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| Introduction Until a while ago, many telecommunication service options were regarded as belonging solely to the world of business and were in some cases treated as luxuries that were not for general consumption. It is no doubt the vision of a future world in which "knowledge" is the essential factor in a nation's development that has led to the conclusion that everything that contributes to the accumulation of information content is not just positive and convenient, but fundamental and indispensable. Communication is the channel for people to derive their knowledge and increasingly through telecommunications network. For that reason, that which we know as "TELECOMMUNICATIONS" is of undeniable importance to the development of modern society. Any improvement in telecommunications, anything which assures their optimum dissemination, has a direct impact on the knowledge acquired by a specific nation or social group at a certain point in its history. Telecommunications not only influence the changes taking place in the modern world, but are their main cause. Access or lack of access to advanced telecommunication media, owing to their significance for the degree of knowledge achieved by specific social groups, is generating a new form of social marginalization between different countries (as well as between social sectors and/or areas in the same country), which is potentially more serious than any hitherto experienced by human society. For this reason, facilitating access to knowledge and, in consequence, to telecommunications, is more important today than ever before. Nowadays, therefore, telecommunications are reckoned among basic or primary necessities. Considering telecommunications as basic or primary necessities requires that telecommunications be available for every member of the society. In other words, telecommunications should be universalized so that one can have access to telecommunications (network) at will. It also means that the telephone network should be universalized since only through telephone network do telecommunications services could reach every citizen. This requirement gives born to the concept of universal service. Thus, the goal of every universal service policy is to make sure that telephone services are available and equal for every member of the society. This goal, however, is not met under market mechanism, whether monopoly or competitive one since universal access to telephone networks creates large positive externalities. Therefore, it requires the role of the regulator to achieve maximum social benefit. As Pradip Bhatnagar, who has acted as a WTO consultant, wrote the following ideas on the universal service obligation in an article entitled "Convergence and the World Trade Organization" that: "Most economists advocate government intervention only when there is market failure. One instance is when intervention is for the achievement of social goals such as equity, especially when significant externalities arise through redistribution of resources. Here the fact that private benefit is less than social benefit means that market forces would fail and that the good/service will be under‑provided in the absence of government intervention". There are vast amount of papers by regulators and organizations around the world such as the World Bank (WB) and International Telecommunications Union (ITU) studying policy for providing universal service. ITU (1998) in the "World Telecommunications Development Report" on Universal Access, examines the progress towards universal access to communications, reasons for disparities, and policy solutions for the situation. McCarthy Tetrault (2000) summarizes the experience of providing universal service of some countries in the world as well as recommends policy solutions for the matter in the "Telecommunications Regulations Handbook". Besides, many regulators and authors have studied the progress of universal service in their own countries. For example, Wellenius (1997) studied the "Extending Telecommunications Service to rural areas - The Chilean Experience", raising the importance of universal service fund; Weller (1999) with the paper "Auctions for universal service obligations" introduced the efficient solutions to deliver universal service obligations; Stephen Graham (1996) distinguishes the socio-economic of a universal service telephone network…Regulators such as OFTEL (Office of Telecommunications) in Great Britain, FCC (Federal Communication Commission) in United States; OECD (Organization for Economic Cooperation and Development), OSIPTEL (Organismo Supervisor de Inversion en Telecommunicaciones) in Peru; SUBTEL (Subsecretaria deTelecomunicaciones) in Chile…has issued their own documents on the progress of universal service provision in their own countries. The related documents on providing universal service in Vietnam, unfortunately, are rare. There is, so far, no documents done by international organizations examined the matter in Vietnam. Department General of Posts and Telecommunications (DGPT) - the regulator in Vietnam - also has no such document in this field. The recent "Study on Telecommunications Development in the Socialist Republic of Vietnam" by JICA (1999) gives only a brief overview on this matter. Therefore, an comprehensive research on such matter in Vietnam is still absent. Thus, the core objective of the thesis is to find answer for the following central question: What should be done to provide universal service in Vietnam? The thesis fristly focuses on reviewing the economic rationale for providing universal service. Then, we shall review various mechanism for providing universal service. After that, some case studies on advanced countries in providing universal service are done to withdraw valuable lessons for the provsion of that service. An analysis of the provison of universal service in Vietnam is followed to find the reason that Vietnam has yet to provide universal service. Finally, some policy recommendations to improve the provision of universal service in Vietnam are provided based on the analysis of previous sections. The scope of this thesis is to investigate the provision of universal service in Vietnam in the period of 1993-2000 and the service mentioned in this thesis is basic voice service only. In addressing the central question, the research uses the qualitative method only, including descriptive and comparative analysis. The data for analysis comes from two sources. The primary data is from my own survey in Thai Binh province from 10th of July to the 25th of July, 2001 and secondary data comes from DGPT (mostly Posts and Telecommunications Statistical Yearbook) and VNPT (annual report) and from other interantional organisations such as: World Bank, International Telecommunications Union... The thesis contains of a introduction and four chapters. Chapter one present theoretical framework for the provision of universal service. Chapter two provides some case studies and give some lessons. Chapter three investigate the matter in Vietnam and Chapter four recommend some policy implications.
Chapter I: Literature Review 1.Definitions 1.1 Universal service According to International Telecommunications Union (ITU), universal service is recognized that "the services, the charges and the safeguards shall be the same for all users in each category of correspondence without priority or preferences" (ITU, 1998). European Committee, in their Green Paper (1998) defines universal service as a composite concept that includes two aspects. Frist, universal service should be provided on general geographical coverage and the second is that it should be provided on demand to all users on reasonably the same terms regardless of the users' location within the service providers terriority or franchise area and the cost of connection to the network. According to Organization for Economic Co-operation and Development (OECD, 1997), universal service definition should include: · Universal geographical access: it means that the provision of service be on demand irrespective of whoever, wherever and whenever the user requests it · Universal affordable access requires that access be affordable for all people who wish to use the service.
In short, the concept of universal service involves making the telecommunications network available for "basic" telephony to those households and firms which wish to make use of it. Basic access is typically defined to include voice-grade fixed access to the public switching telecom network (PSTN) for developing countries but may include value-added services such as Internet access for developed countries. 1.2 Universal access Concerns about universal service is relatively emerged in developed countries that already have high level of household telephone penetration. Therfore policies have generally been aimed at the few without a telephone at home rather than the majority of the population which already have one (ITU, 1998). However, for developing countries, basing telecommunications development around policies of universal service is problematic and they realise that a transitional goal - universal access - will be more practical in the short run. This goal focuses on providing reasonable access to telephone network for people and varies across countries. However, the core of universal access in every country is to provide public access for each member of the society. 2. Rationale for the provision of universal service 2.1 Economic rationale 2.1.1 Positive network externalities According to Economides, externalities in telephone network come from the complementary of network components. In a n-spikes star network, it is known that the number of phone calls that can be made is n(n-1). Thus the addition of the nth spike creates 2(n-1) new potential phone call. Therefore, the addition of the nth customer increases the number of goods in the network proportionately to the size of the (preexisting) network. If the cost of connection is constant per customer and phone calls are equally desirable, the total value of all goods in the network keeps increasing in n as more customers are connected to the switch. This is one aspect of network externalities (Economides, 1995). According to National Regulatory Research Institute (NRRI, 1991), Telecommunications indeed create large externalities, including "positive" network externalities. It relates to the increased value to the individual network users that results from the presence of and potential interaction with other network users. Therefore, a market failure will occur if the market are free to provide the service since market produces less quantity than the optimal level required by the society when positive externalities are in presence. However, that externalities are not alike at different level of penetration and they are more significant at low penetration rate (NRRI, 1991). Kahn and Shew (1987) also share this view, they conclude after an extensive survey of literature that it is not clear how the large increase in telephone penetration over the last half century has affected the external value of adding a marginal subscriber to the network since on the one side, it would tend to increase as subscribership approached universality, but as subscription has exceeded 90 per cent, marginal subscriber have come to consist disproportionately of people relatively isolated from society generally, to whose hypothetical addition to the network existing subscribers would impute progressively smaller values. However, Kahn and Shew (1987, p.242) point out that empirical investigation do suggest that the marginal externality benefits of even the relatively small percentage of subscribers who would drop off the system if basic service charges were substantially increased cannot be ignored, even on grounds of economic efficiency alone. 