Good on Temasek, Shame on the Government

On Recent Events

I have come to know, through very reliable sources, of an incident that has greatly enhanced my confidence in Temasek as being independent of government influence. This incident has greatly influenced my perceptions of Temasek and has deepened my understanding of the regulatory problems that Temasek is facing in Indonesia and Thailand.

Not too long ago, the top officials of a Singapore Government Agency (let's call it ABC) approached the top leadership of Temasek, seeking that Temasek influence one of the corporations (XYZ) under its control to enact a series of plans designed to produce a favourable regulatory outcome for ABC. This occurred because ABC feared that it would not be able to get XYZ to do what ABC wanted without Temasek's influence.

I am extremely happy to say that Temasek turned around to ABC and said that Temasek cannot and would not influence the management of the corporations under its control. This is despite the fact that Temasek could have tried to accede to ABC's requests and influence XYZ without risk of public knowledge. However, I feel that the officials of ABC should have known much better than to try to use the government's position as owner of Temasek to try to get Temasek to influence XYZ in ABC's favour.

Temasek and the Ministry of Finance have clearly stated repeatedly that Temasek is to act independently of the government as a financial investor. Temasek's role is thus not to produce political and/or regulatory outcomes for government agencies. Any act by Temasek to this effect would severely tarnish the credibility and reputation of Temasek in its operations, particularly considering the trouble it is going through with Shin Corp in Thailand and with Indosat in Indonesia.

Thus, I would go so far to say that ABC's behaviour was tantamount to an attempt to abuse one's position of authority and influence. It was a selfish act that only considered the individual interests of ABC without considering the potentially deliterious consequences to Temasek, the Ministry of Finance, and the rest of Singapore. I am hence extremely disappointed with the top officials of ABC. What they did was fundamentally irresponsible and unacceptable.

Once again, I would like to give credit to Ho Ching and Temasek for standing firm in not exercising its influence over XYZ, and hope that this behaviour is indicative of how Temasek conducts itself with the rest of its investments.

On PT Indosat

ST Telemedia has recently completed its divestment of its stake in PT Indosat to Qatar Telecom.

ST Telemedia completes $2.5b Indosat sale to Qtel
S'pore firm transfers stake that had been at centre of antitrust dispute. -ST
Chua Hian Hou

Tue, Jun 24, 2008
The Straits Times

QATAR Telecom (Qtel) has defied some political resistance to complete a controversial acquisition of a Singapore firm's stake in No.2 Indonesian telco Indosat.

The US$1.8 billion (S$2.5 billion) stake was transferred to Qtel by Singapore Technologies Telemedia (ST Telemedia), which held the shares in two holding companies. ST Telemedia is a unit of Temasek Holdings.

The Indosat stake that ST Telemedia held has been at the centre of a legal dispute since last year, when Indonesia's Business Competition Supervisory Commission, or KPPU, ruled that the Singapore firm had breached antitrust laws.

The KPPU claimed that Temasek had engaged in monopolistic practices in Indonesia's mobile-phone market, and had breached anti-competitive laws by holding majority stakes in more than one company in the same industry.

Temasek has a deemed stake of about 20 per cent in Indonesia's No.1 telco Telekomunikasi Selular (Telkomsel) held via SingTel. It also had a 31 per cent deemed stake in Indosat, held via its wholly owned unit ST Telemedia.

The KPPU fined the companies and also ordered Temasek to sell its deemed stake in either Telkomsel or Indosat. It also ruled that buyers could purchase the shares only in 5 per cent chunks at most.

Temasek, SingTel and ST Telemedia claimed that there was no breach of antitrust laws and appealed against the ruling in the Central Jakarta District Court.

But last month, the Indonesian court upheld the KPPU's ruling. The three firms then said they would appeal against this decision to the Indonesian Supreme Court.

But on June 7, ST Telemedia announced that it was selling its Indosat stake to Qtel.

It is unfortunate that ST Telemedia has had to elect to divest its lucrative stake in PT Indosat in order for its parent, Temasek, to avoid further complications in the antitrust lawsuit it is facing against KPPU. While not the most favourable outcome, practically it was probably the most prudent decision on the part of ST Telemedia.

