Universal Service Economics and Funding Options David N. Townsend

1. CoE/ARB ITU/BDT & CTO Workshop on Universal Service Policies and Funding Sana’a, Yemen, 07-09 Oct 2003 Universal Service Economics and Funding Options David N. Townsend

2. Universal Service Economics, Funding What factors inhibit achieving Universal Access? • Supply/costs • Infrastructure investment, expansion • Technology upgrades • Network operation, maintenance • End user equipment • Technical knowledge, skilled personnel • Demand • Income levels vs. prices • Costs of living, choices • Education, training, awareness of technology

3. Universal Service Economics, Funding Market Structure Issues • Traditional approach to telephone service: • Monopoly, state-owned telephone utility • Telephone service seen as a public responsibility • Extend infrastructure, service according to national budget, political priorities • Prohibit competition, on the assumption that it will drain revenues from the public operator

4. Universal Service Economics, Funding Market Structure Issues • Theory and objectives of liberalisation: • Economic, market incentives will promote faster, more efficient infrastructure and service development • Private investors have greater incentive, insight to serve customer demand • Experience with market-based businesses will benefit economy in general • Universal service public policies can complement private market initiatives

5. Universal Service Economics, Funding Market Structure Issues The “Access Gap” concept Economic Gap MarketGap Access Available Urban / Affluent >>> Rural / Low Income

6. Universal Service Economics, Funding Market Structure Issues • The Access Gap • Theory: for any service, there are three levels of access: • Existing access: locations and customer groups already connected • Market gap: where access should be achievable through market forces • Economic gap: where costs and demand can’t be reconciled by the market • (1) is readily observed; (2) and (3) are the policy challenge

7. Universal Service Economics, Funding Market Structure Issues • Economic Development • There is a broad assumption, and much evidence, that expanding communications access promotes economic development and opportunity • Key questions surround the impact and timing of these effects: • How will economic benefits translate into increased demand/ability to pay for services? • How fast will this occur, hence what would be the payback to investors?

8. Universal Service Economics, Funding Policy and Regulatory Strategies • Subsidy vs. Incentives • Subsidies to overcome economic gap: • Public subsidies -- taxes • Internal cross-subsidies -- private monopoly, USO, unbalanced tariffs • Industry cross-subsidies -- Universal Service Fund (applied to supply or demand side)

9. Universal Service Economics, Funding Policy and Regulatory Strategies • Subsidy vs. Incentives • Incentives to identify and close market gap: • Open market entry -- licenses, franchises • Tariff rebalancing, cost-based interconnect charges • Universal Service Fund (applied to start-up costs) • Government service guarantees

10. Universal Service Economics, Funding Policy and Regulatory Strategies • Short-run “subsidies” vs. long run “incentives”? • Depends upon: • nature and size of current market vs. economic gaps • economic development impact of access • Effectiveness of policies, regulation • Education, training in ICTs

11. DNTA Thank You For more information, please contact: David N. Townsend President, DNTA DNT@dntownsend.com www.dntownsend.com/dnta/ +1-781-477-9356 (tel) +1-781-593-4707 (fax)