Infrastructure Regulatory Review For Government of Vanuatu

Transcription

1 Public Disclosure Authorized and Public Disclosure Authorized Public Disclosure Authorized Infrastructure Regulatory Review For Government of Vanuatu Financed by PPIAF and supported by the World Bank Public Disclosure Authorized May 2005 Copyright Castalia. All rights reserved. Castalia is not liable for any loss caused by reliance on this documents. Castalia refers to members of the worldwide Castalia Advisory Group and its staff

2 Table of Contents Executive Summary Sector Performance Current Regulatory Arrangements Recommendations v vi vii viii 1 Introduction and Summary Next steps 2 2 Characteristics of Vanuatu Relevant to Utility Service Provision 3 3 Electricity and Water Sectors Electricity Sector Performance Water Sector Performance Current Legal and Regulatory Framework for Electricity and Water 24 4 Telecommunications Sector Sector Performance Structure of the network Service availability Demand Quality of Service Price Benchmarking History of service pricing Financial Performance Rural service Conclusions: Sector Performance Current Legal and Regulatory Framework for Telecommunications 63 5 Recommended Regulatory Improvements Regulatory Tasks Designing a Regulatory Institution Public Participation Regional Regulatory Co-operation Resolving Policy Issues Summary 85 6 Action Plan 87 Annex A: Glossary of Abbreviations 90 Annex B: UNELCO Tariff Schedule 92 Annex C: Draft Policy Paper 94 Annex D: List of Legislation, Contracts and other Documents 99 Annex E: Telecommunications Price Benchmarking 106 Annex F: History of service pricing 125 Annex G: Legal Documents 135 i

3 Tables Table 5.1 : Human development indicators...44 Table 5.2 : KPIs for TVL fixed network...45 Table 5.3 : KPIs for TVL GSM network...46 Table 5.4 : Comparing fixed networks KPI targets with TVL actual values...46 Table 5.5 : Market characteristics of sampled jurisdictions...48 Table 5.6 : TVL prices ranked against other operators from a sample of selected countries.49 Table 5.7 : TVL prices ranked against other operators from a sample of selected countries.50 Table 5.8: Annual operating expenses (VUV)...56 Table 5.9 : Key drivers of operating expenses...56 Table 6.1 : Regulatory Tasks...73 Table 6.2 : Policy and Ownership Tasks...74 Table 6.3 : Institutional design details...82 Table E.1 : Methods used to vary fixed call rates Table E.2 : Tariff structure for mobile call rates Table F.3 : Per minute international call prices (VUV) Table F.4 : Internet access service charges Table F.5 : Fixed line plans by operator Table F.6 : Mobile plans by operators Table F.7 : Per-minute international call charges ( ) Table F.8 : Conversion rates Figures Figure 4.1 : Percentage of population with access to electricity...6 Figure 4.2 : Access to electricity vs. GDP per capita...7 Figure 4.3 : Electricity outage time...8 Figure 4.4 : Average electricity tariff...9 Figure 4.5 : Average electricity tariff vs. total electricity production...10 Figure 4.6 : Electricity low user bill...11 Figure 4.7 : Electricity medium user bill...12 Figure 4.8 : Electricity low user bill as percentage of GDP...13 Figure 4.9 : Electricity medium user bill as percentage of GDP...13 Figure 4.10 : Utility expenditure as percentage of total income...14 Figure 4.11 : Staff per thousand electricity connections...15 Figure 4.12 : Transmission and distribution losses...16 Figure 4.13 : Percentage of population with access to water...18 Figure 4.14 : Access to water vs. GDP per capita...19 Figure 4.15 : Average hours of water supply...20 Figure 4.16 : Average water tariff...21 Figure 4.17 : Non-revenue Water...22 ii

4 Figure 4.18 : Staff per thousand water connections...23 Figure 5.1 : Fixed lines in operation for selected countries ( )...36 Figure 5.2 : Number of mobile subscribers ( ) for selected countries...36 Figure 5.3 : Combined number of fixed and mobile lines ( ) for selected countries...37 Figure 5.4 : Relationship between fixed-line teledensity and economic development...38 Figure 5.5 : Relationship between mobile teledensity and economic development...38 Figure 5.6 : Relationship between combined fixed and mobile teledensity and economic development...39 Figure 5.7 : Trend between GDP per capita and combined teledensity...40 Figure 5.8 : Population density for selected countries (2002)...41 Figure 5.9 : Proportion of population living in urban areas for selected countries...42 Figure 5.10 : Human development index for selected countries (2001)...43 Figure 5.11 : TVL revenue by service type ( )...51 Figure 5.12 : Revenue by operating expenses, depreciation and profit...52 Figure 5.13 : Operating expenses split by staff costs, bad debt and loss on asset disposal...53 Figure 5.14 : Access lines per employee...54 Figure 5.15 : Operating expenses per fixed line ( )...55 Figure 5.16 : Profit margin and return on assets...58 Figure 5.17 : Ratio of annual investment to sales and to assets...59 Figure 5.18 : Fixed and mobile subscribers, Morocco, Figure 6.1 : Institutional design process...71 Figure 6.2 : Three Components of a Regulatory Institution...76 Figure 6.3 : Spectrum of Institutional Options...78 Figure 6.4 : Structure of Shortlisted Options...81 Figure 7.1: Proposed Action Plan...88 Figure E.1: Monthly rental residential Figure E.2 : Monthly rental business Figure E.3 : Residential peak local calls Figure E.4 : Residential off-peak local calls Figure E.5 : Business peak local calls Figure E.6 : Business off-peak local calls Figure E.7 : Residential peak national calls (40 km) Figure E.8 : Residential off-peak national calls (40 km) Figure E.9 : Business peak national calls (40 km) Figure E.10 : Business off-peak national calls (40 km) Figure E.11 : Residential peak national calls (550 km) Figure E.12 : Residential off-peak national calls (550 km) Figure E.13 : Business peak national calls (550 km) Figure E.14 : Business off-peak national calls (550 km) Figure E.15 : Postpaid mobile monthly rental Figure E.16 : Postpaid mobile peak call to fixed service Figure E.17 : Postpaid mobile off-peak call to fixed service Figure E.18 : Postpaid mobile peak call within mobile network Figure E.19 : Postpaid mobile off-peak call within mobile network Figure E.20 : Prepaid mobile peak call to fixed service Figure E.21 : Prepaid mobile off-peak call to fixed service iii

5 Figure E.22 : Prepaid mobile peak call within mobile network Figure E.23 : Prepaid mobile off-peak call within mobile network Figure F. 1: Monthly PSTN line rental charges Figure F.2 : Peak per minute STD call charges Figure F.3 : Off peak per minute STD call charges Figure F.4 : Per minute charges for post-paid mobile calls iv

6 Executive Summary In response to the Government of Vanuatu s request for assistance to strengthen utility regulation, a World Bank team visited Vanuatu in April 2004 to investigate sector performance in telecommunications, electricity and water provision, and to review the existing regulatory provisions in these sectors. This report summarizes the team s findings. A first draft of this report was prepared and circulated in July 2004; however, changing political circumstances delayed the official presentation of report findings until April The presentation to Government officials, sector spokespersons and interested public sector representatives in Port Vila on 19 April 2005 stimulated considerable discussion, reflecting the ongoing political and social importance of satisfactory and affordable infrastructure provision. This final version of the report has been revised in light of comments on the draft and concerns raised during the April 2005 presentation. We discuss ways in which the current regulatory system for water, electricity and telecommunications in Vanuatu could be developed and improved to ensure these services are delivered in an efficient and costeffective manner. Specifically, the report: reviews the performance of the electricity, water and telecommunications sectors reviews current regulatory arrangements, industry and market structures for the utilities against good international practice recommends specific regulatory and institutional changes for the government s consideration. In undertaking these reviews and forming recommendations, Vanuatu s unique characteristics have been kept firmly in mind. In particular, it has been noted that Vanuatu s demographic and geographic circumstances make it an exceptionally difficult country to serve. Only 20% of the population of 200,000 lives in urban areas; the remainder is spread over about 80 widely-distributed islands, amongst which travel is typically costly and difficult. Many of the islands are mountainous and densely wooded, making land access difficult, and further exacerbating the service provision problems of low population density and highly dispersed and remote settlement patterns. Furthermore, people in such remote areas live largely outside the market economy. GDP per capita, at around US$1,100, is among the lowest in the region. In addition to these physical constraints, utilities in Vanuatu face ongoing disputes over land tenure. This confusion over property rights can cause problems for utilities whose networks traverse many land-holdings, and has resulted in expensive underground diversions of electricity lines in some areas and delays in telephone cell-tower construction. v

7 Sector Performance In general this report finds that, considering its level of income and difficult topography, the quality of utility services is unusually good in Vanuatu. Much of this success is attributable to the effectiveness of private sector participation, particularly with regards to water and electricity services. The Government has contracted with a private company, UNELCO (a subsidiary of the SUEZ group) for provision of water and electricity services in Port Vila, and electricity services in Luganville, East Malikula and Tanna. The Government also holds a contract for telecommunications services with Telecom Vanuatu Limited (TVL), which is owned in equal parts by the Government of Vanuatu, Cable & Wireless, and France Cable and Radio. Although access to infrastructure outside the service areas of these companies varies and in many instances is poor, at the request of the Government this report focuses on the performance of UNELCO and TVL. However, broader sector concerns have also been noted for policy attention: for example, rural electrification is low in Vanuatu in comparison to other Pacific and small island nations, where more focus has been placed on universal access. Increasing electrification would have obvious economic and social benefits for Vanuatu, and further investigation into efficient options for increasing service coverage is encouraged. With respect to UNELCO s performance, the report finds that electricity is relatively expensive in Vanuatu. However, this can be largely explained by the small size of the systems, as well fact that the utility is financially self-sufficient, whereas many utilities in the region that charge lower tariffs are not. Furthermore, electricity for low-consumption customers in Vanuatu is subsidized by other consumer groups, resulting in the total bill for such users being on par with other island nations. The report finds that there is some scope for further efficiency gains in electricity supply, in particular in staff levels (which appear to be inefficiently high, although some staff sharing with water services may account for this) and perhaps also in fuel purchasing. The government has powers under its contract with UNELCO to investigate these areas, and if warranted, request a price review. UNELCO also appears to have performed satisfactorily under its water supply contract, resulting in a reliable and high quality supply of water for Vanuatu s capital city, Port Vila. Efficiency of provision seems to be reasonable, and the water tariff, while high for the region, may be justified, since unlike many other utilities, UNELCO is financially selfsufficient. Any efficiency gains leading to tariff reductions for electricity supply will also be reflected in water tariff reductions, as electricity price is a factor in the water tariff indexation formula. TVL, in contrast to UNELCO, has a contract to serve all of Vanuatu; accordingly, its performance is affected by Vanuatu s geographic and demographic constraints. In particular, benchmarking suggests that national access levels to telecommunications services are lower than expected for Vanuatu s per capita income level. The main focus of TVL s telecommunications infrastructure is Port Vila, and to a lesser extent Luganville. There is evidence that the level and quality of service could be improved in rural areas. We also understand that TVL s plans to provide some improvement in rural service via the extension of the GSM service have been recently put on hold due to the high costs involved. At present, TVL sets its own performance targets and indicators and some of these do not appear to be as rigorous as those of other developing countries. Also of concern is the vi

8 finding that TVL local calls and residential rental charges are relatively expensive as are international calls and Internet charges, although mobile call rates are low in comparison to other countries in the region. A review of TVL s financial accounts revealed very high operating costs per line and staff numbers in relation to lines, indicating that there may be scope for efficiency improvements that could help reduce the high rates for consumers. Current Regulatory Arrangements Unlike some countries where an independent regulatory body has been established, Vanuatu s utilities are regulated by contract. Accordingly, it was important for the team to examine the relevant contracts closely, and review the manner in which their provisions had been applied. It was found that the concession contracts between UNELCO and the Government contain reasonably well-designed regulatory rules, and give the Government useful powers to enforce these provisions. Service standards are reasonable, well specified and enforceable, but in some areas need to be more tightly specified. Penalties for noncompliance could also be set higher, to reflect costs to consumers. There are also some areas in which tariff rules could be improved. For example, although the current indexation formulas are in line with good international practice and do not compensate UNELCO for inefficiency, they do not provide any incentive to purchase fuel at least cost, as fuel price increases are passed directly to consumers. For both water and electricity contracts, tariff reset rules are unclear. These deficiencies aside, the greatest scope for improvement in regulation lies in strengthening the institutional arrangements for supervision of the contracts. Government officials and Ministers indicated a frustration that the Government is often not aware of its powers under the contract, or able to exercise them efficiently - the contracts are complex legal documents, and legal, financial and engineering skills are required to understand them and supervise operator performance under them. Other parts of Government with an interest in the electricity and water sector do not receive information on it, do not feel able to monitor the contracts, and may be suspicious of UNELCO because they feel that the Government is not able to monitor the company effectively. These concerns also apply to the arrangement between the Government and TVL. However, with regard to telecommunications the Government s situation is more complex. Telecommunications service is governed by a license; however, the statute governing telecommunications states that the license can only be changed with the consent of the utility, making it more like a contract. Beyond this license, the Telecommunications Act and TVL s Franchise Agreement give TVL the exclusive right to operate the public telecommunications system in perpetuity. Although there are opportunities for Government to terminate the arrangement (firstly in 2012 and then every three years thereafter, or alternatively in the event of a breach) this comes at the cost of a compulsory purchase by the Government of TVL s assets at market value. Any form of competition is not possible under the current arrangements unless TVL agrees to a modification of their license and the Act is amended. Nevertheless the Government does have powers with respect to telecommunications service provision and pricing as well as the right to set rules. Currently, regulatory powers are vested vii

9 in the Minister for Telecommunications. The original Telecommunications Act introduced a regulatory authority but with the subsequent repeal of that Act the Minister assumed the role of oversight of the industry. The Government is entitled to representation on the Board of TVL in its capacity as shareholder. This shareholder role is quite different to the industry oversight role and cannot be regarded as fulfilling any regulatory responsibilities. It is important for the Government to be able to access the appropriate skills and expertise in order to develop and implement policies for telecommunications that will ensure these regulatory responsibilities are fulfilled. Recommendations Key areas in which Government may wish to improve management of the telecommunications, water and electricity sectors, include: management of existing regulatory powers the introduction of limited additional regulatory provisions, include tighter specification of service standards and assistance to customers in resolving disputes with utilities policies for extension of telecommunications and electricity services to unserved or underserved areas policies for supply of electricity to Luganville following 2010, and of telecommunications nationally following The latter two points indicate areas for policy development, which, although discussed, are not the main focus of this report. The report s recommendations are centered on improving regulatory arrangements so as to focus on opportunities to lower the overall costs of telecommunications, electricity and water provision by increasing efficiency. In order to achieve this, many of the regulatory tasks that would need to be performed are basic supervisory tasks, such as checking that the tariff indexation formula is applied correctly, and auditing the utility s reports of performance against existing service standards. Infrequently, more complex tasks such as recommending new tariff levels and structures will need to be performed, or new service standards agreed. These tasks require considerably more analytic skill and judgment. In telecommunications, there are also a number of specialized tasks, such as radio spectrum management (controlling who is allowed to use which parts of the radio spectrum) and liaising with the International Telecommunications Union. The report s recommendations on additional regulatory powers include setting new services standards (especially in telecommunications), which would then need to be monitored. Assisting customers in resolving disputes which they are not able to settle directly with the utility will also be important. Although several regulatory options are possible, the report recommends the creation of a small, dedicated Contract Management Unit to perform the required regulatory tasks. This could be a unit within the civil service structure, or it could report to an Independent Board. In either case, the function of the unit would be to monitor and enforce routine compliance viii

10 with the contract, and to advise the Government on major issues such as reviews of tariffs and service standards. Both options have merit. The added benefit of an Independent Contract Management Unit, however, is that it would be more likely to provide advice and decisions which are widely recognized as competent, objective and legitimate. Accordingly, this is the option the report recommends be pursued. In order to enhance coordination in sector decision making, and make efficient use of the skills and expertise of Unit members, the report also recommends that the Unit be given responsibility for sector coordination and policy advice i.e. that it be a Utility Contract Management and Policy Unit (UCMPU). The UCMPU would be charged with monitoring and enforcing the electricity and water concessions between the Government of Vanuatu and UNELCO, and the telecommunications contract between the Government of Vanuatu and Telecom Vanuatu (TVL). In particular, the UCMPU would be responsible for monitoring tariffs and ensuring these are set at a fair and reasonable level in accordance with the contract, ensuring service standards specified in the contracts are adhered to, and advising the Government with regards to the development of relevant sector policies and regulations. To be efficient, it is recommended that the UCMPU would subsume the function of the Government bodies currently supervising these areas, including the Energy Unit and those staff in the Ministry of Infrastructure with responsibilities for telecommunications. The report envisages that the UCMPU would consist of 3-5 members, who would also need consultancy advice during set-up of the UCMPU and on an on-call basis, for more specialized work and for work peaks. The UCMPU would report to an Independent Board of three to five members. The Board members could be respected senior private sector and public service figures, headed by an international regulatory expert. Initial estimates indicate that the UCMPU would cost 45.5 million Vatu in its initial year, decreasing thereafter, with an additional cost of around 16.5 million Vatu for each tariff review. Although this may initially seem prohibitive, it is likely that the majority of the set-up costs could be financed with donor assistance, and operating costs could be financed by a levy on utilities (although this would add around 1% to 1.5% to the average utility bill). Accordingly, the net costs to Government could be negligible, whilst benefits would include improved efficiency in tariff levels, improved reliability and quality of service provision, improved transparency in utility operation and government relationships with utilities and improved customer satisfaction, amongst others. This recommendation is now being followed up by Government officials. The report outlines an action plan that has been discussed with relevant members of the Ministry of Infrastructure and Public Utilities, Ministry of Lands and Natural Resources, Ministry of Finance and Economic Management and other concerned departments. This plan involves finalization of the Draft Policy Paper and deliberation of the paper by Cabinet by the end of July ix

11 1 Introduction and Summary The Government of Vanuatu requested assistance from the World Bank to strengthen utility regulation. The government wants a regulatory system which will ensure that water, electricity and telecommunications services are provided efficiently, to a good quality standard, at reasonable prices. The Public Private Infrastructure Advisory Facility provided funding for Castalia and Network Strategies to carry out an initial diagnostic phase. This report is the result of that initial diagnostic phase. The report: Reviews performance of the electricity, water and telecommunications sectors on measures of cost, access, quality and efficiency, identifying the areas in which Vanuatu is doing well, and those aspects where the government might desire improvement Reviews the current regulatory arrangements, industry and market structures for the utilities against good international practice, and suggests areas in which changes to the current arrangements might help to improve performance Recommends specific regulatory and institutional changes for the government s consideration. In general the report finds that, considering its level of income and difficult topography, the quality of utility services is unusually good in Vanuatu. Access to service in the main population centres of Port Vila and Luganville is also good. This is directly attributable to the government s decision to use private companies to provide these services. Any reform proposals must recognize and preserve these strengths. The quality of service does come at a price and average tariffs for many services are high relative to comparator countries. The business consumers we talked to believe the government has made the right decision to demand quality services, even if they cost more. There are measures in place to ensure that basic services are affordable for low income households. However, we find that there are opportunities to lower the overall costs by increasing efficiency, and this should be an important focus of new regulatory arrangements. The current regulatory arrangements in electricity and water are reasonably well-designed, and provide the government with most of the legal powers it needs to achieve its objectives. The main area for improvement is the government s own management of the contracts with the private operators. The contracts are complex legal documents. Legal, financial and engineering skills are required to understand them, supervise the operator performance under them, and carry out the processes envisaged by them, such as tariff reviews. In telecommunications, existing contracts give the incumbent operator the exclusive right to operate the public telecommunications system in perpetuity and competition is not possible. Nevertheless within the terms of the existing agreements the Government does have powers with respect to telecommunications service provision and pricing as well as the right to set rules. However at present Government policy is underdeveloped in all these areas. Once 1

12 again it will be important for the Government to be able to access the appropriate skills and expertise in order to develop and implement policies in these areas. The report recommends that a specialist contract management unit which has these skills should be established. We review various options for the governance and legal powers of this unit, and conclude that while its powers should be largely limited to enforcing existing contracts, it should be created as a separate legal entity, outside existing Ministries. We recommend an Independent Contract Management Unit, governed by a three to five person Board, which could include a recognized regional expert in utility matters. The Board would have a small staff, and also contract in analytic capacity from regional firms with relevant expertise. This structure is most likely to provide professional continuity, focus and objectivity, at reasonable cost. A Draft Policy Paper presenting this option to the Council of Ministers is provided in the annexes of this report. In addition to improving mechanisms for regulation and contract management, the government has some important policy issues to address in infrastructure. While development of utility policy, as opposed to regulation, is beyond the scope of this report, we note that a key area for policy development will be extension of access to unserved areas. Currently there are various schemes to extend access, but there is no clear policy on how to prioritize the areas to be served, which bodies should serve them, or how this service should be financed. The other key policy area relates to provisions for electricity service in Luganville following expiration of the current contract in 2010; and provisions for telecommunications after 2012, when the Government has the opportunity to change the current arrangements, including the opportunity to introduce competition in telecommunications. 1.1 Next steps The government is invited to consider this report, and decide how it wishes to proceed. If the government wishes to continue with the process of regulatory reform, the World Bank expects to be able provide further assistance, should the government request it. This would probably be structured in two further phases PHASE II: Institutional Development. This phase would involve designing and supporting the development of a multi-sector institutional arrangement, building on the recommendations in this report PHASE III: Capacity Building. Following the implementation of the institutional arrangements, the third phase of this project would entail the delivery of a structured capacity building program and start up assistance. This would amount to creating the government s chosen regulatory institutional arrangements, including providing training to staff and assistance with initial regulatory tasks. 2

13 2 Characteristics of Vanuatu Relevant to Utility Service Provision In considering performance of utility service providers in Vanuatu, it is important to bear in mind that Vanuatu is an exceptionally difficult country to serve. The total population of the country is less than 200,000, spread over about 80 islands. The total length of the island chain, from Aneityum in the south to Torres Islands in the north is around 900 kilometers. Incomes are low, with a per capita GDP of around US$1,100. Land tenure is largely unresolved, causing problems for utilities whose networks traverse many land-holdings. For example, Telecommunications of Vanuatu Ltd finds it is often not clear whose permission is required to cite a cell-tower in any particular location. The two main population centers are Port Vila, the capital, with a population of around 30,000, and Luganville with a population of around 11,000. These centers have a pattern of formal settlement, roads and utility services similar to small towns in the Caribbean, New Zealand or elsewhere in the Pacific. Outside these areas the pattern of settlement is of small dispersed villages, often with no road access. Many of the islands are mountainous and densely wooded, making access difficult. People in these areas live largely outside the market economy. Transport between islands can also be difficult. In this report we compare service provision in Vanuatu with other countries. We have selected small island countries in the Pacific and Caribbean, with GDP per capita below US$5,000 and populations below one million as the main group of comparators. However, while similar, most of these countries have most of their populations on just one or two islands, with road access to most villages. They also tend to have larger population centers than Vanuatu. These factors imply that with the possible exception of the Solomon Islands, the comparator countries should cost less to serve than Vanuatu. 3

