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Executive summary

Ooredoo Oman appreciates the opportunity that the Telecommunications Regulatory Authority

(TRA) has given it to respond to the consultation on Accounting Separation Regulation and

Guidelines.

After reviewing the consultation documents provided by the TRA, Ooredoo Oman is pleased to

submit its detailed response for which we provide an executive summary in this section.

Ooredoo Oman considers that accounting separation, and in particular the form of accounting

separation that the TRA has prescribed, is a disproportionate remedy to address the regulatory and

competition issues in the Omani telecommunications market.

When the TRA carried out its market assessment in 2012, it used partial data from 2011. In these

four years the competitive landscape of Omani telecommunications market has changed

significantly; there has been sizeable growth of MVNOs using the networks of incumbent operators

and the increased rollout of fixed access infrastructure by Ooredoo Oman.

The TRA is therefore proposing to impose an onerous and disproportionate remedy based on

competition assessment findings which are out of date. For example, MVNO’s have been able to

effectively gain access from both mobile networks and Ooredoo Oman in particular. We consider it

essential that the TRA revisits its market assessment, taking into account the changes in the market,

before requiring Ooredoo Oman to implement such a disproportionate remedy.

Even based on the findings of the 2012 market assessment, the potential competition issues arising

from the perceived dominance or joint dominance of Ooredoo Oman did not warrant a remedy as

disproportionate as the one the TRA is proposing.

It is worth noting that there is little international precedent for the prescription of accounting

separation as a remedy for mobile operators or for smaller fixed operators whose network overlaps

with that of the incumbent.

Not only is accounting separation generally being perceived as a burdensome remedy but the TRA

has proposed a particularly onerous and disproportionate form of accounting separation, which is

likely to create costs which far outweigh any potential benefits. In some cases the requirements will

make implementation unfeasible. Specifically:

The TRA has reserved itself the right to request separated accounts for all services, including

markets where Ooredoo Oman does not have SMP;

It has formulated CCA and LRIC methodologies for all services without assessing the real

need and benefit of using these methodologies compared to the costs of implementing

them;

It has reserved itself the right to publish the accounts, disregarding confidentiality issues or

potentially unintended consequences;

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It has placed unnecessarily stringent audit requirements, including the requirement for fairly

presented accounts, which entail a significantly higher cost and effort than properly

prepared accounts;

It has set out an unrealistic timetable for the presentation of the accounts;

It sets a level of granularity which makes the accounts difficult to prepare and may lead to

qualified audits;

The TRA has stated that it wishes to develop a market for wholesale access and sees

accounting separation as a transitory remedy to facilitate this. Given the significant

implementation costs of accounting separation, it is disproportionate to request it as a

transitory measure; and

It has required a very detailed level of documentation

Therefore Ooredoo Oman believes that the TRA should consider carrying out an updated market

assessment that better reflects the current conditions of the Omani market.

Notwithstanding this, Ooredoo Oman believes that the TRA should re-assess the implementation of

accounting separation as an adequate remedy to meet its objectives. If the TRA still concludes that

accounting separation is warranted, it should prescribe a form of the remedy which is proportionate

to the market failure it is trying to address, feasible to implement and that does not impose an

unreasonable burden on operators and the sector as a whole.

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1. Introduction

1.1. The legal basis for requiring accounting separation In August 2013 the TRA issued decision 74/2013 regarding Market Definition, Dominant Licensee

and Remedies. In this document the TRA set out its decision on the relevant markets in the

telecommunications sector in Oman, the dominant operator(s) in each market and the remedies

prescribed for each market where Significant Market Power (SMP) was found.

In the case of Ooredoo Oman, it was found to be jointly dominant with Omantel in the following

markets:

Market 4: retail broadband internet access from a fixed location

Market 6: retail mobile services market

Market 13: Wholesale broadband access at a fixed location

Market 15: Wholesale trunk segments of leased lines

Market 16: Wholesale IP international bandwidth capacity

Market 18: Wholesale access and call origination on public mobile telephone networks

Market 20: Wholesale transit

In addition, Ooredoo Oman has been found singly dominant for the following markets:

Market 11: Wholesale voice call termination on individual public telephone networks

provided at a fixed location

Market 17: Wholesale voice call termination on individual mobile networks

For all these markets the TRA prescribed, among other remedies, accounting separation.

In February 2015 the TRA issued the Accounting Separation Regulation and the Accounting

Separation Guidelines for consultation.

While Ooredoo Oman does not agree with the joint dominance designation, it is pleased to respond

to the consultation being carried out by the TRA in response to the accounting separation regulation

and guidelines.

Ooredoo Oman considers that there is evidence which contradicts the finding of joint dominance,

namely the continued rollout of competing infrastructure and the increased market share by MVNOs

due to increased wholesale access. In addition, there is little evidence of collusion in these markets,

thereby the risk of abuse of dominance is small. With this in mind, accounting separation is a very

harsh remedy to address a small risk.

Additionally, not only is accounting separation not a well-focused remedy for joint dominance issues

but the specific requirements by the TRA are disproportionate and, in some cases, are likely to act as

an obstacle to implementation.

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1.2. The Omani context

The following section provides a brief overview of the Omani telecommunications market. It is not

intended to act as a detailed review of the Omani telecommunications market but simply to provide

some context as to the market where the TRA intends to implement accounting separation

remedies. Specifically, it discusses the size of the telecommunications market in Oman as well as the

evolution of competition in the mobile and fixed parts of the market.

1.2.1. Demographics

Oman has a relatively small population with approximately 3.2 million inhabitants spread over an

area of 212,240 km, making it one of the least densely populated in the world. Nonetheless,

approximately 60% of the population resides in the 10 largest urban centres in the country.

The relatively small size of the addressable market means that any potential regulation which is

likely to create a cost should be implemented with a clear idea of the costs and benefits related to it.

For example, in the case of accounting separation, the costs are generally fixed and are not

proportional to size. The costs of implementation would therefore have to be absorbed by a small

subscriber base.

1.2.2. Mobile market

In spite of having only two mobile operators, the mobile market in Oman is highly competitive. It is

one of the most highly penetrated markets in the region with a total penetration of 188%1

(December 2014).

In addition to the two mobile network providers, there are several Mobile Virtual Network

Operators (MVNO’s) that operate or have operated using both Omantel and Ooredoo Oman’s

infrastructure.

Since the provision of telecommunications licenses to MVNOs in 2008, these have been able to

capture a sizeable part of the market as the following chart shows2:

Chart 1. Subscriber market share

1 Source: Telegeography

2 Source: TRA

Omantel 47%

Ooredoo 41%

MVNOs 12%

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Furthermore, just in 2014 MVNOs increased their share of the market from 10.1% to 12%. This level

of MVNO penetration compares well with that achieved in other countries where MVNOs have been

allowed to operate as the following chart shows3:

Chart 2: MVNO penetration rates by subscribers4

It is worth noting that not only have MVNO’s been able to gain wholesale access to the existing

mobile networks but it has actually been Ooredoo Oman which has been more accommodating to

competing downstream competitors. This puts into question the assertion by the TRA that Ooredoo

Oman is jointly dominant in the wholesale access and call origination on public mobile telephone

networks market (market 18).

1.2.3. Fixed market

Despite its low population density Oman has achieved a high degree of fixed penetration (excluding

fixed-wireless) with 93.27% household penetration achieved in December 20145.

While Omantel remains the incumbent operator, Ooredoo Oman has made great strides since 2009

where it started to roll out its own fibre access network. Nonetheless, its market share is still

significantly smaller as the following chart shows6:

3 Source Piran Partners MVNO Observatory 2014

http://www2.piranpartners.com/index.php?option=com_joomdoc&task=cat_view&gid=35&Itemid= 4 Germany MVNO share has been adjusted for subscribers contracted with branded resellers like Freenet, Drillisch and

United Internet (whose combined contract customer base is 9.7mn in Q1 2014). The UK MVNO market share has also been adjusted for the 1mn contract customers for Giffgaff (which is also a branded reseller). http://imagepool.drillisch.de/download/2014-10-22_Drillisch-Warburg_Research_en.pdf and http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/10456091/Budget-mobile-network-giffgaff-hits-1m-mark.html 5 Source: TRA

6 Source: BMI

0% 10% 20% 30%

Poland

Italy

Spain

France

Oman

UK

Germany

Market share (%)

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Chart 3: Fixed line market share

With Omantel still having more than 80% of the total retail fixed market, it is clear that it still enjoys

a dominant position. Nonetheless, Ooredoo Oman fails to understand how it can be concluded that

it shares that dominant position with Omantel when its market share and footprint is much smaller.

