Regulatory Uncertainty: A Major Factor in Conflict Areas
Post-conflict governments in war-torn areas often make it a priority to rebuild their telecommunications networks. This is because it is difficult to advance other rebuilding efforts, such as restoring order and supporting humanitarian initiatives, without reliable communications. On the other hand, emerging government institutions are usually financially weak or dependent on foreign aid, so these governments turn to private investment to rebuild the telecommunications sector. Given the cost of rebuilding wired infrastructure, investors tend to view wireless projects, including satellite, as yielding higher and quicker profits, but the regulatory environment usually determines how much risk investors are willing to assume.
The Interim Regulatory Environment
An interim regulator is sometimes put in place after a conflict. However, with interim governing authority also comes the question of legitimacy. Will a new government recognize a license issued by an interim government? If so, will the new government extend that license past its current term?
This happened in Iraq where the Coalition Provisional Authority, put in place after the defeat of the Baa’thist regime, auctioned three nationwide mobile licenses with two-year terms. The auction winners hoped that a new government would extend the licenses based on favorable performance. As it turned out, the sovereign Iraqi government extended two of the licenses for terms of 15 years.
The Non-Existing Regulatory Environment
There are cases in which no regulatory framework exists, such as in Somalia where the state-owned PTT collapsed after a civil war erupted in the early 1990s. Foreign investment in telecommunications has been practically non-existent in Somalia. Instead, growth has been organic, with a few telecommunications providers established by local entrepreneurs. These telecom providers formed self-regulatory bodies to coordinate their operations, interconnect their networks and manage disputes.
There are regions where conflict never seems to end, such as in Afghanistan. A year after the ousting of the Taliban, the new government held a mobile license auction. However, the auction failed to attract the same level of interest as in Iraq. The winning bidder was a consortium among an equipment manufacturer, a development agency and two foreign operators. This was an evident attempt to spread the financial risk, but, as expected, little interest has been shown in rebuilding the fixed network. For this effort, Afghanistan has had to rely on donor nations, the World Bank and the International Telecommunication Union.
The Potential Risks and Rewards
There are many risks associated with operating in post-conflict areas. Among them are higher operating costs, security issues and uncertain regulatory frameworks. The question always lingers: Will the potential rewards in each post-conflict situation be sufficient to offset the higher levels of investor risk? Not surprisingly, one of the most profitable positions often is being the first to market and operate in an environment with little to no competition.
It is important to evaluate the regulatory environment before succumbing to the lure of quick profits and flocking to post-conflict countries. Is the regulatory environment non-existent, interim or continually in flux? The answer to this question should have a direct impact on the investment strategy. The recognition of licenses by subsequent governments is paramount, and so is the enforceability of property rights in cases involving fixed assets like teleports.
A country emerging from conflict may be seen as a blank page with the potential to build the sector from scratch. A first-comer typically takes the bulk of market share. With new post-conflict governments emerging in the Middle East, satellite operators and service providers should be taking a close look at the regulatory environment in these regions. The regulatory forward-thinkers of today will be the telecommunications leaders of tomorrow.
Raul Magallanes runs a Houston-based law firm focusing on telecommunications law. He may be reached at +1 (281) 317-1397 or by email at firstname.lastname@example.org.