2.1.2 Universal service as a public good The provision of universal service is also justified on the basis of public good. The public good model emphasizes the economic growth and development benefits of telecommunications infrastructure investment, and in addition, recognizes the societal benefits which can be attributed to investment in the telecommunications network infrastructure including environmental, public health, safety and welfare enhancements, also the classic "positive" network externalities that we discuss above, and other indirect and intangible subscriber benefits (OECD, 1996). The public good model implies that a policy' assuring a relatively high level of basic universal service will yield significant economic benefits Bliss Research (1991) and National United Council (1991) and Oftel (1991) also recoginze that signigicant benefit of the provision of universal service. 3. Promoting universality: comparing the options 3.1 Stages of network development According to Milne (1998), in general, a country must experiences the following five stages before it reaches unversal service goal. The development process includes five overlapping stages and each stage has its own some common characteristic and universal service goal. In the first stage, network is being established and emphasis is to find solution to link all major urban centers. In the second stage, network grows and emphasis shift to services avaiable in all geographic areas on the same basis. At the third stage, universal service goals become driven by the expected benefits to the economy from the mass participation encouraged by low installation and rental charges. The fourth stage comes when network reaches completion, with high level of household telephone penetration, universal service becomes focused upon social goals, ensuring telephone service available to all and meets special needs. The final one reaches when all needs for basic communications are satisfied and access to advanced information service are available to the public. 3.2 Promoting universality - comparing the options The question then is how to fund that development. In general, there are five main mechanisms in use around the world today to implement universality policies and they are not mutually exclusive. 3.2.1 Sector reform 3.2.1.1 Privatisations Privatization promotes universality because privatized providers usually have to meet network expansion targets as a requirement for its license and to maximize their profits. Besides, other reasons are fund availability, commercial incentives, better management and flexibility in extending service (Intven, 2000). The positive effect of privatisation on universality has been recognisedb worldwide. The studies done by Megginson et al (1994), ITU (1999) and Ros (1999) confirm that effect. However, privatisation alone does not assure the universality. Wallsten (2000) and Ambrose et al (1990) in their study note that, for the best result of privatisation, role of regulator is necessary. 3.2.1.2 Competition Some thought that competition is harmful for unviersality since it raises price which is cost-based (access and charges), thus negatively affecting residential customers and small business, leaving rural areas unserved (OECD, 1995). Others think that competition generally has positive universality effects (Intven et al, 2000). In practice, there is broad agreement overall that competition is likely to be the most effective method of promoting universality The studies done by Petrazzini and Clark (1996) and Wallsten (2000) on Latin America countries confirm that competition is associated with network improvements. 3.2.1.3 Cost-based pricing The traditional cross-subsidies mechanism allows for low price of local call and access and high price of long distance call. In cost-based pricing mechanism, price of local call and access will rise and therefore some fear that will negatively affect residential customers. Practice shows that fear is not true. Result in OECD has proved that penetration rate increases when cost-based pricing is applied (Intven, 2000) That positive result is similar in developing countries in study by Ros and Banerjee (2000). It is because with new meachanism, operators are able to reduce their access deficits since the construct of network now is profitable, rather than unprofitable as before. 3.2.2 Mandatory service obligations It is the most commonly used mechanism to promote universality since regulator imposes obligations on operators to provide service. However, if excessive obligations are imposed, operators have to use inefficient cross-subsidies mechanism to fund that obligations or simply fail to meet that target. 3.2.3 Cross-subsidies Cross-subsidies by incumbent operator is the main mechanism for the promotion of universality in the world. That mechanism involves the use of surplus revenue form profitable service to finance the loss in unprofitable service (Intven, 2000) and can be maintained in monopoly market only. There is two kind of cross-subsidy: intra service and inter-service cross subsidy. That mechanism has disadvantages such as: competitive unsustainability, inefficiency of untargeted subsidies, promoting inefficient consumption and promoing anti-competitive purposes. 