Controversy over universal service provision funds at 3GSM Asia.

Charles F. Moreira   

The publication of the Universal Access Executive Summary by GSM Association at the recent 3GSM World Congress Asia event in Singapore in October earned it the ire of the Malaysian Communications and Multimedia Commission (MCMC).

The GSM Association is a worldwide association of GSM operators as key members plus some other players in the communications industry.

It commissioned Intelecon Research to conduct the study and results of the report showed that 32 out of 92 developing countries surveyed had set up universal service provision funds (USF) which levy contributions from fixed and mobile operators based on a percentage of their gross net revenues to subsidise rollout of telecommunications networks in rural areas.

This percentage typically ranges between 1% and 2% among most of the 32 countries, though Malaysia came in for especial criticism for topping the list by levying 6%, followed by India and Colombia (5%) and Thailand (4%), Bolivia (about 3.5%) and Afghanistan (under 3%).

So far, 15 of the 32 funds have collected a total of US$6billion, of which US$2bil was from the mobile industry, while the rest have either just begin to collect levies or are expected to do so soon.

However, the report contends that only 27% or US$1.62 billion of that US$6 billion has been disbursed to operators for network expansion, while the rest remains un-allocated or unspent.

The GSM Association was especially unhappy that USF funding has not had the desire impact on increasing market penetration, simply because US$1.6 billion or 93% of funds disbursed was on rolling out fixed networks, while a mere 5% or US$75 million was allocated to expand mobile networks.

It also cited the United States, which levies 10.5% on interstate end-user revenues and collected a total of US$31 billion between 1999 and 2004, to which mobile operators contributed 53% or US$16.4 billion but only received US$800 million or 2.6% in return.

It felt this was a very inefficient allocation of funds, since the World Bank estimates that a mobile connection costs one-tenth the cost of deploying a fixed line and it could cover an additional 450 million people or 7% of the world’s population, if remaining US4.4 billion was exclusively allocated for mobile network rollout.

Furthermore, it expects USF funds to collect a further US$3.8 billion by the end of the decade and if that too that was allocated on mobile rollout, mobile coverage would be almost 100% within about three and a half years. 

The association contends that if countries continued spending most of their USF on fixed infrastructure, they would be denying the mobile industry from serving less well-off customers with sustainable and affordable mobile services, which could also boost the economies of developing countries.

It cited results of a 2005 study which showed every 10% increase in mobile penetration could raise the economic growth rates of developing countries by 0.6%, so governments should give priority to realise these gains by extending coverage of sparsely populate areas.  

The GSM Association also recommended that governments should rely on market forces as the primary means to extend access and connections to mobile communications and only rely on USF as the last resort for providing communications services in remote or high cost areas.  

It also recommended that USF programmes should be a short-to-medium term measure, that it should be phased out over time where universal service provision has been achieved, either through market forces or government subsidy. Governments should make their universal access policies public, ensure transparency of their accounts and review its progress regularly.

Telenor Group Deputy CEO, Arve Johansen

According to its president and chief executive officer, Napoleon Nazareno, Smart Communications in the Philippines managed to cover 99% of his country without a USF by working with vendors to develop a low cost, low capacity access network with low capital expenditure to cover over 99.99% of its 160,000 municipalities, except for 13 where it was dangerous for its staff to provide coverage.

“Also recognising that the many rural Philippines people are daily paid, we adopted the model used to sell shampoo by the sachet rather than bottle, so it could be affordable to most people,” said Nazareno. So Smart introduced micro-top ups worth 30 pesos or US 57 cents, valid for three days, or 10 peso valid for a day. 

Too high?
More specifically on Malaysia, Johansen felt that its mobile operator, DiGi Telecommunications in which Telenor has a major stake, has complied with the governments Time 1 and Time 2 deadlines for mobile operators to provide nationwide coverage so a 6% contribution was too high and moreover, there’s a need to share infrastructure to reduce costs.

