The Tribune

By NEIL HARTNELL Tribune Business Editor DESPITE beating many countries via a 42 per cent improvement in a key productivity benchmark between 2006-2009, the sector regulator last night suggested the Bahamas Telecommunications Company's (BTC) 2010 accounts did not show the "required efficiency". Unveiling its BTC efficiency study consultation, the Utilities Regulation & Competition Authority (URCA) said data contained in BTC's 2010 separated accounts showed that despite a major fall in interconnection costs, it could be vital to reduce the newly-privatised carrier's wholesale charges to an "efficient level of costs". As the incumbent carrier, BTC will levy 'wholesale' charges on other operators who interconnect with its network as a necessary condition to provide telecommunications services. Interconnection allows calls originating on one operator's network to terminate on another carrier's system, in return for an agreed charge, but if these prices are set too high at the wholesale level - as is URCA's concern with BTC's current pricing - it could put rivals out of business, and stifle the intended competition/liberalisation of the Bahamian communications market. URCA also disclosed other interesting data that compared BTC's productivity, and that of the telecommunications sector as a whole, to other industries in the Bahamian economy during the period 2006-2009. While the Bahamian economy's total productivity, based on Department of Statistics information, was shown to have risen by 2.7 per cent between 2006-2009, that for the transport, storage and communication industry was 3.3 per cent - above the national average. Productivity over that four-year period varied wildly, according to Department of Statistics data. The greatest improvements were shown by the manufacturing and wholesale/retail sectors, with respective increases of 19.4 per cent and 11.5 per cent, between 2006-2009. Other industries that seeing productivity improvements over the same time period were mining, quarrying, electricity, gas and water, at 9.1 per cent; financing, insurance, real estate and other business services, at 7.5 per cent; and agriculture, hunting, forestry and fishery at 6.7 per cent. Yet, worryingly for the Bahamas, productivity in the country's largest private sector industry, hotels and restaurants, fell by 13.7 per cent between 2006-2009. And it dropped even more in construction, by 23.2 per cent. When it came to BTC, URCA said it had focused on total connections (for fixed-line and cellular services) per employee between 2006-2009. "BTC's total connections per employee increased by 42 per cent over the four-year period, exceeding that in many other countries, including those with similar mobile penetration growth over that period. However, a large share of that growth is driven by its significant growth in mobile connections during that period," URCA said. Between 2006-2009, BTC's total connections per employee rose by 41.8 per cent, from 299 to 424, placing it - and the Bahamas - seventh out of a total of 30 countries in a benchmarking sample. Yet some 27.9 percentage points of BTC's growth came from increased cellular penetration. Stripping that out, URCA said: "It further confirms that BTC's increase in lines per employee has been less than the average across the sample, taking into account changes in mobile penetration. "Thus, controlling for the underlying growth in mobile penetration levels, BTC's increase in lines per employee has been less than the average across our international benchmarking sample. Further, with 424 connections per employee in 2009, BTC remains at the lower end of the overall sample." As a result, URCA suggested that BTC's productivity improvement - in both the fixed-line and cellular segments - was less than the sample average, and its "current operational productivity level remains below those experienced elsewhere". Focusing on other BTC benchmarks, URCA said that between 2006-2009, average revenues per employee and total lines per employee had risen "considerably". Yet total costs per fixed and mobile connection had also grown. "The relative performances of the BTC's fixed and mobile businesses have varied, with the average cost per fixed line having increased by 12 per cent between 2006 and 2009, and the average cost per mobile connection decreased by 39 per cent over the same period. Most of the increase in average cost per fixed line appears to be driven by operating costs," URCA said. BTC's unadjusted average cost per line was higher than for all rivals in a benchmarking sample. When this was adjusted, it remained above the sample median, although was no longer the highest. And, on unadjusted costs per minute, BTC's costs were again the highest. When these were adjusted, URCA added: "Whilst BTC's average costs per minute remain the highest value within the benchmarking sample, the gap between BTC and others is narrower, suggesting that some of the higher cost is related to the higher operating cost environment of the Bahamas." The communications sector regulator said BTC's Reference Access and Interconnection Offer (RAIO) needed to be amended to reflect the carrier's latest accounting information, which was likely to lead to lower wholesale charges for rival operators going forward. And further revisions are likely to follow. "BTC may be required to adjust its revised RAIO charges based on the outcome of this efficiency study," URCA said. "This is to ensure that the interconnection rates are not only cost-oriented, but further reflect only efficiently incurred costs. Based on the preliminary results presented above, URCA is of the preliminary view that further efficiency adjustment to BTC's revised regulated wholesale charges based on the 2010 accounting separation results may be required. Given the magnitude of the potential adjustments, URCA is minded not to apply these as a one-off adjustment in a single year." And it added: "URCA's analysis to date suggests that, based on 2010 accounting separation data, BTC's (wholesale) unit costs of both business segments are above those reported by other operators, and may therefore not reflect the efficient level of costs required for providing these services. "This is the case despite BTC's 2010 accounting separation statements showing significant reductions in unit costs of interconnection services relative to those underlying the current BTC URCA-approved RAIO charges. "This may mean that it is important to make adjustments to BTC's regulated wholesale charges, which are based on its accounting separation unit cost results, to ensure they fully reflect an efficient level of costs." URCA added that the decision by BTC's parent, Cable & Wireless Communications, to write down the value of obsolete equipment had resulted in a 3 per cent reduction to the carrier's "fixed business total adjusted costs".