the
value of forward sales is unnecessary regulation and fails the test of proportionality.
JT is firmly of the opinion that the proposed solution to the problem of absconding
operators, and JT would advise considering those operators in financial distress, represent
regulation which is disproportionate to the likely failure of the market mechanism in
question and that the solution lies in the first instance in identifying the scope and size of
the issue and the opportunity for the industry itself to devise a market-based solution.
A ROCK AND A HARD PLACE
The TRC needs to consider their reactions to licensees in financial distress carefully as
experience shows in other jurisdictions that regulatory policy can, an often does, merely
accelerate the licensees’ path to corporate failure. The reason for this is that regulatory
compliance comes at a cost to licensees who, when faced with financial distress, will
attempt to reduce their costs to sustainable levels and perform only those functions which
generate revenues. Consequently, regulatory action for non-compliance is more likely to
precipitate failure than defer it. Indeed, the ultimate sanction of license revocation is, in
these circumstances, an idle threat when the likelihood of bankruptcy is already tangible
because regulatory sanctions would be a self-fulfilling prophecy. In this context, Article
6(d) of the telecoms law is of little use in protecting consumers.
THE PRINCIPLE OF RISK
JT contends that the TRC’s assessment of risk is flawed for three reasons. Firstly,
consideration is given exclusively to the risk of absconding operators without any
analysis of how often this has happened in other jurisdictions. The risk is therefore not
sufficiently evidenced to be considered a material one if the consequence is new
regulation. Secondly, the analysis ignores the risk of corporate failure which JT would
adjudge to be a far greater threat to consumers and has been experienced on a large scale
in Europe and North America in the last five years or so. And finally, the TRC
requirement that; “at all times the liabilities of the operators are duly covered” fails to
recognise that enterprise is inherently risky for all stakeholders, and in an effectively
competitive market, necessary to encourage consumers to learn from both good and bad
purchases.
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In assessing the risk of absconding licensees, JT is unaware of such an occurrence
anywhere and would be interested to examine such cases in detail prior to passing a final
opinion on the matter. JT is therefore of the opinion that the TRC should explain in detail
its risk assessment with scenarios and evidence to transparently justify their proposed
regulatory approach.
In any event, JT would object strongly to any proposal which spread risk across all
licensees ignoring the difference in risk premia between large established operators and
smaller new entrants. Existing licensees, whether dominant or not, should not be treated
as the bankers of the industry either by the regulator or their wholesale customers. In any
event, if the principle of cost-orientation is to be maintained effectively, it is important to
remove as much risk premia as possible from wholesale prices and to eliminate the
probability of non-payment for wholesale services if the entire industry, and in turn their
customers, are not to pay for a new entrants’ failures through higher interconnection
tariffs.
Currently, JT requires interconnecting licensees to provide a bank guarantee covering the
net interconnection charges likely to be incurred over the maximum period of nonpayment before JT has the right to disconnect. Any withdrawal of such financial
guarantee would be treated as a breach of contract and disconnection would surely
follow, which would precipitate bankruptcy if the course had not already been set. It is
this principle, a licensee withdrawing a financial guarantee, threatening market exit and
the loss of service to many customers, that the TRC should be most concerned with.
In assessing the level of the risk over time, the TRC has proposed formulae to ensure that
the financial guarantee matches the risk arising from the sales of prepaid services. JT
agrees that a process whereby licensees are required to maintain a financial guarantee as a
proportion of their net asset value is flawed. Although it is possible that an operator’s net
asset values may far exceed their liabilities, such a scheme fails to recognise the position
of prepaid services in their marketing strategies, the difficulty of accurately assessing the
net asset values and the risk of fraudulent accounting (which has dogged the US telecoms
industry).
However, it is a ludicrous proposition to base a financial guarantee on whether ‘the TRC
and the licensee can agree detailed forecasts’ of prepaid service sales. Operators are
unlikely to know their average validity periods or their average forwards sales value.
They will almost certainly book prepaid credit as a sale and not a liability. Such a
solution seems destined to cause market distortions and will fail to reflect the true risk in
the market which is best assessed by market forces and not a mathematical formula that
fails to recognise the market’s dynamism.
THE OPPORTUNITY FOR SELF REGULATION
The market for prepaid telecoms services is today characterised by a relationship of trust
between consumer and service provider. Generally, this trust is repaid by consumers
continuing to purchase prepaid services and licensees treating these transactions as sales
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on their profit and loss statements rather than current liabilities on their balance sheets.
