ICT Infrastructure in Emerging Asia
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Policy and Regulatory Roadblocks
Edited by
Copyright © LIRNEasia 2008
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Library of Congress Cataloging-in-Publication Data
Khan, Amir Ullah.
States of the Indian economy: towards a larger constituency for second generation economic reforms / Amir Ullah Khan and Harsh Vivek.
p. cm.
Includes bibliographical references and index.
1. India—Economic conditions—1947–2. India—Economic policy—1991–
I. Vivek, Harsh, 1982–II. Title.
ISBN: 978-0-7619-3673-2 (Hb) 978-81-7829-839-9 (India-Hb)
The SAGE Team: Sugata Ghosh, Jasmeet Singh and Rajib Chatterjee
The research reported in this book was supported by the International Development Research Centre (IDRC) of Canada. The compilation of the research into an integrated whole was assisted by the financial support provided by the Social Science Research Council (SSRC) and IDRC.
The research in Sections 2 to 4 was conducted as part of third cycle of World Dialogue on Regulation for Networked Economies (WDR) research on diversifying participation in network development, an effort coordinated by a team led by Professor William Melody. The inspiration behind the research in Section 1 was Dr Randy Spence, then at the IDRC. Randy was also the champion of the pro-market, pro-poor research and capacity-building program which has been implemented in emerging Asia by LIRNEasia. This book would not have come about if not for the faith Bill and Randy had in the LIRNEasia team and approach. This book is dedicated to them.
The editors and authors gratefully acknowledge the contributions of Muttukrishna Sarvananthan (Point Pedro Institute of Development), Claire Milne (London School of Economics and Political Science and Antelope Consulting), Abu Saeed Khan, Ratna K. Tuladhar, Mahinda Ramasundara (Suntel [Pvt.] Ltd, at the time), as well as of the interviewees and all those who provided data, too numerous to mention here. There was extraordinary cross-fertilization of ideas among the authors over the duration of the research and writing and their mutual contributions must be noted. The editors are also grateful to Chanuka Wattegama and Luxman Siriwardena for their contributions in shaping the research behind this book.
We acknowledge the contributions of participants at the 10th LIRNE.NET regulatory training course and the WDR Expert Forum in Singapore and the LIRNEasia Networking Meeting in Jakarta in September–October 2005 in improving the research.
Acknowledgements are also due to TNS Lanka, who conducted the research in Section 1 of this book. Sriganesh Lokanathan, Prashanthi Weragoda and Sabina Fernando of LIRNEasia helped manage the research at various stages and knit the separate components into a unified collection.
This book, and the research program which it draws from, rests on the assumption that connectivity—the opportunity (but not the compulsion) to engage in electronically-mediated communication (synchronous as well as asynchronous), information retrieval in various forms, and publication—is good. This assumption is not, however, a religious belief. It rests on evidence, if not proof.
After much debate, it is now recognized that economic growth is a necessary condition for the alleviation of human misery (or for the achievement of human development). The relationship between the ability to communicate over distance using technological means and economic growth has been much discussed (Cronin et al., 1993; Cronin et al., 1991; Cronin et al., 1993; Hardy, 1980; Mansell and Wehn, 1998; Menou, 1993; Samarajiva, 1995; World Bank, 1999). Correlation is beyond dispute, but the case for causation is unlikely to be fully established. Development requires many inputs; communication and knowledge being only some of them (see Figure 1).
Establishing causation was considerably more important prior to the 1990s when public funds, domestic as well as donor, were still the main source of investment for expanding access to information and communication technologies (ICTs), defined as including, but not limited to, telecom. Access to telecom is the foundation for ICT use. In many developing countries and among the poor, telecom (and perhaps radio and TV) constitute the total experience with ICTs.
The increased private investment in telecom in the 1990s dipped as part of the overall downturn following the bursting of the IT bubble, overbidding on 3G (Third generation) mobile and overbuilding of optic fiber capacity at the turn of the century. But at least for emerging Asia, it always remained above the levels of the early 1990s. Investment is particularly robust in South and Southeast Asia, the regions covered by this book (see Figure 2), partly because a new group of investors based in the South, such as Ayala, Etisalat, Orascom, Reliance, Singapore Telecom and Telekom Malaysia (TM), have entered the semi-liberalized markets of this region in a significant way.
When public funds were being expended on telecom, it was necessary to ensure that scarce financial resources were being spent on services which give the greatest public benefit. A rupee more for telecom was a rupee less for road building. Now, the burden of proof is much less because private capital is the main (and in many cases, exclusive) source of funding for expanding telecom networks.
Figure 1
Communication Technologies in the Context of Inputs Contributing to Development
Source: Author.
Figure 2
Annual Telecommunication Investments in South and South-east Asia (USD millions) (1985–2002)
Source: Author, based on ITU databases.
For example, telecom is one of the largest contributors to growth of Gross Domestic Product (GDP) in Sri Lanka. Yet, it draws no public funds whatsoever, contributing significantly to the exchequer. Investments in telecom do not detract from other worthwhile investments, but instead, contribute to them. This happens in two principal ways. First, the Sri Lankan government obtains substantial revenues from the sector, directly in the form of returns on its 49.5 percent investment in the incumbent and in taxes from telecom users (approximately 20 percent of every rupee spent on telecom services goes to government); with little or no leakage, telecom tax revenues are very valuable to government. Second, the availability of modern telecom facilities of reasonable quality enables improved performance in all other sectors of the economy, which, in turn, generates higher revenues for the government. Prior to liberalization, the telecom sector was a drag on the rest of the economy; now, it is a driver.
The first section of this book, "Demand at the Bottom of the Pyramid" illustrates the existence of demand at the bottom of the pyramid (BOP) at levels much higher than expected in terms of expenditure on telecom services. The always-beyond-expectations demand that has been exhibited by the unconnected when offered telecom services, most strikingly in the form of telecom riots (BBC, 2005; Nasarullah, 2004), is reason enough for private investors to step in.
The available evidence of employment and tax generation and similar benefits is adequate to justify government action to facilitate private supply (Lane et al., 2006; Waverman, Meschi, and Fuss, 2005; Zhen-Wei Qiang, and Pitt with Ayers, 2004), though not necessarily, for massive public investment. Scarce public resources are better spent on infrastructure that is less attractive to private investors such as drinking water, breakwaters in ports, and rural roads.
The dramatic shift in the composition of World Bank loans in the telecom sector, shown in Figure 3, is an example of what happens when this line of thinking is accepted. It may not be possible to attribute the massive growth in telecom worldwide during the past decade (Figure 4) to the World Bank getting out of the business of financing government-owned integrated monopolies and putting its resources behind reforms instead, but the withdrawal of World Bank assistance had no ill effects, at least!
The perennial opportunity-cost question, though, reappears in a more modest form. Given finite investment resources of governments, should they be spent on telecom as against drinking water or breakwaters in ports? Not telecom, because it does not need government investment. Given the finite resources to design and implement reforms in governments, should they be spent in reforming telecom or education, or military procurement, or electricity? Should it be telecom—because it is easier to reform, because it generates more tax revenues than the alternatives, and, because it yields greater benefits to the economy?
Connectivity is undersupplied because of historically evolved policy, locked in by inertia, has made it so. This book is, among other things, an extended conversation about whether technology by itself can increase supply, or whether policy and regulatory pre-conditions have to be satisfied to realize the potential of technological and service innovations.
In the extreme form, the argument may be framed in terms of policy and regulatory reforms versus supply of new technologies. Assuming a fixed quantity of resources (capital,
Figure 3
Composition of World Bank Loans in Telecom Sector (1980–2000)
Source: World Bank (2002, p. 22).
Figure 4
Growth in Fixed and Mobile Subscribers in the Asia-Pacific, Europe and Central Asia, and the Americas (1984–2003)
Source: Author, based on ITU databases.
personnel, etc.), should it be allocated solely to policy reform or to new technologies? More moderately, the debate may be framed as one between the emphasis placed on institutional reforms versus technologies; mostly on reforms with technology playing a supporting role, or, mostly on technology with reforms not being neglected?
One who looks at the explosive expansion of connectivity within the past two decades, especially in relation to the seminal 'Missing Link Report' (Independent Commission for World Wide Telecommunications Development, 1984), which serves as a good baseline, may be tempted to attribute all growth to new technologies such as wireless. There is no question that reductions in per-line costs over the past two decades have enabled more people to be connected. But what gave rise to those reductions?
The dramatic reductions in the per-line cost witnessed in the past 5–6 years were made possible by economies of scale in manufacturing and competition among manufacturers, driven primarily by massive growth in several large Asia-Pacific markets—China, India, Pakistan, Bangladesh, Indonesia, and Vietnam. Why were these conditions not present earlier?
Before multiple service providers, operating under varying forms of competition, found reason to connect the hitherto unconnected in large numbers, there was no need for large production runs—the necessary condition for realization of economies of scale. Before telecom operators started to behave like normal firms seeking to obtain the lowest-cost inputs, there was little reason for equipment manufacturers to drive down costs. In the old days, the determinant of equipment sales were not price, but the overall calculus of vertically integrated national champions, tied aid, the local-manufacturing provisions of long-term purchase agreements and bribes.
So it appears that the lowering of barriers to entry in telecom service markets and the vertical disintegration of telecom value chains served as pre-conditions for lowering of the costs of connectivity. But this was not all. The virtuous cycle of expanding connectivity, with greater demand driving down the cost inputs and lower costs of inputs causing even greater demand would not have gotten started if not for business innovations that transformed the entire business of supply of telecom services.
In the engineer-dominated PTT (Posts Telephones and Telegraphs) culture of yore, it would have been unthinkable to offer connections at the low average revenue per customer as is being done today, or to offer flexible and consumer-responsive service packages. In Indonesia, the current average revenue per prepaid customer of Excelcomindo (TM subsidiary) is USD 4.64, but the company is making profits and connecting more people.
In 1998, the regulatory commission in Sri Lanka had to coerce the reluctant incumbent, Sri Lanka Telecom Limited (SLTL), to offer a three-part installment plan to customers (Samarajiva, 2000). In 2006, the same company, now nine years after privatization, facing intense competition and having somewhat outgrown the PTT culture, offered a much more favorable, 10-part installment plan to potential customers on its own initiative.
In the old days, the first reaction of telecom operators to new technologies such as mobiles that work both in circuit-switched mode and in packet-switched mode on Wireless Fidelity (Wi-Fi) networks would have been to quash them through appeals to regulators and the courts, if not through direct pressure on manufacturers. Now, such reactions are less common, especially in the liberalized markets. For example, Cingular, an operator in the United States, is now offering such dual-mode phones, even at the risk of harming its existing markets (Richtel, 2006).
If new technology alone could extend connectivity, the offering of Internet services by Bhutan Telecom through its fully-owned DrukNet Unit in 1999 with International Development Research Centre (IDRC) assistance should have yielded good results. Until the second mobile operator starts functioning under the license issued in 2006, Bhutan remains one of the last remaining government-owned integrated monopolies.
With donor assistance, Bhutan Telecom connected the mountain kingdom to the world in May 1999 as part of the celebration of the King's Silver Jubilee. The connection of the world's remotest country to the Internet was undoubtedly a good thing and made a few headlines. Yet, the new technology had little or no impact on extending connectivity. DrukNet simply became another service from the same lackadaisical and unimaginative monopoly, serving a few government and foreign entities, travel agencies and tourists willing to pay high prices and tolerate the poor quality of service.
The discussion of Wi-Fi innovations in Indonesia in Section 2 also illustrates the inadequacy of technology by itself. As Chapter 4 illustrates, Indonesia may have one of the highest levels of citizen activism and do-it-yourself knowledge regarding Wi-Fi as a local-access technology. But, as Chapter 6 shows, this has not translated into commensurate increases in digital opportunity because of the perverse policy and regulatory environment within which the Internet service providers and citizen activists have had to operate.
Would it have been better if the activists put all their energy into policy reforms? Or if they ignored the policy process altogether and concentrated entirely on developing workarounds to the barriers erected by misguided policy?
It is unlikely that there can be an answer to these questions that is correct for all countries and all times, or even for Indonesia at all times. The Indonesian civil society activists have a major policy success to their credit, the unlicensing of the 2.4 GHz band as one of the first acts of the Yudhoyono administration in January 2005. As Chapter 4 shows, the activists are in favor of greater policy reforms. So this suggests that they have not conceded the policy space.
The real question is whether the policy success of getting the 2.4 GHz band unlicensed could have been achieved without the previous educational and mobilization activities? Would the reform advocates have had the clout without the numbers provided by the extensive mobilization and the resources without the Internet Service Providers (ISPs) and the Warnet (Warung Internet) cybercafés? Would there have been ISPs and Warnets if technological workarounds had not been devised to circumvent the barriers erected by the incumbent monopolist?
It appears that the technology focus created the conditions for effective reform actions in the policy space. If the activists had boycotted policy process altogether, they could not have freed up the 2.4 GHz band and created the conditions for further connectivity-friendly reforms such as the lowering of leased-line prices. But had they not done the hard work of community education and mobilization, they may have been less successful in changing bad policies.
The lifting of policy constraints on participation in the provision of connectivity may be described as liberalization, a process that achieved critical mass in 1984 with the AT&T (American Telephone & Telegraph Company) divestiture in the United States and the reforms in the United Kingdom that included the end of the British Telecom (BT) monopoly and the establishment of the Office of the Telecommunications Regulator (OFTEL), now Office of Communications (OFCOM), as a specialized ex-ante sector regulator. Conceptually, liberalization includes the following components, ideally in sequence (Fink, Mattoo and Rathindran, 2002; Samarajiva, 2002):
The creation of an explicit regulatory regime, separate from the incumbent or major operator;
The relaxation of entry controls to allow more suppliers to participate in the market and at various points in the value chain; and
Reform of the incumbent or major operator, which in many cases includes a complete or partial change in ownership and/or management.
The wave of reforms that spread across the world since 1984 did not take long to build up momentum, as shown in Figure 4.
The Asia-Pacific has emerged as the driver of worldwide connectivity expansion, with the East Asian Tigers supplying much of the needed hardware and also reaching saturation in basic services and the world's two most populous countries, China and India, providing the numbers. Yet, the region is also home to some of the economies which offer their citizens the least connectivity, as seen in Figure 5.
It is easy to rest on the achievements that have been made. However, it is more productive to make a realistic assessment on the lines of Ashok Jhunjhunwala (2001, p. 1):
In 1991 both India and China had about 5.5 million telephones. Today (2001), India has about 35 million telephones—a six-fold increase in a decade is by no means
Figure 5
High and Low Performers in Asia-Pacific Telecom
Source: Author, based on ITU (2005).
an achievement in the conventional sense. But in the same period the number of telephone lines in China has grown to about 200 million; and is adding about 30 million lines every year.
So the question is "what could have been?" It is clear that connectivity in the unreformed economies has not grown. But at the same time connectivity in many of the "reformed" economies has not grown as much as it could have.
The Section on "Demand at the Bottom of the Pyramid" provides evidence of how much unsatisfied demand there is at the BOP. Section 2, "Access, Against All Odds", dealing with the softer issues of local access networks and mechanisms, and Section 3, 'Regulation: To Stifle or Enable?', dealing with the harder issues of backbones, cross- and other subsidies and cost allocations, deal with policies—not necessarily the best policies or international best practices from idyllic lands populated by honest politicians and competent officials; but real policies that have been tried, and either failed or succeeded in the harsh terrain of some of the most poorly governed countries this side of Somalia and Liberia.
Levy and Spiller (1994) drove home the point that the optimal policy solution was not the absolute best but what fitted the environment in which they were to be applied. Our attempt here is not to describe the best policies for extending networks, but to identify the policy actions that would be most efficacious in the governance badlands of South and South-east Asia.
We do not seek to whitewash the failures or justify them. We take joy when Bangladesh connects a million new mobile users in one month and Pakistan overtakes both India and Sri Lanka in extending mobile connectivity in the space of one year. We rage when our governments talk the talk of greater connectivity and walk the walk of corrupt monopoly and proven failure.
The countries that we write about have done well in extending connectivity in the past decade, for the most part. South Asia has gone from 15 million in 1995 to over 110 million in 2005, a more than seven-fold increase in a decade. Indonesia also shows a six-fold growth over the decade like its giant counterpart, India. However, as Jhunjhunwala points out, well is not good enough. The East Asian giant, China, has grown enormously, connecting more than twice the combined number in South and South-east Asia up to 2004.
The analysis in this book suggests why Indonesia's committed ICT activists and ISPs have been driven from pillar to post simply to use the Internet, as shown in Chapters 4 and 6. They have had to devise complex workarounds that boggle the imagination and violate all languages used in Indonesia as well as the law, simply to browse the web and send e-mail. They had to engage in 'unlegal' (not illegal, as they point out) activities to be able to connect to the Internet. They had to change a President to get a band of frequencies unlicensed. If all this energy could have been used for more productive purposes, what would have been the result?
Chapter 5 documents the lessons that can be learned on business models that can be derived from the Village Phone enterprise in Bangladesh, which Nobel Laureate Muhammed Yunus made famous and which in turn made Yunus famous. These innovations do not relate to telecom per se, but are business practises that made it possible for women to make a living out of telecom, and for others to use it. Some of the innovations, the authors find, were specific to time and place and need not be replicated. For example, today's context of cheap handsets reduces the need for the provision of micro-credit to potential Village Phone operators to get their phone business started; the availability, and now the predominance of prepaid makes the continuing credit relationship less significant. Yet, other aspects such as the ability to receive as well as make calls and the higher degree of privacy afforded by a mobile phone versus a public call office can, and are, being absorbed into current adaptations of the Grameen Village Phone model.
The Grameen Village Phone program was an innovation that flowered despite the incredibly hostile telecom regulatory environment. The roll-out was delayed because of the difficulties of getting the phone service operational. Even today, full interconnection is not available for all Grameen phones. If all these barriers did not exist, what would have been the result?
The battle over backbone in India described in Chapter 7 illuminates several key issues in telecom policy and reform. Is the Government of India not treating backbone as an essential facility that should not be wastefully duplicated because of an exaggerated respect for the 'private property rights' of a fully government-owned incumbent or because of fear of the incumbent's managerial caste and powerful unions? Will 'pure infrastructure providers' who see only operators as customers enable competitors to match the stockpiled advantages of the incumbent in the rural areas, or will they also transform themselves into 'service providers' directly interacting with customers? If the answers to these questions had been clearer, would more dark fiber have been lit and more rural customers connected? What would have been the result?
Chapter 8 describes a good policy idea orphaned at birth and beset by misfortune and malgovernance in Eastern Nepal. Can least-cost subsidy auctions work when the telecom regulatory environment takes a dive and the macro political environment becomes actively hostile? Does this case study give donors and governments a better sense of when to cut and run? Would the prospects for least-cost subsidies have been better in Asia, had the World Bank retreated in the face of rapidly deteriorating security, political and regulatory environments? What would have happened if the gunpowder had been kept dry for a better day?
Chapter 9 demonstrates that the world's second largest universal service fund has for the most part been unutilized and wrongly directed, though the disbursements have been done most transparently. If all the money extracted from the capital-hungry sector had been disbursed quickly and if the changes now being implemented had been accepted at the start, what would have been the result?
It is almost surreal to read the contorted progress of the Access Deficit Charge policy in India in Chapter 10. It is perhaps the best single answer to the Jhunjhunwala question as to the causes of underperformance in the Indian telecom sector. The narrative describes the tortuous process by which the Telecom Regulatory Authority of India (TRAI) grinds down the forces protective of the incumbent, its privileged managerial castes and its multitude of unionized employees. It is almost as if it knows the right answer, but it has to work through a sequence of wrong answers to gain acceptance for the right answer. What if the vested interests were less entrenched and TRAI could have implemented the right answer at the beginning? What would have been the result?
The book itself is an introduction, not a conclusion. It is an introduction to a new way of governing, especially in areas that rest on specialized, yet incomplete, knowledge such as infrastructure. The basic idea is that policy requires knowledge, but that the knowledge is necessarily incomplete. Decisions must be made with the best available evidence. The imperfections of the available evidence should be remedied by subjecting them to the test of argumentation (Melody and Mansell, 1983).
Accordingly, the book contains multiple points of view and contestations. LIRNEasia, the organization that generated the research which forms the basis of the chapters, is not the most sympathetic to incumbents; yet the head of regulatory affairs at an incumbent phone company has been invited to respond to the authors, within the book itself. Generally, the authors favor market forces and see regulation as a necessary evil. However, a leading regulatory professional has been asked to make his comments within the covers of the book itself. The authors are, for the most part, immersed in telecom and ICTs and see the world from vantage points that privilege those technologies and associated practices; yet the last of the responding authors comes from outside the ICT field.
'What could have been' is an interesting question, but, on the face, it addresses the past. 'What is to be done' is the question that focuses attention to the present and the future. The workarounds described in this book are not simply the equivalents of the two-headed goats in formaldehyde in the museum of South Asian reforms; they contain within them valuable lessons for the way forward. Wish as we may, we cannot conjure up effective and clean governments for our region overnight. Future reforms must also take place within the dysfunctional contexts described in the chapters.
The reforms in the ICT sectors have so far resulted in the improvement of governance in this sector, if not yet in the larger polity. The point is not to perpetuate the vested interests and dysfunctional governance arrangements, but to challenge the vested interests and improve governance. We believe and hope that the research presented in this book will contribute to that process.
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In the time of integrated government owned monopoly or in the 'bad old days', the picture regarding demand was very clear: it was there; it was unsatisfied. People waited for longer than 10 years for a fixed phone; they had to seek the intervention of politicians and officials to obtain a connection; in many cases, bribes had to be paid to multiple parties.
Tremendous progress has been made in meeting unsatisfied demand. Figure S1.1 illustrates the growth in the total number of telephone subscribers in South Asia between 1995 and 2004.
Figure S1.1
Total Telephone Subscribers: South Asia (1995–2004)
Source: ITU (2005).
In the first instance, emphasis had to be on removing the artificial constraints preventing demand from being met. With manifest demand being met in some areas, particularly in urban areas, the question of the nature of the remaining unmet demand becomes important. Do the dimensions of the existing service offerings correspond to what the remaining unconnected actually want?
Conventional thinking would focus on the price of getting connected and staying connected. Without question, price is important; but price is not everything. The success of prepaid telephony, first in mobile and now even in fixed, is evidence that what people want is not simply lower prices. Even when prepaid call charges were higher than post-paid, the demand for prepaid was higher. Basket calculations for monthly expenditure on telecoms for lower-end users indicate that prepaid is now the cheaper option in many countries, as illustrated in Figure S1.2. Perhaps the ability to control or minimize expenditure on telecom allowed through prepaid connections, also evidenced by the lower Average Revenue per User (ARPU) generally found among prepaid subscribers, contributed to its popularity.
Figure S1.2
Comparison of Sri Lankan Prepaid and Post-paid User Baskets, Calculated on a Monthly Basis for Lower-end Users (September 2006)1
Source: Tahani Iqbal at LIRNEasia.
Telecom policies and regulations assume that demand is known. This is understandable because demand, especially for new products and services, is extremely difficult to determine.
Economics has a simple solution. Whatever succeeds in the market is in demand; what does not succeed is not. The market is the best discovery process. There is no reason for anyone other than a supplier to expend resources on researching demand.
In public policy, not all goods and services are created equal. Some are merit goods. Some have significant positive externalities. For these or other less justifiable reasons, public policy may seek to expand supply of certain goods and services.
The focus of the first two chapters is on the strategies used by those at the bottom of the pyramid (BOP). In Chapter 1, the choices made by BOP users among fixed, mobile and public access modes are discussed. Chapter 3 presents a case-study of the Jaffna district of Sri Lanka, a unique 'between-conflict' society (at the time of the survey).
Chapter 1 shows that significant use of telephones exists in the 11 locations studied, despite official numbers of subscribers per hundred inhabitants in India and Sri Lanka being less than 25 percent of the population at end of 2005. In the Sri Lankan locations, only 0.3 percent of those approached were excluded because they had not used a telephone in the previous three months; in the Indian locations, the corresponding percentage was 12. Within the samples, 77 percent of those who were in the lower income group (less than US Dollars [USD] 50 per month) used phones but did not own them. Among those in the relatively higher income group within the locations (USD 50–100 per month), 49 percent did not own the phone that they used.
The results also show that most of the owner-respondents or subscriber-respondents are 'newbies'; in India, 31 percent of the owners/subscribers in the seven locations had a mobile connection for less than six months; in Sri Lanka, the corresponding percentage was 16. In the Jaffna district of Sri Lanka, as Chapter 3 reports, 100 percent of the overwhelmingly large number of mobile customers had their connections for less than three years.
In effect, the BOP research is a study of people who have recently joined the market for telecom services as direct customers and those who are about to join. In the new world of low ARPU and high profit mobile telephony in South Asia, this is a critical market segment which is likely to drive revenue growth and market share. For example, In India, as in March 2006, blended ARPUs for Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA) (both mobile) were USD 7.82 and USD 5.47, respectively, and Earnings before interest, taxes, depreciation and amortization (EBITDA) per subscriber was approximately USD 45, according to TRAI (2006). Dialog Telekom, Sri Lanka's largest mobile operator's blended APRU for the first quarter of 2006 was USD 6.85, while its EBITDA per subscriber was approximately USD 9.93 in 2005.
It is reasonable to assume that the factors that influence the choice of mode (Chapter 1) as well as the strategies used, after getting connected, in the course of using the service (Chapter 2) are broadly the same for those who are about to join the market in similar circumstances'. Operators can design better services for this market segment using the knowledge generated by the BOP research. Equipment manufacturers can profit from this knowledge to improve the designs of their starter and low-cost handsets (GSMA, 2005).
The key finding of Chapter 2 is that those at the BOP do not use as many economizing 'strategies' as one would expect, observing the behavior of middle-class teenagers, for example. The authors suggest that this is caused less by ignorance, than by the constraints within which they communicate. The fact that most of the users communicate through other people's phones—for financial considerations or otherwise—is an obvious constraint. That they are most probably calling people in similar circumstances, for example a relative who is also dependent on the use of someone else's phone, limits the strategies that can be employed. The authors also point to the fact that only 31 percent of the study group had access to multiple modes of communication, contributing to the low use of strategies. The modes that the majority of this group have access to—(private) fixed and public phones—only exacerbates the situation. Public phones come with several additional constraints, for example, difficulties in accessing them at night.
People like to save money if it can be done without too much inconvenience. As phones continue to spread through the populace, it is likely that the constraints, especially those related to ownership and access to phones by the called parties, will become less significant. Therefore, the findings of Chapter 2 should not be interpreted as suggesting that cost-saving strategies are irrelevant. Rather, they should be understood as showing the constraints within which those at the BOP operate, not only in terms of communication, but even in terms of strategies.
In liberalized environments, policy makers and regulators need not get involved in the nitty-gritty of service design. That is the province of operators. The introduction of 'lifetime' prepaid mobile connections in India, albeit not uncontroversial,2 is one response by operators to the inconveniences experienced by prepaid customers when their credit balance reach zero—evidenced by the difficulties cited by prepaid users in the BOP study. However, because telecom markets are far from perfect and extant public policy assumes that greater access to telecom is desirable, policy makers and regulators may wish to pay attention to the barriers faced and difficulties experienced by subscribers in obtaining services and using them, as described in Chapters 1 and 2. Although a significant proportion of users within the localities studied appeared to be using brand new handsets, a well-functioning second hand market could assist as much as the GSM Association's low-cost handset initiative (Khan, 2006). The financing of new connections did not seem to be a large barrier to owners, with few making use of installment schemes. The higher entry barriers to consumers in the fixed telephony market, especially in Sri Lanka, seem worthy of the policy maker's and regulator's attention. Even here, the introduction of low per-line cost CDMA technology and competition have already lowered connection charges from USD 200 to around USD 100 for the new entrants. How the Sri Lankan incumbent manages to attract customers despite connection charges that are almost double that of competitors is a question that the research reported in these chapters does not answer. This is so despite a larger number of complaints about the process of getting connected as well as complaints about the service, as compared to mobile services. Hopefully, the follow-up research being conducted by LIRNEasia will shed light on this counter-intuitive outcome.
The barriers faced and difficulties experienced in the shared use of private phones were considerable, given that almost two thirds of those studied relied on other peoples' phones. Phone owners complain about the inconvenience caused by others using their phone, even when they receive a fee for providing the service. Those who use others' phones complain of the distance that they have to travel to the nearest phone as well as the amount they have to pay for a phone call. These problems can only be eliminated when every household has access to its own phone. However, in the meantime, policies that promote public access points can be implemented, as in India, where 'public call offices' or PCOs (which can even be free-standing roadside desks equipped with a telephone and a signboard) are given discounted call rates to provide telecom services; leaving room for a small profit to be made by the reseller. In 2006, India had over four million public access points throughout the country (TRAI, 2006, p.11), also evidenced by the relatively higher reliance on public access points in the Indian localities, seen in Chapter 1. However, if reliable and cost-effective infrastructure is not available, policies to promote public access to telecom will be less than effective.
1. Price baskets were developed from Organization for Economic Co-operation and Development (OECD) methodology, to compare the relative affordability of mobile telecom access for low, medium and high users (only low users are reported here). The OECD methodology was adapted for the actual minutes of use (MOU) as reported by the largest operator (operator average outgoing plus incoming MOU) for Sri Lanka and by TRAI (average outgoing MOU) for India and, applying average minutes of use for the 'medium user', while applying the ratio of low:medium:high used in OECD methodology to obtain the respective baskets; baskets were also adapted for prepaid connections, taking into account incoming call charges (applicable in Sri Lanka) and SMS usage.
2. http://www.lirneasia.net/2006/03/lifetime-free-prepaid/
Dialog Telekom (2006). Business Performance—1Q 2006. Retrieved July 21, 2006, from http://www.dialog.lk/corporate/downloads/1Q%202006%20Investor%20Forum.pdf
GSMA (2005). GSM Association Defines New 'Ultra-Low Cost' Handset Segment To Connect The Unconnected. GSMA Media Release, Tuesday, February 14, 2005, Cannes, France.
ITU (2005). The Internet of Things. ITU Internet Reports, 2005. Retrieved from http://www.itu.int/osg/spu/publications/Internetofthings/InternetofThings_summary.pdf
Khan, A.S. (2006). Stolen handsets: Emerging Challenge in Mobile Markets. Presentation made at APC Regional ICT Policy Consultation, Dhaka, April 19–21, 2006. Retrieved October 10, 2006, from http://www.lirneasia.net/wp-content/uploads/2006/10/ASKhan%20Stolen%20handsets %20Dhaka%20APC.pdf
TRAI (2006). The Indian Telecom Services Performance Indicators for Financial Year Ending 31st March 2006, 28th June 2006. Retrieved July 20, 2006, from http://www.trai.gov.in/trai/upload/Reports/26/Report%20QE%20Mar-06%20Part%20I.pdf
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At the bottom of the pyramid (BOP) extravagant spending, especially when it comes to non-essential goods or services, is out of the question. This chapter looks at the use of telecom by the user at the bottom of the pyramid. It looks at how these users communicate and what considerations and constraints shape their communication; it looks at what people use phones for, and tries to assess the value that people place on communication, based on the amounts that they spend, and how much they are willing to spend on communication.
This chapter is the first of three chapters based on the findings of a quantitative study of users at the BOP in South Asia. One would expect to see a usage pattern that would reflect the given financial constraints, that is, minimal use and a very careful consideration of cost factors. This chapter finds that despite perceptions that telecom prices are high, those at the BOP are willing to spend significant amounts of their monthly household income on these services, especially on mobiles. They value these services for the convenience afforded in terms of time as well as money saved in travel, etc.
This chapter is based on a survey that was conducted among 3,199 users of telecom services at the BOP (defined in this case as people who had used a phone at least once in the preceding three months) in a total of 11 localities in India and Sri Lanka in April and May, 2005.
The localities are given in Table A1 of Appendix 1. The localities were selected to capture the diversity that exists between the markets in each country. The data does not represent India and Sri Lanka as wholes, but only the financially constrained, or BOP within the enumerated localities.
Tele-users at the BOP were defined by two parameters: a monthly household income of approximately less than US Dollars (USD) 100 per month; and socio-economic classification (SEC)—SEC groups B, C, D and E (that is, excluding SEC group A, the highest ranking group). Further details on the methodology are provided in Appendix 1 of this book.
This section looks at how BOP users communicate, what access modes they use, and what difficulties they face in using those modes. It also looks at what BOP users consider as priorities in communication, in terms of why they choose to use particular access modes and for what purposes they use them. The section finally explores the value that users at the BOP place on telecommunication.
There is a growing body of research that suggests that demand for telecom services in developing countries is larger than generally thought, especially among lower-income groups. Research is beginning to show that low-income earners are willing to spend a substantial share of their monthly income on telecom services. Estimates of the share of monthly income spent by financially constrained groups on telecom services in developing countries are in the range of 10 percent (Gillwald, 2005; Intelecon, 2005; Souter et al., 2005)—far higher than the two to three percent rule-of-thumb regularly used in the telecom sector in developed countries (Intven, 2000). A study among rural phone users in Bangladesh found that more than half of those studied were willing to spend approximately USD 2 to 6 (or approximately two to 6 percent of the monthly household income) on a three minute call to a relative overseas, if they 'needed money badly1. There was even a group who would be willing to spend up to 12 percent of their monthly household income for that same phone call (Richardson, Ramirez and Haq, 2000).