According to the MCMC, its USF programme was included in the Malaysian Communications and Multimedia Act (CMA) 1998 to address the telephony penetration divide between urban and rural areas because the national penetration rate for basic telephony was still very low at 16% of the population and there were many people in remote areas without access to basic telecommunication services.

It said this was necessary because mobile operators back then focused on rolling out infrastructure to more lucrative urban areas and tended to ignore the less lucrative or non-profitable rural areas.

However, since Telenor entered Malaysia in 1999 after the Act was introduced Johansen could not comment on what happened before. “However, in general, operators must start somewhere and the faster one is able to benefit from existing network coverage, the faster it is possible to ensure wider coverage, and in Malaysia, DiGi had increased the coverage from just below 50% of the population to over 86% in the last five years and DiGi is continously rolling out coverage,” said Johansen.

“Besides serving people in sparsely populate areas, it’s in operators’ interests to covering these areas to serve people from urban areas who travel frequently travel to their kampungs, and in principle Telenor believes market forces and a competitive environment will ensure network roll-out and increasingly competitive pricing,” said Johansen.

Johansen also notes that prices of mobile equipment have dropped over the last few years and pricing of mobile services have been constantly falling. “Traditionally, mobile pricing has been higher than fixed line but the gap is narrowing every day and Telenor’s aim is to ensure affordable mobile services throughout both Malaysia and the other countries where we are present,” said Johansen.

Telenor supports every initiative that helps ensure mobile services are available to as many people as possible but it believes that competition amongst the different players in a local mobile market is the best way to ensure this.

“A good example would be GrameenPhone which now covers 95% of the Bangladesh population, up from only 22% five years ago and while USF may be the right tool in some instances, competition is the best insurance,” said Johansen.

On whether GSM Associations contention that USF should be spent on mobile, rather than fixed infrastructure being a partisan position favouring the mobile operators, rather than the needs of the people, Johansen said he did not believe the mobile industry is able to fool anyone.

“Customers are generally the same everywhere, independent on variables like income and if you don’t think you need of a mobile phone, you simply won’t buy one,” said Johansen.“However, we know for a fact that mobile services are attractive, especially among lower income groups in rural areas where other kinds of infrastructure like fixed lines are not available.

“We firmly believe it is of all parties’ interest to focus on modern, mobile technologies.  In addition, it is a fact that mobile operators contribute substantially to the GDP, which is an important consideration in countries with emerging mobile markets,” he added.

All must contribute
According to the MCMC, all network facility providers, network service providers and application services providers with individual or class licenses under the CMA with annual net revenue of RM2 million or more are required to contribute towards the USF, the only exception being content application services providers. 24 licensees contributed towards the fund in 2005.

We asked MCMC whether the fund was disbursed mainly to fund fixed infrastructure, rather than mobile and it said it would revert to us but hadn’t done so at time of writing.

On whether fixed line operators were selected for infrastructure rollout under the USP programme, despite tenders being open to all mobile and fixed operators, the MCMC said  all three cellular operators (Maxis, DiGi, Celcom) have been designated to roll-out USP programs and besides that, it had also also designated 4 other service providers, namely Telekom Malaysia, TT dotcom, Nasioncom and EB Technology to roll-out the USP programs, based solely on their successful bidding proposal. 

On whether USF contributions should be 2% or less, the MCMC said it reviews the contribution from time to time but based on its last study done last year, it decided to retain the 6% for the time being, since the study took account of the national economy, industry’s growth and practices, especially in other developing countries.

The MCMC maintains it was unfairly criticised by the GSM Association at 3GSM World Congress Asia 2006.

While it was not published in the report or mentioned in public, we understand that the GSM Association mentioned in a closed-door meeting that the MCMC had allocated 49% of the RM2 billion from its USF on infrastructure rollout in Malaysia.

According to the MCMC, it planned to rollout 48,000 basic telephone lines in 89 underserved districts in the country, thus increasing telephone penetration by 1%, and according to an impact assessment by a consultant conducted this year, its USF has benefited people in rural and remote areas by bringing them tangible social and economic benefits, and the report strongly recommended continuation of its USF programme.