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

Agenda

• Introduction• Expectations from the subsidy• Outcomes of the subsidy • Issues and conclusions• Discussion from a research perspective

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 )

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

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

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

Implementation expectations

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

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

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

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)

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)

STM site area in EDR

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

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

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

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

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

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!’

Conclusions

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

-Anonymous

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?

Thank you.

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