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Socio-Economic Planning Sciences xxx (2009) 1–16

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Socio-Economic Planning Sciences

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The impact of Universal Service Obligations and International Cross-subsidies

on the dispersion of telephone services in developing countries
Boris Ramos a, *, Khalid Saeed b,1, Oleg Pavlov b, 2
a
Escuela Superior Politécnica del Litoral, Campus Gustavo Galindo, Km. 30.5 Vı́a Perimetral, Guayaquil, Ecuador
b
Social Science and Policy Studies Department, Worcester Polytechnic Institute, 100 Institute Road, MA 01609, USA

a r t i c l e i n f o a b s t r a c t

Article history: This paper re-evaluates the telecommunication policies often applied to create regional dispersion of
Available online xxx services in developing countries. We observe that failure to consider the complexities of the regional
telecommunication systems in creating policies and investment strategies has increased the telecom gap
between urban and rural regions worldwide. In particular, the teledensities of rural telecommunications
Keywords: in developing countries have remained very low in spite of support through universal service obligation
Rural telecommunications
fees and cross-subsidization from international services. As traditional methods for economic analysis
System dynamics
and modeling have failed to identify mechanisms that improve telephone dispersion in these countries,
Developing countries, Universal Service
Obligations we use a system dynamics modeling approach to deal with complexities of the situation in order to
Cross-Subsidies evaluate how Universal Service Obligations (USOs) and International Cross-Subsidy (ICS) policies affect
Telecom policies telephone densities. We demonstrate that these policies may be counterproductive due to the structure
of the telecom system itself. We also show that, when market-clearing pricing is combined with USOs
once the urban telephone density reaches a minimum threshold, the dispersion of rural telecommuni-
cations can be considerably improved.
Ó 2009 Elsevier Ltd. All rights reserved.

1. Introduction the outside world with telecommunications has been found to

In the past several decades, telecommunications have often
been seen as a luxury in developing countries while investments in
basic needs and infrastructure have, understandably, received
much attention [31]. As a result, developing countries account for
approx. 40% of the total number of telephone lines although they
contain about 80% of the world’s population [42]. The situation is
worst for the poorest segment of these countries, often referred to
as ‘‘low income,’’ ‘‘least developed’’ (LDCs), or ‘‘Fourth World.’’ They
have only 5% of the total number of telephone lines worldwide
while containing 40% of the world’s population.
Conditions in the rural regions of LDCs are perhaps the most
severe. Although more than 50% of their population is rural, only
12% of the telecom infrastructure serves such areas [42]. There is,
however, growing recognition that telecommunications are
essential for economic development, as well as the political and
social integration of remote areas. Indeed, linking remote villages to
* Corresponding author. Tel.: þ11 593 4 2269858; fax: þ11 593 4 2853078.
E-mail addresses: bramos@espol.edu.ec (B. Ramos), saeed@wpi.edu (K. Saeed),
opavlov@wpi.edu (O. Pavlov).
1
Tel.: þ508 831 5563; fax: þ508 831 5896.
2
Tel.: þ508 831 5234; fax: þ508 831 5896.
improve the quality of life of local populations [13,34]. The
importance of telecommunication networks for rural development
suggests the need to search for more effective policies and invest-
ment strategies designed to increase telephone penetration in
these areas.
Selected policies have been implemented by governments and
autonomous telecom service organizations in developing countries
in efforts to facilitate diffusion of telecommunication services.
These include Universal Service Obligations (USOs) [12,15] which
use resources generated in urban regions to subsidize the deploy-
ment of telecom infrastructure in more rural areas. Increases in
these obligations generally lead to increases in the percentage of
telecom investment assigned to rural communities. Obviously,
then, USOs decrease the proportion of telecom investment made in
urban centers.
A second well-known policy involves internally cross-subsi-
dizing (ICSs) some services, such as local phone calls, with long
distance and international calls in order to increase the demand for,
and penetration of, telephone lines [6,12]. This policy has been
implemented in both rural and urban areas of such developing
countries as Ecuador, Honduras, and Bolivia. In such cases, local
traffic has been subsidized with revenue generated by international
flows [40–42].