14 3 Electricity and Water Sectors Vanuatu has contracted with a private company, UNELCO (a subsidiary of the SUEZ group) for provision of water and electricity services in Port Vila, and electricity services in Luganville. Parts of East Malikula and Tanna were recently added to the arrangement. Vanuatu has a long history of private supply of electricity, dating back to at least 1941 when a concession for electricity supply in Port Vila was signed between the government and l Union Electrique Colonial. Outside the areas supplied by UNELCO there are a variety of arrangements for electricity provision, all on a small scale. In some villages wealthier people have their own generators. However, we were told that while people generate for themselves, they do not supply to their neighbors. Cultural traditions would make it difficult for one person in a village to charge their neighbors for providing them with power, and it would be prohibitively expensive to give the power away. Some schools and clinics have their own generators. Solar panels and batteries are used to operate remote telecommunications facilities. Water services in Luganville are provided by the Public Works Department, which is also responsible for the supply of water in Isangel and Lakatoro. In addition, the Department of Geology, Mines and Rural Water Supply has the responsibility for the areas of water resources legislation, management and quality monitoring. Port Vila has a limited sewer network, which is operated by several small-scale providers. Only the hospital and the three main hotels have sewage treatment plants, which are not all well maintained. Both the public and private sectors provide septic tank emptying service with disposal at the municipal landfill site. However, the emptying charge (equivalent to US$110) discourages many households from using this facility. A sewerage collection system has been proposed in the ADB-funded Sanitation Master Plan for at least the main urban areas of Port Vila together with primary and secondary treatment with final effluent disposal to land. In rural areas, water supply improvements are the responsibility of the public sector. The National Rural Water Supply Program aims to provide potable water to all the rural population of Vanuatu. The technical construction guidelines seek a low and appropriate level to allow for community usage of water rather than connection to individual houses for private use. However, despite Government commitment to this program, there are still rural communities that lack adequate water supply. Due to the rapid increase in urban population, peri-urban settlements have increased over the last few years, generally in rural, unsecured land adjacent to the municipal boundaries. These settlements are currently not served and there is no policy to service them. At the government s request, the focus of this section is on UNELCO s operations in Port Vila and Luganville. We look first at performance, benchmarking Vanuatu against a range of comparator countries. These countries have been selected for their similarity in terms of size and demographic characteristics, and therefore provide good indications of the water and electricity service one could expect in Vanuatu. However, it should be noted that UNELCO 4

15 serves only urban areas, whereas utilities in other countries often have more widespread service areas. Accordingly, we might expect UNELCO s performance to be superior on measures concerning quality and efficiency. After reviewing performance, we then describe the current regulatory arrangements, and identify any weaknesses. Finally we recommend ways in which regulatory and policy arrangements might be improved. Because the arrangements for electricity and water provision are similar, under each topic we consider first the electricity services, then the water services. 3.1 Electricity Sector Performance Electricity is vital for economic and social development. Currently it accounts for just over 2% of GDP. To put this into perspective, the national accounts indicate that kava production accounted for a somewhat greater portion of GDP. Vanuatu s main hope for economic development lies in the modern services sectors, such as its growing tourist trade and off-shore financial services. These businesses need reliable power to operate. Social and economic development requires education, which is helped enormously when children (and adults) have electric light by which to study in the evenings. Staying in touch with the world by telephone and TV demands electricity. So too do the small agricultural processing operations that could increase rural livelihoods Access to electricity and consumption Figure 3.1 shows the percentage of people in Vanuatu who have electricity, compared to the percentage of people in other Pacific Island and Caribbean countries, and in developed island economies such as New Zealand and Singapore. Clearly, at around 25% access to electricity in Vanuatu is low compared to most of the comparator countries. 5

16 Figure 3.1 : Percentage of population with access to electricity Access to electricity (% of population) Solomon Islands Vanuatu Haiti Samoa Fiji Dominican Republic Guyana Jamaica St. Kitts Dominica St. Lucia Grenada Trinidad & Tobago Barbados New Zealand Singapore Ireland Access to electricity is strongly influenced by levels of income. It is no surprise that access to electricity is higher in rich countries like New Zealand than it is in Vanuatu. Figure 3.2 shows the relationship between electricity access and GDP per capita. In this figure we have limited the analysis to islands 1 with populations of less than 1 million, and GDP per capita of less than US$5,000, to ensure comparability with Vanuatu. The trend line in Figure 3.2 shows the expected relationship between GDP per capita and access to electricity, calculated using data on the countries shown. Vanuatu falls well below the trend line. This indicates that access to electricity in Vanuatu is lower than one would expect, given its GDP per capita. For example, people in Haiti have greater access to electricity, even though Haiti is a considerably poorer country. 1 We include Guyana since although it is a mainland country, it has such poor land transport links that its position is similar to that of an island 6

17 Figure 3.2 : Access to electricity vs. GDP per capita Dominica St. Lucia Grenada 80 Guyana 70 Access to Electricity (%) Haiti Samoa Fiji Vanuatu Solomon Is , , , , , , ,000 GDP per capita (Vatu) Vanuatu s relatively low access to electricity may be explained in part by its topography it is more difficult to supply electricity across numerous small islands than to one or two large islands like Haiti or Samoa. It is also explained by a difference in policy emphasis. Most of the comparator countries have had policies designed to extend access widely throughout the country. These policies have had costs - for example, in Fiji the focus on expanding service widely has probably contributed to the difficulties the utility has in providing a reliable service, while in Guyana the utility incurs losses and so poses a fiscal burden but they have resulted in widespread electrification. In contrast Vanuatu has until recently focused on providing electricity service only to the two major towns. This focus has achieved a reliable power supply, which is not a burden on the government. However, to increase access, the government will need to develop a rural electrification strategy, in addition to the current concessions Quality of electricity service Quality of electricity service is measured by its reliability, and by the stability of frequency and voltage. Most utilities do not collect data on frequency and voltage fluctuations in the grid, but we were able to get data on reliability, measured as hours of lost supply per customer per year. As Figure 3.3 shows, Vanuatu performs far better on this measure than all the Pacific Island countries for which data was available. It does not do as well as Jamaica, but Jamaica has a much larger system, and higher levels of income, making it easier for the utility to invest in reliability. It is noteworthy that both Jamaica and Vanuatu have privately operated utilities, while in Fiji, Samoa and the Solomon Islands the utilities are publicly owned and operated. 7

18 Figure 3.3 : Electricity outage time Electricity outage time (hours per customer per year) Jamaica Vanuatu Fiji Samoa Solomon Islands Interviews with major users and residential customers confirmed a high level of satisfaction with the service UNELCO provides. Those interviewed specifically noted the rapid restoration of power following cyclones. Several interviewees had business interests in other islands in the Pacific, or had traveled to them, and were clear that the services provided in Vanuatu were superior to the services in many of the other islands. However, it should again be noted that UNELCO serves only urban areas, and therefore should be expected to repair faults more quickly than utilities serving remote or rural areas Cost of electricity service Figure 3.4 provides our estimates of the average electricity tariff in Vanuatu and the comparator countries. At an average of around 37 Vatu per kwh, tariffs in Vanuatu are high by world standards. However, they are not out of line with other small island countries which recover the full cost 2 of service through the tariff, such as Dominica and St Vincent in the Caribbean. 2 Full cost recovery refers to the costs of operations, maintenance, depreciation, debt service and return on investment. 8

19 Figure 3.4 : Average electricity tariff Average End User Electricity Price (Vatu per kwh) Trinidad & Tobago New Zealand Haiti Singapore Dominican Republic St. Kitts Solomon Islands Jamaica Suriname Barbados Samoa St. Lucia Grenada Guyana Fiji St. Vincent Vanuatu Dominica To test the extent to which relatively high tariffs could be explained by Vanuatu s small system size, Figure 3.5 shows average tariffs plotted against annual electricity production (log scale). To ensure a reasonable comparison we plotted only systems which: Provide reasonably good service Recover full costs through the tariffs Are island-based Generate a majority of their electricity from imported fossil fuels. From this analysis it seems that the higher tariffs in Vanuatu may be very largely a result of the size of the system. There may be some scope to lower costs through increased efficiency, but to expect significantly lower costs would be probably be unrealistic. 9

20 Figure 3.5 : Average electricity tariff vs. total electricity production Average end-user electricity price (USc per kwh) Vanuatu Dominica St. Vincent Grenada St. Lucia Barbados Jamaica Dominican Republic Singapore Log of electricity production (kwh per year) We also tested the affordability of the tariff for small and medium residential consumers. We calculated the bill for a small user (30 kwh per month) and a medium user (280 kwh per month) in a number of countries. These are shown in Figure 3.6 and Figure 3.7. Despite its relatively high average tariff, low users in Vanuatu face a monthly bill only a little over 600 Vatu per month. This is low in relation to most of the comparators. The low bill reflects a tariff structure which provides a significant cross-subsidy to those who consume only a small quantity of power, as a matter of social policy. 10

21 Figure 3.6 : Electricity low user bill 4000 Bill for low user household (Vatu for 30kWH per month) Trinidad & Tobago Singapore Fiji Solomon Islands Vanuatu Jamaica St. Vincent Grenada Barbados Antigua Guyana New Zealand Samoa St. Lucia Dominica In contrast, the bill for a medium consumption residential household is one of the highest among the comparator countries. This follows from the high average tariffs, and the fact that the medium users must contribute something toward the cross-subsidy for the low users. 11

22 Figure 3.7 : Electricity medium user bill Bill for medium user household (Vatu for 280kWH per month) Trinidad & Tobago Singapore Solomon Islands Fiji New Zealand Jamaica Barbados Grenada St. Vincent Samoa Guyana Antigua St. Lucia Vanuatu Dominica To put these bills in relation to income levels, Figure 3.8 and Figure 3.9 show the annual small and medium user bills as a percentage of GDP per capita for each country. This gives some indication of the relative affordability of electricity in the different countries. In Vanuatu a low user bill represents around 5% of GDP per capita. This is around the middle of the group of comparator countries. However, a medium user bill would equate to over 80% of GDP per capita, near the top of the comparator group. While the relative rankings are interesting, one should not read too much into the percentages themselves. In particular, electricity bills as a percentage of GDP cannot be translated easily into the more useful measure of electricity bill as a percentage of household incomes, because of differences in household size, and the percentage of GDP which flows to resident households. Another thing which makes interpreting the figures difficult is that income distribution is not even throughout the country. In Vanuatu, incomes in Luganville and Port Vila are much higher than in the rest of the country. Since almost all electricity consumers live in Luganville and Port Vila, clearly the income of electricity consumers is higher than the national averages would suggest, and so electricity bills will be a lower percentage of income for actual consumers. 12

23 Figure 3.8 : Electricity low user bill as percentage of GDP 12.00% Annual Bill for Low Household User / GDP per capita (%) 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Singapore Trinidad & Tobago New Zealand Barbados Antigua Fiji Jamaica Grenada St. Vincent Vanuatu St. Lucia Solomon Islands Dominica Samoa Guyana Figure 3.9 : Electricity medium user bill as percentage of GDP 100.0% Annual Bill for Medium Household User / GDP per capita (%) 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Singapore Trinidad & Tobago New Zealand Barbados Antigua Fiji Grenada Jamaica St. Lucia St. Vincent Dominica Samoa Solomon Islands Vanuatu Guyana 13

24 To give a more realistic idea of household expenditure on electricity in relation to other expenses, Figure 3.10 presents expenditure on water, telecommunications and electricity as a percentage of total expenditure for the average household in Port Vila, Luganville, and in rural areas, as well as the average for the country as a whole. In Port Vila, the average household spends around 4.5% of income on electricity. The lower figures for the other areas do not reflect higher incomes or lower prices, but rather the fact that outside Port Vila most households use much less electricity, and so their average expenditure is lower. Figure 3.10 : Utility expenditure as percentage of total income 5.0% Average household electricity, water and telephone expenditure as a % of income 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% electricity telephone water Port Vila Luganville Rural Total Source: 1999 Survey of Household Expenditure Unfortunately, data which is directly comparable to Figure 3.10 is not easily available for other countries. So Figure 3.10 is best used for assessing affordability as a percentage of household expenditure, while Figure 3.8 and Figure 3.9 provide information on affordability relative to other countries Efficiency of electricity service Efficiency of an electricity company should in theory be measured by comparing the level of output against the level of inputs. Outputs could be measured as electricity supplied, and inputs as the total cost of supplying that electricity. Although information on electricity supplied was available, data on the total cost of supply was not readily available. In the absence of this data, and as a proxy to measure the efficiency of an electricity system, industry practitioners use indicators that measure staff per 1,000 connections, as well as 14

25 transmission and distribution losses. Data on these indicators is presented in Figure 3.11 and Figure Figure 3.11 : Staff per thousand electricity connections Electricity Employees per 1,000 Connections New Zealand Jamaica Barbados St. Lucia Singapore Grenada Trinidad & Tobago Dominica St. Vincent Guyana Antigua Samoa Vanuatu Fiji Solomon Islands Figure 3.11 indicates that UNELCO s labor productivity is low, at 17 staff per 1,000 connections. While the number has been reduced from 30 staff per 1,000 connections five years ago, it is still much higher than for other utilities of a similar size and level of performance, such as Dominica and St Vincent. Clearly this is one area where efficiency can be further improved 3. On the other hand, Figure 3.12 shows that transmission and distribution losses are exceptionally low in Vanuatu. While this may be explained in part by the compact distribution system, it is nevertheless an excellent performance, which reflects strong commercial and technical management. 3 It should be noted that the high figure for staff per electricity connections may be related to the sharing of staff between water and electricity functions. As UNELCO began operations as an electricity service provider, and only more recently took over water provision in Port Vila, it is possible that the staff figures for electricity include a number of individuals who now have some involvement in both services (e.g. managers, accountants, customer service staff etc.). This would in part account for the low staff figures provided for water services. It is likely that UNELCO is able to economize through this sharing of staff between services. 15

26 Figure 3.12 : Transmission and distribution losses Transmission and distribution losses (%) Singapore Trinidad & Tobago Vanuatu Ireland Barbados Fiji New Zealand St. Vincent Antigua St. Lucia Grenada Solomon Islands Jamaica Dominica Samoa Dominican Republic Guyana Haiti Fuel procurement The biggest single cost of an electricity system is typically fuel. We discussed fuel purchase arrangements with UNELCO. The company assured us that these are competitive, providing details to back up the assertion. As the following analysis of regulatory incentives shows, while UNELCO does not benefit from buying expensive fuel, it also has no clear economic incentive to minimize the price at which it purchases fuel. This is one area in which changes to the regulatory regime could be considered 4. Several people argued that the best way to lower fuel prices would be to install better fuel handling facilities at the port in Port Vila. This may be something the Government investigates to determine if such an investment is in the national interest. It also seems that if UNELCO had a more direct incentive to minimize fuel costs, UNELCO might take more of an initiative in this area. 4 Another concern that has been raised around fuel procurement is that the Government currently grants UNELCO fuel tax exemptions, thus reducing the company s costs and providing little incentive to seek alternative arrangements. However, it should be pointed out that this saving is passed directly on to consumers, and thus is a form of Government subsidy; UNELCO receives no financial reward as a result of this policy. 16

27 3.1.6 Electricity service overall assessment Vanuatu lags other countries in the percentage of population with access to electricity. This is a result of government policy which has so far focused on provision to the major urban centers. A rural electrification policy focused on financial and institutional arrangements should be developed. In the urban areas, by contracting a private company to supply power, Vanuatu has been able to achieve a quality and reliability of electricity supply considerably above that of many other Pacific Islands. Electricity is relatively expensive in Vanuatu, but this can be explained largely by the small size of the systems, as well fact that the utility is financially self-sufficient. There is some scope for further efficiency gains in electricity supply, in particular in staff levels 5, and perhaps also in fuel purchasing. The government has powers under the contract to investigate these areas, and if warranted, request a price review. 5 See Footnote 3. 17

28 3.2 Water Sector Performance Access to water and consumption Figure 3.13 shows the percentage of the population with access to an improved water source. At 88%, Vanuatu does relatively well. Figure 3.13 : Percentage of population with access to water Access to improved water source (% of population) Haiti Fiji Solomon Islands Suriname Dominican Republic Vanuatu Trinidad & Tobago Antigua Belize Jamaica St. Vincent Guyana Grenada Bahamas Dominica St. Kitts St. Lucia Samoa Barbados Singapore Mauritius United States Box 3-1 : A note on access data In this report we use the data on Access to improved water sources as our main indicators of the extent of service provided. These data come from the World Development Indicators. The definition of improved services is broader than conventional piped supplies, and does not differentiate between types of improved service. So for example, access to water from a standpipe and access to water from a rainwater catchment tank will both be classed as access to improved water service, and not differentiated from access to water through an in-house connection. Of course, someone who gets water from a stream will not be classed as having access to an improved water source. However, access to an improved water source does not necessarily mean access to safe drinking water. For example, someone with a piped connection who nevertheless needs to boil water before drinking it is counted as having access to an improved water source. Definitions and collection methods may vary between countries, making comparisons problematic. Despite these limitations, these indicators are currently the best available. The World Bank Netherlands Water Partnership has a project underway to develop better water access indicators and collection methodologies, which should help with similar work in the future. 18

29 As Figure 3.14 shows, Vanuatu does particularly well in providing access to water for its level of GDP, with access levels higher than in Fiji and Suriname, both considerably wealthier countries. On the other hand, Samoa, with only slightly higher GDP per capita, does considerably better in providing access to improved water sources. Figure 3.14 : Access to water vs. GDP per capita Guyana Vanuatu Samoa Dominica St. Vincent Belize Mauritius St. Lucia Grenada 80 Suriname Access to Improved Water (% of population) Haiti Solomon Is. Fiji , , , , , , ,000 GDP per capita (Vatu) The access data indicate that the Government has been successful in ensuring that most of the population has access to an improved water source, and is better at providing access to water than to electricity. However, this does not reflect one way or the other on UNELCO, since UNELCO s concession area is only for Port Vila and environs Quality of water service The key quality dimensions of piped water service are the reliability of supply, the chemical and bacteriological quality of the water, and pressure. As illustrated in Figure 3.15, UNELCO provides 24 hour supply to all its customers, which is better than water utilities in many other Asia-Pacific cities. It is also better than the performance achieved by many Caribbean water utilities. For example, the capitals of Jamaica, Trinidad and Guyana all experience water rationing in at least some districts for some months of the year. However, it should be noted that UNELCO serves only the urban area of Port Vila, and therefore should be expected to have better supply continuity than utilities with large networks including remote or rural areas. 19

30 Figure 3.15 : Average hours of water supply 20 average hours of water supply Kiribati Marshall Islands Guyana Trinidad St Lucia Jamaica Manila Singapore Port Vila Phnom Penh Internationally comparable data on bacteriological and chemical quality is hard to obtain, but the water in Port Vila is reported to be safe to drink from the tap, which is not true of many comparator countries. Pressure is also reported to be adequate Cost of water service Figure 3.16 shows the average cost of water in Vatu per cubic meter in Port Vila compared to a number of other Asian and international cities. At around 58 Vatu per cubic meter, water is more expensive in Port Vila than in any of the developing country Asian comparators. This may be partly explained by the fact that the tariff in Port Vila recovers the utility s full costs. The Port Vila tariff is also lower than in the developed country comparators like Sydney and Singapore, and lower than in Jamaica and other Caribbean countries. As Figure 3.10 showed, the average household in Port Vila spends around 3.2% of income on water. 20

31 Figure 3.16 : Average water tariff Average Tariff (US$ per m3) Fiji Philippines Samoa PNG Vanuatu Pohnpei (FSM) Jamaica St. Lucia Dominica Efficiency of water service To test whether the current tariffs may be in some sense too high, we looked at the efficiency of provision. A key indicator of efficiency is the level of non-revenue water that is, the total leakage, theft and under-billing that occurs in the system. As Figure 3.17 shows, UNELCO performs relatively well on this measure. Distribution losses at 25% are not much above best practice levels, and may even be optimum if water resources are plentiful and pumping costs are low. However, it should again be noted that UNELCO serves only the urban area of Port Vila, and therefore might be expected to have better efficiency than utilities with large networks including remote or rural areas, where concerns such as water theft and leaks may be harder to monitor. 21

32 Figure 3.17 : Non-revenue Water 70% 60% Non-Revenue Water (%) 50% 40% 30% 20% 10% 0% Vanuatu St. Lucia PNG Marshall Islands Pohnpei (FSM) Yap (FSM) Kosrae (FSM) Dominica Kiribati Solomon Islands Fiji Samoa Jamaica The second most important conventional indicator of efficiency for a water company is the number of staff per thousand connections. This ratio is shown in Figure Here UNELCO performs very well, with staff productivity at levels above what are considered to be best practice in Latin America. One issue in calculating this ratio for UNELCO is the allocation of management staff shared between the water and electricity businesses. It is possible that this distorts the figure somewhat 6. 6 See Footnote 3. 22

33 Figure 3.18 : Staff per thousand water connections 40 Staff per 1000 connections Vanuatu Palau Jamaica St. Lucia Dominica Fiji Kiribati Solomon Islands Madang (PNG) Rabaul (PNG) Samoa Kosrae (FSM) Pohnpei (FSM) Marshall Islands Yap (FSM) Water service overall assessment Nationwide water access statistics appear to be impressive. If the data are to be believed, this indicates success in policies to extend access to improved water supply throughout the country. Vanuatu has achieved a reliable and high quality supply of water to its capital city. Efficiency of provision seems on an initial review to be reasonable, and the tariff, while high for the region, may be justified, since unlike many other utilities, UNELCO is financially selfsufficient. 23

34 3.3 Current Legal and Regulatory Framework for Electricity and Water We reviewed the concession contracts between UNELCO and the Government for electricity supply in Port Vila and Luganville, and for water supply in Port Vila. We found that while they have some deficiencies, the contracts do contain reasonably well-designed regulatory rules, and give the Government useful powers to enforce these provisions. There are some areas in which the rules could be improved, possibly with the agreement of UNELCO. There are also areas in which further policy development might be helpful, in particular regarding extension of service to unserved areas. The greatest scope for improvement lies in strengthening the institutional arrangements for supervision of the contracts. In this section we start by summarizing the legal instruments which govern provision of water and electricity services. We then review key regulatory provisions: service standards and coverage; tariff-setting; monitoring and enforcement; and customer-service. We look at the key policy areas of exclusivity and competition, and extension of service to unserved areas. Finally we review the current arrangements for contract supervision and policy development Statutes and agreements The basic legal structure for provision of services is the same for water and electricity. A sector law sets out the basic background rules and powers of the Minister, while one or more concession contracts govern the responsibilities of UNELCO to provide service, and control the tariffs it may charge. Annex D: List of Legislation, Contracts and other Documents lists the key documents of which we are aware. Not all documents were available to the team, and one of our recommendations is that the government establish a centralized repository of all legal documents affecting the sectors Coverage and service standards Electricity The key provisions on coverage and service area are summarized below. These have been taken from the Port Vila concession. The provisions are similar for Luganville Service area. The concessionaire has the right to supply the municipal districts of Port Vila and a 15 kilometer strip beyond the municipal limits Obligation to serve. The concessionaire must serve anyone within the concession zone that requests service and is prepared to sign up for a one year contract (five years in the case of high voltage supply). However, the network does not yet cover the entire concession zone, and where network extensions are required, the customers benefiting can be required to cover part of the cost of the extension Exclusivity. The concessionaire has the exclusive right to sell power within the service area. However, anyone is allowed to generate power for their own use 24

