Design and operation of universal service funds Rohan Samarajiva Course on Regulatory Design and Practice Nay Pyi Taw, September 2017 This work was carried out with the aid of a grant from the International Development Research Centre, Canada and the Department for International Development UK..

Universal access & universal service Universal access is when everyone can access the service somewhere, at a public place, thus also called public, community or shared access. In general there would be at least one point of access per settlement over a certain population size. Universal service describes when every individual or household can have service, using it privately, either at home or increasingly carried with the individual through wireless devices. InfoDev, ICT Regulation Toolkit

Universal access in flux Because of mobile phones, universal service is feasible for voice. Payphones becoming obsolete For Internet use universal access is still relevant: WiFi hotspots and telecenters Shanghai street, 2013

Approaches to universal service, not necessarily mutually exclusive Cross subsidies United States and Canada, actual Most other countries, claimed Mandatory service obligations Malaysia in late 1980s South Africa in 1990s Requirements re telecenters in Myanmar mobile licenses issued in 2013-14 Market reforms Started in UK/US in 1984; Most countries since 1990s Universal service funds Started in Colombia & Peru (1994 with levies on telecom operators/users) Also Chile (1995), with funds coming from general taxation 2G; ?? First generation; tried and found wanting  2G

World Bank’s efforts on equity in 2000-2010 assessed 4.28 Equity and integration of marginalized groups have been more effectively supported by Bank support for ICT policy and sector reform than by operations specifically designed to achieve these goals. ICT operations that supported reforms to introduce competition into the sector, when successful in supporting those reforms, have had significant impact, especially in access to cellular telephony services. This increase in overall access has had a spill-over effect of providing access to the underserved. Lower tariffs (especially in cellular telephony), falling handset prices, and the expansion of prepaid cellular services are all channels that facilitate access by the poor. Independent Evaluation Group, World Bank (2011) Capturing Technology for Development

Is a third generation of universal service instruments emerging? LIRNEasia’s research on broadband initiatives indicates it is, but 3G efforts are already showing cracks Gunaratne, R.L. et al. (2015). National broadband networks of Malaysia, India, Indonesia and Australia: A comparative study. Competition and regulation in network industries. Vol 16(1): 23-46.

Execution is the problem . . . “We’ve informed telecom minister Kapil Sibal at a recent NOFN review meeting that it will be impossible to extend broadband connectivity to 1 lakh GPs by March 31, 2014, since BSNL, RailTel and PowerGrid have not finalised the C&T tenders,” a top telecom department official told ET. “Even if they manage to award the contracts by the month as promised, we will only be able to meet a tenth of the broadband coverage target in the first phase,” he added. A senior executive of Bharat Broadband Network Ltd (BBNL), which is the executing agency of the NOFN venture, complained that “umpteen reminders had been sent to BSNL, which will award 70% of the C&T contracts to multiple vendors, but to no avail”.

Third generation: regional experience

Internet Ecosystem Australia India Indonesia Malaysia Infrastructure HSBB – FTTH in industrial areas BBGP – connectivity via multiple tech in rural areas NOFN – fiber from block to gram panchayat level Palapa Ring – connecting all Islands through fiber NBN Australia – wholesale network FTTH, fixed wireless or Satellite Attractive Content/ Applications Affordable User-friendly Devices Australia India Indonesia Malaysia 1Malaysia Netbook Distribution E-gov, e-health, e-education, e-commerce My1Content portal Introduction of e-gov, e-education and e-health App Development Centre Skilled Users Broadband Carnivals, ICT Training Affordable packages Tax breaks Government User Network – Anchor client Digital Literacy Program Programs to improve ICT literacy

Malaysia – High Speed Broadband Network (HSBB) as at April 2014 Access Network Domestic Backhaul International Backhaul TM Fiber Network Malaysia – High Speed Broadband Network (HSBB) as at April 2014 1.74Tbps total International BW Capacity (from 682Gbps) 25 Operators for HSBB Transmission 5 Operators for HSBB Access 1.5 million Ports installed International Connectivity Customers 723,014 Subscribers (48% take up) Implemented by Telekom Malaysia, as a PPP with Gov. Total cost 3.5B USD, out of which Gov spent 0.75B. Conditions to access network commercially negotiated Broadband for General Population – subsidizes BB in rural areas using USP

