Subsidies are a common form of direct government intervention in telecommunications markets. Subsidies are likely to exist whenever the final price paid for a good or service is less than the cost of providing that good or service. Companies may, for a time, cross-subside one set of customers with the profits from another – however the more common form of subsidy involved a direct government contribution making up the difference between the cost of private provision of a service, and the price consumers pay for it.
This section considers how subsidies can be used to improve broadband access. In particular, it focuses on the considerations policymakers should give to subsidy design to ensure that subsidies are spent appropriately.
4.4.1 Subsidies as an Instrument of Fiscal Support
Policymakers should approach subsidies with a degree of caution. The literature of economic literature has, for some time, warned of the dangers of direct government intervention in markets and the distortions such interventions can cause.* Further, the fiscal pressure imposed by subsidies is not likely to be counterbalanced by the benefits they deliver, particularly in the short-term. In addition to this, most countries have bilateral and multilateral obligations to other nations that often involve commitments that limit or exclude the provision of government subsidies to national industries or discrimination in the provision of such subsidies. Policymakers should examine each of these factors before considering whether subsidies could, or should, form part of broadband infrastructure policies and plans.
Having considered these factors, policymakers may consider the use of subsidies as a tool of policy, particularly in already highly regulated industries like the supply of telecommunications, water or electrical services. In certain circumstances subsidies may prove effective in mitigating or removing the effects of market failures in these sectors.
Subsidies are a medium-intervention strategy.* Although subsidies require investment of fewer resources than direct infrastructure construction or ownership by government, subsidies represent a significant commitment to market involvement. If implemented prudently, subsidies help to deliver services to groups who would otherwise miss out in an efficient manner. However, without adequate levels of transparency, probity and fairness subsidy programs may present significant economic and political risks.*
Subsidies can be financed directly from domestic government budgets or from international development assistance. They can also be a policy mechanism used by UASFs to distribute funds collected from a universal serve obligation or a levy.
220.127.116.11 The Rationale for Subsidies
The economic rationale for subsidies is demonstrated at the economy-wide level. Subsidies cover the difference between the costs of providing a service and the revenues that are then recovered from selling that service. Without a subsidy, investments in broadband infrastructure in certain areas would not return economic profit to firms, so those investments are unlikely to be made. The rationale for government providing a subsidy to make particular investments worthwhile for private businesses is that the overall benefit of increased broadband coverage is both socially and economically beneficial.
The economic impact of government investment in broadband infrastructure, through mechanisms like the provision of subsidies, can provide both immediate and long-term positive economic effects. Recent econometric analysis measured growth in 120 countries between 1980 and 2006. This analysis demonstrated that for every 10 per cent increase in penetration of broadband services across an economy the economy grew by 1.3 per cent, on average.*
A particular benefit to subsidies is the fact that they provide a leveraged benefit. In providing a subsidy that covers the difference between a marginal project and a commercially profitable one, governments can induce significant commercial investment for a fraction of the cost of that investment. Rather than having to pay for the whole cost of the infrastructure, as the government would do if they built it themselves, a subsidy can deliver the benefit of the infrastructure provision for a fraction of its cost.
Broadband investments delivered through subsidies are more likely to be fiscally sound than other policy alternatives, as the market-led nature of the investments is likely to deliver greater value for money than other approaches.* Private sector firms are likely to have advantages like skilled staff, a deep understanding of technological options and the ‘reach-back’ into the corporate knowledge of international parent companies that should contribute to the efficiency and effectiveness of market-led programs.
Japan’s New IT Reform Strategy (IT Strategic Headquarters, 2006) and Digital Divide Elimination Strategy [MIC], 2008) both set FY2010 (March 2011) as the national target for eliminating all of its Broadband Zero Areas. A Broadband Zero Area is a region where broadband service is not available, even to households in the region that wish to subscribe. Eliminating all Broadband Zero Areas means making broadband service available to every household nationwide.
While Japan was working to meet its goal by the end of FY 2010, MIC prepared several kinds of promotion schemes, targeting both local government and telecommunications operators, in order to support broadband deployment. Promotion schemes included grants, interest aid, debt guarantees, and tax breaks.BOX 4.19Case Study: Japan - ICT Grant and Collaboration with Local Governments
One such promotional scheme was the ICT Grant, a grant available to local governments for building broadband facilities to address the digital divide. Under the ICT Grant, a local government submitted its proposal to MIC and if approved, MIC paid one third of the total broadband facility installation cost. In many cases, targeted areas were also depopulated. Thus the ICT Grant could be combined with a Depopulated Area Development Bond, a local government bond providing even further reimbursement. If this bond was available, a local government would be responsible for only 20% of the total cost.
Once these broadband facilities were built, the local governments often formed long-term contracts (Indefeasible Right of User: IRU) with telecommunications operators, under which the local government let telecommunications operator use the facilities in exchange for providing broadband service to the community. In this situation, the operators did not have to pay broadband facility installation costs.
