Regulatory risk highest in Sri Lanka lowest in Malaysia

Posted on December 23, 2009  /  0 Comments

Fitch Ratings, a global rating agency, said the South Asian and South East Asian countries are divergent in terms of regulatory risk. It says Sri Lanka has the highest risky regulatory environment while the risk is lowest in Malaysia.  Buddhika Piyasena, Director in Fitch’s TMT team, said,

Sri Lanka’s high regulatory risk score reflects insufficient transparency in the regulatory process combined with the regulator’s strong connection with the political framework.

The total regulatory risk score for each market is derived based on three major sub-categories:

  1. Political & Social Policy Risk.
  2. Industrial Policy Risk.
  3. Inability of Ownership/Management to Offset Regulatory Risk.

Excerpt on Sri Lanka, as stated in the report, is noted bellow:

As in most developing markets, Sri Lanka’s telecom regulator has supported government policy in making telecom services more accessible and affordable. However, without a credible long term road map in place, the TRCSL has allowed far too much competition in the market, especially in the mobile space. Its rationale is still unclear for allowing a fifth mobile operator in an already intensely price‐competitive market with a total population of 20 million people.

Profitability of the operators has seen a marked deterioration over the last two years. For example, in October 2009, Millicom International Cellular SA sold its operations in Sri Lanka (Tigo, the third‐largest mobile operator) to Emirates Telecommunications Corporation (Etisalat, ‘A+’/Stable). Dialog, a subsidiary of Malaysia’s Axiata, which was among the most profitable corporates in Sri Lanka, reported losses in FY08.

Major concerns are a lack of transparency in licensing; allocation of scare resources; and certain regulatory decisions. For example:

  1. The non‐transparent process under which the fifth mobile operator licence was issued in 2007.
  2. A further non‐transparent process for the award of WiMax licences in 2007. SLT was not awarded a licence while some other established telecom operators and applicants were licensed; no reasons have been identified for the omission of SLT.
  3. A directive was issued in 2008 prohibiting telecom operators from charging interconnection fees for a year until November 2009. The timing of this directive is highly questionable.
  4. Reaction to anti‐competitive/predatory pricing has not always been equitable.
  5. Transparency relating to the universal service obligation (USO) fund managed by the TRCSL has been very weak. No refunds have been made to operators on account of eligible capex.

Furthermore, the telecom sector has been specifically targeted to augment tax revenues. A levy of 10% has applied to usage charges on mobile and fixed‐telephony services since 2007/08. The TRCSL substantially increased spectrum charges in 2008, when operators were struggling with a rapid deterioration in profitability.

The Fitch report has covered Sri Lanka, South Korea, Australia, Indonesia, India, New Zealand, China, Thailand, Taiwan, Philippines, Singapore and Malaysia. Since Bangladesh has not been studied in this survey, the lowest score to Sri Lanka may be questioned.

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