Broadband policy for developing countries ESW Concept Note: August 10, 2010

Broadband policy for developing countries ESW Concept Note: August 10, 2010 Objectives The proposed economic and sector work (ESW) activity on broadband policy for developing countries has the following objectives: 1. Identify policy options for how developing countries can accelerate the diffusion of broadband networks (henceforth broadband ). 2. Disseminate findings to developing countries ICT policymakers and regulators through a report and workshop. Rationale and value added This ESW will: (1) expand the literature on broadband policy options, (2) create knowledge on the evolving role of government in broadband diffusion, and (3) support World Bank operations. The ESW expands the literature on broadband policy options. Compared to policy analyses focusing on telephony, broadband remains understudied. This matters because broadband has a comparatively greater impact on development than other ICT. Consequently, restricted understanding of policy options to diffuse broadband will delay or deny the potential development gains. This activity will add to existing knowledge on broadband policy in three ways. First, it consolidates existing information on policy options for enabling the diffusion of broadband. Second, it will analyze how countries have implemented broadband policies, drawing upon the best practice examples and creating knowledge on translating policy ideas to actionable programs. Third, it disseminates this knowledge and findings to the appropriate audiences both within and outside the WBG. The ESW also creates knowledge on the evolving role of government in broadband diffusion. Experience shows that governments are not static entities with respect to regulated markets. Instead, their functions and influence vary as markets evolve from innovation to saturation. Specifically, there is a balance between the government and private sector will enable the greatest diffusion of broadband, and that the nature of this balance varies as the market develops. This ESW will analyze this dynamic and evolving role of government in promoting, regulating, and then universalizing broadband. Going beyond a general conception of government creating an enabling environment, this analysis will allow governments to think clearly about specific measures that respond to both specific local circumstances. Simultaneously, it is important that the government should not crowd out the private sector. These aspects are discussed later in this concept note. The ESW will also support Bank operations. Its findings will inform staff of the range of policy options available to low- and middle-income countries looking to spur the diffusion of broadband. Further, by disseminating its findings, this ESW creates opportunities for the Bank to engage with client countries on the topic of broadband development. In this way, this ESW will also influence regulatory policy in client countries. Further, this activity is closely associated with a proposed infodev activity looking at the developmental impact of broadband. These two activities are complementary because they are concerned respectively with examining the creation of an appropriate policy response, and the impact of the diffusion of broadband. Expected outputs 1. Report. The data collection, analysis, and conclusions of the study will be included in a report. 2. Dissemination activities. The ESW will emphasize dissemination of key messages and lessons learned from the study through knowledge sharing activities including publications and country or regional workshops, including a proposed joint workshop with OECD. The authors will also publish the report 1

through appropriate Bank channels (e.g. IC4D, Viewpoint notes) and in conferences or academic journals. Background This ESW identifies policies to enable the rapid diffusion of broadband in developing countries. When implemented, these policies can enable countries to realize the benefits of expanded access to broadband at a faster rate than might be predicted, for instance, by their level of GDP per capita. The ESW proposes using the Republic of Korea s (Korea) experience in broadband development as a useful example of how developing countries can accelerate growth. This section gives a theoretical background for the ESW. There is a broadband divide There is growing recognition of how broadband supports economic growth in both developed and developing countries. Expanded access to broadband facilitates social and economic integration, increases the efficiency of businesses, enables wider service provision by governments, and opens new opportunities for countries, firms, and individuals looking to participate in the knowledge economy. However, the extent to which developing countries can realize the economic benefit of broadband is limited and a broadband divide exists between them and the developed world. Low- and middle-income countries lag significantly behind high-income countries in broadband diffusion (Figure 1). This lag is due to high-cost or low-quality infrastructure, low perceived demand, or restrictive policies and regulations. Consequently, an increasing number of developing countries looking to realize the benefits of broadband are held back by low diffusion of their broadband networks, as well as slower speeds and higher prices. Figure 1: Broadband subscriptions in different country groups (per 100 inhabitants) 1 25 20 15 10 5 High income Lower middle income Upper middle income Low income 0 2000 2001 2002 2003 2004 2005 2006 2007 Without accelerating growth, the broadband divide is inevitable Without accelerating the supply and demand of broadband, developing country markets might take a long time to develop, making the broadband divide wider. Studies on the diffusion of innovations theorize that innovations spread through society following an S-curve. 2 Early-adopters lead to accelerated mass-market diffusion, decelerating to ultimate saturation in a variety of ICT (see Figure 2). Further, typical diffusion models predict much slower penetration rates in rural and remote areas relative to urban zones. 1 World Development Indicators data, 2008 2 Rogers, E. Diffusion of innovations. New York: The Free Press. 1971. 2

