Document(s) 9 of 21

INTRODUCTION

Greater access to ICT networks and to ICT-enabled services have been hindered in many developing countries by factors ranging from policy and regulatory failures to misperceptions of the cost-effectiveness of providing these services to 'marginal customers'.¹ Yet, there is empirical evidence of considerable untapped business potential among such marginal customers. Innovative approaches to network development and expansion have been found, especially in the developing world.

The objective of this chapter is to analyze the necessary and sufficient conditions for network expansion and investment in marginal communities, drawing from the experience of the Grameen Village Phone (VP) program, an innovation of the Grameen Bank (GB) of Bangladesh. The VP program has been successful in providing access to telecommunications to over 45 percent of the villages in Bangladesh, as at the end of 2005, through providing microfinance to villagers to purchase a mobile phone and a Grameenphone (GP) connection, which is then operated as a pay-phone, providing access to fellow villagers for a charge. This is particularly impressive in a country that had 3.44 telecom (fixed plus mobile) subscribers per one hundred inhabitants in 2004. The VP program has been hailed as a unique model for the development of rural telecom infrastructure, promoting development and poverty alleviation in Bangladesh through the use of ICTs expanding telecom access to the rural poor, while maintaining a sustainable business model.

The models that work are defined and shaped by specific policy, regulatory and institutional environments and by the technology available at a particular time. Because specificity does not readily lend itself to practical and generalizable policy insights, the access problem is approached through the lens of transaction cost economics in order to retain a comparative perspective. As such, this chapter argues that access solutions evolve through the minimization of the transaction costs of doing business; that rational entrepreneurs will structure their models to ensure both cost-effectiveness and sustainability. In the process, 'win-win' solutions for most stakeholders may emerge.

The second part of this chapter examines the common misconceptions regarding provision of telecom services to marginal customers; this misconception is particularly pernicious in countries with low telephone penetration levels. This part looks at evidence from Bangladesh, India, and Sri Lanka. The next part sets out the basic conceptual framework relating to transaction cost minimization and analyzes the Grameen solution. From this central thesis of transaction cost minimization, a range of options are considered from an 'in-house' or vertically integrated model to various forms of outsourcing solutions, such as resellers and virtual network operators (VNOs)—and, finally unveiling the factors likely to produce these outcomes. The conclusion touches on the debate surrounding traditional microfinance approaches vis-à-vis market-based approaches in improving the lives of marginal communities, cementing the argument that markets can, and have been made to work for the poor, provided that business strategies create workable incentive structures.

THE ACCESS PROBLEM: DISPELLING THE MYTHS

The under-provision of telecom services for potential users in countries with low telecom penetration is linked to two misperceptions. First, that the demand for telecom services among marginal customers is too low to generate commercially viable business. Service providers tend to believe that marginal customers cannot afford the services, if they need them at all. Second, that the transaction costs of providing services to marginal customers include a significant payment collection component, which is perceived as being too high to justify rolling out the network.

New research suggests that investing in marginal communities is good for business. In Bangladesh, the VP program has demonstrated that there is an enormous untapped demand for telecom services amongst the rural poor. Studies indicate that users of these village phones spend around 7 percent of their income on telecom services on an average (Prahalad and Hammond, 2002) with consumer surplus yielded by a single phone call from a village to Dhaka estimated to range from 2.6 to 9.8 percent of mean monthly household income (Richardson, Ramirez and Haq, 2000, p. 2). It is estimated that the average net income earned by a village phone operator (VPO) is more than double the per capita income for Bangladesh (Alauddin, 2005). From a social perspective there is evidence that the VPOs—entrepreneurial women in rural Bangladesh—gain empowerment as they generate an income, participating in family decisions in a society where traditionally women have little or no say (Keogh and Wood, 2005). Chapter 1 showed that among telecom users at the BOP in the samples studied, 64 percent of the mobile users spent at least 4 percent of their income on mobile communications.

