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Governments must grasp network infrastructure economics to fulfil their universal broadband service goals

The UN goal to provide universal and affordable broadband access (“connecting the unconnected”) by 2020 is making slow progress and at the current rate we forecast that it may take well beyond 2030 to achieve.

Four critical success factors are generally recognised: access, affordability, digital literacy and local content. The initial focus must be on delivering the first two as they are interrelated and a prerequisite to enable the second pair.

Mobile technology (3G/4G) is the most cost-effective solution for expanding broadband service in rural/remote areas but most networks are already at or close to the limit of their commercial viability.

Our network infrastructure economics analysis for the GSMA’s Connected Society programme clearly demonstrates that governments must:

  • Encourage the Mobile Network Operators (MNOs) to use active network infrastructure sharing to maximise the commercially viable 3G/4G coverage; typically, this alone will only enable access for 60-80% of the population in a developing country
  • Provide fiscal and regulatory concessions to motivate MNOs to construct a single shared 3G/4G network for the most remote areas, extending access to almost 100% of the population.

The good news is that any tax or licence/spectrum fee concessions should pay for themselves through net increases in GDP and fiscal income.

Governments and MNOs must work together to understand this picture and develop joint solutions.

What is network infrastructure economics?
Greatly simplified, from a network operator’s perspective, it is the analysis of the net cash flow resulting from:

  • The revenues received from addressing the rural population
  • Associated marketing, sales and distribution costs
  • Capital and operating expenses to build, operate and maintain the network in the rural areas.

However, for universal broadband service, it is critical to broaden the analysis to include the government’s and user’s perspectives. For the government, the socio-economic impact of rural broadband expansion needs to be assessed in terms of impact on GDP and fiscal income, for example, from:

  • Import duties on network equipment and user devices
  • Sales taxes on user devices and services
  • Licence or spectrum fees paid by the network operator(s)
  • Corporation tax on profits made by the network operator(s)

Finally, to validate the assumptions made in the preceding analyses, it is also important to evaluate affordability for the rural users in terms of the devices and services (including sales taxes) compared to income levels.

Why is broadband coverage not commercially viable in very rural areas?
As an MNO expands coverage from urban into rural areas, revenues per cell site fall and costs increase. Rural areas are characterised by sparse population and very low income users leading to much lower revenue per cell site than urban areas. On the cost side, the major culprits are power (often there is no access to the electricity grid), backhaul transmission (very long distances and difficult terrain) and site maintenance/security (no local expertise).

In most countries, operators are already close to the limit of commercially-viable coverage. In fact, with competitive pressure on the price per Mb and increasing traffic per user, operators are starting to see the profitability of some existing rural sites turning negative. Network infrastructure sharing has grown rapidly during the last decade mostly as a means to combat this issue.

What is the optimal solution to provide rural broadband coverage?
The lowest cost approach to construct a mobile network in very rural areas is to use active (MORAN or MOCN) RAN sharing by two or more MNOs. The revenues will also end up being shared and thus it will still not be commercially viable to expand coverage to 100% of the population.

Surely this is exactly the purpose for Universal Service Funds (USF)? It is and countries such as Tanzania and Uganda have been using their USFs in just this way. Unfortunately, governments also want to use their USFs to finance other equally important initiatives and far more cell sites are needed than the USF can provide for.

Our aforementioned analysis for the GSMA shows that infrastructure sharing and USF funding do help to expand coverage…but only so far. If governments truly wish to provide universal, affordable broadband access, then they need to identify the fiscal and regulatory measures to help close the gap. To do so requires analysis of the socio-economic benefits.

Why should governments consider tax or licence/spectrum fee concessions?
By expanding broadband access to the whole population, fiscal income and GDP will increase. Doesn’t it make sense to forgo some of this increase in order to make the project commercially viable for the risk-takers? It should be possible to design targeted tax incentives or licence/spectrum fee concessions that will make rural broadband expansion a win-win for the MNOs, the government and, most importantly, for the currently disadvantaged people living in these areas.

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