Legal, IT, Telecommunication

Understanding Universal Access in Rural Areas

*Long read

Information technology is a massive revenue contributor to a country’s economic health. Innovation centric policies have led to a remarkable growth since inception. In developing countries, a Universal Access policy has to be part of a country’s telecommunications policy. Rural areas in developing countries are one of the most challenging regions and this limits how well a market can function in extending service to these areas. Accordingly, a Universal Access policy has to intervene in the market to ensure the provision of telecommunications.

Just yesterday, the Communications Authority reported that telcos had contributed Kenya Shillings  5.3 billion ($51 million) to Kenya’s Universal Access Fund to connect remote parts of the country. Guided by this announcement, this long read analyses certain policies stemming in legislation that seek to promote and facilitate universal access in rural areas with the understanding that:

  1. “universal access” implies that the whole population has access to the service;
  2. “universal coverage” means that population can obtain a service if the user finds it; and
  3. “universal service” is reached when all individuals or households are subscribers to a service.

Understanding the market

Arturo (2010) noted that universal access policies are not a substitute for reforms aimed at increasing competition in the market place. Universal Access policies are focused on remote and isolated areas that present a significantly less acceptance to service providers as a result of the low income of these households and/or the high costs projected in accessing them.[1] Indeed they are aimed at curbing the access gap which is where the under-served rural areas belong.

Basic economics inform us that any market is rooted on two factors; supply and demand.[2] In telecommunications, supply is related to the costs and capital injections required by a provider in providing a service, and demand is the reaction/response of the targeted population to that service. The rural/remote access factor can be a huge win for an operator if done right. The risk involved, which is what pushes most investors away, is that one would be doing business with a low income demographic whose ROI[3] would not be viable. Arturo attributes this challenge to low purchasing power, low usage, and seasonal income as some characteristics that reduce the expected revenues that an investor could realize.

Current debates revolve around 3 areas; liberalization where foreign players come and offer telecom services, government monopoly in which a government agency or corporation is the sole provider of telecommunication services and competition is prohibited by law[4], and lastly, public private collaboration.

 Government Monopoly

Wilson (1992) stated that a modern state has three governing instruments at its disposal; spending, exhortation and regulation. Regulation is the most heavy-handed due to rules of conduct that are governed by state sanctions. While other forms of regulation may supplement markets, public utility regulation effectively supplants the market (Kahn, 1971).

A Government Monopoly is when a state supplies a good/service exclusively (and more cheaply) than others. Faulhaber (1987) noted that a monopoly occurs when the average cost of production declines with increasing volume allowing the resulting monopolist to charge prices above costs and to cut back the amount supplied and consumed to the profit-maximizing level. Wilson adds that it is inefficient because it excludes a large number of consumers who are prepared to compensate a producer at a price close to the marginal cost.

Liberalization

Liberalization has been defined to mean “the reform of the telecommunications environment through reducing or eliminating the monopoly of national carriers and creating a competitive environment ….. which is to a certain degree a degree of privatization involving transferring all or some portion of the telephone service government to private ownership.”[5] An OECD report noted that liberalisation could contribute to achieving universal service in infrastructural services. However there is a danger of this method undermining the very crux of Universal Access because it gives private players the leeway to choose their demographic; they can cherry pick who to target, and where to operate and these are for the most part, richer consumers or are from the most profitable regions.

 Public private partnerships (PPP)

PPP has been described as “a cooperative venture between the public and the private sectors built on the expertise of each partner that best meets clearly defined public needs through the appropriation of resources risks and awards”[6]. An example where this is visible is the City of Amsterdam’s CityNet venture with Reggefiber and Municipal involvement in Fiber Buildouts in Sweden.[7]

Universal Access Policies

Policy papers, guidelines and reports have been developed in order to provide affordable telecommunication services in rural areas by international organizations such as the ITU, World Bank and governments. The challenge is appropriate literature with regards to developing countries. Nevertheless the two most commonly used policies are the Universal Access Fund (UAF) and the Universal Access Obligations (UAO). The former is in combination with inverse subsidy auctions of carrier of last resort” (COLR) licences while the latter is in the provision of mobile or fixed-line telecommunications. Institutions matter in regulatory economics and that institutional setting in developing countries vary from the ones in industrial countries.