These findings indicate that the purchasing power of marginal customers may be higher than believed and point to a large unmet demand at the BOP. However, they tell only half the story. Unleashing this potential not only depends on an informed perception of marginal customers as a potential profit base (something that GB acquired through years of interaction with its clients as a microfinance institution with deep roots in rural communities); it also depends on the way in which services are packaged, marketed, and delivered—that is, how the business model is structured to minimize transaction costs.

Minimizing Transaction Costs of Increasing Connectivity: The Grameen Solution

The essence of transaction cost economics (TCE) is its approach to the 'allocation of economic activity across alternate modes of organization (markets, firms, bureaus, etc.), [using] discrete structural analysis, [and describing the firm as] a governance structure (which is an organizational construction)' (Williamson, 2005, p. 41). An important contribution made by TCE to socio-economic analysis and to the understanding of business structures and strategies is its focus on the science of contract; this focus draws from the fields of law, economics and organization theory. In contrast to traditional neoclassical economics but in line with the broader new institutionalism that it is situated within, TCE gives prominence to the role of governance in shaping the structure of a transaction, or a particular organization structure. To cite one of the founders of institutionalism, Commons (1932, p. 4), 'the ultimate unit of activity…must contain in itself the three principles of conflict, mutuality and order. This unit is the transaction.' In short, governance is seen a means to bring in order, to mitigate conflict and allow for mutual gain.

At a practical level and for the purpose of this analysis, TCE implies that the organizational structure that will evolve is determined largely by the transaction costs involved in providing a particular service. In the Grameen case the high transaction costs associated with the provision of telecom services to the rural poor are lowered by the extensive physical and social infrastructure that Grameen has on the ground; the outcome is an 'in-house' model where all parts of the process remain within the Grameen 'family' of organizations.

Extending Network Access

The VP program, an initiative of GB and Iqbal Quadir, a US-based Bangladeshi, was set up through the establishment of two companies—Grameen Telecom (GTC, a non-profit rural telecom company) and Grameenphone (a for-profit mobile network operator). It has been in operation since 1997. This innovative strategy for network expansion was conceived within an environment of limited interconnection facilities—hostile conditions created by the incumbent fixed operator, Bangladesh Telegraph and Telephone Board (BTTB), and permitted by government apathy. These unfavorable initial conditions led GP to seek alternative means of penetrating the countryside, resulting in a network sharing agreement with Bangladesh Railway, which led to the acquisition of a 1,800 km long fiber optic network; this arrangement essentially gave the company access to a nation-wide network parallel to that of the incumbent. With the fiber optic network under its belt, GP also obtained a critical strategic advantage over rival operators constrained by insufficient interconnection with BTTB and has thus been able to expand its coverage throughout the country rapidly. GP's coverage is extensive, and has by and large followed the railway network. Furthermore, as Figure 5.1 illustrates, the VP program has expanded significantly since its inception, with over 250,000 VPOs in September 2006³ and a positive return in terms of revenue as shown in the same figure.

Figure 5.1
Growth in Village Phone Operators (1997–2006, September) and Grameenphone's Revenue from Village Phones (USD) (1997–2003)

Sources: Grameen Telecom (2005), http://www.grameenphone.com and Grameen-phone Annual Report 2005, Grameenphone Annual Report 2003.²

The 'Grameen Family' Infrastructure

The Grameen family of organizations is an important element of the VP program's success—screening creditworthy clients and ensuring repayment (both activities carried out by GB branches at the village level), and allowing for economies of scope. The mechanics of the VP program and the role of the three key organizations involved—GP, GTC, and GB—as well as their relationships are illustrated in Figure 5.2. GB provides loans to selected VPOs to obtain a connection to GP's cellular service; in July 2005, when this research was conducted, the amount of the loan was approximately USD 133 (Grameen Telecom, 2005). The VPO resells telecommunications service to people in and around their villages, for a profit.