In light of the incident I have narrated above, I have much more confidence in believing that Temasek exerted no strategic influence over its 'effective' stakes in PT Indosat (previously owned thru ST Telemedia) or Telkomsel (currently owned thru SingTel). In light of this, the regulatory decision by KPPU against Temasek probably holds little water and I am inclined to accept the arguments of Temasek's lawyers that Temasek is innocent of the claims of monopolistic practices brought against it by KPPU.

Yet this incident is exemplary of the problems that Temasek faces as it expands out of Singapore to make investments overseas. Even as Temasek makes its decisions on commercial grounds and independently of the Singapore government, its government-linked perception and the close ties to the government do Temasek no favours. Indeed, Temasek's status as a government owned entity is very much a liability when it comes to dealing with political and regulatory knock-on effects. Temasek's actions overseas incite political suspicion simply because it is owned by the Ministry of Finance, and not necessarily because the government actually exerts any influence over its actions.

On Shin Corp

How best, then, to deal with this problem? One solution would be not to take any majority stakes in any prominent or politically-linked foreign companies:

Singapore's Temasek plans to cut its stake in Thailand's Shin Corp
By Amy Kazmin in Bangkok, for the Financial Times
Published: June 18 2008 03:00 | Last updated: June 18 2008 03:00

SINGAPORE'S Temasek Holdings plans to reduce its stake in Shin Corp, the Thai group it took control of more than two years ago, through a public offering of shares.

In a statement to the Stock Exchange of Thailand yesterday, Shin Corp said it was drafting a prospectus for an offering that would increase the minority shareholding, although it also said it would have to monitor the investment climate and sentiment in order to "conduct a successful offering . . . in the future".

Shin Corp gave no details of a timeframe or size for such a deal.
In January 2006, Temasek paid $3.8bn, or Bt49 per share, for a 96 per cent stake in Shin Corp, the telecommunications-to-aviation group founded by Thaksin Shinawatra, who was then Thailand's prime minister.

The deal, Thailand's largest takeover, triggered a crisis as Bangkok residents protested against the Shinawatra family's $1.9bn tax-free profits from the deal.

Critics accused the Singaporean state investment agency of violating Thai laws limiting foreign ownership of telecoms companies to 49 per cent, though the deal replicated similar take-overs.

The furore culminated in the September 2006 coup and the seizure of most of the Shinawatra family's earnings from the sale.

The military government also vowed to investigate whether the takeover violated foreign investment laws.

Like the PT Indosat case, Temasek probably made the investment in Shin Corp in full compliance of the laws of Thailand as they knew it, and were unfortunate victims of the political turmoil in Thailand. In all fairness to Temasek, it had probably no inkling that the military coup and its subsequent fallout could have been triggered by the sale of Shin Corp by Thaksin Shinawatra to Temasek.

Yet in hindsight, the highly politically charged nature of the transaction should have raised alarm bells during Temasek's political due diligence of the transaction. Here was an asset of national pride, changing hands between the Prime Minister of the country and the investment arm of a foreign government body. Surely there had to be knock-on political ramifications.

But nevermind that, what is done has been done and we cannot turn back the clock. Yet Temasek's latest plan to cut its stake in Shin Corp only just having recently acquired it, is acknowledgement that an investment's political fallout is a burden too heavy for the company to bear. This mirrors ST Telemedia's decision subsequent to the KPPU case, on behalf of Temasek.

But adopting such a strategy going forward can place significant constraints on Temasek's investment options. It now has to carefully weigh the potential political ramifications of every investment it makes. Doing so would narrow the universe of potential investment and acquisition targets available to Temasek, and place downward pressures on Temasek's investment returns. That Temasek's assets under management continue to balloon, do it no favours either. Temasek has to deal with the double whammy of having more capital under its responsibility, and fewer options with which to deploy this capital.

Indeed, Ho Ching's job is certianly not one I would envy; it is a tough set of problems she has to deal with. But deal with these problems, she and her team must. Otherwise, it is time to reduce the scale and scope of Temasek, and start returning the money to the people.

Can Singapore's corporate elite come up with the solutions for such tough problems? Singaporeans will surely watch intently, and only time will tell.

Temasek’s Hands in Too Many Pies

In the latest news surrounding Temasek – related investments in Telecom companies, ST Telemedia has divested its entire stake in PT Indosat to Qatar Telecom.