3.2.4 Access deficit charges Access deficit charges is a variation of cross-subsidy. In this mechanism, operators of subsidizing service (usually long distance service) have to contribute to subsidize other operators that provide subsidized service (local service) (Intven, 2000). Therfore, this mechanism has the same disadvantages as cross-subsidies mechanism. Besides, it also has other disadvantages such as: encouraging bypass of the PSTN and technology inefficiency. 3.2.5 Universality fund Universality fund is commonly seen as the best mechanism to promote universality. It is a mechanisms that is special designed to achieve universality objectives and are generally administered independently from the incumbent operator. This fund are usually used to finance specific and targeted high cost areas and/or low-income subscribers. Source of this fund may come from the government budget or contributions of operators. There are two ways to distribute the subsidy of universality fund. The first is that regulator estimates the costs of the subsidy using financial model and the second is that the subsidy is estimated by operators through a competitive bidding process. Be aware that not every project requires subsidy since benefit that universal service provider get can outweigh the cost of provoding services in such areas because of life-cycle effect, ubiquity, brand enhancement and benefit of serving uneconomic boxes.
1. Chile 1.1 Competition policies Chile was the first country in Latin - America to privatise and liberalise Telecommunications sector. Privatisation and competition was introduced in the late of 1980's and brought about positive effects in raising investmenst in Telecommunications sector and therefore penetration ratio is also improved. 1.2 Universal service obligations Chilean regulator does not impose any obligations on operations for providing service in rural or remote areas, only the requirements to provide service within the area for which the licence is granted. Therefore, rural telecommunications benefit a little from the privatisation of incumbent operators and the liberalisation of the market 1.3 Universal services fund Although the privatisation and liberalisation of Telecommunications market have increased the teledensity in Chile in general but a considerable portion of Chilean living in rural and remote areas does not have access to telephone network. Therefore, Chilean regulator set up a fund for the special purpose of providing service in high cost areas where operators do not provide service in market mechanism. Recognising that universal access is the feasible goal in the near future so Chilean regulator focus the subsidy from universal fund to provide public access for people in rural areas. Source of universal service fund comes from government budget. 1.4 Market mechanism in providing fund for universal access projects The innovation of Chilean regulators in providing universal access is that it uses market mechanism to allocate fund for universal access. Operators have to compete with each other to receive the fund. In other word, they have to "bid" for the lowest subsidy. This approach has significantly the amount that regulator has to use to fund universality project. After the plan of providing universal access was completed in 1999, Chilean regulators decided to add some advanced services in the scope of subsidy from universal service fund. It reflects the development in the concept of universal service in Chile and a similar program was applied to that program. 2. Peru 2.1 Legislation adustment for universality goal. 2.1.1 Revising Telecommunications Law for competitions Before the year 1994, the provision of Telecommunications services is done by the monopolistic Telefonica del Peru (Peru Telephone). The revision of Telecommunications Law has promoted the privatisation of Telefornical del Peru ( 5 years for transition frm monopoly to competition ) and opened the sector to competitions. Besides, to promote efficient competition in telecommunications market, the Peruvian Full Competition Guidelines was published in August 1998. The privatization of incumbent operator in Peru as well as the licensing for new entrants has changed the telecommunications market in Peru from monopolistic to competitive one 2.1.2 Setting new regulatory bodies for universal service administration Before the revision of telecommunications laws, the telecommunications sector in Peru is under the administration of the Ministry of Transport, Communications, Housing and Construction (MTCHC). The revision in 1994 has given born to OSIPTEL, a regulator, and FITEL, a universal access telecommuniations fund. The establishment of FITEL is for the purpose of financing all or part of the telecommunications in rural areas with the explicit intention of achieving universal access which are unserved in market mechanism. The fund is financed by a 1 percent tax (administered by OSIPTEL) in gross annual billing of all telecommunications providers. 2.2 Universal access policy 2.2.1 Universal access as a transitional goal Peruvian regulator has set a transition goal for universal service. This transitional goal is universal access. According to the Guidelines, by the year 2003, telecommunications network must be extended to five thousand unserved localities in the rural areas. 