Grameenphone has been able to piggy-back on GB's established micro-finance infrastructure in the context of determining and ensuring the creditworthiness of clients. The streamlined selection process, which has resulted in the screening out of bad debtors, and a repayment rate of approximately 98.95 percent,⁴ is depicted in Figure 5.3. GB is the first point of contact for VPOs with GB staff permanently located in villages and regularly meeting borrowers. These regular meetings with VPOs work well to avoid problems of moral hazard (unwillingness to pay back) and adverse selection (carrying a larger percentage of bad debtors) associated with informational asymmetries between lenders and borrowers.

Figure 5.2
Relationships among Grameenphone, Grameen Telecom, Grameen Bank Branches, and Village Phone Operators in the Context of the Village Phone Program

Source: Knight-John, Zainudeen and Khan, 2005.

The scope economies associated with GB's microfinance base include the provision of micro-loans to selected VPOs to purchase a handset and a connection; loans for solar panel cells and DC batteries are also provided in locations where there is no electricity through Grameen Shakthi, another member of the Grameen family.

Figure 5.3
The Village Phone Operator Selection Process

Source: Knight-John, Zainudeen and Khan, 2005.

There is also a significant 'power relationship' between GB and its borrowers that own 94 percent of the total equity of the Bank—illustrated by the 16 decisions⁵ that clients must commit to when becoming a member of the Bank. This vertical power structure between the Bank and the VPOs is complemented by peer pressure; loans are given to groups of five and the entire group is denied credit if one person defaults. Thus, the risk of jeopardizing one's reputation in a tightly integrated village community helps to create a strong incentive mechanism for the repayment of loans.

The Grameen model has led to a situation where in 2004, the VPOs that made up approximately 3.85 percent of GP's subscriber base accounted for 15.5 percent of GP's total airtime revenues (Alauddin, 2005), while incurring less costs that those associated with a regular subscriber. As at June 2005, the average revenue per user generated by a VPO connection was twice that of a regular subscriber.

From the perspective of GP, the company that owns and operates the cellular network, the VP program is one customer; GP treats the entire program as a bulk buyer of airtime, issuing a single summary bill in English at the end of the month to GTC for the aggregated airtime of all the VPOs. GTC then makes out airtime bills in Bengali for each GB branch office, with a summary for that branch. The GB branch makes out individual bills for each VPO, and the actual collection of monies from VPOs is carried out by the GB branch at the village level; monthly bill collection is integrated with loan repayments (including for the initial package). The branch pays the bill to GTC by the last date of payment. GTC bears marketing and advertising costs of the VP program, supplies handsets, provides support, training, service, and repair of handsets, and overall management of the VPO network (Grameen Telecom, 2005).

GP therefore avoids several costs it would incur if it were to provide individual connections to VPOs without the involvement of GTC and GB. GP only incurs costs related to:

• communication infrastructure
  
• technical support
  
• provision of airtime (which is provided at a 50 percent discount)
  
• provision of a bulk bill to GTC
  
• government licensing and regulatory compliance and liaison
  
• government financial and taxation liaison

Affordable Mobile: The Grameen Strategy

The Grameen solution also takes into account the demand side of the equation, that is,, the affordability factor. For example, the shared access model used in the VPO program—where one phone provides access to multiple users—concentrates demand and aggregates purchasing power. Citing Prahalad and Hammond (2002, p. 10): 'an individual consumer might not be able to afford a particular product or service, [while] a group, or even a whole village, often can.'

GP also provides airtime to GTC for the VP program at a discounted rate of around 50 percent. Whilst this was initially part of GP's business strategy (embodied in the principle, 'good development is good business'), it is now one of GP's biggest Corporate Social Responsibility programs. The discount is an exclusive privilege offered by GP to GTC, and applies to all rates that are normally charged to GP customers. The tariffs charged by GTC to VPOs are hence less than what regular GP customers pay. The discounted rate allows GTC to cover its costs, and the VPOs to make a profit. Thus, in the absence of an airtime discount, the rates that VPOs would have to charge users in order to cover costs would be much higher; in turn, demand for telecom services would be lower, and hence the profitability of each VP would be reduced, and the sustainability of the program would be negatively affected.

