Price restructuring and implications for achieving Universal ServiceAccess

1
Price restructuring and implications for
achieving Universal Service/Access
Dr Tim Kelly, ITU Workshop on Trends in Regional
Telecom Prices in Asia-Pacific Bangkok, 11-15
Sept 2000
The views expressed in this paper are those of
the author and do not necessarily reflect the
opinions of the ITU or its Membership. Dr Kelly
can be contacted by e-mail at Tim.Kelly_at_itu.int
2
Agenda

• What is Universal Service / Access?
• Changing notions of universal service
• Quantifying universal service obligations
• International comparisons
• The dilemma
• Price restructuring tends to lead to higher
  prices for monthly subscription charges and local
  calls
• Residential customers are the most affected
• Getting the balance right
• between affordability and sustainability
• between cross-subsidy and cost-orientation

3
Universal access

• Availability ...
• Accessibility ...
• Affordability ...
• of basic telephone service
• to promote the extension of the benefits of the
  new telecommunication technologies to all the
  worlds inhabitants
• ITU Constitution, Article 1

4
Universal access and Universal service

• Universal service telephone in every home
• Universal access telephone within reasonable
  distance for everyone

5
Teledensity disparities
6
The scale of the problem (global)
72 of worlds population live in economies with
less than 10 main lines per 100 inhabitants
Population, million
Teledensity band
Source ITU World Telecommunication Indicators
Database.
7
Teledensity transition
Source ITU World Telecommunication Development
Report 1998 Universal Access.
8
The scale of the problem (national)

• Urban/rural divide
• 12 of Thailands population lives in Bangkok
• 50 of Thailands fixed-line subscribers in
  Bangkok
• Teledensity 36.1 in Bangkok 4.7 in rest of
  Thailand
• Churn
• In a competitive market, carriers will attempt to
  win rich, credit-worthy subscribers and to lose
  loss-making ones
• Mobile/fixed divide
• Younger, richer subscribers have mobiles only or
  both
• Older, less wealthy subscribers have fixed lines

9
Estimates of the cost of meeting USOsAs a
percentage of total sector revenue
Payphone

• Argentina 0.6-1
• Australia 2.0
• Chile 0.2
• Colombia 4.3
• France 3.0
• Norway 2.0-2.4
• Peru 1.0
• Sweden 0.8-1.2
• Switz. 1.7-2.2
• UK 0.2-0.3
• USA 5.0

losses
4
Tariff
imbalances
41
Geographic
price
averaging
32
Social
Programmes
23
Estimated breakdown of USOs in transition to
competition in France, 1999. Total 4.9B FF
Source World Bank.
10
Universal service dilemmas

• In Thailand, there is geographically-averaged
  prices and a local call costs 3 Baht (untimed)
• BUT, in Bangkok, more than 2 million consumers
  live within local call zone
• In rural areas only a few hundred consumers live
  within local call zone
• THEREFORE, consumers in rural area are
  cross-subsidising those in Bangkok!
• SO, geographically averaged prices do not always
  assist with Universal Service

11
Measures of Accessibility South Africa
Teledensity
10.7
Cellular density
3.7
Total telephone
density
14.4
Household
telephone
penetration
29
Universal access
penetration ( of
households with
access to
telephone)
82
Source

Statistics South Africa
.
lthttp//www.
statssa
.
gov
.
za
/gt
12
New concepts of Universal service Mobile
overtaking fixed lines in Finland
Penetration rate,
per 100 inhabitants
80
70
Household penetration,
in
Fixed-line
60
100
50
Fixed-line
40
80
30
60
20
10
Mobile
40
0
90
91
92
93
94
95
96
97
98
99
20
Mobile
0
90
91
92
93
94
95
96
97
98
99
13
Pre-paid mobile and Universal Service
Pre-paid mobile cellular subscribers, 1998, as
of total
Italy

• Mobile can enhance access
• Pre-paid has given access a major boost, esp.
  in Europe
• Pre-paid allows subscribers to receive incoming
  calls (under calling party pays regimes)

Mexico
Portugal
S. Africa
Indonesia
Austria
Greece
Philippines
Source ITU World Telecommunication Indicators
Database.
14
The myth of subsidised access

• It is commonly argued that telephone access
  should be priced at a low rate so that as many
  people as possible can afford it
• But,
• this may result in subsidies from
  non-telephone users to telephone owners, who are
  typically business, government and richest 1 of
  population
• if revenues do not cover costs, then the waiting
  list will grow

