Financing telecommunications projects in Asia: a promising regulatory perspective.

AuthorChong, Rachelle

    Asia's telecommunications market has long been viewed as lucrative and fast growing. The value of the Asian market is estimated at $180 billion, while a recent study shows that the "Asia-Pacific excluding Japan has been the fastest growing information and communications technology market, moving at a compound rate of over 14.5%."(1) Given this rapid growth and potential, foreign investors (particularly major global communications operators) have shown strong interest in investing in the region's telecommunications infrastructure upgrades.

    At the same time, telecommunications authorities and governments have been moving away from the traditional monopoly model of regulation and separating and privatizing their telecommunications operators. A worldwide trend to introduce competition to the telecommunications sector--often beginning with the wireless telephone market--has continued the liberalization movement, particularly in developed economies. Competition brought new investment in infrastructure, lower rates, and innovation to the market. As the benefits of a competitive telecommunications market become apparent, many Asian governments also recognize that global corporations require, and in fact demand, state-of-the-art telecommunications infrastructure. They realize that priorities must be placed on telecommunications infrastructure projects in order to attract new business and development to their countries. Finally, in the last five years, the stunning emergence of the Internet and its potential to promote global electronic commerce caused governments and telecommunications authorities to place a higher priority on promoting and studying information infrastructure issues, so that their countries will not be relegated to the category of information "have nots."

    After several years of strong growth, however, the severe economic crisis that affected all industry segments in Asia caused investors to pause and reevaluate the risks involved in financing infrastructure projects. The Asian economic crisis stalled projects in every industry segment. Beginning in 1998, the crisis resulted in a hold on numerous telecommunications projects, especially in countries such as Indonesia, Thailand, and Malaysia.(2) Thailand and Indonesia postponed privatizations of state-owned incumbent telecommunications providers.(3)

    One positive result of the capital crisis is that it prompted some countries to open their telecommunications markets to increase foreign investment.(4) For example, in 1998, Malaysia reformed its laws to allow foreign investors to own up to 61% of a local telephone company.(5) During the World Trade Organization (WTO) Basic Telecommunications Agreement negotiations, Korea also submitted that it would raise the ceiling on foreign ownership from 33% to 49% by 2001.(6) In an effort to jumpstart this process, the government recently raised the ceiling to 49% effective July 1, 1999.(7)

    The WTO Basic Telecommunications Agreement(8)--signed by sixty-nine nations in February 1997--also helped to push forward liberalization schedules that were underway. In Singapore, the termination of Singapore Telecom's monopoly on wireline services moved from 2007 to 2000.(9) In Korea, a third international operator was added,(10) In Thailand, the government committed to initiate liberalization in three years instead of ten.

    The greatest effect of the WTO Agreement, however, is expected to come from the adoption of regulatory principles binding certain signatories to rules on anticompetitive practices, interconnection, universal service, the public availability of licensing criteria, and other issues.(12) The adoption of these regulatory principles is very significant to foreign investors for two reasons. First, a stable regulatory environment provides investors with a secure investment climate. Second, as discussed below, certain regulatory safeguards enhance and protect competitive conditions.(13)

    The financing of any project, including a telecommunications project, involves various risks, including currency risk, political risk, technological risk, and regulatory risk. This Article focuses on regulatory risk. It first provides one perspective on the regulatory issues that should be considered when assessing the investment opportunities in Asian countries. The Article then provides country-specific analyses of countries with more developed, and, therefore, more "investor friendly" regulatory schemes. Furthermore, this Article addresses those countries with less developed, but potentially favorable regulatory schemes based on the regulatory principles previously identified.


    From a regulatory perspective, potential investors should assess two aspects of a country's regulatory regime in order to determine whether the regulatory environment would be favorable toward investments in telecommunications projects. First, most countries have in place restrictions on foreign ownership and investment in telecommunications companies. The extent to which a foreign investor is allowed to participate in telecommunications projects often is determined by these foreign ownership limits. Second, a stable, transparent, and competitive regulatory atmosphere with an effective, independent regulatory agency is necessary to protect the investment and minimize undue political risks.

    1. Foreign Participation Restrictions

      Governments often use a variety of mechanisms to restrict foreign participation in the telecommunications market. These mechanisms must be analyzed on a case-by-case basis in order to determine the nature and level of investment allowed in a particular country.

      Typically, foreign investment is capped with a foreign investment ceiling, which may vary according to type of telecommunications service or type of investment.(14) For example, a country's laws may allow direct foreign investment in a licensee up to twenty-five percent in its wireline carriers and up to one hundred percent in wireless carriers. It may allow a higher amount of foreign investment in a holding company that owns a subsidiary that is a licensee, on the theory that the structure of the holding company dilutes the impact of the foreign investor's control over the licensee. Alternatively, foreign investment may be allowed through other legal mechanisms, such as joint ventures, business cooperation contracts (BCCs), build-transfer arrangements (BTs), and memoranda of understanding (MOUs).(15) These legal mechanisms should be studied carefully so that a participant fully understands the extent and nature of its role in the project.

      One of the more controversial investment vehicles used in Asia was China's "Chinese-Chinese-Foreign" (CCF) approach.(16) The CCF approach was developed to "circumvent China's long-standing prohibition on foreign ownership, operation[,] and management of telecoms enterprises."(17) Using a CCF approach, a "Chinese company licensed to operate a network ... creates a joint venture that serves as an investment clearing house. Complex [three]-way management contracts between the operator (Chinese), the joint venture company (Chinese), and the investor (Foreign) combine equipment leasing, royalties, consulting[,] and license fees in a network supply contract in lieu of direct equity investment."(18) When it was first introduced, the CCF approach seemed to signal a new willingness of the Chinese government to open one of the world's largest telecommunications markets. Last year, the Chinese government officially banned CCFs, and earlier this year, Unicom, the state-owned company which had employed CCF arrangements, "froze [sixteen] million [dollars] in revenue to be paid to foreign CCF participants and began buying them out."(19) CCF participants now have until the end of August to back out of the joint venture contracts or they risk receiving nothing in return.(20) These actions are the result of the Chinese government's decision to list Unicom shares in Hong Kong and overseas exchanges as a means of obtaining foreign investment. The decision to use financial investors and remove strategic investors is seen by some to be a move backwards that ultimately lessens foreign involvement in China's telecommunications industry.(21)

      Notably, Asian governments traditionally have kept a tight hold on foreign investment in telecommunications. The WTO negotiations reflect this trend. Pursuant to these negotiations, most Asian countries continued to retain lower caps on foreign ownership of local telecommunications companies than other regions of the world.(22) Although governments have encouraged joint ventures between local and foreign firms, the level of foreign investment and equity stakes in such ventures also have been limited. Only a few governments, such as Hong Kong, Australia, and New Zealand, have established liberal ownership reforms that encourage foreign ownership.(23)

    2. Regulatory Safeguards

      Regardless of the size or type of investment established, in order to protect that investment, a stable, transparent, and competitive regulatory regime with an effective, independent regulator must be in place.

      1. Stable and Transparent Environment with an Independent Regulator

      A stable and transparent regulatory atmosphere minimizes the political risk that additional unforeseen restrictions will be imposed may impede private investment or favor one competitor over another. Since impartial decision making is necessary to effectuate competition and ensure that incumbent operators are not unfairly advantaged, an independent regulatory agency constitutes the first step toward ensuring a stable regulatory environment. Ideally, the regulator is fully separated from the operator, and rules are established that prohibit any conflicts of interest between the regulated entity and the regulator.(24)

      Transparent regulation also is necessary to provide investors with accurate information and the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT