Closing the Gap in Access to Rural Communication: Chile 1995-2002

WORLD

BANK

DISCUSSION

PAPER

Work in progress for public discussion

Closing the Gap in Access to Rural Communications Chile 1995-2002

Björn Wellenius

NO.

430

WORLD BANK D I S C U S S I O N PAPER NO. 430

Closing the Gap in Access t o Rural Communications Chile 1995-2002

Bjorn WeZZenius

The WorldBank

Washington,D.C.

Copyright 0 2002 The Intemational Bank for Reconstruction a n d Development/THE W O R L D B A N K 1818 H Street, N.W. Washington, D.C. 20433, U.S.A.

All rights reserved Manufactured in the U n i t e d States of America First printing February 2002 1234040302 Discussion Papers present results of country analysis or research that are circulated t o encourage discussion and comment within the development community. The typescript of this paper therefore has n o t been prepared in accordance with the procedures appropriate to formal p r i n t e d texts, and the W o r l d Bank accepts n o responsibility for errors. Some sources cited in t h i s paper m a y b e i n f o r m a l documents that are n o t readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those o f the author(s) a n d should n o t b e attributed in any manner t o the W o r l d Bank, t o its affiliated organizations, o r t o members of i t s Board of Executive Directors or the countries they represent. The W o r l d Bank does n o t guarantee the accuracy o f the data included in this publication and accepts n o responsibility for any consequence of their use. The boundaries, colors, denominations, and other information s h o w n o n any m a p in this volume d o n o t imply o n the p a r t of the W o r l d Bank Group any judgment o n the legal status of any territory o r the endorsement or acceptance of such boundaries. The material in this publication i s copyrighted. The W o r l d Bank encourages dissemination o f i t s w o r k a n d will normally grant permission promptly. Permission to photocopy items for i n t e m a l or personal use, for the i n t e m a l or personal use of specific clients, or for educational classroom use, i s granted by the W o r l d Bank, p r o v i d e d that the appropriate fee i s p a i d directly t o Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission t o reprint i n d i v i d u a l articles o r chapters, please fax y o u r request with complete information t o the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries o n rights and licenses should b e addressed to the W o r l d Bank at the address above or faxed t o 202-522-2422. ISBN: 0-8213-5092-7 ISSN: 0259-21OX Bjorn Wellenius is a Consultant in the Global Information and Communication Technologies Depart-

ment at the W o r l d Bank.

Cover Image: Reproduced f r o m a poster of Fondo de Desarrollo de Telecomunicaciones, by kind permission of Subsecretaria de Telecomunicaciones, Chile. L i b r a r y of Congress Cataloging-in-Publication D a t a has b e e n a p p l i e d for.

Contents ...................................................................................................................... VII.. ... Acknowledgments..................................................................................................... .VI ii Acronyms ...................................................................................................................... ix 1 Executive Summary ...................................................................................................... 1. Background ............................................................................................................... 3 2.The Telecommunications Development Fund......................................................... 5 Foreword

.

Administration........................................................................................................................... Eligible Projects ........................................................................................................................ Competitive Tenders ................................................................................................................. Licenses .....................................................................................................................................

3 Results, 19952002

.

...................................................................................................

......................................................................................................

15

Reliance on Market Forces ...................................................................................................... 15 Minimal Regulation................................................................................................................. Simple and Relatively Fast Processing....................................................................................

Competence and Leadership....................................................................................................

5 More on Selected Success Factors

.

9

Population Coverage ................................................................................................................. 9 Private Resource Mobilization ................................................................................................ 10 Utilization and Revenues......................................................................................................... 11 Operating Companies .............................................................................................................. 12

4 Success Factors

.

5 6 6 6

.......................................................................

Competition for the Market..................................................................................................... Growth-OrientedBusiness Strategy ........................................................................................ Cost-Reflective Access Charges..............................................................................................

6 Improving the Basic Design

...................................................................................

Target Population .................................................................................................................... Selection Bias .......................................................................................................................... Local Participation .................................................................................................................. ImplementationDelays and Penalties ..................................................................................... Quality of Service and Monitoring .......................................................................................... Administration.........................................................................................................................

iii

15 16 16

17 17 18 20

23 23 24 25 26 27 28

.

