Telecommunications Technologies Deployment in Developing Countries- ROLE OF MARKETS AND INSTITUTIONS Farid Gasmi Université de Toulouse I (GREMAQ, IDEI) (gasmi@cict.fr) Laura Recuero Virto Université de Toulouse I (GREMAQ) (recuerovirto@hotmail.com) February 2005 1-33
Introduction ROLE OF MARKETS AND INSTITUTIONS Policies for the provision of telecommunication services in developing countries significantly differ from those typically implemented in developed countries: - Fundamental objectives - Technological strategies deployed - Institutional and market framework Analysis of reforms in developing countries needs to account for these countries specificities. Objective: Illustrate strength of these arguments in the case of universal service. Observation: Striking asymmetry between institutional and academic literatures.. February 2005 2-33
Fundamental Objectives Individual vs. collective access Level of service vs. level of geographical coverage February 2005 3-33 ROLE OF MARKETS AND INSTITUTIONS ROLE OF MARKETS AND INSTITUTIONS
Developed countries: Individual vs. Collective Access High GDP High teledensity Private or per capita (over 40%) individual ownership COUNTRY Canada USA Germany Japan GDP per capita (1997 USD) 20,608 30,173 25,625 33,231 Teledensity (telephone lines per 100 people 1998) 63.4 66.1 56.7 50.3 Telecom target Individual line Individual line Individual line Individual line Source: ITU(1999). February 2005 4-33
Developing countries: Individual vs. Collective Access Low GDP Low Public or per capita teledensity shared access (5% or less) COUNTRY Ethiopia Kenya Pakistan Madagascar Source: ITU(1999). GDP per capita (1997 USD) 118 (1995) 350 2,600 260 Teledensity (telephone lines per 100 people 1998) 0.26 (1997) 0.94 1.99 0.29 Telecom target A telephone booth in every town A telephone within walking distance A phone in every village A public phone in every village February 2005 5-33
Level of Service vs. Level of Geographical Coverage Main objective of developed countries: Level of service USA, EU: Periodical update of a basket of services for individual households COUNTRY Canada USA Source: OCDE (1999). Universal Service Targets Individual line local service with touch-tone dialing, enhanced calling features; access to operator and directory assistance services; access to long distance network; a copy of a current telephone directory. Voice grade access, with the ability to place and receive calls; Touch-tone signaling or its functional equivalent; single party service; access to emergency services; access to operator services; access to directory services; access to long distance services. February 2005 6-33
Level of Service vs. Level of Geographical Coverage Main objective of developing countries: Level of geographical coverage COUNTRY Peru Botswana Universal Access Targets Three access goals: Public payphones in rural villages with less than 3.000 inhabitants (5.000 villages with a total of 3,9 million inhabitants) and, in localities with insufficient service (1.600 localities with 1,8 millions inhabitants) and, internet access in all district capitals of the country (911 district capitals, 1,5 million of habitants). Telephony to all villages of 500 inhabitants or more (160,000 access lines and 500 public phones). Source: FITEL (1996), Navas- Sabater (2002). February 2005 7-33
Level of Service vs. Level of Geographical Coverage Traditional approach: Telephone booths Innovative options: Telephone cards Village phones Bangladesh, India, South Africa and Morocco. Multipurpose Community Telecenters (MCT) Brazil, Vietnam have launched projects in large cities; India, Uganda and Surinam have regional information centers in rural areas. ICT cooperatives Poland, Bolivia. February 2005 8-33
Technological Strategies Economies of rural areas Specific technological approaches February 2005 9-33 ROLE OF MARKETS AND INSTITUTIONS ROLE OF MARKETS AND INSTITUTIONS
Economies of Rural Areas ROLE OF MARKETS AND INSTITUTIONS Why different technological strategies in rural areas of developing countries? Lower disposable income: In countries with low GDP per capita, between 5 % and 1 % is spent on telecom services. Despite higher consumer surplus per call.. Total consumer surplus often not high enough to cover marginal costs of network expansion. February 2005 10-33
Economies of Rural Areas ROLE OF MARKETS AND INSTITUTIONS Why different technological strategies in rural areas of developing countries? Higher installation and maintenance costs per line for wired and wireless: Lack of associated infrastructure: Rural roads, electricity networks most importantly. For cellular and VSAT, installation cost double or triple Lack of on site technical personnel and high failure in training rural inhabitants: Costly repairing, monitoring, configuration and tariff adjustment services. Lack of on site spare parts. February 2005 11-33
Specific Technological Approaches ROLE OF MARKETS AND INSTITUTIONS Use of wireless technologies: Lower incremental costs in low density areas and beyond a certain radius from the telephone exchange. However, lower quality and capacity.. Source: Navas-Sabater (2002). February 2005 12-33
Specific Technological Approaches Low frequency bands Lower frequencies better adapted to rural areas from a cost/coverage ratio viewpoint both for cellular and satellite technologies. No impact on quality.. Quality is determined by bandwidth not by frequency range. GSM 1800 GSM 900 GSM 400 February 2005 13-33
Specific Technological Approaches ROLE OF MARKETS AND INSTITUTIONS Low power requirements The operator is responsible for the costs of purchasing, installing, and maintaining the power system. Strong incentives to use off grid and renewable systems. Wireless power provision with solar panels in the village of Villianur, India February 2005 14-33
Specific Technological Approaches And the list is long.. Remote network management Flexibility in terms of scalable and modular systems Simplified user terminal configuration and operation Long life cycles Multi-user terminals Flexible user interface February 2005 15-33
Affordability frontier Institutional and Market Framework Market Efficiency Gap Commercially viable UA Increasing geographical isolation Market Access Gap Non commercially viable UA Commercially viable Universal Access: No direct public intervention Non commercially viable Universal Access: Direct public intervention February 2005 16-33