Business Times - 09 Jun 2008
STT sells Indosat stake, giving Qatar firm a boost
ST Telemedia divesting its entire stake in Indonesian mobile operator

(DUBAI/SINGAPORE) Qatar Telecom (Qtel) is poised to be a major player in the Indonesian telecoms market with the announcement on Saturday that Singapore Technologies Telemedia is selling its entire stake in PT Indosat.

'We believe that Indonesia is a high growth market for telecommunications and that Indosat is very well placed to compete in that market,' said Qtel chief executive Nasser Marafih.

Qtel will pay US$1.8 billion for the 40.8 per cent stake in PT Indosat held by Asia Mobile Holdings, a joint venture firm between the Qatari outfit and STT.

ST Telemedia, a subsidiary of Temasek Holdings, will no longer have any involvement in Indosat after the transaction.

The disposal of the stake came after an Indonesian competition watchdog ruled that Temasek has breached the country's anti-monopoly laws and ordered the Singapore investment firm to divest its holdings in either PT Indosat or PT Telkomsel.

Temasek indirectly holds 35 per cent of PT Telkomsel via its 56-per cent owned unit Singapore Telecommunications Ltd (SingTel).

Temasek’s official line is that ST Telemedia’s board of directors made the divestment decision entirely independently of Temasek. Independence might be true at an operational level, in the sense that the executives handling the divestment and the executives handling the anti-monopoly lawsuit do not know about what each other are doing. However, we can be quite sure that top level executives at Temasek were fully cognizant of all developments at STT which led to the decision to divest the PT Indosat stake, in light of the legal developments in Indonesia.

STT’s latest move in divesting PT Indosat is the latest in a string of developments that can be traced directly to Temasek’s nature as a Singapore government-owned investment agency; the Shin Saga is probably the incident that is most vivid in our minds. While Temasek and its subsidiaries may have complied with the law (according to its lawyers), its close links to the Singapore government and ruling family have presented unpleasant problems as the company ventures overseas and makes investments abroad.

Foreign governments, for whatever reason, have seen it unfit for Temasek to exert too much influence on their countries’ corporate scenes; the spectre of a tiny country owning massive stakes in prominent corporations has lead to anti-competitive lawsuits, tax-evasion attacks and pretty much anything else plausible in the legal arsenal to make sure that Temasek feels the pain of its corporate expansion. And as the saying goes, once bitten, twice shy.

The aftermath of the Thai military coup and the resultant pain felt by Temasek subsequent to stock market losses on Shin Corp must surely have fueled the rapid decision by STT to divest its PT Indosat stake, for fear of potential losses to PT Indosat or further legal penalties that Temasek might have had to suffer as a result of the ongoing legal action in Indonesia. Indeed, there is no other plausible explanation - the PT Indosat stake is such a lucrative investment that ST Telemedia would certainly not have made such a divestment except under duress.

These recent events only serve to underscore the challenges that Temasek faces going forward – its massive capital base, extensive reach in many companies, and undeniable politically-linked image mean that Temasek will see itself facing the prospect of anti-competitive suspicions and political reactions from foreign governments. Indeed, it would certainly be no surprise if Temasek’s investment analysts have added a new dimension to their investment risk analysis – the risk of political backlash, a risk quite unique to Temasek. These risks will only serve to grow as the corporation extends its reach and as the funds under its care expand in size.

And so perhaps it is time for the government to rethink its strategy with regards to its management of its sovereign wealth, and perhaps consider some sort of proper privatization of the GLCs under Temasek’s ownership. For instance, the Indonesian antitrust case would certainly not have happened if Temasek did not control SingTel. Or Temasek might be seen to be much more independent from the Singapore government if it underwent some form of privatization, perhaps an IPO and listing and the attendant enforced corporate disclosure.

Whatever the case, maintaining the status quo is definitely unsatisfactory. Temasek will see its investment mandate constrained by attempts to avoid political backlash from the foreign countries it seeks to invest in. One thing is for sure – repeated press releases claiming that Temasek acts independently of the government and independently of its subsidiaries are too little and too lousy.

It is time for Temasek and the Singapore Government to do better.

SingTel, Starhub & M1: A Comparative Analysis

(Z74 = SingTel, CC3 = Starhub, B2F = M1)

SingTel

Singapore Telecommunications Limited, together with its subsidiaries, provides services and solutions in fixed, mobile and data communications, Internet, IT and consultancy, and satellite.