0038-0121/$ – see front matter Ó 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.seps.2009.08.003

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2 B. Ramos et al. / Socio-Economic Planning Sciences xxx (2009) 1–16
The need for a systems framework to analyze the complexity of
rural telecommunications, and the importance of focusing on
economic and social aspects vs. on technology alone has been
recognized [1]. Several studies have thus found that the gap in
connectivity arises from a lack of technology as well as from
selected social, economic, and organizational factors [25]. It is
therefore unwise to assume that the technology provision in and of
itself will reduce the existing telecom gap.
Long-term telecom planning using a non-linear system
dynamics approach is often seen to be more robust than ‘tactical’
approaches, which are reactive, short-term, and linear [19]. System
Dynamics has been successfully applied to design and evaluate
long-term policies for telecommunications [2,7,14,28], and is used
in this paper specifically for investigating the impact of USOs and
ICSs on the growth of rural telecom infrastructure.
Cross-subsidies in telecommunications have been regarded as
a useful mechanism for expanding networks in rural and poor
regions of developing countries [16], even when several service
organizations are competing for market share [8]. Application of
USOs and ICSs is expected to create positive externalities for the
expansion of services. In particular, they translate into network,
call, and social externalities, which should support rural develop-
ment and increase social efficiency and benefit [6,31]. The question
addressed in this paper is whether the expected improvement will
actually occur in the long term given that there are differences in
regional per capita income, willingness to pay, regional telephone
deployment and operating costs, and telephone deployment
delays.
Simulation experiments with our model show that those ICSs
capable of creating below-cost monthly rental fees (MRFs) (by
keeping international tariffs above cost) are counterproductive as
they reduce service penetration due to financial constraints. A USO
policy was found to have similar impact. We did find, however, that
if (1) market-clearing pricing is used, while (2) USOs are applied
once the urban telephone density reaches approx. 30%, and (3) all
urban demand for connections has been met, then USO policy can,
indeed, accelerate rural penetration. Conversely, without these
preconditions, the same approach appears to be rather ineffective.
2. The telephone dispersion problem in developing countries
The low levels of telephone access, the gap between urban and
rural telephone densities, and large waiting lists of telephone
subscribers show that substantial unmet telephone demand is
quite pervasive in developing countries [31]. Demand is influenced
by MRFs and the usefulness of the telephone service to its users
[38], where the latter depends on the number of subscribers and
telephone density [3,20,31]. On the other hand, the supply of
telephones is constrained by available financial resources, which
are, in turn, a function of the revenues and operational costs of the
telecom service organization [15].
The principles of welfare economics call for setting the price of
each product or service equal to its marginal cost, with output
expanded to meet resulting demand at those prices. Further, there
should be no cross-subsidization, whereby one service is priced
above marginal cost to finance the supply of a service at a price
below marginal cost [17].
In the telecommunications industry, however, it is widely
believed that cross-subsidizations are desirable in order to spread
the benefits of access to disadvantaged and remote rural areas,
where provision costs are generally higher than in urban areas
[31,37]. In addition, cross-subsidies are seen as a useful mechanism
to expand the network in poor areas where an efficient tax system
is not in place, a condition which is typical in developing countries
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Economic Planning Sciences (2009), doi:10.1016/j.seps.2009.08.003
[16]. The total traffic generated in such areas is, however, relatively
low; hence, income from service provision is also low [31,37].
In several developing countries, cross-subsidization has been
applied by overcharging for international long distance, while
providing local access below cost, and by using USO fees to invest in
less profitable rural areas [15]. Such policies have been imple-
mented in the past in order to increase telephone density and
promote universal service in telecommunications. Importantly, the
latter is a part of the World Trade Organization (WTO) agreement of
1997, and is intended for the development of telecom infrastructure
in rural areas of the world [37]. It requires the universal availability
of public telecommunications networks by individual households,
and accompanied by non-discriminatory and affordable prices [12].
USOs and ICSs are telecom subsidies that have been typically
applied to those telephone services regulated by governments, and
mandated to provide affordable and accessible service, such as
fixed ‘wired’ telephones [4]. At the same time, cellular telephone
service, which is generally less regulated, is not significantly
affected by such cross-subsidies. Understandably, private telecom
providers normally do not wish to extend service to unprofitable
rural areas as their focus is on generating profit rather than deliv-
ering public goods [21,30].
2.1. International Cross-subsidies (ICSs)
Regulators and telephone operating entities have traditionally
favored charging below cost MRFs in urban and rural regions, and
overcharging for international services [12]. In most countries, this
ICS has been preferred to that from domestic long-distance service;
hence, international prices have often been set significantly higher
than those for local long-distance. This has occurred despite the
cost difference between the two being insignificant [35].
This same ICS is justified in the name of creating positive
externalities by making basic services affordable and, thus
achieving greater penetration among low-income users [6]. The
World Bank has reported many cases of countries’ international
revenues from its net settlement component representing more
than 50% of the telephone operator’s income [27]. These below-cost
MRFs have even been applied in urban areas where willingness to
pay for telephone service is higher than the MRF. Telecom
companies in Argentina, for example, report that local access
represents more than 25% of the revenue generated in urban areas
[11]. In addition, it has also been established that urban telephone
access, which depends on the MRF, is considerably more inelastic
than in rural areas [9,11].
Table 1 provides a list of countries that have applied cross-
subsidization by holding their MRFs at values considerably lower
than operating costs and, at the same time, overcharging for
international service. This situation is observed in the table’s
metrics (8) and (9). For instance, metric (8) in Zambia is 20.25,
which indicates that the operating costs per line are more than 20
times higher than the MRF in urban areas. On the other hand, it can
also be observed via metric (9) that the international price of a 3-
min phone call from Zambia to the U.S is 2.57 dollars, which is over-
priced and has thus been used to create the ICS.
Similarly, the operating costs per line in Botswana are more than
15 times higher than MRF in urban areas (metric (9) for Botswana is
3.6 dollars). Finally, the operating costs per line in Bolivia are 25
times higher than the MRF in urban areas, where the price of a 3-
min phone call to the U.S is 3.7 dollars. As expected, this is used to
cross-subsidize the under-priced local phone service as indicated
by its MRF.
It is also observed that, in selected countries, the MRF is
significantly lower than is the willingness to pay for telephone
access in urban areas, which suggests that local telephone access is
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B. Ramos et al. / Socio-Economic Planning Sciences xxx (2009) 1–16 3

