THE QUIET REVOLUTION

Deregulation of Iran’s Telecommunication Industry

By Albrecht Frischenschlager

March 2003

One of the last untouched playgrounds for international telecommunication companies is at the verge of opening its doors to domestic and foreign competition. And the stakes are high, as 65 million potential customers, tired of the ill-famous services of the state telecom company are looking for a change.

Promising Signs

In autumn 2002 the news was spreading fast in the Tehran Expat community that after years of talks the first GSM roaming agreement between the Telecommunication Company of Iran (TCI) and a European provider (A1, Austria) has started.

This event was followed shortly by announcements, that the French bank BNP Paribas won a contract to advise the Iranian government on organizing a tender for the country’s first private mobile phone license. Other prominent bidders for the advisory mandate included HSBC Investment Bank and PricewaterhouseCoopers. The first private GSM license will cover the installation and operation of up to 4 million new cellular lines and an award is expected towards the end of 2003.

In spring 2003 a consortium of one Iranian and four European companies was awarded a tender to offer 2-million pre-paid mobile phones. 35 companies took part in the tender and the successful consortium includes Rafsanjan Cooperative Co., Swedish Tele 2, Maison, International Bank and Comviq.

In spring TCI also introduced SMS services to the market.

These news sound like music to the ears of Iranians and Iran based expatriates. At present, Iran’s mobile phone network covers just 2.3 million subscribers. Applicants must pay more than US$ 1,000 to obtain a mobile phone subscription in the free market, or apply to TCI and wait more than a year to purchase a mobile phone for approx. US$ 550. Once obtained the mobile phone is often useless due to an overloaded network.

Public anger is wide spread and culminated last year in the dismissal of the responsible minister by Parliament. The new team around PTT Minister Ahmad Motamed has promised improvements. Aside of its strive for increased participation of the private sector, the ministry also signed in December 2002 a contract with Germany’s Siemens and Sweden’s Ericsson to install 1.2 million new lines in the framework of the governmental GSM system. According to Ali Kermanshah, Deputy Minister for International Affairs at the Ministry of Post, Telegraph and Telephone (PTT) Iran plans to increase the number of GSM lines to 10 million by the end of 2005. Close to 50% shall be provided by the private sector.

This goal seems ambitious. Iran will only be able to reach it in case it embarks on a radical re-organization of its telecommunication sector.

The Global Dimension

The world is presently in the middle of an economic transformation process, that can probably only be compared in its dimensions and effects on humanity with the industrial revolution 200 years ago. This process is reflected in keywords such as Information Revolution, Information Age and Globalization. Countries that read the signs of this fast evolutionary process and act accordingly have a chance to be among the future elite. Countries that do not react will economically and eventually also politically fall behind.

The ultimate goal of deregulating Iran’s telecommunication sectors is to guarantee that Iranian businesses and individuals have access to advanced telecommunication technology in sufficient quality and quantity and that Iran’s economy can take full advantage of new opportunities of the information age. It has to be clear that deregulation of the country’s telecommunication sector is not an option that one can use or not. It is absolutely necessary! Otherwise Iran will in the long run fall economically behind, resulting in the deterioration of the economic situation of each Iranian.

History has proven that only the private sector can respond to fast economic changes in an efficient way. In a world that is globalizing and in an economic environment that is changing ever faster the government’s role has to reduce to a regulator setting the rules of competition, securing a liberal and fair market environment and protecting the weak.

The Iranian Way

So far the theory. But what about the practical application? Iran’s constitution clearly states that the telecommunication sector has to be 100% government owned.

The solution lies in ‘expediency’. Iran has experienced in other sectors with similar limitations (banking, insurance) a gradual change in interpretation of the constitution, allowing private activities. Thus, it is expected that also in the telecommunication sector Iran will not take radical privatization steps (as in most other emerging markets), but has to follow a step-by-step approach.

This already shows that the very ambitious figures and timeframes mentioned in the national and international press by Iranian PTT officials have little chance of success. However, these statements have often a different task: they shall open the politically sensitive issue of deregulation for discussion by the various political circles as a first step to secure eventually their approval.

The Homework

Organizing tenders to attract private GSM operators is one part of the deregulation process. However, the first and foremost task of the Iranian PTT is to transform the existing elements of the TCI into efficient companies. They need to have a chance of survival once private competition starts; at least, they have to be transformed into formidable brides for future partnerships or takeovers. This will require over the next 24 months huge efforts:

Internal Cost Accounting: An important step in modern management is to split a company into different profit and cost centers and to introduce a good internal accounting system. This allows the management to analyze in detail the cost and revenue structure of the company and to make informed decisions. Internal cost accounting also forms an important part of the Management Information System (MIS).