Regulatory Framework ............................................................................................................

28

...........................................................................................

31

Low-Income Urban Areas .......................................................................................................

33

7 Outstanding Questions

Sustainability of Rural Service................................................................................................ Remaining Unserved Rural Population ...................................................................................

. ........................................................................................................... 9. Conclusion............................................................................................................... Annex 1. Cost-Benefit Analysis of Projects.............................................................. 8 Beyond Voice

Private Cost-Benefit Analysis ................................................................................................. Costs..................................................................................................................................

Benefits., ............................................................................................................................

Social Cost-Benefit Analysis ................................................................................................... costs .................................................................................................................................. Benefits..............................................................................................................................

31 32

35 39 41 41 41 42 42

43 43

Project Selection ...................................................................................................................... 43 44 Discussion ............................................................................................................................... Private Costs and Revenues .............................................................................................. 44 Impact on Subsidies ..........................................................................................................

Social Costs and Benefits .................................................................................................. Scopefor Improvement .....................................................................................................

.

Annex 2 Setting Access Charges for Rural Telephone Companies

......................

Background.............................................................................................................................. Method and Application .........................................................................................................

Investments........................................................................................................................ Operating Expenses ......................................................................................................... Cost of Capital ..................................................................................................................

Other Parameters .............................................................................................................. Cost Allocation .................................................................................................................

Results ..................................................................................................................................... Conclusion ...............................................................................................................................

45 45 46

47 47 -48 48 -49 49 50 50 51 51

Tables Table 1. Telecommunications Sector Development in Chile. 1988-2000 ....................................................... Table 2. Seven Rounds of Tenders for Rural Telecommunications Projects. 1995-2000 .............................

Table 3. Financing of Rural Investment, 1995-2000 (US$ million).............................................................. Table 4 . Subsidy Awarded per Locality and per Inhabitant...........................................................................

iv

3 10 10 11

.

Table 5 OutgoingPayphone Calls per Month. per Inhabitant......................................................................

Table 6. Companies ProvidingRural Services Supported by the Fund, 2001 .............................................. Table 7. Investments Mobilized by the Fund, 1995-2000 .............................................................................

Table 8 . Subsidy Bid as Percentage of Available Subsidy ............................................................................

.

Table 9 Access Charges for Different Companies, 2001 ..............................................................................

Table 10. Committed and InstalledRural Payphones, 1997-2002 ................................................................

. Table 12. Rural Tariffs, Official Gazette, February 26 1999.........................................................................

Table 11 Access to Computers, 1998 (% of population) ..............................................................................

V

12 13 14 18 21 26

35 52

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Foreword Three billion people live in rural areas, and most o f them have never made a phone call. Although increasing competition and private participation in the telecommunication sector has extended service to new localities and lower-income groups, major segments o f the population remain excluded. H o w can one expect the information revolution to benefit the poor under these circumstances? Chile i s showing how. Building on major sector reforms in the late 1980s, Chile pioneered in the mid-1990s the use o f competition for markets and subsidies to mobilize additional private investment in rural telecommunications. Since then, in an effort financed largely b y the private sector with only a small contribution o f public funds, the proportion o f Chileans living in localities without even a payphone has fallen dramatically-from 15 percent in 1994 to a projected 1 percent in 2002. This costeffective approach to extending services beyond what operating companies are prepared to do on their own has become international best practice and i s being replicated in various forms elsewhere in Latin America, Asia, and Africa. In this study Bjorn Wellenius documents and reviews the Chilean experience in rural telecommunications. The report focuses on the principles, practical organization, results, improvements on the basic design, outstanding issues, and prospects for extension o f the approach to more advanced forms o f communication and access to information. We expect that this report w i l l help other developing countries learn from the Chilean experience, adapt i t to their own needs and circumstances, and accelerate their efforts to improve basic access to communication. Mohsen Khalil Director Global Information and Communications Technologies Department The World Bank Group