• Wireline services include cable-based and satellite-based fixed telecommunications network services, such as domestic and IDD services, leased lines, data communications, lease of satellite capacity, Inmarsat, and Internet services.
• Wireless services comprise mobile telecommunications services, such as cellular and paging services, and sale of handsets and pagers.
• Information technology and engineering services portfolio consists of information technology consultancy, systems integration, and engineering services.
• Other businesses include subscription television; technical and management consultancy services; ownership and chartering of barges; provision of storage facilities for submarine cables and related equipment; billing services; IT disaster recovery services; operation and maintenance of fibre optic network between Brisbane and Cairns; research and development of software; and managing and operating a call centre for telecommunications services.

Singapore Telecommunications provides its services to corporate and consumer markets primarily in Singapore and Australia. The company was founded in 1879 and is headquartered in Singapore, Singapore. Singapore Telecommunications Limited is a subsidiary of Temasek Holdings (Private) Limited.

SingTel also has extensive overseas investments in Mobile operators around Asia. These include Bharti Airtel of India and Telkomsel of Indonesia.

Starhub

StarHub, Ltd., an info-communications company, provides a range of information, communications, and entertainment services over its fixed, cable, mobile, and Internet platforms for residential and commercial customers in Singapore.

• Mobile services include 3G that enables users to make video calls and 3.5G that offers broadband Internet access over mobile phone; mobile voice services; mobile data services, including video downloads, Web SMS, MMS animation and wallpapers, MMS retrieval centre, Disney mobile, mobile ESPN premiership, and themes, as well as call, MP3, and true tones; green prepaid card; and roaming services.
• Cable TV services comprise operation of news, movies, entertainment, sports, music, and education channels.
• Broadband services include mobile and home broadband access, as well as other Internet services; and fixed network services comprise voice, data, Internet, and wholesale services for businesses.
• StarHub offers online value-added services, such as online music portal; email and broadband content filtering service, family access network, and anti-virus email scan services; data/Web storage services; corporate portal and IP-VPN solutions; and content creation and development solutions.

It is also involved in the sale of customer premise telecommunication equipment. The company was incorporated in 1998 and is based in Singapore, Singapore. StarHub, Ltd. is a subsidiary of Asia Mobile Holdings Pte., Ltd.

MobileOne

MobileOne, Ltd. provides cellular mobile communications services in Singapore. It provides

• a range of mobile voice and data communications services over its 2G/3G/3.5G network.
• international call services to mobile and fixed line users; and wireless broadband Internet services to home, office, and mobile users.
• a range of mobile voice, nonvoice, and value-added services on its cellular network and as an operator.

It has a network of operator-owned retail shops (M1 Shop) and operator-appointed distributor outlets in Singapore. As of December 31, 2007, MobileOne operated approximately 13 M1 shop outlets, as well as an e-shop, which sells mobile phones and accessories online. The company also had approximately 1,535,000 mobile customers comprising 856,000 postpaid customers and 679,000 prepaid customers.

In addition, it involves in the research and development of mobile telecommunications product and services, as well as provision of after sales support and customer services. MobileOne has a partnership with Vodafone to provide a range of wireless business products and solutions, as well as has a joint venture with PLDT (SG) Retail Service Pte, Ltd. to provide prepaid mobile services. The company was founded in 1994 and is headquartered in Singapore, Singapore.

Financials

The following is a comparative financial analysis of the three companies:

Profitability:



As can be seen SingTel has the highest margins whereas Starhub has the highest profitability ratios. However, SingTel has contributions from associates above the EBITDA line, so this skews the results.

Leverage & Multiples:



SingTel has the strongest leverage ratios. However it is also the most expensive, compared to M1 which is the cheapest stock, and has the highest yield.

Why the M1 - City Telecom Partnership Is Front Runner for NGNBN OpCo

Singapore's Next-Gen NBN OpCo RFP was released earlier this month. The race is much more open for the OpCo than the NetCo because of the lower barriers to entry and lower capital investments involved. However, despite this, I think that the only bid that truly makes sense for the NGNBN OpCo is the City Telecom - M1 consortium.

1. The operational separation is extremely onerous for the wireline incumbents, and severely dilutes the attractiveness to StarHub and SingTel.