The ICT grant was technology neutral. It was up to local governments to decide which broadband type to choose based on their needs.
The ICT grant was also telecommunications operator neutral. In many cases, local governments made contract with telecommunications operators through open bidding.
The ICT Grant played a key role in ensuring that Japan reached its goal of eliminating all Broadband Zero Areas by the end of FY 2010. As of March 2009, it was estimated that about 640,000 households did not have access to broadband. This is about 1% of households in Japan. At the time of the FY2009 Supplementary Budget, MIC contacted all local governments that still had Broadband Zero Areas within their territories. About 340 proposals were submitted by the local governments, and MIC approved all them all in the early fall of 2009. The total project cost was about JPY 230 billion and about 340,000 households were expected to gain access to broadband. As for the approximately 300,000 households remaining, many of them were expected to gain access to broadband due to telecommunications operators’ service area expansion. For those areas where local governments did not submit a proposal and that still remained uncovered (about 10,000 households), they were to be provided service by satellite broadband.
2. Collaboration with Local Governments
While Japan was working on accomplishing its national target to make broadband available each household nationwide by the end of FY 2010 (March 2011), the Japanese Ministry of Internal Affairs and Communications (MIC) encouraged local governments to actively participate in this initiative.
In Japan there are 47 prefectures and about 1,800 municipalities, and as of March 2009 about 640,000 households were living in Broadband Zero Areas (areas where broadband service is not available).
There were several reasons for these Broadband Zero Areas. For example, about 60% of Japan’s land areas is mountainous, and there exist hundreds of inhabited islands. Also, Japan is facing an aging and shrinking population problem, which is especially manifest in rural areas. Small rural villages are on the fringe of extinction due to aging and the migration of the younger generations to urban areas. Because of these factors, there exist certain areas where telecommunications operators cannot make a profit and thus do not provide broadband services. Since Broadband Zero Areas create a potential digital divide, it was necessary for the national government together with local governments to work towards eliminating them.
Here are two examples how the central Japanese government worked with local governments:
(a) 11 Local Broadband Promotion Committees
MIC has 11 Branch Offices nationwide. Each branch office organized a Broadband Deployment Committee to discuss how to best deploy broadband. Each Committee was comprised of MIC’s Local Branch Office, local governments (prefectures and municipalities), and telecommunications operators.
Based on their input, MIC regularly updated the Prefecture Broadband Availability Maps. These maps illustrated what kind of broadband service was available. (Note: the map shown below is an early example).
(b) Prefecture Roadmap for Broadband Nationwide Development
In 2007 the Association for Promotion of Public Local Information and Communication (APPLIC) formed the Broadband Nationwide Deployment Promotion Working Group in order to reach the national target. Members included scholars, prefectural representatives, telecommunications operators, and manufactures. MIC participated in this initiative as an observer. The WG held meetings regularly to share best practices and discuss common problems. Also, based on the input from all 47 prefectures, the WG every year updated Prefecture Roadmap for Broadband Nationwide Deployment, which illustrated each prefecture’s plan to eliminate Broadband Zero Areas.
18.104.22.168 Good Subsidy Practice
A World Bank research working paper published in 2004 set out three elements of good subsidy practice,* when a subsidy is being used to deliver infrastructure to rural communities:
- service providers invest their own resources to set up facilities and provide services, at their own risk;
- government provides subsidies to help service providers meet start-up costs, assist customers connect to services, and cover customer’s costs like installation and connection charges or the cost of in-premises equipment; and
- customers pay for the service, at least at the level required to cover network maintenance and operating costs. Customers are also required to pay at least a part of the cost of the connection of the network to their premises, to confirm their demand for the service. Subsidies should ideally be limited to only the small amounts of the service which are necessary with the customer paying for the rest of their consumption.
The rationale behind these principles is that subsidies should be directed at providing access to services, with as minimal impact on market processes as possible. Subsidies can be helpful in encouraging the building of infrastructure and the connection of customers to it.
22.214.171.124 Competition for Subsidies
Another crucial element of good subsidies practice is competitive selection processes. When determining which private sector enterprises government will partner with in the subsidised provision of broadband infrastructure, policymakers should consider the tangible benefits provided for by competition:
- competitive subsidy provision is likely to deliver significant savings to governments, as it ensures that the enterprises with the best business models, technological solutions and market acumen are selected to receive the subsidies;
- regular competitive processes are likely to reduce the risk of corruption or waste in government subsidy programs; and
- the level of the subsidy is determined by the market, rather than by policymakers.
