AFFORDABILITY, GOVERNMENT CHARGES AND DIGITAL INCLUSION
This Chapter focuses on good practices aimed at increasing the affordability of broadband services and digital inclusion. It does so by presenting mechanisms that help reduce the costs of services and devices, taking into consideration taxation and government charges. It also examines the promotion of further digital and financial inclusion by using ICTs to address barriers that emanate from factors such as affordability or for people with special needs.
1. ICTs and specifically broadband are general purpose technologies that can be applied to a wide range of economic and social activities. Their positive effects on development have been well documented. More widespread use of ICTs translates into more social development and general economic growth. Given the large economic and social positive externalities of ICTs, governments should promote their use. This role requires, among other things, to make ICT adoption and use affordable: policies should aim to reduce the “affordability gap”, defined as how many people or households do not access ICT services because their cost exceeds their capability to incur in such expenses.
2. As competition generally brings about more investment, better quality, more supply, and lower prices, the creation of a competitive framework is the single most important initiative that authorities can take to increase affordability. The difference in consumer demand that theoretically exists between any given market structure and a fully competitive market is usually described as the “market gap”. It can be efficiently addressed with comprehensive policies that promote competition and lower barriers to entry. Yet, even with a perfectly competitive market, there may exist market failures preventing areas or groups that can be reached commercially without some form of intervention, commonly referred to as the “access gap” (Navas-Sabater et al., 2002).
3. The recognition that some areas or groups, given they live in isolated areas or cannot afford certain services, do not benefit automatically from competitive markets has prompted several interventions from governments, among them universal service and community access policies (further discussed in Chapter 4). This Chapter focuses on the particular market failure caused by the affordability dimension of the “access gap”, a major challenge especially to the urban poor in Latin America and the Caribbean LAC).
4. Apart from community access, universal policies and retailing innovations, affordability can also be influenced by taxation and other government-imposed charges, which will be treated in this Chapter. This can refer to all charges imposed by different levels of government at different stages of the value chain (among them, direct sales tax, spectrum usage, rights of way and other fees levied on communications networks deployment, import duties, labour taxes, universal service funds, regulatory levies and fees). Taxation by different government agencies throughout the production chain to provide telecommunication services is an important cost element in the sector, and thus directly influences affordability. For mobile communications, the GSM Association (GSMA) estimates that total tax and fee payments as a proportion of mobile revenues were on average 31.9% for a sample of 26 countries, of which seven countries are in the LAC region (GSMA & Deloitte, 2015) . The price of some smart-phones with greater functionality may also be a barrier for some disadvantaged groups to reap the benefits of digital inclusion, though this is being rapidly addressed by market forces as occurred with feature phones.
5. Closing the access gap and spurring digital inclusion requires not only ensuring that services are available and affordable. It also requires that these services are relevant and accessible for disadvantaged groups. While the Introduction addresses Sustainable Development Goals (such as targets for the digital inclusion of women) and Chapter 4 delves into the issue of connecting rural populations, this Chapter will analyse issues related to digital inclusion such as financial inclusion and accessibility for people with special needs. This discussion should be complemented by efforts towards other important ‘demand-side’ issues, such as skills (Chapter 8), digital local content (Chapter 9) and consumer trust (Chapters 12 and 13).
Key policy objectives for the LAC region
6. The main policy objective should be to encourage more people, businesses, and governments to increase their use of ICTs. This is easier said than done: penetration still lags behind in LAC countries, businesses have not fully incorporated ICTs in their processes, and usage is still low by international standards. This general objective can be disaggregated into more specific goals:
• Expand connectivity. Policymakers should promote the widespread adoption of ICTs by tackling the barriers that have hindered a more accelerated growth path. Actions could include the promotion of competition, skills to effectively participate in the digital economy, a more neutral taxation system, the development of local content, and incentives to promote ICT usage in the private and public sectors (addressed in Chapter 9 on business uptake and in Chapter 11 on digital government, as well as in Chapter 10 on e-health and Chapter 8 on education and skills for the digital economy).
• Increase affordability. Governments should aim at increasing affordability not only through expansion of services, but also through more specific policies and regulation that have a positive influence on lowering pricing of services and devices and through targeted redistribution mechanisms aimed at tackling market failures.
• Encourage financial inclusion. The use of mobile telephony and broadband for mobile banking can bring poor people into the formal financial system in a relatively low cost way, although challenges related to privacy and security need to be addressed (Chapter 13).
• Advance the inclusion of persons with special needs through the use of ICTs. The use of ICTs helps reduce many of the obstacles that people with special needs face, thus empowering them to be fully included in economies and societies. ICTs can work as an enabler of integration for persons with special needs.
Tools for measurement and analysis in the LAC region
7. ICTs are a rapidly changing industry, with constant innovation, where today’s cutting-edge technologies quickly become outdated. Governments need to constantly track and benchmark progress towards a set of measurable indicators. This, in turn, will aid the development and modification of national policies in a timely fashion to better meet objectives.
8. As affordability is a relative concept, there is no precise indicator that gives a complete picture. Prices in the market should be evaluated periodically to evaluate trends. Specifically, average and minimum available prices should be collected and compared with the distribution of income. This allows for a precise measurement of how many people and households would need to spend more of their income than an acceptable threshold to acquire broadband services. Additionally, international price comparisons are also a powerful measurement tool.
9. Taxation, at least partially, can be measured through estimated total taxes levied on total cost of ownership (TCO) and total cost of use (TCU), the difference between both indicators being the inclusion in TCO of upfront payments (activation and terminal equipment). Other fees along the value chain (as explained below) can be benchmarked with international data. As a reference, the GSMA has been publishing annual statistics on taxation of mobile services for over a decade.
10. Progress of access to ICTs by people with special needs can be measured through general indicators that track the percentage of individuals with special needs that have adequate access, as well as the existence of infrastructure that supports such access. The ICT Consultation in support of the High-Level Meeting on Disability and Development at the sixty-eighth session of the United Nations General Assembly (ITU, 2013) proposes a full set of indicators for monitoring and advancing the needs of people with disabilities/special needs, but the effective implementation of a that measurement agenda is still an unfinished task.
