STEM newsletter

Business-case evaluation of rural telecoms licences

30 January 2003

The Independent Communications Authority of South Africa is offering licences to use GSM spectrum for fixed-wireless access in low-teledensity areas, for tender by April 2003. Forge Ahead BMI-T and Ericsson Consulting have partnered to develop a business case for these prospective rural operators. Forge Ahead BMI-T is providing consulting and support services and Ericsson, as the solution provider, is modelling the business case in STEM.

The audience for the STEM model includes:

  • The five potential operators which intend to apply for the licences that will be issued for the rural areas. The model will help to validate the overall business case and provide thorough insight into various scenarios for operations.
  • The regulator, the Independent Communications Authority of South Africa (ICASA). Each consortium will use the model to support its licence application, enhancing the presentation of its case to ICASA and proving the feasibility of the business plan.
  • Potential investors and capital providers. The model will demonstrate the return on investment that can be expected in various deployment and ownership scenarios.

Modelling network elements, OSS/BSS and commercial overheads

The network consists of core and access network elements, operational and business support systems (OSS/BSS) and subscriber terminals. Network dimensioning is driven by geographical coverage, traffic profiles and subscriber numbers. The STEM model evaluates four market segments, each using voice or data services: residential, SME/SOHO, corporate and telecentres (walk-in phone and Internet shops).

Market dynamics are provided by the consortia, which have conducted primary market research in the target areas. Service adoption is driven by service price plans, based on assumptions about subscriber sensitivity to the affordability of services. The business case considers interconnect revenue and interconnect operational costs, driven by subscriber numbers and calling profiles. Sales, marketing and employee expenses are also included in the model.

Exploring and validating future scenarios

The challenge is to establish the acceptable range of sensitivities, to ensure that the operations are viable and sustainable in the long-term:

  • Price-plan sensitivities – understanding the impact of various pricing scenarios on service uptake and associated financial performance (cashflow, NPV, IRR).
  • Equipment deployment – the effect of various options for equipment deployment on service availability and subscriber penetration, and hence on cashflow.
  • Ownership options on capital-intensive equipment – the financial impact of building, buying or leasing capital-intensive equipment.
  • Capital structuring – the long-term cash position under a number of scenarios for gearing (debt-equity ratio) and repayment options.
  • Interconnection – understanding the pivotal impact of various interconnect options on the cash position.

Analysis of these scenarios indicates that the central issue facing these new operators will be critical mass. It will be imperative to sign up enough subscribers to provide sufficient revenue streams to cover the initial capital expenditure. Local community players will be minority stakeholders in these operators, and effective marketing of the services as provided from the community to the community will be key to the operators’ success. The licences are expected to be awarded at the beginning of 2004 after a thorough process of review and public hearings where each consortium will present its case.

The scalable nature of the software tool provides an excellent method for evaluating strategic options and documenting the impact of scenarios on the financial position of each fixed-wireless rural operator. Forge Ahead BMI-T has acquired a STEM licence during the course of the project, and Ericsson has again demonstrated its commitment to the value of the tool as a central element of its end-to-end business solution for operators.

Ericsson provides mobile and broadband Internet communications solutions in more than 140 countries around the world.

Forge Ahead BMI-T is an ICT market research, consulting and strategic networking company with a mission to facilitate delivery on promises of a ‘New South Africa’ through the successful implementation of joint ventures and private–public sector partnerships.

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