Risks and uncertainties

Telia Company operates in a broad range of geographical product and service markets in the highly competitive and regulated telecommunications industry. As a result, Telia Company is subject to a variety of risks and uncertainties. Telia Company has defined risk as anything that could have a material adverse effect on the achievement of Telia Company’s goals. Risks can be threats, uncertainties or lost opportunities relating to Telia Company’s current or future operations or activities.

Telia Company has an established risk management framework in place to regularly identify, analyze, assess and report business, financial as well as ethics and sustainability risks and uncertainties, and to mitigate such risks when appropriate. Risk management is an integrated part of Telia Company’s business planning process and monitoring of business performance.

Risks and uncertainties that could specifically impact the quarterly results of operations during 2017 include, but may not be limited to:

Risk

Description

Mitigating activities

Customer privacy

Vast amounts of data are generated in and through Telia Company’s services and networks. New ways of connecting and data-driven business models increase the complexity of understanding and retaining control over how data is collected and used. It is challenging to establish and maintain unassailable privacy protection in increasingly sophisticated data environments and in ever-changing legal, technical and threat landscapes.

Potential impact

Actual or perceived issues related to data network integrity, data security and customer privacy may lead to an unfavourable perception of how Telia Company handles these matters, which in turn may adversely impact business. Not meeting national and EU legislation may cause significant financial penalties.

  • Implementation of the EU General Data Protection Regulation
  • Mitigation activities based on roadmaps driven by countries and group
  • Privacy officers appointed throughout the organisation
  • Efforts ongoing to strengthen information asset and vendor management

Freedom of expression and privacy

The telecommunications industry faces high risks related to the freedom of expression and privacy of users. Risks relate to how national laws and regulations on surveillance of communications or shutdown of networks can be overly broad in ways that violate human rights, and complicity by ICT companies in violations linked to major and problematic government requests. Telia Company may be legally required to comply and, like other operators, only have limited possibility to investigate, challenge or reject such (often strictly confidential) requests.

Potential impact

Actual failure in respecting freedom of expression and privacy may first and foremost damage rights holders by limiting their freedom of expression and privacy. Actual or perceived failure may also damage the perception of Telia Company, leading to exclusion from procurement or institutional investment processes. Network shutdowns and blocking also limits core business which may negatively affect revenues.

  • Building leverage to influence national laws and regulations with peer companies (Telecommunications Industry Dialogue) and joining efforts with multi stakeholder Global Network Initiative (GNI)
  • Transparent reporting on statistics of day-to-day conventional authority requests (Law Enforcement Disclosure Reports) and of unconventional requests (“major events”)
  • Human Rights Impact Assessments carried out supported by external expertise, building knowledge and defining actions for improvement and risk mitigation

Children online

Children and young people are active users of Telia Company’s services. However, children are particularly vulnerable to online threats such as cyber bullying and inappropriate content. Telia Company’s services may also be used for distributing or accessing child sexual abuse material.

Potential impact

Telia Company may indirectly be complicit in violating children’s rights if products and services as well as network filters are not properly assessed. Actual or perceived failure to create a safe online experience for children and young people may negatively affect brand perception, incurring loss of business.

  • Blocking child sexual abuse material (CSAM) in customer networks and detecting and reporting CSAM in internal IT-system
  • Regular follow up our performance against a number of industry self-regulatory initiatives in the area of protection of children online
  • Understanding children’s perspectives on online life through a Children’s Advisory Panel
  • Assessing impact on children’s rights in all relevant business activities

Occupational
health and safety (OHS)

The most significant accident risks related to occupational health and safety (OHS) are linked to construction and maintenance work carried out primarily by contractors. Telia Company employees work mainly in office or retail environments where the main risks relate to psychosocial well-being and ergonomics.

Potential impact

Failure to maintain a healthy and safety working environment may lead to increasing sick leave, low employee engagement and a higher number of accidents and injuries, incurring increased costs and potential loss of critical competence.

