productivity consquences of flexible regulation - ian martin - radcomms 2014
DESCRIPTION
Ian Martin, Regional Head of Telco Research at CIMB Securities talks about productivity and regulation. Presentation given at RadComms conference, September 2014.TRANSCRIPT
ACMA RadComms2014Productivity Consequences of flexible regulation
Ian MartinRegional Head of Telco ResearchCIMB Securities
10 September 2014
2
Market sector MFP index and growth rates within productivity cycles
60
1201
973
-74
19
75-7
6
19
77-7
8
19
79-8
0
19
81-8
2
19
83-8
4
19
85-8
6
19
87-8
8
19
89-9
0
19
91-9
2
19
93-9
4
19
95-9
6
19
97-9
8
19
99-0
0
20
01-0
2
20
03-0
4
20
05-0
6
20
07-0
8
20
09-1
0
20
11-1
2
90
1973-74
1984-85
0.5
1988-89
1993-94
2003-04 2007-08
-(0.7)0.7 0.6 0.9 2.5 0.2 0.0
1981-82
1998-99
Source: PC, Productivity Update May 2013
3
ABS IMT productivity index
60
70
80
90
100
110
120
1989-90 1994-95 1999-00 2004-05 2009-10
Source: ABS cat 5260.0.55.002, 2014
4
Mobile sub-sector productivity
-500
-400
-300
-200
-100
0
100
200
300
400
500
0
10
20
30
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 2011 2012 2013
Pro
ductivity level (2
006 =
100)
Pro
ductivity g
row
th (
per
cent)
Productivity growth (left hand side) Productivity level (right hand side)
Source: CIE, RadComm2013
5
CIMB indicative fixed line productivity
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1980 1985 1990 1995 2000 2005 2010 2015
BIE 1996
ACCC 2004
Residential fixed line
Fixed line
Source: BIE, 1996, ACCC 2004, CIMB estimates
6
7
First telecommunications legislation in Australia
8
Highlights of micro-economic reform
Essentially taking government out of direct involvement in allocation of resources in favour of market allocation … productivity enhancing
Reform of GBEs to focus effort on efficiency rather than other objectives
Market driven allocation of spectrum; spectrum licensing; spectrum trading
Quantifying and direct funding of cross-subsidy
Routine cost-benefit analysis
Introduction of competition
Separation of regulation from production and investment: (Austel, ACCC)
Pro-competitive safeguards: access regime, industry specific regulation
Privatisation of GBEs: capital allocation within an efficient capital market rather than by government
Each step contributed to a better matching of resources with likely demand
9
Undermining microeconomic reform...
Having got out of direct decision-making on resource allocation, governments get back in through the back door, ie by regulation and direction
Over-eager declaration of services(Calls for separation of declaration from management regulation of access)
Regulatory direction over industry structure(Cost Benefit Analysis of any directed change in industry structure)
NBN: renationalisation, regulated technology preference, rollout preference
1. Management of the access regime to achieve a preferred industry structure and/or distributive outcome … will it undermine mobile productivity?
2. Undermining of competitive neutrality: risk to the Internet of Things (IoT)
3. Extensive Ministerial direction over spectrum allocation
… undermining the ability of the market to match resources with demand is what undermines productivity
… regulatory changes post-investment = sovereign risk
10
Regulated access regime: shifted risk and returnRisks have increased in telecommunications infrastructure investment
Invest on one basis … only to see it over-turned post investment commitment
ACCC has introduced new concepts post investment commitment, unrelated to economic efficiency
Returns have increased across telco access seekers through redistribution rather than investment
Several steps-down in access prices … aggregation among access entrepreneurs
Access prices below cost across a broad average of users, disincentive to invest at scale
Structural separation pursued as an claimed ‘reform’ without evaluation
Has left risk with owner of infrastructure and distributed returns to access seekers
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Nov 11 May 12 Nov 12 May 13 Nov 13 May 14
CNU share price
NZ$
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14
MTU share price
A$
Pure access seeker share price mid-2009 to mid-2014 Wholesale only network provider share price since separation
Source: IRESS
Undermined market evaluation of network benefits and costs
11
Market valuation: access seeker v. network provider
Access seekerWholesale only
network provider
Revenue A$1.0bn NZ$1.1bn Similar revenue
EBITDA A$158m NZ$649m 4 times more EBITDA
EBITDA margin 15% 61%
Network assets A$60m NZ$3.1bn 50 times more assets
Intangible assets A$612m NZ$166m
Customers 800k 1,781k Physical network connections
Dividend 26cps 0cps No dividend in FY14
Return on Invested Capital
14% 7.4% Half the ROUC
Market cap, Monday 8 Sept
A$1.4bn NZ$0.7m
Enterprise value A$1.7bn NZ$2.5bn
EV/EBITDA FY15 9.3x 4.5x Half the market valuation multiple
“Sources: CIMB, Company reports
Would the ACCC do the same thing in mobile as it has done in fixed line?
12
The Internet of Things: likely largely wireless connected
Source: Altera
What spectrum and allocation approach for IoT?
What impact will reservation of fixed backhaul to NBN Co have on IoT industry structure and development of services?
Reserved backhaul is 35% of NBN Co’s LT revenue
“We believe that theproliferation of mobile devices and the need to service those devices will be one of the key areas driving demand for the NBN.”
NBN Co, Deloitte Access Economics Report,‘Mobile Nation’, Feb 2013
13
Spectrum management and spectrum auctions
ACMA has a positive reputation among investors for spectrum management
Probably hard not to have a positive reputation given growth in MBB
Good spectrum management is ‘below-the-radar’ for secondary market investors
Spectrum auctions
Closely followed in the equity market given impact on capex and market
How many Ministerial directions are needed to sell a block of spectrum?
‘Red underpants’ requirements unsettle investors
700MHz spectrum price was effectively set by the Minister for Communications
In effect excluded VHA; how can it be ‘efficient’ to have left so much spectrum unsold
Can’t rectify post-auction without triggering sovereign risk
5G spectrum
Will be more closely followed by the market because Demand > Supply
– Where will it come from? Who will have to ‘surrender’ spectrum? What process to manage this?
Process and arrangements should facilitate private sector to evaluate and meet emerging demand
14
What might have been? AWA and mobile telephony, 1949
Source: AWA Annual Report 1949
Mobile wireless
15
Source: AWA Annual Report 1949
What’s that you say, Chris? Productivity and innovation in the mobile sector? That requires flexible regulation to facilitate market-driven
investment and competition, not over-ride it with regulatory preference.
Roger that, over.