Institutional and Market Framework Dual view of universal access in developing countries: Commercially viable Universal Access Tariff rebalancing Privatization Competition Concessions (under an appropriate regulatory framework) Non commercially viable Universal Access Universal Service Funds Mandatory service obligations February 2005 17-33
Commercially Viable Universal Access ROLE OF MARKETS AND INSTITUTIONS Developed countries typical measures are Tariff rebalancing Privatization + Regulation Competition In following these measures, developing countries are Delayed Restricted Early assessment of the impact of these measures.. February 2005 18-33
Commercially Viable Universal Access ROLE OF MARKETS AND INSTITUTIONS Tariff rebalancing: (empirical data suggest) positive correlation with network expansion. Often low penetration due to constrained supply. Higher prices provide operators with incentives to meet demand. A 10 % increase in the average residential price reduces unmet demand by 4.1 % in 23 Latin American countries from 1986 to 1995 (Banerjee, 2000). Similar effects in Malaysia, Hungary, Morocco and Uruguay in the 90s (ITU, 2000). February 2005 19-33
Commercially Viable Universal Access Privatization: (empirical studies suggest) positive correlation with network expansion. Also due to constrained supply, private capital and higher prices allowed by tariff rebalancing gives operators incentives to meet demand. After controlling for tariff rebalancing, privatizing reduces unmet demand by about 28 % (Banerjee, 2000). Reduction of unmet demand of by 10 to 18 % in 22 Latin American countries in 1980-1997 (Gutierrez, 2003). February 2005 20-33
Commercially Viable Universal Access ROLE OF MARKETS AND INSTITUTIONS Privatization: BUT the impact on network expansion depends heavily on.. Government commitment: Risks of asset expropriation and interference with regulation. Degree of independence of regulatory body Countries with low government interference have higher levels of network expansion (Gutierrez, 2003). Privatization coupled with independence of regulation results in increasing network expansion in 30 African and Latin American countries during the period 1984-1997 (Wallsten, 2001). February 2005 21-33
Commercially Viable Universal Access Competition: (empirical studies suggest) positive correlation with network expansion and efficiency. Evidence for Latin American and African countries (Gutierrez, 2003, Ross, 1999, and Wallsten, 2001). Side effects: Might threaten traditional cross-subsidy mechanisms. Expected decrease in the firm s rent due to asymmetric information. How well the regulator will do in developing countries? February 2005 22-33
Commercially Viable Universal Access Competition: BUT the impact on network expansion depends on.. Government commitment (as with privatization), e.g., Senegal. Regulation of access: Capacity of the regulator to enforce rules and tariffs, e.g., Ghana. February 2005 23-33
Commercially Viable Universal Access Concessions: alternative mechanisms Arrangements between the government or incumbent and private investors: BTO (Thailand, Philippines), BOT (Lebanon, India and Indonesia), BOO (Malaysia and Solomon Islands) Though BTO and BOT had initially relative success, incentives problems seem to currently arise, e.g., Thailand, Lebanon, and Indonesia. February 2005 24-33
Affordability frontier Institutional and Market Framework Market Efficiency Gap Commercially viable UA Increasing geographical isolation Market Access Gap Non commercially viable UA Commercially viable Universal Access: No direct public intervention Non commercially viable Universal Access: Direct public intervention February 2005 25-33
Non Commercially Viable Universal Access Role of technological innovations Allow to expand the reach of the mechanisms used to reduce the market efficiency gap. But, need for a flexible regulatory framework Radio spectrum allocation. Coordination between standards. Unbundling incumbent s network elements. February 2005 26-33
Non Commercially Viable Universal Access For those activities that remain non profitable... Developed country s typical financing measures: Universal Service Funds (USFs) Mandatory service obligations Early assessment of the applicability and performance of these mechanisms in developing countries may partly justify restoring the use of cross-subsidies.. February 2005 27-33
USF: Increasing use Non Commercially Viable Universal Access Brazil, Chile, Colombia, Dominican Republic, Guatemala, Malaysia, Morocco, Nepal and Peru; Bolivia, Uganda and Egypt in their planning phase. Limitations: In some cases, inability to levy enough funds through taxation of operators revenues to cover costs of network expansion, e.g., Nepal. Risk of funds being diverted to other public expenditures or private use, e.g., Ghana and Côte d Ivoire. February 2005 28-33
Non Commercially Viable Universal Access USF Auctions: Used to allocate universal access subsidies. Limitations: Lack of competitive bidding, e.g., Ghana. Lack of expertise Loose screening rules, e,g., Chile, Colombia, Guatemala, and Peru. Loose bidding criteria, e.g., Chile and Peru. February 2005 29-33
Non Commercially Viable Universal Access Mandatory service obligations Limitations: Weak enforcement through the legal and judiciary system, e.g., India. Too heavy burdens may not be feasible, e.g., Argentina, Botswana, Chile, Malaysia, Peru, Singapore, and Venezuela. February 2005 30-33
Non Commercially Viable Universal Access Mandatory service obligations Limitations: Poor experience and expertise in specifying targets. Targets might be ex post not enforceable, e.g. Philippines and India. Targets might mismatch effective demand, e.g., Uganda and Philippines. February 2005 31-33
Conclusion Developed countries experiences can (at best) provide guidance to public utility policy making in developing countries. Governments in developing countries have an active role: Removal of market barriers Flexible regulatory rules Intervention in non economically viable activities "Developing-country approach to regulation needs to be supported by theoretical and empirical work. February 2005 32-33
Thank you for your attention February 2005 33-33 ROLE OF MARKETS AND INSTITUTIONS ROLE OF MARKETS AND INSTITUTIONS