Table 1
ICS in selected developing market economies.

Country Urban income Urban access Monthly rental Urban Access Urban Urban cost per Urban Operating Cost of call to US
per capita (US $) willingness to fee (US $) W. to Pay/Mo. population Linie (US $) operating cost/Mo. (US $ per 3 min)
Pay (US $) Fee Ratio density (Pop./km2) costs (US $) fee ratio (year 2000)
Zambia 498 2.07 1.14 1.82 58 921 23.02 20.25 2.57
Bolivia 1230 5.13 1.62 3.17 47 1003 25.07 15.50 3.7
Ecuador 1708 7.12 6.20 1.15 284 515 12.87 2.07 4.9
Honduras 1599 6.67 2.43 2.74 252 535 13.39 5.50 4.2
Thailand 8155 33.98 2.33 14.60 262 529 13.21 5.68 2.5
Botswana 5088 21.20 2.53 8.39 17 1548 38.71 15.31 3.6
Colombia 2329 9.70 2.68 3.62 277 519 12.97 4.84 2.2

W: Willingness, MO: Monthly Rental, Pop: Population.

Source: World Telecommunications Development Report [40]. Data estimated from World Telecommunications Indicators Database [42] and World Development Indicators
[41].

under-priced. This situation can be seen in metric (4) which shows
the ratio of willingness to pay for telephone access to monthly
rental fee in urban areas. In this case, the willingness to pay for
telephone access has been assumed at 5% of monthly income per
capita, as suggested by the International Telecommunications
Union [22]. For example, metric (4) in Botswana is 8.39, which
indicates that access willingness to pay is eight times higher than
the MRF in urban areas. Interestingly, this multiple is approx. three
in Bolivia and 14 in Thailand. Ecuador, has the lowest value for
metric (4) due to an increase in the MRF through tariff rebalancing
(in year 2000).
2.2. Universal Service Obligations (USOs)
In the previous section, we introduced the ICS as a type of cross-
subsidy between international and local telephone services within
companies offering these services. Now, we discuss the USO, which
is another form of cross-subsidy that considers the transfer of
resources from urban to rural regions, or from profitable to
unprofitable areas under the domain of the telecom operator.
Governments and regulatory authorities have created USOs to
generate positive network, call, and social externalities while
guaranteeing service above a specified threshold to rural areas. One
of their objectives in doing so is to accelerate rural development,
and thus improve social efficiency at the national level. Recall that,
in theory at least, the USO gives priority to investment in rural
areas, often above stated cost/revenue limits, while requiring cross-
subsidization from more profitable urban regions [15].
Of interest here, such obligations have been directed to
increasing rural telecom capacity despite evidence of higher oper-
ating costs and lower willingness to pay relative to urban areas.
This process is expected to generate more rapid expansion of the
rural telecom infrastructure, although it will likely do so at the
expense of service quality in more urban and high-density areas
[11].
Table 2 presents a listing of countries that have applied USO,
where, as previously noted, the ratio of willingness to pay to
operating cost is significantly higher in urban vs. rural areas. This
situation can be observed in the telecom metric (5). This metric for
Botswana in urban areas is 2.20, which is much higher than 0.03,
the same metric for rural areas. This indicates a higher willingness
to pay for telephone services and lower operating costs per line in
urban vs. rural areas of the country. Similarly, in Honduras, the
same metric for urban areas is 1.99, which is more than ten times
that for rural areas. One reason for this, of course, is that per capita
incomes are higher in urban areas. At the same time, operating
costs and capital expenses are higher in rural areas as a result of
lower population densities.
Given the above developments, Table 3 provides details of USO
applications in selected developing countries from Asia, Africa, and
South America. We note that several countries in Asia have adopted
USOs in order to expand rural telecommunications in a variety of
ways. The government of India, for example, requires that at least
10% of total installed capacity occur in rural areas [12,24]. In Nepal,
the telecom regulatory authority mandates that operators provide
rural telecommunications to the entire country through a contri-
bution of two percent of total annual income to the rural telecom
fund [23]. The license of the telecom operator in Bangladesh obliges
the installation of one exchange in each sub-District, or Thana [15].
In Pakistan, the telecom operator was mandated to install 150,000
new telephone lines in rural areas to reach villages with over 1000
inhabitants, and achieve a rural telephone density of 0.2 lines per