A least-cost subsidy auction is a proven mechanism for introducing competition into the provision of subsidies. This approach has been used successfully by governments in their partnerships with the private sector that have delivered a range of services, particularly telecommunications, to areas beyond the current reach of the market. A least-cost subsidy auction is likely to involve the following stages:
- government outlines the scope of the program and its objectives: service levels, population coverage, geographic reach and the maximum level of subsidy on offer;
- government communicates these goals to industry through a Request for Proposals process. Key terms of the subsidy offer are also likely to be communicated at this stage, including the length of the program and any special requirements government may have;
- private firms prepare bids in response to the request. If firms have specific questions about the project objectives and auction process government answers them, but information is shared between all potential tendering parties – through mechanisms such as a project extranet;
- private firms are free to develop their own business strategies, technological solutions and pricing structures. They communicate these plans to Government through responses to the Request of Proposals;
- proposals are analysed in a fair and transparent manner. Government selects the proposal that delivers the best value for money;
- government enters into an agreement with the successful private sector firm and pays subsidies in full or in instalments, linked to milestone performance;
- service providers own all facilities and carry legal and financial risks associated with the delivery of the service; and
- government monitors project progress and performance – tracking the effectiveness of subsidies to feed back into later subsidy design processes.*
On 3 October 2012, the Federal Communications Commission (FCC) announced the successful bids for the Mobility Fund Phase I auction. The fund will distribute $300 million in one-time subsidies, in exchange for the winning carriers to build either 3G or 4G networks across previously unserved areas over the next two to three years.
The FCC has not previously utilised a competitive auction mechanism to distribute funds from their Universal Service Fund. The Mobility Fund auction enabled any licensed, eligible wireless carrier to submit bids to build wireless broadband networks in areas deemed to be without such service. The program resulted in an expansion of mobile broadband networks across more than 83,494 presently unserved miles in 31 states in the United States over the subsequent two to three years.
How the Mobility Fund Auction was held
In November 2011, the FCC announced plans for the Connect America Fund, to precede the current $4.5 billion annual universal voice subsidy program. The Connect America Fund, supporting the deployment of broadband services, would consist of three fundamental components:
- a set of subsidies that would ensure the universal availability of fixed broadband service at speeds of 4 Mbps download/1 Mbps upload;
- a Remote Areas Fund that would address additional connectivity needs of the most costly areas to serve; and
- a Mobility Fund that would support the universal availability of mobile broadband service.
Phase I of the Mobility Fund was administered by a reverse auction of subsidies with the objective to expand mobile broadband networks to currently unserved areas. The process of the auction involved:
- the FCC identified and established census blocks currently without mobile broadband service;
- all eligible and licensed wireless telecommunications carriers were permitted to submit their bids for a subsidy to enable access to 3G or 4G services in those areas;
- bids submitted by providers were based on the amount of a one-time subsidy they were willing to accept in exchange for providing mobile broadband to these unserved areas. Such bids were submitted on a census block basis; and
- the lowest subsidy request per currently unserved road mile was awarded as the successful bid by the FCC.
Overall the reverse auction proved to be successful as 38 wireless companies and subsidiaries participated, submitting a combined total of 894 bids. Of these bids, the FCC accepted 795 bids in 31 different states and territories in the US. Each successful provider will receive their subsidy from the FCC once deployment of the 3G or 4G service is complete.BOX 4.20Case Study: The Mobility Fund competitive auction in the United States
Source: Box Credit
State or Territory
Total Qualifying "Unserved" Road Miles
Total Road Miles Across Winning Bids
Total Winning Bids
Average Subsidy Bid Per Road Mile
37 n/a n/a
23,827 n/a n/a
30,947 n/a n/a
17,445 3,985 $23,649,205 $8,193
33 n/a n/a n/a
District of Columbia
n/a n/a n/a n/a
1 n/a n/a n/a
2,086 n/a n/a n/a
6,217 784 $4,309,153 $5,495
2 n/a n/a n/a
719 n/a n/a n/a
614 52 $1,638,497 $31,619
41,847 2,697 $32,840,434 $12,177
1,343 251 $3,581,761 $14,298
1,035 n/a n/a n/a
624 n/a n/a n/a
12,791 1,414 $6,999,375 $4,952
5,187 2,128 $3,356,350 $1,577
739 n/a n/a n/a
176 n/a n/a n/a
9,296 101 $1,419,381 $14,085
15,418 n/a n/a n/a
5,456 n/a n/a n/a
7,840 n/a n/a n/a
Northern Mariana Islands
332 332 $1,264,939 $3,813
3,374 254 $1,829,212 $7,204
47,551 505 $2,165,109 $4,284
5,834 972 $26,108,602 $26,854
3,817 1,166 $2,572,437 $2,206
8,711 8,255 $8,791,998 $1,065
2,161 n/a n/a n/a
6 n/a n/a n/a
46,312 17,920 $17,895,266 $999
30,553 2,776 $21,060,478 $7,585
10,128 n/a n/a n/a
6,805 367 $3,879,887 $10,561
2,725 1,339 $10,376,072 $7,748
56,107 947 $123,081 $130
14,569 913 $8,504,101 $9,313
36 n/a n/a n/a
1 n/a n/a n/a
2,306 647 $4,666,409 $7,216
2,880 784 $2,268,246 $2,892
4,341 97 $2,207,413 $22,818
59,970 14,364 $24,916,904 $1,735
22,716 n/a n/a n/a
10,183 753 $12,414,554 $16,477
n/a n/a n/a n/a
1,149 941 $2,055,840 $2,184
37,102 2,964 $10,139,521 $3,421
7,556 175 $3,041,825 $17,359
24,558 344 $10,611,162 $30,812
26,874 13,577 $22,831,980 $1,682
$3,593TABLE 4.4Summary of Results by State or Territory
Source: Connected Nation, Mobility Fund Phase I Auction Results. Connected Nation, Policy briefing, 10 October 2012. Available at: http://www.connectednation.org/sites/default/files/bb_pp/cn_policy_brief_-_mobility_fund_phase_i_final.pdf
Governments often deploy policies to stimulate broadband demand to compliment supply-side programs. Introduction of online services and information by the government itself is a demonstrative example of the beneficial effects broadband can provide both citizens and businesses. Incentives for the adoption of broadband services can also include the provision of increased access to broadband services at public stations such as libraries or schools.