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Figure 2: Diffusion of ICT globally (subscription per 100 inhabitants) 3 60 50 40 Broadband Mobile phone PC Wireline telephone 30 20 10 0 Broadband, like most other innovations, also diffuses in an S-curve. In the first stage, early adopters business users, high-revenue customers, or state institutions drive the build out of networks. In the second stage, broadband becomes mass-market typically through private-sector-led development. In the final stage, some access gap will remain, where only specific incentives will encourage the rollout and adoption of service. In order to avoid a widening broadband divide, developing countries will have to accelerate their broadband markets to expand faster than the S-curve. This will need: 1. A push in early adoption, in order that the broadband market has a faster transition to mass-market. 2. A fast take-off in the mass-market, with both adequate supply and demand. 3. Programs for universal access to broadband even for remote or high-cost subscribers when the market begins to reach its limits. An evolving role for government To spur such growth and overcome the broadband divide, developing countries are now looking to formulate and implement policies to spur the diffusion of broadband. However, there is no silver bullet, and developing countries have different implementation capacities. Hence, they require knowledge on the range of policy options and their implementation to create an enabling environment for broadband, encourage supply-side growth, and expose latent or create new demand. Indeed, a government will have to enact different policies as the market grows. Consequently, the role of the government will have to evolve from market promotion to regulation and finally move towards universalization of service provision (Figure 3). 3 World Development Indicators data, 2008 3

Figure 3: The evolving role of government 100% 75% 50% Regulate Universalize 25% 0% Promote 0 1 2 3 4 5 6 7 8 9 10 Early on, promotion policies will have to focus on the development of a national broadband backbone network, demand creation, and creating an enabling environment for competition and investment. When broadband reaches mass-market status, regulation will likely have to ensure competition and support supply growth in the access segment. Finally, universalization will cover access gaps through universal service policies that will drive networks into rural and high-cost areas. Developing a menu of policy options These varying roles require a menu of policy options both that drive broadband growth through these stages of growth, and that developing countries can adapt to local circumstances. At different times, these policies can expand the supply of, or demand for broadband and can help in reducing the price to consumers. These demand- and supply-side policies are cumulative, and will be effective at different stages of market development. Preliminary research suggests the following examples (that will be refined as the report is prepared): Market stages Government role Supply-side policies Early stage Promote Incentives and subsidies for R&D, pilots, and network rollout. Providing broadband networks to schools, government etc. Lower entry barriers. Mass market Regulate Creating an enabling environment for intra- and inter-modal competition. Mandated Infrastructure sharing, including unbundling the local loop. Universal service Universalize State-led deployment of open access broadband networks in high-cost or remote areas. Coordinated rights-of-way. Demand-side policies Government-led demand aggregation. Local content and hardware development. Low cost PCs and other user devices, for instance in education. Digital literacy programs. Cyber-building certification systems. Non-discriminatory access for service or applications providers. Advanced egovernment programs. 4

Korea as an example of accelerated broadband growth To develop this list of options, this ESW will do an in-depth case study of broadband policies and their associated programs in Korea and literature studies of other high- and middle-income countries. The team selects Korea for study because: (1) It was an early mover and remains a leader in broadband development, both for fixed-line and mobile broadband; (2) Its broadband market growth apparently defied the S-curve with a quick drive to the mass market; (3) It adopted systematic and comprehensive policies for promoting broadband; and (4) The Korean government took a direct involvement in the development of broadband. Korea was an early mover and is a leader in wireline and wireless broadband (Figure 4). Korea recognized the importance of broadband in the late 1990s. It has subsequently outperformed most countries in its deployment and use. Until 2004, it ranked first of 53 countries in Asia, North America, and Western Europe. As of June 2008, penetration is 31.2 per 100 inhabitants. Even though Korea is currently ranked seventh of 30 OECD countries in penetration on a per-capita basis, it remains the leader both in household and fiber/lan-based penetration, and Korean consumers enjoy some of the lowest prices anywhere, measured in terms of price per Mbit/s per month. Furthermore, the market is characterized by competition between technologies DSL, cable, and fiber all have significant market share of about a third 4 with some of the lowest prices and fastest speed connections. Korea is also taking the lead in wireless broadband; it was one of the first countries to launch 3G mobile services and estimates suggest that as of 2008, it is the largest market in Asia for both WiMAX/WiBro 5 and commercial Wi-Fi operations. Figure 4: Broadband subscribers (per 100 inhabitants) 6 35 30 25 20 15 10 5 0 Korea, Rep. Japan High income: OECD East Asia & Pacific World 1999 2000 2001 2002 2003 2004 2005 2006 2007 Korea s broadband growth apparently defied the S-curve. Consequently, it is useful to study Korea s success and understand what factors might have driven it, especially to derive lessons for the developing world. This is more relevant now, when there are calls for fiscal stimulus packages to counter the credit crisis; the conditions are similar to those prevailing in Korea at the time of the Asian financial crisis. By defying the Scurve clearly seen in Figure 4 Korea offers a unique example of how developing countries can accelerate their broadband markets and overcome the broadband divide quickly. Korea has adopted systematic and comprehensive policies early and effectively. It strategically executed competition policies, and a variety of supply-push and demand-pull policies. Indeed, an outstanding characteristic of Korea s success is the creation of an enabling policy environment. This makes it a useful example of the range of policy options available for governments. 4 OECD, Broadband statistics, June 2008 5 BMI, The Future of WiMAX in Asia: Winners & Losers, February 2008 6 World Development Indicators data, 2008 5