2.2.2 New universal service mechanism Before the privatisation and liberalisation of Telecommunications sector, the provision of universal service was an implicit job of state owned operator and cross-subsidies was the mechanism of providing universal service. With the new legislation, competition and cost-based pricing is the new mechanism for provision of universal service in Peru. 2.2.3 Universal fund to enhance access: Although privatised operator has met its rollout obligations for privatisations but many locality is being unserved. Therefore, Peruvian regulator set up a special fund for providing universal access in unserved areas. This fund is FITEL and is financed from the collection of 1 percent gross revenue from the telecommunications sector and focuses on providing public payphones for each locality. 2.3 Regulations of the subsidy. FITEL issued criteria for a locality to receive subsidy such that: they must be rural with the population of more than 400 and less than 3.000; being district capital and are of social interest. Besides, those localities should not belong to the rollout obligations of any operators or already have telecommunications network or is served by any operators. 2.3.2 Bidding to receive subsidies Regulator in Peru allows for bidding among operators to receive subsidies from FITEL for providing service in specific areas and international operator can join the bid. Besdies, bidders can bid for more than one project to take advantage of economic of scale, so that FITEL can give smaller bid. Moreover, the subsidies of FITEL is adjusted to finance the operation and maintenance of designated service, not just the installation of as before and includes advaced services, including internet access. Besides, locality that has limited telecommunications network but does not fully benefit from competition or rollout obligations can benefit subsidy from FITEL. 2.3.3 Result of the bidding With innovation in bidding regulations, FITEL enjoy significant benefit because of lower bid. That good result is presented in the full text of this thesis. 3. South Africa 3.1 Definition of universal service and universal access: Although regulator in South Africa has recognised the problem of universal access and universal service and those matter are emphasized in regulatory documents such as: Green paper, White paper and Telecommunications Act but no specific definitions of universal access and univesal service have been given. 3.2 Universal service mechanism Before 1997, the mechanism for providing universal service is cross-subsidies based on monopoly status of Telkom - universal service provider. From 1997, Telkom was privatised and has been given 5 years for transition to competitions. In that period, Telkom still provide universal service based on cross-subsidies mechanism. However, that mechanism must be ended at the end of the exclusivity period. Besides, South Afirca regulator imposes obligations on operators to ensure the goal of universality. Telkom must install at least 2.69 millions line and 120.000 public phone by the end 2002. Other newlt-licensed operators such as Vodaphone and MTN also have to install 7.500 and 22.000 cellular payphones in under-served regions. 3.3 Universal service fund 3.3.1 Universal service fund: Universal service fund was established for the purpose of providing direct subsidy to targeted persons who is negatively affected by higher rate of telecommunications service due to rate rebalancing and to subsidize the cost of network rollout in under served regions by operators. USF collects its sources from the contributions of operators (0.16% annual revenue). To enhance access, USF concentrates on providing public access by setting up community telecentres which typically contain basic and advanced services. The establishment of telecentres is done with the assistance of communities and donor agencies. Besides USF, regulator establishes another fund called Human Resources Fund from the contributions of operators to promote the provision of adequately skilled human resources at all levels and this has helped to raised the efficiency of the implementation of universal services policy at all level of telecommunications sector. 4. United Kingdom. United Kingdom is a developed country with already high teledensity. Therefore, the policy is aimed at providing service to the few without telephone. 