Key Theme: Policy issues

POLICY AND REGULATORY CHALLENGES OF THE DIGITAL DIVIDE[1].

Alison Gillwald

Director, LINK Centre, Witwatersrand University, South Africa.

Abstract

This paper explores the policy and regulatory challenges arising from what has now become known as the digital divide. It will assess the success of privatisation and liberalisation strategies mooted by major multilateral organisations as the solution to the unevenness of global developments. Finally, it proposes that good governance, and the capacity to deliver on it, as a key to meeting one of the major development challenges of our time.

Background

The issue of affordable access and the skills to utilise increasingly advanced but essential services, remains the central public interest challenge for regulators. This is particularly so in developing countries but with new and extended definitions of universal service this applies as much to regulators in developing countries where large numbers of citizens are excluded from the global information economy. The dilemma for contemporary policy makers and regulators is that as they facilitate the linkage of their urban centres into new global networks, illuminating critical paths of planetary contact and influence, so they extend the gap between those residing in the dark spaces between these access axes and those connected to them. The social injustice arising from what might seem like a technological or infrastructural issue is that more than in any previous era, information is power.  So the inequities of access to and dissemination of information are extended to citizens’ differential ability to be effective, whether in their political or economic systems. 

The major policy and regulatory challenge for the ICT sector arising from this globalisation of markets is identified increasingly as the harmonisation of domestic policy, regulation and standards with international principles and practices exemplified in the multilateral agreements and international sector organisations.  Central to these principles is the concept of efficiency, which is the rationale for the broad policy stance which is presented as best practice. This includes a deregulated and competitive market structure; private ownership with strong foreign investment; a reduced role for government; transparency to bring prices closer to costs and finally universal service policies to deal with market failure. [2]

This has been the mantra of the Bretton Woods institutions that determine trade and aid in the world.  Privatisation of the incumbent monopoly and liberalisation of the market, it is argued, will put an end to high costs associated with inefficient monopoly provision. The introduction of competition serves the public interest by inducing suppliers to become more efficient and to offer greater choice of products and services at lower prices, it is said. While full competition has been placed at the centre of any desirable telecommunication policy by these global agencies offering aid or investment, to impose free market conditions onto the inequitable conditions in most developing countries without programmes of redress, would simply reinforce the iniquitous status quo. A more focused and specific competition programme is more likely to extend services and enable marginalised domestic markets to become better integrated into the global economy, with the associated benefits of economic engagement.

Competition – panacea or regulatory tool?

What we do know is that under monopoly provision in most developing countries miserable gains were made in rolling out telecommunication services. Prior to the start of liberalisation in the mid-nineties in Africa, the average teledensity was below 1%. Despite claims that cross-subsidies from international calls and high settlement rates were needed to extend services to the underserved, they were not by and large. Not that they could not have been, but they were not. They may have been used in some instances to cross subsidise the delivery of other important government services, but in so far as providing affordable access for more than a very small minority of our populations, history tells us that telecommunications monopolies have by and large failed Africa.

More importantly, while inducing the opening up of markets to foreign trade and investment, insufficient emphasis has been placed on the need for strong institutional arrangements to deal with the inevitable failure of the market to allocate resource effectively. While effective regulation has been a cornerstone of competitive markets in many of the countries calling for open access to developing country markets, it has not sufficiently accompanied the introduction of competition policies, often expediently implemented by developing countries to offset debt or secure aid. The introduction of competition, without the regulatory capacity or political will to manage a competitive framework, can be entirely counterproductive to the achievement of the very goals intended by liberalisation.

As the Global Internet Liberty Campaign (GILC) concludes in a study on the Eastern European (Internet) market but pertinent to all emerging economies:

“Open and competitive markets make a necessary not always sufficient contribution to securing the public interest objective of universal access, affordable prices, pluralism and diversity. Indeed, in the absence of countervailing regulation, liberalization could worsen the situation. Tariff rebalancing in favor of high volume and long distance users could benefit business and urban customers, while resulting in increases to residential and rural customers.”[3]

Privatisation – solution to infrastructure development or stiffler of sector development?

