ITU Model Universal Service Fund Policies and Procedures Professor David Souter ITU Workshop on Universal Access and Universal Services Policies Amman, Jordan, 7-9 February 2005

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal obligations  Universal obligations are requirements included in the licences of telecoms operators which:  require them to provide:  public access to telephony throughout a territory; and  private access to those customers that require it;  set targets for the expansion of networks and services into previously unserved areas

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal access targets  Two types of targets:  teledensity targets  proximity targets  Teledensity targets can often be achieved without addressing requirements of the poor or of remote/rural communities, and focus on availability of infrastructure  Proximity targets are more related on users, especially the poor and remote/rural communities, and focus on availability of services

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal access targets  Examples of teledensity targets:  average growth in number of lines of 12% p.a. - Mexico (1990-4)  increase main lines from 4 million to 6 million and install 120,000 payphones in 5 years - South Africa (Telkom)  a minimum of 225,000 new lines in 5 years (trebling of existing teledensity) - Ghana (Ghana Telecom)  Targets can be focused on actual line numbers or on network capability  Numerical targets can be met by operators focusing on underserved rather than unserved areas

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal access targets  Examples of proximity targets:  a phone in every village  a phone in every school and clinic a phone in every community with over 500 inhabitants  a phone within one kilometre of every citizen  a phone within walking distance  a phone within one hour’s travel  These targets focus more on social objectives than numerical targets

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal service obligations  Universal service obligations are requirements placed upon telecoms operators to provide a given level of service to all potential customers/households that require it  They usually include general as well as specific consumer terms  Operators with universal service obligations can be described as operators of last resort

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal service obligations in UK : individual service obligations  BT (and Kingston Communications in Hull) are required to provide:  connection to fixed network for voice telephony, low speed data and fax to anyone who wants it at a standard, geographically averaged price  Light User Scheme  Limited Service Scheme (outgoing emergency only)  text-relay service for the hearing-impaired  reasonable geographic access to public call boxes at affordable prices

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal service obligations in UK : general consumer obligations  All voice operators must provide:  free emergency calls  access to operator assistance  access to directory enquiry services  DQ services are now competitive; until 2003, operators had to provide a DQ service  the right to receive itemised bills

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Enforcement/implementation of universal service/access targets  through competition  through license conditions  through innovative approaches to providing service (including telecentres and franchising)  through subsidies  through universal access funds

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal Access Funds (UAFs)  Universal Access Funds are used to provide a means of subsidising access provision in areas or specific locations (or to social groups) where access would not be provided by companies acting on a commercial basis  They compensate operators implementing universal access from a central fund operated on a competitively-neutral basis  Increasingly, they are seen as the best way for a government to secure universal access requirements where these are not being met by the market

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Universal Service Funds (USFs)  Universal Service Funds are used to provide a means of subsidising access provision to people whose location or level of use means that they are not profitable as individual consumers, even at postalised prices  They compensate operators who are providing service for the loss involved  Increasingly, they are seen as unnecessary or insignificant in value in industrial countries where there are competitive markets:  The provider of last resort does not lose significantly enough to merit a payment, and makes some gains from incoming call revenue and reputation

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions UAF mission and objectives  Primary aim is to provide service or access on equitable terms to all citizens  Secondary aims are set out in policy objectives and may include:  Contribution to economic development  Establishment of sustainable and competitive communications market  Core objective to minimise cost to government and so:  Minimise level of subsidy paid  Minimise period for which subsidy is required

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions UAF objectives  It is essential to have a clear view of core objectives and priorities, e.g.  1 – Provision of public telecoms access to all locations with >250 residents  2 – Provision of Internet PoPs to all locations with >5000 residents  3 – Provision of high speed data access to all locations with >20,000 inhabitants  Market research is important in defining these objectives  Sequencing is important in delivering them

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Enabling legislation  USF will be enabled in legislative framework for the telecoms sector and associated regulations. These should include:  Definition of right of access  Definition of USF objectives  Definition of US or UA targets  Establishment and administrative arrangements for USF  Financial arrangements for USF  Enforcement arrangements