35 Reporting requirements. The concessionaire is required to provide accounts in a specified format, and a technical statement of operations to the government each year. The key provisions regarding quality of service include: Frequency stability. Frequency must not fluctuate more than 2% either side of the specified 50 Hz Voltage stability. Voltage shall not fluctuate more than 7% either side of the specified level Reliability. Service must be continuous, except in cases of emergency. Interruptions are permitted for planned works, but must be scheduled to minimize inconvenience, and three days notice must be given Customer service. A standard customer contract is mandated by the concession, and can only be changed with the government s agreement. Customer disputes are to be submitted to the Ministry of Energy. The concession contract provides that some disputes may be resolved by the Minister directly, while others are to be determined by the Port Vila Supreme Court. Penalties apply for breach of these provisions. The penalties are expressed in terms of P which is the price of a kwh of energy for a standard domestic consumer. The penalties are: For a system-wide interruption of service, 500P per hour For interruption of service at one transformer, 50P per hour Overdue accounts and technical report, 10P per day overdue For voltage and frequency fluctuations outside the prescribed limits, which have been notified to the concessionaire, and which the concessionaire has not fixed within a reasonable period of time, 15P per 5% fluctuation beyond the limits established by the contract. In addition, if the concessionaire fails to provide the services specified, and does not remedy the problem within a reasonable period of time after being asked to by the government, the government may terminate the contract. In this case the termination payment to the concessionaire is 20% below the remaining book value of concession assets. Water The key provisions on coverage and service area include: Service area. The concessionaire has the right to supply the municipal districts of Port Vila and a 15 kilometer strip beyond the municipal limits 25

36 Obligation to serve. The operator must supply water to all existing connections and to any new connections requested within areas already served by the distribution network. The distribution network does not cover the entire service area, and the customers beyond the distribution network who desire service must meet the cost of extending the network Exclusivity. The concessionaire has the sole right to supply water in the service area Reporting requirements. The concessionaire is required to provide accounts in a specified format, and a technical statement of operations to the government each year. The key provisions regarding quality of service include: Quantity. Operator must supply up to 400 liters of water per person, per day Pressure. Water pressure equivalent to a head of water of at least 10m must be maintained Reliability. Water must be supplied with no interruptions (except those resulting from Acts of God, maintenance or emergencies) Quality. Water must comply with water quality standards in force in Vanuatu and, as far as possible, to WHO standards. Penalties apply for breach of these provisions. The penalties are expressed as in terms of the price of cubic meter of water at the base rate. The penalties are: For a system-wide interruption of service, penalty equivalent to 100 cubic meters of water per hour For interruption of service affecting more than one tenth of the subscribers, for more than 48 hours, 0.10 cubic meters of water per subscriber per hour Pressure more than 5 meters below the required level for more than 10 hours, a penalty equivalent to the price of 0.01 cubic meters of water per subscriber per hour Other breaches of the schedule of conditions, including failure to provide accounts and technical report, a penalty equivalent to the price of 300 cubic meters per day for each day the violation continues. In addition, if the concessionaire fails to provide the services specified, and does not remedy the problem within a reasonable period of time after being asked to by the government, the government may terminate the contract. In this case the termination payment to the operator is approximately equal to the remaining book value of concession assets. 26

37 Assessment of electricity and water standards Our overall assessment is that the service standards are reasonable well specified and enforceable. Areas in which improvements might be sought include: Tighter specification of some of the details of the service standards. For example, the requirement to provide electricity service within a month of its being requested is somewhat undermined by the fact that the concessionaire can extend the time limit for reasons that are not clearly specified Penalties at a higher level the current penalties are well below the cost caused to customers by non-compliance A more effective and accessible mechanism for customers to resolve any complaints with the utility. In practice, customers are not easily able to seek assistance from the Ministry, and are unlikely to take the utility to court Tariff-setting rules The tariff-setting rules for water and electricity accord with international orthodoxy. They are similar to those seen in West African concessions, but also functionally similar to the regulatory approaches used in the UK and Australia. For both electricity and water, an initial tariff is indexed to increases in key input price levels. There is also provision for a reset of the tariff-level, and the indexation formula every five years, or earlier in the event of significant changes in the conditions under which service is provided. Electricity tariff rules The electricity tariff setting formula was last modified in October 1997, as part of the agreement varying the Port Vila electricity concession. At that time the Reference Tariff was set at Vatu/kWh. Since then, the tariff has been altered quarterly to reflect changes in input prices, in accordance with a precisely-defined formula. Indexation. The formula increases tariffs in line with a weighted average of the increase in input costs. The input costs considered are: The change in average fuel prices, as measured by the price of fuel delivered to UNELCO in both Port Vila and Luganville The change in wage rates, as measured by the rates paid at IFIRA Wharf and Stevedoring The change in the New Caledonian equipment index (adjusted for the exchange rate between the Vatu and the Pacific Franc) The structure of the tariff (that is, the amount paid by each customer class) is then set in proportion to the reference tariff, using formulae set out in the concession contract. 27

38 Resets. There is provision in the contract to reset the tariff every five years, or earlier if there have been certain defined major changes in the conditions under which service is provided (for example, if tariffs have increased by more than 25%, or if there is a major unanticipated variation in cost). A reset must requested by either the Government or the concessionaire if there is no request, the tariff and indexation mechanism continue in force until a reset is requested. The reset is to be made by agreement between the concessionaire and the government. In the event that the parties cannot agree, the matter is to be resolved under the standard arbitration provision of the contract. There are no guidelines or principles to guide the reset spelt out in the contract. As more than five years have elapsed since tariff levels and the indexation formula were reset in the 1997 Agreement Varying the Electricity Concession, it would be open to the government to request a reset now, if it wished. Before deciding whether to request a reset the government would do well to seek independent advice on the range of possible outcomes from such an exercise. Other specific points to note in the tariff-setting approach include: Provisions concerning Sarakata hydro-fund. The tariff and the tariff-indexation formula, are set as if all power were generated by UNELCO s diesel generators. In fact, much of the power supplied in Luganville is generated by the Sarakhata hydro-plant. The savings in variable costs from the use of the hydro-scheme are not applied to reduce the tariff, but are allocated instead to the Sarakata Hydro Special Reserve Fund. This is discussed in Section 0 Uniform national tariff. The cost of supplying power varies between different parts of the country. In particular, Tanna and East Malekula are by far the most expensive to supply since the systems are small, and it is costly to transport the fuel to them. However, the tariff does not vary from place to place. This means that customers in places which are cheaper to supply provide significant cross-subsidies to customers in the high cost areas Provisions for low income consumers. Customers who consume less than 120 kwh per month are eligible for a special rate. They are not charged any fixed monthly fee, and receive the first 60 kwh of power at a rate equal to 65% of the normal domestic rate. Consumption between 60 and 120 kwh per month is charged at the normal domestic rate, while above 120 kwh a penalty rate of 170% of the normal domestic rate is charged (this is necessary to ensure that only low-users benefit from the special discount). The effectiveness of this low-user scheme in providing affordable power is illustrated in Figure 3.6, which shows that small consumers in Vanuatu face a bill in line with, or lower than; small consumers in many comparator countries, despite Vanuatu s relatively high average tariff. However, this cross-subsidy does mean that other users face a higher tariff than they otherwise might. It also only benefits those who have connections many poor people do not have electricity connections. 28

39 Water tariff rules The water tariff consists of a fixed monthly charge based on the diameter of the meter through which a customer is supplied, and a volumetric charge. The volumetric charge is structured on a rising block basis. Those who consume less than 50 cubic meters of water each month pay the basic volumetric charge, and consumption above this level is charged at progressively higher rates, culminating in a 50% surcharge above the basic rate for consumption in excess of 201 cubic meters per quarter. Indexation. The basic charge was set at 40 vatu per cubic meter in the 1993 contract, and has been adjusted in accordance with an automatic indexation formula since then. The formula adjusts the tariff in accordance with the change in the weighted average of specified input prices. The specified input prices are wage rates (as measured by the rate paid an unskilled laborer at Ifira Wharf and Stevedoring), the tariff for high-voltage electricity supply, and equipment costs, as measured by Australian equipment indices adjusted for the exchange rate. Resets. The contract provides that tariffs may be reset after five years, or if there have been significant changes in a number of specified areas, including increase in demand or the number of customers by more than a certain amount, or new obligations imposed on the company. The Schedule of Conditions for the water contract provides more guidance than the electricity concession on how tariff resets should be approached. The contract states that a review should be carried out In order to maintain the tariffs in harmony with the operating costs and depending on the variations in the economic conditions. The tariff reset should be agreed between the government and the concessionaire. In the event that the parties cannot agree, the contract provides for a three-member commission to decide on the tariff change. One member of the commission is appointed by each party, and the two members then appoint the third. In the event that the two members cannot agree on the third, he is to be appointed by the Supreme Court. All members must have demonstrated experience in the field of water supply. The structure of the three member panel is almost the same as the arbitration panel for the electricity commission, the main differences being the requirement for experience in water, and the fact that in the event of disagreement, the third member is appointed by the Supreme Court (while the electricity arbitration clause provides for appointment by the President of the International Chamber of Commerce). However, the fact that the panel is termed a tariff panel, not an arbitration panel, might lead to it approaching its task differently. In addition to the tariff reset clause in the Schedule of Conditions, the main part of the contract contains a Remuneration clause, which specifies among other things that The Operator and the Government undertake to adjust the tariff every five years in such a way as to assure the operator of a return on capital investments of 12% taking into account previous losses. Taken literally, this seems unduly generous to UNELCO, since it seems to guarantee returns regardless of levels of efficiency, and also to allow for tariff increases to cover past under-recovery. It also seems to require a tariff review every five years, which has 29

40 not in fact happened. It would be worth clarifying this provision, and if possible seeking agreement that it is not intended to allow recovery of costs in excess of efficient levels. Provisions for low income consumers. The net effect of the rising connection charges based on meter diameter, and the rising block charge for water, is to assist low-volume consumers by charging them less for the same amount of water than higher-volume consumers pay. Very low consumption customers (less than 25 cubic meters per quarter) also receive a discount on their connection fee. Taken overall, this tariff structure allows connected low-income consumers to get water to meet their basic needs at a cross-subsidized rate. In addition, there is a provision for 1 vatu for every cubic meter sold to be allocated to a Special Fund. The Special Fund is available for the government to use in subsidizing water connections. Assessment of electricity and water tariff-setting rules Generally speaking the indexation provisions are in line with good international practice. They allow tariffs to increase in line with increases in input costs. However, they do not compensate the operator for inefficiency. For example, if labor costs increase because wage rates in Port Vila are increasing, tariffs rise to compensate. However, if the concessionaires labor costs increase because they employ more people, tariffs do not rise. This is a good way to adjust tariffs in line with cost changes while providing incentives for the operator to be efficient. One aspect of the indexation arrangements that could be improved is the method of indexing for changes in fuel prices. The fuel prices used are the actual prices paid by UNELCO. This means that UNELCO s incentives to purchase fuel at least cost are lower than they would be if an external index, such as an Australian fuel price index, was used. The use of non-vanuatu (New Caledonian and Australian) price indices has also been identified as a possible cause for concern; this should be reviewed in tariff-resetting sessions if price indices for the relevant materials in Vanuatu become available. Another item for consideration in a rate review is the appropriateness of depreciation rates. The Department of Finance has indicated that the rates initially assigned to UNELCO may have been too generous, but we have not investigated this further under this report. The reset rules are unclear. In the case of electricity no guidance is provided as to the principles to be followed. This seems likely to create difficulties when the time for a reset arrives. In the case of water, it would be possible to interpret the current provisions as guaranteeing a rate of return regardless of levels of efficiency. This would be undesirable. It is also unclear the extent to which the Department of Finance should be involved in tariff reset meetings. Despite having relevant skills, and an interest in the regulation of utilities from a policy perspective, Department members have generally been excluded from the tariff resetting process. Some donor agencies have indicated that it would be appropriate and desirable to have greater sharing of information with the Department and increased transparency in the reset process. 30

41 3.3.4 The Sarakata Hydro Special Reserve Fund The Japanese aid agency, JICA, financed the construction of the Sarakata hydroelectric power station, which is owned by the government of Vanuatu. Sarakata is on the island of Espiritu Santo, and the plant provides power to Luganville and the surrounding area. The power is distributed by UNELCO. The hydro-power is a substitute for power previously generated by the UNELCO s diesel generator at Luganville, and greatly reduces the variable costs of producing power to supply Luganville. The Japanese government s objective in financing the hydro-project was to promote rural electrification, with the savings in power production costs being available to pay for rural electrification schemes. By the Addendum to the Contract of Concession for the Generation and Public Supply of Electric Power in Luganville of 3 March 1995 it was agreed that UNELCO would be responsible for operating and maintaining the Sarakata plant. It was also agreed that the cost-savings resulting from use of the hydroplant (compared to diesel generation) would be calculated by a detailed formula set out in the Addendum. These cost savings are then applied first to a fund for the renewal of the hydroplant. Savings in excess of 10 million vatu per annum are then allocated to the Sarakata Special Reserve Fund. The Sarakata Special Reserve Fund is transferred to the government, and may be used for the following purposes: To assist in extending the electrical networks To assist in individual connections To electrify public facilities To subsidize individual electricity bills To assist in rural electrification in Vanuatu. The Addendum establishes a Technical Committee comprising: the Minister of Energy or his representative, a representative of the Energy Unit, a representative of UNELCO, and one representative each of the SANMA Provincial Council and the Luganville Municipal Council. This committee makes recommendations on network extensions and individual connections. The government is required to consider their recommendations, but is free to decide how the fund should be allocated among the various permitted purposes. We have not reviewed the application of the Sarakata fund. However, stakeholders vary in their opinions as to how appropriately it has been applied. Some claim that too much of the fund has been allocated to extending existing distribution systems, making new connections, and reducing tariffs, in contrast to the original intent that the savings should be used to promote true rural electrification. There is also a dispute over the financing of a proposed third turbine for the Sarakata scheme. While there is agreement that a third turbine is warranted, there is no agreement as to whether financing should be sought from the Japanese government, or from UNELCO, possibly using a French government aid loan. The main advantage proffered for French- 31

42 financing is that it could be mobilized quickly. On the other hand, the Japanese financing would be a grant, not a loan. The resolution of this debate involves two other issues: the possible extension of the Luganville concession, and the way in which the financial benefits of the Sarakata hydro savings are realized. If UNELCO finances the third turbine, it will require an extension of the Luganville concession, which would otherwise expire in However, we would recommend that the government address the issue of extending the concession in its own right. Our analysis of performance shows that Vanuatu has been well served by having a private power supplier. It may be sensible for the government to look for ways to extend the existing arrangements, regardless of how the third turbine is financed. This could involve a negotiated extension of the current arrangements, or a competitive tender to select a private supplier. The government should engage expert assistance to help it choose whether to renegotiate or hold a tender, and to implement the chosen approach. When the third turbine is commissioned, the savings will increase. One option would be to continue to calculate and allocate the savings using the current mechanism. An alternative approach would be for UNELCO to purchase power from the Sarakata scheme, at an agreed tariff. It is argued that this would provide for a clearer identification of the funds saved, and a clearer separation between those funds and UNELCO. In principle the two approaches should have similar results, but the institutional details matter. These points will need to be resolved, and independent advice may assist the government to make its decision Need for a rural electrification policy The discussion above highlights the desirability of Government developing a clearer policy for rural electrification. A number of studies have outlined possible physical infrastructure development plans, but there is no agreement on the desirable financial and institutional arrangements to support service extension. A rural electricity policy should identify the extent of subsidy to be made available for rural supply, whether that subsidy should be targeted toward lower tariffs or expanded connections, and where the finance should come from. It should also address the question of which institutions should operate rural electricity schemes. Resolving these issues will be important to the development of both urban and rural electricity sectors Customer service issues Customer service refers to issues such as responses to inquiries and complaints from customers, and resolution of disputes. Most regulatory regimes for private companies have provisions governing how quickly utilities need to respond to inquiries and complaints, and provide for a regulatory or customer body to assist customers in resolving disputes with the utility. There are no such provisions in the current regulatory regimes for water and electricity in Vanuatu. In particular, disputes between the utility and customers are resolved either in the courts or in some instances by the Minister. 32

43 We recommend that the government agree with UNELCO a set of customer service standards, and also institute a low cost, customer-friendly dispute resolution process to assist customers with issues they are not able to resolve directly with the utility Exclusivity and competition The concession contracts grant UNELCO exclusivity in electricity and water sales within its concession zones. This contrasts with the usual recommendations to introduce competition in the electricity sector. However, the small size of the electricity system in Vanuatu means that competition in generation or retail is not sensible. A vertically integrated structure is likely to be the most economically efficient. Customers are protected by the right they have to self-supply. However, even customers with relatively large loads (a major resort and a drinks bottler) indicated that they thought UNELCO s supply was cheaper and better than they could achieve through self-generation. In general we would recommend that when new concessions are granted they be nonexclusive. Since we expect a single supplier to be the most efficient industry structure we would not expect awarding non-exclusive concessions to lead to actual competition. However the potential for competition will help to ensure that the main provider offers a good service at a reasonable price. As far as the existing concessions go, we would not recommend trying to change them to introduce competition Current institutional arrangements for contract supervision, policy and regulation Government officials and Ministers indicated a frustration that the Government is often not aware of its powers under the contract, or able to exercise them efficiently. For example, the Energy Unit in the Ministry of Land, Natural Resources and Energy is well regarded for its knowledge of the sector, has copies of the electricity concession contracts, and receives reports from UNELCO. However, the Unit told us that it lacks the expertise to supervise the contracts effectively. The engineer previously employed in the Unit left to take up a better paid opportunity overseas, leaving the Unit unable to reach an informed view on technical issues. The Unit does not have accounting or economic expertise, leaving it unable to check the application of the tariff indexation formula to its own satisfaction, or to form a view on efficient cost levels. Similarly, without access to legal capabilities the Unit is not able easily to interpret the contracts, or to challenge UNELCO in case it appears that the company is not complying with the contract. Other parts of Government with an interest in the electricity and water sector do not receive information on it, do not feel able to understand and monitor the contracts, and may be suspicious of UNELCO because they feel that the Government is not able to monitor the company effectively. It seems that the first task on the regulatory agenda should be to ensure that the Government has the capacity to analyze the information it already receives, and exercise the powers it already has. 33

44 4 Telecommunications Sector 4.1 Sector Performance In this section we review the telecommunications sector in Vanuatu including both the sector structure and performance. The sole provider of public telecommunications services in Vanuatu is Telecom Vanuatu Limited (TVL), which is owned in equal parts by the Government of Vanuatu, Cable & Wireless, and France Cable and Radio. TVL has a 20-year exclusive franchise which will terminate in Hence our review of sector performance focuses primarily on the performance of the incumbent. Note that all data presented was collected in April to June We review: The structure of the network (Section 4.2) Service availability (Section 4.3) Demand (Section 4.4) Quality of TVL service (Section 4.5) Price benchmarks (Section 4.6) History of TVL s service pricing (Section 4.7) TVL s financial performance (Section 4.8) 4.2 Structure of the network TVL has both fixed and GSM mobile networks. The network has a single digital exchange in the capital, Port Vila, with a capacity of fixed lines and mobile lines. This is connected by a terrestrial microwave link to a remote concentrator with 2000-line capacity at Luganville, on the largest island Espiritu Santo. This link has seven hops and provides 34 Mbit/s, or 16 E1s. Nine of the E1s are used for remote long lines that connect phones back to the switch, while another two are for data. Three more serve multiplexers along the microwave link. The local networks at Port Vila and Luganville consist of a small fiber ring and copper cables, located underground, thus providing protection from cyclones. Remote lines are served by an IRT2000 point-to-multipoint microwave radio system. There are five central stations (three at Port Vila and two at Luganville) and some 180 remote stations powered by solar energy. These stations serve between 8 and 48 lines each. The IRT2000 technology is out-of-date and can only provide very low data rates for dial-up Internet access. A VHF system serves additional customers that are too remote for the IRT

45 TVL launched its GSM 900 network in April 2002 and currently has 13 GSM base stations with five more scheduled to come into service in the near future. By early 2004 there were 7500 mobile subscribers compared to 6500 fixed lines. The mobile service generates similar revenues to the fixed service. Around 80% of mobile subscribers have a prepaid service and prepaid GSM cards are also sold to tourists. The GSM base stations are linked back to the switch with 4 E1 microwave links. Each microwave link connects two daisy-chained base stations, each of which require one E1. This leaves two E1s per link that can be used to provide telephony service using a V5.2 concentrator system, replacing IRT2000. The V5.2 system uses standard 64 kbit/s circuits and can provide full rate dial-up Internet access. The supplanted IRT2000 systems are being redeployed to other remote areas that currently have no service, or are to be used for parts. International connectivity is provided by an Intelsat satellite station. TVL has international links to New Zealand (Telecom NZ), New Caledonia and Australia (Telstra and Optus). TVL is currently building a second earth satellite station. Other plans include extending coverage of the mobile network, especially to the south of Port Vila and from the microwave link repeater towers, and deploying a broadband Internet network that overlays the GSM network to provide high-speed Internet access. 4.3 Service availability Growth in fixed and mobile lines The growth in the number of fixed lines in operation in Vanuatu has been steady up until around 2001 or In some countries the number of fixed lines has actually decreased in recent years (Figure 4.1). One cause for this may be the rapid growth in the number of mobile subscribers (Figure 4.2). Figure 4.3 shows the combined fixed and mobile growth for our sample countries. Note that all of these countries have a GDP per capita less than USD

46 100 Figure 4.1 : Fixed lines in operation for selected countries ( ) Fixed lines in operation (000's) Fiji Papua New Guinea Saint Lucia Samoa Vanuatu [Source: ITU] Figure 4.2 : Number of mobile subscribers ( ) for selected countries 80 Mobile subscribers (000's) Fiji Papua New Guinea Saint Lucia Vanuatu Samoa [Source: ITU] 36

47 Combined fixed and mobile lines (000's) Fiji Papua New Guinea Saint Lucia Samoa Vanuatu Figure 4.3 : Combined number of fixed and mobile lines ( ) for selected countries [ Source: ITU] Teledensity Typically there is a strong correlation between teledensity (lines per 100 persons) and the level of development of the country. This relationship is quite complex, as there are many factors involved. In developing countries we observe the following: The telecommunications market is less mature, so we see lower levels of teledensity Income levels (typically measured by GDP per capita) are low, so that while labor costs are lower than in more developed countries, demand for telecoms services may be constrained by affordability. Figure 4.4 and Figure 4.5 show how Vanuatu s GDP per capita and fixed-line and mobile teledensities compare with those in other countries. Both fixed-line and mobile teledensities are low, resulting in a low overall teledensity (Figure 4.6). Note that the size of the bubble represents the population size. 37

