20 November 2023 - Compass Advisory
​
​
A Commentary on the Telecommunications Regulatory Authority of the Kingdom of Bahrain paper titled 'BNET Economic Regulatory Model - A Forward Look'
​
Welcome to our first edition of Compass Insights. Through Compass Insights, we want to share with you our thoughts and views on some of the key issues in the regulation of telecoms and technology.
In this first edition, we provide some thoughts and comments on the paper recently published by the Telecommunications Regulatory Authority of the Kingdom of Bahrain, titled “BNET Economic Regulatory Model – A Forward Look”. This topic is of considerable importance in the separation journey of BNET and we hope our insights will offer value and insights to our readers and stakeholders in the industry.
Intro and context
The Telecommunications Regulatory Authority of the Kingdom of Bahrain (‘TRA’) recently published a document titled “BNET Economic Regulatory Model – A Forward Look”. The paper purposes to set out its initial views regarding the “key aspects of the Bahrain market model that are fundamental to developing an appropriate economic regulatory framework for BNET wholesale services and discuss existing economic regulatory models.”
At the same time, the TRA issued a public consultation on BNET deployment targets, wherein it proposes new deployment targets with regard to accessibility and speed in service provisioning, namely: 99% of valid requests for fixed broadband to be fulfilled within 10 working days and 99% of valid requests for dedicated fibre services to be fulfilled within 30 working days. While certainly ambitious, these targets align with the strategic objectives set out by the TRA in ensuring that Bahrain remains one of the best-connected countries in the world.
Given that these targets would invariably put continuous pressure on BNET to invest (often regardless of actual demand for services), discussions around the appropriate regulatory framework for BNET wholesale services would need to include and consider the new proposed deployment targets.
Overview of the Document
At the outset, we note two important and commendable steps taken by the TRA. First, it acknowledges the uniqueness of the Bahrain model with respect to BNET and, secondly, it sets out four key strategic objectives that should guide the ‘BNET Economic Regulatory Model’.
These can be summarized as follows: (i) world-leading, sustainable broadband infrastructure and accessible broadband services; (ii) further enhancing Bahrain’s business attractiveness by ensuring that dedicated fiber services are available to meet business needs; (iii) maintain competitive prices and capabilities for Licensed Operators, while enabling innovation through advanced connectivity solutions, and (iv) ensure that BNET remains a sustainable business and attractive to investors. To achieve this, the TRA sets out a preliminary exploration of some of the most common pricing and cost models including incentive regulation (CPI-X) Rate of Return regulation (RoR), Building Block Models (BBM), and Benchmarking.
The TRA’s preliminary position is reasoned towards benchmarking given its light touch and flexible nature. It also ensures that regulatory intervention is only done when required. However, given the uniqueness of the Bahrain model, we believe that this may be more challenging than envisaged. We also note that reliance on external benchmarks may disadvantage BNET by putting undue pressure on wholesale pricing. The point of contention is where retail benchmarks would be used while the pressure to adjust prices would be absorbed solely by BNET at the wholesale level.
Moreover, the proposed continuous deployment targets of 99% on BNET may limit the suitability of benchmarks. In such a scenario, it may be worth considering models such as RoR or BBM, which would be more suited for the challenges that a continuous deployment target of 99% may pose.
BBM could offer a more tailored approach to address the unique challenges associated with the proposed deployment targets and incentivization for investments in the long run. It provides a structured framework that directly links revenue allowances to the utility's financial requirements. This becomes particularly relevant in the long-term for mature, monopolistic fiber infrastructure utilities, where the costs of deployment, maintenance, and technological upgrades are critical considerations.
However, we do note and agree with the TRA that the effectiveness of BBM is heavily dependent on the accuracy and reliability of the information used in its calculations. Inaccurate data, flawed assumptions, or incomplete information can introduce uncertainties and compromise the precision of the BBM.
Striking a Regulatory Balance
In evaluating a new economic regulatory framework for BNET, we would advocate for a degree of regulatory forbearance while fully aligning with the TRA’s set strategic goals for BNET.
Firstly, financial sustainability stands as a paramount concern, necessitating a careful examination of the framework's ability to ensure the economic viability of BNET. It is important to note that BNET has only been financially separated from Batelco since June 2021 and therefore is still in its nascent stages – requiring a degree of flexibility to adapt while ensuring the sustainability of investments.
Secondly, regulatory objectives must be considered, underscoring the need to align the pricing framework with overarching regulatory goals as outlined in TRA's Document. The framework should incentivize operational efficiency and gains, with the aim of promoting innovation in quality of service and product offerings in the long run. Additionally, the pricing framework should manage risks and provide incentives for smart investments in networks. Furthermore, practical considerations, including the cost and availability of information, as well as the symmetry of information, must be factored in when gauging the framework's applicability. Finally, the TRA must account for the level of maturity and the extent of monopoly within the utility, recognizing that these factors significantly influence the choice of a regulatory pricing mechanism.
A phased, hybrid approach
We advocate for a phased, hybrid approach in the first regulatory period, suggested at 5 years considering that there will always be a tradeoff between the desire for greater certainty for the recovery of costs (under incentive regulation CPI-X and benchmarking) and the focus on greater rewards and incentives for taking risks (reflected in the BBM approach). Hence, there is merit in adopting a hybrid approach that reflects aspects of both views. This view involves setting a fixed CPI-X cap or benchmarks for a period of 2-3 years with minimal intervention or adjustment followed by a gradual transition into a building block approach. The building block approach would incorporate a gradual phasing of gains through a glide path, using a CPI-X to set revenue or price path.
Further incentive mechanisms may then be implemented outside of this cap and so revenues may change more or less than the cap. This approach can provide BNET some headroom in the first years, considering its huge investments in NBN roll out and regulatory obligations to meet 99% deployment targets before the implementation of a more intrusive pricing regime such as a BBM, which will become more suited to BNET as it matures and stabilizes.
Importance of determining BNET WACC
Given the above, we believe it is imperative for the TRA to consider determining an accurate Weighted Average Cost of Capital (WACC) for BNET. BNET’s sustainability as well as its ability to attract investments are heavily reliant on having an appropriate WACC. The use of any legacy WACC may not accurately reflect BNET’s current funding structure.
A precise and updated WACC is essential for aligning regulatory pricing mechanisms with BNET's unique risk profile and ensuring that the cost of capital adequately compensates for the deployment targets set by the TRA. Moreover, an accurate WACC serves as a key component in estimating reasonable return which is necessary to ensure BNET is properly incentivized to roll out investments, meet the 99% coverage target thereby fostering the long-term growth and competitiveness of Bahrain's telecommunications sector.
Charting the Regulatory Course
We fully acknowledge the challenges in setting the right economic regulatory framework for BNET, and the TRA’s initial views is a step in the right direction. We do believe that there needs to be a very meticulous calibration with regard to deployment targets and pricing models in order to strike the right balance between fostering effective competition, ensuring financial sustainability, and accommodating BNET's unique position.