Persistently high regulatory and economic barriers in the telecom sector result in levels of competition and investment below expectations, while Kazakhstan would need more investments in the sector to densify its network of digital infrastructures. In particular, the economic concentration of the sector and the absence of dedicated investment support measures prevent smaller, “last-mile” operators from entering the market. Establishing an independent regulator for the telecom sector and developing a targeted investment attraction strategy for the deployment of next-generation communication networks, including a further simplification of the investment environment for infrastructure, could enhance the sector’s investment attractiveness and meet the digital infrastructure deployment demand.
Improving Framework Conditions for the Digital Transformation of Businesses in Kazakhstan
3. Improve competition in and investment attractiveness of the telecom sector
Abstract
Challenge 3: A high degree of concentration in the telecom sector slows improvements in digital infrastructure
Kazakhstan has begun demonopolising the telecom market
Kazakhstan’s telecom sector is dominated by three main operators sharing the fixed market, two of them also present in the mobile market. The state-owned Kazakhtelecom remains the most important operator, on both fixed and the mobile segments, as it owns 90% of total fixed infrastructure and more than two-thirds of the mobile market. However, the government has initiated some demonopolisation reforms in recent years.
Following Kazakhstan’s accession to the WTO in 2015, the government lifted a monopoly on the provision of 4G services in the telecom sector, under which only the Altel company, a subsidiary of Kazakhtelecom, had the right to provide 4G services. Since early 2017, all three mobile telephone providers have been allowed to get licenses on existing and new 4G frequencies (Samruk Kazyna, 2016[1]). In March 2021, Kazakhstan Transtelecom, a fixed broadband network operator and former subsidiary of the state-owned rail firm, was privatised. This followed a gradual process initiated in 2014, when the company was first included in a list of strategic assets for privatisation, before 49% of its shares were sold in 2015, followed by a second sale (26% of shares) in 2018 (Government of Kazakhstan, 2014[2]; Kazinform, 2015[3]).
In 2021, recognising the important role of small operators in bridging the “last-mile” connectivity gap, OECD interviews indicate that the government also initiated steps to demonopolise that segment of internet provision. While this reform should enable small operators to enter the mobile market, it remains unclear whether it aims at fostering end-to-end infrastructure competition, or if it is to allow for infrastructure sharing. In the first case, different operators, both new and incumbents, would compete with their own networks, while in the latter, small operators would use the infrastructure of incumbents but provide services to market segments that remain outside the current network, i.e. mainly in rural and small urban areas.
In the framework of this reform, the government has also announced that Kazakhtelecom will sell one of its two mobile operators in 2022, which would result in essentially three independent operators in the mobile market by the end of the year (Government of Kazakhstan, 2022[4]). In addition, the government set up a special Commission on demonopolisation in early 2022, with the main goal of reviewing and proposing amendments to the current legislation applicable to the telecom sector. The Commission is composed of the Ministries of Infrastructure Development and Justice, relevant public institutions, such as the Competition Authority, and representatives of the private sector. However, achieved results have not been communicated so far and it is unclear if the partial privatisation of Kazakhtelecom’s mobile operators will results from the Commission’s activities.
Changes to the regulatory framework could facilitate faster extension of networks and quality improvements
Despite these recent efforts, the telecom sector remains characterised by a regulatory environment that favours incumbents. As a result, new operators struggle to enter the market, and access to infrastructure and tariffs remains highly unequal for small providers, which prevents quality increases across the network.
The three main operators are connected to international mainline internet and operate on both the business-to-business and the business-to-consumer segments. As a result, smaller operators do not have the possibility to compete with their own infrastructure on the fixed market, nor their networks on the mobile one. Instead, they use the infrastructure of the larger operators. OECD interviews suggest that the terms on which larger operators grant access to smaller ones are non-transparent and that pricing policies vary widely, distorting competition at the retail level. In particular, Kazakhtelecom’s monopolistic situation over fixed and mobile infrastructure results in unequal access to infrastructure and tariffs for smaller providers. While in theory the “last-mile” connectivity programme enables smaller operators to take part in the planning and development of new infrastructure where coverage is absent or below the levels set by the NDS, OECD interviews indicated that only incumbents are effectively allowed to participate so far. For instance, recent auctions for the construction of fibre optic communications lines in selected rural regions were allocated to Kazakhtelecom and Transtelecom. This trend might be indicative of the existing policy barriers in the sector, which operate to the detriment of new entrants.