48 Figure 4.4 : Relationship between fixed-line teledensity and economic development Fixed teledensity (fixed subscribers per 100 inhabitants) 60 Australia 50 Papua New New Zealand Guinea 40 Macau Sri Lanka 30 Tonga 20 Malaysia Jamaica 10 Fiji Samoa Philippines Vanuatu 0 Indonesia ,300 1,800 2,300 2,800 3,300 3, GDP per capita - Vatu ('000s) [Source: ITU (2002), Network Strategies] Figure 4.5 : Relationship between mobile teledensity and economic development Mobile teledensity (mobile subscribers per 100 inhabitants) 70 Macau Australia 60 Papua New New Zealand Jamaica 50 Guinea Sri Lanka 40 Malaysia 30 Vanuatu Philippines 20 Fiji 10 0 Indonesia Tonga Samoa ,300 1,800 2,300 2,800 3,300 3, GDP per capita - Vatu ('000s) [Source: ITU (2002), Network Strategies] 38

49 Figure 4.6 : Relationship between combined fixed and mobile teledensity and economic development 140 Combined fixed and mobile teledensity Papua New Guinea Jamaica Malaysia Macau New Zealand Australia 40 Sri Lanka Philippines Fiji 20 Tonga Samoa 0 Vanuatu Indonesia ,300 1,800 2,300 2,800 3,300 3, GDP per capita - Vatu ('000s) [Source: ITU (2002), Network Strategies] Figure 4.7 shows the trend between GDP per capita and combined fixed and mobile teledensity for a larger sample of Pacific and Caribbean countries. Vanuatu lies below this trend line indicating that teledensity is lower than we would expect given the income level. 39

50 Figure 4.7 : Trend between GDP per capita and combined teledensity Jamaica Combined fixed and mobile teledensity Philippines Dominican Rep. Fiji Guatemala Malaysia Trinidad and Tobago Tonga Sri Lanka Honduras 10 Samoa Indonesia Vanuatu Solomon Papua New Islands Guinea ,000 GDP per capita - Vatu ('000s) [Source: ITU (2002), Network Strategies] Demographic characteristics Demographic characteristics influence the cost of providing telecommunications services within a jurisdiction. For example, population distribution affects transmission costs through the required length of routes. Population density is the usual measure of distribution; however this normally requires very low-level data to be effective, as density may vary dramatically across different regions of a single jurisdiction. Vanuatu has a relatively low population density of 17 inhabitants/km 2 (Figure 4.8). 40

51 Macau Sri Lanka Philippines Saint Lucia Jamaica Tonga Indonesia Malaysia Samoa Fiji Vanuatu New Zealand Papua New Guinea Australia Macau: Figure 4.8 : Population density for selected countries (2002) [Source: ITU, CIA World Factbook, Network Strategies] Population density (inhabitants per sq km) Vanuatu has a low level of urbanization, with only 20 percent of the population living in urban areas (Figure 4.9). 41

52 Macau Australia New Zealand Malaysia Philippines Jamaica Fiji Saint Lucia Indonesia Sri Lanka Tonga Samoa Vanuatu Papua New Guinea Figure 4.9 : Proportion of population living in urban areas for selected countries [Source: ITU ( ), Statistics New Zealand (2000)] Urban population (%) 4.4 Demand Vanuatu has been designated as a least developed country by the United Nations. It has a very low GDP per capita, though a more suitable measure of the level of development of a country may be the UN human development index (HDI) (Figure 4.10). This is a composite index of various factors that influence the level of development of a country, including the following: Life expectancy at birth Adult literacy rate Educational enrolment GDP per capita. The UN then uses HDI to rank and classify countries into bands of high, medium or low human development. Vanuatu is placed in the medium human development band with an HDI of

53 UN HDI Japan New Zealand Singapore Malaysia High Medium Low Fiji Philippines Sri Lanka Indonesia Solomon Islands Vanuatu Papua New Guinea Figure 4.10 : Human development index for selected countries (2001) [Source: United Nations] Table 4.1 details some of the human development indicators used by the UN to calculate the HDI. Vanuatu has a life expectancy of 68 years, an adult literacy rate of 34%, and a combined gross enrolment ratio of 54%. The Asian Development Bank 7 notes that while the gross enrolment ratio for primary education is 72% this drops to 22% for secondary education (1998 figures). It is notable from the table that Vanuatu has an extremely low literacy rate, even compared with neighbors such as the Solomon Islands and Papua New Guinea. 7 Asian Development Bank (2002). Country strategy and program update ( ) Vanuatu. October Available at 43

54 Table 4.1 : Human development indicators Country Life expectancy at birth (years) 2001 Adult literacy rate (% age 15 and above) 2001 Gross enrolment ratio 1 (%) Japan 81.3 n/a 83 New Zealand 78.1 n/a 99 Singapore Malaysia Fiji Philippines Sri Lanka Indonesia Solomon Islands Vanuatu Papua New Guinea Combined primary, secondary and tertiary gross enrolment ratio. [Source: United Nations] The low income, low population base, and low urbanization rates characteristics which suggest that demand for telecommunications services in Vanuatu is likely to be constrained. We have undertaken some analysis of demographic and economic information to determine possible telephony take-up. In addition to the economic, social and educational characteristics already identified, we also note the relatively large household sizes. This could put pressure on a single household line, meaning that mobile could be more attractive (that is, not being a shared service), if affordable. In addition, the large household size means that teledensity (lines per 100 persons) will appear low in comparison to developed countries, but clearly a residential phone serves a household more than twice the size of an Australian or New Zealand household. Another notable feature is the extraordinarily high proportion of population which is less than 15 years (42.7%) this group is unlikely to take up mobile, because of affordability issues. The age distribution constrains the addressable market considerably (and probably has more of an impact than simply affordability). The proportion of the population between the ages of 15 and 44 years will probably be the main target market for mobiles. A further notable feature is the strong population growth (>4% per year) in urban areas, which should translate into future growth in residential services (subject to the large household size). In summary, telecommunications demand will be strongly influenced by the high household size and also the large proportion of the population that is less than 15 years old. The large 44

55 household size may partly explain Vanuatu s position below the trend line for telephony and GDP per capita. 4.5 Quality of Service In 2002 the Asian Development Bank (ADB) funded an assessment of poverty and hardship in Vanuatu led by the Department of Economic and Social Development. The Participatory Hardship Assessment involved consulting officials and leaders from 12 communities representing both rural and urban areas and different geographical regions with varying levels of access to services. The lack of basic services in some areas and the poor quality of services available in other areas were found to be key contributors to hardship. Only half of the 12 communities assessed had access to telecommunications, and this was often simply just a public telephone in the centre of the village. The telecommunications service was said to be unreliable especially in the outer islands. For two weeks during the assessment the lines throughout Torba Province were out of service 8. This experience highlights the importance of monitoring quality of service against agreed performance objectives on a regular basis. TVL undertakes some internal quality assessment and have provided us with values for some of standard quality of service indicators shown in the tables below (fixed network in Table 4.2 and mobile network in Table 4.3). Indicator Value Waiting list for main lines Faults cleared within target time 2 76% 3 Percentage of calls which fail during the busy hour 0% Table 4.2 : KPIs for TVL fixed network [Source: TVL] Telephone main lines faults 40 4 Percentage of calls for operator service answered within target time Complaints per 1000 bills Customer satisfaction rate 94% Source: GPT - Monthly Service Activation KPI reports.xls, April 2004, received 5 May days for urban, 30 days rural 3 Crude average of monthly percentages. Source: GPT - Monthly Service Assurance KPI report - Telephony Product.xls, received 5 May Total outstanding faults to year end April 2004: 2560 (source: Chris Bull, 24 May 2004); number of main 6500 lines. 5 Both fixed and mobile networks 6 Average of monthly figures May 2003 April Source: VOC_APR2004.ppt, received 24 May n.a. n.a. 8 Asian Development Bank (2003). Priorities of the people: Hardship in Vanuatu. January Available at: 45

56 Indicator Waiting list for main lines 0 Faults cleared within target time Percentage of calls which fail during the busy hour 0% Telephone main lines faults 0 Percentage of calls for operator service answered within target time Complaints per 1000 bills Customer satisfaction rate Value No faults reported 94% 1 2 n.a. n.a. Table 4.3 : KPIs for TVL GSM network [Source: TVL] 1 Total outstanding faults to year end April 2004 (2560) (source: Chris Bull), from main 6500 lines. 2 Both fixed and mobile networks TVL s key performance indicators (KPIs) are compared with those targeted by other selected countries in Table 4.4. We note that TVL s actual urban fault repair time is in general longer than targets in other developing countries. TVL have a 30 day target for fault repair in rural areas. It is unclear how often this target is met, and we know of no other countries which specify such long fault repair times for rural areas. Table 4.4 : Comparing fixed networks KPI targets with TVL actual values KPI Vanuatu actual Malaysia target Sri Lanka target India target New connections n/a 80% within 24 hours, 90% within 48 hours Faults per 100 subscribers per annum Fault repair time (service restoration) Operator service response level First half of year 85% by end of year (75% if outside Colombo). Second half of year 90% by end of following year (80% if outside Colombo) % within 3 days for urban (within 30 days for rural) 80% within 24 hours, 90% within 48 hours 60% within 24 hours, 100% within 7 working days 94% within 20 sec 30 sec (average of all calls received) Complaints per bills n/a 2% 0.1% Lost calls 0% 6% [Source: TVL, regulators] 100% within 7 days 90% by next working day 95% answered within 10 sec We observe that TVL s networks have no failed calls. In a busy network calls can fail at points of contention that is, where there is a possibility of congestion (caused by more calls 46

57 being offered to the network than there are available resources to carry those calls). These points can include any inter-switch transport, the switch itself, and points of concentration in the access network (i.e. where there are fewer circuits than phone lines). There are no failed calls in TVL s networks because: TVL s network has only one switch, so there is no inter-switch transport The switch at Port Vila, which caters for both the fixed and mobile networks, has an abundance of spare capacity, so it never reaches a point of congestion There are two areas of concentration in the access networks: o Mobile base stations. However in TVL s network the mobile traffic is currently very light the base stations are deployed for coverage and hence have a significant amount of spare capacity and no congestion o The fixed network concentrator at Luganville. However like the switch it has spare capacity and so never becomes congested. In some cases there is just insufficient information to form a detailed picture of service performance. For example, there is a waiting list of 188 for fixed lines, yet there is no information on the duration of the average waiting time for connection. This is a standard measure of service provision in other countries. 4.6 Price Benchmarking In this section we compare TVL s call charges and monthly fees for both fixed and mobile services with a sample of countries from the Asia-Pacific and Caribbean regions. We have focused on island nations in order to benchmark Vanuatu with comparable jurisdictions. The World Bank has requested that we convert local currencies to Vanuatu Vatu using three year average market exchange rates Benchmark countries Table 4.5 lists the countries and incumbent operators included in our comparisons. The population, GDP per capita and numbers of fixed and mobile operators are also provided below. The fixed and mobile plans used are detailed in Annex F. We included Jamaica in the study as it is an island nation and in addition Cable & Wireless operate in this jurisdiction. 47

58 Table 4.5 : Market characteristics of sampled jurisdictions Country Incumbent fixed operator Number of fixed Mobile operator operators included in study Number of mobile operators GDP per capita - Vatu ( 000s) Population ( 000s) Australia Telstra 2 Telstra Fiji Fiji Telecom 1 Vodafone Fiji Indonesia Telkom Telkomsel 9 Indonesia Jamaica pricing Cable & 3 unavailable Wireless Macau Malaysia New Zealand Papua New Guinea pricing unavailable Telkom Malaysia Telecom New Zealand Telekom PNG CTM 3 7 Celcom 5 2 Telecom New Zealand Pacific Mobile Communicatio ns Philippines PLDT n.a Samoa Telecom 1 Telecom 1 Samoa Samoa Cellular Sri Lanka Tonga Sri Lanka Telecom Tonga Telecom 3 Mobitel 4 Tonga Telecom Vanuatu TVL 1 TVL ITU data ITU data [Source: ITU (2002), Baskerville, Hong Kong University, Fiji Telecom, Network Strategies] Results The detailed results of our price benchmarking are contained in Annex F. TVL has a single fixed line plan for all customers, both residential and business. Calls are charged at peak and off-peak rates, but one rate applies nation-wide with no differentiation for distance. No distinction is made between local calls and long distance calls. This results in local calls being relatively expensive and long distance calls being relatively cheap in comparison to other similar countries. TVL s rental charge is relatively high for residential customers. TVL offers some of the cheapest rates for mobile calls in our benchmark sample. This may be explained in part by the fact that TVL does not have to pay interconnection charges to another operator in Vanuatu for its mobile service. 48

59 In summary Table 4.6 shows how TVL ranks against the prices compared for the 11 sampled operators for fixed and prepaid mobile and ten sampled operators for postpaid mobile. Note that a rank of one indicates the most expensive within the benchmark sample. Table 4.6 : TVL prices ranked against other operators from a sample of selected countries Fixed price compared TVL Mobile price compared rank TVL rank Residential monthly rental 3 Postpaid monthly rental 5 Business monthly rental 5 Postpaid peak call to fixed line 9 Residential peak local call 1 Postpaid off-peak call to fixed line 10 Residential off-peak local call 1 Postpaid peak call within network 8 Business peak local call 1 Postpaid off-peak call within network 8 Business off-peak local call 1 Postpaid peak call to other network 10 Residential peak national call (40 km) 7 Postpaid off-peak call to other network 10 Residential off-peak national call (40 km) 8 Prepaid peak call to fixed line 9 Business peak national call (40 km) 7 Prepaid off-peak call to fixed line 10 Business off-peak national call (40 km) 8 Prepaid peak call within network 8 Residential peak national call (550 km) 10 Prepaid off-peak call within network 10 Residential off-peak national call (550 km) 10 Prepaid peak call to other network 9 Business peak national call (550 km) 10 Prepaid off-peak call to other network 10 Business off-peak national call (550 km) 10 [Source: Network Strategies] The ranks are slightly different if purchasing power parity (PPP) rates are used to convert prices into Vatu. Table 4.7 shows how TVL ranks against the other sampled operators using PPP rates. 49

60 Table 4.7 : TVL prices ranked against other operators from a sample of selected countries Fixed price compared TVL Mobile price compared TVL rank rank Residential monthly rental 2 Postpaid monthly rental 6 Business monthly rental 6 Postpaid peak call to fixed line 9 Residential peak local call 1 Postpaid off-peak call to fixed line 9 Residential off-peak local call 1 Postpaid peak call within network 8 Business peak local call 1 Postpaid off-peak call within network 9 Business off-peak local call 1 Postpaid peak call to other network 9 Residential peak national call (40 km) 8 Postpaid off-peak call to other network 9 Residential off-peak national call (40 km) 7 Prepaid peak call to fixed line 11 Business peak national call (40 km) 8 Prepaid off-peak call to fixed line 11 Business off-peak national call (40 km) 8 Prepaid peak call within network 11 Residential peak national call (550 km) 11 Prepaid off-peak call within network 11 Residential off-peak national call (550 km) 9 Prepaid peak call to other network 11 Business peak national call (550 km) 10 Prepaid off-peak call to other network 11 Business off-peak national call (550 km) 10 [Source: Network Strategies] 4.7 History of service pricing We have analyzed TVL s prices over time (with adjustment for inflation). The last major change in service pricing occurred in a tariff rebalancing exercise over the period 2001 to This involved an increase in line rental and decreases in national and international charges. To a large extent this rebalancing appears to have been driven by the introduction of the mobile service together with the need to respond to international trends. We note that although international call charges have decreased substantially over the last decade, they remain relatively high when compared to other Pacific countries. The detailed results are presented in Annex G. We also present in Annex G information on TVL s Internet pricing and we find that except for entry-level dial-up services, all of the Internet offerings are priced at high levels compared to overseas benchmarks. 4.8 Financial Performance We reviewed TVL s annual financial accounts and report our findings below with respect to revenue (section 4.8.1), costs (section 4.8.2), profit (section 4.8.3) and investment (section 4.8.4). 50

61 4.8.1 Revenue TVL s revenue rose from 2002 to 2003, but has not reached the level of revenue achieved during the period 1999 to The trend in revenue between 1999 and 2003 is presented in Figure 4.11 together with the share of revenue provided by different services. Figure 4.11 : TVL revenue by service type ( ) 2000 Revenue - Vatu (millions) National International Internet Phone/Refil card Net settlements Mobile Equipment Sales/Rental Rentals Other services Ancillary Services Telex Adjustments [Source: TVL, Network Strategies] We observe the following: The reductions in total revenue in 2002 and 2003 compared to previous years were caused largely by the disappearance of ancillary services. TVL inform us that the major component of ancillary services was the limited window of opportunity for gains from audiotex In 2002 and 2003 line rental revenue dropped dramatically this was the result of TVL refunding deposits to customers Revenue from equipment sales and rental has declined considerably in recent years as competition has developed in this market Internet services are becoming increasingly important as a source of revenue, in line with trends in other countries The negative components of revenue in 2001 and 2002 relate to adjustments required for the billing system 51

62 Settlements represent an ongoing source of revenue, though this may not continue into the future as there is a general trend now towards decreasing settlements rates Mobile, and in particular pre-paid (Refil cards), is set to become an important contributor to revenue in the coming years Costs Figure 4.12 shows revenue disaggregated into operating expenses (opex), depreciation and profit. Figure 4.12 : Revenue by operating expenses, depreciation and profit Revenue - Vatu (millions) Operating expenses Depreciation Other Profit [Source: TVL, Network Strategies] A detailed breakdown of operating expenses is not provided within the TVL accounts though there is information on staff costs, bad debts and loss on disposal of fixed assets (Figure 4.13). We note that operating expenses have decreased since This is surprising in view of the fact that a mobile network was introduced in While the cost of servicing mobile lines is less than fixed lines, we would expect an overall increase in operating expenses. 52

63 Figure 4.13 : Operating expenses split by staff costs, bad debt and loss on asset disposal 1000 Operating expenses - Vatu (millions) Staff costs Other opex Loss on disp of fixed asset Bad debts [Source: TVL, Network Strategies] Since 2000 the number of employees has fallen, from 188 to 156 by Staff costs represent on average approximately half of opex. Given staff numbers in 2003, the average implied wage is relatively high in local terms at approximately 3 million Vatu per year. This is higher than we would expect as average wages for skilled workers in Port Vila would be less than one-third of this amount. We assume that in this case the average is not meaningful as it has been skewed by management wages. TVL had 42 access lines per employee in 2003, a relatively low number compared to the sample of (primarily) developing countries in Figure This indicates that TVL is less efficient than many of its counterparts. 53

64 Figure 4.14 : Access lines per employee Access lines per employee Korea Telecom Telkom Indonesia Telstra Australia Telekom Malaysia PLDT Philippines Sri Lanka Telecom Kazakhtelecom TVL [Source: operators, Network Strategies] Figure 4.15 shows the total opex per fixed line (excluding loss on disposal of fixed asset) broken down by staff costs and bad debts, and other opex. We note that opex for the last five years has remained around Vatu per fixed line. We have not included mobile lines in the divisor given that the impact on opex of the introduction of mobile appears to have been negligible. 54

65 Figure 4.15 : Operating expenses per fixed line ( ) Opex per fixed line - Vatu ('000s) Other opex Staff costs and bad debts [Source: TVL, Network Strategies] The cost per line appears to be quite high in relation to benchmark costs we have for developing countries and even for servicing rural areas of New Zealand and Australia together with rural and remote areas of a number of other countries. Table 4.8 compares the operating expenses of a sample of developing countries 9. The 2002 annual cost per line of providing universal service in rural Australia is also included. These costs are for ESAs (exchange service areas) with less than or equal to 150 SIOs (services in operation). The annual figures are for the financial year ending 31 December 2002, except in the cases of Telekom Malaysia and Cable & Wireless Jamaica, which are for the 12 months to 31 March We note that TVL s opex per line is almost three times higher than any of the other incumbent country benchmarks and approximately 50% higher than even opex per line for sparsely populated rural areas of Australia. 9 Some of the operators included costs in their opex values that Network Strategies do not believe are true operating expenses. The costs subtracted from the total opex are net foreign exchange gains on operating activities, allowance for diminution in value of quoted investment, depreciation, write off of property, plant and equipment, loans, advancements and investments in subsidiaries, tax expenses and asset impairment charges. 55

66 Operator Country Opex per line TVL Vanuatu S1 1 rural ESAs Australia S2 2 rural ESAs Australia Cable & Wireless Jamaica Jamaica PLDT fixed line Philippines Sri Lanka Telecom Sri Lanka Telekom Malaysia Malaysia Telkom Indonesia Indonesia 25,511 Kazakhtelecom Kazakhstan PLDT mobile Philippines Total Access Communications (TAC) Thailand Table 4.8: Annual operating expenses (VUV) [Source: operators, Network Strategies] 1 Density of SIOs (services in operation) per km 2. 2 Density of SIOs per km 2. The following table lists typical categories and drivers for opex. The drivers (i.e. how the cost varies by network size) are split out by the core (transport and switching) and access parts of the network. Table 4.9 : Key drivers of operating expenses Cost item Cost driver core Cost driver access Network Repairs and maintenance Capacity (minutes of traffic) Lines Software fees and licenses Fixed and/or number of switches (traffic) Site rental Number of sites (traffic) Number of sites (lines) Network management/ operations support Fixed and/or number of switches (traffic) Interconnect charges Traffic Overheads (common and direct costs) Advertising and promotion Fixed (capex) Fixed (per line) Customer services and support Per line and/or per new line Personnel and office Per line Bad debt Revenue (per line) Legal/admin/misc proportion of revenue Per line Billing Per line [Source: Network Strategies] 56

67 From the above cost items we believe that the following would be most significant in Vanuatu. Repairs and maintenance Software fees and licenses Interconnection charges Although much of TVL s access network is underground, there is frequent damage to the infrastructure due to weather and damage caused by members of the public. Maintenance costs may also be high due to the remoteness of parts of the network such as microwave repeaters. Newer switches like those used by TVL have a higher proportion of annual license fees than older networks. Interconnect charges may be higher than for other countries because of Vanuatu s isolation. TVL informs us that mission costs are high in Vanuatu where to repair faults it is often necessary for technicians to charter airplanes and transport equipment to remote islands. However it is important to remember that most of Vanuatu s fixed (and mobile) lines are urban, not rural. The costs of maintaining these lines are considerably less than rural costs. We have also considered the financial impact of the franchise fee and the management fee. In total these fees amount to approximately 7% of gross revenue. Although in the contracts the fees are related to net revenue there is only a small adjustment to gross revenue to arrive at net revenue. It is not specified where these fees are accounted for in the financial statements. It is possible that they form part of operating expenses. If this is the case then opex per line would reduce to Vatu for This figure remains well above any of the benchmarks presented above Profit Although TVL s profit margin rose slightly during 2003, it had fallen significantly between 2000 and The return on assets follows the same pattern, falling between 2000 and 2002, but rising slightly during Figure 4.16 shows the trends in profit margin (the ratio of EBITDA to revenue) and return on assets (the ratio of profit to assets). Overall we would expect the poor performance in 2002 and 2003 to cause TVL some concern. On the other hand the results from 1999 and 2000 were acceptable by (overseas) benchmark standards. 57