Organizational Structure: Simultaneously, it will be important to optimize inside each unit the org chart and the functional organization. This has to go hand in hand with the adoption of a modern human resource system (involving training, career planning, job assessments, competitive compensation system, etc). In this context it will also be important to get in some areas exemptions from the very strict Iranian labor code.

Product Range: Based on the internal cost accounting system the management of every unit has to perform a detailed analysis of the cost and revenue structure for their profit and cost centers and for each of their products/services. Subsequently, the management has to develop a new market oriented price structure for all their products/services, keeping in mind free market rules and social obligations. Finally, management has to set priorities in the fields of capital expenditures and operating expenditures and prepare budgets and long-term development/investment plans for their various business activities.

Simultaneously with increasing the efficiency of its various units the PTT Ministry has to establish a modern supervision body. Regulatory authorities worldwide are typically in the form of a limited liability company that is 100% in the ownership of the state. It’s independence from political interference is guaranteed through the composure of its supervisory board (usually a mixture of representatives of the government and the parliament) that also appoints the management, and through its articles of association that grant the management wide authorities and independence.

The tasks of the regulatory authority are: granting of licenses, management of the radio frequency spectrum, type approval and standardization of communications equipment and materials, protection of consumers, settlement of disputes arising with regard to interconnection, numbering and quality control.

Privatization

Simultaneously with the start of restructuring measures in the existing telecom units, the Iranian PTT in co-operation with private consultants (like the recently appointed Bank Paribas) and international organizations (Worldbank, International Telecommunication Union, etc.) is expected to prepare international tenders for the issuance of new licenses. While the first GSM license and licenses for related services might be awarded quickly, the development in the landline sector is expected to be much slower.

Iran has already restructured its nation-wide landline services into provincial companies. Instead of issuing in this area ‘green field’ licenses, which could prove a politically hot issue, it is rather expected that the provincial companies will be given flexibility to enter into a wide range of co-operation agreement with the private sector, including BOT schemes, that might eventually result in the transfer of partial ownership to the private sector.

The ultimate goal has to be, obviously, that the government gives up in every single unit, including the regional telecommunication company, its majority share. Depending on the political realities, this could be done in more or less steps.

Post-Privatization Restructuring

Post-privatization restructuring will have to take place on two levels. First on a company level: building on the pre-privatization restructuring, the management of each privatized unit will implement its ideas to reach a further increase in efficiency, quality, etc. This requires on-going internal changes. Second, restructuring has to continue on a macro level: the government has to reduce step-by-step its direct interference in the telecommunication sector.

Eventually, in a liberalized environment, the role of the government will reduce to setting the macro policies for the sector and supervising if these laws create the desired market environment. Day-to-Day supervision and management of the telecommunication sector will be effected by the independent regulatory authority. The government will supervise the work of the regulatory authority and the telecommunication market with a small number of experts that could form part of a ‘Utilities Ministry’. This Ministry could also supervise other privatized sectors such as power generation and water supply. There will be no more need for a separate PTT ministry.

Benefits

Aside of being an absolute necessary prerequisite for the further economic development of Iran, deregulation and privatisation of Iran’s telecommunication sector will also address two other important areas of concern for the government – the creation of jobs and budget revenues:

Whereas every restructuring process involves the laying off of staff and the hiring of new staff (following Schumpeter’s concept of ‘constructive destruction’), the net effect of the entire process on the job market will be positive. The liberalisation and privatisation of the telecommunication industry has multiplied worldwide the number of staff (mostly qualified people) in this sector and was in Europe as well as in the US in recent years job generator No. 1.

Furthermore, the government can expect from the entire process substantial revenues in the form of (1) revenues from the privatisation of existing entities, (2) future annual dividends from minority shareholdings, and (3) granting of new licenses. In this context it is interesting to note that revenues from new licenses are not only a one-time effect, but governments in many countries have started to organise tenders whenever a new technology enters the market. For example the present GSM technology will soon be complemented/replaced by the UMTS technology. The German government earned from a tender in 2000 in which 4 UMTS licenses where sold a total of DEM 100 billion (US$ 50 billion) in licensing fees.