126.96.36.199 Public Private Partnerships
In some geographic areas broadband rollout is considerably less viable than in others. In these, hardest to reach places, specialised government and industry partnerships are often required. A strategy that has been utilised to provision services in disadvantaged or commercially non-viable areas are PPPs. The concept involves the cooperation of a government and at least one private sector firm, carrying out projects that are in the public benefit but deliver a return on investment to the private sector. The EU Green Paper on Public Private Partnership characterises a PPP by the following:
- a long-term relationship between public and private partners;
- funding includes at least some private participation;
- the role of the public sector is mainly to define objectives and monitoring, while implementation is left to the private sectors; and
- the private sectors assume at least part of the financial risk.*
The World Bank has approved approximately US$1.2 billion in technical and financial support for connectivity initiatives a significant amount of which relied on PPP structures.* In high-risk markets such as rural telecommunications markets PPP initiatives create a ‘win-win’ situation with the government better able to allocate scarce public resources while still ensuring a customer oriented end product delivered with industry skill which encourages private sector investment.* Below is a table summarising the main categories of PPPs:
All sector operators (MNOs, ISPs) unite to form a private company (special-purpose vehicle) for the purpose of building, owning, and operating the national backbone as a wholesale operator. The government contributes a subsidy with no related ownership to ensure national coverage, including rural access points, open access, nondiscrimination, and low-cost pricing.
Burundi national backbone project, 2007
Similar to the cooperative model except that the government obtains equity and shareholding ownership rights in exchange for its contribution. Generally, government divestiture mechanisms are built in.
The Gambia, Guinea, Liberia, Sao Tome and Principe, Sierra Leone
Traditional build-operate-transfer approach, whereby the government issues a public tender to select a private sector operator to build and operate the national backbone or specific national and cross-border links. The agreement is in the form of a long-term concession (15–25 years) that requires the transfer of the networks back to the government at the end of the concession.
Bulk capacity purchase
The government, acting as an “anchor client,” issues a public tender for the long-term (10–15 years) supply of bulk capacity (+ 1 gigabit) bandwidth. This model stimulates investment by the private sector through the aggregation of demand. In this case, the partnership is governed by a PPP agreement or supplier contract that establishes the rights and obligation of each party.
Standard management contract agreement whereby the government issues a public tender to select a private operator to build, operate, and commercialize the national backbone (or specific national or cross-border links) for a fee.
Build-out of the Next Generation National Broadband Network (NGNBN) segmented into three components. BOO model. SingTel (incumbent) outsources first layer (passive) to OpenNet, second layer (wholesale) to Nucleus Connect, retail to retail service providers (RSPs).
Singapore (being unwound)
Build-out of the Qatar National Broadband Network (Q.NBN) as the FTTH carrier. Q.NBN (100% owned SPV) to provide wholesale and passive infrastructure to retail operators.
Rwanda: build-out of national backbone network. Government ownership with outsourcing of operation, maintenance, commercialization to private sector (KT). Four ducts: one for government use and three available for private sector use. Madagascar: government to subsidize build-our of passive infrastructure (towers and renewable energy) open access to private sector.
Rwanda – deployed
Madagascar – in processTABLE 4.5Models of Public Private Partnerships
Source: Doyle Gallegos, Partnerships for Broadband: Innovative public private partnerships will support the expansion of broadband networks, Information and Communication and Technology, Note 02, June 2012, page 3, Table 1.
A public-private partnership can be implemented through a contractual agreement between the public and private parties, or alternatively by creating a new legal entity with allocated ownership. Such an entity can house assets that were formally publicly owned and the scope for external stakeholder contribution is also apparent.
Investment contributions from the public sector may enable the development of communications infrastructure in commercially disadvantaged areas, or areas considered unprofitable for private investors. Implementation of a PPP strategy may be required in areas where the provision of a simple subsidy would not be enough to attract private sector investment in a project.