68 Figure 4.16 : Profit margin and return on assets Profit margin Return on assets [Source: TVL, Network Strategies] Investment The ratio of annual investment to sales and to assets peaked in 2002 with the investment in the new GSM network, (Figure 4.17). Annual investment is of a similar magnitude to depreciation which is in line with our expectations namely, that TVL is systematically replacing plant and equipment as it depreciates. 58

69 0.70 Annual investment / Sales Annual investment / Assets Figure 4.17 : Ratio of annual investment to sales and to assets [Source: TVL, Network Strategies] Summary TVL s financial performance has deteriorated noticeably over the last two financial years with the erosion of previously highly profitable revenue streams. The accounts indicate that TVL has a relatively high cost structure though a recent downward trend is apparent. We would expect in the future increases in comparatively new revenue sources (Internet, mobile) and thus the poor performance in profit and return on assets in 2002 and 2003 should be reversed. If financial performance does return to the levels of 1999 and 2000 our view is that while the company on average performs reasonably well compared to international benchmarks it is not making excessive profits. We find that TVL s operating costs are significantly higher than we would expect for a network of this size, even with the difficult rural sector to maintain. We also find that staff numbers are relatively high for a network of this size. 4.9 Rural service Rural service is vitally important in Vanuatu where the majority of the population is dispersed in often isolated locations far from the two urban centres. Moreover the low income levels of rural dwellers makes affordability a major issue. In such circumstances a universal service policy is essential. Although universal service can involve quite different objectives from one country to the next, typical requirements include: non-discriminatory availability and pricing of basic telephony services for residential customers regardless of their geographic location prices which are compatible with universal affordability. 59

70 However such requirements may be inappropriate for very poor developing countries, where it is often unrealistic to expect access providers to supply telephony services to everyone at an affordable price. In countries with relatively low teledensity different universal service objectives may be appropriate, for example: short-term targets to provide some telephony access (e.g. payphones) to communities of a certain size priority geographical areas for connection targets for telephone accessibility for example, one hour walking distance to a telephone affordability thresholds medium to long-term targets for rolling out network infrastructure. The high cost of providing telecommunications services to rural areas due to their remoteness, difficult terrain, low densities and low household incomes have led countries to develop alternative technologies, access models and funding sources to achieve universal service Technologies New technologies can provide a more cost-effective method for serving rural areas, and can be deployed more rapidly and flexibly than traditional copper. Mobile As shown by previous research 10, wireless access is more affordable than fixed access in developing countries. In Morocco, the introduction of mobile competition in 1999 resulted in a huge uptake in mobile services, which overtook fixed-line services within a year (Figure 4.18 : ). Furthermore, by 2001 mobile coverage encompassed 90% of the population, in comparison to fixed lines which reached only 6% of the population. 10 Sonja Oestmann (2003) Mobile operators: their contribution to universal service and public access, paper for the World Bank, January

71 Subscribers (millions) Figure 4.18 : Fixed and mobile subscribers, Morocco, [Source: ITU, Network Strategies] Fixed Mobile With advances in technology, fixed systems based on mobile networks are becoming more popular. Fixed mobile is currently being used to provide service in remote areas of Australia, along with microwave and satellite services. VSAT satellite VSATs (very small aperture terminals) are satellite terminals that can send and receive data, voice and video (but not broadcast video) up to several megabits per second. The terminals are relatively expensive so would only find application in extremely remote areas where terrestrial links (whether wired or wireless) are either very expensive or not feasible at all, rather than as a general alternative solution for rural areas. Current rural service provision in Vanuatu Currently TVL decides on priorities for expansion of the telephone service in rural areas with little or no direction from Government. In the past Government has clearly been concerned about levels of rural telecommunications service. In 2000 a loan was raised to finance the 660 million Vatu expansion of the rural network. The objective of the project was to expand the number of rural lines in service from 800 to The loan of 400 million Vatu was provided by the Agence Française de Développement (ADF) to the Government of Vanuatu which subsequently advanced the monies to TVL at low interest rates. The remainder of the project was to be financed by TVL. While we understand that this project was superseded with the introduction of the GSM network in 2002, we have no information on how many additional rural lines were brought into service as a result of the initiative and no information on current rural expansion targets. 61

72 The situation could be improved considerably if Government were to develop explicit rural service targets. Once again the Minister is empowered to direct TVL to extend services geographically, but in order to use these powers policy guidelines and priorities need to be developed for the rural sector in Vanuatu Funding Clearly universal service policies must be funded and typically there are a number of alternative ways of achieving this. The main approaches are: internal subsidies (cross-subsidization) Government subsidy out of general taxation a levy or surcharge on the industry access charges. In the case of Vanuatu where there is only one telecommunications operator an industry levy and contributions through access charges are not options. Furthermore, given the limited taxation applied in Vanuatu a Government subsidy is not an option either. This leaves only the cross-subsidization option; this is currently applied in Vanuatu to support any rural development (with the assistance of aid agency loans in 2000). Although not currently an option for Vanuatu, open access models may be something for Government to consider in the future. Here the infrastructure is provided and managed by a public entity, with the services being provided to end-customers via resellers. While there are a number of existing initiatives, such as STOKAB in Stockholm and NoaNet in the Pacific Northwest, the effectiveness of these must be considered in conjunction with various local factors, including regulatory, demographic, cultural, technological, market and environmental Conclusions: Sector Performance Vanuatu, a less developed island nation of approximately 200,000 inhabitants, has only 6,500 fixed lines and 7,500 GSM mobile subscribers. The main focus of the telecommunications infrastructure is the principal urban centre Port Vila, and to a lesser extent the other urban centre Luganville. The incumbent network and service provider, TVL, faces a number of problems: Low population density Highly dispersed and remote settlement patterns across a large number of islands Low urbanization with only 20% of the population located in urban areas Low income levels Relatively high proportion of the population less than 15 years old 62

73 High household numbers. Despite these characteristics benchmarking suggests that telephony penetration is lower than we would expect for the per capita income level though this may in part be explained by the large household sizes. In addition we note that there is strong population growth in urban areas which may expand demand in years to come. There is anecdotal evidence that the level and quality of service could be improved in rural areas. There was an initiative to improve rural penetration after 2000 but it is unclear how successful this was, and we understand (as of April 2004) that TVL hopes to provide some improvement in rural service via the extension of the GSM service which commenced in TVL sets its own performance targets and indicators and some of these do not appear to be as rigorous as those of other developing countries. Moreover it is not clear in some cases whether its own targets have been met. In terms of benchmark prices TVL local calls are relatively expensive and long distance calls relatively cheap in comparison to other similar countries. This result is not surprising in view of the fact that there is only one nation-wide calling rate with no distinction made between local calls and long distance calls. However residential rental charges are relatively high with only one other operator in our sample charging more than TVL. While international call charges have reduced considerably over the past ten years in line with overseas trends, call charges to all destinations remain relatively high. TVL offers some of the cheapest rates for mobile calls in our benchmark sample. This may be explained in part by the fact that TVL does not have to pay interconnection charges to another operator in Vanuatu for its mobile service. TVL s Internet service is in our view expensive in comparison with many other countries. A review of TVL s financial accounts revealed very high operating costs per line in comparison to other developing countries and also in relation to difficult rural sectors of other countries. In the absence of a detailed breakdown it is hard to explain TVL s continued high level of operating expenses. TVL s own explanation is that the cost of servicing remote lines is extremely high in Vanuatu. However, in our view, the current level of opex per line indicates that there may be scope for efficiency improvements which would reduce operating costs. These gains could then be passed onto consumers in the form of price reductions Current Legal and Regulatory Framework for Telecommunications A review of the key legislation and contracts of the telecommunications sector in Vanuatu revealed that the Minister of Telecommunications has relatively strong powers while Telecom Vanuatu Limited (TVL) has a number of important obligations. The key legal and contractual documents are as follows: The Telecommunications Act No. 10 of 1989, Republic of Vanuatu, 1 June

74 Telecommunications (Amendment) Act No. 18 of 1993, Republic of Vanuatu, 21 June 1993 Shareholders Agreement relating to Telecom Vanuatu Limited between the Government of the Republic of Vanuatu and Cable and Wireless Public Limited Company and Société France Cables et Radio, 6 November 1992 Franchise Agreement between the Government of the Republic of Vanuatu and Telecom Vanuatu Limited, 20 November 1992 Amendment Agreement to Shareholders Agreement among the Government of the Republic of Vanuatu and Cable and Wireless Public Limited Company and Société France Cables et Radio, 1993 We summarize and discuss the main points of the legislation (Section ) and the shareholders and franchise agreements (Section ) below. We also discuss legal opinions on the legislation and agreements (Section ), summarize a recent initiative to introduce new telecommunications legislation (Section ) and summarize the implications (Section ) Telecommunications legislation The 1989 Telecommunications Act states that no person is to operate a telecommunication system in Vanuatu without a license and that the Minister is empowered to issue licenses. For licenses to operate a system to provide Public International Telecommunication Service or Public National Telecommunication Service the Minister must obtain prior approval of the Council of Ministers in order to grant the license. The license must specify: The period for which it has been granted Fees payable for the license The terms and conditions which apply The telecommunication services which are to be provided under the license. The Act also effectively provides for only one telecommunications system for provision of national telecommunication service (in s.16(6)) at one time in Vanuatu there shall be no more than one telecommunication system in operation to provide Public International Telecommunication Service and no more than one telecommunication system in operation to provide public national telecommunication service. Furthermore the Act states that licenses may only be modified with consent of the licensee (in s.17 (3)): 64

75 The modification of a license..shall be on such terms and conditions as may be mutually agreed upon between the Minister and the operator. A large part of the Act is devoted to the establishment, powers and functions of a regulatory body (the Telecommunications Authority or The Authority ). The members of the Authority were to include representatives of the Ministry of Finance and the Ministry responsible for telecommunications. The objectives of the Authority were stated in the Act as: To ensure that Vanuatu has a reliable and efficient telecommunications service To protect consumers interests To promote development of telecommunications services To maintain and promote effective competition in the telecommunications industry To manage the radio spectrum. The main regulatory powers given to the Authority were as follows: Licensing Specify tariffs, call charges and other charges Approve or set interconnection charges Negotiate international agreements and standards Establish technical standards and procedures Ensure compliance with technical standards Equipment type approvals Monitor quality of service Investigate complaints Management of the radio spectrum. In order to carry out the above functions, the Authority was also given the power to make rules, subject to the approval of the Minister. The Act was amended only four years after enactment, apparently due to the failure of the Authority to carry out effectively its responsibilities. References in the Act to the Authority were replaced with the Minister and the entire section of the Act devoted to specifying the Authority s regulatory powers was repealed. This left the Minister with responsibility for: 65

76 Licensing of telecommunications systems Enforcement of licensing conditions Radiocommunications systems Transfer of property rights, assets and liabilities of the Department of Telecommunications Right to use land for the installation and maintenance of telecommunications services Customer complaints Offences and penalties. The power to make rules was transferred to the Minister, subject to the approval of the Council of Ministers Telecommunications agreements Shareholders agreement The shareholders agreement of 1993 among the Government, Société France Cables et Radio and Cable & Wireless established TVL with the transfer of the assets and liabilities of its predecessors (Vanitel and National Vanuatu). The parties to the agreement acquired equal shares in the new company. The agreement established a seven member Board, with three members from the Government and two each from the other shareholder companies. The Government is entitled to nominate the Chairman of the Board and the Managing Director is to be nominated by (and to be an employee of) the other shareholder companies. A management fee of 2% of net revenue is payable by the company to the shareholder companies and between 60% to 80% of net profits is to be distributed as dividends annually. The agreement specifies that TVL should be wound up and the agreement terminated in the event of: Inability to continue operations because of heavy losses suffered by the Company Failure of any Party to perform its obligations under the agreement if, in the reasonable opinion of non-breaching parties, such non-performance defeat the economic objectives of this Agreement or create a material risk of loss to such non-breaching Parties (s20) Effective exclusion of any party from participation in the Board or management of the company. 66

77 Franchise agreement The franchise or license agreement between the Government and TVL of November 1992 granted TVL: The sole rights for [twenty years] to provide, operate and develop, the Public Telecommunication System of Vanuatu and further to be the exclusive provider of Public Telecommunications Services in Vanuatu or to and from any destination outside the Republic or passing in transit through the Republic and further to exclusively provide, operate and develop such additional telecommunication services within the Republic which the Company may with the approval of the Authority from time to time consider necessary or desirable or which the Company agrees to provide at the request of the Authority. [s2.1] Unless the license is terminated by the Minister at the expiry of the twenty-year term (the Termination Date) with six months notice, the license will automatically continue for periods of three years. However if the license is terminated at a Termination Date then under the terms of the agreement the Government is obliged to buy the assets of TVL at market value and assume responsibility for TVL s national staff and its operating companies (s.13.6). The Minister may terminate the license early if there is a breach of the license or if TVL becomes insolvent, but the same conditions will apply with respect to the responsibilities of Government in these circumstances in other words, Government must buy the assets of the company. The agreement also established certain powers for the Minister of Telecommunications. The main ones are as follows: The ability to request service provision or improvements, with the right to invite third parties to respond to these requests if TVL does not respond adequately or at all (s.2.7) The right to request information relating to the financial position and traffic of TVL (s.4.2) The right to inspect and audit the records of TVL at any time (s.7.4) The ability to set tariffs for basic services 11 and the percentage increase in tariffs for other services for the forthcoming year if TVL does not provide its proposed tariffs 45 days before the balance date or at any time when there are extraordinary changes in the operating costs and expenses of the company, or if the Minister does not approve of the proposed tariffs (s.8) Responsibility for relations with international telecommunications organizations (s.10.1). 11 Basic services are local, trunk, and international telephone calls, telegram and telex, and line rental and installation. 67

78 The main duties for TVL under the franchise agreement are as follows: Ensure the efficient operation and development of telecommunications services and comply with the standard of operations reasonably required by the Minister (s.4.1) Payment of a franchise fee amounting to 3% of net revenue following the end of each quarter (s.7) Non-discrimination is to be observed in the provision of service, except in certain circumstances such as insufficient demand to make the service commercially viable or technical obstacles to service provision (s.4.4, 14.3) Legal opinion The Crown Solicitor s Office of New South Wales provided a legal opinion on the Vanuatu telecommunications legislation and agreements in The key points from this opinion are as follows: Under the Telecommunications Act the Minister has no independent power to revoke or terminate the license The Telecommunications Act does not make any provision for the possibility of service providers accessing an operator s network. In addition the Act makes it an offence for a licensed operator to provide by means of the licensed system a service not authorized under the terms of the license. Effectively this means that intra vires the Act to be a telecommunications service provider in Vanuatu one must have a license to operate a telecommunications system or must supply a service that is authorized to be supplied through a licensed telecoms system The TVL license is expressed in terms which give exclusive rights to provide services as well as systems The TVL license is perpetual and can only be terminated at the end of specified time-periods or in the case of breach or insolvency; termination will bring an obligation to Government to purchase the assets of the company Although the TVL license contains provisions for annual tariff approval by Government, the ability of Government to act may be constrained to a certain extent by the consequences it may incur via the shareholders agreement if TVL s ability to operate commercially is endangered 12. Overall the Crown Solicitor finds little scope for legal challenges to the license and shareholders agreements. It may be possible to introduce new legislation to alter current circumstances in the telecommunications market but the Crown Solicitor warns that there 12 Under the shareholders agreement if there is a Government Termination Event the Government will be obliged to purchase assets at current value plus an amount equivalent to anticipated profits between the time of termination and the end of the license term. 68

79 may be a risk of legal challenge to such legislation on the grounds of a breach of Constitutional right of protection from unjust deprivation of property. Thus in view of the potential danger and uncertainties, the Crown Solicitor recommends that Government seek to achieve its objectives through negotiation with TVL Proposed legislation In 2003 a bill was drawn up to amend the Telecommunications Act. The purpose of the bill was to re-establish a Telecommunications Authority, with members to be appointed by the Minister on the recommendation of the Council of Ministers. Membership of the Authority is as follows under the Bill: Finance Ministry representative nominated by the Minister of Finance Representative of the Ministry responsible for telecommunications nominated by the Minister Consumer representative nominated by the Minister Trade union representative nominated by the Minister A representative nominated by the Vanuatu National Council of Women Three other members appearing qualified to be members by the Minister including one with industry experience at a senior level The chief executive officer of the Authority. The chair of the Authority is to be appointed by the Minister while the chief executive office is to be appointed by the Authority. The proposed objectives and powers of the Authority are the same as those of the 1989 Act (which was subsequently repealed) Implications The Government has been left in an awkward predicament as a result of the combined effect of the Telecommunications Act, the Franchise Agreement and the Shareholders Agreement. Together the Telecommunications Act and the Franchise Agreement give TVL the exclusive right to operate the public telecommunications system in perpetuity. Although there are opportunities for Government to terminate the arrangement (firstly in 2012 and then every three years thereafter, or alternatively in the event of a breach) this comes at the cost of a compulsory purchase by the Government of TVL s assets at market value. Thus even if TVL has, as some Government representatives claim, breached their license conditions, Government must be prepared for the financial repercussions in the event of termination. Any form of competition is not possible under the current arrangements unless TVL agrees to a modification of their license and the Act is amended. TVL have indicated that competition in their view is inappropriate for Vanuatu until 2012 at the earliest. Nevertheless the Government does have powers with respect to telecommunications service provision and pricing as well as the right to set rules. The ability of Government to set prices and to require certain service delivery and standards is laid down in the franchise 69

80 agreement while the ability to set rules is enshrined in the Telecommunications Act. Hence we believe that within the terms of the existing agreements Government can achieve objectives with respect to pricing, rural service provision and service quality. It is important to note that currently regulatory powers are vested in the Minister for Telecommunications. The original Telecommunications Act introduced a regulatory authority but with the subsequent repeal of that Act the Minister assumed the role of oversight of the industry 13. The Government is entitled to representation on the Board of TVL in its capacity as shareholder. This shareholder role is quite different to the industry oversight role and cannot be regarded as fulfilling any regulatory responsibilities. 13 The Authority is defined for the purposes of the license to include any successor body, entity or person established pursuant to the Telecommunications Act. 70

81 5 Recommended Regulatory Improvements In this section we analyze options for design of one or more institutions to carry out regulatory functions in Vanuatu. Figure 5.1 sets out the steps this section goes through. We start by identifying the key tasks the government needs to perform in each sector. Some of these tasks are policy or ownership related. We identify these as such, and in section 5.5 offer brief recommendations on institutional arrangements for these tasks. The majority of the tasks are regulatory. These can be divided into tasks to be carried out under the existing legal framework, and additional tasks which would need to be performed if our recommendations on minor enhancements to the legal framework are agreed. We then identify options for organizations which could carry out these tasks. We evaluate the options, and offer a shortlist of two basic institutional designs for consideration by government. We provide organizational details for each of the proposed options. We then consider options for increased public participation and increased regional cooperation Figure 5.1 : Institutional design process policy Identify tasks to manage sectors regulatory regulatory Tasks under existing legal instruments Proposed new tasks Identify options for organisations to carry out those tasks Shortlist of options Agree new powers Policy Tasks Governance/ Ownership institutions Develop detailed institutional arrangements Policy institutions 71

82 5.1 Regulatory Tasks To design a regulatory institution we must first know what regulatory tasks need to be carried out, and distinguish these from tasks related to policy or the government s role as shareholder in a utility. The previous sections of the report identified four key areas in which Government may want to improve management of the sector, as follows: Management of existing powers. The contracts and licenses give Government considerable powers to monitor the service providers performance, and control tariffs and service standards. However, Government lacks the institutional capacity to exercise these powers. This creates frustration and mistrust. An institutional arrangement which allows Government to exercise its existing powers effectively is needed Agree limited additional regulatory provisions. There are some areas in which extensions of regulatory powers would seem reasonable, and need not upset the fundamental economic equilibrium of the contracts. These areas include tighter specification of service standards and assistance to customers in resolving disputes with the utilities. Greater public participation in monitoring performance would also be beneficial Policies for extension of telecommunications and electricity service to unserved areas. UNELCO provides electricity only in four urban areas. Financial and institutional arrangements for extension of supply beyond these areas are in a state of flux. TVL extends service to rural areas on its own terms, rather than in compliance with a government policy Policies for supply of electricity to Luganville following 2010, and of telecommunications nationally following When the Luganville concession expires, government will need to decide whether to extend it, open it up to competition, or move to public supply. After the expiration of TVL s license in 2012 the government will need to decide on arrangements for continued provision of service, and consider whether to introduce competition to the sector The distinction between policy and regulation Of these tasks, only the first two are properly considered regulatory, while the second two are more in the nature of policy issues. There is no hard and fast line between policy and regulatory functions, but generally one can think of regulation as focused on enforcing the rules of the game, and policy as deciding on changes to the rules. Thus regulation includes things like setting tariffs in accordance with agreed procedures, while policy would include things like whether to extend or amend a contract, subsidize provision in rural areas, or open a sector up to competition. It is generally considered to be a good idea for regulatory and policy tasks to be allocated to separate agencies. Again, this is a guiding principle, not a hard-and-fast rule. Several regulatory agencies, such as the Federal Energy Regulatory Commission and the Federal Communications Commission in the USA, effectively develop and promote policy as well as 72

83 enforce regulation. In New Zealand, the Ministry of Commerce performed some utility regulatory functions as well as providing policy advice until recently. We considered whether in Vanuatu the small scale of the utilities and the lack of specialized staff would suggest that policy and regulatory functions should continue to be combined in a single body. One option would be to keep the regulatory functions within the Ministries, as at present. Another would be to create new utility regulatory bodies and give them policy responsibilities also. Although separating the functions would allow focus and sustained attention on managing the current contractual relations with the utilities, it seems unlikely that this would make full use of the time and skills of regulatory staff. Giving a single body responsibility for management of existing contracts as well as addressing new issues, such as how to extend service to new areas, would economize on human resource requirements, and assist the government in creating a cohesive approach to sector policies Summary of regulatory tasks With this distinction in mind, Table 5.1 summarizes the generic regulatory tasks to be carried out in each sector. They are categorized according to tasks which need to be done under the existing regulatory regime and proposed new regulatory tasks. Section 5.2 develops and analysis options for institutions to perform these tasks. Table 5.1 : Regulatory Tasks Electricity Water Telecommunications Existing regulatory and contract-management tasks Tariff monitoring Service standard monitoring Review reports from utility Tariff reviews Service standard reviews Radiospectrum management - - International Telecommunications Union relations - - Proposed new regulatory tasks Assist with customer service issues Monitor additional service standards Providing public access to information and allowing input Equipment standards - - Many of the regulatory tasks are basic supervision, such as checking that the tariff indexation formula is applied correctly, and auditing the utility s reports of performance against existing service standards. Infrequently, more difficult tasks such as recommending new tariff levels and structures will need to be performed, or new service standards agreed. These tasks require considerably more analytic skill and judgment. In telecommunications, there are also 73