One of the requirements of the OpCo is that it has to be operationally separated from its affiliates. This means that OpCo has to:

• Operate in all respects on a standalone basis, separate from affiliated downstream operating units
• Be located in separate premises
• Independently formulate & make own decisions on its assets and commercial policy
• Not allow its affiliated downstream operating units to have unequal influence on the formulation of commercial policy, and access to commercial information or customer confidential information
• OpCo’s Board of Directors, Management and employees not to have responsibilities in any Affiliated Operator

All these requirements will mean that an incumbent like StarHub and SingTel will have to incur significant duplication of manpower and will have to come up with a different brand name for its OpCo's operations, which might in turn compete with or overlap with its non OpCo operations. In short, Operational Separation significantly restricts their flexibility in the allocation of resources and human talent across the OpCo & RSPs.

A much less onerous option for the wireline incumbents would be to simply set up separate integrated OpCos which would have no such operational separation requirements and which could be a simple extension of existing business units. Such business units would move much faster into the market and be operationally ready.

2. A non-incumbent challenger without any sort of cooperation from existing market players faces significant market and demand risk.

Firstly, a Greenfield entrant into the OpCo space faces a significant degree of risk because his OpCo grant depends largely on meeting adoption targets. Furthermore, the incumbents like SingTel and StarHub could migrate their customer base away from the NBN OpCo to their own OpCos once the five-year exclusivity is over, thereby seeking to kill the NBN OpCo, or thereby severly harming its business case.

Secondly, Bidders with a higher risk outlook will seek to be compensated for this risk with the possibility of higher returns through higher ICO prices. However, the attractiveness of ICO prices is weighted very highly in the evaluation criteria. This puts prospective bidders in a fix. In order to be profitable, the greenfield OpCo will need to win some kind of reasonable margin from his operations. However, he is contrained by the ICO evaluation and regulation plus the fact that the iDA is trying to bring about "attractive ICO prices."

These factors, amongst others, make it highly unattractive for any prospective greenfield bidder with no demand guarantee (e.g. Axia, Zitius etc.)

3. This leaves the M1 - City Telecom (CTI) consortium as the only sensible bid.

A City Telecom - M1 partnership goes a long way in circumnavigating the challenges mentioned above.

Firstly, M1 has a substantial mobile customer base in Singapore, and will be looking towards the NGNBN as an opportunity to provide fixed line services to prevent customer churn and to attract new customers. With a stake in the OpCo, M1 will ensure that its services run over the NBN OpCo, thus significantly enhancing the business case of the OpCo.

Secondly, M1 has no significant wireline operations in Singapore. This means that the operational separation is no where as onerous to M1 as the incumbents. Furthermore, with City Telecom taking a major stake in the OpCo and contributing significant manpower and operational expertise to the OpCo, this greatly relieves the need for M1 to create duplication of manpower - the OpCo business does not cannibalise or compete with M1's current core competencies. In contrast to the incumbents, the Operational Separation requirements are a relative non-issue to M1/CTI.

Conclusions

Neil Montefiore must therefore be an optimistic man. Because for a long time now, SingTel and StarHub have been attacking M1's market share because of the small telco's lack of fixed-line offerings.

I certainly hope Neil realises that he has a very real opportunity here and makes the best of it. Consumers would all benefit from genuine extra competition and from someone who appears to have a genuine understanding of what is really going on.

M1's CEO Neil Montefiore on the Pay TV Market

At last, someone with some knowledge about the Pay TV market says something wise about it in the Singapore newspapers. This time, TODAY carried an interview with M1 CEO Neil Montefiore (unlike My Paper which contained a trashy column by the bungling Lee Sze Yong):

Neil makes the following astute observation:

“I’m not in favour of bidding for content because in the end, it costs the consumer more,” he said. “It seems we’re the only example in the world where you introduce competition and the consumer pays more. It doesn’t seem to be the right model to me. I’m hoping the regulators or the content owners will change that.”

Well, Neil, I too wish the regulators or the content owners would do something about it. But I don't think that's going to happen soon.

• The content owners are too elated that they are able to collect monopoly rent from the Singapore market.
• The regulators are too busy covering their asses to please their political masters.
• And of course SingTel wouldn't care two hoots about the inconvenience caused to consumers - they're a multi-billion dollar company who only cares about how they can break into the Pay TV market in Singapore and make more profits.

