Telecommunications

in developing countries
Overcoming constraints to expansion Bjorn Wellenius
Communication services in the developing benefits accrue mostly to middle-income service with the number applied for in se-
world mainly comprise public telecommu- urban families, although some basic tele- lected countries in Africa, Asia, and Latin
nications, limited telecommunications net- communications services are also extended America shows that typically only about 60
works serving specialized needs, posts, to rural and low-income urban areas.
broadcasting, and the press. This article
Underinvestment Table 1
discusses the role of the first category;
these are public utilities, generally monop- Compared with the industrial world, in- Selected telephone densities
olies, usually operated by a posts and tele- vestment in telecommunications in devel- Telephones per
100 inhabitants
communications department of govern- oping countries tends to be very limited.
ment or a state-owned corporation, and Whereas these countries account for over World 19.1
Industrial countries 44.5
necessarily comprising highly integrated 70 percent of the world's population and
Developing countries 2.8
networks within and among countries. about 17 percent of its product, they have Africa 0.8
Telephone services (local, long distance, only 7 percent of its telephones. Compared Asia and Pacific 2.0
and international) typically account for with an average of about 50 telephones for Latin America and Caribbean 5.5
over 90 percent of the sector's investments each 100 inhabitants in the industrial na-
Source: R.J. Saunders, J.J. Warlord and B. Wellenius,
and revenues, so much of the discussion tions, the developing world has an average Telecommunications and Economic Development, Johns
Hopkins University Press, Baltimore, 1983, pp. 4-5.
refers to the experience with these services. of about 3 telephones for every 100 inhab-
Other public telecommunications services itants (Table 1)—the ratio ranging from 0.1
include telex, telegraph, and, increasingly, in Bangladesh and Rwanda to over 10 in
some forms of data transmission. Argentina and Costa Rica. Furthermore,
Investment in telecommunications bene- these limited facilities are mainly concen-
fits all sectors of an economy. Developing trated in one or a few main cities, where
countries tend to spend on communication telephone density is typically about 10
services, directly and indirectly, about times that in the rest of the country (com-
$5-15 for every $1,000 of the output of most pared with about 1.5 times in industrial
nonagricultural sectors. These facilities are countries). Often, there is little or no ser-
mainly used in connection with production vice in provincial towns, including impor-
and distribution activities. Surveys in five tant administrative and service centers; in
developing countries in Africa, Asia, and many countries 70 percent or more of the
Latin America indicate, for instance, that country's population, including most rural
business and government account for communities, has no access to telephone
about 52 percent of telephone lines and 75 services.
percent of telephone revenues; 29 percent This situation coexists with large unmet
of the revenues are from the commercial needs. The limited telecommunications fa-
sector, 25 percent from the service sector, cilities are unable to meet demand. A large
and 10 percent from government. There is proportion of local, long distance, and in-
evidence of significant losses in efficiency ternational telephone calls cannot be com-
incurred in agriculture, transportation, pleted or suffer long delays, particularly
commerce, banking, government, tourism, during busy business hours; repeated at-
and other sectors due to the lack or inade- tempts add to the congestion. The outcome
quacy of telecommunications services. is forgone benefits and operating revenues,
Telecommunications also contribute to the wasted user time, inefficient use of plant
quality of life, by facilitating communica- capacity, and major communication bottle-
tion with kin and friends as well as access necks throughout the economy. A com-
to emergency services; in aggregate, these parison of the number of telephone lines in

Finance & Development / September 1984 33

©International Monetary Fund. Not for Redistribution

 vestment policies, all telecommunications nesses and bottlenecks. Manpower devel-
Table 2 costs can be recovered with a healthy re- opment is particularly difficult in countries
Demand for telephone connections in turn on capital, generating substantial with a limited supply of educated people;
selected developing countries funds for further expansion and surplus 15 or more years may be necessary to build
Expressed Connected lines profits to transfer to other sectors (Table 3). up a full cadre of professionals and manag-
demand As percent ers competent to run an efficient telecom-
(In thousands)
of lines1)
Number
(In thousands)
of expressed
demand
Constraints munications enterprise—and even longer if
Africa Why, then, is there such widespread turnover occurs. Management is often also
Egypt 795 383 48 underinvestment in telecommunications? hamstrung by inefficient or outdated pro-
Algeria 472 311 66 One of the main constraints on investing cedures for financial accounting and audit-
Morocco 270 177 66 more relates to the organization and man- ing, large amounts owed (especially by
Kenya 160 88 55 agement of telecommunications enter- government) for telecommunications ser-
Asia prises. In the short term, there are often vices rendered, weak internal controls and
India 2,350 2,016 86 bottlenecks in project implementation ca- reporting, lack of service performance ob-
Syria 739 239 32 jectives and monitoring, and insufficient
pacity. Inadequate project planning, super-
Thailand 630 366 58
vision, and interdepartmental coordina- capacity for in-house economic analysis.
Bangladesh 147 100 68
Latin America tion, for example, lead to delays in project Ultimately, the sector's development will
Mexico 2,985 2,576 86 completion and especially in connecting be contingent upon the enterprise's ability
Argentina 2,813 1,879 67 new subscribers as capacity becomes avail- to overcome these difficulties.
Peru 516 306 59 able. In the long term, sustained rapid Sector structure and policy can also con-
Guatemala 250 88 35 expansion with adequate operation and strain the development of telecommunica-
maintenance of existing facilities in itself tions. Enterprises in the sector often lack
Source: Saunders, et al., pp. 12-13.
'Expressed demand is trie sum of lines in service demands frequent major adjustments in the financial and administrative autonomy
(supply) plus unmet registered applications for new lines. the organization of the enterprise involved. necessary for efficient business operation.
These difficulties are compounded if the In a few countries, the sector is also frag-
enterprise is—as it typically is—already be- mented into many small and inefficient,
percent of such requests are met (Table 2), deviled by a host of other problems, such and sometimes overlapping, companies. A
and applicants often have to wait several as an inadequate organization structure, diversity of often insufficiently coordinated
years before they are connected. In addi- ambiguously defined functions and lines of government bodies regulate tariffs, invest-
tion, large unrecorded demand is docu- responsibility, slow and ineffective pro- ment plans, budgets, salaries, staffing,
mented in several developing countries curement practices, outdated maintenance equipment imports, and so on. Govern-
and probably exists in most of them. Poten- and operation procedures, overstaffing ments sometimes interfere with day-to-day
tial subscribers are discouraged from regis- combined with employment conditions management and are responsible for high
tering by long delays in obtaining new that fail to retain competent middle-level turnover of managers and senior staff. Sec-
connections, by the fact that telephone and senior staff, and administrative weak- tor policy on the pricing of telecommunica-
companies often do not accept applications tions services is often particularly inade-
where service is not available, and because quate. Tariffs mainly reflect past efforts to
potential benefits are not fully perceived by ensure sufficient revenues with minimal
prospective users before a service is actu- Table 3 public conflict. But the entities' financial
ally introduced into a new area. Economic and financial returns on objectives are not always clearly defined, or
telecommunications investment1 they are inflexible with respect to changing
The lack of investment in telecommuni-
cations cannot be justified by reference to
(In percent)
economic situations; price levels are often
unsuccessful experience. When resources Range Average unduly subject to political influence; and
and support have been made available for Rates of return the revenue generation potential of the
telephone services, it has been possible to Financial2 9-31 20 sector may not be realized. Furthermore,
improve and expand services quickly and Economic (without) prices generally bear little relation to either
effectively. In such situations, telephone consumer surplus)3 17-35 26 the structure of costs or the users' willing-
growth rates of around 10 percent are fairly Economic (with some ness to pay. Extensive use is made of ad-
consumer surplus)4 16-^3 30 ministrative and discretionary rationing of
common, and rates of 20 percent or higher Financial results
have been sustained in some developing new connections; meanwhile, flourishing
Rate of return on net
countries (typically growth rates in indus- private transfers (legal or otherwise) of tele-
revalued assets5 10-29 15
trial countries are 3-8 percent). These rates Self-financing ratio5 12-93 53
phone lines reveal a willingness of users to
have led to important economies of scale Net transfer to pay prices well in excess of official tariffs to
that, coupled with technological innova- government6 5-91 40 obtain service. Moreover, despite generally
tion often facilitated by fast growth, have high congestion at peak hours, call charges
resulted in lower service costs. High eco- Source: World Bank internal reports. are seldom set to shift traffic to off-peak
'Figures refer to the 15 latest telecommunications
nomic returns on investment in tele- programs
2
appraised by the Bank. times or to induce additional traffic and
The discount rate at which the present value of
communications are the norm. Minimum incremental revenues net of incremental costs equals zero.
3
revenues when spare capacity is available.
After shadow pricing and removal of pure transfer
quantifiable economic rates of return are payments (figures from six projects). Another major constraint is that develop-
'Includes a partial quantification of consumer surplus
typically around 30 percent; actual returns, under very conservative assumptions (ten projects).
5
ing countries frequently have limited re-
including estimates of consumer surpluses, Averages for the program execution periods forecast at
sources for capital investment, especially in
future cost savings from scale economies, 'Total forecast during program implementation period
(total over life of investment would be much higher), as
foreign exchange. On average, each addi-
and external benefits, are likely to be even proportion of program cost. tional telephone line costs about $1,500-
higher. With appropriate pricing and in- $2,000, and, as a result, telecommunica-

34 Finance & Development I September 1984

©International Monetary Fund. Not for Redistribution

 The World Bank and telecommunications
The Bank (including IDA) is the largest multilateral source of funds for quacies in enterprise organization structure, project implementation
telecommunications. Between 1962 and 1983 it made 93 loans and capacity, and operation and maintenance; (6) strengthen manpower
credits for a total of $2.7 billion to 42 countries to help finance telecom- planning and training, and long-term technical and financial planning;
munications projects costing $10 billion. These projects generally com- and (7) establish and improve commercial accounting, information
prised "time slices" (approximately three to four years) of the total systems, service performance targets, and other management tools.
telecommunications sector development programs in the countries The Bank also provides advice on the choice and timing of tech-
concerned. They mainly included the modernization and expansion of nological innovation. This role is especially important in telecommuni-
local telephone exchanges and associated cable and subscriber plant; cations, where technology changes rapidly compared with other pub-
reliable high quality long distance transmission (primarily microwave) lic utility sectors. It also fosters staff training in new technology.
and related switching facilities, including subscriber trunk dialing; Through the introduction or expansion of international competitive
international facilities; rural and urban public telephones; exchanges bidding, the Bank promotes competition among suppliers of equip-
and teleprinters for telex subscribers and for replacement of manual ment and materials. This often results in considerably lower bid prices
telegraphs; and technical assistance chiefly in the areas of organiza- than could be obtained by negotiation with one or two established
tion, finance and accounting, training and manpower planning, tech- suppliers, and widens the range of technical options considered. More
nical planning, and project preparation and execution. (In addition, recently, the Bank has been assisting borrowers in obtaining bids for
the Bank has financed telecommunications investments as part of lend- price and terms of supplier financing, when available; this can result
ing for other sectors (principally transport, power, agriculture, educa- in low overall costs without compromising product choice and frees
tion, and health), for a total possibly amounting to about £50 million Bank funds for use in other project components.
per annum in recent years.) Telecommunications projects are relatively fast to prepare and
Through this tending, the Bank emphasizes efficient sector organiza- straightforward to supervise, and are in this sense among the most
tion and management, addressing the economic, financial, institu- cost-effective Bank operations. They also involve little risk: against the
tional, and technical changes required for a country's telecommunica- backdrop of large unmet demand and generally monopolistic oper-
tions sector to become efficient and responsive to the needs of national ation, market and macroeconomic uncertainties do not affect project
development. In particular, it seeks whenever necessary to (1) ensure viability; financial and economic results consistently meet or exceed
adequate autonomy of operating entities from government; (2) pro- forecasts and project targets; partial project implementation delays do
mote tariffs that result in the efficient use of existing plant and new not prevent benefits from other parts from materializing; and progress
investment, full cost recovery, and the transfer to government of sur- and results are easy to monitor and quantify. On the basis of need
plus profits; (3) extend basic communications services to rural and alone, Bank financing of telecommunications (which currently ac-
low-income urban areas as required to meet equity and regional devel- counts for only about 2 percent of the Bank's total lending) could be
opment objectives; (4) reduce the number of operating entities when more than doubled, to cover, among others, over a dozen additional
needed to obtain economies of scale; (5) identify and remedy inade- countries in Africa and Latin America.

tions investment programs in developing development of telecommunications ser- tive introduction of new services, expan-
countries range from about $25 million to vices depends, to a large extent, on a coun- sion of the role of private enterprise, in-
over $600 million per annum. Generally, try's external debt capacity and access to creased use of international competition in
50-80 percent of this investment is in im- long- and medium-term external financing the procurement and financing of equip-
ported goods. The foreign exchange sav- —whether at market or concessional rates. ment, and greater flexibility and initiative
ings and earnings in the economy attributa- in cofinancing among external sources can
ble to better telecommunications, although
Overcoming constraints help achieve this and possibly also result in
probably quite large, cannot be readily Efforts to overcome constraints on the the addition of resources.
quantified and do not accrue directly to development of telecommunications need Afew> services. Extending and improving
the telecommunications enterprises. Thus, to be tailored to each country. To be effec- telephone services is likely to continue to
even if operations can provide large sur- tive, such efforts must consider the tele- constitute the core of telecommunications
pluses in local currency, converting these communications sector as a whole, deal investment in developing countries for
into the foreign exchange required for fur- with both selected immediate problems many more years. This is partly necessary
ther investment implies an apparent bal- and longer-term institutional and policy to meet the large unmet demands. In addi-
ance of payments burden, and the telecom- matters, and last long enough to ensure tion, a countrywide telecommunications
munications sector has to compete with all material improvements, including an or- network can only be financially viable on
other sectors for a share of the country's derly flow of external resources. In particu- the basis of a widespread service such as
limited import capability. In this process, lar, mobilization of additional foreign ex- the telephone. As this infrastructure is built
governments often assign a low priority to change depends mainly upon governments up, new specialized communications ser-
telecommunications, partly reflecting an giving telecommunications a higher prior- vices, that would otherwise not be afford-
inadequate perception of the sector's eco- ity, and conveying this decision to interna- able, may be added at low marginal cost.
nomic and financial potential. Domestic tional development agencies and other The potential for selectively introducing
manufacture of telecommunications equip- sources of external financing. For this, na- advanced communication services is al-
ment can, in principle, reduce the foreign tional finance and planning authorities ready there. For example, new services are
exchange cost of telecommunications in- need to consider explicitly the merits of rapidly becoming standard business tools
vestment, but few countries have the nec- telecommunications investment, as they do in the industrial world. (Most of these re-
essary combination of market size, compet- for other spending on infrastructure. sult from a mix of conventional telecommu-
itive environment, technological capability, However, given the overall scarcity of in- nications, office, and computer technolo-
industrial management expertise, and vestment resources, the focus must be on gies, but also include such services as
skilled labor to do this efficiently. Thus, the making more efficient use of them. Selec- conference facilities, mobile telephones,

Finance & Development / September 1984 35

©International Monetary Fund. Not for Redistribution

 and radio paging.) In the more advanced tion services. In both cases, adequate safe- animation. Both limited recent experience
developing economies, modern sectors in- guards need to be taken to ensure technical and past history suggest, however, that
creasingly require similar up-to-date com- compatibility with existing basic services privatization of telecommunications infra-
munication facilities to maintain effective and proper maintenance of privately structures (as distinct from terminal equip-
contact with their main trading partners owned equipment, and adjustments are ment supply, value-added services, con-
abroad. In less developed countries, jump- needed in sector policy, legislation, and struction, etc.) offers no easy cure to the
ing some stages in the traditional evolution regulation. Evidence from both industrial sector's ailments nor does it relieve govern-
of telecommunications services may be de- and developing countries shows that pri- ments of the need to make hard policy deci-
sirable. For example, it would make sense vate business responds vigorously to these sions and maintain a competent regulatory
to develop communication centers in rural opportunities. capability.
communities that combine the usual small Another large potential role exists for pri- External financing. Telecommunications
post offices with simple voice-plus-data ter- vate entrepreneurs as contractors. Tele- investment in the developing world is gen-
minals initially providing public telephone communications companies in developing erally financed by a mix of domestic and
service, telex-compatible message services, countries often use local contractors for external funds—the latter mainly from sup-
and secure financial transactions. With civil works, laying ducts and cables, pub- pliers, commercial banks, and export credit
newly available technology, this could cost lishing telephone directories, data pro- agencies for the creditworthy countries,
about the same as a post office with an cessing, collecting bills, and so on. Faster and bilateral aid for the less well off, both
(obsolescent) telex machine; initially, it growth in telecommunications would ex- supplemented to some extent by multi-
would offer more and better services, and it pand contractor business and could extend lateral lending agencies. Thus, cofinancing
would be capable of adding new services at it to other regions or countries where such is not a new concept in telecommunica-
marginal cost when needed. (These might enterprises have not been established. Fur- tions. In general, however, the various ex-
include, for example, an audioconference thermore, the trend already initiated in ternal sources have operated indepen-
room for rural extension work or access to some countries to farm out to contractors dently. In recent years, there has been a
a computer-based farmer information and more types of installation work tradition- growing interest in developing more active
technical assistance service.) Such ap- ally undertaken directly by the telecommu- forms of cooperation. Given the relatively
proaches are likely to result in more cost- nications enterprise could be accelerated. low risk associated with telecommunica-
effective solutions for a country's overall Contracting for the maintenance of some tions investment and the export drive of
communications requirements than if each types of plant could also be considered. telecommunications manufacturing in in-
component was supplied separately. It The question of outright privatization of dustrial countries, suppliers are also keenly
would also allow greater flexibility to re- existing telecommunications enterprises is interested in putting together attractive fi-
spond to changing communications needs more contentious. Telecommunications en- nancing packages. Innovative cofinancing
and would facilitate the subsequent devel- terprises in most developing countries policies by multilateral agencies, greater
opment of new services. were originally private (and often foreign) flexibility in export credits, and growing ex-
until nationalization in the 1950s and 1960s. perience in the developing countries in pro-
Private enterprise. Governments in de- Even today, telecommunications services curement involving competition in price as
veloping countries generally have, and well as credit from commercial and aid
in the Philippines are partly run by pri-
intend to retain, state control over the tele- sources can help lower overall investment
vately owned companies, and in other
communications sector. Nonetheless, pri- costs, restructure debt toward repayment
countries they are provided by municipal
vate entrepreneurs could play a greater periods consistent with long telecommuni-
companies (Colombia), private coopera-
role; the advantage would be to relieve cations plant lives, and possibly also result
tives (Bolivia), subscriber-owned enter-
public enterprises from some of the burden prises (Lima, Peru), state corporations in some additional funds becoming avail-
of sector development and allow them to able for this sector.
under private foreign management (Bot-
concentrate on rapidly expanding and effi-
swana), or foreign international carriers. In
ciently operating the basic telecommunica- Conclusion
recent years, a few countries (notably
tions infrastructure. The involvement of The development importance of telecom-
Chile) have been attempting (and others
the private sector would also facilitate inno- munications has been abundantly docu-
considering) a break-up in their state-
vation, promote lower costs through com- mented, especially in recent years. Concur-
owned telecommunications monopolies,
petition, and mobilize new financing for rently, growing awareness of new needs
and selling or franchising them to private
telecommunications investment. for information arising out of industrializa-
enterprise. Such alternatives to monolithic
In some countries, private companies tion emphasizes the importance of taking a
state telecommunications monopolies may
lease or sell terminal equipment (such as closer look at the requirements for telecom-
be increasingly acceptable to developing
telephones, teleprinters, or private branch munications, given the economic bottle-
country governments and merit closer ex-
exchanges) to the subscribers, although fre- necks that can result from inadequate
quently more by default on the part of services. The institutional, financial, eco-
the public telecommunications enterprises Bjorn Wellenius nomic, and technical issues that must be
than by deliberate policy. Large potential a Chilean national, is a dealt with for the effective provision of
benefits are likely to result from extensively senior economist in the telecommunications are demonstrably trac-
deregulating the markets of terminal equip- Bank's Industry Department table. Where these issues have been tackled
ment, if it is done in an orderly fashion. and has recently co-authored in a consistent and sustained manner, the
The concept can be extended to fairly siz- a book on results are impressive. Where telecommu-
able subsystems, such as rural coopera- telecommunications and nications are still considered mainly a lux-
tives, urban apartment or office buildings, development. He is a
ury consumption item rather than a pro-
graduate of the Universities
and industrial estates. Likewise, private duction factor, however, there is mounting
of Chile and Essex.
entrepreneurs could be encouraged to pro- evidence that the price paid in terms
vide new business-oriented communica- efficiencies is large indeed.

36 Finance & Development / September 1984

©International Monetary Fund. Not for Redistribution