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This year has shown us the value of being virtually connected to each other. But not everyone is connected. How do you bridge the digital divide? Tim Kelly, an expert on regulation of the digital sector, joins host Roumeen Islam to talk about how policy and regulation can support affordable access in countries around the world.
This podcast series is produced by Fernando Di Laudo and Jonathan Davidar.
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Transcript
Roumeen Islam: This is the World Bank’s Infrastructure podcast. Today, I consider actions to bridge the digital divide, learning from countries around the world and starting with a story from one of them that I’m sure you will find quite interesting.
In 2002, the population of Afghanistan was over 22 million, yet the country had only 60,000 telephone lines. But that year is important because it was also that year that the first phone call from a commercial mobile telephone company was made. Starting in the early 2000s, the authorities embarked on reform of the ICT sector. They invested in the sector and they encouraged private investment. By January 2020, there were almost 27 million mobile phone users and over 7.5 million Internet users in the country. The retail price of Internet connectivity fell from over $450 a month in 2011 to $37 a month in 2017, a very large drop. Just like Afghanistan, governments around the world are working to increase digital access. Let's find out how.
Good morning and welcome! I'm Roumeen, the host of Tell Me How. Today, I welcome Tim Kelly, expert in ICT regulation, who's joining us all the way from Nairobi to discuss digital access and particularly, bridging the digital divide, a topic that garners special attention these days. Welcome Tim.
Tim Kelly: Thank you Roumeen It's a pleasure to join you.
Roumeen Islam: Pleasure to have you, Tim. So, Tim, even before the pandemic, Internet usage was rising in leaps and bounds. With so many countries and people depending on digital access during the pandemic, the demands have increased even further. What are the numbers looking like these days?
Tim Kelly: Yes, indeed. The numbers are very impressive at the moment. In fact, the main change that we've seen since the onset of the COVID-19 pandemic has been a rapid growth in international Internet traffic of the order of about 30 to 50 percent compared with the March 2019 pre-COVID baseline. And that's happened in a matter of a few months. Now, the factors driving the growth have been the shift to remote working and online learning, but also online entertainment as more people under lockdown are streaming movies or playing games. But it's too early to tell whether the pandemic is bringing a similar increase in subscriber numbers, while digital devices are more important than ever. On the other hand, the pandemic has really put a squeeze on family incomes, and that may slow down subscriber growth.
Roumeen Islam: Yes, it's an important issue to bring up—the affordability question. And as you say with the pandemic, both work and social needs have increased, and it's very important to get more people online. So, what are the main policy considerations in meeting this affordable access challenge?
Tim Kelly: Well, we've seen, as I said, a big increase on the demand side, but we've not necessarily seen an increase on the supply side. You need both physical investment in new, productive network infrastructure, but you also need regulatory changes, and one tends to follow the other. And our experiences are that the regulatory constraints may be preventing the expansion of the network and access to the existing networks. And in some countries, in some cases, companies are making large profits on services that rely on high speed networks, but not necessarily reinvesting those profits in new telecom infrastructure.
Roumeen Islam: So how does regulation limit connectivity? Could we expand a bit on that? And, you spoke about having to increase supply? How is that related to increasing affordable access?
Tim Kelly: I think there are several ways in which regulation maybe actually deterring investors. And when that regulation is changed, for instance, in Tanzania, which are allowed a private company HALOTEL to build its own cable in rural areas, it actually laid three times more cable than the incumbent TTCL in just 18 months. So, in a country like Tanzania, if you can stimulate private sector investment, that tends to work a lot better developing business-friendly regulations rather than requiring a lot of public sector investment.
Roumeen Islam: In response to this very large demand for digital services during the pandemic, what kind of regulatory changes have you seen? So, this Tanzania example you speak of, which is very interesting, actually started before the pandemic. So, what have you seen during the pandemic?
Tim Kelly: A lot of changes. In Kenya, for instance, mobile operators have introduced a special zero-rated Internet traffic, which provides a minimum level of data each week for students to use in their classes for online learning. Also, to encourage the use of digital financial services rather than cash, the regulator has obliged operators to remove transaction fees from mobile money transactions of less than 1,000 Kenyan shillings, that's around U$S 10. And, in other countries like South Africa, additional spectrum was made available to operators to provide more capacity to cope with the heavy traffic levels.
Roumeen Islam: So, there are many things that governments can do. Now, is the telecom sector one that gets a lot of foreign investment? And if so, for which parts? I understand that submarine cables are laid down increasingly by private investors, am I right?
Tim Kelly: Yes, you're absolutely right. The telecom sector does receive a lot of foreign investment, but it tends to be not uniformly distributed. We tend to think of the telecom infrastructure in terms of the first mile, the middle mile, and the last mile. And foreign investment is theoretically important at all levels where it's allowed but it's most common in the first mile, where the Internet first enters the country, for instance, through an undersea cable or through satellite networks. And here the high capital costs usually require or demand an international approach.
