Smart Subsidies: Getting the conditions Right

expanding telecoms in rural Nepal

Harsha de Silva and Ratna Kaji TuladharNew Delhi, March 2006

Urb

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High-income households Low-income households

Previous level of access

Affordability frontier

Urb

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Ru

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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?

Smart subsidies

• Least Cost Auction– One-time investment subsidy for (private)

operators willing to provide universal access service via a competitive bidding process

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

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

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)

Implementation expectations

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

LCA outcome: December 2003• 1st 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

• 2nd round February 2003 successful– Total VSAT Solution by STM Telecom Sanchar; USD

11.9 m

Project as at August 2005

0/370/190/14

37/41

55/57 0/40

0/17

17/18

0/25

24/27

4/1015/246/1747/77

37/80

29/31District Head Quarters

XX/YY XX = VDC installedYY = VDC allottedRural Telecommunications Services

in 16 Districts of theEastern Development Region

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.

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)

An STM site area in EDR

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…

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

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

Justifiable?

Back

Back

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

A village in EDR

Back

Conclusions

“This massive subsidy has resulted in the most expensive calls for the poorest people of Nepal”

-Anonymous

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

Thank you.

Harsha de Silva. desilva@lirne.net

Ratna Kaji Tuladhar. aarketi@wlink.com.np