pproaches 39610 M a r c h 2 0 0 7 N o t e N u m b e r 1 5 Output-based aid in Uganda Bringing Communication Services to Rural Areas Juan Navas-Sabater and Mavis Ampah I n 1999, Uganda had achieved a national teleden- While both national operators had significant rollout sity (fixed and mobile) of about one telephone per obligations in their licenses,1 it was recognized that 100 inhabitants, slightly above the average for Sub- telephone service might not be commercially viable in Saharan Africa (excluding South Africa). But with most all parts of the country. In July 2001, the two operators phone lines concentrated in the Kampala area, rural declared that they could not serve 154 of the country's teledensity was far lower. Indeed, only 380 of the 920 920 subcounties on a commercial basis, forfeiting their subcounties in Uganda were expected to have any kind exclusivity in these areas. As a result, these subcounties of telephone service by 2001. Internet services, still in became the target areas of the OBA projects. their infancy, also were limited to Kampala. In the planning stages at around that time, a new The OBA Projects: Structure World Bank project was designed in part to address and Financing this situation. The Energy for Rural Transformation Project was aimed at creating an environment condu- The projects benefiting from the OBA subsidies are cive to commercially oriented, sustainable delivery of designed to achieve three complementary goals: both renewable energy and information and communi- · Accelerating access to voice telephony by pro- cation technology (ICT) services in rural areas. viding at least one public telephone per 2,500 The ICT component was initially estimated at inhabitants throughout Uganda (this equates to US$5.5 million and later increased to US$12 million an average distance of about 3 kilometers). in line with more ambitious policy objectives, of which · Providing internet access at district capitals by US$10.5 million was covered by an International Devel- creating broadband Internet points of presence opment Association (IDA) credit and the rest by gov- (POPs) in 32 of the total of 562 district capitals of ernment counterpart funds. Output-based aid (OBA) the country--to provide local-rate dial-up Internet subsidies in this amount would support the build-out access--as well as dedicated Internet access for of telecommunications facilities in areas where the op- institutions and Internet kiosks connecting to the eration of the services (but not the construction of the POPs. facilities) can be commercially viable, and the social · Establishing rural multipurpose telecenters at returns of the investments high. "vanguard institutions" (schools, hospitals, associ- The Ugandan government had already success- fully implemented substantial structural reforms in 1 the telecommunications sector, mostly with World UTL's targets included 100,000 new land lines (with 30,000 Bank assistance. These reforms included drafting and to be rural and 3,000 to be public telephones) by July 2005. MTN Uganda's included nearly 88,000 lines (with 2,000 to approving the 1997 Uganda Communications Act: be public telephones) by the same deadline. creating a regulatory authority; the Uganda Communi- 2UCC had previously conducted tenders for the provision of cations Commission; and incorporating and privatizing Internet POPs in 20 district capitals, and 4 district capitals Uganda Telecommunications Limited (UTL) in 2000. already had fully private provision of Internet POPs. The government had also introduced competition in basic telecommunications services by licensing in 1998 Juan Navas-Sabater is a senior telecom specialist with the a second national operator with a duopoly provision World Bank. Mavis Ampah is a senior ICT policy specialist that expired in July 2005. with the World Bank. Supporting the delivery of basic services in developing countries pproaches ations of farmers and micro-entrepreneurs) outside The maximum subsidy available for the telephony district capitals in selected districts. component was specified in the bidding documents. Each region was awarded to the bidder requesting The targeting of the OBA subsidies in all cases is the smallest subsidy. With that award came a service based on public or shared access to the subsidized agreement,and for operators not yet licensed in Uganda facilities--public pay phones, Internet POPs, and public a license. During the five-year service agreement the op- telecenters--in specific geographic areas. For the voice erator is obligated to maintain the subsidized facilities telephony component, however, there is an additional and provide the service in accordance with the terms target: the operator is obligated to provide individual of that agreement, which details quality standards and (private) lines, when requested, at commercially com- reporting requirements. petitive rates in at least 50% of the target locations. Paying the subsidy The subsidy is meant to cover only the initial capital investment gap between the total project costs and the For the telephony component, the subsidy is to be paid maximum private investment that would be available in several installments, each one following the achieve- to obtain a normal rate of return. Operating and main- ment of a milestone: tenance costs are to be covered out of normal market- · Service agreement signed (10%). based tariffs paid by the users. · 50% of public access objectives met (30%). The subsidies are financed under the general · Other 50 % of public access objectives met (30%). framework of the Rural Communications Development · Private access objectives met (20%). Fund, established by the 1997 Uganda Communica- · 1 year of continuous service operation (10%). tions Act and managed by a board of trustees operat- ing at arm's length from the regulator. The fund's main Each winning bidder is required to post a perfor- source of revenue is a universal service levy imposed on mance bond at the signing of the contract, with the the turnover of the telecommunications and postal sec- amount reduced at every milestone in proportion to tors, though the fund may also receive contributions the share of the subsidy paid. For theInternet POPs from multilateral and bilateral agencies3. While by law component a similar but more streamlined set of mile- the levy can be up to 2.5% of operators' gross revenues stones apply. (excluding sale of equipment), in 2000 the communi- cations minister chose to set it at 1% of gross revenues. Outcomes of the bidding In early 2004 the prequalification of bidders for the te- Designing the bidding process lephony component was conducted, and the country's For the telephony component, the bidding process three main operators--MTN, UTL, and Celtel--all suc- included a prequalification phase (not required for the cessfully prequalified. In October 2004, bidding docu- other, simpler components), and the areas to be served ments were given to all three, reflecting the original were grouped into three roughly homogeneous regions target of one public phone for every 5,000 people. (A, B, and C) for tendering. The Internet POPs and However, in November 2004, a new objective of one telecenters were to be bid and awarded individually. To public phone for every 2,500 people was agreed with avoid concentration, however, the bidding documents the World Bank. The three prequalified bidders received specified that no more than 10 Internet POPs would new bidding documents in March 2005, with a bid be awarded to the same operator, though it also cited deadline of May 16, 2005. circumstances under which this limit could be eased. Only MTN and UTL responded by the deadline. The project locations and the maximum subsidy Celtel never submitted a bid, and UTL's bid was con- required to meet the objectives for each of the com- sidered technically nonresponsive. In December 2005, ponents were identified through a detailed study and only regions A and C were awarded to MTN. Region B using a cost model based on experience in similar OBA projects, mostly from Latin America. For the telephony component the total maximum subsidy was estimated at US$8.6 million (US $3.5 million for region A, US 3The IDA credit in support of the objectives of the RCDF $2 million for B, and US $3.1 million for C), and total is not channeled through the Fund, but it uses the Fund's project costs were at roughly double that amount. bidding process and subsidy allocation methods. Supporting the delivery of basic services in developing countries pproaches was not awarded, since MTN's proposed subsidy ex- One unforeseen issue that emerged during bid ceeded the maximum available for this region. Region evaluation was the tax treatment of subsidies. Under B was rebid, and finally awarded to MTN in June 2006. the Ugandan tax code a private firm receiving a gov- Regions A and C were to be completed by December ernment subsidy must pay back to the Treasury 30% 2006 but because of the insecurity in the north and in of that subsidy. This tax was included in the bids as a the eastern part of the country, MTN requested for an separate item by the winning bidder. But it was ex- extension of the project and UCC agreed to extend the cluded from the award in the expectation that the tax whole project to December 2007. Region B is expected authorities would agree to waive payment of this tax. In to be completed at this time as well. 62% of Public Ac- the case that the government does not waive the taxes, cess points have been installed in Region A and C as of UCC will reimburse MTN upon proof by MTN that they December 2006. Region B had no installations. have paid the said taxes. The lesson: potential tax impli- The total project costs for all three regions under the cations of a subsidy scheme need to be identified early, telephony component was estimated at close to $11.7 and solved before the launch of the bidding process. million and the total subsidy finally awarded was $5.2 million, thus leveraging close to 55% in private invest- Sustainability ment. The subsidy had originally been estimated at $8.6 The OBA scheme is designed to be both sustainable million, so the OBA competitive process produced sav- and replicable. Its sustainability comes through the ings of about 38% in the amount of subsidy required. mandatory contributions to the Rural Communications In parallel, 32 Internet POPs in as many district Development Fund by every operator. Its replicability capitals were tendered in October 2004. Bids from five comes through the bidding documents and experience firms were received in January 2005, but only MTN and developed in the World Bank project, which the regula- UTL met the qualification criteria. In July 2005 MTN tor will use to launch similar projects in the future. was awarded 22 Internet POPs, for a total subsidy Each project financed through the OBA scheme requirement of US$685,000, and UTL was awarded also is designed to be sustainable. Operators should be 10, for a total of US$295,000. The two bids combined able to continue providing service well beyond the five amounted to about 73% of