A case study of the application of long run incremental cost models in the jordanian telecommunications industry over the period 2006 - 2012: Performance, efficiency and implementation issues
Jwaifel, Abdullah Mahmoud
Cardiff Metropolitan University
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The thesis examines the impact of the introduction, in 2009, of Long-Run Incremental Costing (LRIC) on the performance and efficiency of the wholesale market of the Jordanian Telecommunications Industry (JTI); an oligopoly industry composed of three, approximately equal sized firms, Orange, Umniah and Zain. Oligopolistic industries are associated with excess returns. The intention of the introduction of LRIC by the JTI regulator was to reduce excess returns and introduce a degree of competition. The research examines the impact of LRIC on performance; comparing two periods pre LRIC 2006-2008 and post LRIC 2010-2012. The data set includes financial accounting data, gathered between 2013 and 2015, from published accounts and primary data drawn from surveys of managers in the three firms, the latter needed to overcome well-known issues of transparency and more importantly the firm’s concern with commercial sensitivity. Analysis of the data revealed that adopting LRIC on pricing and costing apparently had significant impacts on performance; impact varied between measures; sales data (call traffic/volumes) were extrapolated and suggest some impact on competition and market share. Correlations between measures are interesting and not entirely of the order that theory would predict. One suggestion that emerges from correlation/covariance analysis is that performance and efficiency may be more reliably measured by composite measures than independent measures and that heat mapping comparative data is a useful management tool. This thesis draws on a long tradition of cost and cost efficiency analysis in accounting and economics, culminating in the concept of LRIC, which is composed of both. LRIC is really a cost plus measure; an attempt to account for true opportunity costs in a situation where the marginal cost, in this case the cost of an additional call, simply as a variable cost is negligible (and falling with respect to the volume of traffic) but when full opportunity costs are taken into account, they are substantial. IV The data set (population data, JTI is made up of the 3 firms) includes variables grouped under the categories of financial, operational and competitiveness. Variables considered include; rates of return on assets, equity and sales; profit margin, earnings and revenue; capital expenditure; calculated price and cross elasticities, and sales. The data set includes published and unpublished data and data from fieldwork consisting of structured surveys with JTI managers, carried out in 2013-2015. Confidentiality concerns and transparency issues were addressed. This involved the researcher in extrapolation of data especially with reference to sales, mark-up and industry competition. The academic contribution of this thesis is the measurement of the extent of the application of the LRIC model methodology in Jordanian telecommunication firms through tracking the application and development of LRMC through LRIC in a new context (Jordan). Additionally, the impact of the application of the LRIC model methodology on the financial performance of the Jordanian telecommunication firms will be analysed using financial performance indicators. Another expectation is the contribution of an important set of feasible recommendations on increasing the efficiency of the JTI, taking into account the Jordanian context (Economides et al. 2008). This study has many implications. First, from the view point of the regulator (TRC), service providers, whether incumbent or new entrants can earn a sufficient profit to cover a reasonable share of their cost of capital (investments). As a result, the prices of the services provided will be fair and reasonable for consumers. From this viewpoint, the research recommends the continuation of the application of the LRIC model for costing and pricing telecommunications services in the Jordanian telecommunications industry (JTI). Second, from the view point of the regulator (TRC) services providers, whether incumbent or new entrants, can earn a reasonable and sufficient profit and normal return on capital sufficient to cover a reasonable share of common and fixed costs by using an equal proportionate mark-up (EPMU) approach. Also to cover the cost of new investments which meet the increasing demand for next generation technology. This research, therefore, recommends the ongoing application of the LRIC model for costing and pricing telecommunications services in the JTI. V Third, from the view point of the regulator (TRC) the efficiency of prices based on the LRIC model methodology may open the door for new entrants into the industry and also may lead to ensuring that incumbent and new entrants share fixed assets (network elements) with each other as well as encouraging competition. In addition, the efficiency of the LRIC prices will protect consumers’ interests by providing them with new technology at lower prices. Consequently, service providers, whether incumbent or new entrants can earn a reasonable and sufficient profit and normal return on capital sufficient to cover a reasonable share of common and fixed costs by using equal proportionate mark-up (EPMU) approach, and also to cover the cost of their new investments. Thus from this perspective, this research recommends the long-term application of the LRIC model for costing and pricing telecommunications services in the JTI.
PhD Thesis - School of Management
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