These findings highlight the importance that users at the BOP place on such services. This, in line with Prahalad's (2004) notion of 'fortune at the bottom of the pyramid', has led the world's biggest GSM handset manufacturers to embark on initiatives to lower the cost of a mobile handset to below USD 30, effectively creating 'a new low cost market segment' (GSM Association, 2005, p. 4).
The socio-economic benefits that low income users gain from the use of telecom services have been well documented (Bayes, von Braun and Akhter, 1999; Lane et al., 2006; Vodafone, 2005; World Bank, 1999). Some benefits can be gained without ownership. Many users of telephones do not own a phone, and rely heavily on public telephones, as seen in the findings of this study, among others. In Africa, there is still a great reliance on public payphones, even in countries with relatively high per capita incomes (Gillwald, 2005). Nevertheless, Souter, et al. (2005), in a study of the impact of telecom on rural livelihoods and poverty in India, Mozambique and Tanzania, reported that almost half of those who owned a phone had acquired it within the preceding year, and a third of those without a phone indicated that they 'wanted to acquire one within the next year'. Similarly, in the present study, 22 percent of fixed phone owners obtained their connection within the preceding year, while the corresponding figure for mobile owners was 59 percent.
There is a great reliance on public and shared facilities at this level of the market; this includes public call offices, public payphones and post offices. Almost two thirds of respondents in the current study on an average relied either solely on public access phones2 (37 percent of respondents), or public phones along with fixed and/or mobile (29 percent of all respondents). Public access use was much higher in the Indian samples (73 percent of respondents on average) than in the Sri Lankan ones (52 percent). This could be a result of two factors, first, the high density of public call offices (or PCOs) found in India: as at the end March 2005, there were 2,771,132 PCOs across India—this number had nearly doubled by the end of March 2006. Furthermore, of the 607,491 villages in the country, there were village public phones in 548,843 of them by end of March 2006 (TRAI, 2006). Second, this could be because more than 50 percent of the Indian sample had monthly incomes below USD 50 per month, compared to 20 percent in the Sri Lankan samples. Mobile use was almost three times as high among the Sri Lankan respondents, possibly a feature of the higher income levels of the respondents, and the Sri Lankan mobile market being the oldest in South Asia (operating since 1989 while mobile service in India commenced in 1994.)
Figure 1.1
Mode of Access Used at the BOP in Sri Lankan and Indian Samples
Fixed use in the Indian localities increased from urban to rural areas, reflecting the relatively well developed telecom infrastructure in rural India; public access, while still the most popular form of access, did not differ significantly between urban and rural areas in the Indian localities studied, but the mobile use in India (12 percent of Indian samples on an average) dropped dramatically when rural areas were considered alone. In the Sri Lankan samples, people tended to rely more on public access in rural areas.
Fixed phone use tended to be higher among SEC groups B and C, those above 35 years of age, and among females. Mobile use was higher among the young (below 35) segments, especially males, and skewed toward urban areas. Public access users were of the less affluent, lowest SEC groups (D and E) and mostly rural; Indian public access users were of a lower income category than their Sri Lankan counterparts. Younger age groups (below 35) were also heavier users of public access facilities.
Among owners of fixed phones in the samples studied, close to a third allow other people (non-household members) to use their phones to make and receive calls and transmit messages on their behalf. From the perspective of the non-owner users, the most common place to receive calls was at neighbors', relatives' and friends' houses (about two thirds of non-owners); when it came to making calls, non-owners seemed to be more comfortable using a public phone of some sort (about three-quarters of non-owners), where they pay for such use. Normally owners allowed one to four other people to use their phones mostly for incoming calls; however, they did not charge them for this use, stating that they allowed this for social reasons, or as a public service, but perhaps this may be because such (incoming) calls do not cost the owner anything financially.
Mobiles on the other hand were found to be used more as a personal device, with just seven percent of owners allowing non-household members to use their mobile phones.
On an average, 2 percent of those sampled reported that they use the Internet, while four percent reported that they use telegrams.
This sub-section examines the difficulties that BOP users—both owners as well as non-owners—face in their use of telecommunication in obtaining, using and sharing phones.
Generally, respondents did not face too many difficulties in obtaining a phone, with 68 percent of mobile owners and 49 percent of fixed phone owners in the samples studied stating that they had faced 'no difficulties' in obtaining a phone.
Getting connected to a fixed phone clearly involved greater difficulty than getting connected to a mobile. The fact that 83 percent of mobile owners used prepaid connections substantiates this, as obtaining a prepaid connection is usually 'over the counter', requiring only some proof of identification and some relatively small payment, whereas, obtaining a fixed phone connection can involve, in addition to large initial connection charges, a waiting period which may run into years. Incidentally, this was the biggest complaint among fixed phone owners, with 20 percent complaining of more than one year of waiting (Figure 1.2). That 56 percent of mobile owners stated that the reason for investing in a mobile was because of the 'no waiting time' also supports this claim.
Figure 1.2
Difficulties Faced by Fixed and Mobile Phone Owners in Getting Connected at the BOP
Other complaints of fixed phone owners included having to wait for the service to become available, as well as the 'bureaucracy' of getting a connection (paper work, having to make many visits to the service provider's office, etc.), especially among Indian respondents. Thirteen percent stated that information was lacking on fixed phone services.
Constraints on access seemed to be the biggest difficulty faced by mobile owners in getting connected, having to wait until the service became available in their area and having to go to another town to get connected.
Few people complained of difficulties in financing the connection, with nine percent of fixed owners and five percent of mobile owners stating difficulty. Of the fixed phone owners in the Sri Lankan samples, 17 percent had used installment plans to get connected, while in the Indian samples, this number was only 4 percent. The difference in these two numbers reflects the large difference in the cost of getting connected (at the time of the survey)—in Sri Lanka the cost of getting a fixed line ranged from approximately USD 120 (new entrant) to USD 180 (incumbent), while in India, at that time, one could get connected to a fixed phone for approximately USD 16. Yet, the use of installment plans for fixed phones in the Sri Lankan case is low, a surprising finding, given the monthly household incomes of below approximately USD 100.
Perhaps people save up for a few months to finance the connection from their own income or use other sources of finance (loans from family members) which were not reported.
Between rural and urban localities, there were few significant differences (at a 95 percent confidence interval) in the difficulties in obtaining a connection of both fixed and mobile phones; there were significantly more complaints among rural fixed phone owners in the Southern Indian samples about waiting time—having to wait for the service to become available as well as having to go to another town to get connected. Among mobile owners, the only significant differences between the complaints of rural and urban respondents were to be found in Sri Lanka, with fewer complaints of difficulties among rural respondents.
When phone owners were asked about problems faced during the period of ownership, mobile owners had relatively fewer complaints, with 61 percent stating that they experienced no difficulties; some mobile users complained of not getting what they paid for (Figure 1.3). There were many more complaints from fixed phone owners, with 71 percent of them complaining of problems such as the phone often being disconnected (a particularly big problem among the Sri Lankan samples), problems relating to billing (inaccurate billing, bills not reader-friendly, having to travel far to pay bills), and repair time.
Figure 1.3
Difficulties Faced by Fixed and Mobile Phone Owners at the BOP During Period of Ownership
While prepaid was the connection of choice for 83 percent of mobile owners, there was also some unhappiness regarding it. Among Sri Lankan respondents, almost half of prepaid mobile owners complained of the hassle of having to add credit to their account, as well as service and/or calls being disconnected when the credit balance reached zero. Some complained of prepaid cards expiring if not used within a given timeframe, and some Indian respondents complained of having to change their phone number if their account was not credited within a given period. Market solutions have evolved to address some of these concerns, an example being the prepaid mobile packages recently introduced in the Indian market, whereby 'lifetime' prepaid connections can be obtained through a (relatively large) upfront lump-sum payment for a mobile connection which need not be topped up again, ensuring free incoming calls for life. Many owners of prepaid packages also complained of high per-minute rates in comparison to post-paid packages.
Having to pay for incoming calls (that is, a Receiving Party Pays [RPP] regime) can add to the difficulties faced by prepaid owners like those studied in this research; once a subscriber's account balance approaches zero, not only are the outgoing services cut off, but also the incoming services. The user is forced to re-credit her account immediately even if she just wants to receive calls. This can cause a user great inconvenience, as evidenced by a larger number of Sri Lankan respondents citing disconnection of service, calls being cut off, and the inconvenience of having to re-credit their prepaid account balance as the problems faced, in comparison to their Indian counterparts (Figure 1.4).
Figure 1.4
Difficulties Faced by Prepaid Mobile Owners at the BOP
As seen in Figure 1.5, users at the BOP rely heavily on shared access; many do not have their own phones. While most owners allowed other people to use their fixed phones (there were few instances of mobile owners allowing others to use their phones), there were many complaints. Only 41 percent of fixed phone owners stated that they did not experience any problems as a result of others using their phone. The key complaints related to the inconvenience of having to find people when calls for them are received, or having to deliver messages to them. There were also some complaints of people abusing the service (not paying for use, over-using the phone, damaging the instrument, tying up the line, etc.). Most interestingly (and also puzzling), out of the respondents in the Sri Lankan samples, 42 percent charged others for outgoing calls (compared to 19 percent of those in the Indian samples), yet, the Sri Lankan respondents had the most number of complaints! Sri Lankan owners stated that they usually charged below cost, so perhaps they feel that they are not compensated enough for their difficulties.
Taking a look at difficulties faced by the non-owner, only 48 percent of users stated that they had no difficulty in using other people's fixed phones. The biggest problems were the distance to the phone and the high cost of using the phone (Figure 1.5). There were more complaints of cost among Sri Lankan respondents than Indian respondents, possibly as a result of the culture of charging for calls in the country. Some were concerned about the lack of privacy, whilst some stated that the owners do not inform them when a call or message for them is received.
Figure 1.5
Difficulties Faced at the BOP in Using Other Peoples' Fixed Phones
To answer this question, one first needs to examine the factors which influence a user's choice of the mode of communication—that is, by fixed, mobile or public access. Given limited financial resources, do such financially constrained users only consider the cost of each option when deciding which mode to use, or is the decision made up of a set of factors, including cost? Second, one can look at what users actually use phones for; what benefits, in terms of maintenance of social relations or facilitation of business transactions, for example, accrue to the users from the use of a phone.
When asked about the reasons for the choice of mode, the responses indicated a concern for convenience, as well as cost, as indicated in Figure 1.6. Given the monthly incomes of less than USD 100, this is surprising; one would expect a heavier emphasis on cost factors. The
Figure 1.6
Why Fixed, Mobile, and Public Access Users at the BOP Use Respective Mode(s)
ability to use the phone at any time (71 percent) and while on the move (67 percent), were key factors among mobile users, despite a majority in the samples indicating that the cost of mobile services was high.
Even more surprising is the relatively important role that 'symbolic' factors (such as 'fashion' or 'improved social status') play in the user's choice of the mode of access. This has been found in more developed markets, especially among the youth, in the use of mobile phones, for example, in Taiwan, especially among the newer adaptors of mobile phones (Wei and Lo, 2006). Similarly, among the Indian and Sri Lankan respondents interviewed, the former displayed a strong concern for symbolic factors (with up to 50 percent of respondents citing such factors) in comparison to the latter. This could be tied to the fact that mobile phone use in Sri Lanka is more common on an average (with penetration rates of 17 per hundred inhabitants by the end of 2005,2 compared to about seven in India by the end of 2005, according to TRAI, 2006). Chapter 3 shows that these symbolic factors were more prominent in the Jaffna sample, where mobile service is a very recent phenomenon, as compared to the other three samples in Sri Lanka.
The reasons for selecting fixed access and public access phones are similar, except the reasons that 'it is the most economical way to receive calls', and that 'it can be used at any time'. These two reasons might play a greater role among fixed phone users since the use of public access phones usually involves travel to a location outside the home, and at a particular time if it is to receive a call; these factors impose a cost and/or inconvenience on the users, and hence will not be the reasons for users to select public access phones.
The top two reasons given by fixed phone users were the economy of receiving calls (77 percent of fixed users) and the clarity of the connection (65 percent). Among public access users, the top two reasons were ease of use (70 percent of public access users) and the economy of making calls (69 percent).
When actual uses of the phone are examined, it becomes clear that relationship maintenance or social purpose are the most important (Figure 1.7). Such uses include keeping in touch with friends and family (locally and abroad) as well as sending news and messages. What is striking is that instrumental uses, for example, for undertaking business transactions or making logistical arrangements (travel and food) are very low, except with a small percentage of mobile users.
Figure 1.7
What Fixed, Mobile, and Public Access Users at the BOP Use the Phone for
This corresponds with the findings of other recent studies of telecom use in the developing world. Research in India, Mozambique and Tanzania found that the second most important use of telephones in the three countries was for 'social purposes', such as maintaining contact with family, after 'communicating in emergencies', which was the first. Social use of the phone was particularly high in India (Souter et al., 2005). A separate study conducted in South Africa and Tanzania found that the benefits from mobile phones to communities include 'improved relationships', according to almost four fifths of those studied (Vodafone, 2005). As cited in Wei and Lo (2006, p. 56), early research carried out by Keller in 1977 and Noble in 1987 into the 'uses and gratifications' of conventional telephone use had also found social or relationship maintenance uses to be more prevalent than instrumental uses.
There is little evidence to support the many anecdotes of rural farmers using their mobiles to check on the best prices for their products at the nearest market; or the use of phones to facilitate remittances from relatives abroad, even in post-conflict Jaffna (Sri Lanka). It is well known that people in Jaffna rely on remittances from relatives dispersed around the globe, and that one of the primary means of soliciting those remittances is the telephone. However, while 75 percent of mobile users sampled in Jaffna stated that they use mobiles to keep in touch with relatives abroad, none stated explicitly that they use the phone to arrange financial transactions.
The somewhat unexpected high use of telephones for social purposes may be explained by two factors. First, it could be the case that what the respondents broadly categorizes as 'keeping in touch' might well have instrumental aspects; perhaps the value or purpose of a single phone call cannot be pinned down to one category—a phone call to relatives living abroad to enquire about their well-being may also serve to elicit a remittance. Furthermore, at this level of the society, the barter economy predominates; hence a phone call to one's brother might also serve the purpose of arranging the purchase of supplies from him for one's business. Thus, any instrumental use is probably masked as relationship maintenance.
Alternatively, as found by Souter et al. (2005), different communication methods and different information sources are valued for meeting different needs. Souter et al. (2005) found that telephones are the preferred mode of communication for emergencies and family networking, especially in India; mass media (television, broadcast radio, and newspapers) are preferred for general information while face-to-face communication is 'overwhelmingly' the preferred mode for specific information relating to farming, business, education, and political or government matters.
Similarly, among users of SMS, or short message service, the key purpose of this service is 'personal communication' (88 percent), followed by 'emergency communication' (37 percent); SMS is used for 'business communication' by a mere 7 percent of the mobile users that were sampled. This further reinforces the findings of Souter et al. (2005).
Some of the responses to an open-ended question where users were asked to describe an 'instance where having access to a phone allowed you to do something very important and had it not been for the phone, you may not have been able to do it' revealed the value placed on immediate communication, especially in emergency situations, particularly found among respondents from the Hambantota district (Sri Lanka), which was one of the areas worst hit by the Indian Ocean tsunami less than six months before the survey was conducted. Some respondents cited instances where they were able to save both time and money by using the phone rather than having to make a physical journey to communicate a message. Other situations which have been related pertain to conveying news, such as marriage, birth, as well as employment, and in general for keeping in touch with close relatives, particularly in the Kasargod and Sivaganga districts in India, where temporary migration is a significant feature.
Another open-ended question, where respondents were asked to name an 'instance where the absence/lack of access to a phone prevented you from doing something important' yielded somewhat comparable results, with concern for not being able to get important messages regarding illness among family and friends, job opportunities, exam results, etc., on time, or contacting someone in an emergency, expressed in the answers. Difficulties in keeping in touch with relatives seemed to be a concern among some of the respondents. In the Sivaganga district there was marked concern for the time and money involved in communicating in the absence of a phone.
In order to ascertain the kind of value BOP users place on telecom services, it is useful to examine how much of their limited resources they allocate to these expenditures. Those interviewed in this study reported average monthly household incomes of below USD 100, approximately. The findings of this research demonstrate that the amounts that financially constrained users in India and Sri Lanka spend on telecom services are somewhat in line with the estimates of Gillwald (2005), Intelecon (2005) and Souter et al. (2005)—5 to 10 percent. Figure 1.8 illustrates the monthly average expenditure patterns of the respondents on fixed phones, together with public access phones, as well as mobile phones.
Expenditures on fixed phones and public access phones are lower than on mobiles; expenditure on mobile phones is generally higher (on an average, USD 4 to 8 per month) than on fixed phones (on an average, up to USD 4 per month). Expenditure figures, however, were
Figure 1.8
Average Monthly Expenditure on Telecom Services at the BOP
based on the respondents' ability to recall their monthly phone costs, and, therefore, should be treated with caution. Additionally, in the case of fixed and mobile owners, monthly expenditure may include the use by other people within the household, more so in the case of fixed phones (which tend to be used collectively; furthermore, monthly expenditure reported is likely to be the average monthly bill). In the case of public access users, expenditure reported is more likely to be on an individual basis.
A low-end estimate of the share of monthly household income spent on telecoms based on these figures (assuming a maximum income of USD 100 per month) is in the range of 1 to 4 percent on fixed, and 4 to 8 percent on mobile. In the lower income segment, a greater percentage of people were spending over USD 4 a month in comparison to the higher income segment, which would imply the household as a whole spending more than 8 percent of its income on telecom services. Sri Lankan samples revealed that the latter had slightly higher expenditure patterns than the Indian, perhaps because of the overall higher incomes of the Sri Lankan sample. This percentage estimate was seen to be as large as 12 percent among a third of mobile users sampled in the Jaffna district of Sri Lanka, where the demand for international communication is particularly high (see Chapter 3). Nevertheless these numbers are indicative only, given the complexities of identifying 'real' income and the difficulty in relating individual expenditure to household income.
Users at the BOP spend on telecom services even when they find the cost of these services to be high. While fixed and public access users considered the cost of telecom services to be affordable on the whole, the majority of mobile users perceived the cost to be either 'high,' 'very high' or 'extremely high' (Figure 1.9), especially the Sri Lankan respondents. Only 23 percent of mobile users said mobiles were affordable, compared with the 56 percent and 59 percent for fixed and public access phones, respectively.
Even where the cost of investing in a fixed phone is over USD 100, 88 percent in the Sri Lankan samples had the money available to obtain the connection. Less than a fifth of fixed phone owners made use of installment plans to obtain the connection. Added to this, 70 percent
Figure 1.9
Perceptions of Cost of Services at the BOP: Fixed, Public Access, and Mobile
of mobile owners bought their handsets brand new. The use of secondhand handsets was higher among Indian respondents, with close to a third using secondhand handsets, contrasting sharply with the Sri Lankan 4 percent. Interestingly in the Jaffna sample in Sri Lanka, where phone use and expenditure was particularly high (especially on international calls), few (6 percent) relied on second-hand handsets. However, a significant percentage of respondents (16 percent, compared to 1, 0 and 3 percent in the other three Sri Lankan localities studied) stated that they got their handsets 'free'. This appears to be a result of a practice of expatriate Jaffnaites leaving behind their handsets with relatives when they visit Jaffna. Hence, there may be an underestimation of the use of second-hand handsets in the data.
More telling are the responses to how users would change their use of telecom services should the prices come down by half, especially in the case of Sri Lanka, on all modes, particularly on mobile. While respondents in India seem to be on the whole more satisfied with the prices, and perhaps closer to their desired level of use, Sri Lankan respondents indicated a stronger likelihood of increasing use if prices come down. This indicates that there could be a larger degree of unsatisfied demand for telecom services among Sri Lankan respondents (Figure 1.10).
Figure 1.10
Changes in Use at the BOP, Should Cost be Halved: Fixed, Public Access, and Mobile
A closer look at rural respondents, vis-à-vis their urban counterparts, reveals that rural users seem to be, on the whole, more satisfied with costs. This suggests that rural phone users may be more willing to absorb higher per minute call charges, given the alternative of having to communicate in person, where they would have to leave their home to make a call, thereby incurring time and transport costs. In the case of India, at the time of the survey, the presence of an access deficit charge which lowered the costs of rural telephone calls would have further enhanced the perceptions of affordability (Malik and de Silva, 2005; see also Chapter 10).
There is a greater demand for telecom services among low income earners; much of this demand has still not been met, probably due to the misperception that they are not a profitable segment. However, the research shows that these people are not simply looking for the cheapest mode of access. They are also looking for what is more convenient, which mode they can access while on the move, or which will give them more privacy. Many of those who have obtained their own phone connection (fixed or mobile) cite difficulties other than financial ones when asked about their experience of getting connected.
Although many choose not to invest in their own phone for various reasons, people find ways to get connected, whether through a neighbor or a local public call office. Value is placed on the immediate communication permitted through a telephone, especially in emergencies. They are willing to spend relatively large portions of their monthly income on telecom services, to obtain some benefit, like remittances from relatives abroad, or to facilitate a business transaction, or simply to keep in touch.
1. Defined in this case as people who had used a phone at least once in the preceding three months, at the time of the study.
2. Data sources: Samarasinghe (January 19, 2006) for mobile subscriber data & Central Bank of Sri Lanka (CBSL) (2005, Special Statistical Appendix: Table 1) for population (provisional).
Bayes, A., von Braun, J. and Akhter, R. (1999). Village pay phones and poverty reduction: Insights from a Grameen Bank initiative in Bangladesh. Vol. 8. ZEF Discussion Papers on Development Policy, No. 8, May 31–1 June. Bonn: Center for Development Research (ZEF).
Central Bank of Sri Lanka. (2005). Annual Report 2004. Colombo: Central Bank of Sri Lanka Printing Press.
Gillwald, Alison (Ed.) (2005). Towards on African e-Index: Household and individual ICT access and usage across 10 African countries. Research ICT Africa! Johannesburg, South Africa: LINK Centre.
GSM Association (2005). Tax and the digital divide: How new approaches to mobile taxation can connect the unconnected. London: GSMA.
Intelecon (2005). Nigerian Demand Study: Highlights Report, with eShekels for the Nigerian Communications Commission, supported by World Bank. Retrieved January 2006, from http://www.inteleconresearch.com/pages/news.html
Intven, Hank (Ed.) (2000). Telecommunications Regulation Handbook (module 6, p. 6.6). Washington DC: infoDev.
Lane, B., Sweet, S., Lewin, D., Sephton, J. and Petini, I. (2006). The Economic and Social Benefits of Mobile Services in Bangladesh: A case study for the GSM Association by Ovum Consulting. London. Ovum.
Malik, P. and de Silva, H. (2005). Diversifying Network Participation: Study of India's Universal Service Instruments. WDR Discussion Paper WDR0504. Retrieved November 30, 2006, from http://www.lirneasia.net/wp-content/uploads/2006/02/Malik%20de%20Silva%20Sept%202005%20final.pdf
Prahalad, C.K. (2004). The fortune at the bottom of the pyramid: Eradicating poverty through profit. Upper Saddle River, New Jersey: Wharton School Publishing.
Richardson, D., Ramirez, R. and Haq, M. (2000). Grameen Telecom's Village Phone Programme in Rural Bangladesh: A Multi-Media Case Study Final Report. TeleCommons Development Group (TDG). Gatineau: Canadian International Development Agency.
Samarasinghe, A. (January 19, 2006). Special focus on differently-abled: TRC allocates Rs. 2.5m for eNABLE project, new ICT centres. Ceylon Daily News. Retrieved February 2, 2006, from http://www.dailynews.lk/2006/01/19/
Souter, D., Scott, N., Garforth, C., Jain, R., Mascarenhas, O. and McKemey, K. (2005). The economic impact of telecommunications on rural livelihoods and poverty reduction: a study of rural communities in India (Gujarat), Mozambique and Tanzania. Commonwealth Telecommunications Organisation for UK Department for International Development, 2005. Retrieved January 30, 2006, from http://www.iimahd.ernet. in/ctps/pdf/The%20Economic%20Impact%20of%20Telecommunication%20on %20Rural%20Livelihoods-Teleafrica%20Report.pdf
Telecom Regulatory Authority of India (2006). The Indian Telecom Services Performance Indicators for Financial Year Ending 31st March 2006, 28 June 2006. Retrieved July 5, 2006, from http://www.trai.gov.in/trai/upload/Reports/26/Report%20QE%20Mar-06%20Part%20I.pdf
Wei, Ran and Lo, Ven-Hwei (2006). Staying connected while on the move: Cell phone use and social connectedness. New Media & Society, 8(1), pp. 52–73.
World Bank (1999). The World Development Report 1999: Knowledge for Development. Oxford: Oxford University Press.
Vodafone (2005). Africa: The Impact of Mobile Phones in the Developing World. Moving the debate forward: The Vodafone Policy Paper Series, No. 3, March 2005. Retrieved November 2, 2005, from http://www.vodafone.com/assets/files/en/SIM_Project_download_2.pdf
This chapter builds on the previous chapter, taking a closer look at how telephones are used at the bottom of the pyramid (BOP) in what are termed as 'strategic' ways intended to reduce costs of communication.1 One would expect 'strategies'—such as giving 'missed calls' on a called party's mobile as a signal to call back, or using different modes for originating and receiving calls—to be used a great deal by people whose incomes are constrained. However, this study shows low use of such strategies.
This highlights three key issues. First, people have little discretion in the calls that they make, because they make relatively few calls. Second, most of these people do not own a telephone, and, therefore, have little opportunity to use 'strategies', as they have to make and receive their calls whenever and wherever they have access. Third, most of these users have only one mode of access; they do not have the freedom to alternate between modes strategically.
The nature of the strategies used at the BOP should be recognized and understood, because future growth will come from this market segment.
For the purpose of this study the 'strategic' use of telecom services includes the set of conscious decisions made about the use of these services in ways that minimize costs or improve utility. Such strategies may include placing calls at that time of the day when call rates are discounted, or the use of short message services (SMS), or 'text messaging'. These types of decisions are normally termed as strategies in common parlance, but may be more accurately described as 'tactics' because of their short-term nature.2 This chapter looks at the use of such decisions or 'strategies' by telecom users.
There is limited empirical evidence on the use of strategies in telecom use. Judging by the income levels of the people in this study (those with monthly income below US Dollars [USD] 100), it is reasonable to assume that they might engage in strategic behavior in the use of not only telecom services, but also in the consumption of many other goods and services. As elucidated in an issue of the Nokia quarterly newsletter, 'Prospective mobile users in new growth markets…earn less, their income is irregular and they do not have much spending power. As such, they need to be very careful with their money' (Nokia, 2005, p. 3).
Various marketing strategies have been developed to serve the lower-end of the market in ways that take into account fluctuations in spending patterns over the month. A good example is the use of the prepaid mobile connection, where the user pays upfront for his or her use, after having purchased a phone connection for a one time fee. The user does not pay a monthly subscription, and does not have to deal with bill payments.3 Although per minute calling rates on prepaid packages may be higher than those on post-paid or monthly subscription connections, prepaid is more popular in many developing countries. Eighty three percent of mobile users in this study used prepaid connections.
Another facility which can help serve financially constrained users is the electronic credit refill facility on prepaid mobiles. In this system, a user can top-up his/her account by any desired amount (usually above a threshold), rather than a fixed denomination in a card. According to Nokia (2005):
Lower income consumers need low value top-ups of USD 1 or less and the opportunity to buy them anywhere. Electronic refill solutions (e-refill) meet both these needs. By replacing paper vouchers with text messages, operators can reduce the cost of the prepaid process by up to 70 percent.
Although cost per unit may in some cases be higher, this is the price that users pay for being able to buy small amounts. This logic is not limited to the telecom sector; it is commonly seen in fast moving consumer goods (FMCG) markets in the developing world. For example, in India and Sri Lanka, where it is not uncommon to find shampoo, toothpaste, hair gel and many other items being sold in single-use sachets at local shops; it is easier for a low-income consumer to buy a small sachet of shampoo, than to buy a larger bottle that is lower in price by volume, but higher in absolute terms (Kishore, 2003).
This survey reveals that 56 percent of the prepaid mobile owners at the BOP tended to purchase cards in the value range of USD 2 to 5. However, a significant percentage (41 percent in India and 24 percent in Sri Lanka) purchased cards of value greater than approximately USD 5. Surprisingly, and in contrast to Nokia's notions, a high proportion of the Sri Lankan prepaid mobile owners (69 percent) reported that they maintained 'plenty' of credit in their prepaid balance at any given time. This figure was 22 percent among Indian respondents.
Among prepaid mobile owners, 57 percent stated that one of the reasons that they decided to obtain a mobile phone was because of the immediate connection, while 37 percent stated that it was easier to obtain (for example, less paper work) than other kinds of phones; the absence of rental charges or deposits involved also played a role. The barrier of proving creditworthiness to operators, therefore, may be more significant than the connection charge for these low-end users. This suggests that the choice of prepaid packages by users may not be driven by the ability to pay upfront for the connection, but perhaps other reasons, such as the convenience of being able to get connected relatively easily, without having to produce proof of one's place of residence, for example. The drop in new prepaid connections in Bangladesh in 2006, following the introduction of legislation requiring new subscribers to provide personal details upon registration, is testament to this (Telegeography, March 22, 2006).
Donner (2005) documents a widespread phenomenon in Uganda, known as 'beeping', where the caller dials a mobile number and disconnects before the recipient picks up. The caller's number is recognized by the recipient's phone if it has been previously stored in it, and the recipient knows that the caller has sent a signal of some kind. The most common signals identified by Donner are requesting the recipient to call back, to convey a 'pre-negotiated instrumental message' such as 'pick me up now' or perhaps to simply convey that the beeper is thinking of the recipient. This system ensures communication without speaking or typing a single word, and most importantly, it costs nothing. One of the 'rules of beeping' is that 'the rich guy pays'.
The beeping phenomenon has become widespread in some African countries. For example, Mobitel Tanzania facilitates a free 'call-back beeping' service on its network, having realized that increasing number of users were going off the network as a result of high priced airtime.4 According to Donner, two key factors drive this beeping culture—first, a 'pervasive' prepaid environment, wherein people lack the credit to make a phone call, and second, a calling party pays (CPP) system that encourages the making of shorter calls and receiving longer ones.
Chakraborty (2004) also reports a 'missed call' culture in Sitakund, Bangladesh, resulting from the high cost of calls from mobiles, where users have devised systems where the number of times the caller allows the phone to ring before disconnection has a specific meaning (for example, one ring = 'I am at home, where are you?', two rings = 'I am at your house, where are you?', etc.). The Times of India Online (March 16, 2006) also reports of the growing popularity of a similar culture in India in an attempt to save money, despite call rates already being very low. This survey did not question the use of the 'missed call facility' as described above, where the call is not returned. However, the survey did look at some other similar strategies, as described ahead.
In an environment where incoming calls are charged (an RPP, or receiving party pays, environment like Sri Lanka), one may expect to see a lot of people seeking to control costs by finding ways to minimize incoming calls on their mobiles. People may do this by keeping incoming calls on a mobile short and calling back on a fixed phone, if the user has access to a fixed phone. Another way is by choosing to receive calls on fixed lines only, as they are free. This survey shows that of these kinds of 'multiple mode strategies', only returning calls received on a mobile through a fixed phone is being used by users at the BOP.5
Returning calls through a fixed line in response to messages received on a mobile was used by 19 percent of mobile users who have access to more than one mode. However, this relatively high number is due to the Sri Lankan samples, with 38 percent of eligible respondents using it, compared to only 4 percent in the Indian samples—perhaps a result of the differential between mobile and fixed call rates in Sri Lanka (the former being higher). It must be emphasized however, that this strategy is available only to those who have access to mobiles as well as one or more other modes. Such users constitute only 8 percent of the total sample.
The strategies, except for receiving a call on a mobile and returning it on a fixed phone, were more common in the Indian samples; this is peculiar, because in India RPP was replaced by CPP in 2003 (Malik, 2004). This kind of behavior is more appropriate for Sri Lanka, where most mobile users are on prepaid plans and face relatively high incoming call charges. At the time of the survey, a prepaid customer on Dialog Telekom (the largest mobile operator) faced charges of up to approximately USD 0.06 per minute on calls from other networks during peak hours, with only the first 30 seconds of the incoming calls free; this is in contrast to a post-paid customer who may get the first three minutes on an incoming call free.
Another strategy that may be expected in an RPP regime is the switching off of mobiles to avoid incoming calls. The phone is used more as a calling device, as opposed to a calling and receiving device. If widespread, this will reduce the efficiency of the network, where call attempts to switched-off phones cause costs but yield no revenue. Obviously, this degrades the utility of the service to the user and will, in addition, reduce the lifetime of the handset. Switching off to avoid incoming calls is seen as a negative feature of RPP (COAI, 2006; Dewenter and Kruse, 2005).
Of all mobile owners interviewed, 43 percent said that they switch their mobiles off at certain times, interestingly with no significant difference between respondents in Sri Lanka (RPP) and India (CPP). The key reasons for switching off, contrary to expectation, were mostly to conserve the battery of the mobile, according to 62 percent of mobile owners, as well as to avoid being disturbed (43 percent), rather than to minimize cost. Cost concerns appear to be secondary (29 percent).
Controlling communication costs was of greater concern in Sri Lankan localities than in Indian ones. However, interestingly, the incidence of switching off mobiles specifically to avoid incoming calls was larger in the Indian localities. This inverts what one may expect in a CPP/RPP comparison. One may speculate that the short experience with CPP has not been enough for Indian customers to shed behaviors associated with RPP.
