Pricing strategies to achieve Dr Tim Kelly, ITU Seminar on Cost-based Tariffing, Delhi, 16-18 February 1999 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@itu.int Pricing Strategies to achieve What is Universal Service / Universal Access? The myth of subsidised access Defining affordability Pricing strategies For universal access For universal service Targets for the year 21 1
Universal access Availability... Accessibility... Affordability... of basic telephone service to promote the extension of the benefits of the new telecommunication technologies to all the world s inhabitants ITU Constitution, Article 1 Universal access and Universal service Universal service: telephone in every home Universal access: telephone within reasonable distance for everyone Percentage of households with a telephone 1 Universal service 9 8 7 6 5 4 3 2 1 Universal access GDP per capita 2
Teledensity disparities 27.8 to 68.3 (46) 8.3 to 27.8 (46) 1.3 to 8.3 (47) to 1.3 (48) Number of economies 45 4 35 3 25 2 15 1 5 The nature of the problem Teledensity <1: 43 economies 1-5: 36 economies 5-1: 26 economies 1 5 1 2 3 4 5 6 7 8 Teledensity Source: ITU World Telecommunication Indicators Database. 3
Population, million 2' 1'8 1'6 1'4 1'2 1' 8 6 4 2 The scale of the problem <1 1-5 5-1 1-2 2-3 3-4 4-5 >5 Teledensity band Source: ITU World Telecommunication Indicators Database. 72% of world s population live in economies with less than 1 main lines per 1 inhabitants Teledensity transition No. of countries: 43 37 29 28 22 17 19 25 Teledensity: 5 4 3 <1 1-1 5-1- 2-3- 4- >5 1 2 3 4 5 Best Average 2 1 Years 1 1 2 3 4 5 Source: ITU World Telecommunication Development Report 1998: Universal Access. 4
Telecoms transition, from 1 to 3 lines per 1 inhabitants, Asia-Pacific Korea (Rep.) Taiwan-China Singapore Hongkong Japan Australia New Zealand 1 lines per 1 inhabitants 3 lines per 1 inhabitants 1935 1955 1975 1995 Source: ITU World Telecommunication Development Report 1998: Universal Access. Teledensity does not necessarily equal household density USA France Norway Singapore UAE Kuwait Bahrain Qatar Teledensity Household density - 2 4 6 8 1 Source: ITU World Telecommunication Development Report 1998: Universal Access. Persons per household 2.7 2.5 2.4 4. 5.7 7.6 6. 7. 5
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 Socially desirable pricing Rates are kept artificially low Affordable price, maybe < break-even Initial group of telephone users are clustered in the largest city and are not poor May not generate enough revenue for network expansion Percentage of households in Lima, Peru with a telephone, by income, 1996 1 % 84% A = Richest 25% B = Second 25% C = Third 25% D = Poorest 25% 37% 36% 7% A B Lima C D Source: OSIPTEL. 6
Waiting list (millions) 3 2 1 Waiting lists and average waiting times, India, 1975-96 Advance Deposit Scheme introduced Wait list Wait time '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 Source: ITU World Telecommunication Development Report 1998: Universal Access. 8 7 6 5 4 3 2 1 - Average waiting time (years) Defining affordability Relative affordability, e.g., <5 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 7
Telephone charges relative to household income, 1995 1 Note: Source: Percent of households with telephone 8 6 4 2 - % 2% 4% 6% 8% 1% Telephone charges as % of household expenditure The annual telephone charges data are a basket based on one tenth of the installation charge, annual subscription in the largest local network, 7 local calls and 13 long-distance calls. Taxes are included. TU World Telecommunication Development Report 1998: Universal Access. Methodology for determining average and best practice costs Establish average operating costs for telephone network US$ 2-4 per subscriber per year Derive an average tariff US$ 64-122 per year Determine how many households can afford service Where 5% of household income > US$ 1 34-3 2 Choose a policy for families that cannot afford service Financial assistance, widespread payphones, etc. Source: TU World Telecommunication Development Report 1998: Universal Access. 8
Average & best practice residential costs Average Median Best practice Annual operating cost 38 3 2 per line Annual subscription 1 122 96 64 Annual connection fee 2 39 7 3 Total annual charge for 16 13 67 telephone service Annual income required to afford service 3 5'432 4'32 3'48 Note: Source: Based on study of 1 operators from different regions and income groups. Best practice is the lowest 1. 4% of operating costs discounted by 2 per cent (covered by higher business subscription charge. 2. Actual connection charge, divided by seven. 3. Assuming telephone charges represent 5% of income. ITU World Telecommunication Development Report, 1998: Universal Access. Global measures of Affordability 7 6 5 4 3 2 1 With Service Without telephone service On Wait list Could afford Could not afford ~1'5 million households in the world Source: ITU World Telecommunication Development Report, 1998: Universal Access. 9
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 US$5-1 per month) Set separate charges for residential and business subscribers Lower prices for payphone or community telephone access Tariff options, e.g., for low-volume users Installation charges and teledensity in Argentina and Brazil, US$ Installation charge (left scale) $2'5 Teledensity (right scale) 2 Source: $2' $1'5 $1' $5 $ '92 '93 '94 '95 '96 '92 '93 '94 '95 '96 Telecom Argentina TeleBrás ITU World Telecommunication Development Report, 1998: Universal Access. 15 1 5 1
Monthly residential subscription charges, US$ $1 Uruguay $8 Malaysia Hungary $6 Higher monthly subscription charges... $4 $2 Morocco $- 199 1991 1992 1993 1994 1995 1996 lead to faster growth rates Source: ITU World Telecommunication Development Report, 1998: Universal Access. Percentage of households with telephone 7 6 5 4 3 2 1 199 1991 1992 1993 1994 1995 1996 Malaysia Hungary Uruguay Morocco 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 11
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 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, callturnaround, foreign sales of calling cards etc 12
Achieving Universal service Percentage of households with a telephone Canada USA Sweden Australia 1% 8% 6% 4% 2% France Japan % 196 197 198 199 1996 1% 8% 6% 4% 2% Korea (Rep). Turkey Poland Mexico Malaysia Thailand % LDCs 196 197 198 199 1996 Year 21 Goals Goal: Provide reasonable access to telecommunications for all of humanity by the year 21 Teledensity Household telephone penetration Payphones per 1 people 1996 21 1996 21 1996 21 WORLD 12.8 34.4 1.55 Developing 5.7 1 16.3 >5.84 2 Low income 2.44 5 8.5 >2.57 1 excluding China 1.22 4.1.21 Source: ITU World Telecommunication Development Report, 1998 13