Source: Navas-Sabater et.al, 2002.
Today, many governments acknowledge the importance of telecommunications for development, and are more than ready to place public resources to increase access to broadband across their nations. Even though we certainly agree that there is a space for public investment in national ICT strategies, the opportunity cost of public investments is very high. Moreover, unnecessary use of public resources introduces distortions in the economy that could crowd-out private investment and reduce overall operators’ network rollout.
The so-called “gaps model” provides a basic yet insightful analytical framework that should help governments design their national telecommunications strategy – so popular nowadays. I’ve had many conversations during the last year that boiled down to explaining how this model works and the importance of regulation in developing any telecommunications strategy for a country.
Basically, this model breaks underserved areas in two different segments or “gaps”: the market efficiency gap and the access gap (see Figure above).
The market gap (Zone 1) refers to the difference between the level of penetration that can be reached under current plans and conditions and the level that the market could achieve by means of an ideal regulatory and legal environment (given by the Market Efficiency Frontier in the graph). This gap could be eliminated with adequate changes in current regulations and should not require public transfers.
So, before going for the “quick-fix” of subsidies and public investment, maybe some countries should assess whether a better regulation could solve part of the problem. It usually does: In Sub-Saharan Africa, Buys et.al. (2008) concluded that appropriate regulatory environment could increase cell phone coverage in at least 95% throughout the analyzed countries.
The access gap, on the other hand, represents that portion of the market that even under an ideal legal and regulatory environment would not be covered by operators due to its high cost and/or low income level. In order to increase coverage beyond the Market Efficiency Frontier into the access gap, public subsidies are to be considered.
Within the access gap, there is a level of penetration that is worth noting: the sustainability frontier. This frontier divides those projects that are expected to recover their operational costs and remain profitable (i.e., projects where public financing works as a “jump-start” in Zone 2) from those that would require ongoing subsidies (Zone 3). Policy makers should determine whether they want to provide universal access (which implies continuous subsidies) or to dedicate one-time subsidies to increase access up to the sustainability frontier.
It is important to note that all boundaries under this framework are not static, but rather depend on many factors such as technology, appearance of new services or applications, and overall economic environment, among others. This calls for a continuous review of universal access policies and mechanisms, adapting them to these “moving targets”. For example, throughout Latin America, many locations included in Universal Access tenders for basic telephony during the late 1990s are now being reassessed due to the arrival of mobile networks to these locations. Many satellite-based services located in these areas are thus being relocated (in most cases, at the operator’s request) to more isolated areas.
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