Table 2
Indicators of selected developing market economies with USO.

Country Income per Willingness to Population density Operating cost (US $) Willingness to pay/
capita (US $) pay (US $) (Pop./km2) Operating costs

Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural
Togo 488 147 8 2 29 65 13 22 0.64 0.11
Nepal 1217 111 20 2 188 153 15 16 1.37 0.12
India 1199 155 20 3 865 247 9 13 2.15 0.19
Bangladesh 1143 120 19 2 2183 768 8 10 2.53 0.21
Pakistan 884 182 15 3 641 121 10 17 1.46 0.18
Bolivia 1230 644 21 11 47 3 25 8 0.82 0.12
Ecuador 1708 310 28 5 284 19 13 37 2.21 0.14
Honduras 1599 311 27 5 252 32 13 30 1.99 0.18
Thailand 8155 256 136 4 262 103 13 18 10.28 0.23
Botswana 5088 212 85 4 17 2 39 107 2.20 0.03

Pop: Population.
Source: Data estimated from World Development Indicators [41].

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Table 3 in Ecuador are mandated to deploy rural telecommunications as

USO policies in selected developing market economies.
Country Universal Service Obligation
Togo The government of Togo recently mandated the extension
of rural telecommunications by providing telephones
within a distance of 5 km to major centers by 2010.
Nepal Telecom operators are obliged to make a contribution of 2%
of their total annual income to the rural installed capacity
will be in rural areas.
India 10% of total installed capacity will be in rural areas.
Bangladesh The license of operation obliged the installation of one
exchange in each sub-District (Thana).
Pakistan The installation of 150,000 new telephone lines in rural
areas to reach villages with more than 1,000 inhabitants,
and achieve a rural telephone density of 0.2 lines per 100
inhabitants by 1998.
Bolivia The privatized telecom company ENTEL should spend 40%
of its expansion budget on rural infrastructure.
Ecuador Rural telecommunications is part of the operational license
of national telecom operators.
Honduras The country has a telecom Rural Master Plan, which gives
rural areas priority for investment.
Thailand The expansion of telephone service is to cover all villages
with two lines in each sub village.
Botswana The government mandated the telecom operator to serve all
villages with a population greater than 500.
Source: Kayani and Dymond [15], Peha [24], The Sun News On-Line [36], Nepal
Telecommunications Authority [23].
100 inhabitants by 1998 [15]. In Thailand, the government
mandated the expansion of telephone service to cover all villages
with at least two lines in each sub-village [15].
The experience of African and Latin American countries in the
implementation of USOs has been similar to that of Asia. The
government of Botswana, for example, mandated the state-owned
telecom company to serve all identifiable demand in villages with
a population greater than 500 by the year 2000 [15]. The govern-
ment of Togo recently mandated the extension of rural telecom-
munications by providing telephones within a distance of 5 km, by
2010, to every important administrative and economic center [36].
In Latin America, several countries have implemented USOs
either in their national programs or as part of the carrier’s license
agreement. The privatized telecom company in Bolivia, ENTEL, for
example, has spent 40% of its expansion budget on rural areas. The
government of Honduras has a telecom Rural Master Plan, which
gives rural areas priorities for investment, while telecom operators
part of their license agreement [15].
2.3. Performance of USOs and ICSs in developing countries
Table 4 shows that the ICSs applied in developing countries
appear to have had little effect on improving the dispersion of
telephone services. For instance, in Zambia, the overall, as well as
urban and rural telephone densities were reduced, in spite of the
application of the ICS indicated in Table 1. The MRF in Zambia is
approx. 20 times less than the operating cost, and two times lower
than the willingness to pay for telephone access in urban areas. The
below cost MRF is implemented by charging high prices for inter-
national traffic. In the same manner, in Botswana, Bolivia and
Honduras, the overall telephone densities experienced little
improvement in spite of implementing MRFs that are much lower
than the urban operating costs and the willingness to pay for
telephone access.
The application of USOs has also done little to improve overall
telephone densities, and, especially penetration of rural telephone
lines in developing countries, as observed in Table 4. For instance, in
Bangladesh, the penetration of telephone lines in rural areas grew
from 0.03 to 0.05 lines per 100 inhabitants during the period 1993–
2002. Clearly, such minimal change did not reduce the service gap
between urban and rural regions. In Bolivia and Ecuador, rural
telephone densities were reduced which, in turn, increased the
urban-rural gap. Similarly, in Nepal, this gap failed to improve while
in Togo and Pakistan overall telephone densities showed little
change. Importantly, this occurred despite application of the USO
policies described in Table 3.
Given these conditions, our proposed model investigates if
society benefits in all instances, or under specific conditions, in
terms of achieving higher telephone densities and reduced rural-
urban telephone gaps by (1) overcharging for international services
while charging MRF below cost, and (2) by applying USO policy.
3. A system dynamics model of the regional
telecommunications system
Our proposed model considers the case of a government or
privately owned telecom monopoly whose tariffs are fixed and
regulated by an authority. While many countries have imple-
mented this model in their public sectors, it is important to note
that USOs and ICSs also exist in privatized markets when mandated