The Korean government has played a significant role in developing the broadband market. The Government of Korea developed strategic plans and promotion policies when most developed countries were skeptical of government intervention and hesitated to draw up the policies to boost broadband. Hence, while many other countries have carried out a range of varied policies in this area, it is not easy to find any other country with as comprehensive and diverse broadband policies in terms of scope and level of government involvement as Korea. Analytical approach As described above, the overall ESW activity will include a study leading to the preparation of a report and subsequent dissemination activities. This section describes (1) the methodology for the study, (2) the audience and dissemination strategy, and (3) a discussion of some important caveats and considerations for the study. Methodology for the study The study will answer the following questions: 1. How can developing countries accelerate broadband diffusion to defeat the S-curve? What are the policy options available? 2. How can the range of policies support accelerated growth of the broadband market through early adoption, take-off, and drive to achieving universal access? 3. What is the role of government in creating an enabling environment and in overcoming any gaps left by the market? 4. How can governments ensure that state involvement in the development of broadband does not stifle or crowd out the private sector? The study answers these questions through four components: 1. Detailed case study of Korea. Under Bank staff supervision, a consultant will prepare an in-depth case study of the broadband market, policies, and programs of Korea. This case study will provide an historical and political-economic overview of the development of the market, and detail the actions of the public and private sectors in enabling and promoting the growth of broadband networks and their use. It will draw upon earlier studies 7 to provide a comprehensive and up-to-date picture of policies adopted at different stages of market development. 2. Identification of broadband policies and programs. Based on the detailed case study of Korea, as well as the survey of other countries experience, the consultant will prepare and analyze a long list of the different supply- and demand-side policies and programs implemented. This long list will be the prototype list of policies for the remainder of the study. 3. Other countries experiences. Based on a survey of other (developed and developing) countries, the team will identify how policies similar to Korea s have been implemented in other situations, and with what success. This will improve the understanding of how similar policy options might be implemented differently in different political economic circumstances. 4. Analysis and conclusions. The study will end with an analysis of findings and recommendations on policy options for developing countries to consider. Audience and dissemination strategy The intended audience for this ESW is: Government policy-makers and regulators: Officials responsible for broadband strategies, policies, and regulations; Private Sector: Firms that can be inspired to roll out broadband more aggressively; multinational firms who can save by outsourcing some of their information-based activities to new locations in developing countries due to lower cost of broadband; SMEs who can benefit from cheaper broadband access. Civil society and academia: Academics, think tanks, NGOs, etc. who can catalyze the adoption of global best practices in broadband access; 7 See, for instance, ITU (2003) Broadband Korea: Internet Case Study, available at: http://www.itu.int/itu- D/ict/cs/korea/material/CS_KOR.pdf. 6

