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Smart Subsidies: Getting the conditions Right expanding telecoms in rural Nepal

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.

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Smart Subsidies: Getting the conditions Right expanding telecoms in rural Nepal

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

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

  3. Smart subsidies • Least Cost Auction • One-time investment subsidy for (private) operators willing to provideuniversal 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 • 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

  10. Project as at August 2005 17/18 0/17 0/14 0/19 0/37 37/41 55/57 0/40 0/25 District Head Quarters 29/31 24/27 XX = VDC installed XX/YY YY = VDC allotted 4/10 Rural Telecommunications Services in 16 Districts of the Eastern Development Region 37/80 15/24 6/17 47/77

  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 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.net Ratna Kaji Tuladhar. aarketi@wlink.com.np

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