84 specialized tasks of radio spectrum management (controlling who is allowed to use which parts of the radio spectrum) and liaising with the International Telecommunications Union. Our recommendations on additional regulatory powers include setting new services standards (especially in telecommunications) which would then need to be monitored. More importantly, we recommend a regulatory body to assist customers in resolving disputes which they are not able to settle directly with the utility. In telecommunications, control of the equipment which may be connected to the network is an additional regulatory task Summary of policy and ownership tasks Table 5.2 summarizes the major non-regulatory tasks which need to be carried out. A brief action list for policy work in the sector is provided in section 5.5. Table 5.2 : Policy and Ownership Tasks Policy tasks Set rural access-extension policies Decide on introduction of competition Contract amendments Decide on contract renewal Ownership tasks Sit on Board - - Ensure Shareholders agreement honored Designing a Regulatory Institution In this report we use the term Regulatory Institution to refer to the organization or organizations which carry out the regulatory tasks identified in the previous section. As Section discusses, this does not mean that the institution has to be a conventional regulator, in the sense of a body with discretionary powers to make decisions about tariffs and services. It can be a simply an arrangement which lets the government discharge its powers and obligations under the existing contracts and licenses effectively. We emphasize this because the arrangements governing service providers in Vanuatu are essentially contractual, rather than regulatory in the conventional sense. Tariff-setting rules for water and electricity are embodied in a contract, and key regulatory decisions such as period tariff reviews need the agreement of both parties (or go to arbitration in the event that the parties cannot agree). This is different from a conventional UK, US or Australian regulatory arrangement, in which the regulatory has a unilateral power to set tariffs at a review, and the utility has only limited appeal rights. The Vanuatu arrangement is similar to the French model of water regulation a model which is increasingly being seen as appropriate for network industries in developing countries. Box 5.1 gives an example of the 74

85 institutional arrangements recently adopted in Gabon to supervise a concession contract similar to those in place in Vanuatu. Box 5.1 : Contracted services for supervising a concession contract in Gabon In1997 a 20 year concession contract for the operations of water and electricity services throughout Gabon was signed between the government and the SEEG (Société d Energie d Eau du Gabon). When the contract was signed, the Government chose not to set up a regulatory body, largely because: Regulatory bodies are uncommon in Francophone legal contexts, in which regulation by contract is more common The separation between regulatory and policy-setting functions was viewed as difficult to achieve in Gabon It was feared that the creation of a new regulatory body would create extra costs and potentially result in a duplication of functions. Instead, contracting-out mechanisms were incorporated in the design of the contract. The aim of this measure was to strengthen the independence and competence of the Ministerial department (the DGERH - Direction Générale de l Energie et des Ressources Hydrauliques) in charge of effectively regulating the contract. Key regulatory functions that were required to be contracted out included the auditing of the financial accounts of regulated firms, the provision of legal opinions, and the monitoring of coverage performance, for which dedicated funds are set aside from the concessionaire s revenues. The Contracted-out studies required under the concession contract are non-binding but form the main information basis on which the DGERH calculates tariffs and makes other regulatory decisions. Overall, the contracting arrangements seem to have been a success. The hiring and monitoring costs have been reasonable, and have brought the DGERH better control over outcomes, lower costs and better quality of services. Another important benefit has been the improving of stakeholder trust in the DGERH. Furthermore, coverage targets are gradually being met or exceeded by the SEEG, indicating that strong incentives have been given to extend services in non-lucrative areas one of the aims specified in the privatization process. The main challenges that the DGERH has identified from their experience in contracting out have been the budgetary constraints and the difficulties in specifying performance variables, although both of these seem to have been overcome with a reasonable degree of success. However, it is envisaged that the volume of contracted-out services will decrease in the future, due to the completion of many initial activities and the desire of the DGERH to build in-house competence. Source: Environmental Resources Management Contracting Out Utility Regulatory Functions, Annex C. World Bank. Telecommunications service is governed by a license, which seems to make it more like UK or Australian regulation, but this apparent similarity is somewhat misleading, in that the statute governing telecommunications states that the license can only be changed with the consent of the utility, making it more like a contract. What this means is that the current regulatory regime reserves to the government the power to make key regulatory decisions, but also requires that many of those decisions be agreed with the utility, rather than simply imposed. In other words, the regime in Vanuatu is 75

86 properly thought of as regulation by contract, not regulation by a regulatory agency in the conventional sense. In designing institutions which work effectively in a contract-based regulatory regime, we think it is necessary to draw a distinction between three separate organizational functions: Analysis Decision-making Governance The relationship between these functions is illustrated in Figure 5.2. The reason for drawing this distinction is that in a conventional regulatory agency decision-making and governance are carried out by the same people, but in some of the arrangements which we believe might be appropriate in Vanuatu the functions are separated. Figure 5.2 : Three Components of a Regulatory Institution Decision Making Agree tariff Agree service standards Governance Ensure good quality analysis Preserve objectivity of analysis Ensure continuity and record keeping Effective Institution Analysis Review costs to determine efficient level Check application of tariff formula Check service standards being met Any regulatory agency needs an analytic capability. These are the people who check the calculations in the tariff formula, audit performance against service standards, or estimate efficient cost levels in a regulatory review. The analytic staff, (or consultants contracted in to do the analysis), provide their analysis to the decision-makers. This is commonly a Commission of independent, experienced people or a sometimes (in the UK model) a single Director-General. This body makes a decision based on the analysis provided. 76

87 In a conventional organization, the decision-making body is also the governance body. By governance we mean ensuring that the organization is remains objectives and effective, including through good recruitment procedures, auditing and financial management, recording keeping and development of a professional and self-sustaining corporate culture and institutional memory. As the following discussion demonstrates, in Vanuatu it makes sense to consider the possibility of separating somewhat the decision-making the governance functions. This separation allows us to preserve the government as decision-maker, as required by the contracts, while developing new approaches for the design of an analytic body with a professional, independent and sustainable corporate culture Spectrum of options There are many possible institutional arrangements. Figure 5.3 sets out a spectrum of options, starting from incremental improvements over the status quo at the left end of the spectrum, and culminating at the right end with a conventional regulator patterned after the a US Public Utility Commission, or the Essential Services Commission in Victoria. The options can be summarized and evaluated as follows: Ministries strengthened. Description. This option leaves the existing institutional structures unchanged, but adds additional regulatory capacity. In other words, as at present, the sector Ministry for each utility would be responsible for both policy and regulatory tasks. Officials in each Ministry would be charged with monitoring the utilities performance under the contracts and licenses, and advising the Minister on major issues such as proposal to reset tariffs. However, since the Ministries currently lack the capacity to carry out these functions effectively, they would be bolstered with additional analytic resources. This would include an internationally experienced expert being recruited to each Ministry, two or three additional locally-recruited staff in each ministry, and on-call consultancy expertise being available for the most specialized and demanding tasks, such as tariff review Evaluation. This model is not recommended. Its most obvious weakness is that it duplicates resources. There is not enough regulatory work to justify the number of staff this model requires. A better option would be to pull together all the regulatory tasks into a single unit. Since many of the skills required are similar for all three utilities, this would allow skills to be shared between regulating each of the entities. 77

88 Figure 5.3 : Spectrum of Institutional Options Current situation Increasing independence Ministries strengthened Government monitoring unit Independent monitoring unit Independent regulator Decisions Ministers Ministers Minister Board Governance Permanent Secretary Contracted directors Board Board Analysis Existing structure, plus: employ international experts in each Ministry; employ extra local staff; contract for additional expertise new unit monitors all contracts; international expert as manager; 2 local staff; customer service unit; contract for additional expertise new unit monitors all contracts; international expert as manager; 2 local staff; customer service unit; contract for additional expertise New autonomoous body with independent powers to set tariffs and service. Staffed as for independent monitoring unit Not recommended Worth considering Recommended Not recommended Lacks economies of scale and coherence Achieves efficiency and competence, consistent with contract Independent board likely to improve governance, otherwise same as previous Not consistent with water and electricity contracts. Difficult to ensure board makes good decisions. Government Monitoring Unit Description. This option pulls together all regulatory tasks into a single unit. The unit would need to be adequately resourced. This might amount to a single internationally-recruited expert, a couple of locally-recruited analytic staff, and an additional couple of locally-recruited staff for the customer service functions. The unit would also need on-call consultancy advice for more specialized work and for work peaks. The Monitoring Unit would report to the Ministers or Permanent Secretaries responsible for each sector. In other words, the unit would not be independent from Ministers. The rationale for creating it as a separate body would simply be to concentrate resources into a single entity, to allow for increased focus and effective use of skills. It would be financed by Government from tax revenue, like other parts of the civil service. 78

89 Evaluation. This model is worth considering. It would be an effective way to provide the skills necessary to carry out the regulatory functions. It would also continue the current structure of responsibilities in the sector, leaving Ministers responsible for regulatory decision-making and governance. However, this may be a weakness. Ministerial and Permanent Secretary responsibilities change rapidly in Vanuatu, while regulation of utilities requires continuity of staff, relationships and knowledge. It is also likely that competent staff reporting into Ministers or Permanent Secretaries will be asked to help with pressing policy and political matters, diverting their focus from management of the contracts. To avoid these possible weaknesses, we would recommend creating an alternative governance structure for the monitoring unit, to insulate it from short-term political exigencies. Independent Monitoring Unit Description. The staffing and resources for this option would be much the same as for the Government Monitoring Unit. The difference would be in the creation of a separate Board to oversee the Unit. We would recommend a three or five person Board. The Board members would be a mix of regulatory experts from the region, and respected senior private sector and public service figures. The Board would meet between one and four times a year. Its role would be to make decisions on appointment of staff and hiring of consultants, ensure the effective management of the analytic unit, and check advice before it went to Ministers. Decision-making on key regulatory issues such as tariff would remain with the Ministers, but routine regulatory tasks such as checking and enforcement of tariff indexation provisions could be delegated to the Board. If the recommendations on a public participation outlined in Section 5.3 are accepted, the Board would also oversee public hearings. The Independent Monitoring Unit would not be part of the civil service, and could be funded through a levy on utilities (which they would be entitled to pass on to customers). The recommendation to use regional regulatory experts on the panel is influenced by the success of the Vanuatu Court of Appeal (see Box 5.2) Evaluation. The advantage of the Independent Monitoring Unit over the Government Monitoring Unit is primarily in isolating the analysis and advice provided from day-to-day political and policy concerns. This may encourage greater focus and professionalism, and allow the unit to take more of a long-term view. Since the advice provided will be clearly politically independent, it may increase its authority and legitimacy with consumers and utilities. The disadvantages are the costs of a new Board, and the need for legislation to create it. Independent Regulator Description. Organizationally, this would be the same as the Independent Monitoring Unit, with an independent Board, a small number of analytic and customer service staff, and a consultants on call. It would be established by legislation, and funded by a levy on utilities. The difference between this and all the other options is that the unit would be given decision-making powers to set tariffs and service standards, making it a conventional regulator like those in the UK or USA. 79

90 Evaluation. We strongly recommend against this option. Creating an Independent Regulator with power to change tariffs and service standards would override the water and electricity concession contracts, which provide that such changes are to be agreed between the government and the utility, or subject to arbitration in the event that an agreement cannot be reached. Vanuatu has been well-served by the private companies which operate its utility services. It would be unwise to destabilize the relationship with these operators by unilaterally changing key provisions of the contracts under which they have invested in the country. Box 5.2 : Institutional Structure of The Court of Appeal in Vanuatu The Vanuatu Court of Appeal is useful model of institution which has achieved competence and independence, overcoming the difficulties of limited qualified staff and strong personal connections which influence most institutions in Vanuatu. Its success is in large part attributable to its use of judges from elsewhere in the region, as well as to the strengths of the Vanuatu Chief Justice, and the general regard for the rule of law in Vanuatu. The Court is currently comprised of Justice von Doussa from Australia, Justice Robertson from New Zealand and Justice Fatiaki from Fiji, all of whom are also required to be members of the Vanuatu Supreme Court. The judges are appointed to these positions by Vanuatu s President, on the recommendation of the Judicial Commission, currently chaired by Chief Justice Lunabek. There is no legal requirement that foreign judges be appointed to these positions, although traditionally this convention has been followed. Although in the past Court of Appeal judges were appointed for a short, specified term, all current members of the Court have served for at least five years and hold long-term positions, which has ensured a high degree of consistency and allowed Vanuatu s citizens to become accustomed to their presence and judicial approach. The Court convenes for a two week period twice per year, during which time its foreign members, sponsored by their home nations (but with some funding, including cost of travel and accommodation, provided by the government of Vanuatu) take residence in Port Vila. During sittings, one or two judges from the Vanuatu Supreme Court are regularly invited to join the judicial panel, in order to give them exposure to high-level decision-making. The presence of foreign judges in the Court is typical of judicial systems in the Pacific. Overseas judges currently serve in Tonga, Samoa and Fiji. Source: Castalia research and interview with Justice Robertson Recommended Options In conclusion, we recommend the creation of a small, dedicated Utility Contract Management Unit. This could be a unit within the civil service structure, or it could report to an Independent Board. In either case, the function of the unit would be to monitor and enforce routine compliance with the contract, and to advise the Government on major issues such as reviews of tariffs and service standards. Figure 5.4 summarizes the similarities and differences between the two options in terms of structure, while Table 5.3 summarizes the other major organizational design characteristics, such as staffing and funding. Both options have merit. At this stage we would recommend the Independent Contract Management Unit, as being more likely to provide advice and decisions which are widely recognized as competent, objective and legitimate. 80

91 Figure 5.4 : Structure of Shortlisted Options Government Monitoring Unit Ministerial Panel 3 members, e.g.: Minster for water or P.S.; Minister for Electricity or P.S.; Minister for Telecommunications or P.S. Independent Monitoring Unit Board 3-5 members, including.: Regional regulatory specialist; Chamber of commerce nominee; Government nominee Director Director Customer service unit 2 staff Analysis Unit 2 staff Consultancy firm on framework contract Customer service unit 2 staff Analysis Unit 2 staff Consultancy firm on framework contract 81

92 Table 5.3 : Institutional design details Government Contract Management Board Independent Contract Management Board Role Staff Analytic Support Decisionmakers Tariff Indexation - Check that formula is applied correctly Service Standards - monitor and enforce Customer complaints dealing with complaints cannot resolve directly with the utilities Tariff reviews and other contractual adjustments - Advise Ministers, assist in developing Government s negotiating position 1 Director, with international experience 1-3 Analytic Staff 1 3 Customer Service Staff External consultancy on framework contract to: provide quality assurance on staff s work; train staff; carry out specific monitoring and enforcement tasks; take the lead on major regulatory issues such as tariff and service review Ministers on advice of Unit Governance Sector Ministers and/or Permanent Secretaries As at left, except in Tariff reviews and other contractual adjustments the emphasis would be on developing a fair and objective recommendation to serve as a central point for negotiations, rather than on assisting the Government in negotiation As at left, but with an experienced independent Board there might be less need for an internationally-experienced director. As at left Routine issues (e.g. enforcement of tariff indexation and service standards) delegated to Board. Major issues (e.g. tariff and service standard reviews) decided by Ministers on advice of Board Independent 3 to 5 member Board Appointed by Prime Minister after consultation with Leader of the Opposition. Qualification requirements. 1 Member appointed from Government 1 Member nominated by Chamber of Commerce 1 Member to a regionally-recognized regulatory expert Funding Government funding Levy on utilities, which may be passed on to customers 82

93 5.3 Public Participation Our analysis has shown that utility services in Vanuatu are relatively good, and that the contracts governing service are reasonably well designed. Despite this there is a fair degree of suspicion among residential consumers as to whether or not they are getting a fair deal. The fact that the Government has the powers to monitor performance and enforce the contracts with the utilities does not necessarily overcome this suspicion, partly because people are not well aware of the regulatory arrangements, and partly because people believe that individuals or agencies in governments may do deals with the utilities to favor the utilities interests over those of the consumers. In other words, the current system has less popular legitimacy than one would like. International experience shows that a good way to achieve legitimacy is to be open with affected parties and involve them in the decision-making. The US regulatory system is particularly strong in this regard, with its public hearings in which the utility has to make a case for a rate increase or other change in public, and any one affected can be present and ask questions or object. We would recommend greater openness and public participation in regulatory matters in Vanuatu. This could include allowing the public to attend meetings between the utilities and Utility Contract Management Unit, and to ask questions. These meetings would include: Annual reviews of performance compared to service standards Annual reviews of the application of tariff indexation formulae Hearings on tariff or service standard adjustments, when these take place As Independent Contract Management Unit might find it easier to organize and preside over such meeting than a Government body would. 5.4 Regional Regulatory Co-operation Vanuatu s small size makes it difficult for the country to resource institutions such as regulatory body, which require specialist technical skills. Regional cooperation is one way to overcome this problem. Regional regulatory cooperation has worked well in telecommunications among the countries of the Eastern Caribbean, as Box 5.3 describes. It may be sensible to move toward a Pacific regulatory agency in time. However, it would take some years to establish such an entity. Moreover, there is relatively little private participation in utility service in the Pacific, so governments in the region may not see a need to establish regulatory agencies. We would not recommend that Vanuatu hold up its own regulatory reform program while these issues are resolved. For the present, we recommend that the Vanuatu take advantage of regional and international regulatory expertise by: 83

94 Appointing at least one regionally-recognized utility regulation expert to its Contract Management Board Considering recruiting internationally for the head of the Utility Contract Management Unit Contracting with an internationally recognized consulting firm to provide analytic support to the Utility Contract Management Unit. Box 5.3 : ECTEL Regulatory Cooperation in the Eastern Caribbean The Eastern Caribbean Telecommunications Authority (ECTEL) was established as a regional telecommunications regulatory advisory body by the Governments of five Eastern Caribbean states (Dominica, Grenada, St Kitts and Nevis, St Lucia and St Vincent and the Grenadines). Its primary objective is to assist national telecommunications regulators in promoting market liberalization and competition in telecommunications in the member countries. ECTEL s responsibility is to coordinate the approach to telecommunications regulation in each member state. It works closely with telecommunications regulators and governments in each state, advising them on metters relateing to the sector including: regional policy, types of telecommunications services, licensing, fees, pricing, management and provision of universal service. The National Telecommunications Regulatory Commissions (NTRC) are the telecommunications regulators in each of the five member states. Each of these Commissions has five commissioners appointed by the Minister as well as varying levels of technical staff. ECTEL advises on regulatory decisions affecting the member countries but the final decision and its implementation falls to the NRTCs. The following diagram illustrates the ECTEL s structure (left) and its relationship with the NTRCs: Council of Ministers Board of Directors Directorate/ Secretariat NTRC St Lucia NTRC St Vincent NTRC St Kitts & Nevis NTRC Dominica Council of Ministers: This group is made up of the Ministers responsible for telecommunications in the ECTEL states and the Director General of the OECS. Board of Directors: One member from each member state appointed by the Minister for a year Directorate/Secretariat: Managing Director, Professional, Technical and Support Staff ECTEL has had a significant impact on telecoms liberalization in the NTRC Grenada member countries. It has helped to bring about procedures for setting cost based tariffs and interconnection, a significant reduction in tariffs and overseas telephone charges and increased interest in applying for licenses from international operators. The principle of regional cooperation in regulation has enabled ECTEL member countries to manage scarce resources efficiently and leverage the inter-member country networks efficiently resulting in increased flexibility. ECTEL s existence has provided a basis for a strong, unified approach to attracting investment and competition into the region. Rates for telecommunications services have begun to fall, applications for operating licenses are being processed and applications for the establishment of call centers have been received. Where possible, ECTEL endeavors to enact identical regulations in member states and to implement them consistently. This has reduced the burden on individual regulators and has helped to attract investment. 84

95 5.5 Resolving Policy Issues In addition to the regulatory issues described above the Government needs to urgently develop policies on: Extension of service in rural areas What to do when the Luganville Electricity Concession and the TVL Telecommunications license expires, and whether to introduce competition in utility and telecommunication services in the future. In order to enhance coordination in sector decision making, and make efficient use available skills and expertise, we recommend that the Government give responsibility for sector coordination and policy advice to the Contract Management Unit, effectively creating a Utility Contract Management and Policy Unit (UCMPU). Aside from monitoring and enforcing the electricity and water concessions and the telecommunications contract, the UCMPU could also advise the Government with regards to the development of relevant sector policies and regulations. To be efficient, it is recommended that the UCMPU would subsume the function of the Government bodies currently supervising these areas, including the Energy Unit and those staff in the Ministry of Infrastructure with responsibilities for telecommunications. 5.6 Summary Although several regulatory options are possible, we recommend the creation of a small, dedicated Utility Contract Management and Policy Unit (UCMPU) to perform the required regulatory tasks and help coordinate sector policies. The benefit of this being an independent unit is that it would be likely to provide advice and decisions which are widely recognized as competent, objective and legitimate. The UCMPU s responsibility for both regulation and policy advice will enhance coordination in sector decision making, and make efficient use of the skills and expertise of UCMPU members. The UCMPU could be charged with monitoring and enforcing the electricity and water concessions between the Government of Vanuatu and UNELCO, and the telecommunications contract between the Government of Vanuatu and Telecom Vanuatu (TVL). In particular, the UCMPU could be responsible for monitoring tariffs and ensuring these are set at a fair and reasonable level in accordance with the contract, ensuring service standards specified in the contracts are adhered to, and advising the Government with regards to the development of relevant sector policies and regulations. To be efficient, we recommend that the UCMPU subsume the function of the Government bodies currently supervising these areas, including the Energy Unit and those staff in the Ministry of Infrastructure with responsibilities for telecommunications. Ideally, the UCMPU would consist of 3-5 members, who would also need consultancy advice during set-up of the UCMPU and on an on-call basis, for more specialized work and for work peaks. The UCMPU would report to an Independent Board of three to five 85

96 members. The Board members could be respected senior private sector and public service figures, headed by an international regulatory expert. The envisaged duties and operations of this unit would include: Tariff Indexation checking that formulas are applied correctly Service Standards setting standards for telecommunications; monitoring and enforcement of service standards for water, electricity and telecommunications Customer protection setting customer service standards (such as the speed with which customer complaints must be resolved); monitoring and enforcement; dealing with complaints that cannot be resolved directly with the utilities Tariff reviews and other contractual adjustments developing fair and objective recommendation to serve as a central point for negotiations In addition to these key duties, it is recommended that the UCMPU take on responsibility for policy development in the telecommunications, electricity and water sectors, including urban and rural areas. The UCMPU would also be responsible for ensuring information is reliably stored and appropriately disseminated, and would co-ordinate with other Government departments, such as the Ministry of Finance, where appropriate. 86