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions UAF access objectives may include:  basic services  advanced services  economic development (e.g. telecentres as business incubators)  support to community services (e.g. schools and clinics)  Clarity is needed about the priorities and sequencing of objectives

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions UAF funding  UAF funds can be derived from a number of different sources, including:  development agency funding  general taxation  direct contributions from telecoms operators  in cash  in kind (i.e. capital investment to equivalent of cash contribution)  Direct contributions from telecoms operators are increasingly common practice:  e.g. 1% of turnover (up to 5% in some cases)

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Competitive neutrality  Contributions (and grants) should be competitively neutral (a requirement of the WTO Agreement on Basic Telecommunications Services) – not least because all market participants will benefit from greater access in the future  This requires definitions of:  what should be covered by the Fund?  which companies should contribute to it?  which of their revenues are relevant (‘designated revenues’)  It also means no-one should be excluded from the opportunity to take part – though fiscal and other incentives may be used to support market entrants

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Who should contribute? (Universal Access)  fixed telephony operators  mobile telephony operators  other beneficiaries of basic services, e.g.:  data networks  paging operators?  ISPs?  equipment suppliers?  VANS providers?  Will contributions deter network or service development?

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Who should contribute? (Universal Service)  all of the above plus:  cable TV operators?  e-commerce and electronic information providers?  electronic publishers?  broadcasters ?

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Which revenues are relevant?  basic telephony revenues  mobile telephony revenues  data revenues  interconnection revenues  revenues from equipment sales?  revenues from Internet service provision?  converged services??  but not  revenues derived from activities not dependent on the telephone network (e.g. consultancy, postal services)

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Assessment of coverage requirements  Identification of target populations through:  assessment of needs – i.e. of unmet and underserved demand  assessment of costs – of providing service to areas with unmet and underserved demand  assessment of potential revenue  including assessment of changes in revenue streams over time, resulting from demand stimulation and economic growth  Prioritisation of areas for coverage

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Project selection  The areas requiring intervention for subsidy, if this is required, must be carefully chosen and targeted:  Subsidy should not be provided where it is not necessary to cover the economic gap  Subsidy should only be provided at the costs required by an efficient operator  Subsidy should only be provided for capital costs and, if necessary, for operational costs up to the point of profitability  This requires  Market research and analysis  Analysis of the costs of an efficient operator using appropriate technology

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Selection of location  Adoption of priority areas, which might include:  remote and rural areas  urban informal housing areas  low-income areas  minority population areas suffering multiple disadvantage  low population density areas

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Service criteria : basic services  roll-out obligations  including public access points for telephony and internet  distance or population size criteria  affordability  including tariff requirements  quality of service  availability and maintenance  support for consumers  including DQ, operator service, managed access

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Service criteria : advanced services  roll-out obligations / access points  availability of user devices (PCs etc.)  bandwidth  applications  affordability  quality of service  training support

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Implementation selection methods  Licence requirement and enforcement  Unspecified bidding process (solicit bids from all- comers)  Tender process:  ‘beauty contest’  reverse auction  Relationship between universal service fund and overall regulatory framework

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Selection criteria amongst bidding operators  locations  quantity of service  quality of service  affordability (tariff proposals)  community benefits  feasibility of implementation plan  proven competence and financial viability of implementing party  length of subsidy required  amount of subsidy required

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions UAF management  UAF can be managed:  by relevant ministry  by the regulatory agency (e.g. Uganda)  by an independent body (e.g. Mauritania)  In either case:  funding decisions need to be taken on UAF criteria, not distorted for other regulatory or government purposes  UAF funds need to be managed entirely separately from other regulatory income (e.g. spectrum and licence fees)

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Management structure might include:  management board (including regulator)  consultative or advisory committee (with wider representation of stakeholders)  senior management  project managers  specialist accountants