11. On the one hand, access to ICTs by people with special needs is based on impairment type technology, availability of accessible ICT products and services across markets, and affordability. On the other hand, progress towards enabling conditions also has to be measured, e.g. inclusion of ICTs in disability legislation, awareness rates of people with special needs on the use of ICTs, the share of GDP spent on research and development relating to ICT-enabled solutions for people with special needs, and total patents filed or awarded to ICT-enabled solutions for people with special needs. Other more specific indicators relate to healthcare, education, professional and lifelong learning, employment, independent living, government services, and participation in political and public life. Finally, financial exclusion can be measured based on data regarding the share of population using traditional as well as mobile banking.
41. The Sustainable Development Goals include, in Goal 9, the objective of significantly increasing access to information and communications technology and striving to provide universal and affordable access to the Internet in least developed countries by 2020. Thus, affordability of broadband services has become a worldwide priority and a task for all stakeholders; governments and businesses included.
42. Affordability is defined in terms of the relative burden of paying for broadband services with a given income, for a given set of benefits derived from access. Thus, broadband affordability can be increased by three different, non-mutually exclusive, ways: by increasing income, by lowering prices (especially entry-level prices), or by increasing the utility derived from broadband access (such as by shifting the perceived importance broadband access in people’s spending priorities).
43. Increasing income at the national level is one of the main objectives of almost every government. Though broadband uptake plays a relevant role in increasing income, governments take much more comprehensive approaches to economic development. Thus, increasing affordability through higher national income is beyond the scope of the present chapter.
44. Transfer mechanisms for targeted segments of the population – especially, the most disenfranchised, the elderly, women, rural households or even SMEs – could potentially increase affordability. These could be implemented through a voucher system (as was done in the United Kingdom from 2010 to 2015 for SMEs) or direct subsidies to operators to lower prices, which in effect have the same influence as income increases. This is the case for Colombia’s Plan Vive Digital for strata 1 and 2, the poorest of six strata into which the population is divided by considering several socio-demographic variables, and the Connected Households Program in Costa Rica, which aims to help people in vulnerable conditions from quintiles 1, 2 and 3, to access ICTs. General transfer schemes, such as the conditional cash transfer programs that have become widespread in the LAC region (as of last count, 18 countries had such programs) also increase affordability, but allow beneficiaries to choose how to spend the money. By construction, their impact on broadband uptake is lower than a direct broadband-only subsidy.
45. Apart from the transfer mechanisms outlined above, governments have many tools at their disposal to efficiently lowering broadband prices. The Alliance for Affordable Internet (A4AI), a global coalition of private, public, and non-for profit organisations , has identified five common success factors to increase broadband affordability addressed in several chapters of this toolkit:
• Enhanced competition. Competition has proven to bring about investment, better quality, and lower prices. Liberalised markets with an open and competitive environment, have, overall, more affordable services than markets with imperfect competition (see Chapter 3 on competition and infrastructure bottlenecks). Nevertheless, competition alone is not sufficient, as it needs to be effective. Independent regulators with enforcement capabilities, a clear licensing regime, technology and service-neutral rules, as well as a regulatory framework that minimises barriers to entry are common characteristics of markets where competition has thrived (see chapter 1 on regulatory frameworks and digital strategies). Since around 1990, most countries in the LAC region have embarked on a liberalisation of their telecommunications sector. Starting with the privatisation of the public national incumbent, they moved on to creating regulators (not all of them independent) and allowing competition. Some approaches worked better than others; a second wave of regulatory restructuring is now starting to reach the region. Competition and governance frameworks are now being reviewed. Mexico, with the creation of a constitutionally autonomous regulator and the implementation of asymmetric regulation, provides an example of how much the approach has changed in the last quarter of a century.
• Effective broadband strategies, usually set forth in national broadband plans. As shown in Chapter 1 on regulatory frameworks and digital strategies, many countries in the LAC region have developed broadband plans in the last decade. As explained in Chapter 1, for them to be successful, they need to address not only supply (deployment of networks, especially in underserved areas) but also demand (awareness, prices, digital and language literacy, relevant content, government services). These plans must be time-bound and measurable. One example is Colombia’s Plan Vive Digital, launched in 2010 and setting out three overarching goals to be achieved over five years: increase by a factor of three the number of municipalities reached by at least one fibre optic network; connect to the Internet at least 50% of microenterprises and SMEs, as well as 50% of households; and increase by a factor of four the number of broadband connections nationwide. It also aimed at having shared access in all towns of more than 100 inhabitants. Through a private-public partnership, it built a fibre optic network reaching more than 62% of municipalities. It also started overhauling the regulatory framework to allow for full convergence and established rules for promoting local software and content providers. Certain import taxes were reduced or eliminated. Digital literacy courses were developed and implemented. For the last published report, Colombia ranked second on the A4AI affordability index. Another example is Costa Rica’s PNDT, which defines goals such as “100% of the Elderly Daycare Centers with an Intelligent Community Centre in operation by 2021” and “100% of the CEN-CINAI (Nutrition and Education Centres – Comprehensive Care Child Centers) will have Technology Corners by 2021”. Each of these goals is assigned to an institution that is accountable for it, they have a defined budget and their implementation progress is evaluated annually.
• Efficient spectrum allocation. As described in Chapter 2, spectrum is a scarce resource essential for providing wireless telecommunication and broadcasting services. As such, it needs to be managed efficiently and, given its huge opportunity cost, should be made available promptly on a competitive and non-discriminatory basis. It should be assigned through transparent processes that guarantee that economic and social benefits are maximised. As a case of good practice in the region, Peru made slow progress in its telecommunications sector during the first fifteen years after privatization, but it has recently adopted new measures to catch up with the rest of the world. It has recently promoted competitive access to spectrum, even though it was a laggard in addressing the potential benefits of the digital dividend only a few years ago. The government has already auctioned the AWS, 2.5 GHz and 2.3 GHz bands, more than has been done in other countries in the region.