the maximum subsidy years covered by the service agreement by using one- available for Internet POPs. time subsidies to lower the cost of the initial invest- The rural telecenter component is currently being ment and relying on user fees to cover operating and redesigned and has not yet been implemented. The maintenance costs. By design, future subsidy require- objective, now is to deploy 20 small telecenters instead ments are expected to be zero. of the originally planned 7 large telecenters. The operators may freely set user tariffs in the target Other design issues areas in line with commercial principles, though tar- iffs may not exceed the average charged by the major The bidding process was designed to be open, trans- operators in the country by more than 50%. Even so, the parent, international, and competitive, in line with winning bidder decided to charge the same tariffs in the the World Bank's procurement guidelines. The public target areas as those charged elsewhere in the country. could follow the process through the regulator's web Because the general tariff regime is liberal, tariffs will be site. A bidders' conference was held to discuss ques- allowed to evolve with economic conditions in the coun- tions received before the deadline or raised at that try, consistent with the basic principle of cost recovery. event, and written answers were provided to all partici- pants. The bids were opened at a public ceremony with Aid effectiveness all interested parties participating. All parties involved There are several ways to assess the aid effectiveness were satisfied with the transparency of the process. of the OBA scheme in Uganda. One is to compare the Achievement of the targets is being monitored by subsidy level allocated through this project with that an independent technical auditor, hired under the in comparable OBA projects in other countries. For World Bank project. The monitoring results are expect- the telephony project the subsidy per public pay phone ed to be used to improve the process for subsequent comes out to about US$3,700. As shown in the figure, projects, whether funded by the World Bank or by the this is well below the US$11,000 achieved in Nepal Rural Communications Development Fund. under a similar World Bank-funded project and consid- Supporting the delivery of basic services in developing countries pproaches Outcomes of similar OBA projects of one mobile radio base station in each of the 154 sub- counties to be served.5 The result: a cost per location more than three times as high as in the OBA project. Yet another approach to estimate the aid effective- ness of OBA in this particular case in Uganda is to compare three values related to the project: the total project costs, the maximum subsidy (as calculated by the consultants as an acceptable ceiling for the government) and the actual subsidy allocated through the competi- tive OBA mechanism. This approach shows that OBA includes two sources of savings. The first one is related to leveraging private investment, which in the case of the te- lephony component comes close to an average of 55% of the total project costs. The second source is the competi- tive nature of the subsidy award process. In this case, an additional savings of 38% was achieved when comparing the actual subsidy awarded with the maximum subsidy announced in the tender documents. Similar figures ap- ply to the Internet POPs component. erably lower than the average for non-Bank projects in Latin America, where figures have typically ranged be- Conclusions tween US$4,000 and US$12,000 (and, in one project In summary, the use of OBA to promote private invest- in Chile, US$2,000).4 The most likely explanation for ment in the provision of telecommunications services the difference is the relatively high population density in rural Uganda has proven an effective tool. It allowed of Uganda and the project's use of GSM technology, to serve far more communities than anyone had origi- along with the constant decline in equipment costs in nally anticipated, and at a fraction of the cost of more telecommunications. traditional funding methods. An alternative approach is to compare costs with comparable non-OBA projects. Even though no such 4See Juan Navas-Sabater: Universal Access and Output-Based projects have been implemented in the same environ- Aid in Telecommunications and ICT, World Bank, June 2005. ment, it is still possible to construct a hypothetical 5In a few cases a single base station could conceivably serve non-OBA project capable of delivering the same level of more than one subcounty, but the impact on the hypothetical service. For the telephony project, that would consist project would not be substantial. About OBApproaches OBApproaches is a forum for discussing and dis- The case studies have been chosen and presented seminating recent experiences and innovations by the authors in agreement with the GPOBA for supporting the delivery of basic services to the management team, and are not to be attributed to poor. The series will focus on the provision of water, GPOBA's donors, the World Bank or any other af- energy, telecommunications, transport, health and filiated organizations. Nor do any of the conclusions education in developing countries, in particular represent official policy of the GPOBA, World Bank, through output, or performance,-based approaches. or the countries they represent. To find out more, visit www.gpoba.org The Global Partnership on Output-Based Aid Supporting the delivery of basic services in developing countries