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Operational plan  sets out plan for delivering access against targets  provides framework for project selection and management  identification of selection criteria, including:  access objectives  location criteria  definition of services to be provided  technical or technological constraints or specifics

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Implementation plan should include:  three- to five- year business plan  management plan  implementation schedule  tariff proposals  community inclusion and other indirect benefits  monitoring and reporting arrangements

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Reverse auctions and universal access funds  The regulator identifies the maximum subsidy it is prepared to pay to promote provision of access in a particular area  Companies tender to provide service for a lower subsidy level  The regulator selects the company willing to provide service for the lowest level of subsidy

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Minimum subsidy auction example – Chile’s FDT  Universal access fund established 1994 (FDT)  financed from government budget  not from levy on telecoms turnover  funded public telephony access projects only  since 1999 has funded internet access projects

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Chile FDT public access telephony projects  Large number of relatively small projects  Requirement = provision of a public access telephone in each locality within project area  Effective process of competitive bidding

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Chile FDT projects YearProjectsLocalitiesPopulation (‘000) Max. subsidy ($m) Actual subsidy ($m) Total

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Chile FDT projects  almost 200 projects covering almost 6000 locations  serving over 2million people (14% of population)  at a subsidy of $21million, which was half of the subsidy the government was prepared to pay (i.e. a ‘saving’ of 50% on potential subsidy)  average subsidy of $3600 per locality or $9 per inhabitant  average subsidy per locality was higher in outlying regions of project areas

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Chile FDT projects allocation %age of subsidy%age of locations

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Chile FDT - investment impact  Estimates are that:  $21 million in subsidy leveraged  $30 million in additional investment in public access telephony and  £109 million in other services, including residential and commercial telephony  i.e. $1 of subsidy leveraged $6 of private investment

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Minimum subsidy auction example - Peru  UAF established 1994 (FITEL)  financed through contribution on telecoms operators of 1% of gross revenue  first project in 1998  bidders are encouraged to bid simultaneously for a number of projects with the aim of minimising the total subsidy required

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions FITEL projects 1999 & 2000 : summary  over 2000 locations covered  serving over 1million people (4% of population)  at a subsidy of $38million (about 30% of that government was willing to pay)  estimated that $1 of subsidy leveraged $2 of private investment

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions The Uganda Rural Communications Development Fund (RCDF)  Background to Uganda  Telecoms restructuring in Uganda  The Rural Communications Development Fund  structure  tendering process  Internet and ICT components

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Background : Uganda  LDC in East Africa  Population  25 million people  85% rural  50% aged <15  GDP per head = cUS$300 p.c.  overwhelmingly agricultural economy

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Telecoms restructuring in Uganda  1995  first stage of competition (Celtel in mobile market)  1997 Communications Act:  introduced independent regulator (UCC)  1998  entry of 2NO (MTN) offering both fixed and mobile service  2000  privatisation of incumbent operator (UTL)   duopoly in fixed networks; open competition anticipated from 2005

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Telecoms growth in Uganda  Rapid growth in teledensity  from 0.2% in 1995 (40,000 lines)  to 4.0% in 2004 (1,050,000 lines)  Rapid growth in geographical coverage  from urban coverage in 1995  to 85% GSM coverage in 2004  and potentially 100% coverage by end of 2005 (if RCDF fully implemented)  achieved through competitive markets, without subsidy

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Rural Communications Development Fund (RCDF)  Objectives (overall):  to provide access to basic telecommunication services within a reasonable distance to all people in Uganda;  to ensure effective utilisation of the RCDF to leverage investment in rural telecommunication development; and  to promote ICT usage in Uganda.  Only for areas where commercial service provision is not going to be achieved in near future  Operators were required to identify areas in which they would not provide network capability by a certain date and to lose their exclusive (duopoly) rights in such areas

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Rural Communications Development Fund (RCDF)  Objectives (detail):  to ensure that all sub-counties with at least 5,000 inhabitants have access to basic communication services by 2005;  to ensure that the limited resources of the RCDF are effectively utilised to create immediate impact;  to support establishment of an Internet Point of Presence (PoP) in every District of Uganda by 2003, where each PoP shall be associated with at least one Internet cyber café;  to increase the use of ICTs in Uganda, by supporting introduction of ICT use in at least one “vanguard” Institution in every district of Uganda, by 2003; [and]  to promote provision of communication services in rural areas as a profitable business.