• Infrastructure sharing models. Deploying broadband networks requires large capital disbursements and ongoing operational expenses which in effect act as significant barriers to entry. As explained in chapter 3 on competition and infrastructure bottlenecks, infrastructure sharing can potentially reduce broadband provision costs (up to 80%, according to some estimates). Regulators have the tools to monitor, encourage, and when efficient, mandate infrastructure sharing, not only for passive (e.g. towers) but also for active infrastructure (e.g. backbone); or even go further by mandating other types of resource sharing, such as spectrum (described in Chapter 2). Sharing translates into a more efficient use of capital, accelerates deployment, is more environmentally friendly and, most importantly, translates into lower industry costs that allow for lower prices, and thus, increase affordability. Passive infrastructure sharing is not widespread in the LAC region. Many countries have attempted, but have not fully accomplished, setting rules for sharing towers, ducts, and poles. As noted in Chapter 3, in 2012 Chile published the new “Antenna Law” (Ley de Antenas), which not only transferred certain regulating powers to local authorities, but established basic rules for mobile telecommunications tower deployment. Among the several aspects that were regulated was mandatory sharing of towers.
• Universal access to affordable Internet services. For countries for which broadband prices, even after accounting for some or all of the previous success factors, remain a barrier for adoption, shared services play an important role for uptake. These services, either for free or for a minimum fee, can be made available at community centres, public plazas, schools, libraries, and other anchor institutions. They are important in very poor urban areas as well as rural communities. More information on extending broadband access is included in Chapter 4. Increasing benefits derived from broadband access
46. A third way of increasing affordability is by changing the relative value of broadband services and increasing the utility (benefits) derived from accessing the Internet. The higher the benefits, the more people will be willing to pay for broadband access, changing the relative importance of Internet in their spending priorities, provided that incomes are high enough to allow for expenses further than very basic goods and services. People must have a reason to access the Internet: user awareness and digital literacy are critical, but so are relevant content and experiences. Governments can play a fundamental role in increasing the benefits of accessing the Internet, from providing basic services and simplifying the interactions between governments and citizens, to sending and receiving payments. Such actions will increase demand and increase the value of broadband as an enabler of development and inclusion.
Taxation and other government-imposed charges
47. Given the potential influence ICTs have on social and economic development, as well as on reducing inequality, government charges in the sector should be a matter of national policy where the cost-benefit analysis of the government charges should be carefully analysed. There are some general guidelines that help maximise adoption and use and minimise distortions:
• The tax regime should be simple, transparent, and easy to understand. Simple systems are easier to comply with, minimise arbitrage opportunities and evasion, and decrease operating costs.
• The taxation regime should be fair, not imposing unreasonable burdens to any party and should not be regressive.
• Sector specific taxes should be avoided unless it is clear that benefits are larger than costs. The analysis should include externalities arising from higher penetration and use of broadband. In some cases, higher tax rates on one sector might even mean lower government revenue (through lower spending in that sector and lower sector growth).
• The same argument applies for sector specific tax incentives, which distort the allocation of capital in the economy. Even accounting for spill-over effects and externalities, incentivising ICTs through tax subsidies or spending programs might not be the best approach to achieving public policy objectives.
• Administrative fees should be set as close as possible to the real cost of providing the services. Extracting government fees throughout the production process could potentially lead to inefficient allocations of capital. It could stifle growth and investment, and could potentially increase ICT usage inequality.
• Taxation regimes should be competitively neutral. Even in the face of sector specific taxation, all players should be imposed the same levies. They should also strive for technologically neutrality.
48. A lack of access to formal financial services does not mean that unbanked or under-banked people do not conduct any type of financial activities. People without access to formal financial services usually find alternative mechanisms for saving and protecting themselves. Informal services to manage financial resources are known to this population but they are often risky and expensive.
49. ICTs have been influencing the expansion and convenience of financial services since the early stages of computing and telecommunications. Automated Teller Machines (ATMs), Telephone Banking, Internet Banking (e-Banking), and Point of Sale (POS) have made transfers, withdrawals, and debit and credit payments effortless activities. These applications continue to evolve and they bring a new set of solutions and challenges. Online peer-to-peer (P2P) transactions, crowdsourcing, virtual wallets, and digital money, and completely branchless banks have been reducing costs of traditional banking and changing the way consumers with access to fixed and/or mobile broadband access financial services. Most importantly, ICTs are able to address two of the most important barriers to financial inclusion: affordability and availability.
50. In the centre of the disruptive effect of ICTs for financial services are mobile financial services, or mobile money applications. Mobile money applications comprise not only basic transfers and transactions offers, but also savings, credit and insurance. Despite the possibilities offered by mobile money to include a large proportion of the unbanked population, there are still many barriers that block widespread adoption, regulation being the major one. In order to unlock the potential of mobile money in the LAC region, the following good practices could be encouraged:
• Allowing non-traditional financial institutions to provide financial services to business and personal customers: adapting financial frameworks for non-banks is key for harnessing the potential of ICTs;
• Simplifying the process of opening accounts: “Know your customer” (KYC) requirements, such as formal address and identification, increase operation costs, reducing the affordability of services and acting as a deterrent for vulnerable populations;
• Reducing capital requirements for financial services providers: requirements need to be proportional to the risks undertaken in order to enable smaller agents and non-banks to offer these services;
• Relaxing conditions for agents that can execute certain operations, such as cash in and cash out, in order to expand the geographical coverage of simple financial services;
• Improving the conditions for international remittances, one of the fastest growing uses of mobile banking: regulations tend to be restrictive and many countries allow inbound remittances but forbid outgoing services; and
• Promoting interoperability of systems: while mandating the implementation of specific interoperability models rather than spurring a market based approach may slow deployment, initiatives that encourage interoperability are desirable.
51. In this ecosystem, governments can play an important role in spurring mobile banking, as they have the capacity to use these systems to transfer money, make payments (e.g. salary payments, social security, benefits and redistribution disbursements, subsidies) and receive payments (e.g. services, taxes, fines). They have the potential to catalyse the system by adding significant volume that could allow service providers to reach economies of scale faster.
52. For widespread adoption, the value proposition needs to be compelling for consumers, the interface has to be user friendly, transactions should be speedy, and the system ought to be trusted by users. Building such an ecosystem is not an easy task and involves many stakeholders.