97 6 Action Plan In a meeting with Government officials following the presentation of the findings of the draft report on 19 April 2005, an outline Action Plan was discussed. This is illustrated in Figure 6.1. The Action Plan involves four key phases: Approval of preferred option (Utility Contract Management and Policy Unit) Finalization of a Draft Policy Paper for presentation to the Council of Ministers Deliberation by Cabinet and ruling on option Implementation of UCMPU It is hoped that the first three phases will be completed before Cabinet recesses in July 2005, in order to speed development of effective contract management and enable potential PPIAF funding to be operationalized. The actual implementation of the option will take some time, and will include the initial framework design, recruitment of board and staff, and ongoing capacity building. If each of these processes proceeds efficiently, the new contract management unit could become operational in late During the 19 April meeting, the group also discussed the likely budget requirements for setting up a Utility Contract Management and Policy Unit (UCMPU). Estimates of costs were used in preparing a Draft Policy Paper, which has been reproduced in Annex C: Draft Policy Paper. This paper also sets out recommended next steps for the Council of Ministers, including instructions to the Ministry of Finance, the Ministry of Lands, the Ministry of Infrastructure and the State Law Office with regards to their involvement in the investigation and creation of a Unit responsible for contract management and sector policy. A summary of the estimated costs of such a Unit is presented in Table 6.1. Initial estimates indicate that the UCMPU would cost 45.5 million Vatu in its initial year, decreasing thereafter, with an additional cost of around 16.5 million Vatu for each tariff review. It is likely that the majority of the set-up costs could be financed with donor assistance - PPIAF already has US$150,000 available in principle for such support - and operating costs could be financed by a levy on utilities (although this would add around 1% to 1.5% to the average utility bill). Accordingly, the net costs to Government could be negligible, whilst benefits would include improved efficiency in tariff levels, improved reliability and quality of service provision, improved transparency in utility operation and government relationships with utilities and improved customer satisfaction, amongst others. It should be noted that these are only indicative costs - if the Government approves the development of the UCMPU, more detailed investigation of the expenses involved will be necessary. Such investigation would also involve careful consideration of, and potential modifications to the unit structure suggested in this report. 87

98 Figure 6.1: Proposed Action Plan Approve short-listed options Policy paper Cabinet Decision Implementation of option structure and legal framework design law to establish UCMPU appointment of Board Members appointment of UCMPU staff training Action Responsible Parties Consultations led by DESP Led by DESP/MOF with MIPU Cabinet TA Program (WB / PPIAF) with Government of Vanuatu May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 88

99 Table 6.1: Outline of Expected Unit Costs Ongoing Costs (annual) Year One Year Two Year 3 onwards Outsourced work Tariff Indexation Rules review 1,000,000 1,000,000 1,000,000 Service Standards audit report 1,500,000 1,500,000 1,500,000 Financial Reporting templates + mangement 1,500,000 1,500,000 1,500,000 Training 4,000,000 4,000,000 4,000,000 Contingency 1,500,000 1,500,000 1,500,000 Travel expenses 2,500,000 2,500,000 2,500,000 12,000,000 12,000,000 12,000,000 Unit Staff Manager 1,500,000 1,500,000 1,500,000 Analyst 1 1,400,000 1,400,000 1,400,000 Analyst 2 1,200,000 1,200,000 1,200,000 Support 900, , ,000 Consumer complaints 1,000,000 1,000,000 OVERHEADS 5,000,000 6,000,000 6,000,000 10,000,000 12,000,000 12,000,000 Board Members member 1 100, , ,000 member 2 100, , ,000 member 3 100, , ,000 member 4 100, , ,000 Chair (including travel) 3,600,000 3,600,000 3,600,000 4,000,000 4,000,000 4,000,000 Total costs of routine operations 45,500,000 35,500,000 28,000,000 Setup Costs Recruitment and setup 1,500,000 5,000,000 Tariff Indexation Rules review 500,000 Service Standards set 3,000,000 audit report 1,500,000 Financial Reporting templates + mangement 2,000,000 1,000,000 Customer service set standards + implement 5,000,000 Public Relations 1,500,000 1,500,000 Training 2,500,000 17,500,000 7,500,000 0 Special Costs Tariff review (each; 5 yearly) advise 10,000,000 implement 5,000,000 communication 1,500,000 16,500,000 89

100 Annex A: Glossary of Abbreviations 3G ADSL ADF Capex CPE E1 EBITDA ECTEL ESA GDP GSM HDI IP ISP KPI LMDS MMDS NTRC OECS Opex PPP PSTN SIO SME SOHO TVL UN VAT VHF VoIP VSAT Third generation mobile Asymmetric digital subscriber line Agence Française de Développement Capital expenses Customer premises equipment A signal format that carries data at a rate of 2Mbit/s and can carry 32 channels of 64kbit/s each Earnings before interest, tax, depreciation and amortization Eastern Caribbean Telecommunications Authority Exchange service area Gross domestic product Global system for mobile communication Human development index Internet protocol Internet service provider Key performance indicator Local multipoint distribution system Microwave multipoint distribution system National Telecommunications Regulatory Commissions Organization of Eastern Caribbean States Operating expenses Purchasing power parity Public switched telephone network. Service in operation Small to medium enterprise Small office home office Telecom Vanuatu Limited United Nations Value added tax Very high frequency Voice over IP Very small aperture terminal 90

101 3G ADSL ADF Capex CPE E1 EBITDA ECTEL ESA GDP GSM HDI IP ISP KPI LMDS MMDS NTRC OECS Opex PPP PSTN SIO SME SOHO TVL UN VAT VHF VoIP VSAT Third generation mobile Asymmetric digital subscriber line Agence Française de Développement Capital expenses Customer premises equipment A signal format that carries data at a rate of 2Mbit/s and can carry 32 channels of 64kbit/s each Earnings before interest, tax, depreciation and amortization Eastern Caribbean Telecommunications Authority Exchange service area Gross domestic product Global system for mobile communication Human development index Internet protocol Internet service provider Key performance indicator Local multipoint distribution system Microwave multipoint distribution system National Telecommunications Regulatory Commissions Organization of Eastern Caribbean States Operating expenses Purchasing power parity Public switched telephone network. Service in operation Small to medium enterprise Small office home office Telecom Vanuatu Limited United Nations Value added tax Very high frequency Voice over IP Very small aperture terminal 91

102 Annex B: UNELCO Tariff Schedule Electricity (for January 1 March 31, 2005) Base Price = P = Vatu (all fees calculated as fixed proportion of P) Customer Type Tariff (per kwh) Fixed Fee (per kva) Advance Fee Low Voltage Residential a) up to 60kWh/month b) kwh/month c) more than 120 kwh / month a) b) c) Low Voltage Commercial per kva Sports Grounds Public Lighting Low Voltage Other Uses per kva Intermediate Voltage per kva 92

103 Water (for January 1 March 31, 2005) Base Price = P = Vatu (all fees calculated as fixed proportion of P) Advance fees Gauge m 3 Advance Fee Subscription 15mm mm mm mm mm Above 40mm Vatu per m 3 for each consumption block (per quarter year) 1-50 m m m > 201 m

104 Annex C: Draft Policy Paper COUNCIL OF MINISTERS (COM) Jointly Tabled by: The Hon. Deputy Prime Minister Carlo Korman, Minister of Infrastructure and Public Utilities The Hon. Minister Paul Teluluk, Minister of Lands and Natural Resources The Hon. Minister Moana Kalsoil Carcasses, Minister of Finance and Economic Management Subject: Utility Contract Management and Policy Unit Purpose: This paper seeks COM approval to proceed with the establishment of a Utility Contract Management and Policy Unit (UCMPU). The UCMPU would be charged with monitoring and enforcing the electricity and water concessions between the Government of Vanuatu and UNELCO, and the telecommunications contract between the Government of Vanuatu and Telecom Vanuatu (TVL). In particular, the UCMPU would be responsible for monitoring tariffs and ensuring these are set at a fair and reasonable level in accordance with the contract, ensuring service standards specified in the contracts are adhered to, and advising the Government with regards to the development of relevant sector policies and regulations. It is envisaged that the UCMPU would subsume the function of the Government bodies currently supervising these areas, including the Energy Unit and those staff in the Ministry of Infrastructure with responsibilities for telecommunications. Background: The Government of Vanuatu has awarded contracts for the provision of telecommunications, water and electricity services to private operators. These contracts delegate the exclusive responsibility for the provision of water and electricity services in Port Vila, and electricity services in Luganville, Tanna and Malikula to UNELCO, and telecommunications services in nationwide to TVL. The contracts specify rules regarding service coverage, the quality of service to be provided, and the maximum tariffs that may be charged for these services. As the counterparty to each of these contracts, the Government has responsibility for monitoring both utility companies compliance with the contractual provisions. 94

105 Although this arrangement has provided urban areas of Vanuatu with good quality and reliable utility services, the Government has expressed dissatisfaction with a number of features: The Government s ability to apply the regulatory rules in the contracts The lack of public information and transparency The lack of communication between Government departments currently overseeing utility services The high tariffs for utility services. Accordingly, various options for addressing these shortcomings and strengthening utility regulation in Vanuatu have been evaluated with the support of PPIAF-funded Technical Assistance project organized by the World Bank. The project s evaluation of the telecommunications, water and electricity sectors and available regulatory options is presented in the attached report. Structure of Recommended Utility Contracts Management Unit Having analyzed this report, Government officials now recommend the creation of a UCMPU, which would pull all regulatory tasks into a single body. The UCMPU would consist of 3 5 members, including: 1 Director 1-2 Analysis Support staff 1-2 Customer Service staff These staff would also need consultancy advice during set-up of the UCMPU and on an oncall basis, for more specialized work and for work peaks. The UCMPU would report to an Independent Board of three to five members. The Board members could be respected senior private sector and public service figures, headed by an international regulatory expert. The Board would meet between one and four times a year. Its role would be to make decisions on appointment of staff and hiring of consultants, ensure the effective management of the analytic unit, and check advice before it went to Ministers. Decision-making on key regulatory issues such as tariff could be delegated to the Board by Ministers, with Minister retaining a right to review and approve the decision. Routine regulatory tasks such as checking and enforcement of tariff indexation provisions, and overseeing public hearings, could be fully delegated to the Board. Duties of Recommended Utility Contracts Management Unit The envisaged duties and operations of this unit would include: Tariff Indexation checking that formulas are applied correctly Service Standards setting standards for telecommunications; monitoring and enforcement of service standards for water, electricity and telecommunications 95

106 Customer protection setting customer service standards (such as the speed with which customer complaints must be resolved); monitoring and enforcement; dealing with complaints that cannot be resolved directly with the utilities Tariff reviews and other contractual adjustments developing fair and objective recommendation to serve as a central point for negotiations In addition to these key duties, it is recommended that the UCMPU take on responsibility for policy development in the telecommunications, electricity and water sectors, including urban and rural areas. The UCMPU would also be responsible for ensuring information is reliably stored and appropriately disseminated, and would co-ordinate with other Government departments, such as the Ministry of Finance, where appropriate. Financial Implications: The UCMPU would be an autonomous agency, not part of the core civil service, and would not need to be funded by the Government. It would be possible to fund the UCMPU through a levy on utilities (which they would be entitled to pass on to customers). Initial estimates of the cost of set-up and routine operations for a UCMPU are as follows: Vatu ('000) Year 1 Year 2 Year 3 onward Ongoing costs Costs of Unit Staff 12,000 12,000 12,000 (annual) Costs of Board ,000 4,000 Costs of Consultants 12,000 12,000 12,000 Set-up costs 17,500 7,500 0 Total costs of routine operations 45,500 35,500 28,000 Non-routine tasks would be performed periodically, and would have additional costs, in particular for consulting assistance. The main non-routine task would be tariff reviews, which we expect would be required once every five years for each of the utilities. The estimated additional cost per tariff review is 16.5 million Vatu. It is expected that the majority of the set-up costs could be financed with donor assistance. PPIAF already has US$150,000 available in principle for such assistance. Operating costs could be financed by a levy on utilities. Therefore the net costs to Government could be negligible. However, it is likely that a levy to cover the running costs of the unit would add around 1% to 1.5% to the average utility bill. The COM will need to satisfy itself that the benefits for customers of such a unit outweigh this cost. The benefits of the unit are less readily quantifiable, but include the following: Improved efficiency in tariff levels Improved reliability and quality of service provision Improved transparency in utility operation and government relationships with utilities Improved customer satisfaction Decreased information search costs 96

107 Decreased costs of supporting Energy Unit and staff from the Ministry of Infrastructure involved in telecommunications Improved investment and business climate These potential benefits have been evaluated to outweigh the costs of establishing and maintaining the UCMPU. Consultation: The following departments were consulted in the development of these recommendations: Ministry of Infrastructure and Public Utilities Ministry of Lands and Natural Resources Ministry of Finance and Economic Management State Law Office Energy Unit Department of Economic and Sector Planning Department of Strategic Management Department of Trade and Industry Prime Minister s Office Legal Implications: New legislation will be required to officially form the Utility Contract Management and Policy Unit and provide it the necessary authority to oversee the relevant contracts. In particular, the UCMPU will need to be clearly politically independent, in order to encourage greater focus and professionalism amongst its members, allow the UCMPU to take more of a long-term view and increase its legitimacy with consumers and utilities. Recommendations: COM is requested to: Agree to establish a Utility Contract Management and Policy Unit which will take on responsibility for the management and enforcement of contracts and licences for the provision of electricity, water and telecommunications services as outlined in this paper Instruct the State Law Office to prepare a Bill to establish such a Unit Instruct the Ministry of Finance to o Liaise with the World Bank / PPIAF and other donors to seek further assistance in development of the Unit o Co-ordinate the development of the Unit with Ministry of Lands, Ministry of Infrastructure and State Law Office 97

108 o Prepare more detailed estimates of the costs of the unit, and how these could be financed from off-setting savings elsewhere in Government, and contributions from the utilities Instruct the Ministry of Finance and the State Law Office to jointly report back to COM by [date] with details of the Draft Bill, costings, roles, responsibilities and staffing of the unit 98

109 Annex D: List of Legislation, Contracts and other Documents Date Document Title Signatories / Author Description Electricity 1941 The Port Vila Electrical Act Government of Vanuatu 15 August 1986 Convention relating to the Concession for the Generation and Public supply of electric power in Port-Vila 15 August 1986 Specifications relating to the Concession for the Generation and Public supply of electric power in Port-Vila 23 April 1987 Joint venture agreement, plus subsequent amending agreement, about hydroelectric project on the Teoumea Laws of the Republic of Vanuatu Revised edition, 1998 Chapter 65: Electricity Supply The Government of Vanuatu UNELCO VANUATU The Government of Vanuatu UNELCO VANUATU The government of Vanuatu UNELCO VANUATU Constitution of the Republic of Vanuatu Defines the terms of the concession made by the government of Vanuatu to the limited company UNELCO VANUATU, to have the right to generate and supply electrical energy to the public for all purposes. Modification, that specifies that the parties agree upon meeting in order to work on eventual modifications. Agreement and amending agreement deal with a hydroelectric project on the Teoumea and later with authorizing UNELCO to co-operate with SEDEP and extending the agreement to further sites. Laws of the Republic of Vanuatu concerning the electricity supply in the country. 11 August 1989 Co-operation agreement UNLECO SEDEP (Société d Etude et de développement Electro-Techinque Polynésienne Dated 13 September 1989 but addressed to the Prime minister UNELCO Memorandum UNELCO Contains an offer to the government of shares in 99

110 on 20 September UNELCO. 23 January 1990 UNELCO Shareholders Agreement The Government of Vanuatu UFINER (Union Financier pour l Industrie et l Energie) 23 January 1990 The Hydro Power Development (HDP) Shareholders Agreement 23 January 1990 Amendment # 1 to the Convention dated 15 th August 1986 relating to the Concession for the Generation and Public supply of electric power in Port- Vila 23 January 1990 Convention relating to the Concession for the Generation and Public supply of electric power in Luganville 30 April 1990 Deed of assignment of the Luganville Concession.? Prolongation agreement for the Luganville Concession The Government of Vanuatu UNELCO SEDEP The Government of Vanuatu UNELCO VANUATU The Government of Vanuatu Compagnie Electrique de Santo Ltd. (C.E.S.) The Government of Vanuatu Compagnie Electrique de Santo Ltd. (C.E.S.) UNELCO VANUATU The Government of Vanuatu Compagnie Electrique de Santo Ltd. (C.E.S.) Deals with the parties capacity as shareholders in HDP. Amendment that extends the concession by 10 years. Defines the terms of the concession made by the government of Vanuatu to the limited company C.E.S., to have the right to generate and supply electrical energy to the public for all purposes. Transfer of the Luganville Concession,, from CES to UNELCO. Prolongation of Luganville Concession until

111 UNELCO VANUATU 1 July 1990 (date to come into force) Amendment # 2 to the Convention dated 15 th August 1986 relating to the Concession for the Generation and Public supply of electric power in Port- Vila The Government of Vanuatu UNELCO VANUATU Modifies the prices set up in March 1995 Addendum to the Contract of Concession for the Generation and Public Supply of Electric Power in Luganville Relating to the handing over of the Sarakata Electric Power Station Government of Vanuatu UNELCO Vanuatu Ltd Governs responsibilities for the operation of the Sarakata hydro-electric power station, and treatment of the resulting savings in power generation costs 25 September 1997 Agreement Varying Concession Government of the Republic of Vanuatu The Honorable Minister of Lands Geology, Mines, Energy and Rural Water Supply Amends previous electricity concession contract for Port Vila in light of decision to construct a new power station for Port Vila Union Electrique de Vanuatu Ltd 2000 Electricity Supply (Amendment) Act No.21 of 2000 (Summary only) 2000 Electricity Supply (Amendment) Act No.21 of 2000 (Summary only) 2002 UNELCO annual report 2002 UNELCO 24 September 2002 (mail) UNELCO Calculation for the electricity tariffs applicable for the period from 1 January to 32 March

112 24 December 2003 Advice Crown Solicitor s Office Vanuatu utilities contracts: electricity concessions 18 March 2004 (mail) UNELCO Calculation for the electricity tariffs applicable for the period from 1 April to 30 June (2004)? Establishment of a national Energy Corporation Water 1988 Laws of the Republic of Vanuatu Revised edition, 1998 Chapter 24: Water Supply 1993 Water Supply (amendment) Act No.28 of Water Supply (amendment) Act No.9 of December 1993 Contract for the Management and operation of the water supply service in Port Vila. Document 1: Limits of the contract, Schedule of conditions. Document 2: Transitory Provisions and (Government of the Republic of Vanuatu) Constitution of the Republic of Vanuatu Government of Vanuatu UNELCO Vanuatu Ltd. Project submitted to the Council of Ministers for establishment of a national Energy Corporation Laws of the Republic of Vanuatu concerning the water supply in the country. Amendment of section 22 of chapter 24 Insertion of new part III: Agreement or contract for the provision, development, management and maintenance of water supply within area of concession, in chapter 24. Terms of the contract that delegates to UNELCO the management and operations of Water supply Services of Port Vila. 102

113 Appendices Document 3: Subscription policy and specimen subscription agreement for the water supply service in Port Vila Water Resources Management Act No.9 of 2002? A case study of the Privatization of Port Vila Telecommunications 1 June 1989 The Telecommunication Act No. 10 of November 1992 Shareholders Agreement, relating to Telecom Vanuatu Limited John Chaniel, UNELCO Vanuatu Ltd. Government of Vanuatu Société France Cables et Radio (FCR) Cable and Wireless Public Limited Company (CWPLC) Case study that chows how a particular model of a Concession Contract can be; and has been, a successful option for the supply of urban water in a small island country. Constitution, objects, Regulatory Powers and Functions of the Telecommunications Authority, Licensing of telecommunication system, Shareholders agreement signed between the government of Vanuatu, FCR and CWPLC for the merger of Vanitel Ltd and National Telecommunications of Vanuatu Ltd, and the creation of a private company, Telecom Vanuatu Ltd. 20 November 1992 Franchise Agreement The government of the republic of Vanuatu Telecom Vanuatu Limited (TVL) Exclusive franchise granted to Telecom Vanuatu Limited to provide Public Telecommunication Services to the Republic of Vanuatu Amendment Agreement to Shareholders agreement Government of Vanuatu Société France Cables et Radio This amendment modifies the 1992 Shareholders agreement signed between the government of Vanuatu, FCR and CWPLC. 103

114 28 October 2002 PPT presentation of Telecom Vanuatu Ltd. 31 March 2002 Telecom Vanuatu Limited Financial Statements for the year ended 2003 Bill for the Telecommunications Amendment Act No. of Arrangement of Sections 2 December 2003 Advice. Vanuatu utilities contracts: TVL license. Other (FCR) Cable and Wireless Public Limited Company (CWPLC) Telecom Vanuatu Ltd (TVL) Telecom Vanuatu Limited (TVL) Crown Solicitor s Office This amendment modifies certain provisions of the Shareholder s Agreement which were not consistent with the Franchise Agreement Brief presentation of the company, its activity, its main objectives An Act to amend the Telecommunication Act No. 10 of Analyze of the terms of the Franchise contract between the government of Vanuatu and TVL The Price Control Act Establishes a Price Control Bureau that ensures compliance with price control legislation and verifies and reports on infringements Laws of the Republic of Vanuatu Revised edition, 1998 Constitution of the Republic of Vanuatu Whole document. Non-legal documents used in preparation of the report December 1999 Vanuatu Household Income and Expenditure Survey. Vanuatu Statistics Office Tabulation report

115 December 2000 The 1999 Vanuatu National Population and Housing Census National Statistics Office National Accounts of Vanuatu Budget Budget Budget 2004 Fiscal Strategy Report. Volume Program Budget Estimates. Volume 2/ Tome 2. Program Budget Narrative, Volume 3. Statistics Office Government of the Republic of Vanuatu Government of the Republic of Vanuatu Government of the Republic of Vanuatu 105

116 Annex E: Telecommunications Price Benchmarking We have taken into account different charging methods used by different operators. Some of the different methods of charging for calls include: Peak and off-peak rates versus a flat rate over all time periods (many different time definitions occur and some operators use as many as five time periods) Charging per second versus charging per pulse (different pulse lengths can be found in use) The inclusion or not of a call set-up fee Call rates dependent on the destination of the call Call rates dependent on the level of usage during a billing month. Overview Fixed lines The following telecommunication charges are compared for both standard residential and standard business plans: Line rental charges per month Peak and off-peak local call prices for call durations of three, six, ten and 30 minutes Peak and off-peak national calls of 40 km distance for the call durations above Peak and off-peak national calls of 550 km distance for the same call durations. Mobile lines Prices for the following mobile services are compared: Monthly rental for the standard postpaid plan Peak and off-peak prices for calls from postpaid and prepaid customers to: Fixed lines Mobiles within the same network Mobiles on another network. 106

117 Ranking of TVL fixed line prices Monthly rental charges Fixed monthly rentals were available for nine of the 13 countries sampled. TVL s monthly rental ranks the third highest for residential customers (Figure E.1), but is in the middle of the range of rentals for business customers (Figure E.2). TVL does not charge different prices for residential and business customers both pay a monthly rental of VUV Telecom New Zealand Telstra TVL Figure E.1: Monthly rental residential [Source: operators, Network Strategies] PLDT Telekom Malaysia Sri Lanka Telecom Telkom Indonesia Tonga Telecom Telikom PNG Vatu 107

118 Telecom New Zealand Telstra PLDT Sri Lanka Telecom Figure E.2 : Monthly rental business [Source: operators, Network Strategies] TVL Telekom Malaysia Tonga Telecom Telikom PNG Telkom Indonesia Vatu Charging methods for fixed calls Table E.1 compares the different charging methods of the fixed operators in our sample. Local calls are free in the Philippines and for residential customers in New Zealand. Customers in Fiji, Samoa, the Philippines and businesses in Australia pay a flat rate all day every day for all fixed calls. Indonesia, Malaysia, Papua New Guinea, Sri Lanka, and Vanuatu apply a charge per pulse, with pulse lengths ranging from seven seconds to nine minutes. Sri Lanka allows a certain number of pulses free each month, then applies a per pulse charge which decreases with increasing monthly usage. Australian customers and New Zealand residential customers have capped national call charges at certain times of day. 108

