harsha de silva and ratna kaji tuladhar jakarta, 2 october 2005
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Smart Subsidies and Preconditions for their Success The Experience of Expanding Telecoms in Rural Nepal. Harsha de Silva and Ratna Kaji Tuladhar Jakarta, 2 October 2005. Agenda. Introduction Expectations from the subsidy Outcomes of the subsidy Issues and conclusions - PowerPoint PPT PresentationTRANSCRIPT
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Smart Subsidies and Preconditions for their Success The Experience of Expanding Telecoms
in Rural Nepal
Harsha de Silva and Ratna Kaji TuladharJakarta, 2 October 2005
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Agenda
• Introduction• Expectations from the subsidy• Outcomes of the subsidy • Issues and conclusions• Discussion from a research perspective
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Why and what Least Cost Auction?
• Problem, from a telecom perspective– Universal Access socially desirable social
NPV>0– But not always commercially viable private
NPV<0• One solution
– One-time investment subsidy for private operators willing to provide universal access service via a competitive bidding process Least Cost Auction (to ensure costs are kept at a minimum )
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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• Despite liberalization, prospects of rural
expansion bleak– Weak regulatory environment; No RTDF
• Economy and business climate not conducive for investors to come in unsupported
• Introduce LCA scheme to create a business case for private participation– LCA for the Eastern Development Region; 534 VDC– One-time (phased) subsidy– 5 year exclusive license; 10 year renewable license– Right to obtain NLD and ILD licenses
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LCA 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 18 times the tariff of incumbent; whether in or outside the same area
• Now– 6 times tariff of incumbent but uncertain
future; could very well go back to square one if issues not addressed
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Design expectations• (Affordable) telecom services to rural Nepal through
private investment– EDR: 534 VDC; 2 public access lines in each 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)
• Competitive bidding, as opposed to negotiated contract– Eligibility (operations, finance, local participation)– Required subsidy (Maximum available not specified)
• NTA to regulate NTC – No discriminate against RTS; no anti-competitive preferences
or cross-subsidies to own RTS service operations
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Implementation expectations
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Sustainability expectations• Will be sustainable over the long term given the
design; exclusivity over the short term (5 years) but competition thereafter– Did not require business plan; not a beauty contest– 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– Minimum RTS license fee, exempt from frequency fees,
exempt from levies on value added services; no RTDF levy for 5 years
• Conducive political and regulatory environment– Maoists wont disrupt operation. NTA will ensure fair
competition
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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– “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
37/4155/57 0/40
0/17
17/18
0/25
24/27
4/1015/246/1747/77
37/80
29/31District Head QuartersXX/YY XX = VDC installedYY = VDC
allottedRural Telecommunications Servicesin 16 Districts of the
Eastern Development Region
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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 manufacturer
• Catch 22– Need to expand service within the ‘safe’ VDC to
survive; but unable because of high terminal costs. Could have done with other technology (say WLL)
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More design issues• Were sufficient safeguards taken to counter
poor regulatory framework?– Unrealistic 5 year exclusivity
• Exclusivity of 100+ VDC of STM already violated by NTC• No room for 2 operators in rural VDC
– Unsustainable retail tariff (x18; now x6)• No local tariffs; only “VSAT tariff”• Arbitrary IUC of 55% of NTC VSAT tariff applied on STM
• 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 (least need for VSAT)
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STM site area in EDR
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Implementation issues
• Overwhelming security problem– Difficult to install; not safe on road, helicopter?– 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
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More implementation issues• Administration and bureaucratic delays
– VDC lists incorrect? (STM says 1999 lists given in 2003)– 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 monitor; no reporting mechanism
• Not sufficient emphasis on selecting ‘local operator’– No systematic way of selecting; no business plan; no help
nor checking; only NPR 35,000 deposit and NPR 7,500 pre-payment
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Sustainability issues• Demand (quantity demanded) is low
– Cost of call is high; disposal income is low– NPR 9 per minute (4.95 IUC); brought down to 3
per minute at 1.95 loss per minute. Now IUC 2.75– July-Aug 05 for 174 sites, avg min. of use/day
0.36• NTC figures are NPR 20,000/VSAT station (reasons)
• High operational costs– NPR 8.6m per month (according to STM)– 90% sites do not have power; solar
• Restriction to expand services is not good – Unless all VDC served; no value add services,
cannot install in other VDC even at own cost
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More sustainability issues• Poor regulatory environment not helping
– Interconnection issues not solved – ISD license not granted; due Jan 1 2004; STM
not paying license fee?• Estimated market USD 36m/year• But, could be the savior in these difficult times
– Exclusivity condition violated• 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
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Conclusions• Technically, the Leased Cost Auction
methodology has been successful; but…• Implementation slow
– Security situation out of NTA hands…• Sustainability is an issue
– Investigate possibility to introduce cheaper technology within the RTS license
• A hybrid solution by brining in WLL to tarai and shifting existing VSAT to difficult terrain could reduce the cost to USD 6.8m; saving of USD 5m
• STM refutes; says would cost at least USD 15m– Consider if ongoing subsidy (ADC type) would
be more appropriate for the remaining DR
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Conclusions• Still on sustainability…
– Regulatory environment must be improved to reduce anti-competitive behaviour
• Stop exclusivity violations• Correct IUC distortion; possibility for asymmetric IUC? • Provide ILD license
– Reduce political pressure to ‘give lines’ via NTC• Perhaps more intervention from
HMGN/World Bank?– More pressure on the Regulator?– STM complains of ‘no god father for us!’
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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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Discussion: From a research perspective
• Design – Technology– Poor regulatory environment– Mid course correction ability– Economics– Lop-sided coverage
• Implementation– Alternative arrangements in terms of security– Monitoring and evaluations– Selection of local partners
• Sustainability– High cost Arbitrary “IUC”– Unfair competition– Demand-side support?