Current legislation and regulatory requirements impose additional high costs on operators, which tend to favour incumbents. In particular, each operator has to ensure the compatibility of its telecom network and equipment with the Systems for Operative Investigative Activities (SORM) architecture, allowing law enforcement and intelligence agencies to obtain direct access to data on commercial networks (Government of Kazakhstan, 2022[5]). Network and equipment also need to be made accessible to a monitoring facility for analysis, and providers must provide storage for the intercepted data (CLFR, 2015[6]). During interviews conducted by the OECD, these requirements were cited as one of the main barriers for the entry of new operators due to the high costs they impose on potential entrants.
The lack of specific sectoral regulation further limits the possibility to address these issues. Indeed Kazakhstan has no independent regulatory authority for the sector, while the Competition Authority as well as the Committee on Regulation of Natural Monopolies under the Ministry of National Economy are entrusted only with competition matters, without having a mandate for economic regulation (Government of Kazakhstan, 2022[7]; Government of Kazakhstan, 2022[8]). While a dedicated department exists for telecommunications and communications in the Competition Authority, OECD interviews indicated that staffing is very low, with only one person working full-time on telecommunications. The Authority also authorised Kazakhtelecom to buy a 75% stake in KCell, the country’s largest mobile phone operator, resulting in the company owning two-thirds of the mobile market since 2018, suggesting de facto very low anti-trust powers (Financial Times, 2018[9]). In addition, industry associations and an ICT Committee within Atameken are not involved in regulatory activities either, while only two out of the ten employees of the demonopolisation committee work specifically on the telecom sector, and their mandate is limited to improving market conditions for last-mile operators.
Recommendation 3: Create an independent regulator for the telecom sector
Recent OECD research shows that reforms to promote competition and investment in the telecom sector (see below) have been essential drivers of infrastructure deployment, and fundamental to bridge digital divides of both a geographical and quality nature (OECD, 2021[10]; OECD, 2021[11]). In particular, there is evidence of complementarity between liberalisation and regulatory independence in driving a sustained pace of technology adoption, both at the level of society and businesses (ICC, 2007[12]).
Indeed, the cost structure of telecom markets, due to high investment needs and high fixed costs, as well as other barriers to entry, results in monopolistic structures if left unregulated. Across OECD countries, regulation has been used to foster competition, reduce prices and extend the coverage of broadband and mobile networks. In particular, the creation of an independent sectoral regulator is a central tool in the hands of policymakers to ensure wide access to and quality of internet, enhance firms’ competitiveness, and increase investment in the sector (OECD, 2021[10]). Kazakhstan could set up such an agency for economic regulation of the telecom sector, to complement current demonopolisation reforms, support improved internet coverage and quality, and attract investments to the sector.
If in theory the division of roles between sectoral regulation and competition policy is strict, the actual allocation of roles between sectoral regulators and competition authorities varies over time and depends on country-specific conditions (OECD, 2021[10]). Since Kazakhstan is in the early stages of the demonopolisation of the telecom sector, it should consider a clear allocation of roles between the sectoral regulator, which should be the only competent authority for economic regulation (forward-looking), and the Agency for Competition, still entrusted with competition regulation (backward looking), when creating the former. If the regulator were entrusted with the mandate to organise the market ex ante, it would support the demonopolisation process through the prevention and regulation of market failures.
In addition, when establishing such a regulator, it is crucial to ensure the conditions for its independence, de jure and de facto, from both the government and the sector it regulates to allow for effective and impartial regulation. In practice, this requires entrusting the regulator with a clear mission statement, the human and financial means to fulfil its mandate, and clear staffing rules to prevent undue influence (Box 3.1).
Box 3.1. Pro-competitive reforms in the telecom sector support competitiveness
Conditions for the effective independence of a sectoral economic regulator
Sectoral regulators are public bodies helping to ensure access to and quality of key public services, facilitate infrastructure management, and enhance market efficiency. They operate at the interface of public authorities, the private sector and end-users, requiring them to behave and act objectively, impartially, and consistently, without conflict of interest, bias or undue influence. Independence of sectoral regulators is defined in reference to both the political power and the regulated operators:
The former requires avoiding competing interests between general policy objectives and those of sectorial regulation, as well as distortions linked to private interests and the shareholder State.
The latter refers to the need for regulators to avoid the risk of capture through regulated operator(s), either because of proximity with the regulated businesses, influence of pressure groups (both historical operators and new entrants), or asymmetry of information.
In practice, the regulator’s de jure and de facto independence relies upon:
The clarity of its role, with a clear mandate allowing for a forward-looking stance and clear definition of the market it regulates. The mandate should also be stable over time.
The financial and human means to fulfil its mandate, for instance through a plurennial budget, and power to recruit its own staff from a diverse pool of qualified candidates.