Fund design: regional experience

Where does the money come from? Country Source of funds India 5% of adjusted gross revenue Malaysia 6% of weighted gross revenue, levied on operators with revenues from designated services above RN 2 million Nepal 2% of annual income Pakistan 1.5% of adjusted revenue Sri Lanka USD 0.03 per minute on international calls terminated in the country Industry levies- % of revenue or specific calls Malaysia- weights http://www.skmm.gov.my/skmmgovmy/media/General/pdf/USP-AR-2013.pdf, pg 39

How do we measure success? Outcome: How many people who would not be connected through market mechanisms were connected as a direct result of universal-service subsidy programs? Output: Were the funds utilized as intended by the legislation/policy? Necessary condition: were funds disbursed? Sufficient condition: were funds spent for purposes intended by legislation/policy in a transparent and fair manner?

Necessary condition of policy efficacy Money that has been withdrawn from a reasonably competitive sector must be disbursed Otherwise, it’s only doing harm by depressing demand

assessing Necessary condition Necessary condition = zero efficacy

Ways of assessing necessary condition across time & in comparison to other countries Accumulated disbursement rate (ADR) t Y-o-Y disbursement rate (YDR)

YDR is kinder to fund administrators YDR is simply about how much of last year’s inflows were disbursed this year Leaves aside the accumulated balance Also leaves aside this year’s inflows But ADR must be measured because something must be done about accumulated funds Once ADR has declined, YDR must exceed 100% for at least a few years, for ADR to come back to normal

India Source: Universal Service Obligation Fund of India (2016, Oct. 02) Fund status. Calculations by authors

Malaysia Source: Universal Service Provision Fund of Malaysia (2015) Annual report 2014. Calculations, graphics by authors

Pakistan Notes: Contributions and disbursements of 2005/2006, 2006/2007 & 2007/2008 have been combined. The disbursement figures for 3 years differ slightly from that calculated from the USF Annual Report Source: Iftikhar, P. (2015) Proceedings from A4AI Myanmar coalition meeting. Experiences & lessons from the region- Pakistan. Calculations, graphics by authors

Source: Sri Lanka Telecommunications Regulatory Agency Source: Sri Lanka Telecommunications Regulatory Agency. Calculations, graphics by authors

YDR comparative: Never 100%<  ADR declines in all 4 countries over time India (FY April-March) Malaysia (FY Jan-December) Pakistan (FY July-June) Sri Lanka (FY Jan-June) Year YDR 2003/2004 12.72 2003 2003-2007   2004/2005 62.79 2004 2.90 2005/2006 51.88 2005 8.68 2005/2006, 2006/2007, 2007/2008 2006/2007 45.62 2006 3.39 2007/2008 36.70 2007 7.90 2008/2009 25.83 2008 17.68 27.79 27.03 2009/2010 42.35 2009 4.46 25.94 45.04 2010/2011 55.77 2010 29.09 19.47 18.91 2011/2012 26.16 2011 77.91 8.86 12.42 2012/2013 8.24 2012 98.66 35.24 15.39 2013/2014 28.94 2013 98.37 35.08 20.81 2014/2015 26.10 44.99 2014 30.92 Highest

Cause of failure could be management of the funds . . . Most funds are managed by the public sector Pakistan follows a corporate model with representatives from the public and private sector Public Sector Quasi independent entity India ✓ Malaysia Pakistan Sri Lanka Pakistan USF Company Board Public Private CEO h/e, Pakistan’s USFC has also had controversy. In 2013, funds channelled from USFC to MoF

Who utilizes the funds? Sri Lanka India India: USOF funds have been utilized primarily by state owned BSNL Sri Lanka: SLT, incumbent with govt ownership, and Dialog Axiata, largest mobile operator, have received significant refunds

Recommendations Reduce /eliminate distortions by financing subsidies from general taxation or available concessionary credits (Chile, not Colombia) Focus one-off subsidies solely on capital expenditures, e.g., A domestic backhaul network that will be made available on cost-oriented and non-discriminatory terms to all access-network operators Towers and renewable energy in defined rural areas Create special purpose vehicle to disburse the funds, preferably with significant operator participation on board Create specific mechanisms to ensure rapid disbursement, e.g., challenge funds, emergency brakes Sunset the fund/levy, or at least require reauthorization following proper evaluation Stepping down percentages in a levy will still yield adequate revenues in a growing market