4.1 Universal service policy The Telecommunications market in UK has been opened to competition since 1984 with the presence of Bristish Telecom (BT) and Kingston Communication (KC) and the access deficit charges is applied as universal service mechanism. The regualtor in United Kingdom (Oftel) has set a clear definition for universal service. With already high teledensity, defintions of universal service in UK focuses on providing service for all who reasonable request the service, regardless of where they live. The obligation for providing service is imposed on BT and KC> Besides they are obliged to provide special schemes designed to make telephony more affordable for those who are on low incomes or who use the telephone only from time to time. 4.2 Universal service mechanism Recognising the disadvantages of access deficit charges regime such as: complexity, anti-competitive activities, market distortion.., Oftel decided to eliminate that universal service mechanism. With the elimination of ADCs regime in 1997, Oftel has to build another universal service mechanism to make up for loss (if any) that BT has to incur as a universal service provider since that loss will constitute an unfair burden on BT. After calculating the net cost imposing on BT, Oftel concludes that there was no evidence that being a universal service provider imposes net cost on BT and thereore it is not necessary to set up a new universal service mechanism to compensate for BT. That calculation can be seen in the full text of this study. 4.3 Specific program to improve affordability. To enhance the affordability of the few without telephone, BT has applied some specific program such as Residential limited service scheme which has low joining and rental cost but no outgoing call and Light user scheme which mean low rental for those who do not use telephone frequently. These schemes has proved benefit for low imcome households. 5. Some lessons - Define the goal of universal service carefully overtime - Privatisation or competition or both can help increase teledensity overall - Removing the inefficient cross-subsidy mechanism - If there is a transitional monopoly, allow exception for encouraging universal service. - Setting up body to regulate universal service - If dominant carriers are receiving subsidies to provide universal service, do not overpay, and consider the consequences of competition - Better yet, do not give a single carrier subsidies to provide universal service. Chapter 3: The provision of universal service in Vietnam1. Does Vietnam provide universal service? 1.1 Low teledensity: The overall picture of the provision of universal service in Vietnam can be seen in the following Table Table 1: Teledensity in Vietnam
Source: Statistical Yearbook 1998 and Statistical Yearbook of P&T 1986-1995; 1996-1998. Data for 2000 are from Vietnam Economic Times, 5 January, 2001 Although Vietnam has significant progress in raising teledensity (over 24 times in from 1991 to 2000) but the teledensity in Vietnam is still very low. It proves that Vietnam is far from the goal of universal service which briefly means telephone for every household. 1.2 Incomplete network covering: The penetration ratio is a general norm for assesing the level of universality of a country but it does not illustrate the level of network rollout. Making telecommunications network available is an important task that country have to implement for the services to be on demand of the users. The level of network of network covering can be seen in the below Table: Table 2: Communes with telecommunications network
Source: Statistical Yearbook of Posts and Telecommunications, 1996,1997,1998, pp 88-89 The table clearly shows that the cover of telecommunications network has increased over time but it has yet to cover the whole countries. Therefore, people living in communes with no telecommunications network cannot have access to telephone. Besides, the distribution of communes with no telecommunications network shows the imbalance among regions. 1.3 Imbalance distribution of teledensity: For a closer study of level of accessibility to telecommunications among regions of the country, the Table 3 is useful:
Table 3: Teledensity distribution (Main lines per 100 inhabitants)
Source: Study on Telecommunications development in the Socialist Republic of Vietnam (JICA, 1999) The data shows that in metropolitan area, telephone services have been highly penetrated and are superior by far to other areas. In provinces, telephone services concentrates in provincial capital, while the surrouding areas have extremly lower teledensity and many mountainous areas are unserved. This distribution of teledensity clearly supports the conclusion that universal service has not been supplied in Vietnam. In short, although Vietnam has gained impressive achivement in the long process of universal service provision but generally Vietnam does not have universal service and the disimbalance in telephone distribution makes the task of providing service for people in the country, especially those in rural areas more difficult. 2. Backward regulations for universal service 2.1 Restricted sector policy: Under this current regulatory framework on Posts and Telecommunications, it is revealed that regulative authority allows for competitive telecom market in Vietnam. However, the Decree 109/1997/ND-CP and Circular 04/1998/TT-TCBD regulate that operator in the telecommunications market should be State enterprise or joint stock company where the State holds dominant equities or special equities. Private operators are allowed to provide value-added services (Decision 25/2001/QD-TTg) but basic service are still under the monoploly of State-owned enterprise. This regulatory framework does not help to mobilise fund for rolling out the Telecommunications network. 2.2 Regulations on universal service 2.2.1. No clear universal service obligations: Although there are no laws to define specifically the matter of universal service and relating issues such as universal service obligation but to some extent, that matter can be seen in the regulatory document issued by the government. Briefly, those documents require that operators have to "fulfill the public benefit duties" and "subject to the State's accommodation on the provision of the post and telecommunications services". It proves that the government has some ideas on the matter. However the lack of regulatory document that defines specifically what obligations operators have to do in the provision of universal service has eroded the role of regulator in that field. In reality, in the context of competition, DGPT does not impose any roll-out obligations explicitly on operator so that such matter is not well regulated. 2.2.2 Universal service, universal access, universal fund and tariff for universal service. Regulator in Vietnam does have any clear definitions on universal service. Only some angles of universal services are refered in the Development plan. That plan requires that by the year 2010 teledensity in Vietnam should be from 0.12-0.15 and telecommunications reach every village. Clearly, it is not a definition of universal service. For universal access, the problem is even worse since DGPT still does not have any idea on such matter. Therefore, the accessibility to telecommunications network cannot be monitored and assured. In the context of competition, it is naturally that some high cost regions will not be served or be under-served but DGPT does not have any plan to provide service for those regions by a universal service fund. No regulatory documents of DGPT so far has mentioned the establishment of such fund. Currents regulatory documents of the government and DGPT emphasises that tariff for telecommunications services should be cost based. But in essence, the mechanism for providing universal service is cross-subsidy one and DGPT has not set a plan to end that mechanism. Besides, the current fall in international tariff without the corresponding increase in local tariff has eroded the ability to provide service nationwide of DGPT. This proves the backward in the tariff policy of DGPT. 3. Inefficient mechanism for providing universal service: 3.1.1. Cross subsidy among regions: This kind of subsidy relates to the use of surplus revenue from low cost areas to subsidy high cost areas. VNPT in reality is the implicit universal service provider in Vietnam and therefore works on both low and high cost areas. The high cost areas are usually the rural and remote and mountainous such as: Northeast, Northwest and North central cost ones. This loss comes from the high fixed cost of the industry but low level of service used in those areas. 3.1.2 Cross subsidy between services The second kind of universal service mechanism is cross-subsidy between services. Tariff for local call of Vietnam is one of the lowest in the world while that of international call, on the contrary, is one of the highest. Besides, while the number and the minute of international phone call is much smaller than that of interdistrict call but revenue of international service is much higher than that of local and inter-district service. Those kinds of cross-subsidies mechanism prove to be inefficient for the following reasons: - It could be a kind of income transfer from the poor in low cost areas to the rich in high cost areas since tariff is set the same every where irrespective of the the cost. - Subsidy benefits existing customers while those who do not have access to telephone do not receive subsidy. - Subsidy promotes inefficient consumption of the subsidised services since the services are priced below cost and depresses demand for subsidizing services. - Anti competitive use of subsidy since VNPT can use the low price of local service as a barrier for the competition in the local service market. - Cross-subsidy mechanism is unsustainable in the context of competition since competitor will work in high profit regions/services so eroding the ability of VNPT to subsidy high cost areas and subsidized services. - All existing customers receive subsidy irrespective of whether they can afford it or not. Therefore, it is a blunt mechanism. - The recent fall in international tariff of DGPT has further weakened that mechanism since surplus revenue of subsidising service is decreasing. 4. Mixed price policy for universal services 4.1 Adjustment in price structure a policy in favor of universal services Recently DGPT has decided to reform the price system which is unchanged since 1993. New tariffs system has been effective since 1st October 2000. Under this new system, the monthly subscription fee is substantially reduced. to 27000 VND for a telephone per month and for the poor, remote and priority areas it is only 18000 VND and local call is not included in the monthly fee and the principle "pay as you go" is applied, removing the old system that requires 65.000 VND per month including monthly fee and 450 minutes of using local call. This policy is quite innovative since it encourages poor household to connect to the network. 4.2 High installment fee - a discouragement for universal service The fee for installing a telephone set at home in Vietnam is low comparing to other countries in the world but it is relatively high in comparison with the level of income of Vietnamese customers, especially those living in rural areas. The data of my own survey in Thaibinh province shows that installment fee plays a significant role in the decision making of customer in Thaibinh province to have a telephone at home and that current high installment fee is a barrier for them to connect to the network. 4.3 Unequal price policy for local call DGPT has applied an unequal price system for local call. Customers in metropolitan such as Hanoi and Hochiminh enjoy local call tariff for all telephone call within the city while customers in other regions have to pay for inter-district call for telephone call within the province. The author's survey shows that it is may be unequal since most of the telephone call of customers in rural areas are inter-district calls. 5. Is the supply for telecommunications enough? In Vietnam telecommunications market, there are currently three providers including: VNPT, Vietel and Saigon Postel. Although Saigon Postel and Vietel all have their plan to rollout its network for 400.000 and 300.000 subscribers respectively but in reality the task of providing services nationwide is for VNPT. In the recent year, VNPT has invested huge capital to rollout the network. The share of investment in GDP is quite high in comparing with other countries in the world. That huge investment has significantly increased the supply of telecommunications network. The network has covered 81 percent of communes in the country. However, the supply is still lack. Many communes, especially those in remote and mountainous areas, are out of the cover of telephone network. Besides, in the provinces that already has telecommunications network, lack of supply is usually seen. The lack of supply is also seen in mobile market which is more relatively competitive. The cover of mobile network has yet to reach every corner of the country, it includes only the center of the provinces (mountainous and remote areas) and some neighboring of province center (flat areas), leaving many areas unserved by mobile phone. Moreover, supply concentrates mostly on the urban areas and provincial districts. Rural areas and remote areas receive much lower investment fund. This makes the gap in supply of telecommunications among regions more severe. Reasons for lack of supply is as followed: - Competition in the market shrinks the available fund for investment to rollout telecommunications network of VNPT. Other operators do not build their own network. - Imbalance in the structure of investment of VNPT. As mentioned above, most of investment of VNPT is for urban areas so that rural and remote areas receive relatively small fund while the cost of building network in such provinces is higher. - The fund from income tax that government allows VNPT to use is no longer available. - The eroding cross-subsidy mechanism makes it hard for VNPT to rollout the network. - Pressure for further reducing international and long distance call make fund of VNPT less available for investment. 6. Low demand for telecommunications Demand for telecommunications in Vietnam in the period of 1993-1999 witnesses a rapid growth. This rapid growth can be seen in the increasing of number of long distance call, volume of long distance call, number and volume of out going international call and teledensity in the countries. Data of author's survey recommends that the number of household using telephone services is increasing over time and the frequency that households use telephone services also witnesses a gradual rise. Moreover, all households, irrespective of having telephone, wish to continue or to start to use telephone in the future. However, the demand for telecommunications is relatively low since Vietnam is a country with low GDP per capita and international studies show a positive relationship between income and demand. Therefore, demand for telecommunications in Vietnam cannot be high. Besides, the distribution of demand show a bias toward urban areas. Demand is relatively low in rural and mountainous areas and relatively high in urban areas. The demand for telecommunications is proved to be inelastic for local call and quite elastic for long distance call. It is a good news for the cost-based pricing that DGPT is to apply in the future. Besides, the installment fee is considered to be quite significant in the decision for having a telephone at home. The finding that price elasticity of installment fee is quite elastic, especially for low level income group helps us to explain the fact that teledensity disparity is serious for provinces with low level of income.
Chapter 4: Conclusions and Recommendations
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