Reverse Auctions and Universal Telecommunications Service: Lessons from Global Experience

The United States now spends around $7 billion on universal service programs-subsidies intended to ensure that the entire country has access to telecommunications services. Most of this money supports telecommunications service in high cost (primarily rural) areas, and the High Cost fund is growing quickly. In response to this growth, policymakers are considering using reverse auctions, or bids for the minimum subsidy, as a way to reduce expenditures. While the U.S. has not yet distributed funds for universal service programs using reverse auctions, the method has been used widely. First, reverse auctions are akin to standard government procurement procedures, which call for firms to bid on government contracts to keep prices down. Sending contracts out for bid is common in both simple and complex government contracting. Second, many countries around the world have used reverse auctions for distributing universal funds. This paper reviews global experiences with reverse auctions and discusses their implications for the U.S. In particular, I review reverse auctions in Australia, Chile, Colombia, India, Nepal, and Peru. Not all of the auctions were successful, but they clearly demonstrate that reverse auctions can be an effective tool for revealing information about the true cost of providing universal coverage and for reducing expenditures on subsidies.