smart subsidies: getting the conditions right expanding telecoms in rural nepal

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Smart Subsidies: Getting the conditions Right expanding telecoms in rural Nepal. Harsha de Silva and Ratna Kaji Tuladhar New Delhi, March 2006. Expanding in to rural areas?. Affordability frontier. - PowerPoint PPT Presentation

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  • Smart Subsidies: Getting the conditions Rightexpanding telecoms in rural NepalHarsha de Silva and Ratna Kaji TuladharNew Delhi, March 2006

  • Expanding in to rural areas? Urban areasHigh-income householdsLow-income householdsPrevious level of accessAffordability frontierUrban areasRural areasAccess 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

  • Smart subsidiesLeast Cost AuctionOne-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 NepalIn 2000, 56% of 3,914 VDC had no telecom servicesIncumbent (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 participationEastern Development Region; 534 VDC

  • Smart Subsidies; Good, but could have been betterThenIn many VDC, poor rural citizens of Nepal had no access to telecommunicationsWith EDR project; at startTelecom services available to some; but at extremely high tariff (x18 incumbent)Now6 times tariff of incumbent but uncertain future; could very well go back to square one if near fatal regulatory issues not addressed

  • Design expectationsNTA 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 investmentEDR: 2 public access lines in each 534 VDCMandatory Local, NLD and ILD; optional Internet services etc.Low license fees (NPR 100,000 for 10 years)Technology neutralWireless or VSAT (or hybrid)International competitive biddingEligibility (operations, finance, local participation)Required subsidy (Maximum available not specified)

  • Implementation expectations

  • Sustainability expectationsConducive political, policy and regulatory environmentNTA will ensure fair competitionMaoists wont disrupt operationWill be sustainable over the long termAssumed bidding party had a viable planNo limit on expansionFirst install the specified 534 VDC to collect subsidy; then follow internal business planDemand will be generated; value added services alsoLow fees, levies and taxesMinimum RTS license fee, notional frequency fees, exempt from levies on value added services; no RTDF levy for 5 years

  • LCA outcome: December 20031st round Sept 2000 LCA failed; winning bidder pulled out due to deteriorating security situationIssue was not in EDR, but generally in NepalConsultants made the offer more attractiveNew, reasonable set of consumer tariffs (x18), speeded up payment, alternate sites if security situation worsened2nd round February 2003 successfulTotal VSAT Solution by STM Telecom Sanchar; USD 11.9 m

  • Project as at August 20050/370/190/1437/4155/570/400/1717/180/2524/274/1015/246/1747/7737/8029/31District Head QuartersXX/YYXX = VDC installedYY = VDC allotted

    Rural Telecommunications Servicesin 16 Districts of theEastern Development Region

  • Design issuesWere sufficient safeguards taken to counter poor regulatory framework?5 year exclusivityExclusivity of 100+ VDC of STM violated by NTC in year 1No room for 2 operators in rural VDCUnrealistic retail tariffNo local tariffs; only VSAT tariffIUC is of 55% of NTC VSAT tariff applied on STM (STM agreed!)NPR 9 per min. vs. NPR 1 per 2 mins.

  • More design issuesDid 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 activityNo demand forecasts or any other indication of revenue; but initial license envisages sustainability for 10 yearsSTM is a VSAT manufactureWas keeping coverage to winning bidders 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 issuesOverwhelming politico-regulatory problemAll 542 sites closed (Feb 05); 25 opened (May 05) now 183 open; rest and remaining do not knowAllow within km from Army postNew list from Army entirely different from original (except 16); overlapping with NTC areas Difficult to install; not safe on road

  • More implementation issuesAdministration and bureaucratic delaysCustoms delays, decision making delaysNeed to deal with both HMGN and MaoistsFailure in enforcing service availability and qualityLicensee required to maintain service for 10 years; should be open everyday at least 8 hoursBut, unable to properly monitor; no reporting mechanismWas sufficient emphasis placed on selecting local operator?Selection; business plan; NPR 35,000 deposit and NPR 7,500 pre-payment

  • Sustainability issuesPoor regulatory environment is grinding programme to a halt Exclusivity condition continually violatedInterconnection issues not solvedOriginal IUC NPR 4.95 (call NPR 9.00); Now IUC brought down to NPR 2.75 (call NPR 3.00); 18 times vs. 6 timesJuly-Aug 05 for 174 sites, avg min. of use/day 0.36LossesISD license not granted; due Jan 1 2004; STM not paying license fee? (Just granted)Estimated market USD 36m/yearBut, could be the savior in these difficult time

  • Justifiable?BackBack

  • Sustainability issuesCompetition by NTC expansion1m CDMA phones in 5 years including EDR; signal will cover almost all VDC in Tarai, many areas of Hills at much lower tariffRestriction to expand services is not good Unless all VDC served; no value add servicesHigh operational costs90% sites do not have power; solarDemand (quantity demanded) is lowCost of call is high; disposal income is low

  • A village in EDRBack

  • ConclusionsThis massive subsidy has resulted in the most expensive calls for the poorest people of Nepal-Anonymous

  • ConclusionsTechnically, the smart subsidies have been (somewhat) successful; butregulatory environment must be improved if the project is to succeed Stop exclusivity violations and unfair competitionCorrect IUC distortionBring in asymmetric IUC Provide ILD license (just granted)Dynamic, mid-course correctionsInnovative mechanisms (both technology and financing) will work only if a proper regulatory structure is in place

  • Thank you.

    Harsha de Silva. desilva@lirne.netRatna Kaji Tuladhar. aarketi@wlink.com.np