1. Smart Subsidies: Getting the conditions Right expanding telecoms in rural Nepal Harsha de Silva and Ratna Kaji Tuladhar New Delhi, March 2006

2. Urban areas High-income householdsLow-income households Previous level of access Affordability frontier Urban areas Rural areas Access Gap; Geographic and economic constraints leading to under supply. Specific universal access targets and subsidy scheme Market Gap; distorted markets leading to under supply. Improve market effeciency; private investment and competition. Transparent regulatory framework Expanding in to rural areas?

3. Smart subsidies Least Cost Auction –One-time investment subsidy for (private) operators willing to provide universal access service via a competitive bidding process

4. Why a LCA in Nepal? Very low penetration in rural Nepal –In 2000, 56% of 3,914 VDC had no telecom services –Incumbent (NTC) unable to address RT issue Economy and business climate not conducive for investors to come in unsupported Introduce smart subsidy scheme to create a business case for private participation –Eastern Development Region; 534 VDC

5. Smart Subsidies; Good, but could have been better Then –In many VDC, poor rural citizens of Nepal had no access to telecommunications With EDR project; at start –Telecom services available to some; but at extremely high tariff (x18 incumbent) Now –6 times tariff of incumbent but uncertain future; could very well go back to square one if near fatal regulatory issues not addressed

6. Design expectations NTA to regulate NTC –No discrimination against RTS; no anti-competitive preferences or cross-subsidies to own RTS service operations (Affordable) telecom services to rural Nepal through private investment –EDR: 2 public access lines in each 534 VDC –Mandatory Local, NLD and ILD; optional Internet services etc. –Low license fees (NPR 100,000 for 10 years) Technology neutral –Wireless or VSAT (or hybrid) International competitive bidding –Eligibility (operations, finance, local participation) –Required subsidy (Maximum available not specified)

7. Implementation expectations

8. Sustainability expectations Conducive political, policy and regulatory environment –NTA will ensure fair competition –Maoists wont disrupt operation Will be sustainable over the long term –Assumed bidding party had a viable plan No limit on expansion –First install the specified 534 VDC to collect subsidy; then follow internal business plan –Demand will be generated; value added services also Low fees, levies and taxes –Minimum RTS license fee, notional frequency fees, exempt from levies on value added services; no RTDF levy for 5 years

9. LCA outcome: December 2003 1 st round Sept 2000 LCA failed; winning bidder pulled out due to deteriorating security situation –Issue was not in EDR, but generally in Nepal Consultants made the offer more attractive –New, “reasonable” set of consumer tariffs (x18), speeded up payment, alternate sites if security situation worsened 2 nd round February 2003 successful –Total VSAT Solution by STM Telecom Sanchar; USD 11.9 m

10. Project as at August 2005 0/37 0/190/14 37/41 55/570/40 0/17 17/18 0/25 24/27 4/10 15/24 6/17 47/77 37/80 29/31 District Head Quarters XX/YY XX = VDC installed YY = VDC allotted Rural Telecommunications Services in 16 Districts of the Eastern Development Region

11. Design issues Were sufficient safeguards taken to counter poor regulatory framework? –5 year exclusivity Exclusivity of 100+ VDC of STM violated by NTC in year 1 –No room for 2 operators in rural VDC –Unrealistic retail tariff No local tariffs; only “VSAT tariff” IUC is of 55% of NTC VSAT tariff applied on STM (STM agreed!) NPR 9 per min. vs. NPR 1 per 2 mins.

12. More design issues Did bidder make right technology choice? –Why not a hybrid solution including VSAT? –RFP details not comprehensive; did bidder understand EDR Nepal? Lack details on EDR terrain and economic activity No demand forecasts or any other indication of revenue; but initial license envisages sustainability for 10 years –STM is a VSAT manufacture Was keeping coverage to winning bidder’s prerogative the right call? –STM took the easy route; no service in rugged mountains, less in hills. Basically in flat river plains and hills (least need for VSAT)

13. An STM site area in EDR

14. Implementation issues Overwhelming politico-regulatory problem –All 542 sites closed (Feb 05); 25 opened (May 05) now 183 open; rest and remaining  do not know –Allow within ½ km from Army post –New list from Army entirely different from original (except 16); overlapping with NTC areas Difficult to install; not safe on road…

15. More implementation issues Administration and bureaucratic delays –Customs delays, decision making delays… –Need to deal with both HMGN and Maoists Failure in enforcing service availability and quality –Licensee required to maintain service for 10 years; should be open everyday at least 8 hours –But, unable to properly monitor; no reporting mechanism Was sufficient emphasis placed on selecting ‘local operator’? –Selection; business plan; NPR 35,000 deposit and NPR 7,500 pre- payment

16. Sustainability issues Poor regulatory environment is grinding programme to a halt –Exclusivity condition continually violated –Interconnection issues not solved Original IUC NPR 4.95 (call NPR 9.00); Now IUC brought down to NPR 2.75 (call NPR 3.00); 18 times vs. 6 times July-Aug 05 for 174 sites, avg min. of use/day  0.36 Losses –ISD license not granted; due Jan 1 2004; STM not paying license fee? (Just granted) Estimated market USD 36m/year But, could be the savior in these difficult time

17. Justifiable? Back

18. Sustainability issues Competition by NTC expansion –1m CDMA phones in 5 years including EDR; signal will cover almost all VDC in Tarai, many areas of Hills at much lower tariff Restriction to expand services is not good –Unless all VDC served; no value add services High operational costs –90% sites do not have power; solar Demand (quantity demanded) is low –Cost of call is high; disposal income is low

19. A village in EDR Back

20. Conclusions “This massive subsidy has resulted in the most expensive calls for the poorest people of Nepal” -Anonymous

21. Conclusions Technically, the smart subsidies have been (somewhat) successful; but…regulatory environment must be improved if the project is to succeed –Stop exclusivity violations and unfair competition –Correct IUC distortion Bring in asymmetric IUC –Provide ILD license (just granted) –Dynamic, mid-course corrections Innovative mechanisms (both technology and financing) will work only if a proper regulatory structure is in place

22. Thank you. Harsha de Silva. desilva@lirne.netdesilva@lirne.net Ratna Kaji Tuladhar. aarketi@wlink.com.npaarketi@wlink.com.np