A Market-Based Mechanism for Universal Service Obligations

Book excerpt: Developing countries often strive to extend basic telecommunications services to rural and remote areas. Wealthier nations sometimes face similar challenges with other services. This paper proposes a novel policy to motivate private-sector operators of basic infrastructure to expand infrastructure into previously unserved regions. It is particularly useful when resources are transferred to the private sector, as occurs during the privatization of a state-owned telecommunications carrier, the introduction of competition, the release of spectrum, or the allocation of cash subsidies for this purpose. Firms receive tradable universal service obligations in the form of milestones that must be met, and commitments to meet specific deadlines. By exchanging its commitments, a firm can increase or decrease the rate at which it must expand infrastructure. By exchanging milestones, a firm can change where it must expand infrastructure. Making milestones and commitments independent and fully tradable allows each firm to develop the most cost effective business strategy possible, and to adapt that strategy as technology and demand evolve over time. The exchange of milestones and commitments does not diminish the obligations that must be met by industry as a whole, insuring the timely expansion of infrastructure. This paper focuses on telecommunications, but the approach is also applicable to other forms of infrastructure, such as electric power and broadcast television.