The viability of PPP investments is made more difficult in times of lower liquidity, when the capital raising costs of private firms may make their participation in PPP less viable. The inability of a private sector to finance its originally agreed contribution may disrupt the foundation for future growth in output, employment and productivity.* Furthermore, it is often necessary for the government to implement legislation or policies which both enable the PPP project to take place but which also create a regulatory environment attractive to private sector investors.*
Romania’s poorest rural communities which were previously under serviced in terms of broadband access have begun to enjoy the benefits of broadband as a public private partnership called the “knowledge based economy” has begun to connect community libraries, schools and town halls to broadband infrastructure. “Knowledge disadvantaged communities were identified and targeted for broadband rollout subsidised by the government in partnership with private telecoms operatorsBOX 4.21Case Study: Public Private Partnerships in Romania Broadband Access
Source: Broadband Commission, ‘Strategies for the promotion of broadband services and infrastructure: a case Study on Romania (2012) Available at: http://www.itu.int/ITU-D/treg/broadband/BB_MDG_Romania_BBCOM.pdf
4.4.2 Sources of Funds to Support Broadband Development
188.8.131.52 Government Programs
When markets fail to deliver broadband to areas of lower profitability or higher technical difficulty, governments have an important role in financing this important infrastructure. The benefits of this infrastructure can be social, economic and even cultural; making it an attractive investment opportunity for all levels of government.
The following case studies consider two models of successful government involvement in the provision of broadband infrastructure.
With around one in five Canadians living in rural areas, extending broadband access in rural areas has been a priority for the Canadian central Government for some time. In its recent Economic Action Plan, the Canadian Government invested $C225 (US $217) in a rural broadband extension strategy, with more than half of this funding directed into the Connecting Rural Canadians program. The purpose of this program was to provide government grants to encourage private development of broadband infrastructure in areas the market had not yet extended to.
This program began with an extensive mapping exercise, conducted by the Industry Canada department, to determine geographic areas that were unserved or underserved by broadened coverage. This was followed by a competitive call for nominations for private telecommunications providers to rollout infrastructure to these areas. Applicants could receive funding of up to 50 per cent of eligible costs for projects in these areas. In some First Nation communities, funding of up to 100 per cent of project costs was available.
Between June 2009 and April 2012 a total of 84 projects received funding. The project extended broadband coverage to 218,000 Canadian households that did not previously have broadband access. Each of the projects was tailored to the needs of the locality it set to serve, deploying the most appropriate technology in each area. The range of technologies deployed included: fixed wireless, satellite, wireline, DSL and mobile wireless.
Following the success of the program, the Canadian Government has announced its future plans to extend broadband coverage, taking a different policy approach. In 2013 and 2014 the Canadian Government intends to auction spectrum in the 700 MHz and 2.5 GHz bands with rollout obligations attached as conditions of these auction sales. Companies that buy more than one block of the 700 MHz band will be required to rollout services to 90 per cent of the population in their coverage area within five years of the spectrum auction, and to 97 per cent of the coverage area within seven years. This policy approach will not require direct investment of government funds in broadband extension; rather, it pushes the incentive to rollout services onto the companies competing for spectrum licences.BOX 4.22Case Study: Extending Broadband Coverage in Rural Canada
In the early 2000s the French government financial organisation, the Caisse des Dépôts, began offering attractively priced loans to local French government authorities to improve broadband access in their areas. These loans were primarily used to finance backhaul loops that connected local areas to the national fibre backbone.
This investment was coupled with significant regulatory reform. Over the past decade France has been progressively implementing the EU directive to unbundle local loops, allowing further competition on local networks. As at the middle of 2012, approximately 6,257 exchanges have been unbundled, representing more than 85 per cent of the existing lines.*
A good learning from the French experience has been to take a technology neutral approach to government incentivised investment. In 2006, the French telecommunications regulator called for an application for wireless local loop licences in the 3.4 – 3.6 GHz band. The intention was to enable telecommunications providers to use the spectrum to provide broadband access using WiMAX technology. Although spectrum take-up was high, roll out has been slow – with strong competition from other technologies like copper pair, optical fibre, satellite, and local Wi-Fi networks.*BOX 4.23Case Study: Extending Broadband to Rural Municipalities in France
Governments cannot always accurately predict what technologies will best suit market and community needs. So, in structuring government programs, technology neutrality should be an important design feature. Such an approach allows the private sector to select and deploy the most appropriate technological solution in each situation.
184.108.40.206 Mandatory Contributions
Financing broadband projects through direct investments from government budgets is not without risks. Government priorities change, competing fiscal demands emerge and external shocks can all rapidly alter the budget resources available for broadband projects. An attractive alternative for policymakers, that avoids these risks, is to raise the funds for broadband projects from mandatory contributions by telecommunications operators. These funds are generally placed in a Universal Service and Access Fund (UASF), which sits outside the government budget and is assigned to be used exclusively for broadband investments.