The use of SMS, considered to be a cheaper substitute for a phone call, was also examined as a strategy to reduce costs. This was confirmed in the survey results: of those who use SMS (40 percent of mobile users), 88 percent described their use of SMS as a means to 'minimize communication expenditure', as seen in Figure 2.1.
Figure 2.1
Instances Where SMS is Used at the BOP
Respondents did not appear to be making a significant use of the calling rate differentials between 'peak' and 'off-peak' time bands (available in Sri Lanka on both fixed and mobile phones, but not on Indian mobiles) to economize. Respondents were asked about the time of day, as well as the days of the week that they typically make their calls on. Of the fixed users sampled, 81 percent indicated that they do not make their calls on any special day (weekends or public holidays rather than weekdays), while 77 percent indicated that they do not pay attention to the time of the day when making calls.
A similar trend was seen among mobile users in the Sri Lankan samples (there are no rate differentials on mobiles in India), but on a lower scale. Seventy-three percent of Sri Lankan respondents reported that they do not make their calls on any special day and 58 percent make no distinction in the time of the day when making their calls.
There was greater attention to the time of the day among the respondents in some of the Indian localities (Mumbai, Sivagangas, and Gorakhpur), as well as two of the Sri Lankan localities (Jaffna and Colombo), possibly as a result of greater international communication taking place in some of these regions (Mumbai, Sivaganga, Jaffna, and Colombo), in addition to other factors; care is perhaps taken to make calls to different time zones at more convenient times. There appeared to be more 'instrumental' use of phones in Gorakhpur, for example, 32 percent of public access users were undertaking and/or arranging financial transactions through the phone, significantly higher than all the other localities (at a 95 percent confidence interval); perhaps such activities can only be done during working hours, hence greater attention paid to the time of the day when making calls. Additionally, both Gorakhpur and Jaffna had a much higher public access use than the other localities studied; users need to ensure that calls are placed during the operational hours of such establishments.
Some other strategies that were explored included capping telecom use at a certain level of expenditure or call duration, restricting calls to a defined group of contacts, making calls to request another party to call back, and making calls only within the same network, among others. Among fixed phone and public-access owners, the most commonly used strategy was simply keeping calls short. There appears to be greater use of strategies in the use of mobile communication by owners, with similar concern for keeping calls short, as well as disconnecting the phone if a certain amount of call charges or time is exceeded. These cost saving strategies are the most straight forward ways to reduce costs.
Overall, the use of 'strategies' is considerably lower than one might expect, given the levels of income. Even among the lowest income users,6 significantly higher levels of strategic use are not displayed (at a 95 percent confidence interval). This is surprising, considering the relatively high levels of expenditure on telecommunications by these users, as seen in the previous chapter.
Even among the lowest income group, where the incentives to cut down on communications costs could be higher, strategic use is low. Such low use of strategies can be driven by several factors. To begin with, over half of those studied do not even own a phone, and, thus, have constrained access to any mode of communication. In addition, these users have little discretion in the few calls that they make. These factors collectively inhibit strategic behavior with regard to the use of telephones.
Financially constrained people are willing to spend significant amounts on telecom and gain many benefits from such use (Bayes, von Braun and Akhter, 1999; Vodafone, 2005; World Bank, 1999). Many users of telephones do not own a phone, and rely heavily on public telephones, as seen in the findings of this study. Gillwald (2005) finds that in Africa, even in countries that have relatively high per capita incomes, there is still a great reliance on public phones. As indicated by the South African 2001 census figures, of just over 11 million households, only 12 percent of African-headed households had a fixed telephone in the home, as against the national total of 24 percent, while twice as many households had mobile phones (25 percent) as had fixed telephones; overall, only 42 percent of households had access to a telephone (fixed or mobile). In 2003, this figure had increased to 46.9 percent (Statistics South Africa, 2003).
Chapter 1 showed the heavy reliance on shared phones, either through public access phones or other people's phones, mostly fixed. Figure 2.2 shows the patterns of ownership found among users at the BOP in the Indian and Sri Lankan locations; on the whole, a total of 58 percent of all respondents surveyed in both countries did not own the phone that they used, hindering their ability to behave strategically. Those in this group have very limited opportunities to make strategic decisions with regard to telecom use, because non-owners cannot choose the time or the place from which to make a call. This is evident in the relatively higher levels of concern for the day of the week and the time of day of calls found among fixed phone owners; non-owners (fixed) were less likely to make their calls on a specific day of the week or time of the day. Those who have access to the phone all the time (that is, owners) have greater flexibility in deciding when to make a call, whereas those who do not own the phone do not have that luxury; whenever they can access a phone (for example, when they go to the town center to run other errands or when a visit to the neighbor is possible), they must make the call. Not owning a telephone gives them little flexibility when it comes to when, where and how to make or receive calls. The situation is even worse for lowest income respondents (monthly incomes below approximately USD 50), where phone ownership dropped to 23 and 24 percent in the Indian and Sri Lankan locations, respectively.
Figure 2.2
Phone Ownership at the BOP
Another factor that compounds the problem relates to constraints on the people who are being called. It is likely that the people who they call or are called by also do not own phones. For example, when one needs to talk to a relative who only has access to a phone while at work, then one can only do so during working hours, which generally coincide with peak calling times. So even if the caller has access to a phone during off-peak hours, he/she cannot call, because the recipient has limited or no access to a telephone during such time. In the same way, if the call is being made to a neighbor's house, it is unlikely that it will be made at night when the call is cheap because of the inconvenience caused to the phone-owner whose kindness is relied upon to complete the communication.
Many telecom users do not have the opportunity to use strategies to benefit from differential rates or options available through different modes of access, as they only have one option to choose from, as seen by the size of non-intersecting areas of Figure 1.1 in the previous chapter. Only 31 percent (given by the intersecting areas) of those sampled had access to more than one mode. This immediately restricts the user's ability to use 'multiple mode' strategies as described in this chapter. Even among this group, only those with access to either fixed or public (assuming the public phone is a fixed phone itself) together with mobile will be able to make use of such strategies. The fixed location of fixed and public access phones prevents its strategic use. Mobile ownership is essential for strategic use, but is available only to 25 percent of multi-mode users.
Similarly, SMS—generally a cheaper alternative to a phone call—is only accessible to a subset of a subset; that is among those who have access to a mobile, those who are familiar with the Roman script. Though local language SMS is being gradually introduced,7 its use is not widespread as shown by the data, with only 3 percent stating that they used SMS in their local language. SMS use is higher in countries like the Philippines or Indonesia where the national languages use the Roman script.
Financially constrained users make relatively few calls, many or all of which may be non-discretionary or unavoidable.8 This is evident in the larger use of strategies found among respondents in the South Indian samples, where usage patterns were found to be higher. South Indians were found to make a high number of calls and receive almost as many calls on an average per month, while the people in the North Indian and Sri Lankan samples made and received only half as many calls. South Indians make use of a variety of strategies, such as watching call duration, disconnecting the phone, restricting numbers that they can call or that can call them, or only using it at home or when traveling. On the other hand, North Indians and Sri Lankans use very limited strategies to curb their communication expenses. In general, higher use of a set of strategies was found among the 'heavier' users of telecom services (those who make and receive a total of more than 20 calls per month) on an average, in both Indian and Sri Lankan samples.
Overall, financially constrained users make and receive relatively fewer calls. When they do make calls, it is out of necessity; at this point they have very little opportunity to implement and exercise the many strategies that will help them control their communication expenses. However, if their use increases to include more discretionary calls, they may adopt cost-saving strategies like the South Indian respondents.
Users at the BOP spend a relatively large proportion of their monthly income on telecom services and find them to be generally expensive. However, they do not appear to be making concerted efforts to economize. But the real issue is whether these people have the opportunity to be 'strategic' in their use. If callers (as well as the people they wish to call) only have access to a phone for a limited part of the day, and only at specific places, then they do not have the freedom to choose what kind of phone to use, where to use it and how to use it, nor do they have the freedom to 'mix and match' modes. The commonly talked about strategies are available to those who are already well endowed in terms of telecom access: to those who 'have', more options have been given.
It is possible that users at the BOP are in fact strategic in their behavior, but from a different angle, in terms of what could be defined as 'long-term' strategies, such as the choice to invest in a phone at all (versus use one's neighbor's) in order to curb communication costs. In this regard, a great number of those surveyed are in fact strategic in their long-term decision on how to communicate. Similarly, that a majority of mobile owners choose prepaid connections is also indicative. While the cost of mobile service was on the whole perceived as expensive by respondents in this study, Oestmann (2003) finds that mobile access is actually more affordable than fixed access, based on a minimal package for the marginal users with few outgoing calls. When the start-up costs and monthly recurring costs to stay connected are considered, mobile services were undoubtedly found to be more affordable than fixed services in many of the selected countries that were examined by Oestmann. The ability to control expenditure through a prepaid connection may be a key factor for low income users, despite higher airtime charges.
Therefore, the low use of strategies as discussed in this chapter may be a result of constrained opportunities, not a lack of cost consciousness; users at the BOP are cost conscious when it comes to longer term decisions, where they are able to exert some degree of strategy.
1. Further details on the study can be found in Appendix 1 of this book.
2. Those strategies which could be classified as 'long-term' strategies (for example, relating to the overall decision to invest in a phone or not, and which mode to use) as defined in Zainudeen, Samarajiva and Abeysuriya (2006) are not looked at in this chapter. For a deeper analysis of such issues, see 'Telecom Use on a Shoestring: Strategic Use of Telecom Services by the Financially Constrained in South Asia,' A. Zainudeen, R. Samarajiva and A. Abeysuriya. Draft version 2.1 (February 2006) available at: http://www.lirneasia.net/projects/completed-projects/strategies-of-the-poor-telephone-usage/
3. It should be noted here that the advent of the prepaid phone has not only helped overcome problems related to affordability from the user's perspective, but has also alleviated the pervasive problem of high transaction costs of dealing with low-income and low-revenue consumers. This has contributed a great deal to the extension of telecom services to such marginal consumers. Chapter 5 deals with the transaction cost problem in more detail.
4. See http://www.mobitel.co.tz/Pages/faq's.html (retrieved September 2005).
5. 'Use' of a strategy is considered if the user states that he/she uses it more than 50 percent of the time.
6. 'Low income' being the groups of respondents with monthly household incomes below approximately USD 50 (that is, INR 2,500 for Indian respondents and LKR 5,000 for Sri Lankan respondents) and 'High income' being the groups of respondents with incomes between approximately USD 50 and USD 100 (that is, INR 2,500 to 5,000 for Indian respondents and LKR 5,000 to 10,000 for Sri Lankan respondents).
7. See, for example, http://www.lirneasia.net/2006/05/tamilnadu-adopts-tamil-sms-solution-developed-in-sri-lanka/
8. Based on the data collected; although the calling patterns recorded were based on recall of the respondent, the data can be treated as indicative.
Bayes, A., von Braun, J. and Akhter, R. (1999). Village pay phones and poverty reduction: Insights from a Grameen Bank initiative in Bangladesh. Information and Communication Technologies and Economic Development, Vol. 8. ZEF Discussion Papers on Development Policy, No. 8. May 31–June 1. Bonn: Center for Development Research (ZEF).
Chakraborty, D. (2004). The Case of Mobile Phones in Sitakund. Retrieved January 10, 2006, from www.i4donline.net/issue/may04/sitakund_full.htm.
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Dewenter, R. and Kruse, J. (2005). Calling Party Pays or Receiving Party Pays? Discussion paper No. 43, November 2005, Department of Economics, University of the Federal Armed Forces, Hamburg.
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Gillwald, Alison (Ed.) (2005). Towards an African e-Index: Household and individual ICT access and usage across 10 African countries. Johannesburg, South Africa: Research ICT Africa!
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The Times of India Online (2006, March 16). Indians pro at giving missed calls! Retrieved March 16, 2006, from http://timesofindia.indiatimes.com/articleshow/1450522.cms
World Bank. (1999). The World Development Report 1999: Knowledge for Development. Oxford: Oxford University Press.
Zainudeen, A., Samarajiva, R. and Abeysuriya, A. (2006). Telecom Use on a Shoestring: Strategic Use of Telecom Services by the Financially Constrained in South Asia. WDR Dialogue Theme 3rd cycle Discussion Paper WDR0604, Version 2.1. Retrieved October 14, 2007, from http://www.lirneasia.net/wp-content/uploads/2006/02/Zainudeen%20Samarajiva%20Abeysuriya%202006%20teleuse%20strategies.pdf
It is well known that infrastructure is one of the principal casualties of war. It is targeted and destroyed by combatants in pursuit of strategic objectives. It is not possible to maintain it because of war. New infrastructure cannot be built in times of conflict, either because the combatants prohibit it, or because the risks to investment and personnel militate against it. Even after cessation of hostilities, major risks remain, in the form of the possibility of conflict reoccurring and/or inadequate maintenance of law and order. Costs of building and maintaining infrastructure and providing services in post-conflict areas tend to be higher because other infrastructure is lacking (for example, electricity may not be available to power base stations and roads may be in poor condition) and because of the need to provide extra security or pay former combatants for protection. Crocker (2004) noted the commonplace sabotage of infrastructure projects in post-war Iraq, to the extent that successful projects had to be kept hidden to prevent a similar fate. Crocker also reports of the delays in, and in some cases cessation of, reconstruction projects due to sabotage. High insurance costs can pose further challenges in the reconstruction process.
Yet, the greatest need for infrastructure is also in post-conflict areas. The war-weary survivors cannot put their lives back together if they are deprived of basic necessities such as roads, transport, safe drinking water, electricity, and telecom. Without some kind of peace dividend in the form of improved life conditions, the risks of slipping back into war are that much higher. The best peace dividend is restoration of infrastructure. Furthermore, as a survey of Afghanistan's private sector showed access to infrastructure will be a key determinant in drawing investment back into the affected area (World Bank, 2005).
Post-conflict countries have the opportunity to leapfrog into the mobile age, rather than reconstruct what was originally there: often an incumbent owned fixed network. Countries like Lebanon have chosen to do this, encouraging private participation in the process (Jamali, 2003). This can enable the sector to pick up quickly, given the relatively short time needed for wireless communication infrastructure deployment. Afghanistan's fast growing mobile sector is evidence to this. Schwart and Halkyard (2006, p. 3) note that private sector infrastructure investment in post-conflict countries follows a particular sequence, with the mobile sector usually being the only sector to attract 'significant investment' immediately after a conflict because of the 'rapid cost recovery allowed by the sector's economics'. This is partially attributable to high demand, caused possibly by the uncertainties engendered by the conflict itself.
Sri Lanka has suffered from two decades of civil war. Separatist forces of the LTTE (Liberation Tigers of Tamil Eelam) have been pursuing an independent state in the North and East of the island for several decades. The economic cost of Sri Lanka's civil war has been estimated to have been as high as US Dollars (USD) 20.6 billion up to 1996, 169 percent of that year's GDP. The component relating to the cost of infrastructure loss is LKR 90 billion or 13 percent of the country's 1996 GDP, including loss of public infrastructure and damages to houses (Arunatilake, Jayasuriya and Kelegama, 2001).
The cessation of hostilities between 2002 to 2005 provided a unique opportunity to seek to understand what telecom meant to the population of a post-conflict region. Analysis of the findings of a unique government survey conducted in 2004 and a sample survey of telecom users at the bottom of the pyramid (BOP) in the Jaffna District conducted in early 20051 can shed light on connectivity in post-conflict conditions.
Jaffna is the historical and cultural center of the Northern Province of Sri Lanka. Along with the rest of the North and East of the island, it has suffered from two decades of civil war. The armed struggle since 1983 has severely affected the economy of the North and East. There has been no infrastructure development; instead, a significant deterioration has occurred. Loss of human life has amounted to over 65,000. Over 800,000 internally displaced persons have lost their homes and livelihoods (CCIY, 2005, February). Many people have emigrated to countries such as Australia, France, Canada and the United Kingdom. It is estimated that as many as 80 percent of the families in Jaffna district have at least one family member living abroad or in the southern part of the country that has been shielded from the war for the most part, except for periodic terrorist actions by the LTTE.
Before the conflict, the Jaffna District (one of 25 major administrative units within Sri Lanka) was well endowed with infrastructure. It had one of the highest densities of roads in the country as a result of high population density and flat topography. The daily express train serving Jaffna, the 'Yal Devi', was the highest revenue earner for the Ceylon Government Railway. The Department of Posts and Telecommunications considered the Jaffna district one of its highest sources of revenue. This was because Jaffna, with its educated populace, was heavily represented in the government and private sectors in the southern part of the country. Generally families remained in the peninsula while the wage earner worked in the south. The resultant 'remittance economy', taking an intranational form in this first instance, created a strong demand for transport and communication.
The war led to the systematic destruction of the connecting infrastructure, exemplified by the ripping up of the rail track beyond Vavuniya and the use of the railroad ties to build bunkers by the LTTE. The principal highway connecting Jaffna to the rest of the country became one of the bloodiest battlefields of the war and the port and airport located in the Jaffna peninsula became the most valued and heavily guarded strategic assets of the government.
The area was further affected by a partial economic embargo which the Government of Sri Lanka (GOSL) imposed from 1990 to January 2002. This, along with a lack of power supply, severely hampered productive activities in the region (Sarvananthan, 2003). These negative forces have been reflected in the area's per capita income. The Northern Province (with Jaffna as the largest district within it) had the lowest per capita income in 2000, approximately USD 384 (LKR 37,206), slightly more than half the national per capita income of USD 651 (LKR 63,000), according to unpublished data from the Department of Census and Statistics (as cited in Sarvananthan, 2003).
Historically, Jaffna's education, health and income levels had been higher than other districts within the Northern Province. Jaffna is one of the most urbanized districts in the country. It was estimated to have had a total population of 596,000 (approximately 3 percent of the country's population) in 2004 (CBSL, 2005; Statistical Appendix, Table 55), and the highest population density within the Northern Province in 1981, 2001 and 2003 (see Table 3.1). The civil war hit Jaffna the hardest, in terms of physical, material and human losses (CCIY, 2005, February).
Table 3.1
Area and Population of Jaffna, (1981–2003)
| Land Area (km2) | Population | Population Density (per km2) | ||||
| 2001 | 1981 | 2001 | 2003 | 1981 | 2001 | 2003 |
Jaffna district | 1,023 | 739 | 491 | 589 | 795 | 480 | 576 |
Sri Lanka (Total) | 65,610 | 14,847 | 18,732 | 19,252 | 226 | 286 | 293 |
Source: CCIY (2005).
In a rare statistical snapshot taken in 2004, just before the conflict restarted, the Consumer Finance Survey of the Central Bank of Sri Lanka captured household access to services and amenities in the two districts that were under government control in the Northern Province (and which held most of the population), Jaffna and Vavuniya. The relative positions of these two districts in relation to the provinces with the highest and lowest levels of access to the different amenities are given in Figure 3.1.
Jaffna and Vavuniya are lowest in a few categories, but in not as many as one would expect after 20 years of war. They are highest in the use of bicycles, an artifact which suits the flat topography and the resilience of this mode of transport under war conditions. While lowest in TVs and second lowest in radios, the two districts are surprisingly good
Figure 3.1
Access to Amenities in Jaffna and Vavuniya Districts of Sri Lanka, Relative to Highest/Lowest Provinces
Source: Central Bank Consumer Finance Survey (CFS), CBS 2005.
performers in access to telephones (fixed and mobile) and computers. From the last position before the cessation of hostilities in January 2002, the two districts had leaped to third place by 2004, still below the national average, but considerably higher at 19.7 and 2.8 percent of households having a telephone (fixed or mobile) and a computer, respectively, than the lowest province which had 9.1 percent households with a telephone and 0.5 percent households with a computer.
The high interest shown in interactive Information and Communication Technologies (ICTs) in the war torn regions is understandable, given the high levels of emigration and family fragmentation. Prior to the Cease Fire Agreement (CFA) of January 2002, provision of telecom service (fixed or mobile) was prohibited in the Northern and Eastern province to all operators other than the incumbent, so in effect these areas were artificially excluded from the telecom revolution unleashed by liberalization (Samarajiva, 2004).
The leading mobile operator, Dialog Telekom (then MTN Networks), started work on extending the network to the government controlled areas in the Northern Province within weeks of the cessation of hostilities, offering connections within 90 days of the CFA. Over 150,000 new connections were given in the North and East alone in 2003, according to Dialog Telekom (August 2005). The rapid uptake illustrates the large unmet demand that existed in the North and East. By the time the networks were again made non-operational by the armed forces in August 2006, Dialog Telekom was serving 220,000 customers in the North and 200,000 in the East (Dialog Telekom, 2006). Mobile use dwarfed fixed use, which had risen to 22,127 by mid-2006 for the entire Northern Province (TRC, 2006) with a significant proportion being in the southernmost part of the Province, Vavuniya.
This section looks at telecom use at the BOP in the Jaffna district in Sri Lanka, at some of the unique features not seen in the other districts of Sri Lanka surveyed.
People at the BOP in Jaffna primarily use mobile and public access (public call offices, payphones and phones in post offices) phones, as shown in Table 3.2.
Table 3.2
Modes of Telecom Access Used at the BOP in Sri Lankan Localities
| Jaffna (%) | Badulla (%) | Colombo (%) | Hambantota (%) | Average of Sri Lankan Samples (%) |
Public access phone | 51 | 58 | 37 | 55 | 52 |
Fixed phone | 7 | 40 | 50 | 53 | 37 |
Mobile phone | 44 | 23 | 35 | 35 | 34 |
Note: Respondents may use more than one mode.
Compared to the other areas, fixed phone use in Jaffna was low, just 7 percent. This reflects the low number of fixed phones available in the Jaffna district, and the Northern Province as a whole, which had 8,021 fixed lines at the end of 2001 (TRC, 2002).
Table 3.3 shows the distribution of service providers used by people at the BOP in Jaffna, compared with the other Sri Lankan samples. On the mobile side, Dialog GSM (now Dialog Telekom) was the main service provider, given their early entry into the Northern Province. On the fixed side, incumbent Sri Lanka Telecom Limited (SLTL) was the main provider, although it is quite possible that the SLTL figure is overstated by respondents who assume that the established partially government-owned operator is the supplier to all public communication bureaus. This pattern contrasts with the other localities studied in Sri Lanka, where other service providers have a significant presence. Mobitel and Suntel, who subsequently commenced operation in Jaffna, appeared to have a limited presence among respondents at the time of survey.
Table 3.3
Service Provider to Phone Owners at the BOP in Sri Lankan Localities
|
| Jaffna | Badulla | Colombo | Hambantota |
Operator | Type | % of All Respondents | |||
Sri Lanka Telecom Limited (SLTL) | Fixed | 56 | 42 | 56 | 60 |
Lanka Bell | Wireless local loop | 0 | 0 | 1 | 0 |
Suntel | Wireless local loop | 1 | 0 | 4 | 1 |
Celltel | Mobile | 0 | 14 | 10 | 3 |
Dialog GSM | Mobile | 43 | 6 | 19 | 26 |
Hutch | Mobile | 0 | 3 | 3 | 5 |
Mobitel | Mobile | 1 | 2 | 3 | 3 |
Tritel | Payphone | 0 | 2 | 2 | 1 |
Don't know |
| 1 | 35 | 14 | 15 |
Note: Respondents may be using more than one operator's services.
After the implementation of the CFA, the restrictions on mobile service provision in the North and East were lifted. Dialog Telekom (then MTN Networks) was able to capture the market, giving 150,000 new connections in the North and East within two years (Dialog Telekom, 2005). Consequently, Dialog GSM was used by 43 percent of teleusers at the BOP in Jaffna, a much higher percentage than in the other locations.
Although only 7 percent of respondents in Jaffna stated that their mode of access was 'fixed', many of those who use communication bureaus may have given 'Sri Lanka Telecom' as their service provider, as this is the kind of phone that is assumed to be used in many of the communication bureaus. SLTL was the only operator present in the area until 2002.
Mobiles not only offer quick connection, but in the case of Jaffna, they are far more economical. A new SLTL fixed line can cost up to LKR 50,000 (approximately USD 500) in Jaffna compared to LKR 20,000 (approximately USD 200) in Colombo. This is because this company charges for installation based on the distance from the customer's premises to the nearest distribution point.2
In the first year that Dialog GSM entered the North and East, it gave 150,000 new connections in this area alone, 32 percent of the new connections in the entire country (PIPU, 2004). Prior to 2002, there was no cellular coverage in the North and East of Sri Lanka as found by the survey, with zero respondents having owned a mobile for more than three years (in contrast to 22 percent in Badulla, 7 percent in Colombo and 10 percent in Hambantota3).
The principal reason given by 80 percent of respondents for choosing mobile in rural Jaffna was 'that there is no waiting time involved'. This was similar to the response in the remote locations, Hambantota and Badulla, and quite different from urban Jaffna and Colombo, suggesting that waiting time for fixed phones was a greater problem in rural areas (Table 3.4).
Another reason why teleusers at the BOP in Jaffna obtained mobile phones was so that other family members could use it; this indicates that the mobile was obtained more as a household phone, possibly because of the difficulty in obtaining a fixed phone. However, the 'community' use of mobile phones was limited to family members, with no BOP mobile owners in Jaffna allowing people outside their family to use their mobile. This contrasts with the other locations, where some mobile owners allow non-family members to use their phone to make and receive calls (10 percent in Badulla, 1 percent in Colombo, 16 percent in Hambantota and 10 percent on an average in the Indian samples). However, a significantly greater proportion of mobile users in Jaffna send and receive messages for other people on their mobiles 'most of the time', compared with the rest of the country (Table 3.5).
Table 3.4
Reasons Why the Respondent Obtained a Mobile Phone at the BOP in Sri Lankan Localities
|
| Jaffna |
|
|
| |
|
| Urban (%) | Rural (%) | Badulla (%) | Colombo (%) | Hambantota (%) |
Economic factors | No rental charges | 11 | 54 | 70 | 11 | 33 |
| No deposit required | 8 | 10 | 43 | 3 | 23 |
| No connection charges | 2 | 0 | 33 | 1 | 10 |
| Lower call charges | 4 | 1 | 6 | 0 | 16 |
| Affordable rental | 0 | 1 | 6 | 21 | 28 |
| Close contacts are on the same network | 11 | 10 | 1 | 18 | 5 |
Convenience factors | Immediate connection | 28 | 80 | 87 | 37 | 72 |
| It is easier to obtain | 8 | 17 | 55 | 45 | 61 |
| Ability to use it at anytime | 70 | 87 | 64 | 68 | 74 |
| Other members in family can use it also | 40 | 39 | 28 | 6 | 34 |
| Better network and connectivity | 17 | 37 | 51 | 18 | 56 |
Table 3.5
Sending and Receiving Messages for Other People through Mobiles at the BOP in Sri Lankan Localities
|
| Jaffna (% of Mobile Users) | Badulla (% of Mobile Users) | Colombo (% of Mobile Users) | Hambantota (% of Mobile Users) |
Send messages for other people | Most of the time/always | 34 | 3 | 3 | 13 |
| Occasionally | 15 | 46 | 24 | 25 |
Receive messages for other people | Most of the time/always | 34 | 3 | 11 | 13 |
| Occasionally | 15 | 42 | 39 | 24 |
Interestingly, fewer mobile users in Jaffna (compared with the rest of Sri Lanka) cited the reason for obtaining a mobile as it being 'easier than any other kind of phone'. This could be evidence that there really was not much choice in terms of the mode of access, that is, that obtaining a mobile was the only option. Concern for financial factors did not feature, except for 'no rental charges' in rural Jaffna.
Convenience appears to weigh most when obtaining a mobile phone in Jaffna. The ability to carry the phone around and the ability to use it at any time were very important in both urban and rural Jaffna; this could be perhaps because many people work in other areas of the island, probably Colombo. Having a mobile allows them to be contactable, and to be able to call home at any time. The importance of mobility and the ability to use the phone at any time may be related to the lack of security in the everyday lives of its inhabitants.
About 50 percent of rural respondents in Jaffna use public access telephones. The reason they give is that there is no other choice.
A larger proportion of teleusers at the BOP in Jaffna stated that mobile communication was less affordable than in the other Sri Lankan locations. No one in Jaffna found the cost of mobile communication to be 'affordable', unlike in the other localities; this could indicate a lack of other options.
Rural Jaffnaites were unhappier about the cost of communicating, shown by the large percentage stating the cost as 'extremely high'. Users in Jaffna were the least 'happy' group in the Sri Lankan sample with regard to mobile costs. Table 3.6 provides the mean value of the perceived cost; a higher mean indicates that the users find it more affordable, and vice versa. As Figure 3.2 illustrates, users in the other Sri Lankan localities find the cost of mobile communication more affordable than those in Jaffna. Using mobiles in urban Jaffna was perceived to be slightly more affordable than in rural Jaffna at a 95 percent confidence interval.
Table 3.6
Mean Value of Perceived Cost of Using Mobiles at the BOP in Sri Lankan Localities
| Jaffna | Badulla | Colombo | Hambantota | |||
| Urban | Rural | Urban | Rural |
| Urban | Rural |
Mean response | 2.38 | 2.15 | 3.00 | 3.05 | 2.81 | 2.38 | 2.15 |
Standard deviation | 0.49 | 0.69 | 0.72 | 0.79 | 0.66 | 0.49 | 0.69 |
Significantly different from Urban Jaffna (95% CI) |
| No | No | Yes | Yes | Yes | Yes |
Significantly different from Rural Jaffna (95% CI) | Yes |
| No | Yes | Yes | Yes | Yes |
Note: 1 = extremely high, 2 = very high, 3 = high, and 4 = affordable.
Figure 3.2
Views on the Cost of Using Mobiles at the BOP in Sri Lankan Localities
Table 3.2 showed that there were very few fixed phone users in the Jaffna district among teleusers at the BOP, but a large number of public access phones users; from here on, this chapter considers both of these categories as one, given that it is likely that the public access phones in question are actually fixed phones. Furthermore, while the general patterns in the calling behavior reported are based on the respondent's recall, as Appendix 1 notes, this is subject to a degree of inaccuracy (also resulting in relatively higher numbers of respondents who did not answer questions on call frequencies and durations); however, the numbers can be considered as indicative of the actual calling patterns.
In general, Jaffnaites appear to be heavier users of the phone than those in the rest of the Sri Lankan samples, given the more frequent calls being made and received on all modes (fixed, public access and mobile).
Jaffna's calling patterns diverge dramatically from the other localities with regard to international calls: 55 percent of teleusers at the BOP in Jaffna receive more than one international call per month, and 18 percent make more than one international call per month; while these numbers are still low (that is, one call per month), they are considerable when compared to the other Sri Lankan samples, as seen in Figure 3.3. This is probably due to the high number of migrants from Jaffna. There are very few respondents in the Jaffna sample who never or rarely receive international calls on fixed/public access lines.
This pattern corresponds to the unofficial estimate that about 80 percent of the total households in the Jaffna district have members who have left Jaffna and now reside abroad.4 Many families are fragmented and telecom helps them to stay in touch, and also, very importantly, provides a means of securing financial remittances, which is an important reason to keep in touch, for many.5 Foreign remittances may be a significant source of income for most households in Jaffna. However, official statistics on this category of income are not available.
Within the Sri Lankan samples, Jaffna stands out, with a high frequency of international calls being made and received. Figure 3.4 shows that a significant percentage of users among mobile users at the BOP in Jaffna receive more than five calls a month.
Figure 3.3
Frequency of International Calls on Fixed/Public Access Phones at the BOP in Sri Lankan Localities: Incoming and Outgoing
Figure 3.4
International Calls on Mobile Phones at the BOP in Sri Lankan Localities: Incoming and Outgoing
A majority of respondents in Jaffna claim to use the phone to 'keep in touch with friends and family abroad', as shown in Table 3.7. This is explained by high international migration and fragmented families. When looking at the stated purpose of 'keeping in touch with family and friends abroad', the geographical dispersion of families becomes more evident in Jaffna as compared to the rest of Sri Lanka.
Table 3.7
Use of the Phone to Keep in Touch with Family and Friends Abroad at the BOP in Sri Lankan and Indian Localities
|
| Fixed Phone Users (%) | Mobile Phone Users (%) | Public Access Phone Users (%) |
Sri Lanka | Jaffna | n/r | 75 | 55 |
| Badulla | 11 | n/r | 8 |
| Colombo | 20 | 18 | n/r |
| Hambantota | 6 | 8 | 5 |
India | Cuttack | 13 | 61 | 23 |
| Dehradun | 4 | n/r | 5 |
| Gorakhpur | 7 | 11 | 7 |
| Kasargod | 30 | 29 | 17 |
| Mumbai | 26 | 20 | 15 |
| Neemuch | 0 | n/r | 1 |
| Sivaganga | 10 | n/r | 18 |
Note: n/r-percentage not reported due to low base.
Jaffna's higher use of phones for keeping in touch with people abroad has some similarities to Kasargod in South India, which also has a high migrant population; this is also seen in Colombo and Mumbai, the large metropolis, where a significant part of the population is formed of migrants from other parts of the country.
Table 3.8 shows the frequency of international calls on mobiles in the Sri Lankan localities. Mobile users at the BOP in Jaffna clearly make and receive more international calls to keep in touch with family and friends.