SERVING MARGINAL CUSTOMERS PROFITABLY: BUSINESS MODELS THAT ENHANCE ACCESS

The Grameen solution has two characteristics. First, it is a reseller model, where the telephone is owned by a local entrepreneur, who resells services within the locality—in this case the village. Second, it is an 'in-house' solution—a model of transaction-cost minimization that has appeal in the context of low-trust/credibility conditions in countries with weak law and governance capacities.

The Grameen solution evolved in a specific market, regulatory and technological context; it is by no means a universal remedy for the problem of access to marginal consumers. Yet, as seen earlier in this chapter, the Grameen story does provide very useful policy insights on converting a potentially unfriendly business environment into one that can work for all stakeholders. The keys to its success—the factors that lend themselves to generalization for policy and business purposes—are the identification of the relevant transaction costs and the design of a solution that can minimize these costs; a cost-effective model that would also ensure business sustainability. In the remainder of this part, we extend our central thesis of transaction cost minimization to explore other solutions or models for enhancing network participation.

The Prepaid Reseller Approach

This solution, adopted in the Ugandan variation of the Grameen model, provides a lower-transaction-cost alternative to the 'original' model. The original Grameen model takes a post-paid approach, where the VPOs settle the airtime bill at the end of the month. In the prepaid variation of the model, users who have already secured a handset and connection to a network operator (through the Village Phone-type program) buy airtime in advance—either by purchasing prepaid 'top-up' cards for specific (discreet) values (for example, 100, 500, or 1,000 Taka) or by using 'electronic-refill' systems for any desired amount.⁶ This can usually be done at designated retail outlets, such as grocery stores. As the services are used, the available credit is periodically 'topped up'.

The most advantageous aspect of this approach is that the need to screen creditworthy customers and ensure repayment is eliminated. People pay for services before using them, so there is no risk of non-payment of bills. Users of prepaid mobile connections have largely been in developing countries,⁷ where fixed telephony is either unavailable or very limited or, in instances where mobile service exists and marginal customers are unable to obtain 'post-paid' connections for lack of creditworthiness. Often in developing countries, credit histories are not well documented, making it difficult for operators to distinguish between customers who are likely to pay their monthly bills and those who are not. Such informational asymmetries drive up risk and therefore the transaction costs of doing business through monthly subscriptions, or a 'post-paid' approach.

An operator may avoid and/or reduce certain costs through a prepaid approach, but significant costs will still be involved in a prepaid system. Prepaid operations require sophisticated software systems that can keep track of account balances and deduct the correct amount of credit for all types of services provided. Costs are also incurred in printing and distributing charge cards (or top-up cards) to retailers. If an electronic refill system is in place, then this also requires sophisticated software as well as a small piece of equipment for the retailer to credit customers' prepaid accounts.

The Local Reseller Approach

Another solution to network access that has evolved is the reseller model. The basic model is made up of a network operator that owns and maintains the network infrastructure and provides the 'service' (that is, airtime) to a buyer, who then resells this airtime usually for a profit.

There are two versions of this model, each defined by the nature of the relationship between the reseller and the network operator. Here we look at the first version: that of the local reseller. The second kind of reseller is the 'VNO,' or 'virtual network operator', discussed subsequently.

In a local-reseller approach, an entrepreneur obtains telephone line(s) from a network operator, paying a connection fee and a monthly bill, which includes line rental and airtime charges. The local reseller provides telecom services to people in the vicinity, most likely, making a profit. The relationship between the network operator and the reseller is similar to that of a regular customer, except for discounts for wholesale purchase, if at all. Resellers may or may not be required to obtain a license, or register with the regulator, depending on the regulatory regime that prevails in a particular jurisdiction.

In theory, the risk from the network operator's perspective should be greatly reduced, as the local reseller collects use charges from the end users—whom the network operator perceives to be risky. However, this solution has its own problems. The perception among operators in Sri Lanka, for instance, is that the local resellers pose a greater risk factor than individual subscribers, often running up bills in the equivalent of thousands of dollars, leading to line disconnection upon non-payment. Under the current legal infrastructure, there is little to stop these resellers from obtaining a new line at a slightly different address (for example, street number '59/1', as opposed to '59'), under a different household member's name, and by starting a new business. Moreover, in countries where legal enforcement is weak, it is sometimes more costly to take legal action than simply write off bad debts. What is apparent from the empirical evidence on the local reseller approach, therefore, is that its workability depends on the institutional setting—in particular, the norms, principles and practices of law and governance that prevail in a given environment.

