An increasingly practical way to prioritize projects is through the level of expected private investment compared to subsidy. Some projects require less than 30 per cent subsidization and are therefore likely to generate as least twice the amount of subsidy in capital investment.
Whereas universal access and service (UAS) programmes are geared towards extending the reach of markets into areas where service providers may not reach without subsidy, the principle of smart subsidy requires consideration of service sustainability in the medium to long run . Project viability in the context of subsidy requirements can often be summarized as shown in the following table.
Source: Intelecon Research & Consultancy Ltd.
The methodology for making these assessments is described in Section 6.2 Modelling costs, viability and subsidy requirements.
In general, projects and service locations in categories 3 and 4 are the most attractive for UAS programmes since they address areas that are not likely to be served in the short to medium term commercially, yet have a good chance of becoming sustainable and commercially viable in the long run after application of a smart subsidy. They also successfully leverage private investment beyond the amount of subsidy offered. This principle can and should be considered as the most desirable, whether the project is for telephony into new areas, ICT service development or broadband backbone infrastructure, as the principle of commercial viability is generally the only that can guarantee sustainability. Communications projects in these categories also typically carry socio-economic benefits that exceed the level of subsidy provided.
The figure below illustrates how financial viability and socio-economic benefit viability can be compared when considering project priorities.
Source: Intelecon Research & Consultancy Ltd.
Projects in categories 1 and 2 usually do not need subsidy. Even if the geographical areas in this category are not presently covered, they may be contiguous with existing service areas or represent the next logical step in national infrastructure build-out. They will be reached by the market, sooner or later.
Projects in category 5 (low financial return and socio-economically weak because they might reach so few people) carry with them the risk that even after receipt of a one-time subsidy, the service provider may not be able to continue profitably in the long run, as the operating costs may be too high and revenues too low because of low population. On balance, if the usage is low, the socio-economic benefits may be considerably below the level of subsidy required, which means they may be hard to justify. However, since this category may apply to the last 3 to 5 per cent of the population but sometimes up to 25 or 30 per cent of a country’s land area, they could justify the government deciding to subsidize them for political reasons, or they could become viable at a later stage in the UAS programme, after the more viable areas have been reached.
In the case of telephony access, some areas in category 5 can also be packaged with service areas conforming to category 3 or 4, in order to increase coverage to less viable communities.
The final selection of and prioritization of projects, as well as subsidy requirements, will usually involve a blend of qualitative and quantitative regional ranking as well as financial analysis to determine apparent commercial viability and to estimate the financial gap, which is the one-time subsidy required to entice operators to meet UAS targets.
The Practice Note Malawi Pilot – Prioritizing and selecting districts for UAS project provides an insight into the use of the above methodology for regional prioritization.
- Under the concept of developing a sustainable UAS investment, a smart subsidy is the term used to describe an initial subsidy (usually given on a once-only basis) that is designed to be results-oriented, does not distort the market, and encourages cost minimization and growth of the market. It helps to kick start a project or service, with the ultimate objective of the programme becoming commercially viable, whereas without the subsidy investors might otherwise have been reluctant to invest. No further subsidies are needed if the service targets (e.g., the market penetration and level of access) are set realistically, with medium term commercial viability in view. The gaps model, which explains the smart subsidy principle, was first introduced and explained in Chapter 1, Section 1.3.3 Market Gaps and universal access policy.