119 Table E.1 : Methods used to vary fixed call rates Fixed operator Free Time of Pulse Set-up Monthly Capped local calls day charging fee usage calls Telstra residential Telstra business 1 Fiji Telecom Telkom Indonesia Telkom Malaysia 1 1 Telecom New Zealand residential 1 1 Telecom New Zealand business Telekom PNG 1 1 PLDT Telecom Samoa Sri Lanka Telecom Tonga Telecom TVL 1 Applies to national calls only. [Source: Network Strategies] Local call charges Fixed call tariffs were available for 11 countries. TVL has the most expensive local call charges for both peak and off-peak calls and for all customers. Only Telstra in Australia and Telecom New Zealand differentiate local call charges between residential and business customers. Telecom New Zealand provides unmetered local calls to home lines but charges businesses. Telstra charges both residential and business customers an untimed per call charge, with business local calls charged at a lower rate. Most of the sampled operators charge a flat rate per minute for local calls, regardless of the time of day. Five operators provide cheaper rates for off-peak times: Telkom Indonesia, Sri Lanka Telecom, Tonga Telecom, TVL and Telecom New Zealand (business only). Figure E.3 and Figure E.4 show the residential local call prices for peak and off-peak respectively. Figure E.5 and Figure E.6 show peak and off-peak prices for businesses respectively. 109

120 Figure E.3 : Residential peak local calls TVL Sri Lanka Telecom Tonga Telecom Telkom Indonesia Telekom Malaysia Telstra Telikom PNG Fiji Telecom Telecom Samoa Telecom New Zealand Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes PLDT Vatu [Source: operators, Network Strategies] Figure E.4 : Residential off-peak local calls TVL Tonga Telecom Telekom Malaysia Telkom Indonesia Sri Lanka Telecom Telstra Telikom PNG Fiji Telecom Telecom Samoa Telecom New Zealand Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes PLDT Vatu [Source: operators, Network Strategies] 110

121 Figure E.5 : Business peak local calls TVL Tonga Telecom Telekom Malaysia Telkom Indonesia Telecom New Zealand Sri Lanka Telecom Telstra Telikom PNG Fiji Telecom Telecom Samoa Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes PLDT Vatu [Source: operators, Network Strategies] Figure E.6 : Business off-peak local calls TVL Sri Lanka Telecom Tonga Telecom Telecom New Zealand Telkom Indonesia Telekom Malaysia Telstra Telikom PNG Fiji Telecom Telecom Samoa Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes PLDT Vatu [Source: operators, Network Strategies] 111

122 National call charges Two different distances for national call prices are compared: 40 km and 550 km. Most operators offer cheaper off-peak prices for national calls. In Fiji, Samoa and the Philippines only a flat rate is available. In Australia residential customers are charged rates depending on the time of day, but business customers pay a flat rate. For long distance calls of 40 km TVL is ranked in the mid to low range of the sampled countries. Figure E.7 and Figure E.8 show peak and off-peak residential national call prices, and Figure E.9 and Figure E.10 peak and off-peak national call prices paid by businesses. Figure E.7 : Residential peak national calls (40 km) Telecom New Zealand Telkom Indonesia Tonga Telecom PLDT Telikom PNG Fiji Telecom TVL Telstra Sri Lanka Telecom Telecom Samoa Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Telekom Malaysia Vatu [Source: operators, Network Strategies] 112

123 Figure E.8 : Residential off-peak national calls (40 km) Tonga Telecom PLDT Fiji Telecom Telecom Samoa Telecom New Zealand Telstra Telikom PNG TVL Telkom Indonesia Telekom Malaysia Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Sri Lanka Telecom Vatu [Source: operators, Network Strategies] Figure E.9 : Business peak national calls (40 km) Telecom New Zealand Telkom Indonesia Tonga Telecom PLDT Telikom PNG Fiji Telecom TVL Sri Lanka Telecom Telecom Samoa Telstra Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Telekom Malaysia Vatu [Source: operators, Network Strategies] 113

124 Figure E.10 : Business off-peak national calls (40 km) Tonga Telecom Telecom New Zealand PLDT Fiji Telecom Telecom Samoa Telstra Telikom PNG TVL Telkom Indonesia Telekom Malaysia Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Sri Lanka Telecom Vatu [Source: operators, Network Strategies] TVL prices for long distance calls of 550 km are cheaper than most of the other countries in the sample. TVL ranks the second lowest for peak and off-peak calls for all customers. Residential peak and off-peak prices are shown in Figure E.11 and Figure E.12.Peak and off-peak prices for business customers are compared in Figure E.13 and Figure E.14. Note that for Telecom Samoa we have used its prices for International Group 1 calls, which include American Samoa and Tokelau, to better represent the large distances of Vanuatu national calls. 114

125 Figure E.11 : Residential peak national calls (550 km) Telecom Samoa Telkom Indonesia Telikom PNG Fiji Telecom Telecom New Zealand Telekom Malaysia Telstra Tonga Telecom PLDT TVL Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Sri Lanka Telecom Vatu [Source: operators, Network Strategies] Figure E.12 : Residential off-peak national calls (550 km) Telecom Samoa Fiji Telecom Telikom PNG Telstra Telekom Malaysia Tonga Telecom PLDT Telkom Indonesia Telecom New Zealand TVL Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Sri Lanka Telecom Vatu [Source: operators, Network Strategies] 115

126 Figure E.13 : Business peak national calls (550 km) Telecom Samoa Telkom Indonesia Telikom PNG Fiji Telecom Telecom New Zealand Telekom Malaysia Tonga Telecom PLDT Telstra TVL Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Sri Lanka Telecom Vatu [Source: operators, Network Strategies] Figure E.14 : Business off-peak national calls (550 km) Telecom Samoa Fiji Telecom Telikom PNG Telekom Malaysia Tonga Telecom Telecom New Zealand PLDT Telstra Telkom Indonesia TVL Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Sri Lanka Telecom Vatu [Source: operators, Network Strategies] 116

127 Ranking of TVL mobile prices Postpaid monthly rental charges TVL charges VUV 1575 per month to subscribers of Smile Premium, the postpaid mobile service. Figure E.15 ranks TVL in the middle of our sample. Mobitel Digicel Jamaica Vodafone Fiji Telstra Figure E.15 : Postpaid mobile monthly rental [Source: operators, Network Strategies] TVL Telecom New Zealand Telecom Samoa Cellular CTM Celcom Vatu Charging methods for mobile calls Table E.2 compares the various charging methods for mobile calls. About half the sampled operators charges depend on the destination of the call, whether it is within the same mobile network, to another mobile network or to a fixed network. In only three cases is a flat rate charged, independent of the time of day: the postpaid customers of Telstra, Vodafone Fiji and Cable & Wireless Saint Lucia. Customers of Telstra postpaid, Vodafone Fiji prepaid and TVL pay per pulse, with lengths ranging from 30 seconds to four minutes. Call set-up fees are charged only by Telstra and Pacific Mobile Communications (Papua New Guinea). 117

128 Table E.2 : Tariff structure for mobile call rates Mobile operator Destination Time of day Pulse charging Telstra postpaid Telstra prepaid Vodafone Fiji postpaid Vodafone Fiji prepaid Telkomsel C&W Jamaica postpaid C&W Jamaica prepaid CTM Celcom Telecom New Zealand Pacific Mobile Communications Telecom Samoa Cellular Mobitel Tonga Telecom TVL [Source: Network Strategies] Set-up fee Postpaid call charges For calls to fixed lines, TVL is the second cheapest for peak calls (Figure E.16) and the cheapest for off-peak calls (Figure E.17). 118

129 Figure E.16 : Postpaid mobile peak call to fixed service Telecom New Zealand Telstra Vodafone Fiji Digicel Jamaica CTM Mobitel Telecom Samoa Cellular Celcom TVL Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Telkomsel Vatu [Source: operators, Network Strategies] Figure E.17 : Postpaid mobile off-peak call to fixed service Telstra Telecom New Zealand Vodafone Fiji Digicel Jamaica Celcom Mobitel CTM Telecom Samoa Cellular Telkomsel TVL Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Vatu [Source: operators, Network Strategies] 119

130 For calls to another mobile within the same network, TVL ranks in the low range. See Figure E.18 for peak calls and Figure E.19 for off-peak calls. Figure E.18 : Postpaid mobile peak call within mobile network Telecom New Zealand Telstra Digicel Jamaica Vodafone Fiji Telecom Samoa Cellular Telkomsel Celcom TVL Mobitel CTM Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Vatu [Source: operators, Network Strategies] 120

131 Figure E.19 : Postpaid mobile off-peak call within mobile network Telstra Telecom New Zealand Vodafone Fiji Digicel Jamaica Celcom Telecom Samoa Cellular Telkomsel TVL Mobitel Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes CTM Vatu [Source: operators, Network Strategies] Prepaid call charges TVL s call prices for prepaid customers are in the lower range of those sampled for both peak and off-peak calls to: Fixed lines (Figure E.20 and Figure E.21) Mobiles within the same network (Figure E.22 and Figure E.23) 121

132 Figure E.20 : Prepaid mobile peak call to fixed service Vodafone Fiji Telecom New Zealand Pacific Mobile Communications Digicel Jamaica Telstra Telecom Samoa Cellular Mobitel Telkomsel TVL Tonga Telecom Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Celcom Vatu [Source: operators, Network Strategies] Figure E.21 : Prepaid mobile off-peak call to fixed service Telecom New Zealand Digicel Jamaica Vodafone Fiji Pacific Mobile Communications Telstra Mobitel Telecom Samoa Cellular Telkomsel Tonga Telecom TVL Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Celcom Vatu [Source: operators, Network Strategies] 122

133 Figure E.22 : Prepaid mobile peak call within mobile network Vodafone Fiji Telecom New Zealand Pacific Mobile Communications Telstra Telecom Samoa Cellular Digicel Jamaica Telkomsel TVL Mobitel Tonga Telecom Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Celcom Vatu [Source: operators, Network Strategies] Figure E.23 : Prepaid mobile off-peak call within mobile network Telecom New Zealand Vodafone Fiji Pacific Mobile Communications Digicel Jamaica Telstra Telkomsel Telecom Samoa Cellular Mobitel Tonga Telecom TVL Price for 3 minutes Extra price for 6 minutes Extra price for 10 minutes Extra price for 30 minutes Celcom Vatu [Source: operators, Network Strategies] 123

134 Benchmarked prices The tables below summarise the benchmarking results and compare TVL s prices to the median of the prices from the benchmarked countries (using three year average market exchange rates to convert to Vatu). The call prices are the total cost for a three minute call. Total cost of a three minute call from a fixed line Residential (Vatu) Business (Vatu) Peak Off-peak Peak Off-peak Vanuatu all fixed calls Benchmarked local Benchmarked national (40 km) Benchmarked national (550 km) Total cost of a three minute call from a mobile line Post paid (Vatu) Prepaid (Vatu) Peak Off-peak Peak Off-peak Vanuatu all mobile calls Benchmarked to fixed line Benchmarked within mobile network Benchmarked to another mobile network Monthly rental Fixed residential (Vatu) Fixed business (Vatu) Postpaid mobile (Vatu) Vanuatu Benchmarked

135 Annex F: History of service pricing TVL fixed prices Monthly rental We note that since 1999 there has been an upward trend in PSTN line rental though this has fallen off in Monthly PSTN line rental (VUV ) Figure F. 1: Monthly PSTN line rental charges [Source: Network Strategies] (rebalanced) 2003 National (STD) call charges The per-minute price of national calls has fallen since 1986 and since 2003 has been dependent only on the time of day, not on the distance of the call. Figure F.2 and Figure F.3 show the per minute STD charges for peak and off-peak respectively. From 1986 to 1999 national calls were priced into two bands; calls within the same area and national calls. Three pricing bands were used until a tariff rebalancing occurred in 2001; same area, adjacent areas and non-adjacent areas. After the rebalance one tariff was applied to all national calls. 125

136 Figure F.2 : Peak per minute STD call charges Peak per minute call charge (VUV ) (rebalanced) 2003 Same area National Adjacent areas Non-adjacent areas [Source: Network Strategies] Figure F.3 : Off peak per minute STD call charges Off-peak per minute call charge (VUV ) (rebalanced) 2003 Same area National Adjacent areas Non-adjacent areas [Source: Network Strategies] 126

137 International call charges Per minute call charges experienced high annual reductions during the 1986 to 2001 period. As would be expected, the rate of decrease in call charges has slowed since rebalancing in Over the 1986 to 2003 period per minute call charges decreased by an average of 76%. The different international call charges for the years are detailed in Annex F. We compared current international call charges with other selected Pacific countries and found that while Vanuatu s charges are not the most expensive we observed, international calling to all overseas destinations is relatively expensive from Vanuatu (see Table F.3). Note that three year average market exchange rates have been used to convert prices into Vanuatu Vatu. Table F.3 : Per minute international call prices (VUV) Type of call Fixed peak Fixed off-peak Mobile peak Mobile off-peak Call origin Call destination Australia Fiji New Zealand Samoa United Kingdom Vanuatu Samoa Vanuatu Tonga New Zealand Samoa Vanuatu Tonga New Zealand Samoa Vanuatu Tonga New Zealand Samoa Vanuatu Tonga New Zealand [Source: operators, Network Strategies] 127

138 TVL mobile prices The figure below illustrates that while local call charges are currently relatively low, charges for calls to neighborhood zone countries (Australia, NZ, Fiji and New Caledonia) and rest of the world (ROW) countries are approximately seven times and eleven times, respectively, greater at peak times than at off-peak times. The greatest decrease in per minute call charges over the period has been for local and national peak-time calls (63%). Figure F.4 : Per minute charges for post-paid mobile calls. 300 Per minute call charge (VUV ) Local and national - Peak Local and national - Offpeak International: Aus, NZ, Fiji, New Cal - Peak International: Aus, NZ, Fiji, New Cal - Off-Peak International: ROW - Peak International: ROW - Offpeak [Source : Network Strategies] Internet Table F.4 lists prices (exclusive of VAT) for dial-up, wireless broadband and ADSL Internet access. Except for the Star5+ (entry level) dial-up Internet access package, all of TVL s Internet access services are priced at a very high level. For example, unlimited dial-up Internet access is available through Xtra (New Zealand s largest ISP) at approximately one-quarter the price offered by TVL. The one-off charge for ADSL is also significantly higher than would be expected at NZD1200 versus approximately NZD315 for connection through Xtra (including purchase of the ADSL modem). The high one-off charge and monthly prices of the wireless broadband packages are explained in part by the fact that purchase and installation of an external antenna is required; and the services are bundled with either one or two mobile telephones, each with a generous call allowance of VUV10 000/month. 128

139 Table F.4 : Internet access service charges Service Bandwidth (kbit/s) Included usage allowance One-off charges (VUV) Price/month (VUV) Excess usage fees (VUV) Dial-up (includes PSTN line rental) Star hours /hour Dolphin hours /hour Manta hours /hour Whale hours /hour Unlimited 56 Unlimited n.a. Wireless broadband Marlin SOHO National traffic: 1000 International traffic: 128 Marlin Silver Marlin Gold Marlin Platinum National traffic: 1000 International traffic: 128 National traffic: 1000 International traffic: 128 National traffic: 1000 International traffic: Mbytes /Mbyte 1 Gbyte /Mbyte 2 Gbytes /Mbyte 5 Gbytes /Mbyte ADSL 2 n.a. n.a n.a. 1 Source: fax from Richard Hall, Managing Director, TVL. Information for the Unlimited service is not on the TVL website, 6 May n.a. information not available on TVL website [Source: TVL] Data used for tariff analysis Residential and business fixed line plans The benchmarking comparisons use the prices of the standard residential and standard business plan. Where it was not clear which plan was the standard option, an average was taken for each price. Table F.5 details the fixed line plans used for each operator in the benchmarking sample. 129

140 Table F.5 : Fixed line plans by operator Operator Residential plan(s) used Business plan(s) used Telstra HomeLine Plus BusinessLine Plus Fiji Telecom One plan for all customers (residential and business) Telkom Indonesia Monthly fee an average of tariff packages I-V 1 Telkom Malaysia Monthly fee an average of Peninsular and Sabah/Sarawak 1 for a capacity exceeding 1000 lines Telecom New Zealand HomeLine with Weekends and Weeknights Business NZ Wide Telekom PNG National and Standard Residential Business PLDT Residential SME Telecom Samoa One plan for all customers (residential and business) Sri Lanka Telecom 2 Residential Business Tonga Telecom Residential Business TVL One plan for all customers (residential and business) 1 Call prices the same over the various plans. 2 Sri Lanka call prices depend on monthly usage. The most expensive per minute rate was used for the benchmarking. [Source: Network Strategies] Postpaid and prepaid mobile plans Table F.6 lists the postpaid and prepaid mobile plans used in the price benchmarking. Table F.6 : Mobile plans by operators Operator Postpaid plan used Prepaid plan used Telstra Personal 20 Prepaid Mobile Vodafone FIJI Voda33 Fast Fone Telkomsel kartuhalo simpati C&W Jamaica b800 bfree CTM $60 plan n/a Celcom Ezy Xcel Telecom New Zealand Go Mytime 100 Go Mytime Prepaid Pacific Mobile Communications n/a Prepaid B-Mobile Telecom Samoa Cellular Postpaid Premo Sri Lanka Telecom Cool 100 Prepaid A Tonga Telecom n/a U-Call TVL Smile premium Smile rifil [Source: Network Strategies] 130

141 International call charges TVL tariffs for international calls are shown in Table F.7 below. Table F.7 : Per-minute international call charges ( ) Per minute call charges (VUV ) International destinations Africa and remaining Asia Peak n.a. Africa and remaining Asia - Off-peak n.a. America Peak America Off-peak n.a. Australia Peak Australia - Off peak n.a. Europe Peak Europe - Off-peak n.a. Fiji Peak n.a. Fiji- Off-peak n.a. Hong Kong, Japan, Taiwan Peak n.a. Hong Kong, Japan, Taiwan - Off-peak n.a. New Caledonia Peak n.a. New Caledonia - Off-peak n.a. NZ Peak NZ - Off-peak n.a. Other Pacific Islands Peak n.a. Other Pacific Islands - Off-peak n.a. Pacific Islands Peak n.a. n.a. n.a. n.a. 179 Pacific Islands - Off-peak n.a. n.a. n.a. n.a. n.a. PNG/Solomon Islands Peak n.a. PNG/Solomon Islands - Off-peak n.a. South Pacific Islands Peak n.a n.a. South Pacific Islands - Off-peak n.a n.a. 1 In 1986 there were seven charging zones: New Caledonia; Australia and Fiji; NZ; PNG and Solomon Islands; Europe; Hawaii, American Samoa, Saipan, Guam, Marshall, Wake, Midway, Caroline, Hong Kong, Japan, Philippines, Singapore and Taiwan; Other Asian countries, Africa and America. 2 In 1988, 1989 and 1990 there were eight charging zones: Australia, Fiji, New Caledonia and NZ; PNG and Solomon Islands; South Pacific Islands; Europe; all other Pacific Islands; Hong Kong, Japan and Taiwan; Africa and America; remaining Asia data has been provided for 5 charging zones: Australia; NZ; Europe; America; Pacific Islands. 131

142 Per minute call charges (VUV 2003) International destinations Africa and remaining Asia - Peak Africa and remaining Asia - Offpeak America - Peak America Off-peak Australia - Peak Australia - Off - peak Europe Peak Europe - Off-peak Fiji Peak Fiji- Off-peak Hong Kong, Japan, Taiwan - Peak Hong Kong, Japan, Taiwan - Offpeak New Caledonia - Peak New Caledonia - Off-peak NZ Peak NZ - Off-peak Other Pacific Islands Peak Other Pacific Islands - Off-peak Pacific Islands - Peak n.a. n.a. n.a. n.a. n.a. Pacific Islands - Off-peak n.a. n.a. n.a. n.a. n.a. PNG/Solomon Islands - Peak PNG/Solomon Islands - Off-peak South Pacific Islands - Peak South Pacific Islands - Off-peak In 1995 there were seven charging zones: Australia, Fiji, New Caledonia and NZ; PNG and Solomon Islands; South Pacific Islands; Europe, all other Pacific Islands; Hong Kong, Japan and Taiwan; Africa and North and South America; remaining Asia. 5 In 1996, 1997, 1998 and 1999 there were four charging zones: Australia, Fiji, New Caledonia and NZ; PNG, Solomon Islands and other South Pacific countries; Europe, rest of Pacific, Hong Kong, Japan, Taiwan; Africa, North and South America and other Asian countries 132

143 Per minute call charges (VUV ) International destinations (rebalanced) Africa and remaining Asia Peak n.a Africa and remaining Asia - Off-peak n.a America - Peak America Off-peak n.a Australia - Peak Australia - Off - peak n.a Europe Peak n.a Europe - Off-peak n.a Fiji Peak Fiji- Off-peak n.a Hong Kong, Japan, Taiwan Peak n.a Hong Kong, Japan, Taiwan - Off-peak n.a New Caledonia - Peak New Caledonia - Off-peak n.a NZ Peak NZ - Off-peak n.a Other Pacific Islands Peak n.a. n.a. n.a. Other Pacific Islands - Offpeak n.a. n.a. n.a. Pacific Islands - Peak n.a. n.a Pacific Islands - Off-peak n.a. n.a. n.a PNG/Solomon Islands - Peak n.a PNG/Solomon Islands - Offpeak n.a South Pacific Islands - Peak n.a. n.a. n.a. South Pacific Islands - Offpeak n.a. n.a. n.a. 6. In 2000 there were four charging zones: Australia, Fiji, New Caledonia and NZ; PNG, Solomon Islands and other South Pacific countries; Europe, rest of Pacific, Hong Kong, Japan, Taiwan; Africa, North and South America and other Asian countries. 7. In 2001, 2002, 2003 and at present there are two charging zones: Australia, Fiji, New Caledonia and NZ; rest of the world. [Source: Network Strategies] 133

144 Conversion rates Local currencies are converted to Vanuatu Vatu using three year average market exchange rates (summarized below). The average was calculated from the Oanda 14 daily rates for the three years ending 30 June The three year average market exchange rates used to convert prices into Vatu are listed in Table F.8. Country Three year average market exchange rates (local:vatu) Australia 0.01 Fiji 0.02 Indonesia Jamaica 0.37 Macau 0.06 Malaysia 0.03 New Zealand 0.01 Papua New Guinea 0.03 Philippines 0.40 Samoa 0.02 Sri Lanka 0.71 Tonga 0.02 Vanuatu 1.00 Table F.8 : Conversion rates [Source: Oanda (June 2001 to June 2004)]

145 Annex G: Legal Documents This Annex provides a collection of relevant legal documents: Laws of the Republic of Vanuatu Revised Edition 1988: Arrangement of Articles Laws of the Republic of Vanuatu Revised Edition 1988: Chapter 24 Water Supply Laws of the Republic of Vanuatu Revised Edition 1988: Chapter 65 Electricity Supply Water Supply (Amendment) Act No. 9 of 1993 Water Supply (Amendment) Act No. 28 of 1993 Electricity Supply (Amendment) Act No. 21 of 2000 The Telecommunications Act No. 10 of 1989 Bill for the Telecommunications Amendment Act No. of

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