1.2.4. Summary

The TRA should give careful consideration to the conditions of the Omani market before imposing an

onerous remedy such as accounting separation. Specifically, it should take into account that:

The Omani market is small and the costs of accounting separation are not proportional to

size. These costs will therefore have to be absorbed by a smaller subscriber base as well as

investors.

The Omani mobile market has been competitive and wholesale access has been made

readily available to access seekers, especially by Ooredoo Oman.

In the fixed market Ooredoo Oman has fewer subscribers and a smaller footprint than

Omantel and, therefore, cannot be considered to be jointly dominant in the retail and

wholesale fixed markets.

1.3. Accounting separation in the context of an outdated market assessment

When the TRA carried out its market assessment in 2012 it used 2011 data. In its final report it

analysed some information from 2012, but did not subject this market information to consultation.

As discussed in the previous section, the Omani telecommunications market has changed

significantly since then. As a result, the TRA is planning to impose onerous remedies based on

findings which may no longer be valid.

Omantel 82%

Ooredoo 18%

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It is significant in this respect that the TRA clearly indicated in its 2012 consultation document that

the time horizon for its market assessment horizon was 2 years from the adoption of the relevant

report. That assessment horizon should properly start from the end of the last year of market data

that was assessed, i.e. 2011 in relation to markets that were actually consulted on, or 2012 if market

data that was not subject to consultation is relevant, which Ooredoo considers questionable.

The fact that the relevant assessment horizon is now passed, while the TRA is only now consulting

on the accounting separation remedy, shows that the introduction of an accounting separation

remedy (and indeed other remedies that have not even been consulted on such as market caps)

cannot be considered to be of great importance to assuring effective competition in the market, and

bearing in mind the very significant cost of accounting separation, strongly supports the conclusion

that its introduction is disproportionate.

It should also be noted in this respect that the first set of regulatory accounts that have to be

produced under the AS remedy are an FAC HCA basis, and not a LRIC basis. Although those FAC HCA

accounts are to be generated within 12 months of the regulation being adopted, practice suggests

that in fact it will probably be about 2 years before the first set of HCA FAC accounts will be

available, and the second year’s LRIC accounts will be even further off. In addition, the TRA appears

to consider that where the audit of those accounts are subject to a qualification, their costing

information may not be relevant for regulatory purposes. Ooredoo understands that on the basis of

the auditing standards indicated by the TRA there is a strong possibility of some qualification to the

audit of those accounts for the first two years of regulatory accounts produced. The likelihood is

therefore that the accounting separation obligation on Ooredoo will not produce any information

that the TRA can rely on for regulatory purposes within the next 3 ½ to 4 years.

These factors also strongly support the view that the TRA must carry out an updated market

assessment which not only better reflects the current situation, but also looks properly at the

relationship between the likely cost burden compared with the harm addressed, and takes into

account the fact that results of AS are not likely to be usable for several years, at which time the

market situation may look very different. An updated market assessment will minimise the risk of

imposing such onerous remedies as the proposed version of accounting separation on markets

where there are no longer competition concerns, or at least not serious enough to warrant such

intrusive and burdensome remedies.

1.4. The role of AS

Accounting separation has been formulated as one of the remedies available to regulators to

address dominance in telecommunications markets. Accounting separation is, however, not a

blanket remedy to be imposed whenever dominance is identified.

The role of Separated Accounts is two-fold, they potentially act as both as an ex-ante remedy for

certain competition concerns and as an informational tool for the TRA.

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The role of Separated Accounts, as a regulatory remedy can be appropriate but it is most important

that:

the regulator is clear and precise about the nature of the competition problem;

accounting separation is a suitable and efficient remedy for the identified problem;

any accounting separation remedy is at the level of the economic market where the

competition problem has been identified;

the remedy is constructed in the least intrusive/burdensome form possible to address the

identified competition problem; and

the expected benefits of the remedy outweigh the costs of the remedy.

The EU framework provides guidance as to the objective of accounting separation. Within the EU,

accounting separation is a remedy specifically imposed on an operator in a particular defined

relevant market in response to finding of SMP in that market. Its status as such is recognised in the

EU framework’s enshrinement of accounting separation as one of 5 specific wholesale remedies

available to NRAs to impose on SMP operators, where appropriate and proportionate. In other

words, accounting separation is not justified, needed or relevant where:

an operator has SMP in an upstream market, but transparency in relation to its treatment of

its retail arm is not a concern; or

the downstream market is effectively competitive.

Accounting separation is a highly intrusive and costly remedy, requiring significant amounts of

internal and external resources. Furthermore, accounting separation generally addresses a narrow

type of market failure, namely dominance in wholesale markets providing an essential input to retail

operators where additional transparency and monitoring against discrimination is needed (e.g.

ensure that there is no margin squeeze or cross-subsidy).

As a result, it would neither be appropriate nor proportionate to require an operator to prepare

separated accounts in relation to services other than those in which it has been found to have SMP.

In addition, given the significant costs that building separated accounts entail, there has to be a clear

benefit to its implementation, which more than offsets the costs that it creates.

The Omani market is smaller than that of most countries where AS has been implemented. As a

result, the significant costs required for implementation and ongoing production of separated

accounts will have to be absorbed by a smaller subscriber base. As will be discussed later in this

response, the TRA has formulated more onerous AS requirements on Ooredoo Oman than, for

example, Ofcom has imposed on BT, a company serving a population of more than 64 million people.

It is therefore unlikely that the benefits resulting from the imposition of this remedy would offset

the costs.

In addition, Ooredoo Oman considers that the competition issues that the original market

assessment identified were not serious enough to warrant a remedy as onerous as accounting

separation and certainly not with the requirements that the TRA has set out. Furthermore, the

developments in the Omani telecommunications market since the original market assessment was

carried out indicate that these competition concerns are less relevant today.

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The TRA has formulated the accounting separation remedy based on the finding of joint dominance

for markets 4, 6, 13, 15, 16, 18 and 20. There is scant precedent for regulators finding joint

dominance.

In 2003 ComReg attempted to impose joint dominance in the mobile access market in Ireland on

Vodafone and O2. In 2005, however, the decision was annulled by the Electronic Communications

Appeal Panel (ECAP) because, among others, ComReg failed to establish that prices charged by the

two mobile operators were above the competitive price levels and that tacit collusion required a

symmetric market share for the involved parties7.

There are only a handful of additional cases (e.g. Spain) where joint dominance was found in the

mobile market and accounting separation was never required. Furthermore, we are not aware of

joint dominance finding in any fixed market.

It is worth remembering that joint dominance would mean that, in the relevant market, Omantel

and Ooredoo Oman are able to coordinate their activities independently of the market and to their

own benefit. The TRA has failed to explain how, for example, in the fixed access market where it has

a much smaller footprint than the incumbent Ooredoo Oman would be able to effectively coordinate

with Omantel to its own benefit.

The TRA has proposed remedies on both the mobile and fixed businesses of Ooredoo Oman. We

now discuss the issues related to accounting separation in mobile and fixed separately.

1.4.1. Accounting separation on Ooredoo Oman’s fixed network

Ooredoo Oman’s fixed wireless network was rolled out in 2010 and their fixed fibre access network

started being rolled out only in 2011, with 64,000 fixed subscribers in total compared to over

300,000 subscribers for Omantel.

There is little evidence of joint dominance being found when there are competing infrastructures,

much less when the incumbent has a footprint larger than the nascent operator. Lack of joint

dominance in overlapping networks is not uncommon as, for example, many European countries

have incumbent fixed networks, which partially overlap much smaller cable networks. Where these

networks overlap there has not been any finding of joint dominance or led to a qualified finding of

dominance for the incumbent.

A good example of this is the UK where BT and KCOM have been found dominant8 despite Virgin

Media having its own access network which overlaps the incumbents’ networks. Ofcom has not

found BT/KCom to be jointly dominant with Virgin. Specifically, in its 2012 review9, Ofcom stated

that “(…) while we acknowledge that Virgin is considering expanding its network footprint (as

7 See http://www.compecon.ie/attachments/File/Compecon_Newsletter__6.pdf

8 KCOM is dominant in the Hull area and BT is dominant everywhere but Hull. It is worth noting that this is not a finding of

joint dominance but of dominance on different markets. KCOM and BT provide services in different geographical markets, therefore each is singly dominant in its own market. 9 http://stakeholders.ofcom.org.uk/binaries/telecoms/ga/fixed-access-market-reviews-2014/statement-june-

2014/volume1.pdf

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discussed above), we consider it unlikely that this will significantly reduce BT’s market share in this

review period. We therefore consider it likely that BT’s market share will still be greater than 50% by

the end of this review period.” Ofcom therefore concluded that BT/KCOM continued to be dominant

while Virgin Media was not dominant or jointly dominant.