The Virtual Network Operator (VNO) Approach

The second kind of reseller is the VNO—exemplified by the British mobile operator, Virgin Mobile. In this approach, the VNO establishes itself as an operator without building a network; instead, it piggy-backs on the network of an existing operator and resells services under its own brand name, utilizing its own assets such as brand name and distribution facilities.⁸ In this instance, the relationship between the VNO and the network operator is one where the former purchases bulk airtime from the latter, paying by the minute. The network operator avoids costs such as billing, collection, distribution, etc. The network operator incurs lower operation/variable costs and can afford to sell airtime to the reseller at a discounted or bulk rate.

In the VNO approach, the risk of providing service to the marginal customer is transferred from the network operator to the reseller (the VNO); that is, assuming the VNO does not default on payment to the network operator. An additional benefit accruing to operators is the ability to reach users in segments that have not been captured by their own brand names. What this implies also is that VNOs have the greatest positive impact when they team up with carriers that have a relatively small market share or a brand name that is not strong enough to withstand competition on its own; this model is less attractive for market leaders. As pointed out in the analyses by Pyramid Research (2005a, p. 2), UK's T-Mobile has been able to grow its market share by about 7 percent since it teamed up with Virgin Mobile in 1999. It is questionable, however, if these beneficial impacts would be replicated in the case of market leaders such as Verizon or Vodafone that have established their brand image globally.

An additional point raised by Pyramid Research (2005b) is that there is little space for VNOs in the context of markets that have pent-up demand and scarce network capacity. Telecom markets in the African region, for instance, have very different characteristics—with subscriber growth at record levels, network operators with stretched capacity confronting problems of poor call quality and call completion rates and average revenue per user (ARPU) in the prepaid segments falling rapidly; VNOs do not appear to be a viable option in situations of low ARPU levels.

CONCLUSION

This chapter attempted to answer two questions, based on empirical evidence: first, what does the evidence indicate with respect to the perception that there is little value in investing in marginal customers. Second, if there is empirical evidence that there is significant business potential at the BOP, what are the business models or approaches that can be used to extend access in a sustainable manner—models that will facilitate a win-win situation for all stakeholders. As illustrated in the analysis earlier in this chapter, the perception that it is not cost-effective to extend network access to marginal customers is not true.

Using the conceptual framework of TCE, we then set out a generic 'rule'—transaction cost minimization—for the structuring of workable and sustainable business solutions to the access problem. Using the Grameen model as a starting point, we unpack the conditions for success. Technology plays a relatively lesser role in generating a workable solution than a correct understanding of the market and the associated transaction costs, and tailoring an appropriate solution. The choice between in-house and out-sourcing models or between different versions of out-sourcing solutions depends on the nature of transaction costs that a business faces in a given environment and at a given time.

Drawing from the microfinance approach taken by Grameen—a market-oriented approach with an appropriately crafted incentive structure, and suitable institutional mechanisms—markets can, and do serve the poor, as well as other marginal customers. To illustrate, the VP program provides VPOs with a livelihood, a means of generating a steady income by reselling telecom services, in effect a 'market' solution. This approach sets into motion a virtuous cycle and facilitates a win-win solution for all stakeholders, with the VPOs generating an income that in turn increases the certainty of repayment—an encouraging factor for operators to provide rural telecom services.

NOTES

¹ In this chapter, the 'marginal customer' is defined as one that is excluded from market transactions under a given configuration of demand and supply conditions; if, for instance, supply is increased by a single unit, then the marginal customer would be included in the transaction.

² http://www.grameen-info.org/bank/GBGlance.html, accessed September 2006.