Table 4
The dispersion of telephones in selected developing market economies with USO and ICS.

Countries Telephone Density Urban Telep. Density Rural Telep. Density % Rural Lines Rural/Urban Telep. Telecom Policies
Lines per 100 inhab. Lines per 100 inhab. Lines per 100 inhab. Density Gap

1993 2002 1993 2002 1993 2002 1993 2002 1993 2002 USO ICS
Zambia 0.92 0.81 1.89 1.70 0.30 0.24 20 18 0.160 0.140 O
Togo 0.45 1.05 1.59 3.12 0.01 0.08 1 5 0.004 0.025 O
Nepal 0.37 1.41 4.07 12.69 0.00 0.02 1 1 0.001 0.001 O
India 0.89 3.98 3.20 10.38 0.12 1.49 10 27 0.037 0.144 O
Bangladesh 0.21 0.46 0.99 1.84 0.03 0.05 10 8 0.026 0.026 O
Pakistan 1.24 2.5 3.68 6.25 0.09 0.39 5 10 0.025 0.063 O
Low income 0.68 1.70 2.57 6.00 0.09 0.38 8 12 0.042 0.066 5 1
Bolivia 3.28 6.37 5.39 10.23 0.60 0.33 8 2 0.111 0.032 O O
Ecuador 5.45 11.02 8.92 16.97 1.21 0.89 10 3 0.136 0.053 O O
Honduras 2.1 4.81 4.45 7.83 0.40 1.67 11 17 0.090 0.213 O O
Thailand 3.93 10.5 13.24 27.00 1.75 6.11 36 46 0.132 0.226 O O
Botswana 3.12 8.28 5.86 13.18 1.22 3.57 23 22 0.208 0.271 O O
Colombia 8.46 17.94 8.95 24.08 7.37 1.33 27 2 0.823 0.055 O
Middle Income 4.39 9.82 7.80 16.55 2.09 2.32 19 15 0.250 0.142 5 6

Inhab: Inhabitants; Telep.: Telephone.

Source: World Telecommunications Indicators Database [42], Kayani and Dymond [15], Peha [24], The Sun News On-Line [36], Nepal Telecommunications Authority [23]. Data
estimated from World Development Indicators [41].

