MoldTelecom Tariffs Rebalancing Problem

MoldTelecomand

The Problem of Prices Rebalancing

Adrian, Camille, Natalia, Pavel

Corporate GovernanceIES FSV – Charles UniversityApril, 2011

Structure of the Presentation:

I. Introduction & Company Overview

II. The Rebalancing Prices Problem:

2.1. Economic Constraints

2.2. Social Constraints

2.3. Regulatory Constraints

2.4. Political Constraints

III. Recommendations & Conclusion

MoldTelecom and The Problem of Prices Rebalancing

Introduction & Company Overview


Creation: In 1993, in the Republic of Moldova

Turning point: In 1999 MoldTelecom was reorganized and became a Joint Stock Company with the State being the unique stockholder


Fixed Telephony Mobile OperatorInternet

Operator and also offers

Internet Access to other Internet

Providers

1.119 million customers (3rd trimester of 2010)


Landline Market Share


General Assembly

Supervisory Board

General Director

Vice-Director

6 Departments 5 Divisions 3 Centers

The hierarchy makes the internal communication more complicated, such that the decision making process is slowed down even between the representatives and is a time-consuming activity.

Many analysts are calling this phenomenon as: filtration.

1 state-representative from the Government

• In February, 2011, MoldTelecom announced that since 1st of March it will start its rebalancing program, which will look like this

• Generally, it is in-line with its development strategy announced before and a good step before company’s privatization


HOWEVER!

It was made with the violation of OECD

corporate governance principles

Increase in tariffs for landline calls

Decrease in tariffs for international calls


MAIN ISSUES of Corporate Governance:

- Low transparency

- Unfair treatment of stakeholders (principle-agent problem)

- Political conflict (prisoners’ dilemma)

- Unclear and inefficient regulatory framework

- It was too sharp (a gradual reform

would be more acceptable)


MoldTelecom (tariff

rebalancing)

Regulatory constraints

Political constraints

Social constraints

Economic constrains


Analytical Constraints

Map

The Rebalancing Prices Problem:Economic Constraints


MoldTelecom (tariff

rebalancing)



Social constraints

Economic constrains



Map

The OECD Principles of Corporate Governance

Principle I

ENSURING THE BASIS FOR AN EFFECTIVE CORPORATE GOVERNANCE FRAMEWORK

“The corporate governance framework should bedeveloped with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets.”


Political and social constraints

The necessity to cross-subsidize


International calls pricesCash generator

Landline calls prices

Cash consumer

$$


• Cheap land-line calls ensure MoldTelecom quasi-monopoly

No free competition

Expensive international calls (bad for citizens, businessmen, but also for country’s image)

Poor quality of services

• Thus, tariff rebalancing doesn’t seem to be a bad idea!

• However: it was made too sharp!


• Tariff rebalancing strategy was adopted in 2000=> gradual rebalancing each year

• It was frozen in 2002, due to political reasons

• Policy-makers myopia: => short-term versus long-term benefits

• From 2002 up to 2011 no major changes, but the need for reform became imperative

+ the need for privatization, according to IMF program

Shock therapy amid a social crisis – bad idea!


The Rebalancing Prices Problem:Social Constraints


MoldTelecom (tariff

rebalancing)



Social constraints

Economic constrains



Map

Alexander Graham Bell, inventor of the phone and first customer of landline phone

call services, obviously


Principle IV

THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE:

“The Corporate Governance framework should *…+ encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.”

“*…+ Stakeholders *…+ should have access to relevant, sufficient and reliable information on a timely and regular basis.”


MoldTelecom mission is:The client and his needs is our top priority.

Global Competitiveness Report 2010-2011:The degree of customer orientation in Moldovan businesses…

120 out of 139

Even if GCR refers to the business sector as a whole and not focused on MoldTelecom, let’s do not forget that MoldTelecom is one of the biggest, largest and most-profitable state-owned

companies in Moldova.



BUT let’s see how the price rebalancing was introduced to consumers and how transparent this process was…

MoldTelecom announces that Diasporas of Moldovan citizens living abroad have

solicited to reduce the price for international phone calls

19 January 2011

MoldTelecom announces that the company is going to decrease its prices

and implement a new price-strategy starting with March 2011

Consumers realize that the decrease of international calls prices are

compensated by substantial increase in national phone calls

28 January 2011


National Calls Packages “Rebalanced” prices

Standard + 137,5%

Econom (renamed to Social) +150%

Facilities* No change*Facilities package is available only to disabled people, war invalids, participants of the liquidation of the consequences of Cernobal damages, Moldovan citizens illegally repressed and later rehabilitated, and also people who have under their guardianship minors, disabled persons since childhood.