  • Implementation of OHSAS 18001 occupational health and safety management system in all major operations
  • OHSAS 18001 implementation activities include risk assessments, training, investments and support to employees’ wellbeing
  • OHS KPI s to follow fatalities, rate of lost time, injuries and sickness absence followed up quarterly locally and on group level

Ability to recruit and retain skilled employees

People is at the core of everything that we do and it is the people with all their talents that will enable us to execute on our strategy. There is an increased demand for talents in the area of ICT and the competition is getting tougher. In order to win the battle of talent Telia Company needs be great at attract, recruit, and retain highly skilled employee to ensure the demand and supply.

Potential impact

Failure to recruit and retain necessary skilled employees may impact the ability to develop new or high growth business areas and thereby deliver on the strategy.

  • Efforts to build a strong employer brand to ensure talent attraction
  • Establish a modern and efficient global recruitment process
  • Providing internal growth opportunities
  • Continuous improvements and follow up of the results from yearly employee survey

Environment

Climate change is increasingly driving regulation and taxation related to reduction of greenhouse gas emissions and the use of fossil fuels.

Potential impact

Increasing scarcity of natural resources, particularly rare minerals used in network and consumer technology hardware, may lead to increased hardware costs. Increasing energy costs, greenhouse gas emissions taxation and price increases caused by natural resource scarcity may incur additional costs. As a consequence of climate change, extreme weather conditions might be more common which may negatively impact network performance and customer satisfaction.

  • Work to increase energy efficiency and improve waste management
  • Purchasing “green electricity” in regions Sweden and Europe
  • Buy-back and recycling programs for mobile devices
  • Implementation of ISO 14001 environmental management system in regions Sweden and Europe

Customer service and network
quality

Telia Company focuses on offering high-quality services and networks, which is fundamental to customer perception now and in the future. The ambition to create a service company on the customers’ terms requires a major internal change of processes, attitude and focus in many parts of the company. Additionally, Telia Company currently outsources many of its key support services, including network construction and maintenance in most of its operations.

Potential impact

Extreme weather conditions and natural disasters may cause serious problems to network quality and availability. The limited number of outsourced service suppliers, and the terms of Telia Company’s arrangements with current and future suppliers, may restrict its operational flexibility and incur unnecessary costs. Failure to meet customers’ quality requirements or expectations may have an adverse impact on customer retention and acquisition.

  • Ensuring network resilience through a combination of sound risk management, business continuity planning and incident management
  • A group wide crisis management organization handles unexpected and critical incidents negatively affecting our operations
  • Continuous work to improve internal as well as outsourced operational processes to fulfil customer expectations
  • Customer satisfaction is continuously measured both to improve our under­standing of, and fulfil, customers’ expectations

Corruption and unethical business practices

Some of the countries in which Telia Company operates are ranked as having high levels of corruption. The telecommunications industry is particularly susceptible to a range of corrupt practices as it requires government approvals and necessitates large investments. Key areas where the threat of corruption is significant include the licensing process, market regulation and price setting, the supply chain, and third-party management and customer services.

Potential impact

Actual or perceived corruption or unethical business practices may damage the perception of Telia Company and result in financial penalties and debarment from procurement and institutional investment processes. Related fraud may significantly impact financial results. Ongoing divestment processes may in themselves pose risks of corruption, fraud and unethical business practices.

  • Anti-bribery and corruption (ABC) program, based on Telia Company’s compliance framework, implemented in all parts of the organization
  • “Responsible exit” plan for region Eurasia containing actions to ensure continued third party due care activities to prevent, detect and remedy ABC risks
  • Education and communication efforts on ABC to targeted audiences, specifically high-risk roles

Responsible procurement

Telia Company relies on a vast number of suppliers and sub-suppliers, many of which are located in countries or industries with challenges in upholding ethical business practices, human and labour rights, health and safety and environmental protection. Despite efforts to conduct due diligence and onsite audits, suppliers and sub-suppliers may be in violation of Telia Company’s supplier requirements and/or national and international laws, regulations and conventions.

Potential impact

Failure or perception of failure of Telia Company’s suppliers to adhere to these rules and regulations may damage customers’ or other stakeholders’ perception of Telia Company. Violations of laws and regulations puts suppliers and sub-suppliers at risk of needing to limit or terminate their operations, which may negatively affect how Telia Company is able to deliver its services. Severe violations may lead to Telia Company needing to seek new suppliers, which may negatively impact procurement costs and delivery times.