53. In the LAC region, some policy makers have realised that mobile financial services could provide a steady route for financial inclusion and are adapting their regulatory frameworks. Colombia and Brazil are examples of that (Box 6).
Individuals with special needs
54. According to the World Health Organization, approximately 5% of the world’s population has disabling hearing loss, and more than 4% are visually impaired (of which about 13% are blind). Broadband, and, more generally, ICTs, could help to reduce the exclusion and inequality that individuals with these, and other physical and cognitive challenges, face. However, in order to enable all people to fully realise their potential, broadband access without services and applications adapted to the special needs of users is not enough. In order to improve labour market opportunities and social empowerment of those people with special needs, the full potential of ICTs must be seized to meet that goal.
55. Accordingly, several goals should be outlined and specific good practices followed:
• Improve awareness, since the early stages of conception, of developing and designing ICT products and services compatible and adaptable to the needs of people with special needs;
• Include and engage people with special needs and their organisations in the design of public policies;
• Ensuring that governments lead by example and incorporate into their day-to-day routine ICT products and services that fit the needs of people with special needs. Including requirements that take into account the needs of people with special needs in public procurement is a key tool for fostering inclusion and developing a more robust market accessible ICT products and services.
56. Article 27 of the United Nations Convention on the Rights of Persons with Disabilities (2006) recognizes the rights of people with disabilities to work on an equal basis with others, including the opportunity to make a living by work “freely chosen or accepted in a labour market” in an environment that is open, inclusive, and accessible to people with disabilities. The Convention also prohibits all forms of employment discrimination, promotes access to vocational training and opportunities for public, private, and self-employment, and calls for reasonable accommodation in the workplace, among other provisions.
57. As documented by several studies, both in developed and developing countries, working age adults with special needs experience significantly lower employment rates and much higher unemployment rates than those without special needs. Lower rates of labour market participation are one of the important pathways through which disability may lead to poverty. ICTs help people with special needs obtain employment by opening new fields of work, providing better access to education and training for existing opportunities, and allowing governments and non-governmental organizations (NGOs) to track and organize employment initiatives. People with special needs use ICTs to work, such as retail associates, telecommuting service agents, and self-employed entrepreneurs with online storefronts. In terms of training and social mobility, ICTs promote distance-learning and reduce the cost of certification for various workforce positions. Finally, governments and NGOs use ICTs to ensure accessibility initiatives are on track and to respond to evolving trends in the labour market and the ‘special needs’ community.
58. Technology is creating new tools for the diverse population of individuals with special needs, be they physical, intellectual or developmental. In some countries, a broadband connection coupled with the capabilities of Internet Protocol-based technology has created a unique opportunity to apply powerful technologies to expand the possibilities available to individuals who struggle with disabilities and cognitive impairment. The United States (Box 7), along with several other OECD countries, has been at the forefront of spurring inclusion and advancing the integration and independence of people with physical and cognitive disabilities and special needs.
59. Colombia also provides a good example of initiatives implemented to improve the accessibility of ICT products and services for people with disabilities (Box 8).
12. A crucial aspect of broadband uptake in the LAC region is affordability. Affordability is a relative concept that should be gauged against income in the population. It reflects the monetary effort that households and businesses should make to access the service. In the OECD-IDB Questionnaire, when asked about the main barriers for the uptake of online and ICT services in middle and low income groups of the society, LAC countries ranked “high prices for devices/services” as the more pronounced hindrance (Figure 1).
13. As a rule of thumb, prices that exceed 5% of disposable income substantially dampen demand (Galperin, 2012). Wide income inequalities exacerbate the situation, as low income households tend to have a much lower income than the average. In Brazil and Mexico, the bottom of the pyramid (defined as those households located in the bottom three income deciles) has an average household income of around 30% of the national average. As both national averages stand at around USD 1,400 PPP per month, a 5% maximum expenditure in telecommunication services would translate into around USD 20 PPP. Such an amount allows for notably limited access.
14. High income households (two top deciles), who have telecommunication services penetrations generally above 90%, tend to account for around 50 to 60% of total household spending in telecommunication services. As a percentage of their disposable income, the amount spent is usually well below the 5% threshold. The bottom of the pyramid accounts for only 5 to 10% of total telecommunication revenues. On average, household spending is well below the 5% threshold due to the fact that ICT penetration is scant. Of those households that actually spend on ICTs, the average spending significantly exceeds the threshold (Box 5).
15. Although mobile telephony charges have decreased steeply in recent years, fixed telephony and broadband have witnessed, in contrast a less substantial reduction on prices. Mobile operators have taken a role to invest and develop service innovations in LAC through the launch of offers such as prepaid services and daily tariffs for mobile broadband. As a result, more affordable services are now offered and at least 8o% of the mobile access in the region is based on prepaid (GSMA, 2015).
16. Nevertheless, in terms of affordability, average offers in the market tell an incomplete story. A much better picture of the situation is given by the least expensive option available in each market, under the assumption that access is important even if consumption amounts are capped (and usually very expensive on a per unit basis). In the second quarter of 2015, the cheapest available offers for fixed broadband ranged from USD PPP 14.92 in Brazil to more than USD PPP 50 in Argentina and Venezuela. For mobile broadband (1 GB plans), plans ranged from USD PPP 3.35 in Costa Rica to more than USD PPP 30 in Venezuela and Ecuador (Figure 3).
17. For fixed broadband, in the five years to 2Q2015, prices for the cheapest plans did not change substantially in the LAC region. Three countries (Nicaragua, Bolivia and Honduras) saw large decreases, but they are still three of the most expensive countries. Nine countries saw marginal increases, whereas seven saw marginal decreases. The average cheapest regional price went down by less than 10% (excluding Venezuela) in the same period (Figure 4).
18. In relative terms, six countries had fixed broadband minimum prices of less than 2% and six above 5% of GDP per capita. For mobile broadband, all countries except one offer plans priced under 5% of GDP per capita, with ten of them under 2% (Figure 5). Roughly speaking, these numbers translate into around half those percentages in terms of income per household. As households buy other telecommunications products (mainly, voice services), these minimum expenditure percentages are a mild burden for the average consumer, but an almost unsurmountable one for the bottom of the pyramid.