The independence of its leadership, with transparent rules for appointment and dismissal.
Transparency and accountability rules across all staff and leadership such as clear rules on the nature of employment accessible upon leaving the regulator and safeguards against lobbies and pressure groups (for instance through collegial structures, and clear rules for relations with market players and in particular SOEs).
The example of Mexico’s telecom regulator
Before 2013, the Mexican telecom sector was highly concentrated, and its sectoral regulatory agency had limited capacity to execute its mandate: the agency’s commissioners were selected by the Government and operated in a weak legal environment with limited sanctioning and implementation powers. The 2013 constitutional reform created the Federal Institute of Telecommunications (IFT), a strong and independent regulator for the telecommunication and broadcasting sector:
IFT became fully independent and the sole economic regulator for the telecom sector, as it has been separated from the Communications and Transportation Ministry, and a three-step selection process (involving academia, the President and the Senate) of IFT Commissioners ensured independence of its staff.
IFT was granted wide sanctioning power and tools over firms. In particular, it has been granted automatic jurisdiction over any firm owning more than 50% share in radio, TV, cellular, fixed-line phone, internet, or cable TV markets, as well as jurisdiction to target firms on a case-by-case basis if they possess substantial market power. Sanctioning tools have also been increased, and include 6% of revenue gained in Mexico for first offences, 12% for repeated ones, order to divest assets, and revocation of concessions.
In order to fulfil this new enlarged mandate, the agency has been granted additional human and financial means. Today the agency has about 700 employees, seven permanent commissioners, as well as technical evaluation committees, dedicated judges trained in telecom matters, and specialised courts to treat sanctions. Finally, the judiciary has also been reformed so that the agency’s rulings cannot be blocked in court.
Challenge 4: Regulatory and economic barriers constrain financing below the level required to “future proof” digital infrastructure
Efforts to improve the investment environment have made ICT a promising sector for investment
After a boom in the early days of independence, the telecom sector gradually lost some attractiveness to investors in the mid-2000s, in particular due to the mounting investments required to compete with incumbents, chief among them Kazakhtelecom (Samruk Kazyna, 2016[1]). Since Kazakhstan’s WTO accession in 2015, efforts to improve the business environment have made ICT again a promising sector for investment, especially for companies from, inter alia, Turkey, Sweden, and the Netherlands. In 2020, the total ICT market represented about 3.0% of GDP, two-thirds of which was made up by the telecom market and one-third by the information technology market; revenues stood at about USD 2bn, among which internet represented 38% and mobile communications 26% (U.S. International Trade Administration, 2022[15]). The COVID-19 pandemic acted as a catalyst for citizens and business to switch to internet-based services, and the sector has therefore gained renewed attention from domestic and international investors alike, particularly in relation to the upgrade and extension of existing fixed and mobile networks, the rollout of 5G mobile communications technologies, and digital technologies to be used for developing e-government services, smart transport, urban infrastructure, financial sector applications, and the Internet of Things (IoT) (U.S. International Trade Administration, 2022[15]).
For domestic investors, investment opportunities in the sector have expanded, especially in relation to service provision to remote and under-served areas. Under the government’s last-mile connectivity plans, small operators are granted some benefits, including exemption from customs duties, exemption from value added tax on the import of raw materials, and state in-kind grants for the provision of high-quality internet in rural areas (Government of Kazakhstan, 2016[16]). However, as indicated by the sub-sectors of interest to investors, the quality upgrade of networks serving main population centres is also a central element both for the digital competitiveness of the private sector and for the further growth of the ICT sector. Currently, the government offers certain tax breaks to large operators if they provide high-speed internet in rural areas. Given the capital-intensive nature of the sector, access to capital is critical to ensuring the deployment and expansion of a robust network, and FDI can play a significant role in addition to domestic investment (ICC, 2007[12]). Kazakhstan’s obligations in relation to its WTO accession include the removal of the rule limiting non-residents to ownership of no more than 49% of any telecom company, excluding mobile operators, but no particular time frame has been set for this removal (Samruk Kazyna, 2016[1]). Currently, a government waiver is still required for foreign investors wishing to acquire more than 49% of shares in a telecom company, as well as limits to foreign ownership for the announced partial privatisation of Kazakhtelecom’s mobile operator (Baker McKenzie, 2022[17]).1
Remaining regulatory and financial barriers remain prohibitive, especially for small “last-mile” operators
Despite improvements to the investment framework and the renewed attractiveness of the sector for domestic and foreign investors, OECD interviews indicated that Kazakhstan’s communication networks fall short of the investment level needed to bridge the connectivity gap for rural and small urban areas, as well as to upgrade the quality and densify the network in urban centres. Expanding communication networks to rural and remote areas requires indeed high levels of investment, as the “last-mile” segments are more costly to cover due to their distance to core network facilities. In addition to the financial challenge, the provision of last-mile fixed connections requires a broad deployment of high-speed “middle mile” infrastructure. As for mobile, the economic challenges often relate to ensuring sufficient backhaul capabilities to the mobile cell sites, as well as efficient spectrum management (OECD, 2021[11]).
