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Telecoms investment in emerging markets


02 April 2013

Managing risks to telecoms businesses in emerging markets  

Political and regulatory risk is a first-order issue for investment in emerging economies – international operators may face arbitrary changes to licences as a form of expropriation and arbitrary and unlawful increases in tax burdens. The issues on which we advise telecom investor clients around our network when investing in emerging market telecoms, whether a stake in an existing operation or a greenfield licence, include:

Foreign ownership: mandatory relationship with local partners, combined with local ownership requirements and the ability to exit a local partner from a consortium agreement, treatment of holding companies, use of nominee arrangements and management contracts to achieve control and increase economic stake (including whether Foreign Investment rules apply even to transfers of ownership interests in foreign holding companies). Challenges to foreign ownership structures (including changes to the FDI regulations) by competing operators or local regulators can hinder financing and discourage further investment, putting the investee operator at a competitive disadvantage;

Listed companies: mandatory post-licence listing requirements, tensions between foreign ownership limits and mandatory takeover rules, treatment of local shareholders as associated bidder/concert party;

Local partners: status as politically-exposed persons for international anti-corruption legislation, adequately investigating the background of the local partner company, and its beneficial ownership, investigating the legitimacy of the process by which the investee acquired its licence;

Financing: structuring (and managing lenders' expectations for) security packages, local rules regarding ownership/registration of interests in land (network sites), costs of taking security;

Foreign exchange: restrictions on repatriation of profits and sale proceeds on exit – some countries have special exemptions for foreign investments to permit repatriation, but these need to be examined as they may have time limits, or require repatriation to follow a particular route, or be limited to the initial investment amount;

Special investment laws: these reduce import duties for network equipment, permit currency exchange, reduce corporate tax, simplify visa requirements, and provide other concessions, as well as clawbacks commonly included in these laws on a disposal (eg of network or passive infrastructure);

Investment protections: structuring for investment treaty protection and other anti-expropriation measures, including the reliability of their dispute-resolution mechanisms, and minimisation of tax leakage (including using dual-tax treaties), licence as pure concession or contractual agreement with government, with options for offshore dispute resolution including interim relief and enforceability (eg the NY Convention on the recognition of foreign arbitral awards, judicial cooperation treaties and waiver of sovereign immunity);

Licence conditions: term and renewal, effect on network assets at the end of the term (including scope of assets to be transferred at the end of a BOT concession), access to spectrum and refarming conditions, universal service (obligations and access to funds for "grey areas"), modification conditions/national interest provisions, access to rights of way in the public domain (including federal/state/local jurisdictional conflicts), and rollout obligations (and the consequences for not meeting them);

Regulatory regime: relationships with local regulators, clarifying the scope of jurisdiction where there are multiple regulators or where a transition between regulators occurs, access and interconnect, including mobile termination rate and cost models, access to international gateway, terms for access to the incumbent's or other operators' backbone network, mandatory wholesale products for resellers, national roaming, mobile number portability and VoIP policies, moratorium on further network operator or service provider/reseller licences, challenging decisions of regulators, forum for resolving inter-operator disputes, speed and effectiveness of remedies.


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