vii

Acknowledgments Fieldwork in Chile was carried out in July 2000 and this paper was concluded in May 2001. The author gratefully acknowledges the information and comments provided by all the organizations mentioned in this paper and especially by (in alphabetical order of last names) Mario Andrade, Guillermo Balut, Oscar Cabello, Patricia Campillay, Eugenio Castro, Eduardo Contreras, Eduardo Costoya, Nicholas Garthwaite, Roberto Gurovich, Daniel Hojman, Eliot Hussein, Juan Navas, Christian Nicolai, Jorge Parra, Carlo Rossotto, Hardy Schmidt, and Daniela Vergara. Financial support was received from the World Bank Group’s Global Information and Communication Technologies Department; the South Asia Forum for Infrastructure Regulation, a World Bank training program; and infoDev, a grant program administered by the World Bank to promote the use of information for development. The paper was edited b y Chris Marquardt.

viii

Acronyms CNT

Compaiiia Nacional de TelCfonos S.A.

CTC

Compaiiia de Telecomunicaciones de Chile S.A.

CTR

Comunicaciones y Telefonia Rural S.A.

ENTEL

Empresa Nacional de Telecomunicaciones S.A.

GVT

Global Village Telecommunications S.A.

ITU

International Telecommunication Union

IRR

internal rate of return

NPV

net present value

SUBTEL WLL

Subsecretaria de Telecomunicaciones wireless local loop

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Executive Summary Although telecommunications reforms in Chile led to rapid development in the 1990s driven b y the private sector, rural areas remained largely excluded because of the high cost o f providing service, low revenue potential, and lack o f strategic interest to the operating companies. In 1994 the government established a Telecommunications Development Fund, financed by the national budget, to catalyze additional private investment in payphone service in rural and urban areas with l o w income and low telephone density. The Fund has been very successful. Between 1995 and 2000 i t supported the provision of payphone service to more than 6,000 rural localities with about 2.2 million inhabitants, thereby reducing the proportion of Chile’s population living in places without access to basic voice communication from 15 percent in 1994 to 1 percent in 2002. In addition, some 25,000 individual rural telephone lines are being provided. The subsidies awarded cost the government less than 0.3 percent o f total telecommunications sector revenue during the funding period, and Fund administration cost about 3 percent o f the monies granted. The Fund’s success was due largely to extensive reliance on market forces to determine and allocate subsidies, minimal regulatory intervention, simple and relatively expeditious processing, and effective government leadership. Competition among existing and new operators for the rural market and subsidies led to substantial reductions in cost to the government compared to earlier public sector investments in similar facilities. Commercial success has hinged on operators using the subsidized payphone infrastructures to also provide individual business and residential telephone lines and, subsequently, add value through new services (including voice mail and internet access in some areas) over this network. Interconnection was the single most important regulatory factor o f commercial viability, with access charges in some cases surpassing 40 percent o f rural operating revenues. The design o f the Fund proved robust, and remains the leading example o f a costeffective solution to reduce access gaps in basic communication in emerging economies. Some questions remain, however, about whether the services can be sustained in the long term, what to do with the small residual rural population s t i l l excluded, and whether anything needs to be done in urban areas. These questions-in addition to limited design improvements suggested by the Fund’s experience, as well as work s t i l l in progress on quality standards and monitoring-are relevant to the Fund’s proposed extension into more advanced modes o f communication and access to information, as well as to other countries learning from the Chilean experience.

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Background Reforms in Chile led to rapid development in the telecommunications sector in the 1990s. Privatization o f state-owned enterprises was completed in 1988, and the remaining legal and regulatory barriers to entry and competition in all market segments were removed by 1994. This resulted in fast growth, new services, technological innovation, high productivity, and prices among the world’s lowest. B y 2000 the number o f fixed and mobile phone connections had multiplied ten-fold, service had become widely available, and more than 70 percent o f households had a telephone (Table 1). Table 1. Telecommunications Sector Development in Chile, 1988-2000 1988

I994

2000

Privatization

Full Competition

Maturing Market

Telephone main lines (million)

0.6

1.6

Mobile customers (million)

0.0

0.1

3.2 2.8

0.6

1.7

6.0

Total connections (million)

5

11

7

0.7

Telephone digitalization (% lines)

38

100

100

Telephone main lines per employee

74

208

223a

Households with telephone (%)

16

40

74

Per 100 inhabitants Outstanding applications (years)

a

39