Palau Chamber of Commerce

Fiber Optic Submarine Cable Project MicroPal Presentation

Pramod Thummala(Rhinehart Silas)(Keobel Sakuma)

May 12, 2015

CORE IDEAS• Cable Is Critical For Palau

(1) Effective Government(2) E-commerce / Banking(3) E-health(4) Education(5) Tourism

• Only Room For One Cable• Access For All:

(1) No Monopoly Power(2) Regulated Rates / Non-Discriminatory Treatment of Service

Providers

Desirable characteristics of cable options

Capacity

• Enough capacity to accommodate Palau’s demand for next 20 years

CAPEX

• Lower capital expenditures than alternatives

OPEX• Lower operating expenses than alternatives

Execution risk

• Low execution risk based on consortium members reputation and solid finances

Regulatory risk

• Low regulatory risk based on ease of FCC approval for Guam cable landing

Desirable governance characteristics of future cable company

• No one service provider or subset of service providers shall control the board of directors

• Efficient operation and maintenance

• Sale of wholesale cable capacity based on open access principles - non-discrimination, transparent and cost-based

To prevent submarine cable abuse / monopoly position

Modern Telecom Law

• Mandate cable to sell capacity under open access principles

• Non-discrimination

• Transparency• Cost-based

Effective Regulation

• Independent competent regulator with power to enforce open access regulations

Governance in Submarine cable

• No single telecom service provider should control the board

• Board with incentive on having a well functioning cable company

• Competitive constraints through multiple subsea cables – ideal, but only possible in large markets

• Multiple competing service providers as owners—none with majority shareholding – not an effective option where number of service providers are few

• Robust open access regulation – non-discrimination, quality assurance, cost-based pricing. This requires:• appropriate telecom law is implemented• adequate enforcement regime• adequately staffed regulator

• State ownership of entity - (See World Bank/ADB funded projects in Liberia, the Gambia, Solomon Islands, Tonga, etc.). Idea is not to retain state-ownership in perpetuity, but to ensure adequate governance in the short to medium term while regulatory regime is strengthened.

How are subsea cables in developing markets governed to ensure that public interest is served?

Ownership Type Pros Cons

100% State Ownership • Ensures public interest incorporated for all decisions on operation

• Prevents control by one or two service providers

• Reduces beneficial decision-making input from private actors

• Eliminates opportunity to attract private capital

• Could lead to bureaucracy

Majority State Ownership (or Golden Share)

• Ensures public interest reflected in all decisions

• Prevents control by one or two service providers

• Private sector to have input in decision-making

• Allows private participation, less debt

• Limits private sector control

Majority / 100% Private Ownership

• Ensures all aspects of operation are on a commercial basis with a view to maximizing profit

• Minimizes need for state involvement for financing

• In a monopoly or duopoly market, could lead to results that are not beneficial to society as a whole (e.g., higher prices, access)

• Forces reliance on legislative and regulatory regime, and requires adequate enforcement to ensure results are in public interest

Comparing Ownership Options

Amendments - SuggestedAmendment 1:- ADB Loan Ratification (clarification)

Amendment 2:- Public-Private Option (minority private ownership)

Amendment 3:- Enough revenue to pay ADB Loan / OPEX

Amendment 4:- Protection of Cable in Marine Areas

Amendment 5:- Good faith effort to pass telecom law in future

Debt Sustainability Assessment• The planned borrowing for the Submarine Cable Project can generate

enough revenues for the Belau Submarine Cable Corporation (BSCC) to fulfill its financial obligations. It is thus highly unlikely to impose any debt repayment burden on the Government who provides sovereign guarantee. Estimated financial and economic internal rate of returns indicate the profitability of the project.

• Debt Sustainability Assessment (DSA) was updated by incorporating the

planned borrowing for the Submarine Cable Project as a part of publicly guaranteed debts. If fiscal adjustments, in particular the tax and tax administration reforms, are not implemented in the next five years, and the Submarine Cable project is implemented, Palau’s debt to GDP ratio will deteriorate. However, even in this case, the level of debt to GDP ratio would remain below the threshold of debt distress. Once the fiscal adjustments are made, the debt to GDP ratio could decline constantly even with the borrowing for the Submarine Cable Project.