19. Affordability is still an important hurdle for broadband adoption in the LAC region, as prices are still high when compared to income levels and wealth distribution, especially for the most economically disenfranchised segments of the population. A number of LAC countries have started to address this issue. Many operators in the LAC offer “social” service plans (“popular” in Brazil, “social broadband” in Costa Rica). Some governments have subsidised access devices (tablets for students in Colombia and Mexico, while Costa Rica has a subsidy to buy a computer with Internet access for families assessed to be living in poverty). Most countries have free Internet access in certain public places (in Costa Rica there are four programs financed by Fonatel pursuing that objective – Connected Communities, Equipped Public Centers, Connected Public Spaces and Solidary Broadband). There are cases of increasing affordability by lowering taxation (low income plans in Brazil and Colombia’s “Vive Digital”). Though not specific to telecommunication services, most countries have income redistributions policies that have also increased affordability of ICT services.
Taxation and other government-imposed charges
20. Taxation is necessary in any economy to finance current government spending, support public investment, and redistribute income among citizens. That being said, taxation affects supply and prices, impacting demand and reducing affordability. Hence, the fiscal regime that applies to the ICT sector has to be put in perspective with other national goals. Government intervention also needs to consider spending programs, including income support to low-income households.
21. ICTs are general purpose technologies that have a positive measurable effect on growth and productivity. From a theoretical perspective, as these technologies have positive economic externalities and generate other social benefits, they are a potential candidate for goods and services that could be promoted by the state, including by reducing the tax burden on supply, adoption, and usage. The argument is the following: a more neutral tax structure that takes into account positive externalities, lowers barriers to affordability and increases investment, which could bring economic and infrastructure development, could increase productivity and employment; affecting education, healthcare, and overall development, which in turn could bring about growth and additional tax revenue for government.
22. In practice, however, many governments apply additional and sometimes substantial industry specific taxation on telecommunication services. Revenue collection may be carried out efficiently and at a low cost, as the sector is a significant part of the economy concentrated on a handful of very large formal corporations. For example, the two largest telecommunication companies in Brazil accounted for 6.3% of the revenues collected from the 20 largest taxpayers in 2014 (11.2% if Petrobras, the state-owned oil company, is excluded). Higher tax revenues collected by a small number of large taxpayers in the short term often may take precedence over longer-term potential economic and social benefits for development and may have other detrimental effects where it is, for example, not neutral (e.g. favouring one technology over another).
23. This creates a dilemma, as overtaxing the sector to generate current fiscal revenue conflicts with applying a more neutral taxing approach (or, at least, applying the general taxation regime) that promises to have a more positive effect, less distortive, on the economy in the future. Most countries in the LAC region have chosen the first option. Most studies arguing for neutral taxation, however, concentrate on the value of the second option.
24. There are many ways to develop a taxonomy of taxes. This report groups them into three almost non-overlapping categories. It is important to stress that many payments to governments are not strictly considered taxes, but their effect is similar to levying a tax so they are included in the following classification.
25. The first are general taxes are the broad-based taxes that usually apply to all activities in the economy and should be considered the basis for evaluating how much distortion special taxes cause. These taxes comprise, on consumers, value added taxes (VAT), sales taxes, or their equivalent. On companies, these are regular taxes that are imposed on profits, as well as non-recoverable taxes on investments goods (e.g. product-type VAT). Labour contributions (social security, payroll taxes, etc.) and other taxes that apply to all players in the economy also belong in this category. Of course, actual broad-based taxes often have numerous exemptions and exclusions for distributional, administrative or political reasons
26. The second, special taxes or fees to consumers, which are taxes levied on the sales price and take several different forms, all of which have a negative effect on demand:
• On overall spending on a specific product or service. This is usually an additional percentage on a consumers’ bill, in addition to VAT. For example, Mexico applies a 3% “special tax” on all telecommunications services except Internet and public and rural telephony. It was imposed in 2010 together with other tax rate increases (VAT and income tax). Since 2003, Colombia has applied a 4% differentiated VAT on mobile services. This tax finances sports at the national and state level. The Dominican Republic charges a 10% excise tax and a 2% tax to finance the regulator and projects for universal service. In El Salvador, at the end of 2015, the government approved the application of a 5% tax on telecommunication services to finance security plans.
• On usage. These are special taxes on usage, which can either be charged on the actual price (sometimes at different rates for different services – calls, SMS, data) or on a per-event basis (call, SMS); they are sometimes defined as a percentage of price, sometimes as a fixed amount. For example, Jamaica imposes a surcharge of around USD 0.004 per mobile voice minute.
• On terminal equipment and handsets. A terminal device is indispensable for access to telecommunication networks; these devices (modems, handsets, dongles, cable boxes, tablets, computers and so forth) are expensive and represent an important overall percentage of the total cost of access to ICTs, even though they could potentially be financed or subsidised by operators (at the cost usually of raising switching costs or charging more for services). Taxes on such devices become a barrier to access (especially for people with lower incomes) and can hinder take-up of newer services and technologies. These taxes can take several different forms (e.g. higher VAT rates, “luxury tax,” constant amount per unit, higher import duties). Some countries have gone even further, applying different rates for different types of devices (e.g. feature phone vs smartphone, or even exemptions if the price is under certain amount) or even different origins (e.g. imported vs locally manufactured). For example, in 2010 Argentina imposed a 26.63% import duty on mobile phones, LCD monitors, and PCs; it has recently been reduced to 20.5%. Ecuador imposes quotas on the import of smartphones. Many of these taxes are driven by the need to increase government revenue or influence the international balance of payments, but others are used to give incentives to local production or to address current account imbalances.
• On activation or on installed base in service. Some countries impose a one-time fee per new connection. For example, Jamaica has a 0.8% surcharge on the value of the SIM. Brazil charges R$26.83 (around USD 8) per new connection. Some countries in the LAC region apply yearly fees for active users; for example, Brazil has imposed this fee (of R$13.42, or around USD 4 per connection per year) for many years.
