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Smart Subsidies: Getting the conditions Right
expanding telecoms in rural Nepal
Harsha de Silva and Ratna Kaji TuladharNew Delhi, March 2006
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Urb
an
are
as
High-income households Low-income households
Previous level of access
Affordability frontier
Urb
an
are
as
Ru
r al
are
as
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?
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Smart subsidies
• Least Cost Auction– One-time investment subsidy for (private)
operators willing to provide universal access service via a competitive bidding process
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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
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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
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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)
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Implementation expectations
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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
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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
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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
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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.
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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)
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An STM site area in EDR
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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…
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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
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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
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Justifiable?
Back
Back
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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
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A village in EDR
Back
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Conclusions
“This massive subsidy has resulted in the most expensive calls for the poorest people of Nepal”
-Anonymous
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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