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Rural Telephone population is the source of potential customers; these customers

Demand then become subscribers in the waiting list; and subscribers in the
+ waiting list are available to become connected customers.
The actual demand for telephone lines includes connected
customers, customers on the waiting list, and potential
+ consumers. As in any market, the population becomes ‘potential
consumers’ when the utility of the service exceeds its price. Price
Rural Telephone +
represents the MRF for postpaid telephone service. The potential
Deployment customers become customers in the waiting list after they are
Rural Traffic
+ willing to pay for the activation charges and/or telephone devices
[38]. Willingness to pay for telephone access has been defined as
5% of household income [12,15], a measure more recently sup-
- + ported by the International Telecommunications Union (ITU)
+ [22].
Financial Customers in the waiting list become connected subscribers
Resources
when they get connected, which depends on the connecting
- +
+ capacity of their telephone company [14]. Connected subscribers
thus represent that part of demand which is serviceable under
+ current conditions of supply [29]. They create the revenue that
feeds into the financial resources of the telephone company, as
Urban Telephone shown in Fig. 1.
Deployment Potential new customers adjust towards indicated demand for
Urban Traffic
+ new lines, which is a function of total population, telephone density
+ as a network externality factor, the MRF, and income per subscriber.
Urban income per subscriber depends on income per capita, which
is, in turn, a function of non-agricultural income. In addition, it is
+
assumed that the impact of telephone density on rural access
Urban Telephone demand is lower than it is in urban areas, which is borne out by
Demand evidence concerning the income and preferences of rural pop-
ulations in developing countries [9,11,39].
Fig. 1. A simplified sector map of the regional telecom system.
The impact of the MRF on indicated demand is determined by its
elasticity of demand. Not unexpectedly, this has been observed to
by telecom regulatory authorities. Discussion of the model involves be higher in rural vs. urban areas due to differences in income levels
four sectors: 1) Telephone Demand, 2) Telephone Deployment, 3) and the perceived usefulness of the service [3].
Telephone Traffic, and 4) Financial Resources. These sectors are
replicated for two regions: Urban and rural. At an aggregate level, 3.2. Telephone deployment
interactions between/amongst the sectors can be represented by
the causal diagram of Fig. 1. Telephone deployment in both urban and rural regions is rep-
The structure of each sector is described below. Detailed resented by the two-stage process of Fig. 3. New orders of tele-
mathematical relationships underlying the model appear in phone deployment depend on both the shortfall and supply of new
Appendices A (Equations) and B (Behavioral Relationships). telephone connections – a decision rule widely used for managing
supply chains [18]. As the deployment process involves consider-
3.1. Telephone demand able delay, a stock of the same in progress is included in the supply
chain. It is important to note that such delay varies between urban
The Telephone demand sector shown in Fig. 2 is represented as and rural regions, due mainly to population density and the avail-
a three-stage process, both in rural and urban regions, where the ability of human resources and complementary infrastructure

Activation and Device Connecting Rate

Acceptance Delay
Potential Customers Waiting List Connected Subscribers

New Potential Rate of New Rate of Connecting

Customers Rate Customers Customers

Actual Demand Network

Externality Impact
Demand
Adjustment
Demand Fraction
Indicated Demand Income per
Subscriber
Monthly Rental
Population Fee

Fig. 2. Telephone demand sector.

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Deployment Delay
Telephone Deployment in Progress Telephone Capacity

New Orders of Telephone Connecting Rate

Telephone Deployment Deployment Rate
Cost of
Telephone Line
Telephone Capacity
Supplied Telephone Financial
Adjustment
Capacity Resources

Telephone
Demanded Waiting List
Capacity Planned
Telephone Capacity
Fig. 3. Telephone deployment sector.

