Lisa Leidig Issue: Latin America I 1999
Article no.: 6
Topic: Universal Service/Access Funding Strategies:World Best Practices
Author: Lisa Leidig
Title: Senior Consultant
Organisation: Ovum, UK
PDF size: 64KB

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Article abstract

As the worldwide trend to liberalise the telecommunications sector continues to gain momentum, it is becoming more difficult if not impossible to sustain funding mechanisms designed for a monopolistic environment. Policy makers are searching for the best practices on how to implement new mechanisms. Here, Ms. Leidig summarises the funding practices developed in a number of countries, and reveals some of the key lessons learned and examples of the best practices.

 

Full Article

The various funding mechanisms that can be used to support universal service and access policies can be divided into two camps – those used in monopoly environments and those used in competitive environments. As the worldwide trend to liberalise the telecommunications sector continues to gain momentum, it is becoming more difficult if not impossible to sustain funding mechanisms designed for a monopolistic environment. From Monopoly to Competitive Environments Policy makers are searching for the best practices on how to implement new mechanisms that: · continue to ensure national objectives · do not place an unfair burden on any one provider · promote competition in local markets In monopoly environments it has been possible for a sole or a limited number of operators to assume the costs of meeting universal service and access objectives in both developed and developing economies. Funding mechanisms were primarily financed by cross subsidies flowing from: · international (settlement/accounting rates) to domestic · long distance to local · business to residential · urban to rural These traditional mechanisms have managed to survive through various waves of liberalisation and will continue to do so until local markets are open to full competition. Change Drivers linked to Competition There are a number of change drivers linked to the various stages of competition rendering existing universal service/access funding mechanisms obsolete. Stage 1: Monopoly Environment Historically, telephony was considered a public commodity similar to that of other utilities. Ownership was primarily of a monopolistic nature, i.e. state-owned or dominated by a small group of private companies. The primary universal service objective at the time was to develop a national network that covered the maximum of people in terms of lines, regardless of distance. This policy committed European operators to ‘pass’ all homes; whereas the policy in the US and Canada was to connect all households. Due to limited resources in most developing countries, telecommunications operators connected users with the most need – government agencies, state owned enterprises and individuals that could pay for service. Local rates in both economies were subsidised by a flow of cross subsidies. Stage 2: Liberalising Environment In developed economies, pressure from new entries trying to get into the lucrative telecommunications business pushed governments to open up portions of the market, allowing new entrants to compete typically in the long distance and cellular markets. In the US, for example, it was MCI in 1969 that pushed the Federal Communications Commission (FCC) to licence new operators to provide private line services to business users in direct competition to AT&T. In many developing countries, governments began the process of liberalisation largely to generate investment so that they could bring telephony to more users, particularly outside of urban areas. For example, the regulator in India realised in 1997 that the monopoly provider alone, would not be capable of meeting an estimated demand of 67 million connections for the period 1997-2000.lt therefore licensed 21 new operators to help fill the resource gap. A continued reliance on cross subsidies as the only way of meeting universal service and access goals in this type of environment would eventually lead to a situation where local operators with obligations would have less revenues available to offset the high costs of serving less profitable areas and customers. This is because new entrants would cream-skim the most profitable areas of the market i.e. business and urban residential users. To avoid this situation, many regulators have authorised mechanisms that allow local operators to charge connecting operators when they wish to connect to the local loop. In developing economies, regulators have granted periods of exclusivity for some companies in turn for obligations. This practice can also be accompanied by governmental support to rural operators or telecentre projects, with funding from the national budget. In South Africa, for example, all licensed operators have specific penetration targets. In addition, the Universal Service Agency utilises governmental funding for the daily operation of telecentres who bring advanced services to everyone. Stage 3: Full Competition An open licensing environment in which all operators can provide all services everywhere under the same terms and conditions renders earlier funding mechanisms obsolete. In a fully liberalised environment it is no longer possible to promote a level playing field with only a few operators to bear the burden of government objectives. All operators must share the burden or alternatively, targeted assistance should be available to qualifying operators or users. If this is not the case, local access providers could find themselves handicapped by being the carrier of ‘last resort’ services to customers generating the least profit. Full liberalisation beginning in 1998 in the European Union (EU) is leading many regulators to consider the establishment of a fund. Effectively, licensed operators would have to contribute to the funding, on the basis of a percentage of revenue, traffic or market share. Monies would then flow to operators designated as universal service providers. In the US, all carriers are required to pay 4% of revenue to a universal service fund as well as a flat rate connection charge. State regulators are currently evaluating various competitive bidding options that would enable companies to compete in order to receive subsidies. In Finland, where the majority of users have high GDPs, the government provides direct assistance to users with a low income. This policy enables operators to provide local services to set tariffs close to costs. Who Pays? There seems to be some consensus among our profile countries that the burden of meeting universal service and access objectives should be shared among providers. No single operator should have to bear the burden alone in a competitive environment. This includes cellular providers. However, the vast majority of contributing operators is still the incumbent PSTN operator. This is largely due to the fact that full competition is in its initial stages in both developed as well as developing economies. For example, the developed economies of the EU opened their markets to full competition in January 1998, but only France has implemented a funding mechanism to help spread the burden of universal service among providers. Who Receives Support? Ovum suggests that mechanisms that enable a variety of operators to support universal service and access goals maximise efficiencies and can ultimately bring down the cost of providing such services. However, in most environments it is still the incumbent PSTN or incumbent local access providers that are the sole recipients of any subsidy. Which Mechanisms are being Used? Our survey of countries indicates that there are some key trends behind which mechanism policy makers select fund universal service and access goals: · Licence obligations are used in countries that are about to open up their markets for the first time (Philippines, South Africa) as well as in many developed countries where the local market remains a monopoly (EU until January 1998). · A central fund is being used in some developing countries to transfer monies from the national budget to operators extending their services into rural localities (Chile) through a competitive bidding process or for specific telecentre projects (South Africa). · A central fund is also gaining ground in countries where there is full competition so that all licence operators can share in the burden of providing universal service or access. In some cases, this funding mechanism includes a surcharge on the actual interconnection procedure until local access providers can rebalance tariffs. · Targeted direct assistance mechanisms that are exclusively used to support universal service are not currently wide spread in any economy. The exception is Finland. An economy where the majority of subscribers have a high GDP is necessary in order for this mechanism to be successful. On the other hand, developed countries are considering the use of competitive bidding processes to target direct assistance to operators that provide the most efficient means of delivering universal services. Conclusion The success of various mechanisms may well be vested in the details rather than in the selection choice, i.e. choosing the mechanism may be less important than the methods used to implement the mechanism. As shown in Figure 5, our survey shows that there are some factors that promote the success of selected mechanisms and others that do not.