Due to the lack of success of incumbent telcos in most developing countries to adequately build out the infrastructure after decades of monopoly, the solution of privatisation proffered by multilateral agencies has been widely adopted over the last few years. In many developing countries privatisation has been implemented through the introduction of a strategic equity partner with the promise of a period of extended monopoly. The rationale for this is a strong one. Often indebted monopolies need the injection of capital and skills and technology transfer in order to roll out service to the vast majority in many developing countries who do not receive even basic services, modernise their outmoded networks and prepare for competition. Despite the fact that there are now over 120 GATS signatories - of which over 100 are developing countries, and over 70 have signed the Basic Telecommunications Agreement and a significant number of them have adopted the reference paper and have undertaken to established independent regulators - privatisation is often adopted without a commitment to liberalisation of the market more generally. This together with the absence of necessary regulatory arrangements, rather than reaping its potential benefits results frequently in markets distortions.

What then are some of the early indications of the applications of these privatisation strategies? There is some evidence to suggest that countries that have gone this route, especially those who did so at the advent of large-scale public usage of the Internet, may questionably have met their formal rollout targets but possibly at considerable cost to the broader development of their ICT sectors.[4] Where stringent monopoly rules apply or where inadequate regulation fails to enable the liberalised components of the sector to compete effectively, innovation and customer service is unlikely to flourish. The impact on the industry, and the economy more generally, of players in the sector being prevented by law from using alternative, cheaper and more effective telecommunications solutions and the difficulties, including extortionist costs, of obtaining access to the incumbent’s network, need to be weighed carefully against the contribution of the monopoly to the growth and dynamism of the sector. This is so not only at the value added end of the market where innovation tends to occur but also in terms of universal access provision. Where alternative access networks have been permitted and the provision of services to underserviced areas have been opened up to other players besides the incumbent, service rollout has often been quicker and more widespread.[5]

Privatisation has been more readily adopted by many developing countries than other aspects of liberalisation, because of the tangible monetary benefits for the often-indebted exchequer. The main driver of the attachment of a period of exclusivity to the garnering of a strategic equity partner or to the public listings of telcos has been the sum the state can extract from investors. This is not an evil in and of itself.   Countries all over the world have long used revenues from the telecommunications sector to cross-subsidise other areas of social delivery, to offset debt and other legitimate uses.  The danger lies in the conflation of the optimising of state assets with the promotion of the national interest. This is especially the case when political success is measured by the short-term receipt of foreign currency rather than longer-term national development objectives. The protection of state assets is undoubtedly an important public policy principle. Extracting a few extra million dollars however, for a period of exclusivity needs to be carefully weighed against the negative impact the exclusivity is likely to have on the growth and diversity and quality of services.  The resulting privatised monopoly, driven by shareholder demands and the imperative to stifle competition, requires even more rigorous regulation than the public monopoly, which, despite the inefficiencies associated with it, at least has some public service ethos.

Institutional arrangements that anticipate the potentially negative impact of short term political decisions, can build in the use of regulators, if they operate at arms length, to limit political decisions that may have short term financial or political gains but directly or indirectly inhibit the attainment of broader national goals. And this is not a phenomenon restricted to developing countries: the failure of the 3G auctions in Europe would be a case in point.[6]

Access – infrastructure or affordability?

Perhaps more importantly, privatisation is likely to be accompanied by the rebalancing of tariffs, to bring charges for service in line with costs, resulting invariably in higher local rates, which prior to rebalancing were subsidised by international calls. While competition purists might welcome the cutting of these cross-subsidies, the result has been the exclusion on the grounds of affordability of precisely those intended to be the beneficiaries of the exclusivity. A study conducted for the telecommunications regulator in South Africa in 1998 found that if 2% of household income was assumed to be needed for telephony, 44% of households could not afford a service at R30 (about US$6 at that time) a month and that 60% of all households would not even be able to afford the monthly line rental then of R50 (US$8).[7]  More recently Telkom SA’s last annual report indicates that while Telkom had met its annual target of installing 675 000 lines in the last financial year “a complete review of non-paying customers and crackdown on commercial fraud resulted in a disproportionate number of fixed lines being disconnected”. This resulted in a decline in net customer lines from nearly 5,5 million in 2000 to less than 5 million in 2001. So while Telkom has installed over half a million lines, nearly half a million subscribers churned.[8] With little option in terms of service, one can assume that most of these subscribers either terminated their service or were cut off due to their inability to pay. While cross-subsidies have become a dirty world in discourse of this kind, it is clear that for many years to come access to the home for a vast numbers of citizens in developing countries will only be possible through some form of subsidy or life-line tariffing. Rather than jettisoning cross-subsidies as a legitimate social strategy, regulators should set up systems that will ensure that they are transparent, not used anti-competitively, that they are serving their objectives, are targeted and form part of broader collective access strategies such telecentres and payphones. Establishing accounting mechanisms and strict reporting requirements would however also be required to facilitate this outcome.