It is also interesting to note that keeping in touch with friends and family abroad is more significant with mobiles than with other modes. This is so in Sri Lanka due to the liberalization of the international telephony market in 2003, which brought down international calling rates by around 70 percent (PIPU, 2004). For example, the per-minute
Table 3.8
Frequency of Calls to Keep in Touch with Family and Friends Abroad (Incoming and Outgoing) per Month for Mobile Users at the BOP in Sri Lankan Localities
| Jaffna (% of Mobile Users) | Badulla (% of Mobile Users) | Colombo (% of Mobile Users) | Hambantota (% of Mobile Users) |
Number of incoming calls per month |
|
|
|
|
None | 24 | 75 | 74 | 92 |
1–5 calls per month | 35 | 17 | 11 | 7 |
6–10 calls per month | 22 | 3 | 6 | 0 |
>10 calls per month | 18 | 6 | 10 | 1 |
Number of outgoing calls per month |
|
|
|
|
None | 70 | 90 | 85 | 92 |
1–5 calls per month | 19 | 7 | 7 | 8 |
6–10 calls per month | 9 | 0 | 7 | 0 |
>10 calls per month | 3 | 3 | 1 | 0 |
tariff to Canada was LKR 55 to LKR 70 before liberalization, whereas it has fallen to LKR 11 per minute or lower, depending on the package, three years later. Furthermore, prepaid mobile users can make international calls without a large deposit as long as sufficient credit is available in the account.
Incidentally, urban Jaffna had the highest Internet use among the samples in Sri Lanka, significantly more than any of the other samples at a 95 confidence interval. Fourteen percent of teleusers at the BOP in urban Jaffna used the Internet, as compared to one percent in rural Jaffna, 3 percent in Colombo, and 2 percent in Badulla and Hambantota. This reflects the higher demand for international communication in Jaffna, being satisfied through a cheaper alternative, Internet telephony—an alternative that may not be available in rural Jaffna, owing to the lack of infrastructure (that is, fixed lines).
Another reason attributed to the high use of telecom, both incoming and outgoing, national and international, in Jaffna, is that many residents from the neighboring 'uncleared' or rebel-held areas of the Vanni come to Jaffna to make calls abroad. Even though SLTL has given a limited number of telephones to the towns within the LTTE-controlled areas, vast areas of the Vanni are still out of bounds for both mobile and fixed phones. Charges in Kilinochchi (the center of LTTE administration) are very high, especially for overseas communication. Therefore many of the residents go to Jaffna (or Vavuniya) to make calls.6
People in Jaffna seem to spend more on mobile communication, on an average, than the other Sri Lankan locations, as Figure 3.5 shows.
A higher percentage of Jaffnaites spend more than USD 8 per month on mobile communication. This is explained by the fact that they make the most international calls. Even after the lowering of international rates since 2003, they are costlier than local and national calls.
Similarly when fixed and public access users are considered, it can be seen that expenditure levels are as high among the Jaffna teleusers at the BOP as for those in Colombo (Figure 3.6).
If it is assumed, conservatively, that all the high spenders were earning USD 100 a month, the results indicate that 59 percent of mobile users at the BOP and 14 percent of fixed users at the BOP in Jaffna spent at least 8 percent of their income on telecom. This is considerably higher than what is normally expected. As Chapter 1 discusses,
Figure 3.5
Expenditure on Telecom by Mobile Users at the BOP in Sri Lankan Localities
Note: The LKR amounts have been crudely converted to USD, at the exchange rate of LKR 100 to the USD.
Figure 3.6
Expenditure on Telecom by Fixed and Public Access Users at the BOP in Sri Lankan Localities
Note: The LKR amounts have been crudely converted to USD, at the exchange rate of LKR 100 to the USD.
research is beginning to show high numbers such as these. However, caution must be exercised with this finding because it is possible that the respondents may have been understating their monthly income, especially because they may be receiving sporadic remittances that are not always included in answers regarding the monthly income.
The calls made by Jaffnaites appear to be longer as compared to those in the other three localities, which could be one of the major contributors to the higher spending.
Jaffna had the highest use of SMS among the Sri Lankan localities studied, with 57 percent of mobile users using SMS locally, and 6 percent also using it internationally, as seen in Figure 3.7. Domestic use was similar to that in Colombo, but the use of international SMS was significantly higher. SMS offers a cheaper way of communicating across borders as compared to calling.
It appears that in general, Jaffnaites spend more time on the phone, especially mobile users, speaking for longer than those in the other Sri
Figure 3.7
Use of SMS by Mobile Users at the BOP in Sri Lankan Localities
Lankan samples on both incoming and outgoing calls, except in the case of outgoing international calls, where a marginal number spend more than five minutes on calls; this is perhaps a result of cost-consciousness given the higher call rates. The average call durations among mobile users, as reported by the respondents, are given in Table 3.9. Those for fixed and public access users are given in Table 3.10.
In the light of the fragmented nature of Jaffna families, this is an expected outcome. The calls are likely to be of a longer duration because the calls that are made, or received, are to/from the many friends and family who are outside the district.
It appears that at the BOP in Jaffna using a mobile phone is associated with improved social status, particularly among urban BOP users, 21 percent of whom chose to use a mobile as they perceived that it improved their social status. This percentage is higher than in other Sri Lankan locations, which range from 0 percent to the highest of 10 percent for Colombo (Table 3.11). This is in sharp contrast to the Indian samples that were also studied, where using a mobile phone was perceived to improve social status among 57 percent of mobile users.
The same is true with regard to carrying mobile phones as a form of fashion. In Jaffna, 11 percent of the urbanites think it is fashionable. This again differs from the rest of the Sri Lankan samples. Among
Table 3.9
Average Duration of Outgoing Calls on Mobiles at the BOP in Sri Lankan Localities
|
| Average Call Duration | Jaffna (% of Mobile Users) | Badulla (% of Mobile Users) | Colombo (% of Mobile Users) | Hambantota(% of Mobile Users) |
Incoming | National calls | <5 minutes | 35 | 93 | 90 | 87 |
|
| >5 minutes | 50 | 3 | 8 | 4 |
| International calls | <5 minutes | 14 | 21 | 29 | 8 |
|
| >5 minutes | 60 | 6 | 3 | 2 |
Outgoing | National calls | <5 minutes | 73 | 93 | 96 | 94 |
|
| >5 minutes | 20 | 1 | 0 | 4 |
| International calls | <5 minutes | 23 | 10 | 21 | 10 |
|
| >5 minutes | 2 | 0 | 0 | 0 |
Table 3.10
Average Duration of Outgoing Calls on Fixed and Public Access Phones at the BOP in Sri Lankan Localities
|
| Average Call Duration | Jaffna (% of Fixed and Public Access Users) | Badulla (% of Fixed and Public Access Users) | Colombo (% of Fixed and Public Access Users) | Hambantota(% of Fixed and Public Access Users) |
Incoming | Local calls | <5 minutes | 23 | 35 | 60 | 52 |
|
| >5 minutes | 7 | 5 | 7 | 2 |
| National calls | <5 minutes | 18 | 41 | 58 | 54 |
|
| >5 minutes | 17 | 10 | 6 | 4 |
| International calls | <5 minutes | 14 | 5 | 10 | 3 |
|
| >5 minutes | 41 | 2 | 4 | 2 |
Outgoing | Local calls | <5 minutes | 35 | 78 | 95 | 85 |
|
| >5 minutes | 8 | 4 | 2 | 3 |
| National calls | <5 minutes | 52 | 91 | 89 | 93 |
|
| >5 minutes | 12 | 7 | 1 | 5 |
| International calls | <5 minutes | 18 | 7 | 15 | 10 |
|
| >5 minutes | 6 | 1 | 0 | 1 |
the Indian samples, 60 percent felt that is more fashionable to use a mobile phone. This is perhaps due to the fact that the mobile is more of a recent phenomenon in Jaffna, as it is in India.
Table 3.11
Reasons for Choosing to Use a Mobile at the BOP in Sri Lankan Localities
| Jaffna |
|
|
| |
| Urban | Rural | Badulla | Colombo | Hambantota |
| (% of Mobile Users) | (% of Mobile Users) | (% of Mobile Users) | (% of Mobile Users) | (% of Mobile Users) |
Improves my social status | 21 | 3 | 1 | 10 | 6 |
It is fashionable to use one | 11 | 7 | 6 | 4 | 7 |
This study demonstrates that the people in post-conflict societies, such as Jaffna, despite considerable financial constraints, have a higher demand for telecom services than people in areas directly unaffected by conflict. Understandably, a greater share of the income of people in post-conflict societies is spent on keeping in touch with family and friends.
Areas that have suffered extended periods of violent conflict are often characterized by a significant proportion of the population migrating to non-conflict regions as refugees or otherwise. The civil war that affected the Jaffna peninsula for two decades led to a net loss of around one-third the pre-conflict population; many fleeing the district, and even the country. Families left behind are fragmented. The need to keep in touch, as well as the need for financial support in the form of remittances from relatives abroad have driven demand for telecom services to a level that is dramatically higher than in other areas of Sri Lanka. People make and receive many more international calls, and calls are longer than in other parts of Sri Lanka. The need to secure financial remittances further increases the importance of keeping in touch with those living away from home. The telephone is not just an instrument to keep in touch, but one that secures the livelihood of these conflict-affected people.
The need for keeping in touch has proved to be a top priority, even where costs are perceived to be high, and service problems exist. The data suggests a more inelastic demand for telecom services than in other parts of the country. Although people are willing to spend larger amounts of their regular monthly income on telecom, none of the respondents perceive the cost to be 'affordable' unlike respondents in other areas. This indicates a lack of choice.
Limited telecom options during the time of conflict, as a result of government restrictions as well as limited infrastructure, contributed to a large pent up demand for telephones. As in the case of Jaffna, once operators are able to commence service in such an area, connections will surge; low cost wireless technologies, such as Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA), can play a critical role in getting people connected quickly. Connections can be provided immediately, especially where prepaid approaches can be adopted. The wire-line alternative can be slow and costly, especially where infrastructure is not only limited, but most likely damaged as a result of conflict. Furthermore, while people have previously been heavily reliant on shared means of fixed access, through public call offices for instance, mobile telecom service may be preferred for its virtue of mobility, despite higher call costs. Mobiles allow people to make calls, as well as be contactable at any given time as long as service is available, which can give users a greater sense of security.
1. Further details on the study can be found in Appendix 1 of this book.
2. http://www.slt.lk/data/forhome/011telecon_new.htm#
3. Note: bases are small.
4. M. Sarvananthan, Personal Communication, August 2005.
5. M. Sarvananthan, Personal Communication, August 2005.
6. M. Sarvananthan, Personal Communication, August 2005.
Arunatilake, N., Jayasuriya, S. and Kelegama, S. (2001). The economic cost of the war in Sri Lanka. World Development, 29(9), pp. 1483–1500.
Central Bank of Sri Lanka (CBSL) (2005). Central Bank Annual Report 2004. Colombo: CBSL.
Chamber of Commerce & Industries of Yarlpanam (CCIY) (February 2005). Identification of Economic Opportunities for Children Affected by War in the Northern Province of Sri Lanka. International Labour Organisation's International Programme on Elimination of Child Labour. Retrieved November 30, 2006, from http://pointpedro.org/category/research-studies/
Crocker, B. (2004). Reconstructing Iraq's Economy. The Washington Quarterly, 27(4), pp. 73–93.
Dialog Telekom (2005). Dialog GSM/Dialog Telekom press release. Retrieved October 12, 2007, from http://www.dialog.lk/en/corporate/press/releases/pressRelease.jsp?id=31
Dialog Telekom (2006, October 30). Comments by Chief Executive Officer at Investor forum. Colombo.
Jamali, D. (2003). Post-war telecommunications reform in Lebanon: Trends and challenges. info, 5(2), pp. 34–44.
Public Interest Program Unit (PIPU) (2004). Progress Report: May 2002–April 2004. Ministry for Economic Reform, Science and Technology, Sri Lanka.
Samarajiva, Rohan (2004). Sri Lanka's telecom reforms of 2002–03. SAFIR Newsletter, issue 17, pp. 5–9. Retrieved October 15, 2007, from http://www.safirasia.org/safir/files/Newsletter/Issue17.pdf
Sarvananthan, M. (2003). An Introduction to the Conflict Time Economy of the North & East Province of Sri Lanka. Point Pedro Institute of Development Working Paper 01, May 2003. Point Pedro Institute of Development Point Pedro, Sri Lanka.
Schwart, J. and Halkyard, P. (2006). Postconflict Infrastructure: Trends in Aid and Investment Flows. Public Policy for the Private Sector, Note number 305, issue 305.
Telecommunications Regulatory Commission of Sri Lanka (2002). Statistical information provided to the author.
Telecommunications Regulatory Commission of Sri Lanka (2006). Statistical Overview 1. Retrieved November 25, 2006, from http://www.trc.gov.lk/pdf/statover1.pdf
World Bank (2005). Investment climate in Afghanistan: Exploiting Opportunities in an Uncertain Environment. Finance and Private Sector, South Asia Region, World Bank. Washington DC: The World Bank.
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Section 1 demonstrated that there is significant demand for connectivity at the Bottom of the Pyramid (BOP). The evidence from the BOP research goes against several common, and still prevalent, misconceptions—that those at the BOP have no need for telecom services, and/or are unable to afford telecom services. Government-owned operators who are said to be driven by considerations other than profit have in the past seen little reason to serve such segments. As a result, large swaths of financially constrained market segments have remained unserved, or underserved. The rapid growth triggered by the lowering of barriers to market entry and competition have extended service to some degree, but even after liberalization, many at the BOP have remained underserved because of bad policy, poor regulation and unimaginative business plans.
Telecom networks are made up of an access component (what customers directly interact with) and a backbone component, made up of 'big pipes' that carry large volumes of voice and data. The emphasis in this section is on the access network, though not simply limited to the equipment. For example, in Chapter 5, the emphasis is on business models that make access possible through Grameen Village Phone Operators (VPOs).
Chapter 4 is about people who want to use networks, not about networks per se. It describes the massive volunteer-based information and communication technology (ICT) education campaigns conducted in Indonesia around connectivity, assisted, among others, by the International Development Research Centre (IDRC). Faced with impossibly difficult conditions caused by bad policy, poor regulation and overall non-responsiveness from the government, civil society activists such as co-author Purbo engaged in efforts to educate consumers and producers of communication services. Because of the strength of that educated community, the Indonesian civil society was able to pull off a major policy reform, the delicensing of the 2.4 GHz frequencies used for Wi-Fi.
This section looks at how market participants, where policy and regulatory inadequacy compounded by hostilities from incumbent operators have found their own solutions. These workarounds may not be optimal, as in the case of Wi-Fi being used for backhaul in the absence of reasonably priced leased lines (Chapter 6), but they are the best available alternatives.
The Chapters in this section look at the cases of Indonesia and Bangladesh. Both of these countries have been poor performers in terms of telecom and broader ICT infrastructure (Figure S2.1), compared to their regional peers.1 The growth that has been achieved has been a result of complex workarounds to surmount barriers thrown up by incumbent telcos as well as the government.
Both countries have suffered from dysfunctional regulatory and policy environments which have prevented them from achieving anything near their potential. But perversely,
Figure S2.1
Fixed Phone, Mobile, and Internet Subscribership per 100 Inhabitants: South Asia and Southeast Asia (ASEAN and SAARC Countries, respectively, 2004)
Source: ITU (2006).
the same hostile environments have also created innovation in the form of the world renown Grameen Village Phones that may have contributed to the award of a Nobel Prize in 2006 to the visionary Professor Muhammad Yunus, and to technical and educational innovation in Wi-Fi in Indonesia—that too will probably be recognized with a significant award in the near future.
The business innovations described in Chapter 5 have given Bangladesh, one of the poorest countries in South Asia, a surprisingly high level of rural telecom access. This innovative reseller model has connected 50,000 of the 64,000 villages in the country to telecom services (Grameenphone, 2006). Poor but entrepreneurial Bangladeshi women are assisted in purchasing a mobile phone which is connected to Grameenphone's GSM network, but provided subsidized airtime, so that the reseller may turn a profit. The demand that these phones generate is responsible for the network operator's highest ARPUs. Four percent of Grameenphone's subscribers who were village phone operators generated 16 percent of its revenue, as Chapter 5 reports. These innovations, with appropriate modifications, can and should be emulated.
The complex Indonesian workarounds described in Chapter 6 need not be emulated abroad. Yet the accompanying education and awareness building should be, if the objective is the co-innovation of ways to connect rather than the passive consumption of policies and services. The analysis of the workarounds leads to different conclusions, namely the identification of specific policy and regulatory barriers that require reform.
The key factor that has to be understood in both these cases is that the resulting systems/structures arose out of necessity, not choice. In the case of Indonesia, hostility of the incumbent towards private operators and licenses that prohibited them from building the links they could not buy left Internet service providers (ISPs) helpless. This gave rise to the innovation. In the case of Bangladesh, the business innovations were driven by high handset costs and low income levels in villages.
Thus, while these two approaches were optimal in their particular circumstances, they probably should not be replicated unchanged. As Chapter 5 points out, there are other options that may be more suitable, depending on the circumstances. In today's prepaid world, the necessity to involve a third party to administer billing and collection does not arise; with handset costs falling below USD 30, the need for micro-loans no longer exists.2
This section, perhaps more than any other in this book, is illustrative of the inadequacy of purely technological solutions. People who have been made aware, business innovations that take full account of the existing price and affordability constraints, technical and operational workarounds to policy and regulatory perversities—these are the things that can get people connected. In the never-perfect world of policy, there will always be a need for human imagination and the will to make possible the use of technology to get people connected.
1. Both countries have seen considerable growth in the mobile sector since 2004.
2. See Knight-John, Zainudeen and Khan, 2005 for more discussion.
Grameenphone (2006). Retrieved November 15, 2006, from http://www.grameenphone.com/index.php?id=79
ITU (2002). Asia-Pacific Telecom Indicators 2002. Geneva: ITU.
ITU (2006). Measuring ICT for social and economic development: World Telecommunication/ICT Development Report 2006. Geneva: ITU.
Knight-John, M., Zainudeen, A. and Khan, A.S. (2005). An Investigation of the Replicability of a Microfinance Approach to Extending Telecommunications Access to Marginal Customers. LIRNEasia research report. Retrieved from http://www.lirneasia.net/projects/completed-projects/grameen-phones-replicability/
TRAI (2004). Growth of telecom services in rural India: The Way Forward. TRAI Consultation Paper No 16/2004. Retrieved November 23, 2006, from http://www.trai.gov.in/trai/upload/ConsultationPapers/17/27octconspap.pdf
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Indonesia is one of the largest countries in Asia, spread across three time zones, with a population estimated to be 221 million in 2005.2 Stricken with political and economic instability, frequent natural disasters and ethnic conflict, Indonesia has faced a series of domestic crises. In addition to these difficulties, the Government of Indonesia has not played a positive role in the development of the country's Information and Communication Technology (ICT) sector in the form of effective regulation and policy making. Instead, several poor regulatory decisions3 based on short-term goals have had a negative impact on telecom and Internet infrastructure and service development. The limited growth and development seen in the recent past can be largely attributed to the untiring efforts of Indonesian civil society.
The many definitions of civil society share a common feature; it is the arena in which people come together to pursue common interests because they care enough about something to take collective action (Purcell et al., 2006). This includes representatives from professional and grassroots levels, community media activists and media interest groups, volunteers, youth activists, philanthropic institutions, as well as human rights advocates, to name but a few. Due to their strength in numbers and reach, civil society organizations play an important role in educating the public, building capacity (through knowledge transfer and training), promoting public-interest objectives, and influencing government decisions. With the emergence of the Internet and other ICTs as global information tools, civil society has gained significant weight in political and economic arenas (Zinnbauer, 2001); similarly, it has an important influence on the development and diffusion of these ICTs. This chapter describes the role that civil society has played in promoting Internet use in Indonesia against a backdrop of meager state-support for the development of the ICT sector.
Internet development in Indonesia, as in many countries, was initiated by the academic and research community in the early 1990s. Access, at that time, was limited to a small circle of scholars and 'techies' based at universities connected to UniNet, the first Indonesian inter-university network.4 The Internet became accessible to the general public only after the launch of Indonesia's first commercial Internet service provider (ISP), IndoNet, in 1995 (Table 4.1), and the subsequent spread of public Internet access points, commonly known in Indonesia as warnet.5
Table 4.1
Indonesian ICT Sector (1990–2005)
| 1990 | 1995 | 2000 | 2005 |
1. Internet subscribers | 0 | 31,000 | 384,000 | 1,500,000 |
2. ISPs | 0 | 2 | 139 | 232* |
3. Internet hosts | 0 | 2,351 | 26,727 | 112,630 |
4. Internet users |
| 50,000 | 1,900,000 | 10,000,000 |
5. Internet customers per 100 inhabitants | 0 | 0.01 | 0.19 | 0.69 |
6. Fixed subscribers per 100 inhabitants | 0.6 | 2 | 3.23 | 3.97 |
7. PC penetration |
| 0.50 | 1.05 | 3.68 |
Sources: (1) ITU and APJII estimates,6 (2) APJII,7 (3) ITU estimates,8 (4) ITU and APJII estimates and BPS (2006),9 (5) Figure 6.7, Chapter 6, (6) BPS (2006) and ITU estimates, and Figure 6.7, Chapter 6, (7) ITU estimates10 and BPS (2006). | ||||
*This number (given by APJII's website) is most likely an underestimation of the actual number, given that about one-third of ISPs in Indonesia are said to operate without a license (see Chapter 6). | ||||
Although growth in Internet use was slow during the first five years, the number of users increased rapidly from 2000 to 2005, as seen in Chapter 6. Nevertheless, Internet penetration is still lowest in Indonesia when compared to peers,11 and as indicated by the six-dimension Internet rating model developed by the Mosaic Group,12 there is room for improvement—Indonesia has an overall rating of 15.5 out of a total of 24. This can be attributed to the lack of adequate infrastructure as a result of restrictive government policy and ineffective regulation by Directorate General of Post and Telecommunication (DG Postel) and Badan Regulasi Telekomunikasi Indonesia (BRTI). Fixed infrastructure, on which Internet services depend, is dominated by the state owned incumbent, PT Telkom, who along with PT Indosat, another state owned operator, control international gateways. Because of the dominance and political influence of these two operators, regulators have been unable to implement effective reforms; the monopoly situation has resulted in excessive prices (Schwab, Porter and Sachs, 2002), under-developed networks and a lack of access to telecoms. Chapter 6 provides more details on the policy and regulatory framework.
Chapter 6 argues that, owing to Indonesia's skewed geo-demographic structure and license conditions which only permit network operators to build infrastructure, ICT development has been concentrated in the metropolis (in urban centers like Jakarta, Bandung, Bali, and Surabaya) while rural areas lack access to even the most basic telecom infrastructure.13 Telephone and computer penetration have gradually increased over the years, but these figures are still very low in comparison with the Philippines and Thailand. The existing ICT infrastructure is said to serve only 1 to 5 percent of Indonesia's population (Purbo, 2003). Although the government had plans to connect all the major islands and cities by satellite, submarine, and terrestrial cable (NUSANTARA 21), they were shelved due to the absence of investment capital.
Since most Indonesians have no access to fixed telephones, computers or the Internet, and because they cannot afford to own these facilities or pay to use these services (even when access is available),14 the warnet model of Internet access has been successful. Warnets provide relatively affordable access ranging from as low as US dollars (USD) 0.05 to USD 0.09 per hour any time of the day, and it is not surprising that 1.56 percent (approximately 3 million) of Indonesian households use these access points (BPS, 2006).
Another factor contributing to the low use of ICTs is the limited knowledge and use of English in Indonesia. The national language of Indonesia, a dialect of Malay called Bahasa Indonesia, is used in education, government, and business, while other local dialects are still very important in certain areas. As such the ability to use the Internet is limited.
The ICT civil society has played a pivotal role in educating thousands of Indonesians in ICTs, with assistance from the private sector. The community has promoted the use of the Internet and relevant ICTs to people across Indonesia from the early 1990s. Initially constituting academics alone, the community now encompasses a wide group of individuals, from ICT experts to a range of users/practitioners—techies, hackers, programmers and general users, and activists; these groups try to promote the use of the Internet and ICTs at all levels of the society and in all aspects of life. In addition to this core group, many Indonesian businesses (ISPs, warnets, etc.), students, teachers, and the general public have taken to extending ICTs affordably and effectively to the last mile, as Chapter 6 will show. As their reach and influence has broadened over the years, the group has striven for a reasonable mix of supply- and demand-side measures to enable diffusion of the Internet throughout Indonesia. Actions aimed at educating the people, especially the youth, and promoting alternatives to gain better access to ICTs, have resulted in a significant increase in Internet use (Figure 4.1).
Figure 4.1
The Development of the Internet in Indonesia
Source: Authors.
When the Internet was opened to the public in the mid-1990s, very few people knew enough about the technology to make use of it; there was a definite lack of IT expertise. Realizing early on that the effective use of technology required appropriate skills and know-how in addition to access itself (Lim, 2002), the ICT community focused their efforts on spreading knowledge of the Internet to as many people as possible, in order to generate an interest in ICTs. This was executed by conducting many training sessions and distributing information resources across the nation. The growing numbers of experts and users—the products of the original information distribution cycle—have gone on to promote ICTs in their own communities by authoring various books and conducting tutorials in local dialects. This education process can, therefore, be seen as a recurrent cycle of teaching and learning, leading to an ICT-literate Indonesian society.
This ongoing process has resulted in the added benefit of creating a pool of well trained ICT intellectuals and experts who have gone on to create relevant software and hardware tools for the Indonesian ICT user. Consequently, there has been a continuous improvement in local software applications and web content, and even the development of innovative networking solutions (neighborhood and school networks) with assistance from the private sector. These actions have improved Indonesia's Internet presence and encouraged increasing numbers of Indonesians to get online.
Growing community action in Indonesia has resulted in bringing about an ICT literate society, improved online content, a large number of local software applications and innovative workaround network solutions. This sub-section discusses these results in more detail.
In order to enable knowledgesharing among the public, the community conducts regular training courses (seminars, demonstrations, and road shows) across the country. Recognizing that lowcost knowledge distribution is important for the adoption of ICTs, these courses are usually taught for free (or, for about USD 3 to 5 per head, at most) and feature ICT experts, practitioners and activists, including participants from the private sector. Even hackers, well known among Indonesians, such as Jim Geovedi and Irvan, make presentations at these events. Depending on the resources available, the courses range from hands-on practical sessions to simple face-to-face discussions with the students, mostly youth. Programs are conducted on various topics, from regulatory issues (public access and Wi-Fi, and VoIP) to technical issues like Free and Open Source Software (FOSS), software and website development, programming, etc., while the most common sessions are the general ICT awareness programs. The former courses are focused more on schools and colleges, while the latter are taught to the general public. Taking into account the demand for these training sessions, it is normal to have over 300 people attending each seminar, and about two to three seminars in two to three different cities every week. As more Indonesians become interested in ICTs, the frequency of training courses has multiplied. Private sector assistance comes in the form of funding to conduct these tutorials and road shows; some companies donate equipment to budding ICT researchers, authors, and users. Even the Indonesian Ministry of Education assists in organizing, coordinating, and implementing this kind of community action. The Ministry has played a major role in the growth of the ICT sector—it has been a strong proponent of ICT education and has even made plans to introduce the subject in school and university curricula. ICT organizations were to collaborate with educational institutions and ICTs were meant to be used as learning tools, but these plans could not be implemented due to various impediments (Belawati, 2003). Despite these setbacks, the Ministry of Education, in collaboration with other (government) entities, supports ongoing civil society activities that bring about greater ICT education and awareness in Indonesia.
Media such as radio, television, and newspapers are also used to promote the use of computers and the Internet. ICT-related education programs are frequently telecast on TV; radio talk shows host ICT activists and experts, and newspapers carry articles written by them. The dissemination of information through the use of print (pamphlets, fliers, magazines, and books) and online publications (newsletters, e-zines, and e-books) is also undertaken. Publications in local languages are useful sources of information to those interested in learning about ICTs.
Unlike in other countries, Indonesia's hackers have a positive impact on local web content and software development, as they publish their experiences in magazines, books and online media. Authors can get up to USD 700 to USD 900 per book in royalties; each book is sold at concessional rates of about USD 2 to 3 on an average, or is distributed free-of-charge at training courses. Indonesian technology magazines are also widely available and cost USD 1 to 2. Many of these magazines accept contributions from local authors and pay about USD 15 to 25 per article.
Although a number of programs are operated by the government, the key drivers of Internet development in Indonesia are civil society groups. Umbrella organizations like Masyarakat Telematika Indonesia (MASTEL) and the Indonesian Infocom Society, which bridge the government, private sector and other interested parties, play a significant role by 'conducting various activities to promote and develop Indonesian telecommunication expertly and evenly'. They focus on industrial development through better access and content and domestic applications (FOSS, e-commerce, etc.) and hardware development. Asosiasi Penyelenggara Jasa Internet Indonesia (APJII), Indonesia's ISP Association, carries out a number of educational programs, in association with the private and public sectors, hoping for the growth of the service industry and increasing Internet users to 20 percent of the population by 2007. There is also a large FOSS sub-community within the ICT community.
Due to these efforts, many Indonesians are getting online and making better use of ICTs. Many of these individuals have careers in IT, some as academics and others as techies. Many students who are trained at these seminars and tutorials develop software applications appropriate for use in Indonesia (the programs are operable in Bahasa Indonesia and are freely downloadable). Others develop web content for Indonesian Internet users, increasing appropriate local content. Additionally, the development of workaround networking solutions by these individuals has enabled cheap Internet access to previously unconnected areas in Indonesia and is their most important contribution so far.
The Internet is a global communication medium, facilitating information retrieval, publication, dialogue, and coordination amongst groups and individuals across the world. From websites and data repositories, to mailing lists/fora, user groups, online communities, chat rooms and blogs, the Internet provides the domain, reach and freedom for an author to develop his/her writing skills and make his/her voice heard across an audience that is both local and global. While some of these discussions are confined to closed groups, others are open to the public.
Other popular online media used for social purposes, knowledge sharing, business activities and general information exchange, are mailing lists and user groups. Tech user groups can be loosely categorized into ICT policy enthusiasts, hackers, techies, programmers and network administrator communities. Almost all these groups operate in Bahasa Indonesia and are hosted at Yahoo! Groups (over 45,000 in total, however, only a few are active and effective). Hacker group Jasakom-Perjuangan is currently the largest in Indonesia with over 12,000 members, while the Network Administrator community, represented by Indowli and Asosiasi–Warnet, has over 10,000 members. These groups facilitate the discussion of current IT affairs, tech problems, and business ideas, among other ICT topics.
The Linux community, Sony AK Knowledge Centre and Open Source-Indonesia groups are playing important roles in determining the course of FOSS development in Indonesia, while the Indonesia Goes Open Source (IGOS) initiative by the government and other private sector institutions provide ancillary support. The government established copyright laws in 2003 and issued a decree requesting the development of software in Indonesian languages using Open Source platforms. Without encouragement by the ICT communities to develop and use FOSS in Indonesia, the decree would have been of no effect. In addition to the increased use of Linux and other open-source software, many local software applications have been developed by amateur and professional programmers who are members of these communities.
The most impressive software developed so far, the Indonesian Digital Library Network (DLN), improves the quality of graduates coming out of the university system, through easy access to information that they could not have accessed otherwise. For instance, a student on the island of Kalimantan can gain easy access to the Institute of Technology, Bandung (ITB) library located in Bandung, on the island of Java, as easily as he can gain access to a digital library in New Zealand. Unsurprisingly, the DLN won an award from the American Society for Information Science and Technology (ASIST) in 2001 and the prestigious Indonesia Infocom Business Community (i2bc) e-Award in 2002 which honors organizations that make a positive impact on ICT development in Indonesia.
Many individuals who develop Indonesian FOSS applications have had no formal ICT training, apart from the courses conducted by the ICT community. The rest of their knowledge has been obtained through their own initiative and through the use of freely available online and offline resources.
The most impressive outcome of civil society and private sector action is undoubtedly the development of 'workaround' networking solutions; these have enabled cheaper access to the Internet in the previously underserved areas of Indonesia. This innovation came about as a result of persistent attempts to bypass Telkom's last mile infrastructure (and, therefore, avoid paying excessive charges), made by ISPs and other small and medium ICT entities.
As explained in Chapter 6, ISPs have been forced to pay PT Telkom's exorbitant charges, making Internet subscriptions too costly for average Indonesians. In order to circumvent this, ICT experts and academics developed 'neighborhood networks' and 'school networks' which provide lowcost, shared Internet access around neighborhoods and schools, respectively, using wireless networks (Wi-Fi). These access points follow the warnet model of operation and make use of wireless networks that rely on radio waves, running on 2.4 GHz or 5.8 GHz bands up to 5–8 km and, most importantly, bypass Telkom's last mile infrastructure. By running either a Unshielded Twisted Pair (UTP) cable around the neighborhood or by using a Wi-Fi access card and using bandwidth from nearby Internet cafés (or schools), Internet connectivity can be distributed throughout the area for as low as USD 15 to 30 per house per month. As more households and computer units join the network, and as technology develops, the cost further declines (unfortunately, along with quality). While most school networks provide the same services as Internet cafés for a cost of about USD 0.5 per student per month, others resell bandwidth to distribute connectivity around their neighborhoods. School networks allow many more people to access the Internet than just those who can afford personal computers (PCs) in their homes.
Setting up and maintaining a wireless connection for a Neighborhood or School Network is a low-cost activity.15 An advanced ICT-literate individual can build a Wi-Fi network without much difficulty. These alternative network solutions are discussed in detail in Chapter 6.
