D+C Newsletter

Dear visitors,

do you know our newsletter? It’ll keep you briefed on what we publish. Please register, and you will get it every month.

Thanks and best wishes,
the editorial team

Register

Mobile telephony

Telecom services for everyone

by Thorsten Scherf
Bolivian politician on the phone.

Bolivian politician on the phone.

Universal access funds (UAFs) are useful tools. Their subsidies can enable private-sector telecom companies to service remote areas. For the approach to succeed, however, many political considerations need to be weighed. It is impossible, moreover, to guarantee an operational telecommunications network without reliable institutional and regulatory settings. [ By Thorsten Scherf ]

In many developing countries, the telecommunications sector is growing fast. Today, large sections of the people have access to this kind of infrastructure. However, rural areas only benefit from this trend to a limited extent. The reason is that market mechanisms in themselves do not guarantee adequate services everywhere – and in some places they do not even guarantee any at all.

The combined effect of the following three factors is that a commercially viable telecom service may be impossible:
- The purchasing power of rural communities is generally low; their incomes are small and erratic. Providers therefore have little incentive to invest.
- The costs of installing and maintaining networks are much higher in sparsely populated regions than in urban agglomerations.
- Investments are especially expensive in areas like mountains or rain forests, which are difficult to access.
Therefore, government intervention may be required.

Smart subsidies

In this context, universal access funds (UAF) that pay “smart subsidies” are to be recommended (World Bank 2002, ITU 2003). Such funds allow governments to intervene in a way that does not disrupt the advantages of private-sector activity. In 60 nations, UAFs have been implemented or are in planning stages, according to the OECD (2004).

UAFs provide funds to ensure universal access to telecom services in rural areas. They subsidise private-sector companies for operating in places where doing so would not be possible based on market dynamics alone. In a tendering process, a contract is awarded to the bidder that guarantees the required service with the lowest public subsidy.

Typically, licences issued define regions to be served and the kind of services to be provided. In Peru, for example, 5,000 unserved settlements in six regions were named. The licence holders that demanded the least public support were picked in an auction; and they are supposed to provide local, long-distance and Internet connections for 20 years.

In theory, the UAF approach serves two purposes. First, it makes possible reliable telecommunication services in remote regions. Second, it minimises subsidies thanks to bidder competition. Practical experience, however, is quite varied, and the empirical data does not allow for any clear conclusions so far. Some projects have been very successful. In Chile, for instance, the share of the people without access to telecommunications was reduced from 15 % to only one percent (Wellenius 2002). By contrast, other UAF attempts were plagued by considerable difficulties, in Bolivia, Brazil and Nepal, for instance (UN 2004).

Moreover, it is evident that UAF projects differ considerably depending on geographical, institutional and economic circumstances (Navas-Sabater et al. 2002). The level of necessary support may thus vary substantially. In Peru, for example, subsidies for each place to be supplied amounted to just $ 2,250 – compared with $ 18,800 in Chile. The ration of subsidies demanded to those available in principle also tends to vary. In Chile, 50 % of what was made available was spent, in Colombia that share was only 45% and in Peru even a mere 25% (ITU 2003, Wellenius 2002).

Financial matters

Various sources may be tapped into to finance UAFs, including:
– compulsory payments by profitable telecom providers,
– the national budget,
– proceeds from licence auctions,
– contractual penalties arising from unfulfilled agreements and
– donor funds.
The latter plays a crucial role in some developing countries. For instance, approximately $ 124 million would be needed to make universal access a reality in Nepal. If operating companies there had to pay a tax of one percent of their revenue, it would take 109 years to accumulate the necessary capital (Navas-Sabater et al. 2002).

Meanwhile, raising money is often not the only tough issue. It may also be difficult to actually use the funds, as UAF experiences in Bolivia showed. In this case, the regulatory authorities pooled money from user charges, auction revenues and other income, in order to promote the spread of information and communication technology in remote regions. Nevertheless, no UAF programme has been implemented yet. Several tenders which had already been concluded were subsequently declared invalid; and relevant legislation failed to gain a majority in parliament after operating companies lobbied against it (Barja 2004).

Bids – and, accordingly, the level of subsidisation – generally depend on several factors. The institutional environment (rule of law, corruption et cetera) is very important at national and sectoral levels. If there are shortcomings, operators can only invest with a high degree of uncertainty; and as a result, they will typically request high subsidies. If companies are to apply for a licence at all in such circumstances, they are prone to ask for something like a risk premium.

As a general rule, UAF subsidies are paid output-based. Operating companies only receive the money once they have met their contractual obligations. In the case of Chile, payment was made in a lump sum once the services were up and running. In Peru, 35% of funds were transferred prior to implementation and 25% immediately afterwards. The remaining 40% are paid in six-monthly instalments over a five year period.

Obviously, output-based aid provides an incentive to fulfil contractual obligations. The disadvantage is that, in countries with weak governance, operators may worry whether funds will ever be disbursed as promised. In some cases, it will be difficult to attract any investor at all.

Political consideration

There is an important trade-off, moreover. The better the quality of supply is supposed to become (concerning network density and the number of connections in the target area, for example), the higher the investment costs will be for operating firms. Accordingly, they are likely to require more subsidies.

In a similar sense, it matters what charges end-users have to pay. If charges are unregulated or set very high, less subsidy will be needed. On the other hand, demand will then be likely to remain low, and poor people will stay excluded in future too.

If a licence only defines services (such as local and long-distance telephony) and not the technology to be used (mobile or fixed lines, for instance), resulting subsidies are likely to be lower (World Bank 2005: 33). After all, economic theory suggests that companies will then chose the most cost-effective option.

In practice, however, things can turn out quite differently. Consider that, in Peru and Nepal, suppliers of telecom technologies bought licences in UAF tenders in search of new markets. Obviously, such companies will always use their own technology, whether it is the most suitable or not (De Silva and Tuladhar 2006). In Peru, one consequence was that obligations were not met as agreed. Rather, the operating company tried to amend the licence in its favour in subsequent negotiations.

UAF licences often grant exclusive servicing rights, providing operators with a monopoly in a certain area for a specified time. This practice minimises subsidies as providers can capture the entire demand in any given target region and thus maximise their turnover.

However, such exclusive rights must be enforced. In Nepal, for example, the regulatory authorities has been turning a blind eye to the fact that the state-owned telecom operator disregards the legal monopoly of private providers in some places, thus jeopardising their profitability there.

It is just as important that the obligation to interconnect networks is met. Once more, Nepal, a country which is torn by violence and suffering from fragile statehood, serves as an example. Its national operator does not live up to this obligation in any reliable manner. Therefore, rural networks are frequently disconnected.

In order to ensure that bidders meet the required preconditions of providing telecom services in the long-term, prequalification measures can be a useful part of the tendering process. However, these measures must not be too strict, for otherwise too few competitors will bid. Political decision-making must strike the right balance.

Summary

Subsidies from an UAF can help to provide the general public in rural areas with telecommunication services. However, this approach is neither a cure-all, nor does it work in a “one size fits all” manner. Various advantages and disadvantages must be weighed carefully when working out the specific structure of any given UAF project.

The institutional context demands special attention. No UAF will be able to guarantee a sustainable telecom infrastructure if governance is not adequate and does not provide a trustworthy institutional and regulatory environment.