International Calls “Rebalanced” prices

~Average~ -150%


But it is obvious that national landline services are used more often by a bigger share of population and poorer households

SOCIAL BENEFITS < SOCIAL COSTS!

MoldTelecom announces that Diasporas of Moldovan people living abroad have solicited

to reduce the price for international phone calls

19 January 2011

MoldTelecom announces that the company is going to decrease its prices

and implement a new price-strategy starting with March 2011

Consumers realize that the decrease of international calls prices are

compensated by substantial increase in national phone calls

28 January 2011

11 Diasporas are blaming MoldTelecom for inventing their “solicitation” to decrease international calls prices

15 February 2011

MoldTelecom recognizes that there was no official letter from Diasporas, but the

company re-confirms that price-rebalancing will not be annulated

17 February 2011

By the decision of the National Agency for Competition Protection and the decision of

the prime-minister of Moldova, MoldTelecom is obligated to cancel any

price modifications

23 February 2011


Agent

MoldTelecom

Principal

Consumers

Providing services

Paying bills

SELF INTEREST SELF INTEREST

-Higher prices-Lack of transparency-Market Inefficiency

-Lower prices for services-Transparency-Market Efficiency



Principle IV

THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE:

“The Corporate Governance framework should *…+ encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.”

“*…+ Stakeholders *…+ should have access to relevant, sufficient and reliable information on a timely and regular basis.”

No co-operation with the customers

No access to the financial information

No wealth creation

No transparency in decision-making

No reliability in the provided information


The Rebalancing Prices Problem:Regulatory Constraints


MoldTelecom (tariff

rebalancing)



Social constraints

Economic constrains



Map


Principle I (C)

“The corporate governance framework should […] clearly articulate the division ofresponsibilities among different supervisory, regulatory and enforcementauthorities”

If it is not consistent and coherent it can easily result in costly market distortionsand undermine the accountability of both management and the state as an owner.

For MoldTelecom: there are 2 national regulation agencies with over-lappingresponsibilities!


The National Agency for Protection of Competition was created on

February 2007.

NAPC’s missions are:1. to promote the state policy in the field of the protection of

competition

2. to prevent, limit and suppress anti-competitive activity

3. the state control over the observance of the Law on the Protection of Competition and advertising.


The National Regulatory Agency for Telecommunications and Informatics started activity on August 2000 and was reorganized in 2008

NRATI’s missions are:1. to ensure the regulation of telecommunications service and

network market

2. to implement the national policy and strategy for the development of this very important economy sector

3. to promote fair competition

4. to enhance investments and innovations in this field.



February 2011: Moldovan Government invervened and enforced NRATI to decide whether MoldTelecom needs to be regulated or not (?!)

March 2011: It takes few weeks to NRATI to say: YES! Let’s regulate MoldTelecom!

2000: Creation of the NRATI

2007: Creation of the NACP + recognition of the dominant position of MoldTelecom by NACP

2008: NRATI was reorganized, being assigned with the ressponsibility to regulate telecom market and assign dominant position – OVERLAPPING BEGINS

2011: NAPC decides to cancel its decision: MoldTelecom is free to modify itsprices and right after few weeks MoldTelecom announced tariff rebalancing

February 2011: NRATI and NAPC “are fighting” for the right to “regulate” MoldTelecom. None of them is declaring it dominant on the market.

The Rebalancing Prices Problem:Political Constraints


MoldTelecom (tariff

rebalancing)



Social constraints

Economic constrains



Map


Liberal

Democrats

DemocratsLiberals Communists

Alliance for European Integration

Majority in the parliament Opposition


“Enforcing the process of privatization of state owned assets from the

liberalized industries, on the bases of opened auctions, announced and transparent.” (MoldTelecom is one to be privatized !)

“Liberalization and development of the markets of communication technologies”

“Reforming “MoldTelecom”, ensuring a transparent and fair access to the infrastructure for all the market players”

“Tariffs optimization and diversification of the services in the ITC sector”


Liberal Democrats

DemocratsVlad Filat

President of PLDMPrime Minister

Marian Lupu President of PDM

Speaker of Parliament

1. Ministry of International Affairs2. Ministry of Finance 3. Ministry of Health4. Ministry of Education5. Ministry of Justice 6. Ministry of Internal Affairs7. Ministry of Agriculture

1. Ministry of Economy2. Ministry of Informational Technology3. Ministry of Culture 4. Ministry of Infrastructure 5. Ministry of Labor and Social protection

- NAPC - NRATI


When MoldTelecom announced about rebalancing the prices, Prime Minister, Vlad Filat, reacted through a official letter (which very quickly was made public) for Minister of Economics, Valeriu Lazar.

MoldTelecom is a state owned company, so it is logic that in the Supervisors board, there is a person responsible for monitoring on behalf of the Government thus Government as a entity must have known about the decision before it was made public.