Emerging VoIP (Internet telephony) is another feature that has become available to Indonesians through Neighborhood or School Networks, which allows cheap communication, both locally and globally. By utilizing VoIP to make phone calls, Indonesians avoid the excessive call charges of PT Telkom and PT Indosat. Currently 15 Indonesian VoIP providers are in operation and the cost of carrying data in and out of the country is declining. Equipment for Internet telephony is now available off-the-shelf and is fairly easy to use; the one-time cost for a VoIP handset is around USD 20 to 70 (a Telkom circuit-switched handset costs around USD 25 to 35, and a fixed wireless handset costs between USD 35 to 50) and the monthly operating costs are about USD 25. This technology can be used to build a community telephone network sidestepping PT Telkom's telephone infrastructure, which again further reduces costs per call.
Civil society actions have had major impacts on Indonesian Internet development and use; within a short period of 10 years it is estimated that over 10 million Indonesians, more than 4,000 schools, and over 4,000 Internet cafés (including the warnet) have gone online. Significant progress has been made in the creation of an ICT-literate society, improved online presence and better local applications. What is most significant is that all of this has been achieved without much government and donor support.
Despite a lack of regulatory support from the Indonesian government as well a variety of geographical, political, and economic obstacles, progress has been made in the deployment and use of the Internet in Indonesia with the support of local communities. Much progress has been made in the diffusion of ICT education in the country.
With the exception of the Ministry of Education, the Government of Indonesia has not provided much support for the development or adoption of ICTs; in fact, its telecom policies have constituted a major barrier. While the private sector enjoys the benefits of competition in the IT market, the fixed telecom sector is essentially monopolistic, although the regulatory framework states otherwise. It is imperative that more enlightened policies and regulations are implemented for the benefit of all Indonesian citizens; the recent reforms proposed by the government show promise. Such policies would include those that not only permit, but also encourage private participation in infrastructure development, and help to reduce prices through competition. Effective regulation is also required in the sector. Since the unlicensing of the 2.4 GHz band for Wi-Fi in January 2005, the government has been making better decisions in consultation with the ICT community. It has forced telecom operators to cut leased line prices by 50 percent16 and now has plans to introduce a least-cost subsidy auctions to roll-out backbone networks. To ensure competitiveness in the telecom sectors, the authorities have plans to introduce another international gateway provider and have already allowed the entry of new players in the fixed wireless and mobile sectors (Goswami, 2006).
The ICT community aggressively promoted the use of the Internet throughout Indonesia, and their actions have resulted in the creation of an ICT-literate society, an improvement in Indonesia's online presence and better local applications. These outcomes and the development of alternative network solutions that enable affordable access to the Internet have had positive impacts on the sector.
1. Divakar Goswami assisted in the preparation of this chapter, with the verification of certain facts.
2. World Bank: http://devdata.worldbank.org/data-query
3. For example, granting exclusivities to incumbents for the fixed-line sector and international gateway; licensing framework that prevents ISPs from building infrastructure; no tariff regulation of leased line and international bandwidth which are crucial inputs for provision of Internet service, etc. See Chapter 6 and Goswami and Purbo (2006) for more information.
4. This network is now the base of the non-commercial research and academic information network known as IPTEKnet.
5. Abbreviation of warung Internet, loosely translated as cybercafé or Internet café.
6. ITU World Telecommunication Indicators 2004 database and APJII estimates (http://www.apjii.or.id/dokumentasi/statistik.php?lang=eng)
7. APJII (http://www.apjii.or.id/dokumentasi/statistik.php?lang=eng)
8. ITU World Telecommunication Indicators 2004 database.
9. There are many estimates of the number of Internet users in Indonesia based on varying and arbitrary definitions. For instance, the APJII estimate for Internet users is derived by multiplying the number of subscribers by some factor close to 10. The most reliable figure of 10,000,000 Internet users in Indonesia is the result of a national survey carried out by BPS in 2005. http://www.apjii.or.id/dokumentasi/statistik.php?lang=eng
10. ITU World Telecommunication Indicators 2004 database.
11. See Figure 6.1.
12. The model takes into consideration (a) Pervasiveness, (b) Geographic dispersion, (c) Sector absorption, (d) Connectivity infrastructure, (e) Organizational infrastructure, and (f) Sophistication of use, http://mosaic.unomaha.edu/gdi.html
13. Of the 66,778 villages across Indonesia, almost 65 percent remain unwired.
14. The cost of owning a telephone includes an initial connection charge of USD 31 and monthly subscription charges of USD 3.4 in addition to per minute call charges (ITU, 2006), the total of which is unaffordable to most Indonesians. Besides owning telephones, few Indonesians own PCs. A basic, no-frills personal computer can cost between USD 200 and 250 and this is far too costly for an Indonesian earning an average of USD 80 per month. Additionally, Internet access charges (that is, the subscription to an ISP) vary between USD 5 and 60 per month, depending on the type of connection (telephone, cable, or fiber optic). Based on ITU (2003) figures, the average Indonesian spends up to 28 percent of his income per month for Internet access.
15. It costs approximately USD 2,000 to set up a neighborhood network, which, if divided among the neighborhood, will reduce individual charges further.
16. 'Leased Line Tariffs to be Regulated', Bisnis Indonesia, September 27, 2006.
Badan Pusat Statistik (August 2006). Profile of Information technology usage by public, National Social Economy Survey Results (Susenas) 2005. Statistic State News No. 42/IX/14.
Belawati, T. (2003). Philippines: ICT Use in Education. In G. Farrell and C. Wachholz (Eds.), Meta-survey on the Use of Technologies in Education in Asia and the Pacific 2003–2004 (pp. 121–127). Bangkok: UNESCO.
Goswami, D. (November 9, 2006). Indonesian Country Study Colloquium presentation. Colombo, Sri Lanka: LIRNEasia. Retrieved May 20, 2006, from http://www.lirneasia.net/2006/11/colloquium-indonesia-sector-performanceindicators-study/
Goswami, D. and Purbo, O. (2006). Wi-Fi "Innovation" in Indonesia: Working around Hostile Market and Regulatory Conditions. WDR 3rd cycle, Discussion Paper WDR0611. Retrieved from http://www.lirneasia.net/2006/05/wi-fi-%e2%80% 9cinnovation%e2%80%9d-in-indonesia-working-around-hostile-market-and-regulatory-conditions/
ITU (2002). Asia-Pacific Telecommunication Indicators. Geneva: International Telecommunication Union.
ITU (2006). World Telecommunication Report 2006. Geneva: International Telecommunication Union. Retrieved from http://www.fastforward.tt/files/cms/ITU%20WTDR%202006%20-%20ICT%20Measurement.pdf
Lim, M. (2002). From Walking City to Telematic Metropolis: Changing Urban Form in Bandung, Indonesia. In Tim Bunnell, Lisa B.W. Drummond and K.C. Ho (Eds.), Critical Reflections on Cities in Southeast Asia (pp. 75–100). Singapore: Brill Publisher and Times Academic Press.
Purbo, O. (2003). Indonesia. Digital Review of Asia Pacific 2003/2004 (pp. 1–11).
Purcell, F., Vernous, G., Wakunuma, K., Akbar, S. and Finquelievich, S. (2006). Role of Civil Society: Internet Governance and Developing Countries. Internet Governance Research Project, Diplo Foundation. Retrieved March 25, 2006, from www.diplomacy.edu/Conferences/IG/presentations/VeronicaCretu.pdf
Schwab, K., Porter, M. and Sachs, J.D. (2002). The Global Competitiveness Report 2001–2002. Oxford and New York: Oxford University Press.
Zinnbauer, D. (2001). Internet, Civil society and global governance: The neglected political dimensions of the digital divide. Information & Security, 7, pp. 45–64.
Greater access to ICT networks and to ICT-enabled services have been hindered in many developing countries by factors ranging from policy and regulatory failures to misperceptions of the cost-effectiveness of providing these services to 'marginal customers'.1 Yet, there is empirical evidence of considerable untapped business potential among such marginal customers. Innovative approaches to network development and expansion have been found, especially in the developing world.
The objective of this chapter is to analyze the necessary and sufficient conditions for network expansion and investment in marginal communities, drawing from the experience of the Grameen Village Phone (VP) program, an innovation of the Grameen Bank (GB) of Bangladesh. The VP program has been successful in providing access to telecommunications to over 45 percent of the villages in Bangladesh, as at the end of 2005, through providing microfinance to villagers to purchase a mobile phone and a Grameenphone (GP) connection, which is then operated as a pay-phone, providing access to fellow villagers for a charge. This is particularly impressive in a country that had 3.44 telecom (fixed plus mobile) subscribers per one hundred inhabitants in 2004. The VP program has been hailed as a unique model for the development of rural telecom infrastructure, promoting development and poverty alleviation in Bangladesh through the use of ICTs expanding telecom access to the rural poor, while maintaining a sustainable business model.
The models that work are defined and shaped by specific policy, regulatory and institutional environments and by the technology available at a particular time. Because specificity does not readily lend itself to practical and generalizable policy insights, the access problem is approached through the lens of transaction cost economics in order to retain a comparative perspective. As such, this chapter argues that access solutions evolve through the minimization of the transaction costs of doing business; that rational entrepreneurs will structure their models to ensure both cost-effectiveness and sustainability. In the process, 'win-win' solutions for most stakeholders may emerge.
The second part of this chapter examines the common misconceptions regarding provision of telecom services to marginal customers; this misconception is particularly pernicious in countries with low telephone penetration levels. This part looks at evidence from Bangladesh, India, and Sri Lanka. The next part sets out the basic conceptual framework relating to transaction cost minimization and analyzes the Grameen solution. From this central thesis of transaction cost minimization, a range of options are considered from an 'in-house' or vertically integrated model to various forms of outsourcing solutions, such as resellers and virtual network operators (VNOs)—and, finally unveiling the factors likely to produce these outcomes. The conclusion touches on the debate surrounding traditional microfinance approaches vis-à-vis market-based approaches in improving the lives of marginal communities, cementing the argument that markets can, and have been made to work for the poor, provided that business strategies create workable incentive structures.
The under-provision of telecom services for potential users in countries with low telecom penetration is linked to two misperceptions. First, that the demand for telecom services among marginal customers is too low to generate commercially viable business. Service providers tend to believe that marginal customers cannot afford the services, if they need them at all. Second, that the transaction costs of providing services to marginal customers include a significant payment collection component, which is perceived as being too high to justify rolling out the network.
New research suggests that investing in marginal communities is good for business. In Bangladesh, the VP program has demonstrated that there is an enormous untapped demand for telecom services amongst the rural poor. Studies indicate that users of these village phones spend around 7 percent of their income on telecom services on an average (Prahalad and Hammond, 2002) with consumer surplus yielded by a single phone call from a village to Dhaka estimated to range from 2.6 to 9.8 percent of mean monthly household income (Richardson, Ramirez and Haq, 2000, p. 2). It is estimated that the average net income earned by a village phone operator (VPO) is more than double the per capita income for Bangladesh (Alauddin, 2005). From a social perspective there is evidence that the VPOs—entrepreneurial women in rural Bangladesh—gain empowerment as they generate an income, participating in family decisions in a society where traditionally women have little or no say (Keogh and Wood, 2005). Chapter 1 showed that among telecom users at the BOP in the samples studied, 64 percent of the mobile users spent at least 4 percent of their income on mobile communications.
These findings indicate that the purchasing power of marginal customers may be higher than believed and point to a large unmet demand at the BOP. However, they tell only half the story. Unleashing this potential not only depends on an informed perception of marginal customers as a potential profit base (something that GB acquired through years of interaction with its clients as a microfinance institution with deep roots in rural communities); it also depends on the way in which services are packaged, marketed, and delivered—that is, how the business model is structured to minimize transaction costs.
The essence of transaction cost economics (TCE) is its approach to the 'allocation of economic activity across alternate modes of organization (markets, firms, bureaus, etc.), [using] discrete structural analysis, [and describing the firm as] a governance structure (which is an organizational construction)' (Williamson, 2005, p. 41). An important contribution made by TCE to socio-economic analysis and to the understanding of business structures and strategies is its focus on the science of contract; this focus draws from the fields of law, economics and organization theory. In contrast to traditional neoclassical economics but in line with the broader new institutionalism that it is situated within, TCE gives prominence to the role of governance in shaping the structure of a transaction, or a particular organization structure. To cite one of the founders of institutionalism, Commons (1932, p. 4), 'the ultimate unit of activity…must contain in itself the three principles of conflict, mutuality and order. This unit is the transaction.' In short, governance is seen a means to bring in order, to mitigate conflict and allow for mutual gain.
At a practical level and for the purpose of this analysis, TCE implies that the organizational structure that will evolve is determined largely by the transaction costs involved in providing a particular service. In the Grameen case the high transaction costs associated with the provision of telecom services to the rural poor are lowered by the extensive physical and social infrastructure that Grameen has on the ground; the outcome is an 'in-house' model where all parts of the process remain within the Grameen 'family' of organizations.
The VP program, an initiative of GB and Iqbal Quadir, a US-based Bangladeshi, was set up through the establishment of two companies—Grameen Telecom (GTC, a non-profit rural telecom company) and Grameenphone (a for-profit mobile network operator). It has been in operation since 1997. This innovative strategy for network expansion was conceived within an environment of limited interconnection facilities—hostile conditions created by the incumbent fixed operator, Bangladesh Telegraph and Telephone Board (BTTB), and permitted by government apathy. These unfavorable initial conditions led GP to seek alternative means of penetrating the countryside, resulting in a network sharing agreement with Bangladesh Railway, which led to the acquisition of a 1,800 km long fiber optic network; this arrangement essentially gave the company access to a nation-wide network parallel to that of the incumbent. With the fiber optic network under its belt, GP also obtained a critical strategic advantage over rival operators constrained by insufficient interconnection with BTTB and has thus been able to expand its coverage throughout the country rapidly. GP's coverage is extensive, and has by and large followed the railway network. Furthermore, as Figure 5.1 illustrates, the VP program has
Figure 5.1
Growth in Village Phone Operators (1997–2006, September) and Grameenphone's Revenue from Village Phones (USD) (1997–2003)
Sources: Grameen Telecom (2005), http://www.grameenphone.com and Grameen-phone Annual Report 2005, Grameenphone Annual Report 2003.2
expanded significantly since its inception, with over 250,000 VPOs in September 20063 and a positive return in terms of revenue as shown in the same figure.
The Grameen family of organizations is an important element of the VP program's success—screening creditworthy clients and ensuring repayment (both activities carried out by GB branches at the village level), and allowing for economies of scope. The mechanics of the VP program and the role of the three key organizations involved—GP, GTC, and GB—as well as their relationships are illustrated in Figure 5.2. GB provides loans to selected VPOs to obtain a connection to GP's cellular service; in July 2005, when this research was conducted, the amount of the loan was approximately USD 133 (Grameen Telecom, 2005). The VPO resells telecommunications service to people in and around their villages, for a profit.
Grameenphone has been able to piggy-back on GB's established micro-finance infrastructure in the context of determining and ensuring the creditworthiness of clients. The streamlined selection process, which has resulted in the screening out of bad debtors, and a repayment rate
Figure 5.2
Relationships among Grameenphone, Grameen Telecom, Grameen Bank Branches, and Village Phone Operators in the Context of the Village Phone Program
Source: Knight-John, Zainudeen and Khan, 2005.
of approximately 98.95 percent,4 is depicted in Figure 5.3. GB is the first point of contact for VPOs with GB staff permanently located in villages and regularly meeting borrowers. These regular meetings with VPOs work well to avoid problems of moral hazard (unwillingness to pay back) and adverse selection (carrying a larger percentage of bad debtors) associated with informational asymmetries between lenders and borrowers.
The scope economies associated with GB's microfinance base include the provision of micro-loans to selected VPOs to purchase a handset and a connection; loans for solar panel cells and DC batteries are also provided in locations where there is no electricity through Grameen Shakthi, another member of the Grameen family.
Figure 5.3
The Village Phone Operator Selection Process
Source: Knight-John, Zainudeen and Khan, 2005.
There is also a significant 'power relationship' between GB and its borrowers that own 94 percent of the total equity of the Bank—illustrated by the 16 decisions5 that clients must commit to when becoming a member of the Bank. This vertical power structure between the Bank and the VPOs is complemented by peer pressure; loans are given to groups of five and the entire group is denied credit if one person defaults. Thus, the risk of jeopardizing one's reputation in a tightly integrated village community helps to create a strong incentive mechanism for the repayment of loans.
The Grameen model has led to a situation where in 2004, the VPOs that made up approximately 3.85 percent of GP's subscriber base accounted for 15.5 percent of GP's total airtime revenues (Alauddin, 2005), while incurring less costs that those associated with a regular subscriber. As at June 2005, the average revenue per user generated by a VPO connection was twice that of a regular subscriber.
From the perspective of GP, the company that owns and operates the cellular network, the VP program is one customer; GP treats the entire program as a bulk buyer of airtime, issuing a single summary bill in English at the end of the month to GTC for the aggregated airtime of all the VPOs. GTC then makes out airtime bills in Bengali for each GB branch office, with a summary for that branch. The GB branch makes out individual bills for each VPO, and the actual collection of monies from VPOs is carried out by the GB branch at the village level; monthly bill collection is integrated with loan repayments (including for the initial package). The branch pays the bill to GTC by the last date of payment. GTC bears marketing and advertising costs of the VP program, supplies handsets, provides support, training, service, and repair of handsets, and overall management of the VPO network (Grameen Telecom, 2005).
GP therefore avoids several costs it would incur if it were to provide individual connections to VPOs without the involvement of GTC and GB. GP only incurs costs related to:
communication infrastructure
technical support
provision of airtime (which is provided at a 50 percent discount)
provision of a bulk bill to GTC
government licensing and regulatory compliance and liaison
government financial and taxation liaison
The Grameen solution also takes into account the demand side of the equation, that is,, the affordability factor. For example, the shared access model used in the VPO program—where one phone provides access to multiple users—concentrates demand and aggregates purchasing power. Citing Prahalad and Hammond (2002, p. 10): 'an individual consumer might not be able to afford a particular product or service, [while] a group, or even a whole village, often can.'
GP also provides airtime to GTC for the VP program at a discounted rate of around 50 percent. Whilst this was initially part of GP's business strategy (embodied in the principle, 'good development is good business'), it is now one of GP's biggest Corporate Social Responsibility programs. The discount is an exclusive privilege offered by GP to GTC, and applies to all rates that are normally charged to GP customers. The tariffs charged by GTC to VPOs are hence less than what regular GP customers pay. The discounted rate allows GTC to cover its costs, and the VPOs to make a profit. Thus, in the absence of an airtime discount, the rates that VPOs would have to charge users in order to cover costs would be much higher; in turn, demand for telecom services would be lower, and hence the profitability of each VP would be reduced, and the sustainability of the program would be negatively affected.
The Grameen solution has two characteristics. First, it is a reseller model, where the telephone is owned by a local entrepreneur, who resells services within the locality—in this case the village. Second, it is an 'in-house' solution—a model of transaction-cost minimization that has appeal in the context of low-trust/credibility conditions in countries with weak law and governance capacities.
The Grameen solution evolved in a specific market, regulatory and technological context; it is by no means a universal remedy for the problem of access to marginal consumers. Yet, as seen earlier in this chapter, the Grameen story does provide very useful policy insights on converting a potentially unfriendly business environment into one that can work for all stakeholders. The keys to its success—the factors that lend themselves to generalization for policy and business purposes—are the identification of the relevant transaction costs and the design of a solution that can minimize these costs; a cost-effective model that would also ensure business sustainability. In the remainder of this part, we extend our central thesis of transaction cost minimization to explore other solutions or models for enhancing network participation.
This solution, adopted in the Ugandan variation of the Grameen model, provides a lower-transaction-cost alternative to the 'original' model. The original Grameen model takes a post-paid approach, where the VPOs settle the airtime bill at the end of the month. In the prepaid variation of the model, users who have already secured a handset and connection to a network operator (through the Village Phone-type program) buy airtime in advance—either by purchasing prepaid 'top-up' cards for specific (discreet) values (for example, 100, 500, or 1,000 Taka) or by using 'electronic-refill' systems for any desired amount.6 This can usually be done at designated retail outlets, such as grocery stores. As the services are used, the available credit is periodically 'topped up'.
The most advantageous aspect of this approach is that the need to screen creditworthy customers and ensure repayment is eliminated. People pay for services before using them, so there is no risk of non-payment of bills. Users of prepaid mobile connections have largely been in developing countries,7 where fixed telephony is either unavailable or very limited or, in instances where mobile service exists and marginal customers are unable to obtain 'post-paid' connections for lack of creditworthiness. Often in developing countries, credit histories are not well documented, making it difficult for operators to distinguish between customers who are likely to pay their monthly bills and those who are not. Such informational asymmetries drive up risk and therefore the transaction costs of doing business through monthly subscriptions, or a 'post-paid' approach.
An operator may avoid and/or reduce certain costs through a prepaid approach, but significant costs will still be involved in a prepaid system. Prepaid operations require sophisticated software systems that can keep track of account balances and deduct the correct amount of credit for all types of services provided. Costs are also incurred in printing and distributing charge cards (or top-up cards) to retailers. If an electronic refill system is in place, then this also requires sophisticated software as well as a small piece of equipment for the retailer to credit customers' prepaid accounts.
Another solution to network access that has evolved is the reseller model. The basic model is made up of a network operator that owns and maintains the network infrastructure and provides the 'service' (that is, airtime) to a buyer, who then resells this airtime usually for a profit.
There are two versions of this model, each defined by the nature of the relationship between the reseller and the network operator. Here we look at the first version: that of the local reseller. The second kind of reseller is the 'VNO,' or 'virtual network operator', discussed subsequently.
In a local-reseller approach, an entrepreneur obtains telephone line(s) from a network operator, paying a connection fee and a monthly bill, which includes line rental and airtime charges. The local reseller provides telecom services to people in the vicinity, most likely, making a profit. The relationship between the network operator and the reseller is similar to that of a regular customer, except for discounts for wholesale purchase, if at all. Resellers may or may not be required to obtain a license, or register with the regulator, depending on the regulatory regime that prevails in a particular jurisdiction.
In theory, the risk from the network operator's perspective should be greatly reduced, as the local reseller collects use charges from the end users—whom the network operator perceives to be risky. However, this solution has its own problems. The perception among operators in Sri Lanka, for instance, is that the local resellers pose a greater risk factor than individual subscribers, often running up bills in the equivalent of thousands of dollars, leading to line disconnection upon non-payment. Under the current legal infrastructure, there is little to stop these resellers from obtaining a new line at a slightly different address (for example, street number '59/1', as opposed to '59'), under a different household member's name, and by starting a new business. Moreover, in countries where legal enforcement is weak, it is sometimes more costly to take legal action than simply write off bad debts. What is apparent from the empirical evidence on the local reseller approach, therefore, is that its workability depends on the institutional setting—in particular, the norms, principles and practices of law and governance that prevail in a given environment.
The second kind of reseller is the VNO—exemplified by the British mobile operator, Virgin Mobile. In this approach, the VNO establishes itself as an operator without building a network; instead, it piggy-backs on the network of an existing operator and resells services under its own brand name, utilizing its own assets such as brand name and distribution facilities.8 In this instance, the relationship between the VNO and the network operator is one where the former purchases bulk airtime from the latter, paying by the minute. The network operator avoids costs such as billing, collection, distribution, etc. The network operator incurs lower operation/variable costs and can afford to sell airtime to the reseller at a discounted or bulk rate.
In the VNO approach, the risk of providing service to the marginal customer is transferred from the network operator to the reseller (the VNO); that is, assuming the VNO does not default on payment to the network operator. An additional benefit accruing to operators is the ability to reach users in segments that have not been captured by their own brand names. What this implies also is that VNOs have the greatest positive impact when they team up with carriers that have a relatively small market share or a brand name that is not strong enough to withstand competition on its own; this model is less attractive for market leaders. As pointed out in the analyses by Pyramid Research (2005a, p. 2), UK's T-Mobile has been able to grow its market share by about 7 percent since it teamed up with Virgin Mobile in 1999. It is questionable, however, if these beneficial impacts would be replicated in the case of market leaders such as Verizon or Vodafone that have established their brand image globally.
An additional point raised by Pyramid Research (2005b) is that there is little space for VNOs in the context of markets that have pent-up demand and scarce network capacity. Telecom markets in the African region, for instance, have very different characteristics—with subscriber growth at record levels, network operators with stretched capacity confronting problems of poor call quality and call completion rates and average revenue per user (ARPU) in the prepaid segments falling rapidly; VNOs do not appear to be a viable option in situations of low ARPU levels.
This chapter attempted to answer two questions, based on empirical evidence: first, what does the evidence indicate with respect to the perception that there is little value in investing in marginal customers. Second, if there is empirical evidence that there is significant business potential at the BOP, what are the business models or approaches that can be used to extend access in a sustainable manner—models that will facilitate a win-win situation for all stakeholders. As illustrated in the analysis earlier in this chapter, the perception that it is not cost-effective to extend network access to marginal customers is not true.
Using the conceptual framework of TCE, we then set out a generic 'rule'—transaction cost minimization—for the structuring of workable and sustainable business solutions to the access problem. Using the Grameen model as a starting point, we unpack the conditions for success. Technology plays a relatively lesser role in generating a workable solution than a correct understanding of the market and the associated transaction costs, and tailoring an appropriate solution. The choice between in-house and out-sourcing models or between different versions of out-sourcing solutions depends on the nature of transaction costs that a business faces in a given environment and at a given time.
Drawing from the microfinance approach taken by Grameen—a market-oriented approach with an appropriately crafted incentive structure, and suitable institutional mechanisms—markets can, and do serve the poor, as well as other marginal customers. To illustrate, the VP program provides VPOs with a livelihood, a means of generating a steady income by reselling telecom services, in effect a 'market' solution. This approach sets into motion a virtuous cycle and facilitates a win-win solution for all stakeholders, with the VPOs generating an income that in turn increases the certainty of repayment—an encouraging factor for operators to provide rural telecom services.
1. In this chapter, the 'marginal customer' is defined as one that is excluded from market transactions under a given configuration of demand and supply conditions; if, for instance, supply is increased by a single unit, then the marginal customer would be included in the transaction.
2. http://www.grameen-info.org/bank/GBGlance.html, accessed September 2006.
3. Exchange rate of BDT 66 to USD 1 used, from www.xe.com, September 7, 2005.
4. http://www.grameen-info.org/, accessed August 2005.
5. For example, the borrower will outlaw dowry practices, use pit latrines, drink only from tube wells where available, if not boil their water or use alum, educate their children, etc.
6. The electronic refill system is not yet available through all operators in all countries.
7. It is estimated that over 50 percent of the world's mobile users are on prepaid plans. In developing countries, the percentage is much higher—http://www.sfu.ca/cprost/prepaid/early.htm; the findings reported in Chapter 1 also support this with 83 percent of mobile owners in the Sri Lankan and Indian samples studied choosing prepaid mobile connections.
8. Adapted from the definition of 'mobile virtual network operators' or MVNOs given by Sekino, Tripathy and Di Capua (2005, p. 3).
Alauddin, R. (2005). Connecting People in Rural Communities through ICT: Grameen Telecom Experience. Presentation made at Workshop on Building e-Community Centers for Rural Development. Asian Development Bank Institute, Bali, December 8–14, 2004. Retrieved November 14, 2007 from http://www.adbi.org/files/2004.12.08.cpp.connecting.rural.ict.pdf
Grameenphone (2004). Grameenphone Annual Report 2003. Dhaka, Bangladesh: Grameenphone.
Grameenphone (2006). Grameenphone Annual Report 2005. Dhaka, Bangladesh: Grameenphone.
Grameen Telecom (2005). Grameen Telecom. Presentation slides provided by GTC, Dhaka. Retrieved September 7, 2005, from www.grameenphone.com
Keogh, D. and Wood, T. (2005). Village Phone Replication Manual: Creating Sustainable Access to Affordable Telecommunications for the Rural Poor. United Nations ICT Task Force. New York: The United Nations Information and Communication Technologies Task Force.
Knight-John, M., Zainudeen, A. and Khan, A.S. (2005). An Investigation of the Replicability of a Microfinance Approach to Extending Telecommunications Access to Marginal Customers, LIRNEasia research report. Retrieved October 11, 2007, from http://www.lirneasia.net/wp-content/uploads/2006/02/KnightJohn%20Zainudeen %20Khan%202005%20Replicability%20GP%20microfinance.pdf
Prahalad, C.K. and Hammond, A. (2002). What Works: Serving the Poor, Profitably. World Resources Institute. Retrieved October 15, 2007, from http://www. digitaldividend.org/pdf/serving_profitably.pdf
Pyramid Research (2005, October 14, a). MVNOs: To Host or Not to Host, That is the (MNO) Question. Analyst Insight. Cambridge, Massachusetts: Pyramid Research.
Pyramid Research (2005b). MVNOs in Africa? Retrieved October 11, 2007, from http://www.pyramidresearch.com/pa_09feb_mvno.htm?SC=PDO2a
Richardson, D., Ramirez, R. and Haq, M. (2000). Grameen Telecom's Village Phone Programme in Rural Bangladesh: A Multi-Media Case Study Final Report. TeleCommons Development Group (TDG). Gatineau, Canada: Canadian International Development Agency (CIDA).
Sekino, H., Tripathy, A. and Di Capua, M. (2005). Your Brand, Unplugged: A Strategic and Structured Approach to Launching an MVNO. Chicago: Diamond Cluster International.
Williamson, O.E. (2005). Transaction Cost Economics. In Claude Menard and Mary M. Shirley (Eds.), Handbook of New Institutional Economics. The Netherlands: Springer.
Zainudeen, A., Samarajiva, R. and Abeysuriya, A. (2006). Telecom Use on a Shoestring: Strategic Use of Telecom Services by the Financially Constrained in South Asia. WDR Dialogue Theme 3rd cycle Discussion Paper WDR0604, Version 2.1. Retrieved October 14, 2007, from http://www.lirneasia.net/wp-content/uploads/2006/02/Zainudeen%20Samarajiva%20Abeysuriya%202006%20teleuse%20strategies.pdf
Wireless Internet technologies have the potential to bridge the digital divide between countries and regions that have well developed telecommunications infrastructure and those that do not. The Internet has the potential to improve the lives of people, especially in hard to reach areas outside urban centers. Given the necessary infrastructure, a wide array of interactive multimedia solutions—from government services, to education, to commerce—can be brought to these usually underserved areas. However, such areas are typified by poor infrastructure and connectivity.
It is precisely in places where infrastructure is poorly developed that wireless networking, particularly the Institute of Electrical and Electronic Engineers (IEEE) 802.11x standards, popularly referred to as Wi-Fi, can be viable solutions that allow leapfrogging of some parts of the traditional wired network to connect people in far flung villages to each other and to the wider world via the Internet. The fast declining costs of wireless technology along with the embedding of Wi-Fi chipsets in a variety of mobile devices, including mobile phones, can potentially extend some form of broadband Internet connectivity to difficult areas of the world (Wireless Internet Institute, 2003).
However, the challenge of bridging the digital divide has been less an issue of finding and deploying the right technologies and more of finding ways to overcome institutional, regulatory, and market barriers to satisfy connectivity needs.
Despite the overwhelming benefits of Wi-Fi for rapidly extending connectivity, only 41 percent of developing countries allow license-exempt wireless spectrum for Wi-Fi, compared to 96 percent of developed countries (Wireless Internet Institute, 2003). Developing countries lag in Wi-Fi-enabling regulations because they are yet to carry out necessary regulatory reforms which will transform their telecommunications sectors from those dominated by government-operated monopolies to those with workable competition. Where incumbents have been partially privatized, the government continues to retain controlling shares in the operator. Where regulators have been appointed, they have been undermined by undue interference. In these countries, the regulatory environment is not conducive to license-exempt bands that allow a panoply of services, including voice, to be provided by wireless, circumventing the legacy infrastructure of the incumbent. It is understandable that incumbents who have invested in a wired infrastructure would be hostile to any 'disruptive' technologies that can loosen their hold (Wireless Internet Institute, 2003). What is less understandable is why incumbents who have not invested in rural areas and in data services are still hostile to Wi-Fi.
Although wireless local LANs were in existence before Wi-Fi standards were established, communication among wireless equipment manufactured by different vendors was often not possible (Kharif, 2003). In 1990, under the aegis of the IEEE, a group was formed to develop common wireless standards. After the IEEE 802.11 standard was published in 1997, vendors developed Wi-Fi equipment around two variants of the 802.11 standard: 802.11b (operating in 2.4 GHz band) and 802.11a (operating in 5.8 GHz band) by early 2000. Other variants of the 802.11 standard were developed over time, offering higher bandwidth for data transmission, as shown in Table 6.1.
The potential of Wi-Fi in developing countries goes beyond homes and urban centers, which have been the preferred sites of deployment in developed countries. The very features that make it popular in developed countries make Wi-Fi attractive for bridging the digital divide: its ease of set-up, use, and maintenance; its relatively high bandwidth; and, most importantly, its relatively low cost. High demand for Wi-Fi equipment has brought down unit costs (Pentland, Fletcher and Hasson, 2002); Wi-Fi routers and cards retail below USD 80 each.
Table 6.1
Wi-Fi Standards
| Family of Wi-Fi Standards |
| |
Standard | Speed | Frequency Band | Compatible with |
802.11b | 11 Mbps | 2.4 GHz | b |
802.11a | 54 Mbps | 5 GHz | a |
802.11g | 54 Mbps | 2.4 GHz | b, g |
802.11n | 100 Mbps | 2.4 GHz | b, g, n |
Source: Author, based on Wi-Fi Alliance, http://www.wifialliance.com/ | |||
Using antennae and repeaters, the range of a Wi-Fi connection can be extended from 50 m to 20 km (Pentland, Fletcher and Hasson, 2002). With this kind of range and low deployment costs, Wi-Fi technology opens up new possibilities for providing rural connectivity.