This arrangement is born out of practicality and an implicit understanding that the
qualifications for receiving post-paid services are often out of reach for many consumers.
It seems that this relationship of trust has not been tested substantially to date as
evidenced by the fact that many prepaid service providers make no arrangements in their
customer contracts to refund unused prepaid credit to customers if requested. Of course,
were this relationship to be tested, it may well be an optimal strategy to offer to refund
unused credit on demand to demonstrate the operators’ commitment to the relationship of
trust. Such a solution must be determined by the market and not by regulation if
consumers are to consider such an offer in their purchasing decisions. As such, this
approach may present a powerful marketing tool if consumers value the promise.
This approach has been taken further by more responsible companies who form industry
associations wishing to differentiate themselves from poor quality providers, those whose
business practices are questionable or those who want to demonstrate their customerorientation. There are many examples such as the Licensed Taxi Drivers Association in
London which campaigns to remove poor quality alternatives such as rickshaws and
unlicensed taxis from London’s streets, ensure that their members have a detailed
knowledge of London streets of a higher quality than the alternatives and polices its own
members to prevent criminals damaging the reputation of professional taxi drivers. Such
industry associations are formed without regulatory pressure in competitive markets
because consumers are prepared to pay higher prices to fund the membership charges that
taxi drivers must recover from their customers.
Another consumer protection mechanism found in the insurance industry may also have
relevance in the Jordanian telecoms industry. Retail insurers often resell the wholesale
products of larger insurance groups who in turn may syndicate their risks through reinsurers who spread the risk of a single insurer across a larger group of companies for a
fee. In this sense, it may be better for the generally smaller prepaid service provider to
ensure (or even insure) that, in the event of financial distress, their larger and more stable
suppliers are able to honour any prepaid sales directly under certain terms and conditions.
Although executed in much secrecy, the corporate failure of Ionica, the worlds’ first
FWA operator, in the UK in 1998 was preceded by an agreement between the regulator,
British Telecom and Ionica to ensure an orderly market exit which did not cause undue
costs to consumers for which Ionica’s customer database was passed to British Telecom.
A further reason to encourage the industry to resolve this issue without regulatory
intervention is that by including a third party to return prepaid credit to customers, a
potentially unnecessary significant cost has been introduced which will have the impact
of increasing consumer prices for such services. Added to the comparatively limited
marketing communications capabilities of the TRC, and the direct customer relationships
enjoyed by licensees, it would seem to JT that the TRC’s involvement is potentially
duplicating the role of the insolvency practioner who are generally more experienced in
dealing with queues of customers baying for money (or blood).
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JT concludes that Article 6 (g) of the Telecoms Law, which requires the TRC to
encourage self-regulation, is far more likely to result in a proportionate and competitively
neutral remedy to the risk of absconding or financially distressed operators and that the
TRC should only intervene if there is demonstrable evidence that consumers require such
protection at a fair price and that the industry is unwilling or unable to provide it.
TRC EARLY WARNING SYSTEMS
JT recommends that the TRC revises its approach to this issue and utilises as far as
possible market forces to reduce the risks of consumer loss arising from fraud and
corporate failure. The TRC already has many procedures in place which could be
developed further to address the needs caused by this issue.
First, the license application process includes a qualifying process in which the TRC must
accept culpability if a license is issued a license inappropriately. Carrying out a thorough
investigation of the licensees’ owners and managers is mandatory, as is the acquisition of
an independently assessed credit rating for the company. Repeating this process if the risk
of failure or flight is considered to be increasing on a regular basis would do much to
protect consumers. Above all, this process must be transparent such that all stakeholders
can take a view of the risk associated with the licensee. JT would therefore propose that
the TRC consider listing on the TRC website those licensees who have failed to meet
their financial commitments to other licensees and the TRC within the periods set down
in their licenses and interconnection agreements. Such a mechanism would deter
licensees from abusing supplier credit and would contribute to improving commercial
and consumer decisions.
Second, the TRC should be promoting the efficient dissemination of information about
licensees to all stakeholders regularly. Consumers often suffer because they are the last to
know about impending corporate failure, whilst shareholders and suppliers may have
already acted to mitigate their potential losses. In this sense, accurate and timely
information about the status of risky licensees can act as an early warning system – a
form of prevention rather than cure. This information, an early warning system, might
most pertinently relate to total supplier debt as this measure would often indicate the
extent to which a licensee has cash flow difficulties which, irrespective of the supposed
excellence of their business plan, demonstrates a risk of failure because they
underestimated their working capital requirements.
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