Roumeen Islam: And this is why you know, we see companies like Google and Facebook very involved in this area of investment, because I understand they've already got undersea submarine cable projects underway.
Tim Kelly: Yes, that's right. There's certainly a lot of investment in international cables. For instance, Google and Facebook are working together on the 2Africa cable, which is having potentially a big impact on the level of connectivity around Africa.
Roumeen Islam: So that's the first mile. Now, shall we go to the Middle Mile, which is the next segment after the Internet enters the country. And, this segment has high capital costs too, right? But not quite as high as the first mile?
Tim Kelly: Yes, the middle mile or what we call the backbone is the network that connects together the main urban areas of the country. It's usually provided by fiber or microwave, and many countries reserve investment in the backbone to the historical operator or the incumbent. And, that tends to limit opportunities for foreign investors.
Roumeen Islam: Why do they reserve the middle mile for the state operator? Are there economic reasons?
Tim Kelly: It's often because they're trying to preserve the state-owned operator, which might otherwise suffer financial difficulties. So, by restricting foreign entry, the hope is that they would, therefore, enable the operator to survive.
Roumeen Islam: So that's the middle Mile. Now let's get to the last mile. What is that? And, who is active in this segment?
Tim Kelly: The last mile is what connects the consumer to the telecom network or the Internet network, and it's mainly provided in most developing countries by cellular mobile communications. And there is a relatively high level of foreign investment in this area. Big companies like Vodafone MTN or Orange they’ve tended to build networks in countries where they have been allowed to acquire licenses, and the governments, for their part, have benefited from spectrum sales. In Myanmar, for instance, which started to open up its telecom market in 2012, investors came from as far afield as Japan, Norway, Qatar and Vietnam.
Roumeen Islam: And do you get domestic private investors in the middle and last miles? Or is it just foreign investment?
Tim Kelly: It can happen. For instance, utilities, energy or railway may form the basis for domestic competition. That's the case in China, for instance. But, in most smaller developing countries, a local private investor really lacks the scale, or the experience, or the deep pockets to enter the infrastructure market. A Telecom is a business in which sunk costs are typically very high, and it's also an industry with network externalities which benefits from economies of scale.
Roumeen Islam: So, you say that the sunk costs are very high and the technology just keeps evolving from 4G to now 5G, so I wonder how the costs are evolving with the technology?
Tim Kelly: Well, the simple rule of thumb is that with each successive generation of telecommunications technology, the costs increase by an order of magnitude. So, 4G networks cost more than 3G networks, and 5G networks at which the world is investing in at the moment will certainly cost more than any previous technology.
Roumeen Islam: Well, then, how do network industries typically recoup these very large investment costs?
Tim Kelly: Well, historically, the cost of network investments have been recouped by customers using tariffs that are usage based. For instance, we typically used to say that customers paid for calls by the minute, by the mile, and by the megabyte. But with the shift to Internet based traffic, that's hardest to sustain. Instead, telecom operators these days need to make money from data traffic rather than voice traffic, and also from advertising.
Roumeen Islam: Here's a conundrum. Telecom operators need high volume data traffic to make money. Some areas are very poor and may not be using a lot of data. What are policy options here? Are private investors just waiting for the opportunity to invest here, too?
Tim Kelly: Removing regulatory barriers will certainly do a lot to encourage private investment, but it's only part of the solution and it's not sufficient to bridge the digital divide. In many parts of Africa, particularly in rural areas, the costs of deploying, operating, and maintaining infrastructure is so high and the potential return for operators is so low that a different approach is needed, typically based around public private partnership.
Roumeen Islam: I can see how public private partnerships would be a very good solution to many of these issues. What can public policy do to encourage this and to address these barriers?
Tim Kelly: I think there are a number of approaches that can work. In Niger, for instance, which is marked by a very low population densities, difficult terrain, and civil insecurity, some government support may be necessary to stimulate investment. Through the Niger Smart Villages project, we're encouraging investment through a competitive bidding system whereby the private sector, mobile operators or tower companies can bid the lowest level of subsidy required in order to attract them to invest in rural areas: a kind of reverse auction. Now, that project is just at the very start but the response from the private sector to date has been very supportive.
Roumeen Islam: That's good to know. I understand that there's another option. Governments may establish special funds to encourage investment in these areas. Could we talk a bit about that?
Tim Kelly: Certainly! The United States is one of the first countries to introduce what's known as a Universal Service Fund, or USF, to which all operators contribute a portion of their revenues and other countries have followed suit, albeit with mixed results. Now, the purpose of the USF is to use those contributions to cover network deployment costs that might otherwise be uneconomic for telecom operators to serve without some level of subsidy or public intervention. A USF might also be used for special purposes, such as connecting schools, or connecting hospitals, or developing digital skills. Now, as all operators contribute to the USF, they should also be able to draw upon it to implement projects in rural areas.