 Analysis

Principal – Agent

The Principal-Agent model is understood to mean a contractual obligation between the government as a representative of the general public, and the telecom providers. The government (principal) delegates through a regulatory agency as intermediary a task to the operator (agent).

Universal Access Obligations (UAO)

UAO can be viewed as the obligation of an operator to offer either a full range or a basic package of services, which has to be of good quality to all users at affordable rates including special tariff schemes for low income customers; a connection to the fixed network, which includes functional internet access; reasonable geographic access to public call boxes; and a range of services for customers with disabilities including the text relay service.

UAOs are bundled together with one or more items of value, like the permission to provide telecommunication services in a certain area or access to spectrum. These obligations normally contain the duty of network roll-out – either to target a predefined number of new service lines or a specific regional coverage to be reached in a given period. Licenses contain an explicit list of penalties that will incur in the case of non-compliance. Operator’s incentive to bear the duty of serving loss generating customers is the right to serve also profitable ones and make profit after all.

In 2000, Uganda allowed provision of all telecommunication services an obligation to build 89,000 lines over five years.[8] Due to the asymmetries of information between the government and operators it is very common to award the license through a bidding process as an allocation mechanism to induce operators to reveal their own private information. Thus by awarding the license to the bidder who pays the highest price, auctions of telecommunication licenses or spectrum ensure efficient usage of resources by allocating it to those entities that value it most. Further these licenses contain penalty clauses in case they do not reach their fulfilment targets.

Universal Access Funds in combination with reverse subsidy auctions (UAF)

These are measures where the market does not ensure the provision of telecommunication services effectively making them unprofitable. And so the state intervenes to provide incentives for investments and the supply of service. This intervention is through the Universal Access Fund (UAF). This model is operational in several Latin American countries as well as a small number of Asian countries. Regulators hand pick regions where the ratio of estimated social value to estimated cost is greatest. In each region a regulator specifies a number of localities where public payphones should be placed, a maximum price for phone calls, and a maximum subsidy deemed commensurate with costs and these concessions are allocated through competitive tenders, i.e. each project is awarded to the bidder requiring the lowest subsidy for providing the determined telecommunication services in defined rural areas.

 

Bibliography

[1] Arturo Muente‐Kunigami and Juan Navas‐Sabater, ‘Options To Increase Access   To Telecommunications Services In Rural And   Low‐Income Areas’ (World Bank, 2010)<http://siteresources.worldbank.org/EXTINFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/Resources/282822-1208273252769/Options_to_Increase_Access_to_Telecommunications_Services_in_rural_and_Low-Income_Areas.pdf> accessed 8 April 2017.

[2] ‘Law Of Supply And Demand: Basic Economics’ (Investopedia) <http://www.investopedia.com/university/economics/economics3.asp> accessed 8 April 2017.

[3] Return on Invenstment

[4] ‘Government Action’ (Boundless) <https://www.boundless.com/economics/textbooks/boundless-economics-textbook/monopoly-11/barriers-to-entry-reasons-for-monopolies-to-exist-70/government-action-263-12360/> accessed 8 April 2017.

[5] Sherif Kamel, ‘Electronic Commerce Prospects In Emerging Economies: Lessons From Egypt’ [2010] Encyclopedia of E-Business Development and Management in the Global Economy <http://www.igi-global.com/chapter/electronic-commerce-prospects-emerging-economies/41271> accessed 8 April 2017.

[6] Antonis M Hadjiantonis and Burkhard Stiller, Telecommunication Economics (1st edn, Springer Berlin Heidelberg 2012) pg 101

[7] ‘Case Studies On PPP Arrangements For Telecommunications | Public Private Partnership’ (Ppp.worldbank.org, 2016) <https://ppp.worldbank.org/public-private-partnership/sector/telecom/telecom-laws/case-studies-telecommunications> accessed 8 April 2017.

[8] Peter L. Smith and Björn Wellenius, ‘Mitigating Regulatory Risk In Telecommunications’ [1999] Public Policy for the private sector, page 3.  Please note that the author was unable to find recent findings.

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