This is a simple result of the economics of the bidding model and the monopoly over content rights.

The only realistic chance consumers have is to band together and speak up and make noise through the consumer commission to enact change. Either that or boycott SingTel. It's really up to the consumers to demand and get what they want and stand up for their own consumer rights.

On another note, I think M1 will be the biggest beneficiary in the upcoming next-gen NBN project. In my opinion, an M1 consortium that does not include SingTel and StarHub (i.e. City Telecom & M1) makes the most sense for the OpCo bid. I'll explain why in a later post.

Next Generation Broadband Around the World: Pricing, Penetration & Technology

This post highlights some key statistics of Next-Gen Broadband availability around the world, and benchmarks the Singapore's broadband pricing (SingTel, StarHub) against comparables abroad.

Pricing

As the following chart shows (click for full images), the most affordable 100Mbps plans are available in Korea, Japan and Sweden. StarHub's MaxOnline 100Mbps plan is by far the most expensive 100Mbps plan.


Other high-speed broadband plans are available, but are slower than 100Mbps, as the following chart shows. Particularly notable is the pricing of broadband in the USA. The vertically integrated industry model allowed by the FCC has resulted in exceptionally high pricing of broadband by Verizon in the USA, compared to the rest of the world. However, the 12Mbps plan of StarHub and the 10Mbps plan of SingTel are very very expensive relative to other comparables.(Click for full image)


Penetration

Global FttX penetration rate statistics show that Korea, Japan and Hong Kong are way ahead of the rest of the world when it comes to FttX adoption:


Technology

Finally, we see that Passive Optical Networks (PONs) are the preferred network architecture used by the telcos, with EPON deployed in Japan and GPON preferred elsewhere:

SingTel, Starhub & M1: Analysts' Reactions to the Next-Gen NBN OpCo RFP

CIMB

Operational Separation requirements could significantly dilute the attractiveness of the OpCo to the incumbents.

• Operational Separation significantly restricts their flexibility in the allocation of resources and human talent across the OpCo & RSPs

There is “little incentive for bidders to offer sharply lower ICO prices to what incumbents are charging.”

• Greenfield entrant into the OpCo space faces a significant degree of risk because his OpCo grant depends largely on meeting adoption targets.
• Bidders with a higher risk outlook will seek to be compensated for this risk with the possibility of higher returns through higher ICO prices. However, the attractiveness of ICO prices is weighted very highly in the evaluation criteria.

NGNBN is essentially neutral for the telcos and downside is limited.

Credit Suisse

For incumbents, outcome looks neutral at best...

• At OpCo level it would be easier for infrastructure builders to drag their feet in truly offering open access.
• Receipt of OpCo licences for SingTel and StarHub would be unlikely to change the competitive dynamics materially.

… and more probably materially negative

• Additional player into the OpCo space willl begin chasing the existing broadband revenue pool.

Continue to prefer M1

• Upside potential since M1’s leased line costs could fall and it could defend cellular market share by becoming an RSP.

NGNBN OpCo RFP Released: OpCo to be "Operationally Separated," Receive Maximum of $250m Grant

The IDA yesterday released the RFP for the NGNBN OpCo (see here for more info about the NGNBN). One of the key features of the RFP is that the NGNBN OpCo is to be "Operationally Separated" from other entities. In comparison, it was earlier announced that the NetCo was to be "structurally separated." The following compares the two types of separation (click for full images).

The following are the key features of the Operational Separation Requirements of OpCo as released yesterday to the public, amongst other details:

Next Gen NBN OpCo shall be independent from its downstream affiliated operating units, including the following:

• Operate in all respects on a standalone basis, separate from affiliated downstream operating units
• Be located in separate premises
• Independently formulate & make own decisions on its assets and commercial policy
• Not allow its affiliated downstream operating units to have unequal influence on the formulation of commercial policy, and access to commercial information or customer confidential information
• OpCo’sBoard of Directors, Management and employees not to have responsibilities in any Affiliated Operator
• All remuneration and incentive schemes for the OpCo’sBoard of Directors, Management and employees not to be linked to the performance of Affiliated Operator(s)
• Ensure compliance with Operational Separation Requirements through the maintenance of a comprehensive governance manual, monitoring against a set of Operational Separation Performance Indicators, & appropriate reporting to the Monitoring Board (Source: IDA)
  

Key issues in the OpCo/NetCo separation

How will the government ensure that the costs of NetCo structural separation and OpCo operational separation do not outweigh the benefits to the economy from the separation? The government has said that the end goal in this NGNBN project is to have a "vibrant RSP market," and that the next gen infrastructure will provide "non-discriminatory prices and conditions." Yet it is not clear that these end goals necessitate the onerous layers of legislation and compliance requirements that structural and operational separation of the NetCo and OpCo respectively will require.