[5,33,39]. For this reason, deployment delay is generally higher in 3.4. Financial resources
rural vs. urban regions. Note: urban population density in all
developing countries is obviously a function of the urban land area, The financial resources sector, represented in Fig. 5, assumes
which we assume to be 10% of the total land area, as suggested by that all revenue remains in the system. Cash balance is increased by
Kayani and Dymond [15]. income from telephone services and decreased by operating costs
The number of orders in the waiting list, which is a function of and the amount of money invested in expansion.
the connecting rate of telephone lines and the flow of potential Income from services includes net settlements received from
customers interested in becoming new subscribers, determines the imbalance of outgoing and incoming international traffic,
demanded telephone capacity [14]. The financial resources avail- income from national and international traffic generated in both
able, and the cost of a telephone line, determine the supplied urban and rural regions, and income from MRF. The income from
telephone capacity, which is often lower than demanded capacity national and international telephone traffic depends, in turn, on
due to economic constraints. Indeed, in developing countries, the the total number of connected subscribers in urban and rural
supply of telephone lines is generally lower than existing demand areas, telephone traffic per call, and the price of telephone traffic
[29]. It is also important to note that the cost of deploying a tele- per call.
phone line is normally higher in rural vs. urban regions because of Operating cost is represented as a percentage of capital costs.
lower population densities and less efficient infrastructure The world average was used in our model, being approx. 30% of
[6,10,15]. These considerations are incorporated into our model’s capital costs [15]. Typically, such costs per line have been related to
cost structure. investment per line, which is a function of the average cable
The actual telephone capacity planned is a function of capacity distance from the central office to subscribers [15]. It is defined as
supply and demand. It is equivalent to supplied capacity if supply is a function of the population density and a referential number of
lower than demand. On the other hand, if/when financial resources telephone lines per central office, which we assume to be 5000,
improve and supply exceeds demanded capacity, the latter then a typical size used for urban and rural central offices [15]. As a point
equals planned capacity. of reference, the cost of a telephone line in urban areas of Ecuador
has been previously estimated at below $US 500 [26]. Profits from
telecom operations are accumulated in cash balance, which is
reinvested in telecom expansion [13]. We also assume that the
3.3. Telephone traffic
telephone company allocates a fraction of its cash balance to
This sector, represented in Fig. 4, assumes that the MRF of the
telephone service includes free local minutes, and that rural
subscribers enjoy rates that are lower than corresponding urban
rates [6]. Telephone traffic, both in urban and rural areas, is Telephone Traffic
a function of income per subscriber [15]. However, as previous Adjustmet Time Telephone Traffic per Service
research indicates, the traffic per person is lower in rural vs. urban
areas [13,33,39]. Traffic Adjustment
Telephone density increases the traffic of calls made by
subscribers, and, hence, increases their expenditure for service [32]. Price of Telephone Referential Telephone
Traffic per Service Outgoing
The higher the density, the greater are expenditures per line as well Traffic per Service
International Traffic
as on telephone traffic in general. Further, an increase in urban
traffic is generally more sensitive to telephone density than is rural Traffic Expenditure
per Service Incoming
traffic. International Traffic
Incoming international traffic per line generated overseas is
also included in this sector. We here define it as a function of Income per Expenditure on
Subscriber Telephone Traffic Incoming/Outgoing
both outgoing international traffic per line, and the incoming– Int Traffic Ratio
outgoing imbalance of international traffic. It has been observed
Network
in several developing countries that this imbalance has generated Telephone Density
Externality Impact
more than 50% of telephone company revenue via net settle-
ments [27]. Fig. 4. Telephone traffic sector.

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B. Ramos et al. / Socio-Economic Planning Sciences xxx (2009) 1–16 7

Connected
Subscribers
Telephone
Capital Costs
Income from Investment
Income from TelephoneTraffic
Monthly Rental Fee
Cash Balance

Telecom Income Telecom Expenses

Operating Costs

Fig. 5. Financial resources sector.

expansion of infrastructure in urban and rural areas depending on
the USO policy being implemented.
4. Understanding the Universal Service Obligation and the
International Cross-Subsidy problem
As stated earlier, USO and ICS policies have not led to increased
dispersion of telecom services in developing countries. Many
experiments were performed using our proposed model to better
understand the impact of these policies on the growth of telephone
services. In particular, we simulated USO options with varying
percentages of total investment assigned to rural and urban
regions, as well as several levels of ICS implemented via below
cost MRF.
The base case, with no subsidy policies in place, replicates the
reference mode, which is characterized by low levels, and slow
growth of rural and national telephone densities. This behavior is
generated by the model as structured in Section 3. In doing so, we
seek to replicate the historical behavioral pattern described in
Section 2.
4.1. The impact of implementing Universal Service Obligations
USO policy, shown in Figs. 6 and 7, is simulated by increasing the
Rural Investment Fraction (RIF) from 3.5%, which represents the
base case, to 20%, and then to 65%. These increases are made despite
the fact that the ratio (willingness to pay)/ (operating costs) is
significantly higher in urban vs. rural areas.
Note from Figs. 6 and 7 that increasing RIF from 3.5% to 65%
rapidly reduces both national and rural telephone densities (in the
long run) relative to the base case. This occurs since an increase in
this obligation reduces revenue from telecom services and the
financial resources available for telecom investment. The decrease
in financial resources reduces urban telephone density while also
diminishes density in rural areas in the long run. These reductions
then obviously lower overall telephone density.
It is important to note that an RIF of 20% (substantially lower
than the full 65%), also reduces overall telephone density, but
performs better in the long run than does an RIF of 65%. This results
since lower RIF values are better able to maintain overall revenues
at a higher level, which affects rural telephone density in the long
run. At the same time, RIF values higher than 65% produce a similar
behavior.
When RIF is increased, funds allocated for rural telecom
investment rises with respect to the base case in the short run, as
indicated by Feedback Loop 2 of Fig. 8. The additional telecom
investment assigned to rural areas produces a lower number of
new telephone lines than when this investment is assigned to
expansion of the urban telephone network. This is due to the
higher costs and deployment delays of rural vs. urban telephone
lines.
Improvement in the supply of new rural telephone lines clearly
increases the number of rural connected subscribers. They, in turn,
improve the rural traffic per line with respect to the base case due
to the impact of network size on traffic. This is indicated by positive
Feedback Loop 2 in Fig. 8.