Telecommunications operators are generally willing to contribute reasonable amounts to UASFs, provided certain conditions are in place: the funds are managed transparently, the money in the funds is distributed to worthy projects, and operators are eligible to work on the projects funded from UASF resources.
Jamaica’s Prime Minister announced in 2011 that the island nation would invest half a billion Jamaican dollars (US$490 million) in a high speed broadband backbone network funded from the Universal Access and Service Fund. It was acknowledged by the government that private entities had a tendency to favour investments in densely populated areas which in the past had left rural areas of Jamaica without adequate internet services and that the government had to promote universal access directly.*
Commentators have noted that the Jamaican Universal Service and Access Fund has accrued J$7.8 billion since levies were first introduced in 2005 which is also being used to fund Jamaica’s e-learning project which aims to ensure all high school educational facilities and teacher training colleges have internet access.*BOX 4.24Case Study: Jamaica's broadband funded by UASF
Source: Box Credit
Critiques of UASF schemes point to the inefficiency of spending and outcomes in UASF projects, along with the potential for public infrastructure to ‘crowd out’ private investment. However some level of inefficiency is unavoidable, as the purpose of the funds is to delivery services that the market had deemed to be inefficient in the first place. Inefficiencies and delivery challenges can be managed through attentive and adaptive program delivery.
Implementation challenge: calculating the levies to be charged
Determining the level of the levy and the manner in which it is calculated are important elements in the development of a UASF policy. The global trend has been to calculate UASF levies as a set percentage of gross revenue, applied to all firms in a sector. There are two weaknesses with this approach.
First, a levy as a set percentage of revenue operates is an inefficient tax. When a levy is imposed on all carriers it is likely to be passed through directly to consumers in the form of higher prices for telecommunications services. The higher prices will mean that some consumers who would otherwise have purchased telecommunications services would not enter the market. If the levy is set too high, private investment in telecommunications infrastructure may be discouraged, making the challenge of extending universal service even harder for governments. These effects, described as ‘deadweight losses’, ultimately run counter to the purposes of a UASF.
The second weakness to a set percentage levy approach is that there is no relationship between the quantum of funds flowing in, and the quantum of funds required to be paid out. This could result in the fund either collecting more than what is required to deliver universal service, or less than what is required.
To overcome these challenges, a best practice UASF levy needs considerably greater flexibility than a set percentage levy approach. The diagram below sets out the structure of a dynamic levy model, which involves the following policy design features:
- government defines the success metrics for the UASF. It sets out the coverage, penetration and uptake levels that it considers to be the baseline that the UASF will provide;
- the telecommunications industry makes contributions through a flexible levy mechanism, set year-to-year and apportioned across market participants on the basis of an equitable method;
- the funds that flow into the UASF support projects to deliver access in accordance with the defined goals. These projects are delivered by the telecommunications industry, on the basis of a competitive process like a least-cost subsidy auction; and
- the success of the projects is measured, with the levy adjusted to account for the anticipated future needs of the UASF to deliver its defined metrics.
220.127.116.11 International Loans, Credits, and Grants
A range of international organizations support the development of communication services, particularly in developing countries. The table below considers the focus of each of the main organisations in this sector, but is not an exhaustive list of all agencies providing assistance in this area.
International Telecommunications Union (ITU)
The ITU is the United Nations specialized agency for information and communications technologies.
In addition to 193 Member States, ITU membership includes ICT regulators, leading academic institutions and around 700 private companies.
The ITU’s Telecommunication Development Sector works to ensure that the benefits of ICTs are shared by all of the world’s inhabitants.
World Bank (infoDev)
infoDev is a global partnership program within the World Bank Group which works at the intersection of innovation, technology, and entrepreneurship to create opportunities for inclusive growth, job creation and poverty reduction.
infoDev assists governments and technology-focused small and medium sized enterprises (SMEs) to grow jobs, improve capacity and skills, increase access to capital and markets, ensure that the appropriate policy and regulatory environment are in place for business to flourish, and test out innovative solutions in developing country markets.
The World Bank
The World Bank provides loans and grants for development projects which have the ultimate aim of reducing global poverty.
European Bank for Reconstruction and Development
The EBRD provides project financing tailored to the specific economic and social context and needs of each particular country. The EBRD usually provides up to 35% of the project finance needed for a given undertaking.
Regional development banks for Africa, Asia, Europe, and Latin America
African Development Bank
Asian Development Bank
Council of Europe Development Bank
Inter-American Development Bank
Islamic Development Bank
U.S. Agency for International Development
The U.K. Department for International Development
Japan International Cooperation Agency
National aid organisations fund projects to improve broadband coverage in the developing world. www.usaid.gov/ www.jica.go.jp/english/
Swedish International Development and Cooperation Agency (SIDA)
Canadian International Development and Cooperation Agency (CIDA)
SIDA administers almost half of Sweden’s development aid budget and is active in communications development projects.* CIDA’s goal is to promote sustainable growth in developing countries to eliminate poverty and it has been active in the ICT sphere. http://www.sida.se/English/TABLE 4.6Summary of Results by State or Territory
Source: Table Credit
4.4.3 Universal Access and Service Funds for Broadband Development
While UASFs can be effective in ensuring the availability of proper funding for broadband projects, implementation of these funds in developing countries presents a number of specific challenges.