The IDA is also offering a grant of up to $250m to the winning OpCo bidder. This grant is ostensibly the carrot to entice private investment into this sector and to offset the OpCo separation requirements. And will it be enough?

In view of the multiple compliance requirements that the NGNBN will impose on incumbents, the best option for the incumbents (Starhub & SingTel) is to refrain together from participating in the NGNBN RFPs, and in the mean time invest in their own broadband infrastructures to compete the NGNBN out of business. Starhub would go ahead with its DOCSIS 3.0 investments (just like Comcast has just released) and SingTel would roll out its own FTTx infrastructure. With their entrenched customer base and bundling strategies, they would easily out-compete the NGNBN operators and retain their duopoly status. In contrast, participating in the NGNBN artificially introduces a competitive (and possibly unsustainable) market structure in addition to onerous regulatory requirements.

It will be interesting to watch the developments of this space and see how things develop.

[Click here for official information on the OpCo RFP release (Press release/Presentation Slides/Speech etc)]

M1, CTI & StarHub vs SingTel in Singapore's Next Generation National Broadband Network (NGNBN)

A. Next Generation National Infocomm Infrastructure

The Next Generation National Infocomm Infrastructure (Next Gen NII) is Singapore’s new digital super-highway for super-connectivity. It will entrench Singapore’s Infocomm hub status and open the doors to new business and social growth for the country. Next Gen NII comprises complementary wired and wireless networks to ensure Singaporeans enjoy seamless connectivity.

The wired broadband network or Next Generation National Broadband Network (Next Gen NBN) will deliver ultra-high broadband symmetric speeds of 1Gbps and above, to all homes, offices and schools, while the Wireless Broadband Network (WBN) will offer pervasive connectivity around Singapore.

B. Next Gen NBN (NGNBN) RFP Launch

The IDA, on 11 Dec 2007, released the Request-For-Proposal (RFP) to all interested parties to submit their bid to design, build and operate the passive infrastructure layer of the Next Gen NBN.

According to the Minister for Information, Communications and the Arts, Dr Lee Boon Yang, the Next Gen NBN is envisioned to offer pervasive and competitively priced ultra high-speed broadband connectivity to business users at the workplace as well as to Singaporeans at home, schools and learning institutions and other premises.

The Next Gen NBN is expected to be available nationwide by 2015, although consumers can begin to look forward to a range of new and exciting Next Gen Services such as high-definition video conferencing, telemedicine, Grid Computing-on-Demand, security and immersive learning applications on the Next Gen NBN from about 2010.

The list of qualified consortium leads for the Next Gen NBN RFP is as follows:
1 Alcatel-Lucent Singapore Pte Ltd
2 Axia NetMedia Corporation
3 BT Singapore Pte Ltd
4 City Telecom (H.K.) Limited (Replacing Hong Kong Broadband Limited)
5 Nippon Telegraph and Telephone West Corporation
6 Nokia Siemens Networks Singapore Pte Ltd
7 Singapore Computer Systems Limited
8 Singapore Telecommunications Limited
9 SP Telecommunications Pte Ltd
10 StarHub Ltd

C. StarHub, CTI and M1

Hong Kong's City Telecom (CTI) and Singapore's M1 and StarHub (CMS Consortium), on 20th March 2008, signed a Memorandum of Understanding (MoU) to jointly form a consortium to design, build and operate the passive infrastructure network capable of delivering ultra high broadband speeds for Singapore. The consortium will jointly submit a bid that will meet all the criteria for the Infocomm Development Authority of Singapore’s Request-for-Proposal (RFP) for the Network Company (NetCo).