In one 'wireless' leap, Wi-Fi offers countries the opportunity to connect regions that currently lack wire-line infrastructure; it can also help to connect difficult-to-wire terrain to provide cost-effective connectivity to farmers, traders, and fishermen who live outside urban centers. Not only are Wi-Fi networks significantly cheaper than wired networks, they can be built without obtaining permits and laying cables.
However, Wi-Fi has a number of limitations. It is prone to interference from other Wi-Fi networks in the vicinity and other devices like Bluetooth, cordless phones, microwave ovens, etc., which use the same frequencies. Interference degrades network performance and affects reliability. Furthermore, there is a steep range/bandwidth trade-off, the further one is from the wireless access point. For the above reasons, Wi-Fi cannot provide carrier-class reliability that one expects from fiber optic or microwave links that transport data at high speed and over large distances. It is precisely for this reason that Wi-Fi by itself cannot be a connectivity solution for an entire country. It still requires a link to a high-performance fiber optic backbone. At best, Wi-Fi is effective as an access network for providing last-mile connectivity and as a low-capacity, backhaul network for carrying data over 5 to 10 km, as cases from around the developing world show.
The number of developing countries that have unlicensed the 2.4 GHz band for Wi-Fi services are increasing although their numbers are still small. For example, most of ASEAN and SAARC countries require some form of licensing for deploying Wi-Fi technology (Open Spectrum Foundation, 2006). Among developing countries that have deployed Wi-Fi, coverage is limited to a few localities or regions with a few exceptions.
In India, the unlicensing of the Wi-Fi frequencies saw a sharp growth of wireless hotspots due to private investment. However, the earliest deployment of Wi-Fi in India was made on an experimental basis in rural localities under the DakNet project. This project used the 'store-and-forward' system that asynchronously connected villages via a bus that was equipped with a wireless access point, pioneered by First Mile Solutions (FMS).1 By and large, the growth of Wi-Fi deployment in India remains concentrated in a few urban centers and the benefits of wireless technologies are still to be leveraged in a significant manner for rural access.
FMS has deployed variations of the store-and-forward system in a number of countries including Rwanda and Cambodia. In countries where FMS' store-and-forward system has been deployed, they were made on a small-scale, experimental basis, in most cases with donor funding.
Indonesia stands-out among developing countries in terms of Wi-Fi deployment not only because of the extensive deployment of this technology over a large geographical area but also because this innovation arose from endogenous factors.
Indonesia is the world's largest archipelagic state with more than 17,000 islands. Among the major inhabited islands are Java, where 60 percent of Indonesians live, Sumatra, Kalimantan, Sulawesi, and Papua. Out of a total area of 9.8 million sq km, 81 percent is sea. These physical characteristics pose major challenges to rolling out communication infrastructure.
Wi-Fi deployment in Indonesia is unlike any of the cases outlined in developing countries in the previous section. As early as 1996, before common standards for wireless local LAN were developed, Indonesian Internet Service Providers (ISPs) were using wireless links for back-hauling their data (Simanjuntak, 2005). Long before the 2.4 GHz band was unlicensed in Indonesia, Wi-Fi was deployed in more than 40 towns and cities2 in different islands (Augustine and Sunggiardi, 2005).
Interviews with representatives from Indonesian Wireless Internet Community (INDOWLI), Association of Computer Businesses (APKOMINDO), and Association of Cybercafés (AWARI) suggest that the geographical coverage of Wi-Fi is approximately 60 percent in Java, 30 percent in Sulawesi, 35 percent in Sumatra, and 5 percent in Papua. Not only is the Wi-Fi coverage more than most developing countries in absolute and relative terms, they have been funded by small entrepreneurs. It is the small and medium-sized ISPs rather than the big telecom operators who have invested in wireless networks.
The advantages of Wi-Fi in providing cost-effective connectivity were discussed earlier. Based on the above rationale and from the evidence of extensive Wi-Fi deployment in Indonesia, one would expect Internet penetration and growth to be high in the country. But the evidence presented in Figure 6.1 indicates otherwise. Within the Association of Southeast Asian Nations (ASEAN), Indonesia ranks in the bottom half for Information and Communication Technologies (ICTs). Its Internet subscriber penetration for the year ending 2005 was 0.39 subscribers per 100 inhabitants.
Figure 6.1
ICT Penetration in ASEAN Countries (2004)
Source: ITU (2005).
Wi-Fi deployment in Indonesia has not led to higher Internet penetration, compared to other developing countries. Not only is the Internet subscriber base in Indonesia significantly lower than in its ASEAN counterparts, it is also lower than the ASEAN average. When compared to India, which is also large in size and population and with similar per capita income (Indonesia USD 3,500, India USD 3,100, PPP adjusted), Internet growth in Indonesia is also lagging behind, as can be seen from Figure 6.2. In an eight-year period (1998 to 2005), Indonesia's Cumulative Average Growth Rate (CAGR) for Internet users was 41.2 percent compared to 73.8 percent in India.
Figure 6.2
Internet Subscribers: Indonesia vs India (1998–2005)
Source: Author, based on data provided by APJII and ISPAI.3
It is evident that regulation or policies designed to leverage the low-cost and leapfrogging capabilities of Wi-Fi for achieving greater access have not been implemented in Indonesia. In fact, until January 2005, Wi-Fi deployment was illegal in Indonesia which altogether ruled out a government or regulator role in promoting this technology. The anomaly can only be explained by looking at the context within which Indonesian ISPs deployed Wi-Fi.
From the beginning, Internet growth in Indonesia has been driven by private/non-governmental initiatives, as detailed in Chapter 4.
One of the biggest barriers to Internet development was the high cost of connectivity to the international backbone and domestic leased lines, where they were available. These expenses constituted 60 to 80 percent of an ISP's total monthly cost. Heru Nugroho, former Secretary General of Indonesia's ISP Association APJII, estimated that on an average, ISPs spent about USD 50,000 for international Internet bandwidth per year before the Internet Exchange was established ('Bisnis Indonesia,' 2004b). According to him, bandwidth and networking costs typically represent 25 percent of the total costs of ISPs in other countries.
The high cost of international bandwidth was further exacerbated by the absence of a national Internet exchange. Each of the 35 ISPs had separate international connections to connect to the Internet backbone. Local traffic destined for addresses within the borders of Indonesia was also routed through the Internet backbone and incurred international bandwidth charges. Government initiatives to rectify the local bandwidth and connectivity problems were stalled by the Asian economic crisis in 1997. The government agreed to let the Internet association take the lead in building Indonesia's Internet backbone (Wagstaff, 1999). Led by APJII, a task force was created to develop an Indonesian Internet exchange. It came into operation in 1997.
Theoretically, ISPs could connect from their point-of-presence (PoP) to the Internet Exchange (IIX) by leasing a line from the incumbent. However, in 1997, PT Telkom, the incumbent fixed line operator, did not make leased lines available to ISPs (Allen, 2005).
In the absence of both build and buy options, ISPs decided to continue using the Wi-Fi frequencies, even though it was illegal. The relatively low cost of wireless infrastructure meant that the exposure to risk, in the form of confiscation or closure of the network, was also low.
This peculiar form of Wi-Fi deployment emerged from necessity, not choice. When PT Telkom made leased lines available, the prices were so high that ISPs decided to continue using the Wi-Fi links. Wi-Fi was used in Indonesia both as a backhaul link over long distances and for last-mile access.
The typical ISP network can be divided into an access and infrastructure network, as can be seen in Figure 6.3 (Huston, 1999). In the
Figure 6.3
Typical ISP Network Architecture
Source: Author.
infrastructure network, ISPs are connected to each other (peers) via a fiber backbone for exchanging traffic and to connect to a higher tier ISP to link to the Internet backbone. From their PoPs, ISPs may either use twisted copper pair, coaxial, or fiber optic cable to connect to the curb. The last meters to the customer premises are connected typically via twisted copper pair or coaxial cable. The end service that is delivered may be dial-up, ADSL or cable-based Internet. Typical use of Wi-Fi would be at the edge of the network, as a wireless residential network with a limited footprint.
The network architecture of an Indonesian ISP is typical, as can be seen in Figure 6.4. The ISPs peer with each other via an Internet exchange to which they connect using a variety of methods, including Ethernet, microwave leased line, or Wi-Fi. Wi-Fi, especially at the 5 GHz band, which continues to be licensed and hence is less prone to interference, is used (illegally) in the infrastructure component of the network to haul traffic from the ISPs' PoPs to the curb. From the curb, the ISP may link wirelessly to a large customer like a school or a cybercafé using 2.4 GHz frequencies.
Figure 6.4
Indonesian ISP Network Architecture
Source: Author.
For providing Internet service to neighborhood networks that connect individual houses, ISPs typically use an Unshielded Twisted Pair (UTP) cable to wire the homes, because of the cost savings from using an Ethernet card with the wired option instead of the more convenient but more expensive Wi-Fi access card.
A large customer like a school with a 1 Mbps Internet link will in turn become an ISP by connecting other schools, corporate customers and neighborhood networks. This many tiered retailing of Internet service is necessary to recoup the high retail prices for Internet access. This also explains why more than a third of ISPs operating in Indonesia do so without a license.
A number of factors make Wi-Fi deployment in Indonesia unique. Unlike in the West, Wi-Fi is not deployed primarily as a network for the home but is rather used as an access network to connect large customers such as schools and cybercafés. There is also a blurring of the access and infrastructure network as the wireless link is deployed as a low-capacity backbone to carry data over large distances. Reversing common wisdom, the ISPs use aerial cable to connect homes rather than Wi-Fi because it is cheaper to deploy the former. Finally, because of the lowcost and ease of setting up a wireless network, anyone with bandwidth can and will become an ISP, especially when exorbitantly high retail prices have to be recouped.
A business customer for dedicated Internet access typically pays about USD 4,000 per month for a 2 Mbps link to the IIX and a 512 Kbps international link to the Internet backbone. In order to recoup this high cost, a business customer interviewed for this study became an unlicensed ISP and provided Internet service to 129 customers, which included five schools, 20 Internet cafés, and neighborhood networks connecting 104 homes.
For this Internet service, each school was charged USD 100 per month, each cybercafé USD 200 per month, and each individual house around USD 35. In this instance, not only was the business customer able to cover its costs comfortably but in terms of customers, it was a larger ISP than the licensed upstream provider!
'Unlegal' activities4 were not restricted to the use of the 2.4 GHz and 5 GHz bands for Wi-Fi. Because of high local and international backbone costs, it is sometimes cheaper for ISPs to connect to the Internet backbone directly via satellite, bypassing Indosat's international gateway and avoiding payments for local leased lines. In most cases, direct access to a satellite link by ISPs is considered illegal since not all satellites have landing rights in Indonesia. Representatives from APJII have argued that if bandwidth prices were to fall in the country, the margin between the legal bandwidth price and the illegal will be narrowed, and ISPs will have a greater incentive to avoid the grey market (APJII—Internet Service Provider Cost, 2003).
From the discussions with ISPs and large customers like schools, it was evident that cost factors were the primary reasons why Wi-Fi has been used extensively in Indonesia. The licensing framework also played a part in the choice and will be discussed in greater detail later. The next part will unpack the cost factors.
By any measure, the retail price of USD 4,000 per month for a 512 Kbps Internet link is very high. When that price is seen in relation to the per capita income of Indonesia, it is astronomical. By examining the cost components of the ISPs, one can gain a better understanding of why retail prices are so high. The two major variable cost components of an ISP operating in Indonesia are the cost of domestic leased lines and international bandwidth. In order to determine whether leased line prices or international bandwidth prices are 'high' in Indonesia, it is necessary to compare them with other countries in the region and with international benchmarks.
As can be seen in Table 6.2, a 2 Mbps leased line for a 2 km link provided by an operator costs USD 18,000 a year in Indonesia (48 times that of India).5 Indonesian prices are four times the EU benchmark price. For the 200 km link, the ratios indicate that Indonesian prices are five to six times the EU benchmark and the price in India.
Indonesian international bandwidth prices are also significantly higher. As can be seen in Table 6.3, the price of a 2 Mbps full-circuit international link in Indonesia is four to five times the price charged in India.
Table 6.2
Comparison of Annual Domestic Leased Line Prices: Indonesia, India, and EU Benchmark (2005)
| 2 Mbps Link | |
| 2 km | 200 km |
Indonesia | USD 18,000 | USD 45,000 |
India | USD 376 | USD 7,603 |
EU benchmark | USD 4,802 | USD 9,219 |
Ratio of Indonesian to Indian price | 48:1 | 6:1 |
Ratio of Indonesian to EU benchmark price | 44:1 | 5:1 |
Source: Author, based on data provided by operators in Indonesia and India, Commission of European Communities (2005). | ||
Table 6.3
Comparison of Annual International Full-Circuit Prices to US West Coast in India and Indonesia: Prices (USD) and Price Ratios
| Full Circuit |
| 2 Mbps |
PT Indosat (Indonesian incumbent) | USD 108,528 |
DT Putra(Indonesian satellite provider) | USD 146,400 |
India | USD 37,200 |
Ratio of PT Indosat to India price | 3:1 |
Ratio of DT Putra to India price | 4:1 |
Source: Author, based on IPLC prices for Indonesia provided by Internet Data Centre (IDC) and India price from operator (Allen, 2005). | |
Even when compared to its Asia-Pacific peers, Indonesia's leased line prices are on the higher side as can be seen in Figure 6.5.
Since leased lines are a critical producer good for ISPs, high leased line prices naturally result in high retail prices for Internet services. As can be seen in Figure 6.6 and Table 6.4 comparing ADSL prices, retail price for Internet services are between four to five times more expensive in Indonesia than India.6
The Indonesian case is an example of innovation around constraints. The inadequate supply of network infrastructure, both of backbone and leased lines, resulted in Wi-Fi being chosen as a substitute for filling the 'missing links' in the network. The high price of domestic leased lines meant that ISPs and others relied on a more cost-effective solution in the form of Wi-Fi links. The high price of international bandwidth saw ISPs connecting directly through satellites to the Internet backbone. The high retail price of Internet service spawned a large number of unlicensed reseller-ISPs using Wi-Fi to recoup the high price.
Figure 6.5
Annual Leased Line Prices for 2 Mbps, 2 km Circuits for Asia-Pacific Countries (2005)
Source: Author, based on data provided by operators in Pakistan, India, Bangladesh, Sri Lanka, and Indonesia, Badan Regulasi Telekomunikasi Indonesia (BRTI) leased line study, Commission of European Communities (2005).
Figure 6.6
Comparison of Monthly Internet Prices for Business Users in Indonesia and India (2005)
Source: Author, based on data provided by Indonesian ISP, Indian ISP.
Table 6.4
Comparison of Monthly ADSL Retail Prices in Indonesia and India: Prices (USD) and Price Ratios (2005)
| Bandwith | |
| 384 Kbps | 512 Kbps |
Indonesia* | USD 74 | USD 93 |
India** | USD 23 | USD 41 |
Ratio of Indonesian to Indian price | 3:1 | 2:1 |
Source: Author, based on data provided by BSNL and PT Telkom.7 | ||
The question of why Indonesia has more Wi-Fi deployed than most developing countries has been partially answered. Initially, ISPs were not given build or buy options; they were not allowed to build infrastructure; yet the incumbent did not provide leased lines. It is possible that PT Telekom did this to prevent potential competition from ISPs in the Internet service market and in the voice market with the possible use of VoIP. But it is also possible and likely, as will be ex-plored in greater detail later, that PT Telkom did not have adequate infrastructure on the ground to provide leased lines to ISPs, even if they wanted to. From the ISPs' point of view, whether PT Telkom did or did not have adequate infrastructure, they (ISPs) did not have access to infrastructure that they needed and were forced to improvise with available technology for a workaround solution. If ISPs were allowed to invest in communication infrastructure, it is likely that they would have chosen a different technology. But in this instance, having invested in Wi-Fi, many ISPs continued to use it even after PT Telkom made leased lines available.
Many countries suffer from high leased line and international bandwidth prices. However, we do not see them responding like Indonesia, by deploying Wi-Fi widely. Hence, the earlier allusion that this question has only been partially answered. There are other factors that have contributed to the unique outcome in Indonesia, namely the role played by the civil society and the licensing framework governing the telecom sector. The former was discussed in Chapter 4 and the latter is explored here.
The anomaly between extensive Wi-Fi deployment and a low Internet subscriber base in Indonesia can be explained by the high cost of Internet service and the multi-tier retailing of Internet service by unlicensed ISPs. APJII gets its subscriber data from the registered ISPs who are licensed. Considering that at least a third of the ISPs in Indonesia are not registered and reselling of Internet service is widespread, it would be reasonable to assume that a large number of subscribers and users are not being counted.8
Significantly high prices and unavailability of basic communication infrastructure services indicate shortcomings of regulation. The regulatory and market environment are examined below to explain the high communication infrastructure prices and also the behavior of the incumbents and the ISPs.
The performance of the Indonesian telecom sector has been uneven. Although mobile growth rates are impressive, the rest of the sector is plodding along. In 2005, Indonesia had a combined mobile and fixed line penetration of 19.2 per 100 inhabitants (4.4 fixed, 14.8 mobile). Indonesia has lagged behind the other members of the ASEAN (Jakarta Post, 2002). For example, in Malaysia, the penetration rate for fixed and mobile combined was 76.61 percent in 2005 and in the Philippines it was 44 percent during the same period (ITU, 2005). The digital divide is acute not only between Indonesia and its peers but within Indonesia itself. In the eastern provinces, only 0.02 percent of the population has fixed line phones. More than half of Indonesia's 70,000 villages (or about 43,000 villages) do not have access to any public telephones (Smith and Sulaiman, 2004).
The Asian financial crisis of 1997 resulted in a dramatic decline in Indonesia's economy that led to social and political unrest. The financial instability caused by the sharply depreciating Ruppiah, among other factors, compelled the Indonesian government to approach the International Monetary Fund (IMF) for a loan of USD 10.4 billion.9
The crisis also had a profound impact on the telecom sector. Foreign and domestic investments dried up with the political turmoil unleashed by the financial crisis and forced the Indonesian government to suspend the ambitious Nusantara 21 Project to connect Indonesia's major islands by submarine and terrestrial cable (Chowdhury and Murniadi, 2004). However, the long-term gains from the restructuring of the sector in response to the external shock are being reaped today. As can be seen in Figure 6.7, the telecom sector as a whole is more dynamic than it ever has been.
The crisis forced the Indonesian government to follow a reform trajectory that it probably would not have followed if left to itself. The IMF Letter of Intent issued in January, 2000,10 stipulates a host of reforms for the telecom sector, including making the sector fully competitive by privatizing both state-owned telecom companies (PT Telkom and PT Indosat) and restructuring the sector, finalizing and implementing the 1999 Telecommunications Law that explicitly separates policy and regulatory functions, and rationalizing the extensive cross-ownership of PT Telkom and PT Indosat in the sector, among other measures.
More than five years on, the continued dominance of the two government-run operators and the absence of an independent regulator are clear testimony of the Indonesian government's reluctance to
Figure 6.7
Growth of Fixed, Mobile, and Internet Subscribers per 100 Inhabitants in Indonesia (2000–2005)
Source: BRTI, Annual reports of PT Telkom, PT Indosat, PT Excelcom, Bakrie Telkom, APJII.
reform. As discussed in the next sub-section in detail, the Indonesian government has largely made nominal reforms, more true to the letter than the spirit of its agreement with the IMF. Yet, even these half-hearted reforms have contributed to the creation of a vibrant mobile sector.
Indonesia's telecom reform process can be broadly divided into two stages, the first spanning the early 1990s with the partial privatization of the state-owned telecom incumbents, and the second stage beginning with the setting up of a regulatory agency and ending the exclusivity rights of the incumbents in fixed telephony after the Asian financial crisis (Sugondo and Bhinekawati, 2004). As can be seen from Figure 6.8, the reform process in Indonesia has been slow and halting with the result that even after 15 years the sector is still dominated by two government-controlled incumbents and suffering from weak regulation. The obvious success story is in the competitive
Figure 6.8
Timeline of Indonesia's Halting Reform Process
Source: Author.
mobile telephony sector, which has shown remarkable growth and has contributed to increased total telephone penetration (14.8 mobile connections per 100 inhabitants versus 4.4 fixed connections per 100) (Sugondo, 2005).
From the early 1980s, the telecom sector was dominated by two operators that monopolized all national and international services. PT Indosat was the exclusive provider of international services and operated the international gateways and satellite links. PT Perumtel operated fixed local and long distance services until 1991, when it was partially privatized and reconstituted as PT Telkom. The government created PT Satelindo in 1993 to be the second provider of international service. However, competition was limited since PT Indosat owned 7.5 percent of its shares and PT Telkom 25 percent. Furthermore, PT Satelindo and PT Indosat were required to charge identical tariffs for international service (Minges, 2002). In 1994, PT Satelindo and PT Telkomsel were granted a GSM license. Excelcomindo, a company that the government did not hold shares in, was also given a mobile license in 1996.
The impetus for the second generation of reform came primarily from the IMF. As part of IMF's bailout package, the Indonesian government agreed, among other things, to rapidly privatize both state-owned telecom companies to finalize a new telecom law and set up a transparent regulatory body. The Indonesian government complied with some of the stipulations by passing the Telecommunications Law No. 36 of 1999.
Complying with the commitments to end cross-ownership between PT Telkom and PT Indosat, the Indonesian government separated the two companies in 2001. PT Telkom bought PT Indosat's entire share in PT Telkomsel and PT Indosat bought all of PT Telkom's shares in PT Satelindo. PT Telkomsel's GSM operations were merged with PT Telkom and PT Satelindo's GSM and international operations were merged with PT Indosat.
The Telecommunications Law of 1999 advanced the end of the exclusivity held by PT Telkom for fixed local calls from December 2010 to August 2002, and for long distance from December 2005 to August 2003. PT Indosat's exclusivity over international calls was ended from August 2003 instead of December 2004 (Adiwiyoto, 2004). However, to date, no new licenses have been given to any operators for fixed line services. But the government has doled out USD 49 million (Jakarta Post, 2006) as the first installment of 'compensation' to PT Telkom for ending its monopoly early. The government has not undertaken additional divestment of the telecom incumbents and remains in control of both companies. It owns 51 percent of PT Telkom and the 'golden' and controlling share of PT Indosat.
The current market structure, as shown in Table 6.5, is one that constrains market participation. Historically, exclusive licenses made PT Telkom the monopoly provider of fixed line services. Even though the government has allowed PT Indosat to provide fixed services, it does not have adequate infrastructure on the ground to compete with PT Telkom and provide services such as leased lines.
Furthermore, the absence of an interconnection regime11 mandating cost-oriented interconnection has precluded investment by PT Indosat in the fixed sector. In fact, PT Indosat continues to rely on PT Telkom for leased lines and domestic backbone links.
Although the Telecommunication Law of 1999 enabled the creation of an independent regulatory agency, that option was not exercised until 2003. The ministerial decree of 200312 established the Indonesian Telecommunications Regulatory Body, BRTI,13 to be effective, starting January 2004. However, BRTI has been seen as a 'transitional' body
Table 6.5
Barriers to Market Participation in Indonesia
Telecom Services | Telecom Operators |
Fixed wire line local | Exclusive right 1996–2010 to PT Telkom (Prematurely ended in 2002, but only de jure) |
Fixed domestic long distance | Exclusive right 1996–2005 to PT Telkom (Prematurely ended in 2003, but only de jure) |
Fixed wireless local | Limited competition (Satelindo) |
Fixed international | Monopoly 1995–2004 (Indosat) |
Mobile GSM | Competitive (Satelindo, Excelkomindo, Telkomsel etc.) |
Internet service provision | Quasi competitive; currently 124 ISPs plus 54 unlicensed |
Source: BRTI, Annual reports of PT Telkom, Satelindo, Indosat, Excelkomindo, Telkomsel. | |
that would become fully independent only at some undetermined future time (Sugondo, 2005).
BRTI is crippled by design. Its budget is allocated by the ministry Direktorat Jenderal Pos dan Telekomunikasi (DGPT). BRTI only plays an advisory role to the DGPT. Although DGPT is required to consult BRTI on regulatory matters, it is not obliged to follow BRTI's recommendations. BRTI's decisions should be final but, in practice, they are revised by DGPT.
The Regulatory Committee of the BRTI has five members. Since the Chairman of BRTI is also the Director General of the ministry, there is no separation of policy and regulatory functions. Furthermore, BRTI has to report to the ministry every three months or more frequently, if deemed necessary (Adiwiyoto, 2004). The Indonesian Competition Authority, Komisi Pengawas Persaingan Usaha (KPPU) in its assessment of BRTI also concludes that it does not have a strong legal basis, its dependence on the ministry for budgetary support makes it less independent, and the overlap between BRTI and DGPT's functions breeds confusion in decision-making (Adiwiyoto, 2004).
Interviews with members of the regulatory agency and the ministry indicate that no decisions detrimental to PT Telkom can be taken even if such decisions are good for competition. A new entrant that provides backbone services also confirmed that they have to keep leased line prices aligned with PT Telkom due to pressure from the ministry. In order to preserve the financial interests of the incumbents, the Indonesian government is preventing the telecom sector from reaching its full potential and the benefits of affordable access being realized. The current regulatory environment is not conducive for competition or rapid growth of the sector.14 This is compounded by a licensing framework that inhibits infrastructure rollout.
The telecom licensing structure led to the adoption of Wi-Fi by ISPs as a substitute for backbone. Currently, telecom licensing falls into three categories (BRTI, 2004):
1. Telecommunications Network Providers
2. Telecommunications Services Providers
3. Telecommunications for special purpose15
Telecommunications Network Providers are the only ones allowed to build infrastructure. With a Network Provider license, it is possible to provide services for:
(a) Fixed Network: local, long distance, international, and closed user network
(b) Mobile Network: terrestrial, cellular, and satellite
Since ISPs are considered to be Telecom Service Providers, they are not allowed to deploy any infrastructure. Wi-Fi was adopted because it did not involve conspicuous actions such as digging roads and laying cables. And since the investment for a link costs as little as USD 700 (Sunggiardi, 2005), the capital that was put at risk from confiscation was low. Although 2.4 GHz has been unlicensed, it is still illegal for ISPs to deploy any infrastructure, including Wi-Fi, since they are not licensed as Network Service Providers.
The current licensing framework contributes to the inadequate supply of telecommunication infrastructure in Indonesia. The single supplier in fixed line services resulting from the licensing framework was identified by the Indonesian Infocom Society, MASTEL, as the main cause of scarcity of network infrastructure which was constraining Internet development (Setiyadi, 2005). According to Setiyadi, there are not enough Network Operator Centers (NOCs) that interface between the last-mile and the upstream backbone providers in Indonesia. Furthermore, since the ISPs are not allowed to build network infrastructure by licensing conditions, it weakens the ISPs' negotiating power with higher-tier ISPs. MASTEL strongly recommended that the Indonesian regulator should allow ISPs to build their own infrastructure so that they do not have to rely on the monopoly network provider. Clearly, there is a need to strengthen the independent functioning of BRTI and to re-examine the licensing framework, in order to unshackle the telecom sector and Internet growth.
Telecom networks include access networks and backbone, or the 'big pipes' that connect different access networks. Generally, the backbone's capacity is greater than the networks connected to it. Without backbones, local networks would be isolated. Backbones are the basic building blocks of any national or international telecom infrastructure.
In the early years of the Internet in Indonesia, Wi-Fi played a significant role as a low cost, low-bandwidth backhaul for ISPs. On many routes, the incumbent was unable to provide backbone services because it lacked backbone capacity in many of the islands and regions. Outside of Java and Sumatra wired backbone infrastructure was non-existent. Even today, Papua, Moluccas, Kalimantan, and Sulawesi have poor backbone coverage and have to depend on expensive satellite backhaul. Fiber optic-based backbone is sparsely deployed in Indonesia. Much of it has been deployed in the last five years. The backbone in Sumatra consists of a terrestrial microwave network which is linked to Java with a submarine cable. The island of Java has the greatest amount of fiber deployed in the backbone network. Most of the other islands rely on microwave links or satellite.
Inadequate supply of backbone in Indonesia is primarily due to the lack of competition. Although there was demand for backbone infrastructure from ISPs, business users, and other telecom operators, PT Telkom as the legal monopoly did not make the necessary investments. Much of the recent backbone that has been deployed by PT Telkom is a result of pressure from PT Excelcomindo, the competitive mobile provider.
The extensive deployment of Wi-Fi for backhaul is testimony to the inadequate supply of backbone infrastructure. The first time that Wi-Fi was used as a backhaul connection to serve the function of a low-capacity backbone was in 1996 by the ISP, Cabi.net (Simanjuntak, 2005). Until 1998, PT Telkom did not have adequate infrastructure. For example, 2 Mbps tails for the local link were unavailable; the best that PT Telkom could provide was 64 Kbps (Purwadi, 2005). Wi-Fi was attractive to ISPs because Wi-Fi access points could be set up easily in areas that lacked network infrastructure, and it offered higher bandwidth than was available from PT Telkom at a much lower price. The only problem was that at that time, the use of 2.4 GHz bands for Wi-Fi was illegal. Hence, in an environment in which supply of leased lines were constrained, Wi-Fi was used as an alternative infrastructure solution.
However, Wi-Fi is a sub-optimal solution. It is prone to interference and does not provide carrier-class reliability. Furthermore, its capacity is of a different magnitude compared to fiber optic or even microwave links and throughput rapidly degrades with distance. The most important disadvantage of Wi-Fi is its severely limited range (10 to 20 km). Hence, not surprisingly, Indonesian ISPs who were interviewed were unanimous about their preference for genuine backbone and leased line links if they were available at cost-oriented prices (INDOWLI, AWARI and APKOMINDO, 2005).
Currently, the use of Wi-Fi as a backhaul network is on the decline in the larger cities where adequate backbone infrastructure is available. Despite this, some ISPs continue to use Wi-Fi in the 5.8 GHz bands to haul data over distances as long as 14 km. ISPs that continue to use Wi-Fi in large cities do so primarily to avoid paying for leased lines that are priced significantly higher than benchmark prices in other countries, as was shown earlier.
Wi-Fi 'innovations' in Indonesia are not a result of enlightened policy designed to extend communication infrastructure to unserved areas but rather a workaround solution to hostile market and regulatory conditions. As Samarajiva (2006) concludes in a study on leveraging wireless technologies to achieve rural connectivity, institutions matter. Unless effective policies are in place that allow market entry, manage rights of way, and promote cost-oriented and non-discriminatory access to bottleneck facilities, efforts at bridging the digital divide using wireless technology will fall short of their objectives. The Indonesian experience with Wi-Fi confirms this. Until the market is further liberalized and the regulatory process strengthened, it is unlikely that full potential of the Internet can be realized in Indonesia.
The silver lining for Indonesia is the inherently lower costs of Wi-Fi compared to wired last-mile access technologies, providing the country with potentially explosive Internet growth if regulatory and market conditions are right. A large pool of ICT-savvy teachers and 'geek' activists produced as a result of civil society initiatives, lucidly described in Chapter 4, make it more likely that the benefits of connectivity and infrastructure can be leveraged optimally in Indonesia.
There are a number of lessons from Indonesia that may be applicable to developing countries:
1. Although technology has certain transformative qualities, it cannot by itself bridge the digital divide. The hard work of ensuring that the policy and regulatory pre-conditions must be undertaken in order to realize the benefits of technology.
2. Indonesia shows that Wi-Fi deployment can be commercially viable and that it can be sustained with private investment.
3. Competition in the backbone market is necessary to build the foundation of a developing country's communication infrastructure.
Developing countries with entrenched telecom monopolies can hasten the deployment of broadband by delicensing Wi-Fi frequencies. If ISPs can use Wi-Fi in the access network, they can bypass the incumbent's local loop to provide Internet and other communication services—-if they can be assured of reasonable access to leased lines.
This chapter showed the peculiar uses Wi-Fi was put to in the backbone network, and not in the access network, as is the case in other countries. As the regulatory environment improves and leased lines are made available at more reasonable prices, Wi-Fi use in Indonesia is becoming more normal.
1. http://www.firstmilesolutions.com/
2. The following are some of the towns in Indonesia with Wi-Fi service: Sumatra-Aceh, Medan, Jambi, Bengkulu, Pekan Baru, Batam, Palembang, Lampung; Java-Jakarta, Bogor, Bandung, Cirbon, Semarang, Yogya, Solo, Magelang, Salatiga, Surabaya, Malang, Kediri, Madiun, Mojokerto; Kalimantan-Pontianak, Banjarmasin, Palankaraya, Samarinda, Balipapan; Sulawesi-Makasser, Manaddo, Palu, Gorontalo, Kandari; Maluku-Ambon; Papua-Jayapura, Timika, Manokwari; Bali-Basar.
3. Data accessed from Internet Service Providers (ISPs) Association of India (ISPAI) website: http://www.ispai.in August 2006.
4. In the interviews with ISPs, when the author referred to some of their operations as being 'illegal,' the ISP representatives corrected the usage of the term by coming up with one of their own—'unlegal'—to denote the grey area of the law and the widespread flouting of the rules governing Wi-Fi frequencies.
5. The Indonesian regulator, BRTI, announced regulation to reduce leased line prices by as much as 50 percent on September 26, 2006 (http://www.lirneasia.net/2006/10/leased-line/)
6. Policy and regulatory action on lowering leased line prices, initiated by LIRNE asia research and advocacy, had led, by April 2007, not only to lower leased line prices but also to significant reductions in ADSL prices.