Roumeen Islam: So, this sounds like an interesting exercise. But, how do these funds perform in practice? Are they effective?
Tim Kelly: Some have done very well, such as in Chile or Pakistan, and they really helped countries to move towards achieving universal service. But, other countries have been less successful, and I think the main failing of these funds worldwide is that they tend to accumulate funds, but they're not always very good at dispersing those funds, so design matters. A USF that fails to disperse can be a tempting pot that politicians might dip into ahead of an election, for instance.
Roumeen Islam: Okay, well, given that why was Chile successful?
Tim Kelly: So, Chile was one of the first countries to adopt what we call the reverse auction model that we're now using in Niger, Tanzania, and elsewhere by inviting operators to bid for a least cost capital expenditure subsidy. So many countries are also experimenting with what we call pay or play schemes whereby operators are given the option to contribute an equivalent to mountain operational expenditure through their corporate social responsibility budget to connect the unconnected rather than making financial contributions to a fund.
Roumeen Islam: Countries and other parts of the world are learning from Chile's experience. Can we talk a bit about innovative business models that are being used to reach areas that are harder to reach?
Tim Kelly: Absolutely. We've seen a lot of experimentation, particularly in the field of rural broadband. Now, some of these models use innovative technologies such as drones, nano SATs, or TV White Spaces spectrum Another approach is to combine cell towers in rural areas with off grid solar power.
Roumeen Islam: You know technology is evolving so fast that it's almost impossible to keep up. Shall we move to the pricing of digital services and hardware? In many countries, you know, even basic digital services cost so much that people can't afford to pay, and then they've got to pay for laptops and smartphones and so on. So how do policies deal with this?
Tim Kelly: I think it's one of the biggest challenges that telecom operators still face of how to achieve universal affordability. Usage costs attempt to come down over time as we've seen a shift to free of charge services such as Skype or WhatsApp and device charges have also come down as the basic components of a smartphone are standardized and can be manufactured in bulk. And we're seeing a booming secondhand market develop. A smartphone, for instance, that three years ago might have cost $100 typically costs now around $20 in the markets of Nairobi.
Roumeen Islam: When I look at my digital service bill, I see a huge amount going to taxes. So, aren't there several types of taxes imposed on digital services?
Tim Kelly: Sadly, yes. Taxes are one area where we haven't seen a trend towards decreasing prices, and taxes do raise the price of service and they’ve generally not come down. In fact, governments in many cases have introduced new forms of tax, for instance, on mobile money or social media. In Uganda, for instance, anyone who wants to use the service like Facebook or WhatsApp if they are available in the country, they must pay a daily tax of about five US cents per day. And, as a result of that, the number of Internet users in Uganda actually fell by about 30% rather negating the purpose of the introduction of the tax.
Roumeen Islam: So, what I have heard from you during this conversation is that in fact, there are many, many areas in which policy has a role to help increase affordable access to digital services. I mean, we just talked about taxes. We talked about many other issues, regulation, the cost of hardware and software. So, have I left anything out? Where do I find out more about digital regulation?
Tim Kelly: Good that you should ask that we recently published together with the International Telecommunication Union, a digital regulation handbook. It's available online at www.digitalregulation.org. It builds on 20 years of joint work between the World Bank and the International Telecommunication Union, and it provides a very valuable and dynamic toolkit of resources for digital regulators.
Roumeen Islam: Very good. Thank you, Tim. This sounds like a treasure trove of information. It was nice to have you with us today. And, I just want to mention I hear some frogs in the background. Am I right?
Tim Kelly: Yes. It's not my stomach. It is, in fact, the Frogs of Nairobi performing at this time of night.
Roumeen Islam: Okay. Thank you, Tim. Nice to have you with us.
Tim Kelly: It's a pleasure. Thank you.
Roumeen Islam: So, listeners, we learned about the complex issues surrounding digital access. Here are the most important points that I took away from this discussion. You probably have others.
Firstly, almost all countries today do have the means with which to increase digital access for their residents.
Secondly, investing in telecoms infrastructure is generally a profitable business, but regulatory changes to facilitate market entry and competition are needed to encourage private investment in infrastructure.
Thirdly, affordable prices can be had, but they depend on a number of interrelated factors. You need to have competition among providers of telecoms infrastructure. You need competition between hardware and software providers. You need good tariff policies and the use of innovative business models, and if you work closely with the private sector, you can do really well.
However, subsidies may still be needed in some areas and for some communities. But with the right policies in place, they'll be kept low.
If you have questions or comments, we’d love to hear from you. You can reach us at tellmehow@worldbank.org. Don’t forget to subscribe and thanks for listening!
View all episodes on our Tell Me How: The Infrastructure Podcast Series homepage