On the quality front, the issues are similar: fibre or other high-speed networks that are physically closer to the end user lead to increased internet speed across all access technologies; this represents an important challenge for those located in more remote places. 5G deployment in particular will require consequent network densification (OECD, 2021[11]). On both issues, investment as well as the regulatory frameworks are key to unlocking network expansion. In particular, economies without barriers to investment benefitted from greater and longer-term commitment by investors as well as new management approaches, technology, and skills transfer, driving telecom network expansion (ICC, 2007[12]).
Regarding investment, high regulatory barriers for electronic communications as measured by the OECD Product Market Regulation (PMR) Index, as well restrictions on FDI in the sector, could account in part for the failure to attract the investments needed to extend and upgrade fixed communication infrastructure. Kazakhstan is indeed much more restrictive than both the OECD and Central Asian averages (Figure 3.1). For the PMR, Kazakhstan had the most stringent regulatory barriers to competition of any other country under review, more than three times the OECD average (OECD, 2018[18]).
Figure 3.1. FDI regulatory restrictiveness
Note: CA average includes data for Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. A score of 0 indicates the country is more open, 1 more closed.
Source: (OECD, 2022[19]).
As incumbents hold a quasi-monopoly over cable ducting, additional infrastructure investments, for instance for fibre optic cables, prove very costly and difficult for smaller operators. In addition, if the latter benefit in theory from equal access to infrastructure owned by Kazakhtelecom and other larger players, OECD interviews indicated that in practice only a small number of operators share elements of infrastructure, mainly in the mobile sector. Risks of changing contracting terms and tariff increases from large operators seem to be the reasons. High network use and deployment costs are thereby cited as one of the most important and prohibitive barriers for smaller operators operating on the last-mile segment. Co-investment or co-deployment in broadband access networks could be an alternative, as it is authorised by the law on communication regulating the sector (Government of Kazakhstan, 2022[5]; Baker McKenzie, 2022[17]). That said, OECD interviews indicate that their use is highly limited, that there is no policy support in that field, and that private initiatives rarely occur. From an FDI perspective, the 49% limit on foreign ownership in telecoms also puts foreign investors at a disadvantage, as illustrated by two out of the three foreign operators leaving Kazakhstan since 2016 (Samruk Kazyna, 2016[1]). Finally, beyond some benefits to last-mile operators, neither the government nor the country’s investment promotion agency (IPA), Kazakh Invest, provide targeted investment support or policy support to attract new operators, whose entry could accelerate the expansion of coverage and network densification.
On the regulatory front, OECD interviews also indicated that licensing procedures for telecom services and infrastructure remain a barrier for many small operators, while spectrum management does not meet current needs. All digital telecom services and infrastructure development are subject to mandatory licensing, issued by the Telecommunications Committee of the Ministry of Digital Development, Innovation and Aerospace Industry. For mobile internet, the Committee also issues permits to use radio frequencies allocated by the Interdepartmental Commission on Radio Frequencies (Baker McKenzie, 2022[17]; Government of Kazakhstan, 2014[20]). OECD interviews indicated that the procedures for spectrum licensing remain cumbersome and below demand. In particular, if according to the Law on Communications, frequencies are allocated based on tenders, the Telecommunications Committee is also authorised to allocate frequencies without such auctions. In addition, permits are granted for one year, requiring annual renewals, with notification periods that are reported to be very short and unpredictable (Government of Kazakhstan, 2022[5]). This compounds the financial barriers, including high capital outlays, and unattractive rural market segments preventing new operators for entering the market. The government announced a simplification of procedures for issuing mobile spectrum licences and enforcing frequency compatibility standards earlier this year, though it seems to be mainly aimed at preparing a new licence auction for 5G (Government of Kazakhstan, 2022[21]).
Recommendation 4: Develop an investment attraction strategy for last-mile connectivity and next generation communication networks
A sound regulatory and institutional framework is central to expanding digital connectivity and quality, since private actors undertake the vast majority of the investment required for ICT infrastructure development. Across the OECD, policies that reduce barriers and costs of network deployment and provide incentives to invest have been widely used to support connectivity deployment (OECD, 2021[11]). Likewise, Kazakhstan could develop a three-step investment attraction strategy for the sector to support the further densification and quality upgrade of its ICT infrastructure, thereby paving the way for quality upgrade of current and deployment of next generation communication networks.
