Sri Lanka telecom reform: positive externalities

Jan 30, 2012 (LBO) – Reforms have costs. In any system, there are those who benefit from the status quo. Former President Kumaratunge once said in a speech that it used to cost 32,000 rupees to get a phone connection before the reforms.

No idea how she found the number, but it seemed a reasonable estimate at the time. The amount over the official connection charge went to somebody. Those somebodies lost out because of the reform.

Costs of reform

There are other costs. Back in the 1990s, the reforms were funded by the World Bank through a USD 15 million credit. Most of the money went to a Frequency Monitoring and Management System but around five million US dollars was set apart for technical assistance. People used to complain that this was what was wrong with World Bank assistance: the money came, but it went out again, they said. All that we get are a bunch of reports, they said.

The reforms continued in 2002-04. Another technical assistance credit of USD 5 was used to design and implement reforms in all infrastructure sectors. Some of the money was spent on the liberalization of the international telecom market which was until then a litigation-ridden monopoly. Same story was told about money coming in and going out; consultants made money they said; the country was being ripped off, they complained.

That was years ago.

Just last year, the telecom sector directly earned the government USD 71 million. The year before, in 2010, it contributed USD 122 million. This is not a comprehensive account. Year after year, the money keeps flowing into the Fund of the Telecom Regulatory Commission and from there to the consolidated fund: more than the Sri Lanka Port Authority, more than the Airport and Aviation Services (Sri Lanka) Limited, more than the state banks (all nice government monopolies, single or joint).

It appears the money borrowed from the World Bank yielded good results. The benefits of telecom reform far outweigh the costs incurred by the government.

We don’t really have to worry about the people who used to benefit from the bribes collected in the bad old days (they actually got pay increases to compensate). The end of petty corruption in the telecom industry was a benefit to the people who were compelled to make those payments as a result of scarcity caused by the inept government monopoly.

Other benefits

The Household Income and Expenditure Survey of 2009-10 showed that an average household spent LKR 750 a month on telecom. This was for a lot of utility (technical term for the benefits one gets from a good or service). More than were available in the old days.

Even with voice telephony, a lot more can be done with a phone now when there are almost as many phones as people in Sri Lanka, than when only the elite and some people working for government had phones. Even the few who had phones had few people to call.

The calling opportunities (the number of people that could potentially be called) are now close to 20 million; in the old days it was less than a lakh. And around two million people access the Internet, some through ADSL lines, but most through their mobiles and wireless dongles. So a lot of utility for the costs incurred.

But what really triggered this column was something tangential, but very powerful.

Positive externalities

One of the strongest rationales for government intervention in the economy is the existence of significant positive externalities: benefits to third parties who are not party to the economic transaction.

The annual letter published by Bill Gates a few days back provides an excellent illustration of the positive externalities generated by universal (or almost universal) electronic connectivity.

I am pleased to announce here that the first award will recognize the work of Dr. Asm Amjad Hossain, a district immunization medical officer from Bangladesh. In 2009, Dr. Hossain was assigned to two districts where immunization rates were 67 and 60 percent, respectively. In 2010, they were 85 and 79 percent. These rapid improvements were the result of Dr. Hossain’s innovative approach to running an immunization program. He instituted a process of registering pregnant women with their expected date of delivery, location, and phone number, so vaccinators knew when children were born, where they were, and an easy way to contact their mothers. He provided annual schedules for vaccine sessions to make vaccinators more accountable to the community and had the vaccinators put their phone numbers on the children’s immunization cards, so parents with young children could get in touch with a health worker. These may seem like small innovations, but they show how looking at old problems in new ways can make a profound difference.

The story was about an award. But what I noticed was the role of telephones in the story. The award winning innovation is not just one new thing; it is a collection of process improvements. Critical elements involve phones as easy ways of contacting mothers on the one hand and health workers on the other.

Without the phones, would the innovation have been possible? Without the innovation, would the increase in immunization rates have been possible? Without the increase in immunization rates would it have been possible to save lives?

Without the reforms, would there be phones? Would it be possible to assume that all health workers could be reached, and that the mothers would have phone numbers to give when being registered?

These benefits, it appears, far outweigh the millions of dollars generated by the telecom industry for government.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the ‘Choices’ category.