The first of these challenges is putting in place appropriate transparency and accountability protocols. This can be difficult for governments that do not already have in place appropriate financial management and accountability mechanisms. In such contexts, it may be more appropriate for the fund to be established independent of government and overseen by a board and staff of appropriately qualified individuals. Accountability mechanisms, like public disclosure requirements and parliamentary oversight, could assist to ensure the transparent operation of this type of organisation. In a handful of cases, there have been reports of USAFs which had highly over-regulated and complex decision-making, governance and review structures, with Nigeria and Peru noted by the GSMA as examples of this particular challenge.*
A second challenge faced by all governments operating UASFs is calculating the level and types of payments which should be made from funds. Elements of these difficult decisions include determining the types of equipment to include in cost estimates, the redemption periods and depreciation schedules for this equipment and the process for determining geographical service areas.
The European Commission has developed practical advice to its member states, which can assist all states, in developing policies to encourage the rapid deployment of Next Generation Access broadband networks. The types of conditions the guidelines set out are good policy safeguards that, if implemented, can help to encourage competition and avoid the 'crowding out' of private investment.* Adopting these policy elements will help governments ensure that appropriate payments are made from the funds, and they are at the right level, to ensure broadband networks are rolled-out without unnecessary market distortion.
While Uganda’s Universal Service Fund, the Rural Communications Development Fund (RCDF) is often cited as an excellent example of management of USAFs in emerging economies, it has often exclusively partnered with the telecoms provider MTN to deliver its projects to rural parts of Uganda. MTN holds approximately 60% of the Ugandan mobile market while the fixed line market is dominated by the state-owned fixed line incumbent Telekom Uganda Limited. While competitive bidding processes are now a feature of the RCDF’s distribution of funds, the reality of the matter is that there are only two operators who can effectively bid for RCDF projects, a situation which had the potential to further ingrain MTN’s strong position in the market.BOX 4.25Case Study: Uganda's Universal Service Fund and its effect on competition
Source: GSMA, ‘Survey of universal Service Funds’, April 2013. Pages 137-138. Available at: http://www.gsma.com/publicpolicy/wp-content/uploads/2013/04/GSMA-USF-Main-report-final.pdf
A third challenge faced by governments in administering Universal Access and Service Funds is determining what types of equipment to include in the cost estimates lodged by potential project bidders an to set the redemption periods and depreciation schedules for this equipment.
Defining the success metrics for UASF projects is an important first step, so regulators can these baselines to check the capability of the technology proposed against its baseline service goals. In this way regulators can identify ‘gold plating’ behaviour from firms, which may seek to deliver more expensive technological solutions than are necessary. These types of behaviours can be discouraged through competitive processes for awarding work contracts, like lowest-cost subsidy auctions.
Once a telecommunications company has been selected to do the work, policymakers should carefully select the terms on which this work is done. A redemption period is the period of time the infrastructure remains owned by a party, be it the government or a telecommunications provider, before the ownership of that assets transfers to the other party. In determining this period, policymakers should consider the effective life of the asset or system, the commercial viability of its usage and the likely future demand for the service it provides.
Determining the depreciation schedule for the asset, the manner in which its value can be written down by its owner, policymakers should also have due regard for the commercial circumstances of prospective owners and operators. It may be appropriate to combine both accounting and economic method of depreciation, taking into account the weighted average cost of capital borne by the telecommunications provider, in establishing the arrangements for how the assets can be written down.
4.4.4 Best Practices for Effective Management of Flow of Funds
Any best practice scheme for proper management of funds will centre around three core principles; transparency, efficiency and accountability. The centrality of these principles to any UASF is a crucial factor to the legitimacy and success of the fund.
Efficiency requires a fundamental understanding of the market as it currently operates, as well as accounting and review mechanisms. Efficient programs maximise the impact of the resources invested in them, ensuring that the maximum possible outcomes are achieved. One way government can incentivise project efficiency is to structure contracts with market participants that share risk and rewards.
For example, a contract may be structured to allow a contractor to keep half of the funds saved on a project delivered under budget; while imposing penalties payments for projects that slip over time or budget. This structure allows government to benefit from market knowledge and expertise, and also achieve a saving, through properly aligning contractual incentives.
Accountability requires reporting and monitoring mechanisms, as well as a clear authority structure. These structures may already exist within governments; however, in partnering with market participants through UASF projects, structures may need to be adapted. Governments should regularly audit projects and ensure project milestones are met, and tested against, before incremental project payments are made. Furthermore there should be detailed dispute resolution procedures made available with adequate safeguards to ensure that in the event of an aberration or discrepancy in reporting there is an impartial and objective method for determining the outcome of the dispute.