27. The third and final classification, are special taxes/fees to network and service providers. Operators and service providers pay a myriad of different government charges. Some of these payments are explicitly labelled as taxes, while others are linked to permits, the use or exploitation of publicly owned resources, or to special regulatory conditions. This category can be grouped in five types:
• Special taxes on revenues or profits. Certain countries apply a tax as a percentage of revenues on network and service providers. Brazil, on top of the USF contribution, imposes a levy of 0.5% for a technological development fund. Sometimes, a different tax rate applies to profits from telecommunication service providers. Panama applied different rates until 2013.
• Regulatory contributions:
– Universal service funds contributions. As shown in Chapter 4 on the extension of broadband access, operators are sometimes obliged to make payments for funds aimed at increasing universal service. These payments take several forms, but they are usually calculated as a percentage of revenue, such as Brazil’s 1% FUST contribution.
– Licensing and permit contributions. Most regulators charge administrative fees for issuing permits and licenses to operate. In many countries these fees are either for processes that could be considered unnecessary or are above the cost of providing the license.
– Inspection fees. Some countries charge a fee (either on a per event basis or on a yearly basis) to inspect and verify networks. Brazil’s Fistel (Telecomunications Inspection Fee), which charges a fee for verifying installation (TFI) and an annual payment for inspection (TFF).
– Other regulatory levies. Some regulators impose a charge to support regulatory activities. There are certain countries that impose charges for other goals, such as Brazil’s Technological Development Fund (Funttel), which receives 0.5% of revenues to foster innovation in the sector, or Costa Rica’s Fonatel contribution, which can range from 1.5% to 3% of the gross income of operators, depending on the projects to be financed each year.
• Exploitation of publicly owned resources. The deployment of telecommunications networks entails the use of many publicly owned resources, such as buildings, rights of way, public spaces and land, poles, towers, ducts, etc. Governments usually set charges on these resources, sometimes well above costs; although strictly speaking they are not taxes, they do have similar effects on the production function. Many of these levies represent a substantial part of local income for cities and municipalities, so setting them close to true costs might prove politically difficult. As a general rule, it is recommended that government levies for these concepts be set at the true costs (the so-called Diamond-Mirrless Efficiency Theorem ). Of course, when publicly owned resources are scarce (as the appropriate public space to deploy towers could sometimes be), other mechanisms to reflect scarcity should be used instead. See chapter 3 on Competition and infrastructure bottlenecks for good practices in this area.
• Spectrum fees. The rights to use spectrum are the ultimate example of exploitation of publicly owned resources, and as such, deserve to be treated separately. Spectrum can represent a significant cost of building and operating a telecommunications network. Chapter 2 addresses the most important aspects of efficient spectrum management. The OECD recommends using auctions as the most efficient way to charge the right price and let spectrum be assigned to those who value it the most. Whereas some countries license spectrum with only an upfront payment, others have opted for a two-part fee, composed of an initial payment (usually the amount offered by the bidder during the auction process) and annual spectrum usage fees. Assuming the cost of capital is the same for public and private funds, in terms of net present value these two amounts are theoretically equivalent. Nevertheless, such annual government charges impose costs incurred by all players and thus, it most likely trickles down to final prices; it could also have effects on competition, as on a per unit basis, spectrum that is more heavily used pays lower spectrum unit fee. This is an important consideration for smaller players, who, on a proportional basis, pay higher spectrum annual fees than larger players.
• Special import duties and custom taxes. In most LAC countries, a significant percentage of network equipment (hardware and software alike, such as switches, base stations, computer systems) is imported. These taxes affect the production value-chain and, as such, should be carefully considered; they could even distort certain decisions, such as using more spectrum instead of installing more radio base stations. Import duties could also translate into underinvestment, compromising quality and supply (especially in remote areas and less profitable deployments).
28. There is an additional tax which does not fit into the taxonomy described above, as it mostly affects directly consumers living abroad. Especially in highly regulated environments with monopolistic provision of services, some countries apply high surcharges on international incoming traffic. Such a measure would have negative implications for the provision of international telecommunication services (OECD, 2008).
29. While less prevalent in the LAC region than in Africa and some parts of Asia, the practice of applying surcharges to the termination of incoming international calls can also lead to market distortions. In some cases, they entail additional costs for the state due to enforcement (e.g. where an arbitrage opportunity is created such as in the case of so-called SIM box fraud). In addition this can lead to double taxation for consumers in the country making the call including in the LAC region. The end result is higher prices and supressed demand, often affecting the diaspora (who tend to be less well off in the countries where they are living) when calling family and friends in the countries applying the surcharges.
30. With so many different taxes and charges applied to telecommunications services, a straightforward cross-country comparison is extremely hard. An aggregate comparison can be done by evaluating how much tax is levied on handset acquisition and service costs over the expected life of the service contract (total cost of ownership – TCO). Though this approach reveals how substantial the additional charges are, it does not allow estimating the level of distortion caused by the different charges.
31. According to the GSMA, which periodically assesses taxes in the mobile sector worldwide, LAC countries charged on average 20.1% on TCO in 2014. For the set of countries analysed in previous studies , from 2010/2011, total tax on TCO increased from 17% to 18.4% (Figure 6). For the 27 OECD countries tracked by the GSMA (excluding Turkey, which currently taxes mobile services at 38.32%), total tax went from 20.0% to 20.95% in the same period.
32. Most LAC countries apply some sector specific taxes along the production chain. Most of these taxes end up affecting end-user prices, which in turn decrease demand and affordability. These charges also have implications for the deployment of networks, which have a negative effect on supply, quality, and coverage. They can also distort choices if not applied in a technologically neutral manner, something that is particularly important in an industry with dynamic technological change.
33. While communication services have become widespread in the LAC region (109% penetration of mobile telecommunication services, for example, according to GSMA), a large proportion of low income populations are still largely excluded from financial services. Average banking penetration for high-income OECD countries is 94%; in the LAC region, an average of 51.3% of the adult population has accounts in financial institutions (e.g. banks) (World Bank, 2014).