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF Board  Independent chairperson  Two members of UCC  including Executive Director  Representative of ministry  Four stakeholder representatives  telecoms sector  finance sector  engineers  consumer representative

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF funding  Three funding sources:  1% levy on the turnover of telecoms businesses (operators and ISPs)  contribution from initial (1998/2000) licence fees ($400,000)  grant from World Bank ($5million) as additional commitment to rural electrification programme (available 2004)

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF phases  pilot phase  April 2004pre-qualification  mid-2004tendering phase  main phase  By the end of 2005, every sub-county should have at least one payphone

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF main phase  Tendering for main phase initiated 31 March 2004  Implementation during 2004 and 2005  Three components:  provision of public access telephony in all ‘unprotected’ sub- counties  provision of Internet Point of Presence (PoP) in each district headquarters  support for ‘vanguard’ ICT institutions

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF main phase : telephony  Uganda has 926 sub-counties (local administrative units)  National licensed operators (MTN and UTL) were required to identify within one year of licence (by July 2001) in which sub-counties they would not provide service by July 2002 (to ‘unprotect’ them)  UCC given power to issue licences to alternative operators for ‘unprotected areas’  154 sub-counties unprotected in July 2002 – to be covered by RCDF main phase

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF telephony – tendering process  The RCDF is using a ‘reverse auction’ process, i.e.:  UCC and RCDF Board will announce subsidy cap (maximum available subsidy for each area)  bidders submit offers to provide service for lower subsidy  UCC and RCDF Board accept bid with lowest subsidy (other factors being equal)  First use of reverse auction process in Africa

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF telephony – delivery requirements  Three lots:  154 sub-counties divided into 3 lots  including higher risk Northern areas  bidders can offer for individual lots and for whole  Two phases:  Phase 1 – one public telephone per sub-county (154 telephones)  Phase 2 – one public telephone per 5000 inhabitants (800 telephones)  plus capacity to meet specified level of private demand within three years  No preferred technological solution (technological neutrality)  but nb impact of private demand requirement  No international gateway until end of duopoly in 2005

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF telephony – pre-qualification requirements  (involvement of or intention to be) Ugandan registered company  experience of deploying rural telephony:  at least 5000 lines or 250 telecentres  at least three years  financial security:  net worth of at least $2million  letter of endorsement from regulator in country where operational

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF main phase issues  include importance of :  consolidating areas to enable economies of scale and incorporate least attractive locations  research/modelling of demand and cost projections  technological neutrality  consultation and information processes  integration with evolution of regulatory framework  integrity of competitive tendering process

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF Internet components  Internet Points of Presence (PoPs)  a PoP in every district headquarters town  ICT ‘vanguard institutions’  pilot programme to establish non-commercial (‘public good’) facilities to promote ICT awareness and provide ICT leadership

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions Pilot phase  undertaken in :  telephony in marginal areas inside GSM coverage areas  initial programme of Internet PoPs  Internet cafés (little take-up)  ICT training institutions (little take-up)  Internet content

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF pilot phase outcomes  demonstrated limits to competition:  only one major telco bid to provide telephony service and in only one stage of pilot phase (but was substantially cheaper than alternatives)  questionmarks over demand levels in telephony locations during pilot phase (lower than in main phase locations?)  limited take-up of Internet café and ICT training opportunities in first stage

Professor David Souter, ITU Workshop Universal Access and Universal Services Policies, Amman, February 2005 – Presentation 1: Definitions RCDF pilot phase lessons  include importance of:  market research (including consumer preferences)  engaging the sector in participation  objective selection of locations for subsidy  monitoring and evaluation