For every universal access (UA) region or project, the expected communication service revenue and costs to supply the service can be estimated and submitted to a viability test. This viability test will establish if a certain project needs a subsidy in the first place, and if so, will calculate the likely maximum one-time subsidy that an operator or service provider would require to provide service in a commercially sustainable manner.
The revenue estimate typically takes the following into consideration:
- Regional/rural population (p);
- Regional/rural per capita income (i), estimated either as:
- the average of the lower deciles of national income distribution – corresponding to the proportion of the population who are rural (this assumes that the rural population is generally at a lower income level than urban), or
- an average for the region (e.g. district, provincial) GDP (for example household income from UNDP studies); and
- An expenditure factor (e), which is the percentage of income spent on telecommunications. This can be the national average, or a more conservative regional (e.g., district, provincial) estimate, or findings from demand studies, if available.
Revenues can thus be estimated as follows:
R = p x i x e
(Revenues = Population x rural per capita income x expenditure factor)
Findings from demand studies are helpful to refine the input for (i) – the income of rural people, and (e) – the communications expenditure factor.
While the installed public access phones will not necessarily be able to capture all potential demand, it is likely, if wireless technology is used, that the potential service provider will also be able to capture some private demand, including business and institutions, as well as revenue from urban customers travelling to those rural areas. Costs
The capital and operating expenditure costs of supplying service can be estimated using the pre-dominant technology (usually wireless) utilised by existing operators and service providers in the market. This assumes that existing operators will be interested in expanding into the unserved areas targeted by the UAS policy. Using the predominant technology will represent the cost ceiling, since more cost-efficient alternative and newer technologies, whether selected by the major operators or new entrants, would generally need to be less expensive to be considered competitive solutions. Maximum subsidy estimate
The maximum subsidy requirement may be calculated in one of two ways:
- Construct a 10-year cash flow for each project and area, showing revenue (with an allowance for growth over the cash flow period), capital and operating costs, and calculate the net present value (NPV) using the operator’s assumed cost of capital as the discount rate. If the NPV is negative, this amount will represent the maximum subsidy required by the operator to provide service. If the NPV is positive, this indicates that no subsidy may be required, although it will be necessary to investigate alternative revenue and cost assumptions to determine the robustness of the calculation; or
- Make a basic benchmark calculation that assumes a standard pay-back period of capital cost from revenues of perhaps three years, which is typical for private telecommunications investments. If the projected revenues are greater than 33 per cent of the capital costs (meaning it takes less than three years to achieve pay-back), the project is viable. If they are less than 33 percent of capital cost, the project has negative viability. This will indicate whether, and by how much, the revenues fall short of providing the operator with an acceptable rate of return.
Whatever method is used, both models and their assumptions should be discussed with operators and service providers.
Either of the above methodologies should safely estimate the maximum subsidy required for the following reasons:
- The assumption that public service points will be the prime instrument for securing potential revenue is conservative. In the event an operator is also able to use the same infrastructure to provide private services (e.g., mobile services to individuals that possess a mobile phone), more revenue could be available from some private customers. In this event, the actual revenue would be higher than that calculated by this methodology; and
- The revenues are based only on local (rural) affordability. For example, if revenue from incoming calls is significant, and is also encouraged through a good interconnection arrangement (such as asymmetric interconnection) and revenue share with a village phone operator, it is possible that operators’ incomes could improve significantly due to incoming calls from urban areas.