Ooredoo Oman is in a similar circumstance, with a footprint that is much smaller than that of

Omantel and, therefore, dominance concerns must be strictly limited. It is worth noting that joint

dominance assumes that the jointly dominant operators can coordinate their activities in order to

act independently of the market. Where Ooredoo Oman does not have a network it cannot

coordinate any activities and even where the networks overlap there is no evidence of coordination

or collusion.

Accounting separation is generally imposed on operators which have SMP in an upstream market

which provides an essential input to downstream competitors and where additional transparency is

therefore needed. Ooredoo Oman understands why, for example, Omantel, which is the sole

operator with a nation-wide footprint, may require such a remedy. For example, in areas where

Omantel is the sole wholesale access provider additional transparency between its retail and

wholesale offerings may be required to ensure that there is, for instance, no margin squeeze.

Even though the TRA may still want both operators to provide wholesale access where there is

overlapping infrastructure, there is no need for such onerous transparency requirements on both

operators, much less one as burdensome as the form of accounting separation that the TRA has

prescribed.

Ooredoo Oman therefore considers that the highly intrusive form of accounting separation the TRA

has prescribed on its fixed business that is unwarranted.

1.4.2. Accounting separation on Ooredoo Oman’s mobile network

Across the world it is uncommon for regulators to impose accounting separation remedies on mobile

operators. The fact that there are generally multiple mobile operators covering the same territory

means that no one single operator is likely to be in control of an essential input for its downstream

competitors (e.g. wholesale origination access).

While regulators around the world have encouraged Mobile Virtual Network Operators (MVNOs),

which do not own their own network, they have done it through instruments other than imposing

accounting separation on mobile operators. Generally, the availability of more than one network is

sufficient for potential access seekers to be able to negotiate a favourable deal with access

providers.

There is no indication of there being any access issues to wholesale mobile infrastructure in Oman as

both Omantel and Ooredoo Oman have provided access to several MVNOs, which, in turn, have

been able to capture more than 12% of the retail market.

While the TRA’s intention may have been to facilitate and effectively monitor the development of

this market, it has decided to impose a very onerous form of accounting separation which is likely to

yield very limited benefits, if any, and will come at a significant cost to the industry.

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Ooredoo Oman therefore considers that there is no justification for the formulation of accounting

separation as a remedy for mobile markets.

1.4.3. Summary We consider that the potential competition issues pertaining to Ooredoo Oman that the 2012

market assessment identified does not warrant particularly onerous remedies. The recent

developments in the Omani market have confirmed that a functioning wholesale access market can

develop without the need for heavy-handed regulatory intervention.

However, not only has the TRA decided to push ahead with its implementation of a particularly

burdensome remedy but it has prescribed a very onerous version of accounting separation, one

which is disproportionate to the potential competition issue.

Ooredoo Oman is particularly concerned about the costs that the prescribed accounting separation

remedy would entail and whether these will be offset by the limited benefits that it is likely to bring.

In small markets there is a real and present danger that remedies injudiciously applied may end up

imposing net costs, instead of benefits on consumers. This is because the costs of compliance with

Separated Accounts regulation do not scale with size and in a small jurisdiction can outweigh the

benefits flowing from the regulation. This is particularly the case with a move to a fairly presents

audit opinion as this places significant additional burdens on an operator, as will be discussed in

detail in section 6.

Therefore, while Ooredoo Oman understands and agrees with the TRA’s objective of creating an

access framework which allows new operators to effectively compete at the retail level, the blanket

formulation of an onerous form of accounting separation as a remedy is likely to result in significant

costs for the industry with little in the way of benefits to show for it.

The TRA should therefore ensure that the remedies that it is prescribing are proportional to the

competition concern it is trying to address. Even if the TRA decides that accounting separation is the

correct remedy, it should prescribe a less onerous form of accounting separation which is also

commensurate with the competition issue being addressed.

In addition, the TRA should consider carrying out a new market assessment in order to ensure that

the remedies being imposed are appropriate for the current Omani telecommunications market.

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2. Proportionality in the context of accounting separation

A key principle of regulation is that remedies should be proportionate, meaning that they are no

more interventionist than necessary in order to achieve the specified objectives. In order to ensure

proportionality, there should be a consideration of alternative remedies, and demonstrate that the

least burdensome effective remedy is selected.

In the case of Oman, the accounting separation remedy that has been formulated is not proportional

with the market failure it tries to address. Not only is accounting separation a disproportionate

remedy for the markets where Ooredoo Oman has been found dominant or jointly dominant but the

TRA has chosen to formulate it in an unusually onerous form. Specifically:

The TRA has reserved itself the right to request separated accounts for all services, including

markets where Ooredoo Oman does not have SMP;

It has formulated CCA and LRIC methodologies for all services without assessing the real

need and benefit of using these methodologies compared to the costs of implementing

them;

It has reserved itself the right to publish the accounts, disregarding confidentiality issues or

potentially unintended consequences;

It has placed unnecessarily stringent audit requirements, including the requirement for fairly

presented accounts, which entail a significantly higher cost and effort than properly

prepared accounts;

It has set out an unrealistic timetable for the presentation of the accounts;

It sets a level of granularity which makes the accounts difficult to prepare and may lead to

qualified audits;

The TRA wishes to develop a market for wholesale access and sees accounting separation as

a transitory remedy to facilitate this. Given the significant implementation costs of

accounting separation, it is disproportionate to request it as a transitory measure; and

It has required a very detailed level of documentation.

Ooredoo Oman will discuss each of these issues in detail in the subsequent sections.

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3. Application to markets without SMP

Paragraph 3.7 of the Accounting Separation regulation states:

“The Authority may require the Dominant Licensee, in order to investigate any possible anti-

competitive conduct by that Dominant Licensee, to submit in the given timeframe:

(i) any accounting information, including Separated Regulatory Accounts, for any Relevant Market

and Individual Service in which that Dominant Licensee is operational but has not been declared by

the Authority to have a dominant position;”

By definition separated accounts would only be prepared for the services where SMP was identified

and this remedy was prescribed. Requesting separated accounts for markets for which it has not

prescribed them would be akin to implementing remedies without a market assessment and in

markets without SMP.

Furthermore, there is a contradiction in this requirement as it is aimed at investigating “any possible

anti-competitive conduct by that Dominant Licensee”. Dominant operators only exist in the relevant

markets where SMP was found. In other words, the behaviour of dominant operators in markets

without SMP cannot be assessed because these operators do not exist in the first place.

Ooredoo Oman would like to clarify that the TRA is entitled to request cost accounting information

as parts of its duties, including ex-post competition analysis. On the other hand, separated accounts

can only be requested for markets where SMP has been identified and it has been prescribed as a

remedy.

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4. Costing methodologies

The TRA has imposed disproportionate costing requirements on Ooredoo Oman. The TRA has

effectively formulated all possible costing methodologies for all services in markets where

accounting separation was prescribed without regard for the cost or suitability. Furthermore, the

proposed implementation of LRIC would go against the underlying principle of full cost recovery.

Specifically, the TRA has required all accounts to be presented using CCA and HCA and also two

versions of LRIC costing. Ooredoo Oman sets out its view on CCA and TD-LRIC in the following

sections:

4.1. CCA

The TRA has proposed that a set of accounts has to be submitted using CCA. In its guidelines it has

outlined the revaluation methodology for all assets.

The objective of CCA is to reflect the market price of the assets at present rather than the

accounting value. This is particularly useful for networks where assets have been in place for a long

time and the accounting values are likely to differ significantly from accounting values.

For example, in Europe CCA has generally been used for incumbent networks where many of the

assets continue to be used well beyond the end of their accounting lives. By using CCA it is possible

to have a better understanding of the current value of the network than would be obtained by

reviewing historical accounting values.

With this in mind it is unclear why there is a need for Ooredoo Oman to submit its accounts using

CCA given that its network is new and, therefore, its accounting information reflects the current

value of the network.