One way government can assist industry participants in this respect is to provide for the protection of information which is legitimately ‘commercial-in-confidence’. Giving companies certainty that ‘commercial-in-confidence’ information will be handled appropriately, will make them more likely to share such information with government. Conversely, if companies fear that sharing information with government will lead to its wider distribution, information may not be as readily provided.
Transparency requires appropriate awareness about project goals, progress and outcomes across the range of stakeholders involved in the program. It may require ensuring that project bidders receive the same information and access to discussion, providing information about the recipients of government funding to the wider community, and ensuring that government oversight bodies like appropriately vetted and transparently selected parliamentary committees are able to review into the program and recommend improvements. Most Parliamentary systems require Members to register their business interests such as their shareholdings, interests in real estate and any companies that they have been officers or directors of. In order to ensure they do not suffer from a conflict of interest when sitting on such committees.*
Documentation of project rules and processes is another important element to transparency. Manuals or handbooks for project participants can be a useful tool, to ensure that project participants understand their obligations and commitments through the program.
Columbia’s USAF has gone from strength to strength achieving the goals laid down in its mission statement with admirable success. The fund is under the authority of the appropriate ministry, but is legally and financial autonomous, with strict progress and financial reporting requirements on an annual timescale. The fund is further split into three separate arms, each with different goals; one focuses on online governance, another, Compartel, focuses on telecommunications penetration in remote and rural areas while the last arm aims to improve the competitiveness of small and medium Columbian enterprises through digital initiatives and access. Compartel has installed 12,797 rural community telephony lines/access points using 9,745 sites built into rural locations and has begun a fibre optic project to ensure that the poorest three million Columbians have access to fibre.BOX 4.26Case Study: Columbia's UASF success story
Source: GSMA, ‘Survey of universal Service Funds’, April 2013. Pages200-203. Available at: http://www.gsma.com/publicpolicy/wp-content/uploads/2013/04/GSMA-USF-Main-report-final.pdf
4.4.5 Reviewing the Flow of Funds
To ensure that a UASF is being used for the purposes it was created for, governments should establish strict mechanisms to review the flow of funds out of the UASF. At a fundamental level, this involved appropriate accounting practices with a focus on disbursements. Matching payments to progress, through a structure of milestone payments, is one way to ensure this. However, this approach has the disadvantage of placing cash-flow constraints on the business undertaking the project work.
Regulators must also make important decisions about when to accept information provided by fund recipients, and when they independently test and verify that information. A balanced approach to this verification process is most likely to achieve the best results. If regulators spend too much time evaluating information they run the risk of wasting valuable project resources, though if too few checks are made the projects suffer from lack of oversight. A schedule of random checking may be appropriate, to signal to contractors that the information they provide may be checked, without imposing an onerous burden on regulators.
Another challenge is to ensure that money actually flows out of the UASF and into access programs. This has been a major challenge for several universal obligation funds, particularly in developing countries.
The Indian Universal Service Obligation Fund (USOF) was established in 2002. In the past decade it has collected over US$8 billion from the telecommunications industry through imposing a levy of 5 per cent of the Adjusted Gross Revenue of telecommunications providers. Less than US$3 billion from the fund has, to date, been spent on projects.* A similar problem also exists in Pakistan, where the Universal Service Fund (USF) had collected almost $7 billion in 2009, but only spent around $1.5 billion.*BOX 4.27Case Study: The struggle to spend funds collected by India and Pakistan's funds
An important effect of reviewing the flow of funds can be the identification of unusual or disingenuous directions of funds. These can be caused by fraud or corruption, but can also be the result of adverse impacts of political processes on decision-making. A good example of this can be seen in the politically influenced direction of funding to telecommunications projects in the Australian state of Tasmania.
In order to pass legislation to privatise Australia’s government -owned telecommunications provider Telstra in 1997, the Australian government needed to secure the support of a non-Government Senator from the state of Tasmania, Senator Brian Harradine. The bill was passed, and the company was privatised, on the condition that $250 million (approximately US$232 million) from the initial sale would be allocated to the Networking the Nation program.
More than one fifth of the funds from the first iteration of the Networking the Nation program were directed to Tasmania, the home state of Senator Harradine. Despite being Australia smallest state, both on the basis of geography and population, it received the largest share of the funds under the program.* Senator Harradine would later claim that he secured a total of $353 million for Tasmania from the Telstra sales processes.*
While these funds were not from a UASF, they demonstrate the problem with legislators ‘earmarking’ funds from telecommunications programs to their own constituencies. A process of project approval that is independent from policy makers, or improved probity procedures is necessary to avoid such distortions.BOX 4.28Case Study: Disproporationate public telecommunications funding to the Australian state of Tasmania