This important development effectively narrows down the field to two key bidding consortiums for the NetCo layer of the Next Gen NBN:
i. SingTel and its financial partners
ii. CTI, M1 and Starhub (CMS Consortium)

The other bidders do not have a serious chance in winning the NetCo layer:

1. SingTel's position as incumbent fixed-line operator and its islandwide telecom infrastructure puts it in pole position to roll out the island wide fibre-optic network. It has the experience, deep knowledge, financial pockets and incentive to roll out the fibre infrastructure in the most economically efficient manner that does not duplicate existing infrastructure and requires the minimum construction of new ducts.

2. If the NetCo contract were to be awarded to a player (players) other than SingTel, there is a very high probability that SingTel would then embark on deploying its own fibre-optic network to compete directly with the NGNBN.

• The SingTel entity operating the next gen network would be a vertically integrated beast (from infrastructure operator through to Retail Service Provider) that would not be subject to open access obligations and that would have the speed of execution of an independent, single corporation (rather than a cumbersome regulated consortium).
• SingTel would be able to cherry pick the best and most profitable areas to roll out its network first in order to get a head-start ahead of the NGNBN operators as it is not tied to rollout obligations as stated by iDA
  
• SingTel would not be obliged to make its network infrastructure available to the NGNBN operator, potentially driving civil costs much higher for the NGNBN NetCo.
  

3. It thus follows that any non-SingTel consortium winning the NetCo will have to be a strong, credible force that will be able to take on the SingTel beast in head-on competition and yet be able to survive. The newly formed consortium of CTI, M1 and StarHub fits this bill.

• CTI will bring its experience of operating a fibre network in Hong Kong to the table.
  
• StarHub will bring its deep knowledge & experience with the residential cable networks. It will also bring a strong customer base of payTV subscribers to the table.
  
• Both Starhub & M1 will bring their mobile subscriber base to the table and be able to market a new bundled service incorporating the next-gen services of the NGNBN network.

4. Other players do not stand a realistic chance.

• Any winner of the NetCo layer other than the CMS Consortium will probably be squeezed to death by SingTel, unless the CMS consortium is somehow roped in at the OpCo layer without being awarded the NetCo. This is highly unlikely.
  
• Any independent winner of the OpCo layer that operates with open access without SingTel at the NetCo layer (e.g. Axia) will be absolutely crushed by SingTel, which would have a massive customer base to build its own Next Gen offering and no open access obligations.

D. Conclusions

Thus, it looks like the NGNBN is gradually evolving into a two-horse race. Despite the government's grand plans to create open access and to encourage a vibrant RSP market as well as promote competition along various parts of the telecommunications value chain, the economics of telecoms networking means that a multi-player industry structure looks unsustainable and that the current duopolistic structure will remain, with minor players along the RSP fringe.

I am personally open to considering arguments as to how the NGNBN will allow a third major player into the wireline telco landscape in Singapore. However I remain very skeptical of the possibility of a three-way (or multi-way) fight.

[Update: the NBN OpCo RFP has been released]

Telstra: a Political Operation, or a Free-Market Business?

Phil Burgess, head of public policy at Telstra, has been on the record as having made the following comments:

"We've been aggressive because there is a move under way to confiscate something that is owned by 1.6million mum-and-dad investors and give it to a Singapore company," Dr Burgess told The Australian.

"We're talking about turning over Australia's only nationwide telecommunications network to a consortia run by the Singapore Government. That's a government that executes people, number one, and doesn't allow competition in its own country. It's unbelievable.

"We've had a national broadband plan since August 2005. It's been vetoed twice by the (Australian Competition and Consumer Commission). When people say we're threatening not to do broadband, it just isn't true. We need to have our costs accepted by the ACCC. We are not going to build it if we can't get a commercial return on our investment."

If you scrutinise this statement carefully, what Phil Burgess is saying is the following:

a. Telecommunications business in Australia should be given to Telstra because Telstra's shareholders are mum-and-pop shareholders.

b. Telecommunications business in Australia should be given to Telstra because it is an Australian company and Australia does not execute its people.

c. If Telstra cannot competitively operate a national broadband infrastructure, no other company should be allowed to do so.

Well, how's that for a competitive company?

The last time I checked, business should be conducted based on the ability of a company to offer its customers the best services and the best value, not some call to political arguments or human rights issues.

In my view, these statements are just shameful and show that Telstra does not compete on the basis of economic competitiveness but on the basis of slimy political maneuvering. And it just goes to show that business simply cannot be separated from its political environment.