It is worth mentioning that Ooredoo Oman’s mobile network started being deployed in 2005 while

the initial rollout of fixed access network was in 2009, with additional deployment taking place for

both networks – i.e. more coverage for fixed and 3G/LTE for mobile. Given the age of these networks

the accounting values are expected to be close to the values that would be obtained using CCA.

Preparing CCA accounts requires a significant additional effort and costs and there should be a clear

justification for the implementation of CCA. The TRA therefore needs to make clear what it intends

to use CCA accounts for. If the purpose is to use them in the process of regulatory price setting, this

requirement is likely to be met through the bottom up models being built at the moment as per the

2015 consultation on BULRIC models for mobile and fixed networks.

If the TRA decides that requiring CCA accounts is still required, it should be mindful that the CCA

requirement should be proportionate. As a result, it should opt for a less onerous method to

produce these accounts, namely use indexing for the revaluation of the assets, which will greatly

reduce the effort required while not materially compromising the accuracy and reliability of the

results.

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4.2. TD-LRIC

4.2.1. Limited basis for onerous LRIC requirement

In addition to the two sets of FAC Separated Accounts (on an HCA and CCA basis), the TRA is

imposing a requirement on Ooredoo Oman to prepare two further sets of Separated Accounts, on a

TD LRIC cost basis. This leads to four sets of accounts, which is without precedent.

To justify the inclusion of these LRIC accounts, the TRA states in the AS guidelines that:

“LRIC is often considered to be the ideal methodology to adopt in setting regulated prices at

economic cost. From an economic perspective it delivers the best approximation of what an

efficient licensees costs should be since it shows the actual resource cost in providing an

additional amount of output. This in turn means that LRIC can provide the correct economic

signals to the market. As such, LRIC information is an important part of a set of separated

regulatory accounts.”

The TRA has used this theoretical argument in favour of LRIC costing to justify extending the

Separated Accounts implementation significantly. The TRA has not considered any practical

considerations.

Preparing Separated Accounts on a LRIC basis is an extremely onerous requirement. There are some

regulators that have imposed this, but many only choose to impose Separated Accounts on an FAC

basis. In the UK, whilst there is a LRIC model prepared by BT, this model is unaudited in contrast to

the rest of the Separated Accounts. Whereas regulators would typically present the costs and

benefits of imposing this onerous requirement, it appears that the TRA has not considered this.

We would expect the TRA to firstly set out how they would use the TD LRIC in the Separated

Accounts information to help them make regulatory decisions. This is not immediately clear,

particularly as the TRA is also in the process of preparing a Bottom-up LRIC cost model for this very

purpose. Given that it will have LRIC information available, it is unclear why it is imposing such an

onerous obligation on Ooredoo Oman.

4.2.2. Requirement for two sets of LRIC accounts

The situation is further complicated by the TRA’s decision to require Ooredoo Oman to prepare two

separate forms of LRIC Separated Accounts. The TRA has said that “LRIC should be shown based on

the two definitions”, presumably because the TRA could not decide which definition it preferred.

This heavy-handed approach will significantly increase the workload of Ooredoo Oman, who will

now be required to prepare four sets of Separated Accounts. This consideration, which should be at

the forefront of a regulator’s mind, has not been considered by the TRA.

Furthermore, requiring more information will not only increase the burden on Ooredoo Oman, it will

probably result in reduced usefulness for the TRA. The TRA will receive two sets of LRIC costs, based

on the different definitions, in addition to the LRIC costs generated from its own bottom-up model.

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In this case, having more is not necessarily better as there will just be resulting confusion from all

parties as to what is the appropriate cost to use in pricing and regulatory decisions.

If the TRA continues to require LRIC based accounts, it needs to decide on one specific definition to

use, rather than its current approach which will double Ooredoo Oman’s workload and create

subsequent confusion.

4.3. Summary Ooredoo Oman believes that the costing requirements that the TRA has proposed are

disproportionate, especially with regards to CCA costing and LRIC. Specifically, Ooredoo Oman

considers that:

CCA has little benefit in the case of Ooredoo Oman as both its fixed and mobile networks

are relatively new;

If CCA were to be implemented, revaluation of the assets should be done through

indexation;

The TRA should clarify what the purpose of the TD-LRIC accounts are, given the bottom-up

model it is preparing. The TRA should consider whether any theoretical benefits justify the

practical concerns;

The TRA cannot justify requiring Ooredoo Oman to prepare two separate LRIC accounts.

Instead it must surely decide on a specific definition of LRIC to employ; and

The TRA is effectively requiring Ooredoo Oman to produce four sets of accounts without a

clear explanation of what they will be used for.

17

5. Publication

In the ‘Accounting Separation Regulations’ consultation, the TRA opens up the possibility that the

Separated Accounts may be published:

“The Authority may, at its discretion, publish or require the Dominant Licensee to publish

Accounting Separation Methodology Document, Separated Regulatory Accounts and

Accounting Documents that have been submitted to the Authority in compliance with this

Regulation.”10

However; very little further detail is provided and it is not clear whether this is something that the

TRA is seeking to implement or instead whether it is an option it may only introduce if further

concerns are raised. However, Ooredoo Oman has to assume that the TRA is planning to require

publication.

There are a few regulators who require the Separated Accounts of operators to be published. The

most commonly known examples are in the UK11 and Ireland12. The reason for requiring publication

is to help ensure transparency and allow wholesale access seekers to understand the costs faced by

an incumbent. There is certainly merit in these points from a policy perspective.

However, the majority of regulators that require the preparation of separated accounts do not

require publication. These NRAs understand the merit of transparency and the benefits that access-

seekers will get from understanding the costs faced by the incumbent. However, these benefits are

outweighed by the potential costs of publication. The EC Directive which sets out the option for

implementing Accounting Separation sets out the risks that may result from publication:

“National regulatory authorities may publish such information as would contribute to an

open and competitive market, while respecting national and Community rules on

commercial confidentiality”13

Despite the Directive giving them the opportunity to do so, most NRAs do not require the

publication of Separated Accounts because this would lead to breaches of commercial

confidentiality:

In Sweden, separated accounts are not published due to the Swedish confidentiality act

since TeliaSonera is still partially a public trade company;

In Switzerland, there is no publication because the information of the SMP operator has to

be treated as strictly confidential;

In Germany, separated accounts are not published due to confidentiality requirements

derived from case‐law from the Constitutional Court; and

In Hungary, separated accounts are not published due to such accounts being regarded as

confidential.

10

AS Regulation, Paragraph 12.1 11

http://btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2014/index.htm 12

http://www.eircom.net/regulatoryinformation/separated-accounts/ 13

Article 11 of Directive 2002/19/EC of The European Parliament and of the Council of March 7, 2002 (as amended by Directive 2009/140/EC).

18

We have reviewed the regulatory requirements in ten Middle Eastern countries and have not found

any examples of countries where there are requirements to publish accounts14. In the case of Saudi

Arabia, their telecommunication regulator has a conditional stipulation that designated service

providers might have to publish their accounting separation methodology for transparency

purposes. However, there is no requirement to publish the actual accounts.

The same rationale for not requiring publication of accounts is relevant in Oman. However, given the

reason why Ooredoo Oman has been required to prepare Separated Accounts, it is even more

relevant. Ooredoo Oman and Omantel have been judged to be jointly dominant in a number of

markets. This joint dominance designation, which is unusual as explained above, implies that the

TRA considers that “collusion is an outcome that may be reasonably expected under the

circumstances”. If the TRA does indeed believe that these markets are ripe for collusion between

Omantel and Ooredoo Oman, surely the worst thing to require is for each company to publish

confidential business information.

