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Sun 7 Mar 2004 04:00 AM

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Cash for Connections

Universal access funds (UAFs) are coming under the spotlight as a means to incentivise competing operators to extend their networks into unprofitable areas. Regulators in Oman and Egypt are among those considering adoption of funds as part of their liberalisation programmes, while the World Bank is promoting them to countries across Africa. However, various question marks remain over how they should be managed, and it is expected to be some time before their introduction becomes widespread.

|~|rural1.gif|~||~|The concept of universal access is a cloudy one. On a practical level, regulators have yet to reach a consensus on the most effective way to connect up remote areas.
In the past, monopoly operators have carried the burden of their countries’ universal access objectives through cross subsidies, with revenues from international and urban services paying for infrastructure to be rolled out for less profitable segments.

But once countries have brought in competition, these measures can be seen as a distortion of market forces. It has also been argued that access obligations place an unfair burden on certain players.

In developing countries where telecoms networks are particularly scarce, regulatory authorities have also begun to shift their definition of ‘universal’. Instead of talking about universal access in terms of the availability of advanced, personalised services to the entire population, as in the developed world, they have instead focused on more realistic objectives.

“For a number of years, universal service was a term that was used in developing countries in the same way as it was in developed countries,” says David Townsend, president of rural telecoms consultancy, DNTA. “This was very misleading. Their policies now focus on at least bringing a payphone or telecentre to each rural village of a minimum size, and bringing access into a range that might not be universal but closer to 50% of the population,” he adds.

Universal access funds (UAFs) are emerging as an alternative plan for countries both to finance their access objectives more transparently, and to provide cash to support rural telecoms roll-out in a competitive environment.

Through them, finance is received from competing service providers, which in turn is used to subsidise their provision of access where it is doubtful that profits can be made. Typically, operators compete for licences to deliver services in a ‘minimum-subsidy’ auction. A key benefit is that, in comparison to universal access obligations, private players aren’t forced to enter areas they wouldn’t choose to target, but are given an incentive to do so. “The hope is that the projects will demonstrate their economic viability, so that other operators take a chance and make some investments,” adds Townsend.

Although the first UAF was introduced in Chile in the early 1990’s, their implementation is still perceived to be in its infancy. This can partly be blamed on the fact that telecoms sector liberalisation — seen as a pre-requisite for funds’ adoption — is still in progress in many areas within the Middle East and Africa (MEA).

UAFs have been set up in Uganda and South Africa, and similar programmes are in the offing in Burkina Faso and Madagascar, as part of a push by the World Bank. According to the ITU’s ‘Trends in Telecommunication Reform 2003’ Study, 60 countries have a fund or are in the process of setting one up. But UAFs actually in operation in MEA are smaller in number.

“One reason why Middle Eastern countries have not yet adopted UAFs is that they are really a tool to be used in a liberalised market,” says Andrew Dymond, managing director of consultancy, Intelecon. “The UAF would simply be a slush fund for the incumbent in a monopolised market. It’s only after competition comes in that the UAF is useful — and then only to bridge the last remaining gap that the market can’t reach,” he adds.||**|||~||~||~|While adoption of UAFs relies in part on the speed in which countries liberalise, there have also been instances where the opening of markets has been affected when regulators have set fund contributions too high. Morocco’s failed attempt to sell off a second fixed line licence in 2002, for example, was partly caused by the Agence Nationale de Reglementation du Secteur des Telecommunications’ (ANRT) contribution benchmark of 6% annual revenues for the new entrant.

“The universal service obligations attached to the licence were hefty, both in terms of roll-out obligations and fund contributions,” says Lucy Norton, senior telecoms analyst at the World Markets Research Centre. “[The 6% figure] far exceeded the 1-2% benchmark set by other deregulated markets,” she adds.

While this is a one-off, there is a wider debate over the level of contributions that are appropriate. In the case of the UAF in South Africa, managed by the country’s Universal Service Agency (USA), contributions were perceived to have been set too low.

“[The USA] earmarked 0.25% [of operators’ revenues]... so it had no impact,” says Dymond. “You should first assess the level of subsidies that you need to supply each area. You work backwards, but the idea is to keep [contributions] as low as possible,” he adds.

Another source of contention is who should pay into the funds. Existing UAFs get cash from various sources, including national budgets, levies on subscribers and operator revenues. But the development community has debated whether the sources could be spread wider — to non-governmental organisations and to private players that would benefit from wider telecoms access as a whole, even content providers and equipment manufacturers.

“There is a bit of controversy over who should pay into the funds,” says Townsend. “One question is how far you go beyond fixed and cellular operators. Equipment manufacturers, ISPs, computer makers; everyone of these is part of the downstream value chain so should they not finance what will ultimately benefit them?” he adds.

Who should manage the funds, and the powers handed to them, is also seen as key to their success or failure. While some funds are managed by government ministries, others are handled by regulatory or independent authorities. But the common perception is that funds administered by the latter group are less likely to be influenced by government or political interest. “The management of the fund is critical,” says Dymond. “If it’s going to be perceived as a slush fund, then it’s not going to go anywhere,” he adds.||**|||~||~||~|The ability of UAF administrators to make decisions independent from politics is also seen as key in getting operators onside when a fund is being set up. African regional mobile operator, MTN — which contributes to the funds in Uganda and South Africa — says it sees UAFs as an opportunity to collaborate more closely with regulators to grow the telecoms market and influence the return on its contributions.

“UAFs are a commitment that MTN embraces,” says Yvonne Muthien, group executive, corporate affairs, MTN. “We think a successful model is one where the [fund administrator] goes into joint ventures with the existing operators. After all, we have contributed the funding. You know that the money will reach the intended beneficiaries and expand the market. We feel that USFs are a more appropriate form of revenue generation that will grow the industry and not constrain it,” she adds.

Nevertheless, observers argue that it will take time for administrators to build up the size of funds, and that regulatory expertise can be scarce in markets where liberalisation is still an emerging trend.

“In many countries it won’t be realistic to find the experts to operate a [UAF] agency, and give them the political clout to make decisions that won’t be ignored or dragged to the courts,” says Townsend. “We see a lot of the time that funds are closely linked to the Ministry or the regulatory authority. My own view is that it should be within the offices of the regulator, simply because you have a concentration of expertise there in some of the key fields,” he adds.

Meanwhile, with the move towards liberalisation picking up pace in the Middle East, interest in UAFs is also believed to be emerging among the region’s regulators. Egypt’s Telecoms Regulatory Authority (TRA) is believed to working on the structure of a fund, while rumours indicate a similar move in Saudi Arabia.

Additionally, in Oman, where competition is currently being brought into the mobile sector, the Telecoms Regulatory Authority (TRA) has proposed a fund to aid rural telecoms access, which is currently patchy. The TRA will manage the fund and distribute subsidies if the operators undertake to deploy infrastructure in unprofitable areas.

“Roll-out [of telecoms infrastructure] is very limited, to only 200 villages,” explains Naashiah Alkharusi, board member, Oman TRA. “The operators will contribute through royalties for each licence and the government will allocate certain percentages of these royalties to the UAF,” she adds.

And if politics can be separate from fund administration, the development community hopes that an environment in which UAFs can reap benefits will drive adoption. “The Arab region is probably the furthest behind,” says Townsend. “But there’s pent up enthusiasm for new approaches, and maybe we will see a shift in the way telecoms access is expanded,” he adds.

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