Economic Valuation Factor

An economic valuation factor (EVF) defines the relationship between the financial and economic revenue stream of a project. A typical EVF for telecommunication projects in the past has been around 1.3. In this illustrative example that means that the average consumer surplus (e.g., from travel savings and other benefits) enjoyed by communications users beyond their expenditures on calls is 30 per cent.

An Economic Valuation Factor (EVF) reflects the fact that almost all telecommunications revenue streams only represent part of the benefits, the remainder accruing to users of telephone users as consumer surpluses.

The surpluses are illustrated in figure 1 for public telephone users. The average public telephone user pays a price A for service (e.g., the price of a single call). Some users who are without direct access to the phone, such as villagers who must travel to get to the nearest payphone, pay an additional amount in travel or other expenses, bringing their total cost to B.

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If a new project places an accessible telephone in that person’s village, the caller’s minimum benefit, or consumer surplus, for every call made after installation of the new phone would be a cost saving represented by the value of B minus A (i.e., B-A). In this case the EVF used to calculate economic revenue from the financial revenue is B/A.

If a caller derives additional value – for example through the time saved by not having to travel and used for more productive purposes, then the caller’s consumer surplus could be as high as (C-A). Every project has a range of values for both C and B, requiring averages to be calculated from a sample of locations and users. New projects either eliminate or reduce the level of B for various subscribers. 

The composite EVF, calculated as weighted average for all user types (e.g., business, institutional, payphone user, private user) can range from 1.1 for private users to 2.0+ for business lines. This is illustrated in the willingness to pay graph that shows a small percentage willing to pay four to five (or more) times the cost of a call, with the majority assumed to be between 1.1 and 2 times the cost of a call.

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The typical ratio for rural telecom projects in developing countries is somewhere between 1.3 and 1.7 when the customer penetration is low, such that most subscriber connections are businesses and institutions and that many private calls are made from public payphones.

This analysis applies mostly in areas where mobile coverage does not exist, since it is increasingly the case that where coverage does exist at least one person having the phone is willing to allow others to use it for a fee related to the cost of the call. The principle of the analysis applies to both fixed and mobile service and the popularity of mobile phone service, and peoples’ willingness to pay, attests to the benefit which people ascribe to its use. 

Source: Intelecon Research & Consultancy Ltd.

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