Beware of Bureaucrats Bearing Reports – Debunking the OECD’s Bunk

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While investors know that official publications like the US jobs reports are often completely inaccurate documents which have totally degraded into short-term political tools, people still seem to fall for them every time.  Just as with a corporation’s annual reports, human beings also produce government ones, and in both cases observers should take legendary investor Jim Rogers and accounting watchdog Francine McKenna’s advice and compare what they read with other sources and appreciate everyone’s biases and motivations whether they are investigating opportunities in Cuba or with Warren Buffett.

Investors and voters should take a moment to appreciate that sometimes regulators and researchers are not always driven by political malice (or public altruism), but can often just be incompetent.  America Movil’s (NYSE: AMX) year long saga with the OECD, a Paris-based economic development inter-governmental organization, offers insights into how policy sausages get made and the impacts they have on brands, perceptions, and profits.  In fact, if the OECD’s recommendations for Mexico were applied to the US, shareholders of AT&T (NYSE: T), Verizon (NYSE: VZ), and Iridium (NASDAQ: IRDM) would be forced to subsidize inferior carriers

While it may be difficult for people to believe that government agencies are not well-suited to manage companies in highly-competitive markets, for anyone that has had to deal with EU bureaucracy, UN officials, or transnational busybodies in general, it is understandable that America Movil’s multinational resources have been no match for the intransigence of the OECD.  Most mentions of the company now come with an aside about the OECD declaring them monopolistic.

In many ways, the experience is much like when Microsoft (NASDAQ: MSFT) was blindsided by the EU and US Department of Justice in 1990s.  That epic decade-long struggle was actually Gates and Microsoft’s first taste of politics – and it should be noted that the international regulators only decided their cases well after Microsoft’s “monopoly” had long since been diminished by disruptive competitors.  Previously, Microsoft spent exactly zero dollars on lobbying efforts, though today it has become a regular line item on the lists of Capitol Hill fundraisers.  Global titan America Movil is now also beginning to learn how to deal with predators, and is one of the first emerging market champions to navigate in this brave old world of global regulators and international bureaucrats. 

In many ways their naivete and innocence are endearing, and their earnest attempts to tell their side and communicate their experiences trying to play by the rules is one more reason to appreciate their management team.  Two slides taken from America Movil’s special conference call in November tell the story of the OECD process, and illustrate what the OECD stated in its brief February press release were “extensive consultations…[and a] ‘peer review’ process [that] underpins the transparency, intengrity and impartiality of our assessments and recommendations” [spelling as well as the quotation marks around “peer review” are the OECD’s].  America Movil explains its descent into the rabbit hole which began in early 2011:

  • In the more than 12 months it took to develop the document, the OECD met only once with América Móvil representatives to discuss mobile telephony and once with Telmex for fixed telephony. The meetings, both of them on May 18, 2011, lasted not much more than an hour. There was no specific agenda in any of the meetings. 
  • We did not receive any request for information or to validate information throughout the period in which the study was being conducted.
  • We sought other meetings with the OECD, including through its representative office in Mexico. The meetings we asked for were denied and no options were given to us regarding other dates. 
  • We were neither invited to, nor informed of, the presentation of the draft document in Paris on October 27, 2011. We learned by chance of its taking place and, through an entity affiliated to the OECD’s BIAC (Business and Industry Advisory Committee), managed to obtain a last-minute clearance, literally hours before the event began.
  • We were given in the meeting itself the draft document, only available in hard copy.
  • We were given five business days to provide comments on a nearly 100-page document.

Ultimately, America Movil’s 39-page detailed response that was sent to the OECD was ignored except for four minor changes [slide 8]. 

Also, in a way that is typical of how international bureaucracies respond to citizen and corporate requests, American Movil and an academic researcher requested, “…the source of the data used and for each series any data transformations from the original source to the input into the econometric estimation programs. The explanations should be sufficiently detailed so that the results can be replicated…”

Over a month later, OECD responded, “The computer code and other transformation to data are considered proprietary to the OECD and cannot be shared.”

(Cleary, this is what OECD meant by its strategically punctuated “peer review” clause.)

Yet, the most fundamental disagreement, the OECD’s use of outliers and incongruous comparisons to create a fictional basket of prices that had no basis in averages, medians, or other traditionally accepted calculations was completely ignored even though these problems have discredited previous OECD telecom studies, and the OECD’s research failings have been documented extensively in a paper by Jerry Hausman of MIT and Agustin Ros of NERA Economic Consulting.

More disconcerting for the stated goal of the OECD is that economics professor J. Gergory Sidak of the Netherland’s Tilburg University (which has business, economics, and law programs consistently ranked in the global top-tier) concluded from the data he was able to distill from OECD’s drunken irrationalities that the OECD policy recommendations were not only anti-consumer, but would result in a cartel:

The OECD’s proposed [solutions] for Mexico’s telecommunications marketplace would reduce competition, contrary to the OECD’s aims. The OECD’s proposals would harm Mexican consumers and force an increase in prices paid for telecommunications services. They would create a government-sanctioned price cartel among the telecommunications providers. They would reward inefficient competitors and penalize efficient carriers, all to the detriment of the consumers. Instead of relying on new layers of counterproductive or ineffective regulations, the Mexican government should remove regulatory entry barriers between video and telephone, thereby creating enduring, facilities-based competition.

While detractors would be quick to blame the funding for the conclusions, Sidak’s paper goes point by point and draws on successful examples from practical experiences – something completely lacking in the abstract OECD paper which only serves to demonstrate the OECD’s complete lack of understanding about the telecommunications industry.  Hausman and Ros’ calculations are more transparent and offer more in the way of data and their methodology than the OECD has published or shared (even though that is its taxpayer funded mandate.)  In all cases, the independent scholars (and America Movil itself) have made their computer code and other transformations freely available and easily shared which is a damning response to the OECD’s silence and obfuscation.

The biggest tip off for any report is when claims are absurd when measured against the big picture.  The OECD’s assertion that America Movil cost the Mexican consumer tens of billions of dollars is outlandish when the entire industry’s revenues are less than USD 40 billion.  If such a naked grab for profits was made and the market was truly unable to bear the costs, then it is highly unlikely America Movil and Telmex would be able to retain 70% of the Mexican mobile and fixed line markets, while at the same time they and their competitors were able to nearly double new subscriptions Mexico-wide during the period that the OECD study covers.

[continued from Carlos Slim Better Than Buffett: Global Entrepreneur Yes, Local Monopolist Hardly]
[continued in America Movil: The Future King of the Telecommunications Hill]

 

 

 


Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool owns shares of Iridium Communications and Microsoft. Motley Fool newsletter services recommend Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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