QUESTIONS ARISE ? ? ? ? ?1. Did the Prime Minister reacted in this way because it was a surprise for him ?

If YES => There is a lack of professional approach in Ministry of Economics

or

=> There is a reasonable lack of communication within the Government

2. Did the Prime Minister reacted in this way in order to gain political dividends (being on the side of the consumer = citizen)?


Principle II

THE STATE ACTING AS AN OWNER

B. The government should not be involved in the

day-to-day management of SOEs and allow them

full operational autonomy to achieve their defined objectives.

D. The exercise of ownership rights should be

clearly identified within the state administration. This may be facilitated by setting up a coordinating entity or, more appropriately, by the centralization of the ownership function.

The OECD Principles for State-owned companies:

Liberal Democrats


Democrats

Conflict of interests

Political

Privatization

Cooperate

Cooperate

Not Cooperate

Not

Cooperate

1 3

1 2

Liberal

Democrats

Democrats


1

3

1

2

Social Benefit

Political Dividends

Conclusion & Recommendations


- Low transparency

- Unfair treatment of stakeholders (principle-agent problem)

- Political conflict (prisoners’ dilemma)

- Unclear and inefficient regulatory framework

- It was too sharp (a gradual reform

would be more acceptable)


1. MoldTelecom has to publish on a timely and regular basis its financial statements

2. The regulatory agency responsibilities must be clearly specified, in order to avoid their overlapping

3. The regulatory agencies must be politically independent

4. Moldtelecom has to avoid its cross-subsidizing practices, as it creates entry barriers on the market

5. Rebalancing has to be gradual and in-line with the OECD principles.

6. The state responsible entity must have a “face” and a clear position in the structure of the Government

7. Government has to avoid direct interventions in the activities of Moldtelecom, while strengthening the institutional power of regulatory agencies.



Adrian, Camille, Natalia, Pavel

Thank you!Mulțumesc! Merci! Спасибп! Díky! 고마워 Danke!

Grazie! Dzięki! 谢谢 Teşekkürler!

Graçias! Takk!Ви благпдариме! Cảm ơn! Lorem! Дзякуй!

Questions?Întrebări? Вппрпсы? Otázky? Pyetje? Пытанні?

Въпроси? 问题 Küsimused? კითხვები? Fragen?Kérdések? Domande?

質問はありますか？Spørsmål? Preguntas? Питаоа?


The OECD Principles of Corporate Governance:

http://www.oecd.org/dataoecd/32/18/31557724.pdf

The OECD Guidelines on Corporate Governance of State-owned Enterprises:


ITC Sector in Moldova: Policy White Book:

http://atic.md/files/documents/ICT_en_final.pdf

Code of Corporate Governance of Moldova:

http://www.ebrd.com/downloads/legal/corporate/moldova_code.pdf

Corporate Governance Country Assessment for Moldova:

http://www.worldbank.org/ifa/rosc_cg_mdveng.pdf

MoldTelecom website:

http://www.moldtelecom.md/en/companie/

MoldTelecom Annual Reports (2001 – 2008):

http://www.moldtelecom.md/ro/companie/rapoarte/



http://atic.md/files/documents/ICT_en_final.pdf

http://www.ebrd.com/downloads/legal/corporate/moldova_code.pdf

http://www.worldbank.org/ifa/rosc_cg_mdveng.pdf

http://www.moldtelecom.md/en/companie/

http://www.moldtelecom.md/ro/companie/rapoarte/


National Agency for Protection of Competition in Moldova website:

http://www.anpc.md/index_en.php

National Regulatory Agency for Electronic Communications and Information Technology of the

Republic of Moldova website: http://en.anrceti.md/front

Radio Free Europe in Moldova website:

http://www.europalibera.org/content/article/2326507.html

Moldova.org website:

http://economie.moldova.org/news/change-of-moldtelecom-tariffs-on-fixed-location-communications-

services-is-justified-216922-eng.html

IMEDIA website:

http://www.imedia.md/libview.php?l=en&idc=242&id=1813&parent=0

Government website:

http://www.gov.md/lib.php?l=en&idc=425

Ministry of Economics website:

http://www.mec.gov.md/organigrama

http://www.anpc.md/index_en.php

http://en.anrceti.md/front

http://www.europalibera.org/content/article/2326507.html

http://economie.moldova.org/news/change-of-moldtelecom-tariffs-on-fixed-location-communications-services-is-justified-216922-eng.html

























http://www.imedia.md/libview.php?l=en&idc=242&id=1813&parent=0

http://www.gov.md/lib.php?l=en&idc=425

http://www.mec.gov.md/organigrama

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MoldTelecom Tariffs Rebalancing Problem