WBG staff: Country management teams, sector teams that could both support the broadband agenda and benefit its expansion (e.g. education, agriculture, health, private sector development). To reach this audience, the results of the study will be disseminated in the following ways: 1. Publication of the resulting report in full; 2. Publication of a summary version in a Viewpoint note for wider reach; 3. A Workshop in Washington D.C. with participation of GICT and other WB staff, Korean officials, private sector and experts (in person, via the GDLN, and a live webcast); and 4. Participation in a workshop organized in coordination with infodev and the OECD on the developmental impact of broadband. Caveats and considerations This concept note and the ESW study will clarify three important caveats and considerations. First, one-size does not fit all. It is critical to understand that one solution does not fit all country situations. The local political economy and socio-cultural circumstances will have to inform the design of the final policies and programs. Yet, it is possible to derive lessons and identify options based on what has or has not worked to spur broadband growth in the studied countries. This study avoids a cookie cutter approach by studying how countries other than Korea have implemented similar policies, providing readers with not only a range of policy options but also different implementation situations. Hence, the intention of this study is not to provide a silver bullet solution or suggest that one country s policies are the only option, but rather to lay out the range of options for other countries to consider. Indeed, using the Korean example to identify options, discuss how other countries have undertaken similar policies and programs, and then conclude with an analysis will enable the audience to assess the various options available to them and learn from a variety of examples and country situations. Second, it is important to emphasize that the intention is not to suggest that the government should take over the provision of broadband services. Rather, a balance needs to be struck between public sector programs that improve the reach and adoption of broadband services, and private sector operations of the infrastructure and services. The intention of this ESW is not to suggest the substitution of market mechanisms with government intervention, but to identify policy recommendations that facilitate the market provision of broadband service. At no point is the intention to create a backdoor for government entry into service provision, a move that would potentially undo two decades of reforms and progress in the ICT sector. Instead, this ESW will look for new ideas that allow the government to play a role in improving access to broadband services supplied through the private sector. 8 A number of commentators now suggest that relying on markets alone might not be sufficient to realize widespread broadband provision and adoption. Indeed, as the OECD explains in a recent report, the private sector should take the lead in developing well-functioning broadband markets, but there are clearly some circumstances in which government intervention is justified. 9 Further, a number of emerging models for backbone development suggest that partnerships between the public and private sector will speed deployment even in challenging markets in regions like sub-saharan Africa. 10 Hence, the government also has an important role to play in encouraging the rollout of broadband networks and services. 8 Indeed, there could be specific rules, such as the EU State aid rules. In that arrangement, the Commission s DG Competition monitors State aid to the ICT sector and contributes to the development of State aid policy in this field. State aid is defined as an advantage in any form conferred on a selective basis to undertakings by national public authorities. In view of this definition, a number of measures such as research and development aid or regional aid to ICT companies have to be monitored by DG Competition in order to avoid market distortions. DG Competition also clears aid that is beneficial to consumers, by providing new research grants and encouraging the development of new products, such as open source. http://ec.europa.eu/comm/competition/sectors/ict/overview_en.html. 9 OECD, Broadband Growth and Policies in OECD countries, 2008, p. 12 (emphasis added) 10 Williams, M. D. J., Advancing the Development of Backbone Broadband Networks in Sub-Saharan Africa, IC4D 2009. 7

Indeed, Korea itself was criticized in some quarters for adopting an interventionist approach to broadband. However, the successful government-led programs in countries such as Sweden and Japan have led to a reevaluation of Korea s broadband policies. Now, countries are targeting a number of Korea s programs for benchmarking. This includes the building of the national backbone network, deploying the Korea Information Infrastructure, establishing a national Internet Exchange Point and measures to promote broadband usage and create demand. In addition, several developed nations are studying the Korean case to transfer those models to their own countries. This change of perspective on the role of government in broadband development is of significant importance to developing countries. Developing countries seldom have ideal telecommunications markets, and require proactive government policies and regulation to spur growth, especially in advanced ICT such as broadband. Hence, Korea s experience is also more appropriate for them than the developed countries that limit the government s role to competition regulation. Resources Task team Core team. The core team for this ESW activity is Yongsoo Kim (Sr. ICT Policy Specialist, TTL), Tim Kelly (Lead ICT Policy Specialist) and Siddhartha Raja (Telecommunications Policy Analyst). Consultant. The team will hire and supervise the preparation of the detailed case study on Korea by a consultant (individual or firm to be competitively selected). Peer reviewers. Proposed internal peer reviewers for this activity are Rajendra Singh (Sr. Regulatory Specialist, CITPO) and David Satola (Sr. Legal Counsel, LEGPS). The external peer reviewer for this concept note is John Windhausen (President, Telepoly Consulting). Another external peer reviewer will be identified for the final report review. Management oversight. Philippe Dongier (Sector Manager). Timetable Milestone Date Concept note review meeting January 22, 2008 Data collection and analysis February-May 2009 Draft review May 31, 2009 Decision meeting August 31, 2009 Delivery to client September 30, 2009 Joint workshop with OECD on developmental October 2009 impact of broadband Final delivery including dissemination December 31, 2009 Activity Completion Summary January 31, 2009 8