Building on the recent achievements in streamlining and simplifying the investment framework, as well as the licensing procedures for many sectors (OECD, 2020[22]), Kazakhstan could further improve the enabling environment for infrastructure investments. In particular, introducing harmonised procedures for operators to get all necessary permissions (e.g. permits and licenses) for high-quality network development would enable Kazakhstan to increase the speed of deployment. Since smaller operators usually have fewer resources devoted to regulatory matters, they can benefit most from such reforms, allowing improved network coverage in the last-mile segment and densifying the network. In addition, the government could also streamline the procedure for obtaining permits and licenses for spectrum use and rights of way, to reduce network approval and construction times.
However, instances remain where private investment might not meet the need for infrastructure deployment, coverage and quality, and where the government may be better placed to take a longer-term and broader view of returns. As discussed above, connectivity gaps can indeed arise in areas where the business case for private investments is weak, while the levels of investment needed for densifying infrastructure networks remain sometimes below expectations. In these instances, the government could invest alongside private actors, for instance through public-private partnerships (PPPs) to share the risks associated with the creation, development and operation of an infrastructure asset. In particular, regional governments in Kazakhstan could assess on a regular basis the needs for digital infrastructure renovation or rollout (especially for high-speed networks). Once these needs are identified, the policy relevance as well as the business case of the projects should be assessed to evaluate whether private investment alone would be sufficient to cover for it. Should the business case not be appealing, the government may choose to support the project either through full public investment or through alternative risk-sharing approaches. This evaluation is crucial both to make the best use of public funds, as well as to avoid crowding-out private investment, and should be done in close collaboration with the MDDIAI, the MIID, operators and private sector representatives.2 To ease the process even further, the relevant line ministries could develop a set of standardised alternative approaches (e.g. PPPs, co-investments) on which local governments can draw.
Finally, Kazakhstan could also develop targeted investment incentives, especially for small “last-mile” operators in rural and small urban areas (Box 3.2). Some incentives already exist, though a more ambitious strategy could be developed by providing both direct financial incentives (e.g. through reverse auction mechanisms) as well as regulatory and advisory support during all phases of an infrastructure development project. As it is done in the majority of OECD countries, where 83% of investment promotion agencies (IPAs) actively promote ICT connectivity infrastructure as one of their priority areas for investment, KazakhInvest could be entrusted with this mandate, and actively look for and accompany domestic and foreign investments to the sector (OECD, 2021[23]).
Box 3.2. Investment attraction strategies to support digital infrastructure rollout
Examples of policies to close connectivity divides in rural and small urban areas
Many OECD countries have recognized the need to ensure the delivery of high quality broadband services at symmetric speeds across their territory as a prerequisite to support the business environment in rural and small urban areas, and level the playing field with urban firms. If investment promotion and infrastructure deployment remain overarching policies, tailored initiatives can be used, independently or in combination with other approaches, to close remaining connectivity divides.
Demand aggregation models increase certainty for investors and operators, in areas where the rollout of broadband networks might appear economically unviable: demand is co‑ordinated and bundled upfront by signing up customers in advance, which secures the commitment of local users (households and businesses) to the operator’s services before he deploys its network.
Public-private partnership (PPPs) initiatives share the risks associated with the creation, development and operation of a digital infrastructure asset between governments (national or subnational) and private actors. Most of PPPs in the OECD have been designed as open access networks, so that public funding (e.g. preferential loans or subsidies) promotes competition.
Public funding is used as a second-best policy across OECD countries, to address remaining connectivity gaps despite policies promoting competition and private investment. Financing of connectivity expansion mainly derives from national broadband plans, and comes usually in the form of state aid, dedicated funds, market mechanisms (e.g. competitive tenders and reverse auctions), or voucher programmes for the last-mile connections.
Source: (Mölleryd, 2015[24]).
References
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Notes
← 1. Restrictions on foreign participation include (i) a full ban on the management or operation of the main lines of communication without the creation of a legal entity and of a control centre (for infrastructure quality) on the territory of Kazakhstan; (ii) a maximum 10% participation of physical and legal persons in the management or operation of the operator; and (iii) a maximum of 49% participation in the operator.
← 2. For instance, Sweden conducts prior market analysis to identify not commercially attractive areas, and once these are detected, public consultations of the planned financed expansions are held with private operators to ensure that these plans do not crowd-out a planned commercial development.