  • A standardized risk-based supplier due diligence process implemented and performed prior to signing new or renewed contract
  • Supplier code of conduct, which stipulates our expectations on sustainable business practices, is included in new supplier contracts
  • Security directives are included in contracts where supplier handle customer data

Global financial markets unrest

Changes in the global financial markets are difficult to predict but are affected by macroeconomics as well as political and geopolitical developments. Telia Company operates in a relatively non-cyclical or late cyclical industry and strongly favor having a strong balance sheet, which is very important through difficult times.

Potential impact

A severe or long-term financial crisis may have an impact on customers’ purchasing power and spending on ICT investments and services, which may negatively affect growth and results of operations. Unfavorable changes in the global financial markets could limit the access to capital market funding and may increase Telia Company’s cost of funding. Unusually high volatility in the foreign exchange market with fluctuations of the currency rates have effects on the balance sheet and the income statement.

  • Maintaining a strong Investment grade rating is key to ensure a good access to diversified debt investor’s and bank funding
  • Important to forecast and manage liquidity carefully to avoid any liquidity shortage. By ensuring a smooth and reasonably sized maturity profile of the debt portfolio the refinancing risk is limited
  • The main sources of funding is the free cash flow from operations and issuance in the capital markets. By constantly monitoring the capital markets and take the opportunity to fund in advance when market conditions are favorable, the cost of funding can be managed in an efficient and risk adverse way
  • Telia Company has a committed revolving credit facility supported by 13 core banks as a back-up for any unexpected liquidity needs

Competition and price pressure

Telia Company is subject to substantial and historically increasing competition and price pressure. Competition has from time to time led to increasing customer churn, decreasing customer bases and to declines in the prices, Telia Company charges for its products and services, and may have similar effects in the future. Transition to new business models in the ICT industry may lead to structural changes and different competitive dynamics.

Potential impact

Failure to anticipate and respond to industry dynamics, and to drive a change agenda to meet mature and developing demands in the marketplace, may affect Telia Company’s customer relationships, service offerings and position in the value chain. Competition from a variety of sources, including current market participants, new entrants and new products and services, may also adversely affect Telia Company’s results of operations.

  • Actively monitor changes in customer and market behaviour to create and execute mitigation plans
  • Business transformation programs and new business initiatives in line with our business strategy
  • Continuously exploring opportunities close to our core services to create new revenues

Emerging
markets

Telia Company has made significant investments in telecom operators in Eurasia (Kazakhstan, Azerbaijan, Uzbekistan, Tajikistan, Georgia, Moldova, Nepal), Russia, Turkey and Afghanistan. In September 2015, Telia Company announced its decision to reduce the presence in, and over time leave, region Eurasia. Historically, the political, economic, legal and regulatory systems in these countries have been less predictable than in developed markets. The nature of these markets, including potential government intervention, combined with the fact that the assets are not fully-owned and there are undertakings and obligations in various shareholder agreements, reputational issues regarding the assets and fewer potential buyers than in more mature markets, makes the complexity of these divestments processes high.

Potential impact

The political situation in these emerging markets may remain or become increasingly unpredictable, even to the extent that Telia Company will be forced to exit a country or a specific operation within a country. There may be unexpected or unpredictable litigation cases under civil or tax legislation. Foreign exchange restrictions or administrative issues may effectively prevent Telia Company from repatriating cash, e.g. by receiving dividends and repayment of loans, or from selling its investments. Another risk is the potential establishment of foreign ownership restrictions or other formal or informal possible actions against entities with foreign ownership. Such negative developments or weakening of the local economies or currencies may have a significantly negative effect on Telia Company’s results of operations. The nature of these markets with significant uncertainties and complexity may affect the sales process regarding both expected outcome and timing.

The sanctions against the Russian Federation may negatively affect the Russian ruble and the Russian economy, which in turn may impact countries whose economies are closely linked to the Russian economy, such as a number of region Eurasia countries.

