Universal service in Telecom: Regional experience

1. Universal service in Telecom: Regional experience Rohan Samarajiva SAFIR workshop on Universal Service Obligation New Delhi, 14 July 2007

2. Agenda • What does research say about regional experience on USO? • Findings on regulatory environment on USOs • Explaining the elative positions of India and Sri Lanka • General conclusions • Studies on teleuse at the Bottom of the Pyramid (by those who are the intended beneficiaries of USO) • Characteristics of current owner-users • Barriers facing non-owner users from owning and what can be done by governments, operators and equipment manufacturers

3. Telecom Regulatory Environment (TRE) study, 2006 • Panel study in six countries (reduced to five during analysis) • India, Indonesia, Pakistan, Philippines, Sri Lanka, (Thailand) • 40-101 respondents per country in four categories, statistically normalized • Likert scale scoring across six dimensions of internationally accepted regulatory performance • Diagnostic tool for assessing regulatory performance and communication

4. Universal service obligation Highest Mobile Highest Fixed

5. Universal service • Every country is below the threshold of satisfactory performance of 3.0/5 (midpoint) • Not so on all other dimensions • India has world’s second largest USO Fund and has done several disbursements • Yet, worst performance among the dimensions and within the group • Sri Lanka which had done almost nothing re universal service and does not collect USO contributions from operators (only from international traffic) gets high scores • Less is more?

6. Interrogating the Indian score • India • Does quite well overall (tied for 2nd place in fixed; and 3rd in mobile), and • Is head-and-shoulders above others in tariff regulation (3.7/5 in fixed and 3.5/5 in mobile) • Compared with 1.9/5 in fixed and mobile for universal service (lowest of six dimensions)

7. Possible reasons • USO levy in India (one of the highest) is 5% of adjusted gross revenues of all operators except pure value-added service providers • Transparent means of disbursing the funds, but • Until 2006, collected from all, but given only to fixed • Most funds went to incumbent, due to design biases • The latest round of least-cost subsidy auctions was the best designed; attracted low to zero bids • Getting low bids in least-cost subsidy auctions should not be a cause of unhappiness • But now DoT’s problem is getting rid of funds!

8. Possible reasons • Worldwide, USD 6b collected (mostly in Brazil & India) but USD 4.4b unspent (also in Brazil & India) • Assuming levy percentage unchanged on an expanding base, at least another USD 3.8b will be collected by 2010 (GSMA) • By March 2005, INR 72.4b (~USD 1.6b) collected in India, but only 25% spent (41% by end 2005-06)

9. USO collections & disbursements in India, 2002-2010 Source: Malik, Payal (2007). Forthcoming book chapter.

10. What of Sri Lanka? • Generally a laggard in TRE performance (4th out of 5 in fixed and last in mobile) but • Shares first place for mobile in USO dimension and second by a pip for fixed • Still below the midpoint (3/5)

11. Why? • Has NO general USO • 1997 privatization agreement precludes the levy of USOs from the incumbent • By extension, its competitors cannot be subject to USO • Small universal service initiatives such as connecting rural post offices and payphone subsidies funded directly from general taxation or regulatory fees • Only source of USO funds is levy on international calls resulting from 2002-03 reforms • First tranche of LKR 7b (~USD 70m) disbursed in 2007 April, after the TRE study was conducted

12. Possible conclusion from LK-IN relative positions • Country that does little to nothing on USOs scores higher than the country most active in USOs, with the largest fund and the highest levy % • Sri Lanka rewarded for doing the least harm • Indictment of USO policies and implementation

13. General conclusions • Public Finance theory tells us that the source of US funds that distorts the least is general taxation • India NO; Sri Lanka YES • Taxing a sector (India YES) causes distortions, so best to tax as little as possible (India NO) • Sri Lanka’s tax primarily affects incoming international calls and causes minimal distortions and protects the most vulnerable customers • If original design of decreasing percentages (down to zero by 2008) was kept, even better

14. General conclusions • Once the tax is collected, it should be spent as quickly as possible • Both India and Sri Lanka fall short, but the magnitude of the Indian failure is larger • When the tax is spent, it should be spent fairly • In the early rounds, major flaws in the Indian auction design resulted in most of the money going to incumbent • Privileged wireline fixed access over wireless

15. Consequences of high USO levies • USO levies don’t come from companies; they come from the existing customers and non-owning users, who include the rich, but increasingly the poor • Teleuse @ the Bottom of the Pyramid representative sample survey conducted by LIRNEasia/ACNielsen in 2006 illustrates the problem