7. Data for India was accessed on BSNL's website: http://www.bsnl.co.in/service/dataone_tariff.htm in February 2006. Data for Indonesia was obtained from PT Telkom's website: http://www.telkomspeedy.com in February 2006.
8. Although APJII also provides a separate figure for Internet users for Indonesia that ITU also reports in its indicator database, the author found that APJII routinely multiplies the subscriber base by 10 to obtain it. Hence, the stated user numbers are not accurate.
9. Indonesia Letter of Intent with the IMF, available at: http://www.imf.org/external/np/loi/103197.htm
10. http://www.imf.org/external/NP/LOI/2000/idn/02/index.htm
11. On February 8, 2006, the Ministry issued Government Regulation (GR) No. 8/2006 which mandates a new cost-based interconnection tariff scheme for all telecom network and service operators to take effect from January 2007.
12. Ministerial Decree No. 31 of 2003.
13. Badan Regulasi Telekomunikasi Indonesia.
14. The mobile sector is an exception because the government has introduced a number of players and effective competition exists.
15. The third category of license is for government, defence communication and broadcasting.
Adiwiyoto, B. (2004). The role of a sectoral regulator: Case of Indonesia in telecommunication sector. Presentation at the APEC seminar on Best Practices in the Enforcement of Competition Policy, Pucon, Chile.
Allen, J. (Undated). Internet Background Paper. Retrieved August 7, 2005, from http://www.iix.net.id/library/Iix_history.pdf
Allen, J. (2005, August 19). Personal communication at meeting with IDC, Jakarta, Indonesia.
APJII (2004a). Internet Service Provider Production Cost to Drop (August 8, 2003). Bisnis Indonesia.
———. Spend IDR 450 Billion for Foreign Bandwidth. Bisnis Indonesia.
Augustine and Sunggiardi, M. (2005, August 18). Personal communication at meeting with INDOWLI, AWARI, APKOMINDO, Jakarta, Indonesia.
BRTI (2004). Indonesian Telecommunication Licensing. PowerPoint Presentation.
Chowdhury, M. and Murniadi, H. ( 2005 ). Indonesia country profile. Retrieved October 15, 2007, from http://www.cid.harvard.edu/cr/profiles/Indonesia.pdf
Commission of European Communities (2005). Annex to the Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions European Electronic Communications Regulation and Markets 2005 (11th Report).
Direktorat Jenderd Pos dan Telekomunikasi (DGPT) and UNESCAP (2003). Telecommunications in Indonesia and its WTO commitments. Retrieved January 17, 2006, from www.unescap.org/tid/mtg/ituwtoesc_indo.pdf
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INDOWLI, AWARI and APKOMINDO (2005, August 18). Personal communication with representatives from Internet associations, Jakarta, Indonesia.
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ITU (2005 ). The Internet of Things. Geneva: International Telecommunication Union.
Kharif, O. (April 11, 2003). Paving the Airwaves for WiFi. Business Week Online. Retrieved February 12, 2006, from http://www.businessweek.com/technology/content/apr2003/tc2003041_5423_tc107.htm
Minges, M. (2002). Kretek Internet: Indonesia Case Study. Geneva: ITU.
Open Spectrum Foundation (2006). Retrieved February 12, 2006, from http://www.volweb.cz/horvitz/os-info/asia.html
Pentland, A., Fletcher, R. and Hasson, A. (2002). A Road to Universal Broadband Connectivity. Retrieved January 21, 2006, from http://www.itu.int/council/wsis/080_Annex4.pdf
Purwadi, T. (2005, August 19). Personal communication at meeting with APJII, Jakarta, Indonesia.
Reid, D. (2005). Macedonia leads world with WiFi. BBC Online, November 11.
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Setiyadi, M. (2005, August 19). Personal communication at meeting with MASTEL, Jakarta, Indonesia.
Simanjuntak (2005, August 19). Personal communication at meeting with APJII, Jakarta, Indonesia.
Smith, C.W. and Sulaiman, I.F. (2004). Indonesia requires digital connectivity. The Jakarta Post, September 30.
Still long way to go to bridge digital divide. (2002). Jakarta Post, May 17.
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Sugondo, K. (2005, August 24). Personal communication at meeting with BRTI, Jakarta, Indonesia.
Sugondo, K. and Bhinekawati, R. (2004). Indonesia: Telecommunications on a road to reforms. In Brown et al. (Eds.), Telecommunications Reform in the Asia-Pacific Region. Northhampton, USA: Edward Elgar.
Sunggiardi, M. (2005, August 22). Personal communication at meeting with BONET, Bogor, Indonesia.
Telkom gets first payment from government (2006). Jakarta Post, January 14.
Wagstaff, J. (1999). Indonesia is Struggling to Get Up to Speed on Internet Technology. The Asian Wall Street Journal, March 2.
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This section deals with core issues of telecom policy and regulation. Here, the debates tend to be a little more esoteric than in the previous two sections. The direct implications for consumers of the issues discussed here are not obvious. But they do matter. The interpretation and enforcement of rules in this 'structural' layer of telecom networks have resulted in single telecom operators dominating large geographical areas and in reducing the availability and increasing the price levels of telecom services.
If governments and regulatory agencies get the 'structural' layer wrong, the ramifications can be serious. The design of the Access Deficit Charge (ADC) regime in India, documented in Chapter 10, resulted in enormous additional revenues flowing to the government owned telecom operator BSNL. Revenues like these, together with those from high revenue customers who were already on its network because of its historical position as the monopoly provider, enabled BSNL to build an enormous backbone network that reduced the costs of supplying voice and data services to the rural regions of India, as documented in Chapter 7.
Being present in rural areas and having exclusive access to cheap backhaul capacity, the former monopoly was now in a position to capture most of the universal service funds disbursed by the government, as detailed in Chapter 9. The process that began with the stated necessity of compensating the government owned incumbent for providing services in rural areas below cost ends by transferring massive amounts of funds under various labels from the customers of the private operators to the government owned operator. The evidence so far does not suggest that the objective of narrowing the urban–rural divide is being achieved, as shown in Figure S3.1. Despite the massive transfers to the incumbent, the gap has increased, not decreased, suggesting that incumbent-favoring policies have failed.
Not all the results of the policies of placating and subsidizing the incumbent have been bad. Teleusers at the BOP who were surveyed from Indian rural areas in the study and were reported about in Section 1, reported greater access to fixed phones than their counterparts in Sri Lanka (Figure S3.2).
The chapters in this section raise some critical policy and regulatory issues, but do not necessarily give the final word on them. But it is possible for discerning readers to evaluate the pros and cons of an issue in the light of their specific circumstances and reach appropriate conclusions.
Are the 'big pipes' on which large volumes of voice and data are hauled over long distances within and between countries essential facilities that should provide open access to all competitors on non-discriminatory terms and at cost-oriented prices? Or should they be considered the 'private property' of the incumbents to be used as they please to advance their business in the new competitive environment?
Figure S3.1
Urban versus Rural Subscribers (Fixed Plus Mobile) per Hundred Inhabitants in India (1998–2005)
Source: TRAI (2005).
Figure S3.2
Use of Fixed and Public Access Phones by BOP in Rural Sri Lankan and Indian Localities
Source: LIRNE asia (2005).
Chapter 7 discusses these questions at length, based on the Indian experience. The Government of India, it appears, has taken a position that the incumbent is free to use its backbone network to optimize its competitive position. The entrants are invited to build their own backbone networks, which several have started to do. The chapter lays out the calculus of determining the commercial viability of building competing fiber networks. Indeed, the private operators with a national scope, as well as infrastructure providers, are building backbone networks.
In other countries, the calculus may be different. The population or customer density that would justify the building of multiple fiber links in India may not exist in another country. The governments and the regulators elsewhere may place a greater value on avoiding wasteful duplication of resources. On the other hand, even if governments see the waste of duplicate backbone networks, they may not be able to effectively regulate the incumbents and have no alternative but to ask new entrants to build their own networks.
Chapter 8 describes what comes closest to a policy fiasco among the policy and regulatory actions analyzed in this book. With all good intentions, the government of Nepal, its regulatory authority, the World Bank, and assorted consultants set out to provide telecom services in one of the most rugged and beautiful terrains in the world, Eastern Nepal including Sagarmatha (also known as Chomolangma or Mount Everest), home to some of the world's poorest people. For this purpose, they selected a great policy instrument, the least-cost subsidy auction, developed and found effective in Latin America.
But the enterprise faced a series of misfortunes. An auction was held and a winner identified. Then the entire royal family of Nepal was massacred and an unpopular and authoritarian king ascended the throne. The winner of the auction departed, forfeiting a considerable deposit. But the proponents soldiered on. They redesigned the auction, obtained necessary assurances from the government, the regulatory authority and the government-owned, unreformed incumbent to ensure that conditions for a fresh bid.
The auction was held and a winner was selected. He did not run away, but started to build his network in Eastern Nepal, using satellite VSAT (very small aperture terminal) technology. Now the edifice began to collapse. The regulator with the skills and the commitment retired and the project lost a strong internal champion. The incumbent invaded the territory of the entrant in violation of explicit commitments and set termination charges for his network at exorbitant levels that compelled the entrant to charge outrageous retail prices. The new regulator did not intervene effectively and at the right time.
This was not all. The external environment that capsized the first auction rolled again. The king banned all political parties and assumed power. Among other things, he shut down all the telecom networks in the country, allowing them to restart very slowly and under onerous conditions. The new entrant found that most of its identified locations were now prohibited and he was not even allowed to visit some locations where he had installed connections.
The question is, should everyone else have followed the first winner of the auction when he cut and ran. At what point does one give up on a project because a country's governance framework has deteriorated? Should one use least-cost subsidy auctions only in countries with good governance and where promises made are kept? If these stringent criteria cannot be met, what can be done about the unserved and the underserved? Is telecom a dessert that can be enjoyed only after the meal of good governance has been served?
These questions resonate strongly with the debate around e Sri Lanka, a path-breaking ICT development project in Sri Lanka that is sliding from satisfactory to unsatisfactory ranking because of a change in leadership resulting in significant deviations from the original design that refl ected international best practise (Hanna, 2006). The answers to these questions are not in the chapter, but have to be worked out by the reader in active engagement with the material presented in it.
Like the Nepal least-cost subsidy auction, the Indian least-cost subsidy auctions described in Chapter 9 were conducted most transparently, which suggests that good governance is an attainable goal in South Asia. But the design of the Indian auction was such that pretty much all the subsidies ended up with the incumbent. The massive Indian Universal Service Obligation Fund auctions, the Chapter shows, were designed in ways that more or less determined the incumbent being declared the winner.
Infrastructure sharing, interconnection, and other regulatory preconditions that must exist for a truly fair least-cost subsidy auction are identified in Chapter 9. In a gratifying turn of events, the criticisms made of the universal service subsidy disbursements in early drafts of the preceding research report were picked up by the Telecom Regulatory Authority of India (TRAI) and included in its recommendations to the Government of India. However, with many countries getting ready to establish universal service funds, the lessons extracted from India's experience are likely to be of great value, even if it is in terms of learning 'what not to do'.
The discussion of the multiple iterations of the process of designing the ADC regime in India provides an object lesson in protracted and progressive policy deliberation. Under enormous pressure from the incumbent as well as its government 'owners', the TRAI designed and announced a series of ADC regimes that were repeatedly corrected and improved in the face of substantive criticism. It is almost as though the iterative process was needed in order to wear down the resistance of the guardians of the incumbent.
The chapters in this section throw significant light on the regulatory preconditions that have to be met for effective action to extend networks in environments of less than optimal governance. It is not a collection of best practices that are presented for emulation, but rather a series of real-life exercises that will help readers make realistic assessments of actions needed to effectively extend networks under difficult conditions.
Hanna, Nagy K. (2006). From envisioning to designing e Sri Lanka: Joining the information services economy, Volume 1. Washington DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank.
LIRNE asia (2005). Telecom use at the bottom of the pyramid. Survey findings.
TRAI (2005). Study Paper on Indicators for Telecom Growth. June 2005.
In the course of designing a least-cost subsidy auction for regional telecom networks to serve the underserved northeast1 and deep-south regions of Sri Lanka, it was calculated that the existing backbone network of the Sri Lankan incumbent operator Sri Lanka Telecom Limited (SLTL) was likely to give it at least a USD 7 million advantage over other potential bidders if the auction was conducted without first ensuring that the winner could connect to and use the existing fiber ring to reach the urban concentrations of the west coast and international networks.
Chapter 9 shows the important role played by the massive backbone infrastructure deployed by the Indian incumbent operator Bharat Sanchar Nigam Limited (BSNL) in allowing it to win most of the universal service subsidy auctions. Lacking the cost advantage afforded by having their own fiber or digital microwave backbone networks and unable to gain timely access to the incumbent's backbone and (thereby match the incumbent's advantage), the private operators had to concede to the competition at considerable financial and political cost.
The discussion of Wi-Fi innovations in Indonesia in Chapter 6 also illustrates the critical importance of backbone infrastructure for Internet service providers. All these examples point to the significance of backbone infrastructure—the importance of having the infrastructure and of sharing what exists.
Backbone is that part of the network used to provide communications services. A distinction can be made between national and international backbones, or cable or fiber and radio-based backbones, or terrestrial and satellite links, as well as the level of coverage (entire country or partial). Various types of backbones exist including copper, fiber-optic cable, co-axial cable, digital microwave, Very Small Aperture Terminal (VSAT), and satellite transmission; the backbone includes not just the conduits for carrying traffic, but also the microwave towers and masts. Technologies are constantly being upgraded and per-unit costs are declining. The extent of upgradation and the extent of cost decline have been extensive. Indications are that such changes will continue. The increase in capacity has been very significant with fiber-based systems, but progress is being made with wireless systems too with substantially higher data transfer rates likely to be achieved in the near future.
Backbone infrastructure, or the 'big pipes' that knit a collection of local-access networks into a national network and national networks into a universal network that spans the globe, has attracted greater attention in recent times (see infoDev, 2005 report) for a number of reasons.
In the early stages of telecom reform in the mature, developed market economies, it was assumed that backbone networks could not, and would not, be duplicated. They were seen as 'essential facilities,' understood as 'facilities that cannot reasonably be economically or technically duplicated.' In many cases, new entrants faced a mandate to use the backbone facilities of the incumbent, for the reason that not to do so would cause wasteful duplication.
As this theoretically derived policy principle began to be applied in developing economies, problems appeared. In some cases, the incumbent simply lacked the capacity to provide facilities to new entrants, even if the will was present. The inefficiencies and constraints inherent in government monopolies precluded them from quickly supplementing backbone capacity to accommodate the new business. More importantly, the incumbents were averse to sharing their networks with, and making life easy for, the new entrants. This was the case even when adequate capacity existed. If lack of access to the backbone drove up the entrants' costs, that was all the better.
In this context, and in the absence of strong regulatory mechanisms to compel incumbents to share backbone, reformers retreated. The focus was placed on absolutely essential matters such as ensuring technical interconnection and adequate access to frequencies, with new entrants expected to solve their backhaul problems as best as they could. Wasteful duplication was not a concern, especially when it was known, or assumed, that the incumbent did not have adequate backbone capacity to accommodate the rapidly growing traffic volumes.
Understandably, new entrants were not keen to sink their capital into long-gestation backbone investments when pent-up demand in the urban agglomerations beckoned. The second-best solution of ensuring some kind of market entry, even if the regulatory preconditions could not be satisfied, led to a politically damaging outcome that reinforced the mantras of 'cream skimming' and 'cherry picking' favored by the opponents of reform.
As the supply of telecom services exploded in the urban areas thanks to aggressive new entrants and equally aggressive responses from incumbents, the political pressure began to build for serving the rural areas as well. Ministers and regulators exhorted the new entrants to venture out to rural areas; license obligations, where they had been written to include rural supply, were sought to be enforced when exhortation failed. The new entrants did their internal calculations, comparing the immediate and certain returns from investing in expanding the local-access networks in the urban agglomerations versus the longer-term and uncertain returns of building out backbone and local-access networks in regions with few customers likely to generate high revenues, and found the rural extensions uneconomical even in the face of penalties. Penalties were paid and the new entrants stayed in the urban redoubts.
In the face of this apparent obduracy, governments did what was within their power, at least in India where it had retained the authority to direct the incumbent; it ordered the incumbent to extend the network to rural areas. Possibly because the managers saw this as serving multiple purposes, the directions were followed. In addition to pleasing the political masters, rural backbone roll-out increased capital expenditures and strengthened the competitive position of the incumbent. It would be a stretch to claim that they understood the extension of reliable backbone infrastructure to rural exchanges as a surefire method of winning universal service subsidies, but that was a possibly unanticipated outcome of the roll-out of backbone infrastructure. Whatever the motive was, the end result, as shown in Table 7.1, was greatly beneficial to the incumbent, both politically and economically.
Table 7.1
Incumbent's Exchanges Connected to Reliable Infrastructure in India (March 2005)
Source: Authors, based on Telecommunications Regulatory Authority of India (TRAI) data.4
Notes: * Uttaranchal data has been combined with Uttar Pradesh (East).
** These other reliable media are underground cable (4 exchanges), Analog/Digital UHF2 (458 exchanges), PCM3 (2 exchanges), and other media (450 exchanges).
Politics is short on memory and impatient with complexity. To a great extent, the judiciary of developing countries, which lacks familiarity with economic theory, is also prone to accept simple arguments whether or not they reflect economic reality. The extract from a news report given below is illustrative:
Rejecting the cellular operators' demand for sharing of the BSNL network and infrastructure, particularly in rural areas, the Minister said the government operator took initiative in areas where its private counterparts failed to venture. Now when the BSNL has turned into a good business opportunity, it needs to capitalize on it…. The Government has given enough concessions to the private players and they should now leave Delhi and work in other places to consolidate their position and build infrastructure. ('Remove Connectivity Hurdles,' 2005)
However, now that much of the pent-up demand in urban areas has been mopped up and the regulatory agencies are moving beyond fire-fighting to more sophisticated analyses of the problems of distorted network extension, the issue of backbone networks has risen in salience. The issues of incentives for building and sharing backbone have also risen on the agendas of the knowledge communities on telecom reform, as evidenced by the research on the subject, especially in Africa (infoDev, 2006).
This chapter addresses some of the issues of ensuring efficient roll-out of backbone infrastructure, with special reference to India, a country with backbone in place, even if not optimally used. It develops a simple model for assessing the viability of self supply of backbone by entrants and discusses the policy actions that can be taken to create the conditions for competitive supply of telecom services in rural areas. The model can be used to understand the supply of backbone by two kinds of providers: the 'pure' infrastructure provider, which does not provide services at the retail level, and the service provider, which provides access to others while using it to provide services directly.
The lump-sum nature and level of investment required for backbone infrastructure implies that there is a threshold level of demand, below which the investment is not commercially viable. In the case of India, in some areas and for some operators (primarily for the incumbent), demand appears to exist in the range of the threshold; in many areas, especially rural and underserved areas, demand and supply are not in line with threshold demand, requiring different forms of policy and regulatory intervention.
The longer it takes to reach this threshold level of demand, the greater will be the additional costs to cover (due to losses in the initial years). The payback period will become extended, particularly due to the discounting of applicable net revenues.
There has been considerable emphasis on open-access models for promoting the establishment of the telecom backbone. Important reasons for this include the lower costs that integrated or stand-alone operators supplying backbone infrastructure would have if the backbone is optimally used and the incentives they have to provide others with access to their backbone. However, to expect the infrastructure provider to have greater incentive to establish the backbone, on the grounds that its costs are lower, would not be correct in general. There will be situations when the incentive for a service provider to invest in the backbone is going to be greater than that for the infrastructure provider. In other situations, depending on the relative revenues and costs, only a service provider may invest in the backbone, or only an unintegrated or stand-alone infrastructure provider may do so.
Situations in which investment in the backbone will not be made commercially by both the service provider and the infrastructure provider can be identified. The government will have to take specific measures to assist the process, including providing incentives in these situations. To consider the various possible outcomes, prevailing demand is denoted 'D,' the threshold level of demand 'DT,' and the prevailing supply of backbone 'S.' Table 7.2 summarizes the conditions under which investment in backbone would be commercially unviable.
Table 7.3 summarizes the situations for which investment in backbone would be commercially viable.
Thus, in certain situations, it is necessary only to focus on addressing the supply constraint; increasing the prevailing demand in the market will not help increase backbone. On the other hand, in a number of situations, the supply of backbone will not increase unless the prevailing demand in the market rises.
Table 7.2
Likely Growth in Backbone and Requisite Policy Responses in Situations in Which Investment in Backbone is Commercially Unviable in India
Demand/Supply Situation | Salient Features | Likelihood of Increase in Backbone | Requisite Policy Response for Increasing Backbone |
1. DT > D > S | • Inadequate demand • Excess demand in comparison to supply (i.e., waiting list in market) • Not certain whether certain factors constrain supply | Unlikely | • Increase prevailing demand ▪ Decrease DT through policies to reduce costs, increase operational flexibility, and reduce delays ▪ See if any factors are constraining supply, and address them |
2. DT > S > D | • Severely inadequate demand (i.e., major demand constraint) • No excess demand in comparison to supply (i.e., no waiting list in market) • Not certain whether certain factors constrain supply | Unlikely | • Strong focus on increasing prevailing demand ▪ Decrease DT through policies to reduce costs, increase operational flexibility, and reduce delays ▪ See if any factors are constraining supply, and address them |
3. S > DT > D | • Severely inadequate demand (i.e., major demand constraint) • No excess demand in comparison to supply (i.e., no waiting list in market) | Unlikely | • Strong focus on increasing prevailing demand ▪ Decrease DT through policies to reduce costs, increase operational flexibility, and reduce delays |
Source: Authors.
Table 7.3
Likely Growth in Backbone and Requisite Policy Responses in Situations in Which the Investment in Backbone is Commercially Viable in India
Demand/Supply Situation | Salient Features | Likelihood of Increase in Backbone | Requisite Policy Response for Increasing Backbone |
1. D > S > DT | • Definite situation of supply constraint • Excess demand in comparison to supply (i.e., waiting list in market) | Likely, if supply constraint is addressed | • Address factors constraining supply ▪ Increasing demand will not help increase backbone |
2. D > DT > S | • Severe supply constraint • Excess demand in comparison to supply (i.e., waiting list in market) | Likely, if supply constraint is addressed | • Address factors constraining supply ▪ Increasing demand will not help increase backbone |
3. S > D > DT | • Definite situation of demand constraint • No excess demand in comparison to supply (i.e., no waiting list in market) | Unlikely, unless demand constraint is addressed | • Increase prevailing demand |
Source: Authors.
If there is excess demand in the market and/or likely growth in demand, it is possible that the capacity demanded will exceed the threshold level for attracting investment in the backbone. Infrastructure sharing can increase incentives for investment, as the costs can be allocated among the various entities sharing the infrastructure. The effective cost of the backbone to the user is reduced by sharing. This is more likely to happen when the backbone is installed by an infrastructure provider than when it is installed by a service provider. Universal-service funds and government programs to expand and promote broadband can change the viability frontier; improved interconnection and access revenues can also increase viability, making backbone investment viable in areas that were previously commercially unviable.
There also exists a 'price-threshold level,' or a price level below which the extent of increase in demand would be so large that the stimulus from this large market demand would make investment in backbone self-sustaining and viable, even for what would otherwise be non-viable investments. It may, therefore, be desirable to take steps to create the conditions for prices to decline below the price-threshold level.
Once the market reaches the relevant price threshold, the future growth in demand and revenue sources (through value-added services, Internet, and broadband) would ensure that the investment becomes more attractive. Further, it is likely that with competition and introduction of new technologies, price would decline due to market pressures alone.
With respect to the adequacy of the telecom backbone in a country, the nature of analysis will depend on the particular circumstances in the country. Three possible scenarios can be postulated:
(a) The backbone in the country is adequate. In this situation, within the proposed framework, the policy focus needs to be on access only, including policies related to infrastructure sharing.
(b) Backbone in the country is generally adequate, but some areas have inadequate backbone supply. Where supply of the backbone is adequate, the focus would be on access; where supply of backbone is inadequate, policy would focus on both the establishment of the backbone and access.
(c) Supply of backbone in the country is inadequate. Both the establishment of the backbone as well as access to the backbone have to be examined.
The analysis begins with an illustrative stylized equation for revenues and costs relevant for the telecom backbone. In simple terms, establishment of a backbone, or access to the backbone, depend on the returns from such activities.5 The capital intensive telecom industry requires relatively large investments in backbone, and since the gestation period for obtaining adequate returns is long, there are substantial uncovered costs, especially in the initial years. The present value for the surplus on the investment can be shown simply as:
(i) Present value of the investment = R–C, or Revenues–Costs.
Or as: where,
(ii) Present value = R1 − C1 + (R2 - C2)/(1 + β) + (R3 − C3)/(1 + β)2 + … + (Rn - Cn)/(1 + β)n−1
or 
where,
1, 2, …, n are the different years for which the investment is in operation;
R1, R2, etc., are the revenues in different years from the investment in the network;
C1, C2, etc., are the costs in different years from the investment in the network; and,
β is the rate of discount.
For the investment to be viable, the present value must be greater than or equal to zero. In addition, the investor may also consider whether the payback period or the break-even period is short enough in view of the conditions in the financial market, that is, availability of funds over different periods of time. In effect, this implies an increase in the discount rate, β.
The presence of β in equation (ii) also shows that if there are some constraints or policy situations which delay the investment from becoming fruitful in terms of final capacity available and used, the present value of the project's returns will become less. Thus, high priority should be given to implement policies which bring revenues earlier, or to increase the revenue base in the critical initial years themselves (when use and consequently revenues are also likely to be low).
For understanding the factors which affect the establishment and provision of the backbone, it is useful to separately consider two types of operators. One is the operator who establishes the backbone only to sell the infrastructure service.6 We will term this operator as the 'infrastructure provider.' The other operator is one who establishes the network and sells telecom services using that backbone, and also provides others with access to its backbone. This operator will be termed as 'service provider.'
Bearing this distinction in mind, the components of equation (ii) above are slightly expanded yielding a stylized equation (iii), to give the following representation for the present value of the investment made in the backbone:
(iii) Present value
where,
Rv, Rva, and Ris are the revenues from voice, value-added, and revenues from selling infrastructure (or access charges) respectively. All services which are non-voice services, are categorized as value-added services;
Ik and Iv are the investment required to begin providing services, and additional investment required when volume of services provided is increased respectively;
Wk and Wv are, respectively, the working expenditure counterparts of Ik and Iv;
r is the required rate of return on equity;
d is the depreciation rate on investment;
I is the interest rate on debt;
T is the total of the charges paid to government such as license fee and spectrum charge.
A consideration of the revenue and cost components in equation (iii) will provide a better insight into the difference in the response of a service provider and an infrastructure provider to various situations, as well as the different types of financial and public support policies that can be used to encourage the availability of the telecom backbone. The detailed equation will be relevant more in the section dealing with government policies. For most of the remaining analysis, the simpler forms of the equation, such as in equation (i), are adequate to examine the different factors which affect the establishment of, and f access to, the backbone. The simpler equations are easier to handle and are adequate to broadly indicate the importance of various relevant factors for the purposes of this chapter.
The general points that can be derived from equation (iii) are:
An increase in revenues implies improved present value, as does a decrease in costs. The revenue increase can take place, for example, due to larger number of services being provided or due to an increase in use. Unit costs may decrease as technology changes, or with an increase in the utilization of the network.
In equation (iii), the revenues from services are normally much higher than the revenues from selling only infrastructure.7 Thus, normally, R v+ Rva > Ris.8
Likewise, the incremental cost of increasing the capacity is less than the initial cost. This happens both because the costs of the system decrease over time, and because the capacity of the system can be increased with proportionately less investment. This implies that Ik > Iv and Wk > Wv. As a result, average costs per unit capacity will decrease with an increase in installed capacity.
Since the establishment of the backbone requires a minimum, lump-sum investment, the average cost per unit of traffic will decrease as usage increases.
The lump sum nature of investment also implies a threshold level of demand below which the investment is not commercially viable.
The longer it takes to reach this threshold level of demand, greater will be the additional costs (due to losses in the initial years) to cover, and the payback period will become extended, particularly due to the discounting factor applicable to the net revenues of different years.
With technological change, there is a decrease in costs, and an increase in the types of products under the value-added category that may be provided. The latter would imply an increase in Rva. The decrease in costs can result in price decline and greater use, which may change Rv—the change in Rv will depend on the extent of the increase in use in comparison to the decline in price.
If changes in technology allow other service providers to cut into the market of established operators providing access services, there will be a downward pressure on Rv and Rva for established access providers.
The various components of revenues and costs, the interplay between performance in different years, and the likelihood of backbone not being established in several areas which are commercially unviable, implies that the government may need to develop an overall vision and policy framework, and identify initiatives that must be taken by the private sector, and the supporting initiatives from government.
A 'pure' infrastructure provider and a service provider who also provides infrastructure in addition to retail services will have different incentive structures with respect to installation of backbone and providing backbone to others.
An infrastructure provider establishes the infrastructure only to supply access to others. By definition, therefore, the main issue for such an operator is whether or not to establish the backbone because, once established, the question of denying others access does not make sense.9 In other words, for an infrastructure provider, the establishment of infrastructure and access to infrastructure go hand in hand.
For operators with an interest in both the service market and the infrastructure market, an incentive favoring establishment of backbone is not automatically accompanied by an incentive to give others access. A service provider with infrastructure has three possibilities of earning revenues: revenues from voice services (Rv), revenues from value-added services (Rva), and revenues from selling infrastructure (or access charges) (Ri). A conflict may arise with respect to revenue earned by providing access to backbone (Ri) and the revenue sources earned from sale of the services using the backbone (Rv + Rva).
Normally, for any given capacity of the backbone utilized for provision of a service and for providing access to the backbone, the revenues earned through voice and value-added services will exceed the revenues from providing access to the backbone. In fact, by definition, for any specified capacity the corresponding amounts of revenue (Rv + Rva) > Ri; if it is not so, then the operator will generally not be able to lease capacity and then use it profitably, since the revenues earned through services sold will not cover the costs of providing services using that capacity.
Therefore, incentives exist for the service provider with infrastructure to use the network itself and not provide its competitors with access to that network. If a service provider believes that the market revenues from services will be reduced if he allows others to use his backbone and compete with him in the services market, such an operator will balk at giving others access to its backbone. This incentive structure is likely to prevail in general.
As a market is opened up, entrants will seek to capture the most valuable customers in the established market from the incumbent. The incumbent will be averse to actions that may contribute to such competition, such as providing access to the backbone. If the backbone is fully utilized before the opening of the market, there is a clear trade-off between earning Rv + Rva and earning Ri. Since the former is likely to be greater than the latter, access to the backbone will be provided by the incumbent only if mandatory. However, even when the backbone is not fully utilized prior to market opening, and R ican be earned without necessarily losing a portion of Rv + R va,the incumbent is likely to refuse to supply access or offer access at an unreasonably high price or at unacceptably low quality because it wishes to hinder the ability of the entrant to compete in the services market. Here too, the efficient use of the backbone will rest entirely on regulatory intervention.
This kind of behavior will not be exhibited by an infrastructure provider. If competition in the backbone leasing market is to be encouraged, infrastructure providers are more likely to offer competitive pricing than service providers.
A service provider is more likely to provide access to its backbone, if it perceives the threat to its Rv + Rva to be minimal. This is likely to happen only when the market is growing so rapidly that the service provider with backbone can increase its market even in the presence of competition. However, in this scenario, it may experience or perceive constraints to backbone capacity and may restrict supply to competitors as a result. Here, regulatory action to ensure non-discriminatory treatment will be required.
If the price for access to the backbone is low in relation to cost, the supplier will not have an incentive to provide it and buyers will lose all incentive to build additional infrastructure. Setting the right price to maintain the balance between 'build' and 'buy' decisions is a challenge for regulation. If Ri is relatively low, others will prefer to 'buy' rather than 'build,' and those with the backbone will prefer not to sell at all. In fact, if Ri is set too low, even the infrastructure provider may not have incentive to build and maintain the network.
In light of the differing incentives of infrastructure providers and service providers in terms of giving access to the backbone, particularly the disinclination of service providers to give access under most conditions, a strong case can be made for a separation of functions. In this view, the operations of the service provider should be segregated into two separate units, one dealing with the establishment and provision of network elements such as backbone, and the other providing services through the lease of backbone, and such like, from the infrastructure unit. One example is the recent voluntary structural separation of British Telecom (BT).10
Table 7.1 provides a picture of a widely spread backbone in India. Three points may be emphasized with regard to this data.
First, India is prepared with its widespread optical fiber backbone network to provide broadband in much of the country. With increasing sophistication of radio-based technologies, this coverage could be extended practically across the entire country.
Second, the growth of the backbone in India has taken place in a manner analogous to that of Korea, with the government bearing the burden of building the backbone. The difference is that BSNL, on behalf of the government, made these investments from its funds (supported by revenue sources such as Access Deficit Charges at a later time). The important point is that in both countries, the government intervened to extend the backbone to provide a basis for further growth of the telecom services.
Third, the extensive roll-out of the backbone was achieved by a single operator, the incumbent. This implies that the other operators have to be provided access to the existing backbone, or they should build a backbone of their own. For this, the following issues need to be examined:
How the backbone is being extended in terms of distribution across the country, and the factors which will affect the viability of the backbone's extension, for example, revenues earned and the demand for services.