Conundrum of wireless

This issue of affordability poses an interesting conundrum with regard to the massive growth of wireless mobile services in developing countries. In Africa the growth of mobile telephones has outstripped that of wireline phones. In South Africa mobile subscribers have grown to 8 million in 2001 since the introduction of cellular in 1993 while the fixed network sat just short of 5 million subscribers in March 2001, having increased its subscriber base by less than a million lines since its privatisation in 1997.[9] The dramatic recent growth of mobile subscribers is attributable to the introduction of prepaid services which now constitute around 70% of subscribers, but less than 30% of subscriber revenue[10]. Unlike the rest of sub-Saharan Africa these figures cannot be explained exclusively by the lack of access to fixed line phones, the cost of which is considerably cheaper, especially for pre-paid subscribers, whose tariffs are considerably higher even than the relatively cheaper contract tariffs. Besides the convenience of mobility, and indeed the status, something about the ability of the consumer to control the usage and costs of pre-paid services make this option feasible for large numbers of people whose up-front cost of purchasing the phone may be as high as half of their monthly income. If, with prepaid tariffs considerably higher than contract tariffs, it is the case that the duopoly cellular providers are exploiting the demand brought about by the failure of Telkom to supply quickly enough, and are rather extracting monopoly rents from the poorest sector of the economy who are the least likelihood of qualifying for credit checks for non pre-paid services, rather than it simply being a good financial option with no lock-in or rental costs, then this provides a glaring case of market failure that needs regulation, rather than being a wireless success story.

Whatever the reason the phenomenal growth of mobile wireless services, it requires that policy makers reconsider the limitations on alternative access networks in the name of providing universal access and the demands of consumers for alternative, flexible services and billing, in addressing the issue of the digital divide.

Over and above this regulators will need to be part of broader initiatives to ensure that alternative technologies and new applications, such as the Internet, become ‘economic equalizers’ rather than ‘digital dividers’[11].  Some of the methods will be simple regulatory interventions such as encouraging usage by consumers: consumer growth is determined by pricing regimes. As long as charges relate to time spent on line, growth will be limited. The common practice of per minute billing for local calls in developing countries is a major barrier to individual or collective access. Flexible and competitive pricing is likely to drive down prices. Regulators have to identify the barriers to the effective introduction of the innovative services likely to result from these developments. They need to ensure that their regulation ensures fair competitive participation, ensuring that there are minimal barriers to entry.

Good governance – key to transformation

Finally, all policy and regulatory responses to overcoming the digital divide are dependent on good governance if they are to be effective in the information era. This is characterised by greater institutional transparency and accountability and increased participation by interest groups and individuals in decision-making processes. In many parts of the world pressure from within civil society has shifted the power that traditionally resided in formal government structures to more democratic and participatory forms of governance. These are manifest in the process through which institutional, business and citizen’s groups articulate their interests, exercise their rights and obligations, allocate resources and mediate their differences. “It hinges on equal partnerships, collective wisdom, co-operation and responsible action on the part of all actors in governance (the public sector, the private sector, academia and the media).  It relates to the rule of law, accountable administration, legitimate power, responsive relation and is defined as effective, participatory, transparent and equitable”. [12]

Evidence of the digital divide is that the majority of the world’s people do not experience these participatory systems of governance, reflecting and determining their very underdevelopment. All initiatives to redress the unevenness of informational capitalism should be premised on developing organic, transparent and participatory forms of decision-making.

