Policies for Universal Access to Telecommunications in Rural Areas of Developing Countries - An Institutional Economics Approach

A critical element of most national telecom policy objectives in developing countries is advancing universal access. Due to specific characteristics, rural areas in developing countries are of the most challenging regions. It is widely recognized that there are limits to how well the market can or will function in extending service in these areas. Therefore telecom policy has to intervene in the market to ensure the provision of telecommunications. This paper examines some frequently implemented measures for providing universal access in rural areas: universal access obligations and universal access funds in conjunction with minimum-subsidy competitive auctions. Despite experiencing that results and satisfaction with them are far from uniform across countries, there is no systematic theoretical analysis of relative efficiency and effectiveness of these measures. This article addresses this lack by applying a principal agent model to explore the incentive schemes of the announced mechanisms. This is done by taking into account the impact of economic, institutional and governance characteristics of developing countries. This paper carves out relative advantages of implementing one or another measure depending on the features of existing institutional frameworks. It is shown that successful measures in one institutional setting may be only second best in another. Critical characteristics are high shadow cost of public funds, carrot regulation incentive of output based subsidies, financial and human capacity constraints of regulators and the number of market contacts between regulator and operators. Theoretical analysis is illustrated by some actual universal access experiences in Peru, Bolivia and Uganda