The negative collusive consequences of publication have been considered by regulators previously:

“Another problem with non-discrimination is that together with the transparency obligation

it can also facilitate and indeed encourage tacit collusion among operators. In markets

which meet many or all of the criteria which would indicate the presence of possible joint

dominance, consideration should be given to the extent that such obligations may have

adverse consequences, possibly to the extent that alternative or modified obligations might

be considered…

…Problems similar to that identified in relation to transparency and non-discrimination also

apply in this area regarding co-ordinating effects and the possible promotion or facilitation

of tacit collusion. The revelation of business processes, efficiencies and indeed strategies to

competitors can be mitigated by appropriate control of the information. Therefore the

publication of information by NRAs is conditioned in the sense that it has to contribute to an

open and competitive market, while national and Community rules on commercial

confidentiality are respected.”15

We would expect the TRA to consider carefully the potential risks of publication of separated

accounts. The current consultation implies that the regulator will be able to keep this option up its

sleeve and use it at a time of its choosing, when Ooredoo Oman will get an opportunity to seek to

redact a portion of these accounts. Instead we think that this issue is too important to be left

14

For the following countries, there is no evidence that their respective telecommunication regulation authorities have imposed an obligation to publish their separated accounts:

Bahrain,

Egypt,

Iraq,

Jordan,

Kuwait,

Lebanon,

Libya,

Qatar,

Saudi Arabia and

United Arab Emirates. 15

ERG, Remedies Guidance 2006

19

hanging. The TRA should setting out its position regarding publication, which should be consistent

every year, so that Ooredoo Oman can respond appropriately.

20

6. Audit requirements

6.1. Properly prepared vs. fairly presented The TRA has issued draft guidelines in relation to the type of audit opinion to be applied to Ooredoo

Oman’s Separated Accounts. In its guidelines the TRA has required a fairly presented opinion, a

significantly more onerous requirement than properly prepared.

This section of Ooredoo Oman’s response sets out our understanding of the two different types of

opinion, namely “properly prepared in accordance with…” and fairly presents in accordance with….”,

based on discussions we have had with auditors. In particular, we set out the impact that these

different audit opinions will have on the work required to be performed by the auditors.

The two typical forms of reporting commonly applied to Separated Accounts in other jurisdictions

are:

An opinion as to whether the regulatory financial statements have been properly prepared

in accordance with a detailed methodology document (a compliance framework). Typically

this form of opinion would not consider the appropriateness of the methodologies or the

reliability of the non-financial source data used to drive cost attributions. The form of

assurance is often described as “Properly prepared in accordance with…”.

An opinion as to whether the regulatory financial statements are fairly presented in

accordance with a methodology. In this case the key elements of the methodology are the

costing principles such as “cost causality” and “objectivity” which for a “fair presentation

framework”. This form of assurance would include consideration of the appropriateness of

the detailed costing methodologies and robustness of data sources to implement these

principles (note: the distinction between these two scopes is most significant where detailed

methodology documentation is prepared. In the absence of a very detailed methodology

document a “Properly prepared in accordance with…” audit opinion would need to apply

judgement in considering the appropriateness of the actual methodologies employed).

There are a number of countries where regulators require audited separated accounts but have

been content to only require these to be done on a “properly prepared” basis:

Qatar: Ooredoo is only required to have its Separated Accounts audited to the “properly

prepared basis;

Romania: Romtelecom is only required to have its Separated Accounts audited to the

“properly prepared basis; and

UAE: Etisalat is only required to have its Separated Accounts audited to the “properly

prepared basis.

The following paragraphs detail the Audit work required to meet the different opinion levels.

21

6.1.1. Methodology Review

The methodology review for a “fairly presents” audit opinion will consist of a detailed assessment of

the appropriateness of the methodologies used in the production of the Separated Accounts

including an assessment of the robustness of the methodologies ensuring that the approaches used

are objective i.e. not biased in any given direction. The auditor will also have to make a judgement

about the level of granularity applied for a given methodology to ensure that it is appropriate for the

level of opinion being provided. Typically the auditor would take a sample based approach to the

review of methodologies, but in the first year this sampled based approach must cover a very

significant proportion of the allocated costs.

For a “Properly prepared” audit opinion the auditor must ensure that the material methodologies

used are not wholly unreasonable.

6.1.2. Methodology Application

Under a fairly presents audit opinion the auditor must ensure that for a given methodology the

stated approach has been applied correctly, namely that the correct input data has been used, that

the appropriate calculations have been used within the model used to produce the output driver

data and that the output driver data has been produced accurately. This will involve substantive

testing of the models used to derive the driver data including testing of the following:

Accuracy of input data;

Internal model consistency;

Accuracy of intermediate calculations; and

Accuracy of compilation of output results.

Under a properly prepared audit opinion the same level of testing would be required.

6.1.3. Data Sources

Under a fairly presents audit opinion detailed testing is required of all the material data sources

which provide information to be used in the production of the Statements. The testing of material

data sources comprises the following tests:

Substantive testing of the compilation and extraction of source data;

Testing source data systems with focus upon testing and assessment of management

controls in place over the completeness, accuracy and validity of processing of amendments

and periodic validation procedures;

Testing of controls over the conduct of each material survey with focus on the controls

surrounding the collection of data and the validation of results; and

Assessment of sufficiency of data source in respect of

Objectivity; and

Statistical accuracy.

Under a properly prepared audit opinion, only the first test in relation to the testing of the

compilation and extraction of source data would be required. The further tests required for the

22

detailed testing of these data sources is the most significant component of the extra audit testing

required above that included in a properly prepared audit.

The consultation makes reference to the fact that the proposed fairly presents audit opinion should

be provided within one year of issuing the determination on SMP. This proposed timetable does not

take into account the fact that it is very unlikely to be possible to test the controls in place over the

data sources during 2014 as this year has already past. Indeed it is unlikely given the timing of this

draft determination that the relevant testing could be completed for 2015 either. A detailed

discussion of the potential timing of any change in audit opinion will be discussed section 7.

6.1.4. Systems review

Under both a fairly presents and properly prepared audit opinion the systems review will look at the

underlying infrastructure of each stage of the costing model and ensure through testing of controls

or detailed substantive tests that the models operate as intended. The review will look at the

effectiveness of reconciliation procedures, control totals, systems interfaces, periodicity of data

refreshes and so on. Testing will be also conducted to ensure that all model elements have been

correctly processed.

6.1.5. Financial Statements

Under both a fairly presents and properly prepared audit opinion substantive testing of the

compilation of the financial statements will be carried out, including:

Accuracy of inputs from underlying cost model;

Accuracy of additional calculations within the statements;

Internal consistency of the statements; and

Substantive testing of the key statement reconciliations

6.1.6. Analytical review

One of the other areas of the audit where there is a significant difference between a fairly presents

and a properly prepared audit opinion is in relation to the audit of the Statements themselves. The

additional audit steps consist of the following:

Detailed review of each primary statement for markets/services, examining consistency with

the trends apparent within the statutory accounts and assessing the reasonableness of the

calculated profitability of each market/service;

Detailed review of the calculated costs of network components/services to assess whether

they fall within ranges experienced during reviews of other territories, or identifying the

local circumstances which lead to a justifiable variance from this average; and

Detailed line by line review of the CCA:HCA and LRIC:FAC ratios of network

components/services.

Under a properly prepared audit opinion the statements would only be subject to a high level review

of their overall consistency with the Company’s published statutory accounts and investigation of

any unusual trends or returns.

23

6.1.7. Documentation review

In relation to the review of documentation, both audit standards require largely the same work to be

done, namely:

Assessment of sufficiency of documentation, focussing on the completeness, transparency

and suitability of the documentation of the model for use as a framework for audit

purposes.

Assessment of consistency of model documentation with the principles in the framework

documentation.

While it is true that the more clearly written and detailed the framework documents are, the easier

it is for the auditor to give their opinion, However the provision of an opinion does not require a very

detailed document. It will mean, however, that the auditors will be required to carry out more work

to reach their opinion. If a framework document was not complete, i.e. there were sections relating

to certain parts of the model missing, then the auditors would require the company being audited to

complete those missing areas. In addition, if the documentation contained ambiguities, the auditor

would request the company to make those areas of documentation more clear.

The only difference between the two would be that in order to give a fairly presents form of opinion

the auditor could require the operator to override a particular requirement of the TRA instructions if

this were to lead to a set of accounts that did not fairly present if the framework was followed.

Indeed this would also be true under a properly prepared audit opinion where the instructions of the

TRA were wholly unreasonable.

6.1.8. Summary

In summary the key areas of difference between the two audit opinions are in relation to:

Review of appropriateness of the methodologies used in producing the accounts;

Review of the data sources including testing of the controls in place to ensure completeness

and accuracy of data; and

Review and understanding of the Financial Statements to ensure that the level of

profitability in each market/service is understood.

Therefore, the fairly presented accounts required by the TRA create a significantly higher level of

complexity. As will be discussed in the following section, this increased level of complexity will

translate into a significant increase in the cost of producing the separated accounts.

It is unclear how two sets of LRIC accounts which will provide different results can be determined to

be “fairly presented” at the same time.