15
Socially desirable pricing

• Rates are kept artificially low
• Affordable price, maybe lt break-even

• Initial group of telephone users are clustered in
  the largest city and arenot poor

• May not generate enough revenue for network
  expansion

Source OSIPTEL.
16
Defining affordability

• Relative affordability, e.g., lt5 per cent of
  average family income
• BUT, initial telephone users are are not
  necessarily average
• In low income countries, costs for network
  installation may be high, but incomes are low
• Best practice cost of operating a network
• Methodology must be refined for residential and
  business users
• Costs must be split between one-time recurring

17
Telephone charges relative to household income,
1995
100
80
60
40
20
-
0
2
4
6
8
10
Telephone charges as of household expenditure
Note The annual telephone charges data are a
basket based on one tenth of the installation
charge, annual subscription in the largest
local network, 700 local calls and 130
long-distance calls. Taxes are included. Source
TU World Telecommunication Development Report
1998 Universal Access.
18
Methodology for determining average and best
practice costs
Source TU World Telecommunication Development
Report 1998 Universal Access.
19
Average best practice residential costs
Note Based on study of 10 operators from
different regions and income groups. Best
practice is the lowest 1. 40 of operating
costs discounted by 20 per cent (covered by
higher business subscription charge. 2. Actual
connection charge, divided by seven. 3. Assuming
telephone charges represent 5 of
income.Source ITU World Telecommunication
Development Report, 1998 Universal Access.
20
Global measures of Affordability
Source ITU World Telecommunication Development
Report, 1998 Universal Access.
21
Pricing strategies for extending Universal Access

• Installation charges initially high, but coming
  down over time
• Residential subscription charges should reflect
  cost of servicing line (typically US5-10 per
  month)
• Set separate charges for residential and business
  subscribers
• Lower prices for payphone or community telephone
  access
• Tariff options, e.g., for low-volume users

22
Installation charges and teledensity in Argentina
and Brazil, US
Installation charge (left scale)
Teledensity (right scale)
2'500
20
2'000
15
1'500
10
1'000
5
500
0
0
'92
'93
'94
'95
'96
'92
'93
'94
'95
'96
Telecom Argentina
TeleBrás
Source ITU World Telecommunication Development
Report, 1998 Universal Access.
23
lead to faster growth rates
Higher monthly subscription charges ...
Monthly residential subscription
charges, US
10
Uruguay
Malaysia
8
Hungary
6
Percentage of households with
4
telephone
Morocco
70
2
Malaysia
60
Hungary
-
Uruguay
50
1990
1991
1992
1993
1994
1995
1996
40
30
Morocco
20
10
0
Source ITU World Telecommunication Development
Report, 1998 Universal Access.
1990
1991
1992
1993
1994
1995
1996
24
Demand-side measures for extending Universal
Access

• Tariff cross-subsidies
• Traditional method, but may not benefit those for
  which it is intended
• Universal Service Fund
• Targeted assistance for special needs (e.g.,
  rural areas, disabled), but may create
  administrative burden
• Direct Financial Assistance to users
• Targeted assistance using non-telecom-specific
  criteria, but may be difficult to control abuses
• Community-wide initiatives
• e.g., Payphone in every village, community

25
Supply-side measures for extending Universal
Access

• Market liberalisation
• e.g., allowing new suppliers to enter market,
  liberalising equipment market, giving financial
  autonomy to PTO, encouraging foreign investment,
  Build/Transfer/Operate concessions
• Payphone liberalisation
• e.g., permitting private installation and
  ownership of payphones, community telephone
  shops, telecentres
• Technical solutions
• e.g., Mobile cellular, Wireless Local Loop,
  GMPCS, combined cable TV/telephony

26
Pricing strategies to achieve Universal Service

• Targeted tariff options
• e.g., for low-volume users, the elderly, the
  disabled, foreign migrants
• Prepaid calling cards
• for fixed-line and mobile networks
• Support for incoming calls
• e.g., to allow families to receive calls from
  family members working abroad, for instance
  through voicemail, email, telecentres,
  call-turnaround, foreign sales of calling cards
  etc

27
Achieving Universal service
Percentage of households with a telephone
28
Achieving Universal service
29
Year 2010 Goals
Goal Provide reasonable access to
telecommunications for all of humanity by the
year 2010
Source ITU World Telecommunication Development
Report, 1998