34. Although there has been considerable growth (around 10 percentage points) in account ownership in financial institutions in the region (World Bank, 2014), some population groups remain at the top of exclusion levels in the use of financial services – women that are not heads of households, youth, pensioners, students, people with lower income and education levels, and the rural population (OECD, 2013).
35. ICTs, especially mobile telephony and broadband, are becoming key enablers of financial inclusion. Online banking, payment and transfers are increasingly used means to access financial services across the world. Mobile services have played a central role in connecting lower income populations. Mobile financial services are bringing financial services to millions of unbanked and under-banked people. As of 2014, more than 250 services had been deployed in 89 countries, most of them in the Sub-Saharan region, home of the successful case of M-Pesa, but LAC has also seen its share of mobile financial service deployments, with currently around 50 active ones (Figure 7) (GSMA, 2014).
36. Despite having a mobile financial accounts penetration of only 2.1% (World Bank, 2014), the LAC region has witnessed the highest growth of mobile financial services subscriptions in the world, with the number of financial accounts growing by 50% between December 2013 and December 2014 to reach 14.9 million registered accounts (GSMA, 2014). It should be noted though that the number of active accounts is less than half of that figure, that is, 6.2 million, and small in comparison with the 61.9 million accounts in Sub-Saharan Africa.
37. The LAC region has the particularity of having high levels of people using accounts to receive government transfers (9%). Among other regions in the world, it lags only high-income OECD countries, with 17.2% of people receiving transfers in this fashion. The LAC region is also ahead of other regions, with the exception of the OECD countries, in respect to use of credit card and debit card, 18% and 27%, respectively (World Bank, 2014).
38. Along with having a more developed financial sector and use of financial services, the implementation of government programmes of cash transfers in the LAC region has probably acted as an important force for bringing people into the formal financial sector, hence minimising the demand for mobile financial services when compared to other regions of the world. As will be explored further on, governments can play an important role in harnessing ICTs, mobile telephony and broadband to spur more inclusive development.
Individuals with special needs
39. The prevalence of individuals with special needs in Latin America and the Caribbean have been reported to range, although methodologies may vary, from 2.9% in the Bahamas to 23.9% in Brazil (CEPAL, 2012). In total, around 12%, or 66 million individuals, in the Latin America and Caribbean live with at least one disability, such as, visual and mobility limitations, hearing and speaking disabilities and intellectual and developmental limitations. This last group, that includes people with mental or cognitive disabilities, is according to CEPAL the ones that find the most challenges in integrating themselves in social and economic activities in the LAC region.
40. A key challenge for the LAC region is in collecting basic statistics on people with disabilities in the region. Gathering disaggregated data on their specific limitations, gender, income, use of technologies is an even more difficult task for certain countries. This lack of knowledge on the condition that these individuals face contributes to the fact that people with special needs continue to be part of the groups with lower incomes. When tackling the issue of digital inclusion, initiatives that target enhancing both affordability and accessibility of ICTs are crucial for enabling all individuals to benefit from the digital dividends.
60. This Chapter focused on good practices aimed at increasing the affordability of broadband services and digital inclusion. It presented three different ways on how affordability could be increased: by increasing income (such as through transfer mechanisms for targeted segments of the population); lowering prices of broadband services (such as through enhanced competition, effective broadband strategies, efficient spectrum allocation, infrastructure sharing models and universal access programmes); and increasing the utility of accessing the Internet (such as by enhancing digital awareness, literacy and the provision of local content).
61. Additionally, this Chapter analysed the effects of government charges such as taxation in final prices of broadband services and ICT devices. Good practices to maximise adoption of broadband services in this area relate to developing simpler, more transparent and neutral tax regimes; not imposing unreasonable burdens to any party; avoiding sector specific taxes; and setting administrative fees close to real costs of providing the services.
62. Finally, good practices were presented on furthering digital and financial inclusion. On financial inclusion, it was stated that to unlock the potential of ICTs for financial services it would be necessary to : adapt financial services frameworks to include non-traditional financial institutions; simplifying processes of opening accounts; reducing capital requirements for financial service providers; promoting interoperability of systems; and encouraging user friendly and trust-worthy systems. On expanding digital inclusion, particularly for people with special needs, it was highlighted that it is was crucial to improve awareness of developing and designing ICT products and services compatible to the needs of people with special needs, including and engaging people with special needs in the design of public policies, and ensuring that governments lead by example in this matter.
A4AI (2014), Affordability report 2014. Alliance for Affordable Internet. Available at http://a4ai.org/affordability-report/report/DIRSI BROADBAND PRICE DATABASE (2015), Information available at http://dirsi.net/web/web/en/news-and-events/news/new/dirsi-publishes–broadband-in-latin-america–market-prices-and-trends-.
FCC (2016) “Twenty-first century communications and video accessibility act” www.fcc.gov/general/twenty-first-century-communications-and-video-accessibility-act-0 (accessed on february 29th, 2016)
GALPERIN, H. (2012), Precios y calidad de la banda ancha en América Latina: Bechmarking y tendencias. Documento de trabajo Nº 12. Centro de Tecnología y Sociedad, Universidad de San Andrés, Argentina.
GSMA (2014), Mobile Taxes and Fees. A Toolkit of Principles and Evidence. Available at http://www.gsma.com/publicpolicy/wp-content/uploads/2014/02/Mobile-taxes-and-fees-A-toolkit-of-principles-and-evidence_fullreport-FINAL1.pdf
GSMA (2015), 2014 State of the Industry. Mobile Financial Services for the Unbanked. Available at http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/03/SOTIR_2014.pdf
GSMA and DELOITTE (2015), Digital inclusion and mobile sector taxation 2015. Available at http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/06/Digital-Inclusion-Mobile-Sector-Taxation-2015.pdf
GSMA (2016) GSMA database www.gsma.com/mobilefordevelopment/programmes/mobile-money-for-the-unbanked/insights/tracker (accessed on February 29th, 2016).