The common sense approach to accounting separation is not to require for an opinion initially but

rather just agreed upon procedures. These can then gradually evolve to properly prepared with an

assessment of the feasibility and potential need for fairly presents at an appropriate time. This

approach takes into account that these models change and evolve over time.

A requirement for fairly presented accounts from the start is disproportionate.

24

6.2. Cost of AS

This section considers the potential cost which would be incurred in meeting the TRA’s requirements

for preparing Separated Accounts which are audited. These costs comprise of three elements:

Implementation of Separated Accounts system;

External audit costs; and

Internal costs.

We have set out below the costs for each of these three elements based on whether the audit

requirements were carried out on a “properly prepared” or “fairly presents” basis

It should be noted that the figures stated below are estimates based on information collected from

external parties based on similar work that they’ve done in other jurisdictions. In particular the

estimates of external costs are not based on a detailed analysis of required tasks which the auditors

would typically perform before proposing any work.

6.2.1. Implementation costs

Implementing the Separated Accounts system for the first time is a very complicated process. This

process will incorporate a number of steps

Developing the specification of the AS system;

Reviewing Ooredoo Oman’s data sources, controls and procedures;

Collection of data;

Selecting a platform;

Developing and implementing the AS system;

Producing the Separated Accounts;

Preparing documentation; and

Final analytical review.

Given that the requirements from the TRA include HCA, CCA and two LRIC accounts, many of these

processes will be duplicated. Based on information we have received from external parties who have

implemented AS systems in other countries, we have estimated the costs of implementing a system

in order to achieve a “properly prepared” or “fairly presents” audit opinion:

USD 1,000,000 – 1,200,000 for a “properly prepared” opinion; and

USD 1,300,000 – 1,600,000 for “fairly presents” opinion.

6.2.2. External audit cost

Based on information we have received from auditors about their experience elsewhere of

performing audits to meet the standard “fairly presents”, and “properly prepared” standards, the

required work – and consequently cost – is determined by various factors.

Meeting a “fairly presents” audit standard requires testing of systems and data sources. Typically

one would expect to carry out an initial ‘fit-for-purpose’ review of data sources with particular focus

25

on the non-financial sources such as volume sources as well as the Fixed Asset Register (FAR) which

would be relied on at a much greater level of granularity than for the Statutory Accounts. This

review would typically require external resource led by the auditors but supported by internal

resources. As a result of this internal review it is possible that certain systems will require

remediation in terms of both fixing the controls and processes over completeness, accuracy and

validity of data and also cleansing the standing data. This work will largely be carried out by internal

resources from the operator.

Based on information we have received from auditors who have audited AS systems in other

countries, we have estimated the annual costs required in order to achieve a “properly prepared” or

“fairly presents” audit opinion:

USD 250,000 – 300,000 for a “properly prepared” opinion; and

USD 600,000 – 900,000 for “fairly presents” opinion.

6.2.3. Increased internal costs

The internal costs will increase firstly due to additional resource required in the costing team. It is

difficult to predict the level of internal resource required to meet the more onerous requirements.

We would expect that the core costing team would require around another 5 FTE under both audit

standards.

In addition involvement from cost centre owners and other data providers will need to be more

rigorous both in providing supporting evidence for estimates or assumptions (for example,

establishing allocations with supporting evidence or data) and in explaining changes and movements

in the data year on year.

The estimated cost of the increased costing team is expected to be an initial incremental

cost of USD 250,000 as well as an on-going incremental annual cost of USD 250,000.16 This

cost is estimated to be similar under the different audit opinions.

The estimated internal cost of greater involvement from cost centre owners is estimated at

USD 80,000 per annum17. This cost is estimated to be similar under the different audit

opinions.

USD 300,000 – 1,000,000 for remediation of data sources for the “fairly presents” opinion.

The largest component causing the wide range is the FAR system. It is not known how

accurate this system is but based on its regular usage, it is possible that the potential issues

with this system are not significant.

6.2.4. Summary

Based on the types of costs we have identified in order to prepare Separated Accounts to meet a

specific audit opinion, please find below the cost breakdown for the two opinions:

16

This is based on an assumed annual salary cost of USD 50,000 and an 12 month period for preparing for and producing the Regulatory Accounts 17

Assumes that there are 80 cost centres and 5 FTE days per cost centre is required for building up estimates and providing explanations/evidence

26

Properly prepared Fairly presents

One-off costs Annual costs One-off costs Annual costs

Implementation costs $1m -1.2m - $1.3m-1.6m -

External audit costs - $250k - $300k - $600k - $900k

Increased internal costs $250k $330k $550k - $1.25m

$330k

Total costs $1.25m - $1.45m

$580k - $630k $1.85m - $2.85m

$930k - $1.22m

The present value18 of the costs of fulfilling the AS remedy will range from USD 5.1m – 5.7m for the

properly prepared opinion and USD 8.1m – 11.1m for the fairly presents opinion.

The fairly presented accounting requirement therefore imposes a significant and disproportionate

cost on Ooredoo Oman. If the TRA still considers that accounting separation should be implemented,

it should be done under the properly prepared principle.

6.3. Tripartite agreement

The TRA has prescribed a requirement for the opinion to be addressed to both Ooredoo Oman and

the TRA, therefore requiring a tripartite agreement. In order for the auditors opinion to be relied

upon by the TRA it is necessary that the TRA is a party to the audit engagement, i.e. that there is a

tripartite agreement between the operator, the TRA and the operator’s auditors.

The inclusion of the TRA in a tripartite agreement would mean that the audit opinion on the

Separated Accounts is addressed to both the operator and the TRA and will allow the TRA to rely on

the opinion on those Separated Accounts. The existence of the tripartite agreement would give the

TRA feeling of involvement in the audit process without necessarily granting it significant extra

influence. Whilst there is no Omani or international guidance specific to tripartite agreements we

believe that the guidance issued by, for example, the Institute of Chartered Accountants in England

and Wales provides an appropriate framework for the agreement of contractual terms between the

auditor, the company and the TRA under this guidance. The involvement of the TRA would be limited

to:

Some involvement in the audit planning process with the ability to request certain areas of

the accounts for specific review (under a separate engagement contract for agreed upon

procedures) or highlighting areas of specific interest which the auditor would take into

account when determining their qualitative assessment of materiality on scoping their audit

work (without introducing any specific reporting to the TRA), but they would not be able to

direct the auditors on the specifics of the tests that they must perform as part of their audit;

18

Over a ten year period based on a WACC of 8%

27

Taking part in a tripartite meeting at the finalisation of the audit at which the auditors would

provide an overview of any significant issues affecting the audit opinion; and

Potentially, receiving a copy of any management letter after the finalisation of the audit

which would identify those items that the auditor has identified that require correction but

are not material to the Accounts and therefore did not require correction at the time. The

operator would typically produce a response to the audit management letter addressing

each of the issues identified and describing how they plan to address each of the issues and

over what timeframe.

There would be limits to the involvement of the TRA and the existence of a tripartite agreement

would not for instance give them access to the auditors work papers or provide them unfettered

access to the auditors during the audit process.

6.4. Auditor Requirements

In the AS Guidelines consultation, the TRA sets out the criteria for appointing an auditor for the

separated accounts. The TRA has set out detailed requirements to ensure the auditor has sufficient

capability and is sufficiently independent from the audited companies. The TRA explains that if one

of the conditions is not met, it may use its discretion to accept the auditor in exceptional

circumstances. These auditor requirements are evidently well intentioned; however they are so

stringent such that it will be impossible for Ooredoo Oman to appoint an auditor that meets all the

criteria.

There are very few audit firms in the world that meet the criteria set out regarding capability:

(i) one auditing expert, with at least seven years of experience in auditing and/or accounting experience and good understanding of the financial and accounting standards employed in the Sultanate;

(ii) one regulatory accounting expert, with at least seven years of experience in regulatory accounting in the telecommunications industry;

(iii) one regulatory expert, with at least seven years of experience in regulation in the telecommunications industry; and

(iv) one technical expert, with at least seven years of relevant experience and familiarity with the auditing of regulatory accounts.

Setting these criteria alone, would limit the options available for Ooredoo Oman, albeit with

justification that the resulting auditor would be able to do the job. However, the subsequent

requirements related to independence are so stringent that all the capable firms will be judged to

not be independent. Most of the major international accounting firms that have the capability to

audit separated accounts will have either audited the Statutory Accounts of Ooredoo Oman or will

have worked on other engagements for either Ooredoo Oman or another company with a

relationship to Ooredoo Oman’s parent, thus making them judged not fully independent.