  • A decision has been made to divest our operations in Eurasia. The divestment process is ongoing
  • The divestment of Ncell in Nepal was completed on April 11, 2016
  • An agreement to sell Tcell in Tajikistan has been signed and closing activities are ongoing
  • Focus on management of foreign exchange and counterparty risk exposure, combined with continued development financial policies and risk management processes
  • Efforts to ensure tax, legal and regulatory compliance at local level, with compliance oversight at regional and group level

Investments in business transformation
and future growth

Telia Company is currently investing in business transformation and future growth through, for example, initiatives to increase competitiveness and reduce cost as well as to improve capacity and access. In order to attract new customers, Telia Company has previously engaged in start-up operations and may decide to do so also in the future, which would require additional investments and expenditure in the build-up phase. Further, Telia Company normally has to pay fees to acquire new telecom licenses and spectrum permits or to renew or maintain existing ones.

Potential impact

Success in business transformation and growth will depend on a variety of factors beyond Telia Company’s control, including the cost of acquiring, renewing or maintaining telecom licenses and spectrum permits, the cost of new technology, availability of new and attractive services, the costs associated with providing these services, the timing of their introduction, the market demand and prices for such services, and competition. Failing to reach the targets set for business transformation, customer attraction and future growth may negatively impact the results of operations.

  • Savings and business transformation programs ensuring competitive cost levels as well as ensuring capabilities for future growth
  • Focused execution on Telia Company’s business strategy with the aim of becoming a New Generation Telco

Associated companies and joint operations

Telia Company conducts some of its activities through associated companies, the major ones being MegaFon in Russia and Turkcell in Turkey, in which Telia Company does not have full ownership or controlling interest and are due to that not in full control but still have significant influence over the conduct of these businesses. In turn, these associated companies own stakes in numerous other companies. Under the governing documents for certain of these associated companies, Telia Company’s partners have control over or share control of key matters such as the approval of business plans and budgets, and decisions as to the timing and amount of cash, as well as protective rights in matters such as approval of dividends, changes in the ownership structure and other shareholder-related matters. The risk of actions outside Telia Company’s or its associated companies’ control and adverse to their interests is inherent in associated companies and jointly controlled entities.

Potential impact

The financial performance of these associated companies may have a significant impact on Telia Company’s short- and long-term results. As part of its strategy, Telia Company may want to increase or decrease its shareholdings in some of its associated companies. This may be complicated due to a variety of factors, including factors beyond Telia Company’s control, such as willingness on the part of other existing shareholders to dispose or accept dilution of their shareholdings and, in the event Telia Company gains greater control, its ability to successfully manage the relevant businesses. As they are jointly controlled, there is a risk that the partners may disagree on important matters, including funding of the operations which may affect Telia Company’s position to act as planned. A disagreement or deadlock or a breach by one of the parties of the material provisions of the co-operation arrangements may have a negative effect on Telia Company. 

  • Monitoring of the associates’ performance and development

  • Active board work in our associated compnaies (e.g. MegaFon), driving issues of key importance to Telia Company

  • Continuous work to solve the deadlock between the main shareholders of Turkcell

Impairment losses and restructuring charges

Factors generally affecting the telecom markets as well as changes in the economic, regulatory, business or political environment may negatively change management’s expectation of future cash flows attributable to certain assets. Telia Company may then be required to recognize asset impairment losses, including but not limited to goodwill and fair value adjustments recorded in connection with historical or future acquisitions. Telia Company also has significant deferred tax assets resulting from earlier recorded impairment losses and restructuring charges.

Potential impact

Significant adverse changes in the economic, regulatory, business or political environment, as well as in Telia Company’s business plans, may affect Telia Company’s financial position, and results of operations, impairment losses, restructuring charges which may adversely affect Telia Company’s ability to pay dividends. In addition, these effects may limit us to use tax assets in full to reduce its future tax obligations, consequently leading to an additional tax charge when such tax asset is derecognized.

  • Management constantly reviews and refines the business plans, and may make exit decisions or take other actions in order to effectively execute on business strategy
  • Restructuring and streamlining initiatives, which have resulted in substantial restructuring and streamlining charges. Similar initiatives may be undertaken in the future

Regulation and licenses

Telia Company operates in a highly regulated industry, and regulations impose significant limits on Telia Company’s flexibility to manage its business. In a number of countries, Telia Company entities are designated as a party with significant market power in one or several telecom submarkets. As a result, Telia Company is required to provide certain services on regulated terms and prices, which may differ from the terms on which it would otherwise have provided those services. Effects from regulatory intervention may be both retroactive and prospective.