The significance of this for regulators lies in these general principles and should not be equated necessarily with the complex forms of governance in other jurisdictions. To require that developing countries apply the costly and skill intensive systems of regulation will set developing countries up for failure. Appropriate systems of governance that conform to the central principles of transparency, public accountability, public participation and equity that are implementable and enforceable are resource efficient are far more likely to succeed.

Conclusion

Bridging the digital divide is critical to any nation’s survival. Countries which fail to deal so will perpetuate their underdevelopment in the global economy.

The issue however cannot be reduced to that of infrastructure development alone. While access to telecommunications is recognised as a necessary condition critical to commerce, public safety, governance and human development more generally, it is not a sufficient condition to bridge the digital divide. The links between telecommunications access and development are not straightforward.  Bridging the digital divide will require consideration of the range of issues from affordability and literacy, to education and lack of access to capital that limit access to and the dissemination of information.

From a public policy perspective monopolies have failed dismally to meet their public mandates of universal and affordable service, quality service provision to users or product innovation. But the first round of privatisation and liberalisation in many developing countries do not demonstrate significant gains.

The reasons for this are multiple and specific to the political economies of different nations under review. What is common to most of them however is the absence of the necessary capacity and resources to enforce restructuring policies. What is increasingly evident in developing countries is that while privatisation and competition may be necessary conditions to expand access to basic and advanced communication services, they are far from sufficient.  While competition is an effective tool in regulating the efficiency of the market, its ability to contribute to public interest outcomes of access, affordability, quality and choice of service, is highly dependent on the existence of capacities and resources to implement, monitor or enforce national policies intended to achieve these outcomes. If these conditions do not exist, as they do not in many developing countries, the adoption of privatisation and liberalisation strategies could be counterproductive in bridging the digital divide.

The challenge arising from this is for policy makers and regulators is to create conditions that are sufficiently certain and predictable - within the capacity constraints and political realities of their situation - to secure the investment needed by most developing countries in order to drive their infrastructure development. At the same time they will need to engage in the sometimes contradictory task of creating an enabling environment for the introduction and exchange of the innovative services and products that are necessary to engage effectively in the new economy and to ensure affordable access to them.

In seeking to integrate themselves in the global economy, transitional economies should embrace the potential of the Internet to be an ‘economic equalizer’ and utilise alternative access networks to accelerate their pace of development, facilitate economic activity and connect with the world economy. For the Internet to serve this function, policy makers and regulators in the ICT sector will need to integrate their vision and efforts with those of other social and economic agents. This issue should not be regarded as a luxury to be dealt with once ‘development basics’ have been taken care of. Production and exchange of information drives the new economy. No country can afford any longer not to deploy all potential human capital to the creation of wealth in their economy if they are to accelerate the pace of development. This will require regulatory flexibility, innovation and good governance.

 References

Africa in New Strategy to Cut Communications Costs http://allafrica.com/stories/200109190495.html

BMI Techknowledge, Presentation at LINK Centre, Witwatersrand University

Global Knowledge 2, Transforming Governance, Background Paper, (2000) Kuala Lumpur.

Global Business Dialogue, Tokyo Recommendations, GBDe Conference (2001)

GILC, Bridging the Digital Divide: Internet Access in Central and Eastern Europe, (2000) www.gilc.org

Levy, B and Spiller, P (eds) Regulations, Institutions and Commitment, Comparative Studies of Telcommunications, (1996) Cambridge University Press, Cambridge.

Singh, J Leapfrogging Development? The Political Economy of Telecommunications Restructuring (1999) State University of New York Press, Albany.

Telkom Annual Report 2001,at 7 http://www.telkom.co.za visited 4 October 2001.

Melody W, Spectrum Allocations and Efficient Resource allocation: Learning from the 3G experience in Europe, Journal of Policy, Regulation and Strategy for Telecommunications Information and Media vol.3. No.1. (2001) Camford Publishing, Cambridge.

Melody, W, Next Generation Networks, ICT 2000, LINK Centre conference, Johannesburg at http://link.wits.ac.za

Stavrou, A and Mkize, K, A Telecommunciations Universal Service Policy Framework for Defining Categories of Needy People in South Africa, DRA Development, (1998) Durban.

Webmaster: Editorial Assignments: Vaal Cybercentre, South Africa.

Copyright © 2002-3 Acacia
Last modified: 07/29/03