28

Typically regulators will include requirements to ensure that the auditor is capable of doing the

audit. However, they rely on the audit committee of the operator to determine whether the auditor

is independent. There is no reason why the statutory auditor cannot audit the separated accounts.

Indeed it would be more efficient if this were the case.

Similarly there appears no reason to us why a firm that has worked on an unrelated engagement for

another Ooredoo company cannot audit the separated accounts. The TRA should review its

guidelines related to the choice of auditor, and bring them in line with international best practice, so

that Ooredoo Oman will be able to appoint someone that can meet the criteria. Otherwise the TRA

will be required to grant an “exceptional circumstances” request on an annual basis.

6.5. Specific Audit requirements in AS Regulations

The AS regulations consultation sets out a number of specific requirements related to the audit

which go against best practice for Separated Accounts.

The TRA requires the Auditor to prepare a Compliance Statement to accompany the Audit report.

We understand that it is not common practice for auditors to prepare this statement and the

information that is being requested here would normally be included in the Audit Report and/or the

tripartite meeting. We propose that this superfluous requirement, which would increase the audit

fees, is removed.

The TRA completes its section related to the audit in the AS regulations by setting out its expectation

regarding a qualified audit opinion:

“The Dominant Licensee shall be deemed to have complied with its obligations in relation to the preparation of the Separated Regulatory Accounts only if the Regulatory Auditor issues an unqualified Audit Report in relation to Separated Regulatory Accounts. If the Regulatory Auditor issues a qualified Audit Report, the Authority, without prejudice to its powers to impose penalties, may require the Dominant Licensee to prepare a second set of Separated Regulatory Accounts which address the Regulatory Auditor’s identified reasons for qualifying the Separated Regulatory Accounts. Any and all subsequent Separated

Regulatory Accounts shall also be audited.” The TRA’s heavy-handed approach does not reflect the fact that in-fact there may be circumstances

where it will not be possible for an operator to get an unqualified audit opinion, through no fault of

their own. For example, there may be historic data issues which cannot be rectified for a reasonable

cost, or within a given timeframe. In these circumstances, the proportionate solution would be to

get a qualified report. We understand from discussions with auditors that they have had to do this

when auditing Separated Accounts in other countries. This situation should not mean that the

operator has not complied with its obligations.

We think it will be appropriate for the TRA to remove these final two paragraphs to reflect the

reality that there may be some instances where, through no fault of the operator, a qualified Audit

Report is required.

29

7. Timetable

The TRA has included an aggressive timetable for the production of the separated accounts and

related information. Some of these requirements will not be possible practically, and the TRA needs

to reconsider these accordingly.

The first requirement that Ooredoo Oman would face would be to provide the TRA with a complete

list of individual services within fifteen days from the issuing of the regulations. Given that the TRA

has not yet provided detail of how services will be disaggregated, it will be impossible for Ooredoo

Oman to comply with this, without further detail ahead of the regulations being finalised, so that the

lists can start being prepared. Considering this is a new exercise for Ooredoo, we believe that 60

working days from the issuing of the regulations would be a more reasonable requirement.

The second requirement that Ooredoo Oman would face would be to present a methodology

document within three months from the regulations being issued. Whilst we expect to need to

prepare a methodology ahead of preparing the accounts, and the timetable is not unreasonable for

this, this methodology should only be an internal document. It will be impossible for Ooredoo Oman

to finalise a methodology and present it to the regulator to meet this timetable.

There may be aspects of the methodology that need to be changes at a later stage because of

practicalities in the process. There may be aspects of the methodology that the auditor requires us

to change as part of the audit process. The TRA has stated that this document should be final but

this will not be possible until the end of the audit because the auditor will require changes to the

methodology document. We understand that auditors have required aspects of the methodology to

be changed right up to the date of submission. For this reason the methodology should only be

finalised and presented to the TRA at the same time as the Separated Accounts. It would be

inappropriate to finalise this any earlier.

If the TRA is seeking to make changes to the AS methodology, we understand from discussions with

auditors that this may have an impact on the opinion that they are able to provide. If the TRA

proposes a change to the methodology which the auditor disagrees with, this will prevent it from

being able to issue a “fairly presents” opinion. This issue has been considered in recent directions

from Ofcom to BT.19

The third requirement that Ooredoo Oman will face will be to prepare the first set of FAC-HCA

separated accounts within twelve months after placing the obligation. These accounts will need to

audited to the “fairly presents” opinion. As explained above, under a fairly presents audit opinion

detailed testing is required of all the material data sources which provide information to be used in

the production of the Statements. In order to allow for this testing the operator needs to put

appropriate systems in place to collect the necessary data. It is not possible to retrospectively collect

the data.

This twelve month timetable will not be possible to achieve, given that it means that at least part of

the year for the first separated accounts will be prior to the obligations being finalised. Until

19

http://stakeholders.ofcom.org.uk/binaries/consultations/financial-reporting/statement/statement.pdf

30

operators begin the implementation process, they will be unaware of which data sources will be

required to support the methodologies chosen. Only at this stage will it be possible to understand

whether any remediation is needed for the data sources, and how long it would take. It will

therefore be impossible to get a “fairly presents” opinion for a year which incorporates this period

prior to the finalised obligations.

The TRA needs to take this into account when determining when a fairly presents opinion is

required.

It should be noted that it is common practice not to impose a “fairly presents” audit opinion in the

first year of preparing separated accounts for this reason. Indeed when the TRA first imposed this

obligation on Omantel, it allowed them to have a properly prepared audit opinion as an interim

measure in the first year. It seems contradictory for the TRA to impose a more burdensome

obligation, especially when this cannot practically be done.

In our view, the most sensible approach is to have an evolution of the auditing requirements as

shown below:

First year: Agreed upon procedures

Second year: Properly prepared opinion

Subsequent years: Assess the practicality of fairly presented and potential time required in

order to achieve it.

We understand from discussions with auditors that there are a number of examples of regulators

gradually increasing the level of audit opinion in this way:

Ireland: Eircom was only required to have a properly prepared audit opinion in first year in

1999. There was a move to a fairly presents opinion in 2001.

Jamaica: C&W was only required to have a properly prepared audit opinion in first year in

2008. There was a move to a fairly presents opinion in 2010.

Guernsey: C&W was not required to have the first set of separated accounts audited in

2002. A properly prepared audit opinion was required in 2003. There was a move to fairly

presents opinion in 2005.

Jersey: JT was not required to have the separated accounts audited from 2004 until 2010. A

properly prepared audit opinion was required in 2011. There was a move to fairly presents

opinion in 2012.

Bahrain: Batelco was only required to have a properly prepared audit opinion for ten years.

There was a move to a fairly presents opinion requirement in 2011.

We therefore consider it reasonable to produce the Separated Accounts within twelve months of the

obligation, on an agreed upon procedures basis. However this will only be possible for the Financial

Year that had already been completed. If the TRA wishes to have accounts prepared for the next

year, it needs to allow for twelve months after the completion of the Financial Year.

The fourth requirement that Ooredoo Oman will face will be in subsequent years. At this stage the

subsequent FAC-HCA, FAC-CCA and LRIC accounts will need to be presented six months after the end

of the financial year. As explained above, the requirements set out for the different costing

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methodologies are quite onerous and six months will not be sufficient. For the first year of

preparing CCA and LRIC cost models, it is likely that twelve months will be required in the same way

as they were required for the first year of preparing HCA cost models.

In subsequent years, Ooredoo Oman could move to a faster timetable, with the aim to prepare the

accounts within six months in the long term.

Summary

The TRA has presented a very ambitious timetable for preparing the separated accounts and the

associated information. The TRA presumably expects that this accelerated timetable would end up

giving it better information that it can use for regulatory purposes. However, the timetable is so

quick, that documents need to be prepared before they are ready, or when systems will not be in

place to support them. This is obviously not the TRA’s intention and it should amend the timetable

to better reflect its objectives.

Our proposal is as follows:

Ooredoo sends a list of services to the TRA within sixty working days of the determination;

The first set of HCA accounts are prepared on an agreed upon procedures basis after twelve

months of both the Financial year in question and the placing of the obligations (i.e. either

the 2014 accounts will be prepared a year after the obligations or the 2015 accounts will be

prepared by 31 December 2016);

The finalised methodology will be presented at the same time as the finalised accounts;

The second set of HCA/CCA/LRIC accounts are prepared on a properly prepared basis twelve

months after the end of the Financial year in question;

The third set of HCA/CCA/LRIC accounts are prepared on a properly prepared basis nine

months after the end of the Financial year in question; and

In subsequent years, the HCA/CCA/LRIC accounts are prepared on a properly prepared basis

six months after the end of the Financial year in question.