³ Exchange rate of BDT 66 to USD 1 used, from www.xe.com, September 7, 2005.

⁴ http://www.grameen-info.org/, accessed August 2005.

⁵ For example, the borrower will outlaw dowry practices, use pit latrines, drink only from tube wells where available, if not boil their water or use alum, educate their children, etc.

⁶ The electronic refill system is not yet available through all operators in all countries.

⁷ It is estimated that over 50 percent of the world's mobile users are on prepaid plans. In developing countries, the percentage is much higher—http://www.sfu.ca/cprost/prepaid/early.htm; the findings reported in Chapter 1 also support this with 83 percent of mobile owners in the Sri Lankan and Indian samples studied choosing prepaid mobile connections.

⁸ Adapted from the definition of 'mobile virtual network operators' or MVNOs given by Sekino, Tripathy and Di Capua (2005, p. 3).

REFERENCES

Alauddin, R. (2005). Connecting People in Rural Communities through ICT: Grameen Telecom Experience. Presentation made at Workshop on Building e-Community Centers for Rural Development. Asian Development Bank Institute, Bali, December 8–14, 2004. Retrieved November 14, 2007 from http://www.adbi.org/files/2004.12.08.cpp.connecting.rural.ict.pdf

Grameenphone (2004). Grameenphone Annual Report 2003. Dhaka, Bangladesh: Grameenphone.

Grameenphone (2006). Grameenphone Annual Report 2005. Dhaka, Bangladesh: Grameenphone.

Grameen Telecom (2005). Grameen Telecom. Presentation slides provided by GTC, Dhaka. Retrieved September 7, 2005, from www.grameenphone.com

Keogh, D. and Wood, T. (2005). Village Phone Replication Manual: Creating Sustainable Access to Affordable Telecommunications for the Rural Poor. United Nations ICT Task Force. New York: The United Nations Information and Communication Technologies Task Force.

Knight-John, M., Zainudeen, A. and Khan, A.S. (2005). An Investigation of the Replicability of a Microfinance Approach to Extending Telecommunications Access to Marginal Customers, LIRNEasia research report. Retrieved October 11, 2007, from http://www.lirneasia.net/wp-content/uploads/2006/02/KnightJohn%20Zainudeen %20Khan%202005%20Replicability%20GP%20microfinance.pdf

Prahalad, C.K. and Hammond, A. (2002). What Works: Serving the Poor, Profitably. World Resources Institute. Retrieved October 15, 2007, from http://www. digitaldividend.org/pdf/serving_profitably.pdf

Pyramid Research (2005, October 14, a). MVNOs: To Host or Not to Host, That is the (MNO) Question. Analyst Insight. Cambridge, Massachusetts: Pyramid Research.

Pyramid Research (2005b). MVNOs in Africa? Retrieved October 11, 2007, from http://www.pyramidresearch.com/pa_09feb_mvno.htm?SC=PDO2a

Richardson, D., Ramirez, R. and Haq, M. (2000). Grameen Telecom's Village Phone Programme in Rural Bangladesh: A Multi-Media Case Study Final Report. TeleCommons Development Group (TDG). Gatineau, Canada: Canadian International Development Agency (CIDA).

Sekino, H., Tripathy, A. and Di Capua, M. (2005). Your Brand, Unplugged: A Strategic and Structured Approach to Launching an MVNO. Chicago: Diamond Cluster International.

Williamson, O.E. (2005). Transaction Cost Economics. In Claude Menard and Mary M. Shirley (Eds.), Handbook of New Institutional Economics. The Netherlands: Springer.

Zainudeen, A., Samarajiva, R. and Abeysuriya, A. (2006). Telecom Use on a Shoestring: Strategic Use of Telecom Services by the Financially Constrained in South Asia. WDR Dialogue Theme 3rd cycle Discussion Paper WDR0604, Version 2.1. Retrieved October 14, 2007, from http://www.lirneasia.net/wp-content/uploads/2006/02/Zainudeen%20Samarajiva%20Abeysuriya%202006%20teleuse%20strategies.pdf

Document(s) 9 of 21