Risk factors
Atlantic Tele-Network (ATN), the parent company of GT&T, has told the Securities and Exchange Commission (SEC) that it continues to worry about several risk factors that could affect its operations in Guyana. The likely loss of its monopoly in the Guyana wireline market and the financial irregularities uncovered in 2012 in its GT&T operations weigh heavily on its mind as could be gleaned from the 2013 annual report submitted to the US regulatory body. The latter concern might also be linked to efforts of avoiding accusations of breaching Section 404 of the Sarbanes-Oxley Act which requires US companies to evaluate and report on the effectiveness of their internal controls. The US-based company, whose principal corporate offices are in Beverley, Massa-chusetts, provides wireline and wireless telecommunications services in several markets, including Guyana where material weaknesses in the internal control of its GT&T operations is an ongoing concern.
Risk management is an important part of a company’s due diligence and responsibility to shareholders, and it must provide an assessment of the risks which it faces and the actions that were taken to deal with the threats. With its line of business, ATN faces risks from industry competition, political and social factors, regulatory environment and catastrophic events. Catastrophic events are more systemic and are of greater concern in its island operations. This type of risk however is generally catered for through insurance. Through its corporate strategy of business acquisitions, ATN has diversified its other risks by operating in several separate geographic locations that carry varying degrees of political and regulatory uncertainty. Under its wireline services, ATN competes in both the US and Guyana markets while under its wireless services it competes in the US, Guyana, Bermuda, Turks and Caicos, the US Virgin Islands and Aruba markets. Currently, ATN organizes its operations under three business segments namely, US Wireless, Island Wireless and International Integrated Telephony. However, wireless revenues from its Island and International Integrated Telephony segments are combined and reported as international wireless revenues on its income statement.
Market concentration
Notwithstanding its diversification strategy, each component of its business carries risks in the individual markets in which it operates. ATN competes in the two wholesale and retail parts of the wireless market while controlling the wireline market in Guyana. It is a very marginal player in the wireline business in the USA. Its wholesale operations are primarily focused on the US market where it offers wireless voice and data roaming services to national and international wireless carriers. It has short-term roaming agreements with about 55 US-based wireless service providers and long-term roaming agreements with the four major network operators of AT&T, Sprint, T-Mobile and Verizon Wireless.
The short-term roaming agreements tend to have a 30-day shelf life. The long-term agreements are only with four companies. Market concentration therefore is a major problem in the US market. The four companies that ATN relies on are responsible for 86 per cent of the revenue that it earns. It enjoys no monopoly and is vulnerable to the unpredictable business strategies of its four customers. Not only could it suffer a decline in demand for the roaming services that it provides to them, it could lose their business altogether. The sudden collapse of that market could put ATN in serious trouble.
Constant worry
To a certain extent, ATN is caught between a rock and a hard place in the US market. Not only is it dependent on a small number of buyers, it is also dependent on a small number of suppliers and vendors for its equipment, accessories, services related to its network infrastructure and back-office operations. ATN constantly worries that these suppliers could experience interruptions or other problems and experience difficulty providing the components that it needs for the upkeep of its network. It expresses concern too about obtaining the phones that it provides in the Guyana and other Caribbean markets. Any disruptions in those relations could spell trouble for ATN.
The retail wireless services are concentrated in the island markets and Guyana with two-thirds of its international wireless revenue coming from the island markets. Guyana’s major contribution to ATN is its wireline service which is a lifeline for ATN. Notwithstanding the fact that the Guyana market has dropped to 32 per cent in 2013, Guyana remains important to ATN’s financial buoyancy. Wireline services in Guyana account for two-thirds of the revenue that the International Inte-grated Telephony segment provides to the company, and it is the area in which the company is experiencing the most regulatory pressure. The wireless market in Guyana where it provides retail services is less of a regulatory problem since that portion of the domestic market was always open to competition.
Focus of intense competition
Already the focus of intense competition in the wireless market, ATN is trying to avoid facing additional pressure. The added competition that ATN is trying desperately to avoid is coming from what it thought was a harmonious business partner. ATN purchased Guyana Telecom-munication Corporation (GTC) in 1991 at a time when Guyana desperately needed to upgrade its telecommunications infrastructure. The purchase gave ATN the exclusive right to provide domestic fixed and international voice and data services pursuant to a licence with an initial term ending in December 2010. The licence was renewable at the sole option of ATN for an additional 20 year term. In November 2009, ATN notified the Government of Guyana of its intention to renew its exclusive licence for an additional 20 years. On December 15, 2010, the Government of Guyana notified ATN that the licence had been renewed until such time that new legislation was enacted to expand competition within the sector.
Preserve monopoly
It is clear from the preceding background information that ATN wants to preserve the monopoly position that it acquired when it purchased the state-owned GTC in 1991. On the other hand, the government wants to liberalize the telecommunications market and introduce greater competition. The benefits of competition are usually lower prices, better products, a greater range of consumer choices and better customer service. It is hard to imagine that Guyanese would not like to see the benefits of competition come to the telecommunications industry.
On the face of it, the conflict is an economic one which ordinarily could be solved through the direct intervention of the government, a public policy approach which seeks to achieve economic efficiency and increased consumer welfare. However, unlike monopolies which are born out of self-advancement, this one was the product of a legal opportunity between the government and the private entity. The government is therefore a party to the dispute and any intervention could produce harmful political effects. Consequently, despite the compelling economic arguments for liberalization, the government has to be conscious of the financial and political risks that could emanate from any unilateral or high-handed action that it takes against ATN.
Vested interest
Further, ATN must be aware that Guyanese consumers and businesses have a vested interest in seeing lower prices and better products and remains uncertain about its chances of winning any court battle on the issue as could be seen from the following remarks: “Although we believe that we would be entitled to damages or other compensation for any involuntary termination of our contractual exclusivity rights, we cannot guarantee that we would prevail in a proceeding to enforce our rights or that such actions would effectively halt any unilateral action by the Government.”
Material weaknesses
As if it does not have enough worries, ATN is contending with material weaknesses in its internal controls stemming from the implementation and integration of a new billing system at GT&T. ATN admits that it did not implement adequate controls around the segregation of duties in the new IT environment, and the interfaces between the subsidiary’s new billing system and its financial records. This limited its ability to adequately or sufficiently perform many controls and procedures in a timely manner and effective manner. It is an ongoing concern which is being addressed by management.
