Universal Service Fund, commonly known as USF, is a tax on telecommunication service which is used to fund and subsidise telecommunication infrastructure for remote and rural areas. USF is a controversial regulatory tool. It has been around since 1997 in USA. The goals of Universal Service, as mandated by the Telecommunications Act of 1996, are:
  1. To promote the availability of quality services at just, reasonable, and affordable rates
  2. To increase access to advanced telecommunications services throughout the Nation
  3. To advance the availability of such services to all consumers, including those in low income, rural, insular, and high cost areas at rates that are reasonably comparable to those charged in urban areas

In Pakistan USF was also setup with similar intentions of reducing the digital divide and to advance ICT. Minister for Information Technology, Awais Ahmad Khan Leghari recently said that the government is firmly poised to spend millions of dollars from Universal Service Fund (USF) to add up about 1000 new Basic Transmission Stations (BTSs) and cell sites in remote areas which were not commercially attractive for the existing players. Part of the conditions for licence approvals for new companies such as Telenor and Warid included that these providers will invest in rural areas in addition to the more lucrative urban cities.

Awais Leghari said Ministry of IT had already engaged consultants which would lay down within the next couple of months a proper framework for the USF roll-out through a transparent bidding process to be conducted and overseen by the regulators. He said the number of cell sites in Pakistan had crossed the 10,000 mark and in a couple of years 90 per cent of the country’s population would have access to phone coverage. Also see my related post about network expansion in Pakistan.

As reported by The Economist in an article “At your service – Telecoms in the developing world“, the idea of “universal service” is being extended from voice to broadband.

In India, the government created an auction of the rights to create and run telecommunication networks in remote rural areas. Around the world, such networks are often subsidised by a “universal service fund” (USF) paid for by taxes on existing telecoms services. Auctions are held, and the network operators that demand the smallest subsidies win. They must then provide a certain number of public payphones, as well as signing up subscribers.

Economist notes that something rather odd happened in India: in 38 of the 81 regions on offer, many mobile operators bid zero. In other words, they asked for no subsidies at all. In 15 regions, India’s biggest operator, Bharti Airtel, even offered to pay. As a result, barely one-quarter of the 40 billion rupees ($920m) available in subsidies is likely to be allocated. If operators think there is money to be made running mobile networks even in some of the poorest parts of the world, is USF needed anymore?

More from the Economist article:

Not exactly. Although Indian operators are rejecting subsidies for network equipment, they will still benefit indirectly from the fund, since it is also used to subsidise the establishment of shared sites for mobile-phone base-stations. Even so, India joins other countries, such as Nigeria and South Africa, where commercial mobile networks are rapidly expanding into areas previously considered uneconomical.

In countries where mobile mania is less acute, USFs can help to get the ball rolling. They have been particularly successful in Latin America. A recent study found that Peru’s USF helped to reduce the rural population’s average distance from a telephone from 56km (35 miles) in 1999 to 5.7km in 2002. This kind of achievement has encouraged countries in Asia, the Middle East and Africa, from Mongolia to Morocco, to establish funds. Around 2-5% of the world’s population lives in areas where mobile services can be provided only at a loss, according to a report from the GSMA, an industry lobby group, and Intelecon, a consultancy.

As a result there remains a need for USFs, says Andrew Dymond of Intelecon. But funds are often managed inefficiently. Some governments collect huge sums which they then fail to spend. In India, around 5% of operators’ revenues go to the USF; Brazil has yet to spend any of the $2 billion it has collected. Elsewhere, regulators have chosen to allocate the funds to extending fixed-line networks, rather than cheaper mobile networks.

The advent of broadband-internet connections is also changing attitudes to USFs. Since broadband links can carry both voice and data, some countries (such as Chile) are starting to subsidise broadband roll-out instead of just concentrating on phones. And with so much of its 75 billion rupee fund unspent, India’s government is drafting proposals to subsidise the provision of broadband to every village.

But not everyone agrees that this is the right approach. Rather than subsidising village broadband, funds should be used to provide high-speed access at a district level, says Juan Navas-Sabater of the World Bank. It is then possible for a market to develop in which schools, hospitals and local councils buy capacity and entrepreneurs can establish self-sustaining private telecentres. This model is already taking hold in Uganda, Mongolia, Burkina Faso and Malawi. For universal-service funds and for telecoms in general, the trend is clear: phones first, broadband later.