16. SEC A, B & C SEC D & E Bottom of the Pyramiddefined • Many definitions of poverty, but this study uses SEC D and E; between ages 18-60 • SEC does not take into account income, but it is closely related to income levels *excluding FANA/FATA – Tribal Areas; **excluding N&E Provinces

17. Overall access is very high • Most have used a phone in the last 3 months

18. But many BOP users don’t own phones

19. Current owner users

20. BOP makes/receives around 1 call per day in South Asia Source: Diary

21. Calls are short Source: Diary

22. Mostly local calls at the BOP Source: Diary

23. Non-owner users Primary beneficiaries of USO

24. Key barrier to ownership is affordability

25. The expected cost of getting connected…

26. …compared to what can be afforded Indian BOP expects initial cost to be as high as USD25 but many can only afford USD10

27. Expectations & affordability are more in-line re monthly charges

29. Adding up to the next billion?

30. What is to be done?

31. Mostly, reduce entry costs for the BOP • Policy makers/regulators • Sustain competitive conditions • India has lowest HHI concentration ratios • Improve regulatory environment on all fronts • Universal service and spectrum management seen as most problematic by stakeholders responding to TRE questionnaire • Rethink tax regimes to remove barriers ownership and use • Step down USO tax to zero ASAP • Move away from taxing handsets

32. Mostly, reduce entry costs for the BOP • Policy makers/regulators • Accelerate USO Fund disbursements and infrastructure sharing to increase rural coverage • Encourage well-functioning second-hand market (e.g., Pakistan) • Exclude stolen sets by mandating equipment registration

33. Mostly, reduce entry costs at the BOP • Telecom operators • Leverage benefits of direct access: security, keeping in touch • Improve coverage • Infrastructure sharing is the right way to go • Solve the connection/use charge problem: installment plans? • Collaborate on meaningful content and applications for BOP • e.g., SMS-based remittances • Handset manufacturers • Ultra low-cost phones with warranty • Affordable, functional handsets (e.g., with local language SMS capability)

34. In sum… • Research tells us that present approaches to USO in the region are not working • Need to understand the needs of the intended beneficiaries of USO policies and what is preventing them from having the market meet their needs • At least in telecom, strong case for phasing out universal service levies

35. samarajiva@lirne.net

36. Method • Panel studies using as small a number of questions as possible • Effective perception studies are conducted using one question alone • Need to make minimal demands on time of senior respondents such as CEOs • Use a large number of respondents to balance out the biases; also use statistical methods to reduce bias caused by group representation • Use traditional social-science perception instrument: 5-point Likert scale • Focus on telecom regulatory environment not on regulatory agency per se • In India, three dimensions reflect TRAI performance; three reflect DoT performance • In Pakistan, PTA controls five

37. Method • Five dimensions from GATS regulatory reference paper (document with greatest international legitimacy) + price regulation • Others under consideration • Service-quality regulation • Consumer protection • TRE studies being conducted in Latin America and the Caribbean and Africa • Asian six-country study conducted in August-October 2006 • Building on pilot conducted in 2003: http://www.regulateonline.org/content/view/207/65/

38. Panel composition: categories • Category 1 : Operators, industry associations, equipment suppliers • Category 2 : Financial institutions, private investment houses, banks and credit rating agencies • Category 3 : Educational/research organizations, telecom consultants, law firms • Category 4 : Journalists, telecom user groups, civil society, former members of regulatory/other government agencies

39. Panel Composition

40. Detailed analysis, across each of six dimensions • Countries arranged in order of per capita GDP (Purchasing Power Parity), with Pakistan (PK) lowest and the Philippines (PH) highest • Numbers reported are average scores, rounded to one decimal • Midpoint (3) as threshold of adequate performance • Analysis by each of the six dimensions can be a useful diagnostic tool • Does the score reflect the perceptions of the regulatory agency? • If not, perhaps more should be done to communicate its actions

41. Market Entry Highest Mobile Highest Fixed

42. Access to scarce resources Highest Mobile Highest Fixed

43. Interconnection Highest Mobile Highest Fixed

44. Tariff regulation Highest Fixed Highest Mobile

45. Regulation of anti-competitive practices Highest Mobile Highest Fixed

46. fixedOverall TRE scores Maximum score Mid-point Minimum score

47. MobileOverall TRE scores Maximum score Mid-point Minimum score