Hammond (2000), Reassessing the Diamond/Mirrlees Efficiency Theorem, Stanford University. Available at http://web.stanford.edu/~hammond/prodEff.pdf
Hellen Keller National Center “HKNC Communications Technology for People who are Deaf-Blind” https://www.youtube.com/watch?v=-OE6zr1TXQo
Horrigan, J. B. (2010), “Broadband Adoption and Use in America”, OBI Working Paper, United States Federal Communications Commission Publishing, https://apps.fcc.gov/edocs_public/attachmatch/DOC-296442A1.pdf
INEGI (2008), Encuesta Nacional de Ingresos y Gastos de los Hogares (ENIGH), Instituto Nacional de Estadística y Geografía, http://www.inegi.org.mx/est/contenidos/Proyectos/encuestas/hogares/regulares/enigh/
ITU (2013), Taxing Telecommunication / ICT Services: An Overview. Available at https://www.itu.int/dms_pub/itu-d/opb/pref/D-PREF-EF.TAX-2013-PDF-E.pdf.
ITU (2013), The ICT Opportunity for a Disability-Inclusive Development Framework. Synthesis report of the ICT Consultation in support of the High-Level Meeting on Disability and Development of the sixty-eighth session of the United Nations General Assembly. Edited by the International Telecommunications Union. September 2013. Available at https://www.itu.int/en/action/accessibility/Documents/The%20ICT%20Opportunity%20for%20a%20Disability_Inclusive%20Development%20Framework.pdf
ITU & G3ICT (2014), Model lICT Accessibility Policy Report. Available at http://bit.ly/1p1tXiF.
OECD (2008), “Network Externality Premiums and International Telecommunication Traffic Exchange”, OECD Digital Economy Papers, No. 152, OECD Publishing. doi: 10.1787/20716826
UNITED NATIONS (2006), Convention on the Rights of the Rights of Persons with Disabilities, http://www.un.org/disabilities/convention/conventionfull.shtmlUNITED NATIONS (2015), Transforming Our World: The 2030 Agenda for Sustainable Development. August 2015. Available at http://www.un.org/pga/wp-content/uploads/sites/3/2015/08/120815_outcome-document-of-Summit-for-adoption-of-the-post-2015-development-agenda.pdf
World Bank (2014), “The Global Findex Database 2014: Measuring Financial Inclusion Around the World”, World Bank Policy Research Working Paper, No. 7255, The World Bank Group, Washington.
AHCIET and DELOITTE (2012), Taxation and Telecommunications in Latin America. Available at http://cet.la/blog/course/tributacion-y-telecomunicaciones-en-latinoamerica/
BARRANTES, R. (2007), Análisis de la demanda por TICs: ¿Qué es medir la pobreza digital?, Pobreza Digital: las Perspectivas de América Latina y El Caribe. Diálogo Regional Sobre Sociedad de la Información/IDRC-CRDI.
BARRANTES, R., GALPERÍN, H., AGÜERO, A. and MOLINARI, A. (2007), Asequibilidad de los servicios de telefonía móvil en América Latina, Oportunidades móviles: Pobreza y acceso telefónico en Latino América. Diálogo Regional Sobre Sociedad de la Información/IDRC-CRDI.BARRANTES, R. and GALPERÍN, H. (2008). Can the poor afford mobile telephony? Evidence from Latin America, Telecommunications Policy 32, 521-530.
BONHMAN, H. (2008), Income distribution and the diffusion of networks: An empirical study of Brazilian Telecommunications, Telecommunications Policy 32, 600-614.
GALPERIN, H. and MARISCAL, J. (2007), Digital Poverty: Latin America and Caribbean Perspectives. IDRC-CRDI/Practical Action Publishing.
GALPERÍN, H., MARISCAL, J. and BARRANTES, R (2014), The Internet and Poverty: Opening the Black Box. Diálogo Regional Sobre Sociedad de la Información/IDRC-CRDI.
GSMA (2012), La telefonía móvil y el sistema tributario en América Latina. Available at http://www.gsma.com/publicpolicy/wp-content/uploads/2012/12/Mobile-telephony-and-taxation_overview_SPANISH_WEB.pdf.
GSMA and Katz, R.L. (2013), Mobile Broadband at the Bottom of the Pyramid in Latin America. Available at http://gsma.com/newsroom/wp-content/uploads/2013/12/GSMA_LatAM_BOP_2013.pdf.
IDB (2014), The Broadband Effect Enhancing Market-based Solutions for the Base of the Pyramid. Inter-American Development Bank. Available at https://publications.iadb.org/handle/11319/6642?locale-attribute=en#sthash.DvSXK46U
McKinsey&Company (2014), “Offline and falling behind: Barriers to Internet adoption”, Technology, Media and Teelocm Practice.
1. The average for the eight LAC countries included in the GSMA/Deloitte study is 28%. The countries are Panama, Uruguay, Ecuador, Chile, Colombia, Brazil and Jamaica.
2. See http://www.gsma.com/publicpolicy/tax/research-and-resources.
3. Connected Households Program, launched as one of the programs from the National Strategy for Universal
2. See http://www.gsma.com/publicpolicy/tax/research-and-resources.
3. Connected Households Program, launched as one of the programs from the National Strategy for Universal
Access and Solidarity Service, known as crdigit@l.
5. See Hammond (2000) “Reassessing the Diamond/Mirrlees Efficiency Theorem” available at http://web.stanford.edu/~hammond/prodEff.pdf
6. For many developing countries import duties and customs taxes are an important source of revenue and their reduction is likely to entail significant short-term revenue loss for those countries. Hence an abolition/reduction of special import duties should be carefully considered and coupled with measures to meet incompressible revenue needs.
7. See for example OECD “Time to terminate termination charges?” 13 June 2014. http://oecdinsights.org/2014/06/13/time-to-terminate-termination-charges/
8. The 2011 study did not include Panama, Jamaica, and Uruguay
9. More on www.a4ai.org.
10. This is a clear example of the Laffer curve. A Laffer curve refers to the concept of taxable income elasticity. It states that tax revenue will be zero at the extreme rates of 0% and 100% and that there should be at least one rate that maximizes taxation revenue. This implies that potentially lower tax rates could translate into higher government revenues, or, vice versa, that higher tax rates do not always increase revenue.