Chile: Fondo de Desarrollo de las Telecomunicaciones

The Fondo de Desarrollo de las Telecomunicaciones (Telecommunications Development Fund or FDT) relies on market forces and innovative asymmetric interconnection regulations and is generally regarded as a successful universal access (UA) programme in an emerging economy.

The FDT was created in 1994 with an objective to improve payphone access in rural and low-income urban areas with low teledensity. The FDT offered subsidies to private companies to provide payphone service. Subsidies were allocated through competitive tenders and were resourced from the national budget.

Between 1995 and 2000, the FDT financed the rollout of payphone service to over 6,000 rural towns and villages with approximately 2.2 million inhabitants. The percent of Chile’s population living without access to telephony fell from 15 per cent in 1994 to 1 per cent in 2002. Around 25,000 individual phone lines were provided in rural areas.

The FDT cost the government less than 0.3 per cent of telecommunications sector revenue during the funding period and its administration cost about 3 per cent of the amount disbursed. The following table summarizes the FDT’s success in rolling out rural telephony:

/action/image/show?image_id=127

Administration & bidding process
The FDT is administered by a council appointed by the President of the Republic. The Council decides on the annual programme, prioritizes projects eligible for subsidy, awards subsidies through competitive tender and publishes an annual report.

Annually, SUBTEL, the regulator, gathered requests for payphones from local stakeholders. SUBTEL grouped the requests into projects, each with roughly 20–50 locations and according to geographical and technical considerations, and then carried out a cost-benefit analysis for each project.

Those projects with a positive social net present value (NPV), but with a negative private NPV, were added to the pool of eligible projects. The maximum subsidy for a project was the amount required to make it commercially viable. The projects under consideration were then ranked by social NPV per unit of maximum subsidy.

Competitive bids were invited for each selected project based on available funds, assuming the maximum subsidy would be the bid for each project. Projects were awarded based on the lowest bid one-time subsidy.

Bidders could propose additional services – including business or residential lines – that were then included in the licenses. However, they were not considered in the bid evaluation process nor were they eligible for subsidy. Payphone service was usually required to begin six to twenty months after the license was granted. The subsidy was paid in full when all payphones were in service.

The winning bidder for each project was awarded a non-exclusive 30-year operating license to provide one payphone in each locality included in the project, as well as any additional services included in the bid.

Licensees set their own retail prices for services other than regional call charges from payphones, for which maximum charges were subject to a formula reflecting changes in wholesale prices, cost of labour, foreign exchange, and the corporate tax rate.

Success factors of the payphone programme
An analysis of the FDT’s performance attributes success to the following:

  • Extensive reliance on market forces;
  • Minimal regulation;
  • Simple and relatively expeditious processing; and
  • Effective government leadership.

Reliance on market forces included the following three factors:

  1. The bottom-up identification of demand – areas requiring payphones were identified by regional and local stakeholders;
  2. Competition for the market – existing providers and new entrants competed for rural licenses; and
  3. Subsidies allocated through the market – competitive bidding was used to award projects based on how much subsidy was required (the reverse-bid mechanism).

A number of factors contributed to a state of minimal regulation. These included freedom of business and technical choice, attractive licenses designed to encourage growth, and limited price controls (except for payphone call charges within the primary calling area and for interconnection charges).

There was also an introduction of cost-reflective access charges whereby rural operators were permitted to levy access charges on incoming calls that were significantly higher than those paid to urban companies. Interconnection/access charges were the single most important regulatory factor of commercial viability, with access charges in some cases surpassing 40 per cent of rural operating revenues.

Simple and relatively fast processing was attributable to two factors. First, it was a one-stop process; the FDT offered the opportunities to obtain an operating license and to get access to radio frequencies significantly faster than the standard procedures. Second, the FDT was consistent in that it held seven consecutive rounds between 1995 and 2000 with the processes and rules remaining the same; therefore, it achieved predictability.

Effective and sustained leadership was an important element as well. Senior government officials who conceived the FDT shepherded enabling legislation and oversaw initial implementation until the programme was well established.

Competence was cited as a success factor because a minimal but competent and dedicated staff ran the programme day to day.

One challenge was the sustainability of the rural operators. The programme could have benefited from the regulator, SUBTEL, working more closely with bidders to ensure that their plans were viable, as the operators did not necessarily perform comprehensive due diligence investigations. One of the rural operators was deemed unlikely to ever be profitable due to high costs and low income, while another operator, CTR, managed to generate a small, quarterly net profit by 2006.

After the FDT achieved most of Chile’s social telephony objectives, the government has redefined the fund to support telecentre projects, Internet access for schools, and broadband access and broadband backbones for rural and remote areas.

Source: Wellenius, Björn. “Closing the Gap in Access to Rural Communication: Chile 1995–2002.” November 2001.
“Telecommunications Development Fund” presentation by Subtel, December 2004.
 

Learn More