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8. Granularity of accounts

The TRA has prescribed a level of granularity which will make the process of producing separated

accounts much more complex.

In addition, the TRA has not provided the detail of how the services will be disaggregated. The list of

services for which separated accounts have to be produced has not been consulted on and,

therefore, the actual level of granularity is uncertain.

The level of granularity required by the TRA will make it difficult to achieve the level of accuracy that

the TRA expects. Specifically:

quality of data to support attribution methods may be insufficient for such a granular level

of reporting and assurance;

the objectivity of generic attribution bases cannot be assessed at such a granular level; and

it may not be possible to assess the overall reasonableness of one service where it is too

immaterial relative to the overall business.

Indeed, experience suggests that reporting is normally done at market level. Where regulators

require more granularity in terms of services, for example with BT in the UK, they often allow for less

detail to be included in the Accounts

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9. Evolution of accounting separation as a requirement

One of the intended objectives of the TRA is to create a functioning market for wholesale access for

both mobile and fixed.

While Ooredoo Oman agrees with the TRA in the pursuit of this objective, it considers that

implementing onerous accounting separation remedies is not the proportionate method to achieve

it.

In some instances this market has developed on its own. For example, as was discussed in section 2,

there is a functioning wholesale market for mobile access. Retail access seekers have been able to

gain access to the infrastructure of Omantel and, in particular, Ooredoo Oman, which has allowed

them to gain a significant market share, much higher than that of MVNOs in other countries.

More importantly, in section 6.2 we outlined the costs related to the implementation of accounting

separation. Many of these costs are related to the implementation of systems which allow for the

preparation of separated accounts. Setting accounting separation as a transitory remedy would

therefore force operators to incur a significant cost for something that will not be required after a

few years.

It is worth highlighting that other countries have been gradually moving towards a less onerous form

of accounting separation.

Ooredoo Oman therefore considers that it is disproportionate to prescribe accounting separation as

a transitory remedy. The TRA can achieve –and, indeed, has already partially achieved- a functioning

wholesale market for access without having to impose a remedy as onerous as accounting

separation, much less if it intends to use it as a transitory measure.

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10. Format of the accounts

In order for a set of regulations/guidelines to be implementable there must be sufficient detail that

an operator can take those instructions and implement a system capable of producing the required

outputs in terms of financial regulatory accounts. Unfortunately we do not believe the

regulations/guideline documents are sufficiently clear to allow us to produce the information asked

for.

Table 2 on page 62 in the guidelines refers to HCA Profit (Loss) despite this table being identified as

an FAC CCA level, this appears to be a mistake.

Table 3 on page 63 in the Guidelines is identified as the Profit and Loss Statement for LRIC, but the

profit is again referred to as HCA Profit (Loss). In addition it is not clear which of the values in this

table are supposed to be based on LRIC. None of the rows is identified as being on a LRIC basis for

instance. For a Wholesale market, it would be expected that the costs of the market would be based

on LRIC and the transfer charges would be on a LRIC basis if no tariff or price was available. For a

retail market one would expect that the costs of the Market would be on a FAC basis as LRIC costs

for retail are not required.

The Statement of Capital Employed included in Appendix B of the Guidelines does not make it clear

which is the cost standard to be used, HCA FAC, CCA FAC or LRIC (both types) or all of them.

It is unclear on which cost basis each of the statements numbered 5 to 10 should be produced

under, for instance table 8 on network component costs appears to be on an HCA basis, it does not

appear to be required on a CCA or LRIC basis as it would be expected that the cost headings would

be different under each cost standard.

The above examples show that the proforma statements included in the Guidelines are not

sufficiently detailed enough; one would expect a complete set of proformas to avoid any

misunderstandings.

It should also be made clear that in the first year of production of the accounts there will be no

comparatives.

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11. Documentation

The TRA has set out, in Section 11.3 of the AS Guidelines consultation, the accounting documents

that Ooredoo Oman will be required to prepare alongside the Separated Accounts. The full list of

documents required is spread over five pages, which is an indication of the onerous level of the

documentation requirements. For each of the three types of accounts that Ooredoo Oman will be

required to prepare (HCA, CCA and LRIC) it is required to include a significant amount of

documentation including:

To help explain the three types of accounts, Ooredoo Oman is required to prepare a methodology

document:

An Allocation methodology describing revenue and cost allocation methodologies and cost

items including source data, cost centres, cost centre classifications and an overview of the

cost allocation processes;

A Valuation methodology document describing the approaches used by the licensee to

derive gross replacement cost and net replacement cost; as well as all adjustments made

under CCA Financial Capital Maintenance (FCM); and

A LRIC Methodology document describing the methodologies associated with the calculation

of LRIC.

These methodology documents should be sufficient for the TRA and other parties to understand the

methodology employed by Ooredoo Oman. However, in addition the TRA is requiring that Ooredoo

Oman prepares extremely detailed documents to support each of the different types of accounts.

A Detailed Allocation Methodology (DAM) document which is sufficiently detailed to enable the TRA to develop a complete process map of all the allocations in the system. This needs to include, for example, all General Ledger costs that are inputted into the cost model;

A Detailed Valuation Methodology (DVM) document providing detailed information on the underlying data and methodology used to prepare the FAC/CCA Separated Regulatory Accounts. This needs to include, for example, quantity and unit price information underlying the Gross Replacement Costs for asset categories; and

A Detailed LRIC Methodology (DLRICM) document which is sufficiently detailed to enable the TRA to develop a complete process map of all the allocations in the LRIC model. This needs to include, for example, all General Ledger costs that are inputted into the LRIC cost model as well as all the methodologies used to derive specific routing factors.

To put these documentation requirements into perspective, BT’s DAM document in the UK has in

the past run to over 1,000 pages20. The level of information that the TRA is requiring in enforcing the

preparation of these three detailed documents is disproportionate and unnecessary. The detail

required will mean that there will be significant costs in preparing this documentation, and the

documents themselves will be so large that they are not useful in providing clarification. Moreover

there would be significant competition concerns with this detailed costing and price information

being published, if the TRA decides that this should be enforced.

20

http://btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2011/DetailedAttributionMethods2011.pdf

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12. Conclusion

We again thank the TRA for the opportunity to respond to the consultation on accounting separation

regulation and guidelines. Ooredoo Oman is supportive of the TRA’s objective of achieving a

competitive telecommunications market in Oman.

We believe that the TRA has prescribed a particularly onerous form of accounting separation which

cannot be objectively justified on the basis of a cost/benefit analysis. Specifically we argued that:

The accounting separation remedy was prescribed based on a market assessment which may

not accurately reflect the current condition of the Omani telecommunications market;

A market for wholesale access in Oman has developed and accounting separation is not the

proportionate transitory remedy in order to further develop it;

The form of accounting separation that the TRA has prescribed is disproportionate with

respect to the competition issue it is trying to address;

The TRA retains the option of requesting separated accounts for services in markets where

no SMP has been found;

It requires accounts to be provided using too many different methodologies without a clear

explanation of what the results will be used for;

The TRA reserves the right to publish of the accounts, which may lead to confidential

information being disclosed as well as facilitating anti-competitive practices;

It has set excessively onerous audit requirements including fairly –presented accounts as

well as highly restrictive requirements for the auditor;

It has set an unfeasible timetable to comply with the regulation;

It has demanded a level of granularity which significantly increases the complexity to

produce the accounts and runs the risk of making them less accurate;

It has prescribed a transitory remedy with significant implementation costs;

It has prescribed formats which may not reflect the requirements set out in the guidelines;

and

It has set onerous documentation requirements.

In addition the process followed by the TRA in this consultation has not provided Ooredoo Oman

with sufficient information to prepare a complete response on all issues relating to accounting

separation.

The format of the final accounts has not been set out clearly;

It is not clear the level of granularity required; and

Two definitions of LRIC which contradict each other and cannot be fairly prepared

simultaneously.

We consider it is imperative that the TRA consults again on its proposals for accounting separation.

We trust that the TRA finds our comments useful and we would welcome the opportunity of

discussing our submission further with you.