Since the extension of the backbone will take some time, it is also necessary to consider the issue of access to the backbone, including the policy regarding infrastructure sharing and difficulties that may be experienced by private operators in laying backbone.11
If commercial considerations govern the laying of telecom backbone, it would first be laid on routes yielding adequate returns on investment. Thus, one could have significant backbone capacity but it would serve mainly cities and towns. Hence, in addition to the total availability of the backbone, distribution must also be considered.
The main private operators are extending their backbone networks across the country. Table 7.4 shows the extension of backbone by an operator who holds licenses for all the regions or circles in the country. The infrastructure providers are also increasing their capacity and coverage. For example, RailTel is planning to have about 42,000 route km of fiber by March 2008 (Table 7.5). PowerTel was planning a broadband network of about 19,400 km to be completed in 2006. As on March 2005, the network commissioned by PowerTel was 15,534 km. These infrastructure providers will keep increasing the coverage and capacity because they plan to enter the telecom market as national long distance service providers.
Table 7.4
Reliance Infocomm (India): Optical Fiber and Digital Microwave (March 2005)
License Area | Fiber Route (km) (Phase I-Completed) | Fiber Route (km) (Phase II-Ongoing) | Fiber Route (km) (Phase I + II) | Digital Microwave |
Delhi | 1,626 | 9 | 1,635 | 21 |
Source: Authors, based on TRAI data provided.
Note: Phase II has been completed in some circles, and will be fully completed by end 2005.
Table 7.5
Optical Fiber Cable of RailTel Corporation of India
| Report on Route (km) as on January 31, 2004 | Report on Route (km) as on April 30, 2005 |
Total fiber programed | 28,317 | 32,378 |
(a) Optic fiber cable commissioned | 16,807 | 22,877 |
(b) Optic fiber cable unlit | 2,278 | 2,097 |
(c) Optic fiber cable work in progress | 3,746 | 1,694 |
(d) Optic fiber cable proposed | 5,486 | 5,710 |
Optic fiber cable future works | 11,652 | 10,240 |
Grand total | 39,969 | 42,618 |
Source: Authors, based on TRAI data provided.
As shown in Tables 7.4 and 7.5, the backbone is likely to be extended by the major operators to cover a large part of the country. However, the private operators will cover only those parts which are commercially viable for them after fulfilling their roll-out obligations, which are specified mainly in terms of 'Points of Presence.' The analysis of commercial viability could be conducted in terms of direct revenues or direct and indirect revenues. These concepts may be explained by considering investment in an incremental portion of the backbone.
Direct revenues are the additional revenues generated by subscribers in the incremental area covered by the incremental investment. Indirect commercial viability means the overall revenues generated by the additional possibilities opened up through the incremental backbone. These incremental revenues are generated not only by subscribers in the area covered by the incremental backbone but also by those who call these subscribers, as well as derived from the general impression about the network giving a more complete coverage, and, therefore, providing better communication facilities for subscribers who are roaming or are mobile in various villages, and so on.12
This becomes clearer by considering two different situations: one based on the revenues required to recover the investment in the backbone, and the other based on the data in Table 7.6.
Table 7.6
Reliance Infocomm (India) Subscriber Base in Different License Areas and Notional Subscriber Base for Indicative Viability of Backbone
Source: Authors.
The cost of laying the fiber and installing the relevant equipment can be considered in terms of cost per km. This cost may range between INR 200,000 and INR 250,000 per km (approximately USD 4,483). There are other, higher estimates, ranging from about INR 270,000 to INR 400,000 (or USD 6,052 to 8,966) per km. However, the available evidence supports the former. Of this amount, one third is considered the relevant amount that should be earned each year to recover costs and give reasonable returns.13
Based on industry data reported by TRAI, on the outgoing and incoming minutes for long distance calls, the amount of revenues earned per subscriber from such calls can be estimated to be about INR 600 (approximately USD 13.45) per subscriber per year. Accordingly, it appears that revenues from about 140 subscribers would be adequate to recover the costs of 1 km of fiber. Commercial viability based on direct revenues would require 140 subscribers per km for every incremental extension of the backbone.
Table 7.6 compares a private operator's subscriber base in December 2004 and the notional number of subscribers that would yield the direct revenues which would make the backbone installed in each circle viable. In the metros, the number of current subscribers is far in excess of those required to make the investment in backbone viable. This does not mean that more backbone should be put in the metros. Rather, the subscribers in the metros need to talk to others in other circles also. Thus, the revenues generated by these subscribers can contribute to the costs of the backbone in the other circles too. For assessing the viability of the network, the indirect revenues have to be considered and not just the direct revenues. Hence, the number of subscribers required to make investment in the backbone viable would be fewer than derived from the direct-revenue method. However, the direct-revenue method is used because it uses a specific amount or subscriber base which is not easy to estimate for the indirect method. The direct-revenue method overstates revenues required to cover the investment costs, compared to the indirect-revenue method.
Where the value in columns 5 and 6 is below 1, Reliance's planned incremental fiber is commercially viable. The higher it is, the less viable is the fiber. Accordingly, column 6 shows that only Punjab and the metro circles at the top of the table can justify commercial investment at the combined Phase I and II levels planned by Reliance Infocomm at the present subscriber levels. The lower levels of fiber roll-out under Phase I can be justified in Gujarat, Kerala, Punjab, and Western and Eastern Uttar Pradesh in addition to the four metro circles. The conclusion for Himachal Pradesh is curious in that the relevant value is below 1 in column 5 and considerably higher than 1 in column 6. This shows that the decision not to roll-out fiber in Phase 1 is commercially justified and that the 103 km of fiber planned in Phase 2 cannot be justified.
However, Table 7.6 also shows that with growth of just over 10 percent of Reliance's subscriber base and the resultant aggregate indirect revenues, the overall investment in the backbone will become viable. However, indirect revenues have to be seen not in aggregate or average terms, but in terms of the incremental investment at each stage. It is likely that the incremental investment would not be covered by indirect revenues especially where there are large shortfalls of direct revenues (for example, in the lower rows in Table 7.6). With the notional subscriber base falling far short of what is needed to recover costs for these circles, it is likely that incremental extension of the backbone will be commercially viable, even taking into account indirect revenues. These circles, therefore, require policy intervention to promote installation of the backbone.
In India, this problem is less serious because the incumbent has installed its backbone in most places. However, minimal demands should be placed on the incumbent. The universal service obligations (USOs) policy in India has therefore identified Short Distance Calling Areas (SDCAs)or local call areas which do not provide adequate revenues to recover costs (termed net cost positive SDCAs). The USO Fund Administrator has identified 1,685 such SDCAs, and USO assistance is to be given to operators to provide rural household connections in these areas, with BSNL covering 1,267 SDCAs, Tata Teleservices covering 215 SDCAs, and Reliance Infocomm covering 203 SDCAs (see Table 7.7). Table 7.8 shows the percentages of net cost positive SDCAs in different circles. This table shows a surprising result, namely, that circles which otherwise appear to be relatively profitable have a substantial portion which gives low revenues. Also, several circles with a large proportion of SDCAs which are net cost positive are also among those which have more than 90 percent of their BSNL exchanges linked with fiber.
Table 7.7
Net Cost Positive SDCAs in Different Circles and the SDCAs in Areas Served by Various Service Providers in India
License Area (1) | Number of Net Cost Positive SDCAs (2) | Primary USO Bid Won by BSNL (3) | Primary USO Bid Won by Tata Teleservices (4) | Primary USO Bid Won by Reliance Infocomm (5) | Primary USO Bid Won by Tata Teleservices (Maharashtra) (6) |
Maharashtra | 228 | 172 | 0 | 13 | 43 |
Source: Authors.
Table 7.8
Percentages of Net Cost Positive SDCAs in Circles in India
License Area (1) | Percentage of Net Cost Positive SDCAs (2) | Percentage of Exchanges Linked by Fiber on March 31, 2005 (3) |
Maharashtra | 75 | 95 |
Source: Authors.
Note: Shares of more than 50 percent net cost positive SDCAs and shares of more than 90 percent exchanges linked with fiber are highlighted.
Another noteworthy feature is that the main private operators are planning to extend their network across the country even without taking the USO assistance into account. These operators' plans are, by definition, indications of commercial viability. This suggests that the direct-revenue method may be too conservative.
Nevertheless, analyzing demand in terms of aggregate direct revenue effects gives a good perspective on the minimum revenues required to lay the requisite fiber; it identifies the necessary (but not sufficient) conditions for the backbone to be extended to specific locations. More detailed and location-specific information would be required to assess the sufficient conditions for the provision of backbone. However, with greater competition, which will also include the selling point of comprehensive network coverage, more market revenues coming from broadband, and with progress in technologies which can cover larger areas with lower investments, the results based on the necessary condition will more and more reflect those based on the sufficient condition for the investment in backbone being generated.14
Contrary to conventional wisdom regarding reducing wasteful duplication of backbone infrastructure, Indian policy appears to give greater weight to maximizing the freedom of BSNL to do what it pleases with its network. As quoted earlier, the government has accepted the simplistic argument that BSNL should be free to enjoy the benefits of its investment in backbone infrastructure without being compelled to share it with competitors.
This is in line with the Department of Telecommunication's position on the sharing of BSNL's infrastructure by other operators in the context of the subscribers of other mobile operators being allowed to roam on BSNL's network, which has the largest national footprint. BSNL objected to such a ruling on the ground that it laid its network at considerable expense, which provides it with a unique competitive advantage. The Indian policy makers accepted the argument that forcing BSNL to allow other operators' subscribers to roam on its network, where the other operators did not have their own networks, would amount to penalizing BSNL by taking away its market growth strategy and helping the other operators even though they had not invested in the area.
The gist of these policies and announcements is that Indian operators should not only install their own local-access networks, but also build their own backbones to the extent that commercial negotiation with BSNL does not yield satisfactory leasing arrangements.
TRAI recently gave its recommendations to the government on unified licensing,15 including one to allow a 'niche operator' in each SDCA with less than one telephone per hundred inhabitants. These niche operators would require access to the existing network in order to function; the alternative of expecting them to build their own backbone is utterly unrealistic. It would be worthwhile to consider allowing infrastructure sharing at least in these SDCAs, with appropriate cost-based prices being charged. One complication would be if these SDCAs are also net cost positive SDCAs (which is very likely) and are hence covered by the USO program. It would be necessary to decide how to handle the overlap of USO and potential infrastructure sharing, particularly for broadband purposes. In fact, such a policy could be determined after a year or two for the entire rural area, with the main operators having spread their infrastructure in the meantime.
Other countries less protective of the rights of incumbents over infrastructure, more concerned about avoiding wasteful duplication of infrastructure and more willing and capable of enforcing open-access regulation may wish to take a different course of action. This chapter identifies the various scenarios that are likely to face policy makers and regulators, in terms of supply, demand and threshold demand, and provides the tools to identify the nature of the shortfall in backbone. Such diagnostic tools enable better targeting of policy remedies.
1. North East includes the following circles: Manipur, Mizoram, Arunachal Pradesh, Nagaland.
2. Data provided to authors by TRAI.
3. Ultra High Frequency.
4. Pulse Code Modulation.
5. Regarding the various factors that are considered by investors, Bruce and Macmillan (2002, p. 5), mention the following: (i) Operating statistics and ratios: subscribers (or lines), employees per subscriber (or line), minutes of use per subscriber, churn rate, country penetration; (ii) Financial/Operating ratios: average revenue per user (ARPU), revenue per minute, subscriber acquisition cost, enterprise value per subscriber, capital expenditure per subscriber, capital expenditure per minutes of use; and (iii) Financial Statistics/Ratios: operating revenues, EBITDA, EBITDA margin (EBITDA over revenues), free cash flow, debt/EBITDA (Earning Before Interest, Taxes, Depreciation and Amortization), debt/market capitalization, enterprise value/EBITDA, capital expenditure/revenues, Free Cash Flow (FCF) yield, Price-to-Earnings (P/E) ratio, earnings per share, and return on equity.
6. A number of countries have recognized the importance of such specialized service, especially by other utilities, of providing only infrastructure. They have thus created a special category of license for allowing exclusively the service of infrastructure provision. Likewise, the licensing regimes in a number of countries have evolved to distinguish between those who have infrastructure (which they may or may not use to provide telecom services also), and others who do not have their own infrastructure but themselves provide telecom services using the infrastructure resources taken from others.
7. Although, the cost of bad debts, collection costs, billing problems, etc., can increase the cost of provision of services.
8. While this is likely to be true in general, the easiest way of conceptualizing this is to consider the same level of capacity to be used for two alternative sources of revenues, that is, one, leasing the capacity to others, and the other being the use of the capacity to sell telecoms services. A number of simplifying assumptions underlie this comparison, such as the extent of traffic being the same as that reflected in the implicit capacity utilization considered for determining the access charge for leasing the backbone. Thus, the statements based on this analysis should be seen more as indication of the broad likely features rather than being valid under all possible circumstances. These broad features enable us to get a general perspective on the factors that will affect the establishment of and access to the backbone. More detail in terms of the level of capacity utilization is considered in the later sections.
9. However, there is a possibility that the provider may adopt a pricing model that discourages high volumes—the usual monopoly pricing problem.
10. For more detail, see www.btplc.com
11. In this regard, BSNL does not face the same type of situation as private operators because under the Indian Telegraph Act, the erstwhile Department of Telecom (DoT) and now BSNL have greater powers and flexibility for laying their backbone.
12. At present, such a perception is a strong selling point for the mobile service of BSNL.
13. This is in effect a higher return than is normally given in cost based tariffs. This is especially because the depreciation for the most costly items is very low, that is, the lifetime for those items is relatively long.
14. This is also indicated by the result in different tables which show that a number of circles which are considered to be relatively high potential revenue earners are also those which have relatively larger number of SDCAs which are net cost positive.
15. http://www.ictregulationtoolkit.org/files/657_file_3663177.pdf
Bruce, R. and Macmillan, R. (2002). Feedback to regulators from investors—Telecommunications in crisis: Perspectives of the Financial sector on regulatory Impediments to Sustainable Investment. Report for Global Symposium of Regulators. Geneva: ITU Bureau for Telecom Development.
infoDev (2005). Open access models: Options for improving backbone access in developing countries (with a focus on Sub-Saharan Africa). Retrieved October 14, 2007, from http://www.infodev.org/en/Document.10.aspx
Remove Connectivity Hurdles (2005). The Hindu, April 27.
The supply of telephony has traditionally been skewed towards the urban affluent as opposed to the rural poor. The literature describes this bias as having been caused by a 'market efficiency gap' and an 'access gap' (see Figure 8.1).1 The market efficiency gap is the difference between what markets achieve under existing conditions and what they can achieve if barriers are removed. This gap can be bridged through effective competition, private provision of services, and market-oriented policies and regulations that create a level playing
Figure 8.1
Market Efficiency and Access Gaps
Source: Navas-Sabater, Dymond and Juntunen (2002).
field for new entrants. The access gap refers to people and places that remain beyond the limits of the market due to inadequate income levels or its skewed distribution. Bridging this gap needs subsidies to encourage service providers to enter these areas.
Closing the 'access gap' is not a straightforward task. A number of policy and regulatory complexities have to be considered. While there is debate on the ideal sequence of implementation of policy to bridge the two gaps, it is best to address the market efficiency gap prior to the access gap. Besides the policy and regulatory complexities are the geographic and socio-economic factors that have to be taken into account before designing access-gap-bridging policies. Primarily these are the size and terrain of a country; population densities of the settlements; the income level and its distribution among the population.
Subsidies can be distributed in various ways. Based on the criteria of targeting, market distortion and efficiency incentives, least-cost subsidy (LCS) auctions are considered to be the best method and are thus described as 'smart subsidies'. In LCS auctions, bidders are forced to consider the most cost-effective technology and other cost-saving options to bid for the lowest required subsidy, if at all. LCS auctions are very different from the provision of subsidy using a comparative evaluation scheme, which is known as a 'beauty contest' where the award is determined on a merit-based assessment of the applicant's ability to fulfill a given set of requirements. In countries with poor governance frameworks, it is always safer to use the smart subsidy approach, where only a single dollar figure is evaluated, than one that allows discretion to the tender board that evaluates bids.
LCS auctions for bridging access gaps in rural telecommunication services were introduced in the mid-1990s in Latin America. Chile was the first to do so, in 1995–1997, when a subsidy of USD 10.2 million was disbursed by Fondo de Desarrollo de las Telecomunicaciones to roll-out telecom services in some 4,500 rural locations. Other countries in the region used LCS to encourage regional telecommunications services. Some were more successful than others. Table 8.1 gives a summary of smart subsidy projects implemented in Latin America.
Nepal is country with some of the most rugged and beautiful terrain in the world, and home to some of the world's poorest people. On the
Table 8.1
Latin American Smart Subsidy Projects
Country | Name | Period | Localities Served | Maximum Subsidy Available (USDm) | Subsidy Granted (USDm) | Subsidy per Locality (USDm) |
Chile | Fondo de Desarrollo de las Telecomunicaciones | 1995-1997 | 4,504 | 24.1 | 10.2 | 2,256 |
Peru | Fondo de Inversion en | 1998 | 213 | 4 | 1.7 | 18,800 |
Colombia | Fondo de Comunicaciones | 1999 | 6,865 | 70.6 | 31.8 | 4,600 |
Guatamala | Fondo para el Desarrollode la Telefonia | 1998 | 202 | n/a | 1.5 | 7,587 |
Dominican Republic | Fondo de Desarrollo de las Telecomunicaciones | 2001 | 500 | 3.8 | 3.4 | 6,800 |
Source: Dymond and Oestmann (July 2002).
Notes: *Implementation delay due to disqualification of subsidy winner; second bidder awarded.
**Network not implemented due to operator failure.
one hand, the incumbent Nepal Telecommunications Corporation (NTC) had failed to bridge the access gap in rural areas of Nepal and, on the other, hardly any private operator activity was afoot. Thus began the discussions between His Majesty's Government (HMG) of Nepal through the Nepal Telecommunications Authority (NTA) and the World Bank to consider alternative mechanisms to service these areas. Taking into consideration the difficulties of attracting private investments to Nepal, it was decided to carve out one administration region and implement a private sector led regional telecommunication service program through the provision of a subsidy as a pilot project.2
The beautiful Eastern Development Region (EDR) of Nepal, home to Mount Everest was selected for this pilot project. Because the Regional Telecommunications Development Fund (RTDF) was not yet in operation, the World Bank agreed to provide funds for regional telecommunication services under a long-term credit to HMG.
Based on the lessons of Latin America, the NTA, and the World Bank agreed to call for international competitive bidding. The winner would be the bidder requesting the lowest one-time capital grant. This was to be the first LCS auction in this part of the world.
The salient features of the license design and implementation plan, developed jointly by the NTA along with their Consultants and the Word Bank3 are discussed in this sub-section. The area of coverage was 534 Village Development Councils (VDCs) in the Eastern Development Region (out of a total of 893 VDCs) with a rural population of 4 million.
The license was to be issued on a non-exclusive basis to serve the EDR. However, HMG through the NTA agreed not to authorize NTC or grant any new licenses to any existing or new operators to provide services in the identified VDCs for a period of five years after the license. The logic of the five-year exclusivity seems to lie in the view that the five-year duration would help the licensee build its own network and broaden its customer base prior to competition setting in. The licensee was to install, activate, and operate at least two separate public access lines as Public Call Offices (PCOs) in two separate wards of each VDC. In terms of technology, NTA and the Bank chose to let the applicants decide on the basis of the existing infrastructure and geo-demographic and socio-economic conditions in the EDR. The Request for Applications (RFA) stated 'The Licensee may utilize any appropriate wireless or wire-line technologies in the provision of the regional telecommunication services in the Regional Service Area.' The technology had to meet minimum eligibility requirements and service-quality criteria.
The implementation plan also called for 50 percent of the VDCs listed to be served within nine months of the effective date of the license and 100 percent served within 18 months. Failure to meet network roll-out requirements were to result in the loss of eligibility for the regional telecommunication service subsidy, forfeiture of the performance guarantee, termination of the license, imposition of fines, and even the forfeiture of all equipment, land, and other assets related to the regional telecommunication service. However, given the security situation, the RFA stated that these penalties would not be applied if the roll-out delay resulted from force majeure. In that event, the RFA stated, NTA would modify the locations.
The RFA specified that the licensee has to provide basic public telephone service consisting local, domestic long distance, and international long distance as mandatory services. Once the above requirements were fulfilled, the licensee was to be authorized to provide additional individual or public telephone access services in any location in the EDR. In addition to the mandatory services, offering Internet access, e-mail, prepaid calling card services, data communication services, and so on, were also authorized in all of the identified VDCs as well as the entire EDR once the roll-out obligations were met.
The license provided that from January 1, 2004, the licensee would have the right to obtain a separate non-exclusive license to provide national long-distance services, and a national license to provide international services using its own international gateway. The conditions for the two licenses were to be the same as any others that would be issued.
The design included a service-quality component that obliged the licensee to meet minimum quality and availability-of-service standards. The licensee was also bound by a number of service-availability criteria. The key availability criterion was that each PCO had to be open during reasonable daytime and afternoon hours (suggested 0900 to 1700 hours), totaling a minimum of eight hours, every day of the week. Where a PCO did not have access to the electrical power grid, the licensee was to provide an alternative source of power.
The World Bank was concerned that the many shortcomings in the telecom regulatory environment in Nepal would hinder the success of the project. In order to ensure that regulation would not be detrimental to the proposed project, NTA and the World Bank undertook a number of precautionary measures.
The initial term of the license was set at 10 years, with the licensee enjoying exclusivity in service provision for the first five years. NTA was expected to grant the license renewals, provided that there were no material breaches of the license. The license fee was set at a very low level of NPR 100,000 (approximately USD 1,250) for the initial 10 year period. The licensee was exempted from almost all other fees and levies until the first renewal.
Given the technology neutrality of the design, the licensee was free to use any wireless technology and/or satellite services in providing the services as long as they met stated technical requirements and service quality criteria. The RFA noted that the eventual licensee was required to pay fees on an annual basis for any spectrum license calculated on the same basis and payable on the same conditions as the fees in NTC's spectrum license. However, the licensee was to be exempted from paying spectrum fees as long as NTC was exempted from paying them. The RFA also noted that the licensee would have rights of access to public and private lands and also the rights of inspection and entry set out in the Telecoms Act.
The process of interconnection between the licensee's network and other licensed telecommunications networks in Nepal, including NTC, was to be governed by the Telecom Act's Guidelines for Interconnection.
The tariffs charged by the licensee were to be subject to regulation by the NTA in accordance with the Telecom Act. Except with the prior approval of the NTA, the licensee was not authorized to charge tariffs higher than those set out by 'Regional Telecommunication Service Maximum Tariffs and Default Interconnection Rates' in the RFA (see Appendix 2, Table A2.1).
The RFA stated that the NTA would regulate NTC to ensure that it does not unfairly discriminate against the licensee and does not grant anti-competitive preferences to or cross-subsidize its own regional service operations. The RFA further elaborated that any regional telecom service operations of NTC will be regulated by the NTA so as to ensure that NTC does not abuse its dominant position. It also undertook to ensure that any authorization granted to NTC in the regional service area of the licensee will contain terms and conditions equivalent to those applicable to the licensee.
The above guarantees gave a level of comfort to the bidders in terms of licenses, access to spectrum, tariffs, and possible anti-competitive behavior of the incumbent.
It is evident that the consultants to the World Bank and NTA intended to maximize the number of potential players that would become eligible to bid at the auction by setting eligibility conditions which were not overly restrictive. The key conditions were that the bidder must become registered as a company in Nepal prior to the license being issued; must have Nepalese investors with a minimum of 20 percent equity; must satisfy the NTA of financing capacity to complete roll-out of the network in accordance with the terms of the license; must provide evidence of operating either a telecommunications network with over 250,000 subscribers, or a telecommunications network with over 500 public telephone access lines in rural areas; and must furnish a bid security of USD 100,000.
The RFA was very clear in how the selection process was to be conducted using a single round LCS auction. It said 'The NTA plans to issue the License and the [regional telecommunication service] Subsidy to the Licensee proposed by the Qualified Applicant that proposes the lowest [regional telecommunication service] Subsidy.'4 It is important to note that no maximum subsidy amount was announced, taking the position that 'market knows best' and also guarding against bids converging at the maximum allowable subsidy.
The implementation plan of the LCS determined by the winning bid of the auction was straightforward. The RFA stated that the one-time grant was to be payable in four tranches: first tranche of 40 percent once the 534 access lines have been activated and are in operation; second tranche of 40 percent once 1,068 access lines have been activated and are in operation; third tranche of 10 percent as soon as possible after the end of the first year after the activation of services in all identified VDCs; and the fourth tranche of 10 percent was to be paid at the end of the second year after the activation of services in all identified VDCs provided that quality of service standards were maintained.5
The NTA commenced the auction process that decided on the present Licensee in February 2003. However, this was the second attempt of the LCS auction. The first attempt was in September 2000. At the 2000 auction, NTA received two bids and the applicant with the lowest subsidy signed a letter of intent to undertake the project. However, with the massacre of the King's family and rising Maoist violence, the winning party withdrew, forfeiting its bid bond. In this context, HMG and the World Bank undertook a total review of the program and weighed the options of suspending the project versus improving the attractiveness of the offer by including conditions that mitigated the risks involved and enhancing the financial attractiveness. It was decided to go ahead with a modified auction.
The RFA documents were made available for purchase in February 2003; a prebid conference with six potential bidders was held in April 2003; and applications for the regional telecommunication service license were received in June 2003. During the bidding process, some potential applicants raised additional concerns related to the financial, regulatory, and security risks. To mitigate some of the concerns, additional changes were made to the proposed regional telecommunication service license.
One of the major concerns addressed was the need for revising the scheduling of payments. If the licensee utilized the Very Small Aperture Terminal (VSAT) technology, 20 percent of the total subsidy was to be paid upon activation of the VSAT network hub station, which had to be based in Nepal. The other payments would be 20 percent of the subsidy upon activation of lines to 20 percent of VDCs; another 50 percent of the subsidy upon activation of 50 percent of the VDCs (for a cumulative total of 70 percent); and a further 20 percent (total of 90 percent) upon activation of all lines. The last 10 percent was to be paid at the end of 24 months of awarding the license. If the independent consultant were to certify that the licensee was prevented from serving some of the VDCs due to force majeure, the NTA was to approve a list of alternative locations within which PCOs could be installed.
However, even after all the above changes were effected, the LCS auction process attracted only two bids. One was disqualified on technical grounds.6 The incumbent NTC was not allowed to bid.7 Therefore, based on the only bid received, the regional telecommunication service license was awarded in November 2003 after ensuring compliance with licensing requirements, filing of consortium shareholder agreement and registration with Department of Industry, and receipt of the performance guarantee.
Number of qualified bids | : | One |
Licensee | : | STM Telecom Sanchar Private Limited of Kathmandu, Nepal (USA based); Apollo Investment Group is the Nepali shareholder with 20 percent share. |
License issue date | : | November 21, 2003 |
Roll-out completion date | : | June 16, 2005 |
License validity | : | Ten years extendable by 5 years to 25 years. |
Subsidy amount | : | USD 11,865,000 |
Total number of PCOs to be installed with the subsidy | : | 1,068 in 534 identified VDCs of the EDR |
Work progress as at October 1, 2005 | : | Installation of the Kathmandu hub station began in early March and was certified on April 29, 2004. The hub station at Biratnagar and installation of 20 percent of locations was commissioned on August 26, 2004. |
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| 541 PCOs in 271 VDCs (50 percent milestone) were commissioned on January 14, 2005. As of October 2005, 70 percent of the contract amount had been disbursed. |
Number of PCOs currently in operation | : | 197; mostly in the Terai region. 341 locations closed down by HMG's order. |
Installation monitoring, evaluation and certification by: | : | Planetworks Consulting Corporation, Canada |
In hindsight, several things could have been done differently, particularly in light of the lessons from Latin America. However, there was the overarching security problem.
At the time of commencing implementation, Nepal was undergoing a serious security threat from Maoist rebels who had been waging an armed campaign against the state since 1996 as a result of which some 11,500 people had been killed. It was not uncommon for hartals to shut down entire cities and villages. Sometimes main traffic arteries were shut down for days. In certain areas, the entire administration was run by the Maoists with no reference to government rules. The security situation was non-conducive from the initial stages of the regional telecommunication service project and it was known to all. It is, therefore, most likely that risk premiums that had to be borne in terms of additional costs would have been included in the bid.
Even though the Maoists created some problems in the initial stages of the roll-out, progress was on schedule until mid-January 2005 when 542 PCOs in 271 VDCs were completed. However, the conflict took a different turn when His Majesty assumed direct rule and took over executive powers on February 1, 2005. The king sacked the Prime Minister, dismissed his government and declared a state of emergency. Using emergency powers, HMG ordered STM to shut down all 542 PCO locations.8 Subsequently, HMG permitted STM to reopen 25 out of the 542 locations and by end August 2005, when this study was done, HMG had allowed STM to operate 197 PCO locations in total. In the meantime, STM was unaware of the condition of their equipment in the remaining 345 locations as it had not been possible to even visit these sites due to the numerous restrictions placed on them. However, NTA continued to complain that STM were not interested in relocating these PCOs to other 'safe' areas because they had already collected payments (subsidy) for their installation. In late August 2005, HMG granted permission to STM to restart its implementation program and provided a list of 177 new locations. However, it was alleged that these new locations had been decided by the Army without any thought to their viability given that NTC was already present in them.
From the point of view of the success of the project, there is no doubt that a more conducive security environment would have helped. However, in reality, the ground situation was such that all stakeholders needed to have factored in the unpredictable nature of the situation in Nepal. It is in this context that non-security related issues, particularly those related to ensuring a regulatory environment, within which STM could successfully implement and sustain the regional telecommunication service, are discussed.
A number of studies have evaluated the design and implementation issues of the Latin American LCS projects and arrived at similar conclusions (for example, Dymond and Oestmann, 2002; Guislain, 2004; Navas-Sabater, Dymond and Juntunen, 2002; Samarajiva, 2002; Wellenius, 2002; World Bank, 2003). The most important criteria for the successes was found to be the favorable telecom regulatory environments. Key regulatory aspects were pricing and interconnection. The discussion below considers the Nepali case in light of the past lessons.
The Latin American successes were based on competition, both for the market and for the allocation of subsidies. Each LCS auction winner was selected on the basis of competitive bids. Sometimes incumbents were allowed, at other times they were not. Incumbents, whenever permitted, sought to defend their territories from possible new entrants and new entrants, on the other hand, sought to gain footholds in the demarcated license territories. This competition reduced subsidies at the outset. In Chile, the subsidy given out in some cases was only a sixth of the benchmark.
In this context it is worth revisiting the selection of the Licensee where the Nepalese incumbent was not allowed to bid. An issue that has generated strong opposing views is the decision to continue with the LCS auction despite there being only one eligible bidder—STM. While some, including the NTA and the World Bank, see no reason why the auction process should have been suspended, others argue that going ahead with just one eligible bid was perhaps a significant error in judgment. The consultants to the World Bank are said to have approached more than 100 potential international entities with the regional telecommunication service opportunity and reported that there seemed to be 'sufficient interest from serious bidders to run an auction.'9
Another success factor in Latin America was selecting the 'right' areas using bottom-up approaches. In Chile, local authorities, community organizations, and telecom companies together submitted lists that were later short-listed by regional authorities. Comprehensive market research was undertaken by the regulator and was shared with bidders. Division of license territories into smaller units and allowing bids for multiple licenses was another factor. This process allowed bidders to assemble territorial blocks according to their corporate interests.
In Nepal, how were these VDC areas in the EDR selected? The question is whether sufficient information on the EDR along with demand forecasts was provided to potential bidders by the NTA. The NTA and the World Bank assert that the input from their rural economic consultants (not those who helped design the regional telecommunication service) was based on extensive ground work and the feedback on the draft RFA provided sufficient information for bidders to formulate their plans. Even though the tender did not require a business plan be submitted for evaluation along with the LCS amount, it is obvious that a business plan had to be prepared to calculate the amount. The question is whether the assumptions in these plans were accurate. The NTA revealed that they did not commission a survey to estimate the potential demand for regional telecommunication service in the EDR prior to preparing the RFA.
The primary lesson from Latin America was the importance of a conducive regulatory environment. Because the World Bank and NTA had taken pains (on paper at least) to ensure such an environment would prevail in Nepal, it is worthwhile assessing the outcome.
The license guaranteed exclusivity to STM for the first five years. No new service provider was to be given licenses, nor was NTC to be allowed to provide any service in those VDCs. This decision was rooted in estimates of the economic activity and, hence, the traffic in these areas. Introduction of competition prior to STM building its network and consolidating its customer base was not seen as advisable given the available demand. However, from the date of selecting STM and the time this research ended (November 2003–November 2005), NTC entered more than 100 of the 534 VDCs exclusively earmarked for the STM. The unauthorized entry of NTC to the areas earmarked for STM was a clear violation of the license condition. However, even after numerous complaints from STM and reminders from the World Bank to stick to the agreed rules of the game, NTA failed to stop this continuing abuse.
Adding to the issue of exclusivity violations is the pending implementation of a Code Division Multiple Access (CDMA) license already issued to NTC. The incumbent is planning to install one million lines in the next five years across Nepal including in the EDR. Technical experts are of the view that the CDMA signal will cover almost all VDCs in the Terai region and many of those in the Hill region, which would result in telephone services at a much lower tariff than the existing STM tariffs.10 Be that as it may, the general view is that the CDMA roll-out has been talked
of which: