[afrinic-discuss] Open Access and Financing Principles for the Information Society

[Eric Osiakwan]

Open Access and Financing Principles for the Information Society
By Eric M.K Osiakwan
Visiting Fellow and Scholar, DV Program, Stanford University
eric at afrispa.org 
http://www.openaccessforafrica.org 


Introduction
The second priority from the Geneva phases of the World Summit on Information Society (WSIS) was the financing of the Information Society but the Internet Governance debate has overshadowed this. Given that I have made a submission on the later I feel obliged to contribute my 50 cents to the former – for me financing the information society should take more precedence over the Internet Governance debate. 

Financing the information Society is a tall order because there are so many things to be financed and the financing principles, priorities and practice seems a  bigger challenge, may be that’s why we are giving it less priority but in this essay I would try to make an easy attempt focusing on the financing of infrastructure. Infrastructure is at the core of all the services and products we are envisaging to make the information society so priority must be given to the financing of same. This is not to say the financing of the others should be done later because they can be done simultaneously and as a matter of fact some of the principles am going to advance would be better served in a multi-track approach. 

I think our first consideration should be the need to separate infrastructure from products and services and this distinction is advanced in the global communication paradigm. There is a general consensus to move from the “silos” approach to the communication system to a “horizontal layering” approach. In the silos approach what happened was everyone could do anything once they where licensed to, which meant that companies needed to build capital intensive infrastructure in order to provide services and trade products. This also meant that the end product or service was expensive for the market which meant it was less affordable for the majority. 

Horizontal Layering
The horizontal layering approach is to distinguish infrastructure from services though there are other logical distinctions between:
•	The physical layer (the actual physical infrastructure);
•	The logical layer (managing the connection between the physical infrastructure and higher layers);
•	The applications layer (which includes things such as the Web browser), and
•	The content layer (voice, data or images conveyed by the network.)

Each layer has a set of functional rules that allow it to interface with the other layer and for information to flow over the network. Any player, including new players, can use different elements of the network, or the entire network, to provide services.  The IP-based architecture of the network makes it possible for services to be provided, and innovation to occur, at any point on the network, including, notably, the edges, where the network can be further “grown” as well.

Different segments of the market – and different layers of the network -- will naturally have different structures, and will attract players with different business models.  For example, in most countries and regions, it will not be feasible or logical to have more than one or two providers of backbone infrastructure. The key issue in an Open Access model is to ensure that no player in one of the layers can block access to another layer or to the rest of the network through having dominant market power in one or another layer; hence some key principles of Open Access must be advanced at this stage.  

Key Principles of the Open Access Model
1. Anyone can play
Particularly because of the potential for locally-provided services and network growth “at the edges” made possible by flexible technology and open network models, Open Access models should assure that any provider willing to play by the rules can “plug and play” in the network.

2. Technological neutrality
Regulation should be technology-neutral, taking into account the cost and physical properties of the technologies themselves. No one should be stopped from using a particular technology and indeed a progressive regulator would encourage cost reduction through technology innovation. 

One needs to recognize that in future a wide range of applications will require higher bandwidth. But there may be no significant (order of magnitude) improvements in the performance of fibre, particularly its installation. However with wireless there will be significant improvements in performance and cost/capacity ratio and therefore wireless solutions will become more attractive in local distribution applications.

3.  Fair and non-discriminatory competition at all layers
Competition should be fair and non-discriminatory. There should be no predatory pricing, cross-subsidisation or aggressive cross-ownership. Regulators will need to be capable of dealing with a range of competition issues to ensure a genuine level playing field, and to prevent market strength in one layer from creating unfair competitive advantage at another layer. For all services at a given layer, there ought to be at least two providers and whenever there are not 4-5 providers of a particular service, issues of competitive position would need to be examined. 

What is true for countries at a national level holds true at a regional and international level. Ideally any country should have a choice of at least two providers to connect to neighbours and the rest of the world. The EU competition policy formulation of “significant market power” provides a useful benchmark against which competitive position might be examined.

4. Transparency to ensure fair trading within and between layers
Competitive markets thrive on transparent information about market prices and service. Internal accounting processes in companies need to be sufficiently transparent to enforce fair trading. If there is tradable bandwidth – particularly at an international level – it will allow clear comparisons to be made between different providers. There needs to be greater levels of consumer information to allow comparisons between “offers”, including offers at the interface between layers.

The different roles of players need to be transparent. In order to create trust in the market, infrastructure providers need to be clear that they will not enter service markets to compete with their customers. The regulator exists to encourage competition rather than restrict it but to do so in a way that genuinely encourages increased investment and lower access costs to communications technology. Where appropriate, regulation becomes “light-touch” rather than prohibitive or restrictive. Government exists to create the legal framework through which competition issues can be mediated. 

5. Everyone can connect to everyone else at the layer interface.
In order for a competitive market to function, everyone must be able to connect to everyone else. Service providers would be able to get access to infrastructure from the local to the international level, whether they were small or large entities. 

There will be inevitable interconnection rate issues where the interests of the infrastructure provider in keeping re-investing in the network need to be weighed against the opportunities that can be created for greater levels of new business.

6. Devolved rather than centralised solutions
It is important to ensure that the “intelligence” in the network is to be found at the edges of the infrastructure rather than at its centre. In other words, the infrastructure provider should not be allowed to reserve for itself all of the functions that create value in the market.

In practical terms, it should be possible to create a local entity that can operate on the small or medium-scale and can “plug into” the network without needing to cede control over its activities to the infrastructure provider. Local operators need to be able to own and control a significant level of “intelligence” in the system (eg billing, features, etc) to encourage open access.

Having advanced the following principles a couple of financing mechanisms are made possible namely; 
•	Market funding - support projects that demonstrate market demand and make a return for investors. This can be found through loan, debt and equity and an Open Access approach would be facilitated by access to local funds through SME loan programmes and local and regional stock exchanges.
•	Market “stretch” funding - support the development of projects where market demand will support them in the medium to long term (5-10 years) and where either soft loan repayments are made or capital gains can be made through later sale of shareholding. This would also cover public-private funding partnerships.
•	Social funding - is given because something needs to be supported because it has broader, non-market, development objectives where the returns looked for are social rather than financial. In communications terms, this would cover those parts of a country where service of any kind could not be provided on anything like a market basis, irrespective of future growth.

However these funding mechanisms must be implemented within a set of financial principles if public resources are to be used to intervene in the telecommunications sector, what should the criteria for these investments and projects be? Surprisingly, the criteria are not terribly complex, and there are only three. Readers not familiar with the sector and its traditions will be surprised to know that almost any project on the table today, such as SAT3 and EASSy fiber buildout, violate all of the following “principles”.

Public money should be used to create resources that are open to all customers, including future customers who may not yet exist. When private capital creates a resource one of the forms of “Return on Investment” can be exclusion of future competitors. Private investors can give a price advantage to “early” customers or they can simply deny “late” customers a chance at all. Either form of exclusion is a fine strategy for private businesses investing private money. On the other hand, public money should be used to create opportunity, not exclude it or reserve it for a select group. To the degree that public money finances telecommunications, the network so created should be open to all customers, for all time, on equal terms. This does not mean early contributors of capital should not be paid a fair rate of interest for making their investment early, when risk is higher. It does mean that customers who come along five or ten years later should have access on terms that are determined by the global and regional economy as a whole. Fiber optic systems like EASSy in particular have very long operating life spans, 20 years or more, so they have the ability to grow their benefits to a region if given a chance; to have such a powerful resource controlled by a monopoly consortium is especially damaging.

Resources created with public money should be sold on a cost-recovery basis. Private investors in telecommunications seek a financial return (profit). They must charge the highest price they can get or they will eventually be pushed out by a competitor. Governments should endeavor to insure that private investors in telecommunications enterprises operate in a competitive market; that will hold prices down; but government should not regulate prices or regulate the market in other ways. Only the free market is powerful enough to defend the customer from the natural tendency for private companies to charge the highest price they can. Conversely, when public money is used to create telecommunications networks the situation changes; governments become active participants in the market; but the objective of government participants should not be to charge the highest price they can. The objective of investing public money in telecommunications should be to create the highest benefit to the citizens and economy as a whole. Government needs to satisfy “investors” too, but in different ways. Government needs to deliver results, not profits. Because telecommunications is a high-technology product, the cost of capacity-creation is constantly dropping in real dollars. Certain layers of the telecommunications business involve extremely high levels of technical skill and expertise, so it is never a good idea for government to try and run a telecommunications network. However, parts of modern telecommunications networks, such as fiber optic “backbones,” have all the physical and economic characteristics of roads and waterworks and other “heavy infrastructure.” They are the kinds of resources government can help finance without getting into something too complex for governments to manage. But to achieve maximum benefit these resources need to be made available. That means public money should not seek a financial return, but should buy the delivery of capacity into a fair market at the lowest price possible (which is a price that seeks to recover cost and no more). In fact, public money should not be involved unless the explicit outcome will be a reduction in prices to customers. If public money can’t deliver that, then we have to ask if the free market is not already operating efficiently and if there may be no role or need for public money.

Public money should not be invested in markets that are distorted by anti-competitive regulatory regimes. As stewards of public money, governments should not invest resources in an environment where customers and competitors are not treated fairly by law. Unfortunately in every African country today telecommunications regulations are a systematic labyrinth of laws that create unfair advantages for certain companies, drive costs up for many companies, and drive costs up and deny service to almost all customers. Investment of public money into projects which must operate in these distorted “sub-economies” is a mistake; the vast quantity of telecommunications capacity created by a project like SAT3 or EASSy can only be productively sold in a fair and free market. Therefore, a precondition to large scale projects financed by global donor and World Bank money should be that governments clean regulatory house and create a business climate for telecommunications that is open and fair. 

The last point may be the hardest for Africa. The web of advantages created by the regulators, advantages that accrue to employee unions, government officials, and a handful of selected companies, is so grossly unfair and economically distorted that the backlash will be severe for any government bold enough to try and dismantle this powerful bureaucratic apparatus. It is an indicator of how important telecom is to the economies of Africa that such interests have been created in the first place; and an indicator of how much creative energy might be unlocked when these corrupt and hegemonic structures are finally dismantled. I conclude my pieces tomorrow with a focus on Africa – “Africa in Internet Governance and financing the Information Society” is next. 

Reference: 
This note draws from a study prepared for the WorldBank through InfoDev on “Leveraging New Technologies and Open Access Models: Options for Improving Backbone Access in Developing Countries (with a focus on sub-Saharan Africa”, by a team consisting of Anders Comstedt, Russell Southwood and Eric Osiakwan, under the auspices of the consulting firm Spintrack @ http://www.infodev.org and http://www.spintrack.com 

It also draws from a paper written by Roland Alden on Public Finance of Telecommunication @ www.ralden.com/C1/EASSy/default.aspx 


--
Eric M.K Osiakwan
Executive Secretary
AfrISPA (www.afrispa.org)
Tel: + 233.21.258800
Fax: + 233.21.258811
Cell: + 233.244.386792
Handle: eosiakwan
Snail Mail: Pmb 208, Accra-North
Office: BusyInternet - 42 Ring Road Central, Accra-North 
Blog: http://afrispa.skybuilders.com/users/Eric/blog.html
Slang: "Tomorrow Now"
--