Potential impact

Changes in regulation or government policy affecting Telia Company’s business activities, as well as decisions by regulatory authorities or courts, including granting, amending or revoking of telecom licenses and spectrum permits, may adversely affect Telia Company’s possibility of carrying out business and subsequently results of operations.

  • Proactive work in shaping the new EU Telecom Framework, by sharing detailed solutions with relevant stakeholders within the EU
  • Continiously exploring options to rebalance increased costs and loss of revenues due to regulatory changes 

Review of Eurasian transactions

In late 2012, the then Board of Directors appointed Swedish law firm Mannheimer Swartling (MSA) to investigate allegations of corruption related to Telia Company’s investments in Uzbekistan. MSA’s report was made public on February 1, 2013. In April 2013, the Board of Directors assigned the international law firm Norton Rose Fulbright (NRF) to review transactions and agreements made in Eurasia by Telia Company in the past years with the intention to give the Board a clear picture of the transactions and a risk assessment from a business ethics perspective. For advice on implications under Swedish legislation, the Board assigned two Swedish law firms. In consultation with the law firms, Telia Company has promptly taken steps, and will continue to take steps, in its business operations as well as in its governance structure and with its personnel which reflect concerns arising from the review. The Swedish Prosecution Authority’s investigation with respect to Uzbekistan is still ongoing and Telia Company continues to cooperate with and provide assistance to the Prosecutor. If continued assessments and investigations would lead to new observations and findings, it cannot be excluded that the consequences of such findings would be that the results of operations and financial position in Telia Company’s operations in the Eurasian jurisdictions are adversely impacted.

Another risk is presented by the Swedish Prosecution Authority’s notification in the beginning of 2013 within the investigation of Telia Company’s transactions in Uzbekistan, that the Authority is separately investigating the possibility of seeking a corporate fine against Telia Company, which under the Swedish Criminal Act can be levied up to a maximum amount of SEK 10 million per instance, and forfeiture of any proceeds to Telia Company resulting from the alleged crimes.

The Swedish Prosecution Authority may take similar actions with respect to transactions made or agreements entered into by Telia Company relating to operations in its other Eurasian markets, but it could be noted that the Swedish prosecutor made a public statement in May 2016, that it had decided not to investigate any other of Telia Company’s operations in Eurasia. Further, actions taken, or to be taken, by the police, prosecution or regulatory authorities in other jurisdictions against Telia Company’s operations or transactions, or against third parties, whether they be Swedish or non-Swedish individuals or legal entities, might directly or indirectly harm Telia Company’s business, results of operations, financial position, cash flows or brand reputation. As examples, investigations concerning bribery and money laundering in connection with the transactions in Uzbekistan are conducted by the Dutch prosecutor and police authorities, and by the US Department of Justice and the US Securities and Exchange Commission. As requested by the Dutch authorities, Telia Company has provided a bank guarantee of EUR 10 million as collateral for any financial claims which may be decided against one of its Dutch subsidiaries. Telia Company is cooperating fully with the Dutch and US authorities and has done so since it was informed of the investigations in March 2014 and has engaged leading US and Dutch law firms as legal counsel for advice and support. On September 14, 2016, Telia Company received a proposal from the US and the Dutch authorities for financial sanctions amounting to a total of approximately USD 1.45 billion or approximately SEK 12.5 billion at that point in time. It is not at present possible to assess when the investigations will be finally resolved. Telia Company has received requests to make public the reviews made by NRF and other law firms. However, despite risking criticism, it is not possible to publish the reviews with respect to people, companies, business agreements, privacy and thus the risk of Telia Company incurring lawsuits as the law firms’ views are not necessarily shared by those implicated.

 

  • Telia Company will continue its negotiations with the authorities
  • Telia Company cooperate with and continuously hand over information to law enforcement agencies, who are better equipped to assess whether any criminal acts have occurred