0.126
Rural Investment
Fraction = 20
Phone s / 100 Households

Rural Investment
Fraction = 20 for
TIME < 48 Months Rural Investment
Fraction = 65
0.072
Monthly Rental Monthly Rental
Fee = $ 0.8 Fee = $ 0.5

Base Case

0.018
0 45 90 135 180
Months

Fig. 6. Rural Telephone Density.

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6
Base Case

Monthly Rental

Phones / 100 Households

Fee = $ 0.8
Rural Investment
Fraction = 20 for
TIME < 48 Months
3 Monthly Rental
Fee = $ 0.5
Rural Investment
Rural Investment Fraction = 20
Fraction = 65

0
0 45 90 135 180
Months
Fig. 7. National telephone density.

An increase in rural connected subscribers and rural traffic and continuously. For this reason, an increase in the RIF during the
per line improves telephone company revenues from rural areas, first four years alone is applied (see Figs. 6 and 7). It is observed in
as indicated by positive Feedback Loops 2 and 8 in Fig. 8. Fig. 6 that rural telephone density is improved in the short run, but
However, the extra numbers of such subscribers and corre- is reduced in the long term. On the other hand, from Fig. 7, this
sponding levels of traffic per line generate less revenue were it policy reduces national telephone density during the entire study
an urban network. This results because the willingness to pay in interval.
rural areas, which is a function of per capita income, is lower
than in urban areas. 4.2. The impact of implementing International Cross-Subsidies
Developing countries often have weak policy implementation
institutions. Thus, a policy may often not be applied consistently As described in Section 2, ICS is implemented by having
a below cost MRF both in urban and rural areas while keeping
the price of international telecom traffic high and at above cost
Rural +
Rural levels. Implementation thus occurs despite the fact that urban
Connecting Susbcribers willingness to pay is higher than MRF with demand for urban
Rate
+ access relatively inelastic. The impact of this policy is shown in
+ +4
+ Rural Network the normalized values of Policy 2 in Table 5. Note that both the
-6 - Externality Impact + ratios of urban operating cost to MRF and urban willingness to
Waiting List of Rural +
Rural Tel Expenditure pay to MRF are greater than one. MRF is thus lower than
Subscribers
+ Rural Rate of New Increase from Size of the operating costs and the willingness to pay for access in urban
Customers Network
Rural Telephone + areas.
Capacity Rural Income + +8 Performance of the ICS is shown in Figs. 6 and 7. It can be
-
+2 + observed in Fig. 6 that reducing both the urban and rural MRF from
+ Rural Monthly
Fee Rural Traffic one to 0.8 and 0.5 US $, respectively, reduces rural telephone
Rural Telecom + density with respect to the base case. This occurs since reduction of
Investment +
the urban MRF diminishes the company’s revenue and financial
+ Financial +
Rural Investment
+ Resources + resources, which are used for rural telecom investment. Reduction
Fraction + of financial resources also diminishes both urban telecom invest-
- +
ment and telephone density, as seen in Table 5. Reduction of rural
+ Urban Traffic
Urban Telecom Urban Monthly and urban telephone densities, in turn, reduces the country’s
+ +
Investment Fee overall telephone density with respect to the base case, as shown in
Urban Income +7 Fig. 7. Finally, it can be seen that the higher the reduction of urban
+ -
+1 MRF, the greater is the decrease in regional and national telephone
+
Urban Telephone Urban Rate of New densities.
Capacity Customers Urban Tel Expenditure
+ Increase from Size of the When urban MRF is reduced, it increases the ratio of urban
+
Waiting List of Urban Network operating cost to MRF as well as the ratio of urban willingness to
Subscribers
Urban Network + pay to MRF with respect to the base case, as observed in Policy 2 of
- Externality Impact Table 5. As a result, an increase in international cross-subsidization
+ -5
+ +3 + occurs where the company becomes more dependent on above-
Urban
+ cost international traffic and revenue.
Connecting Urban
A decrease in urban MRF diminishes the company’s resources
Rate Subscribers
which reduces the gain in positive Feedback Loop 7 of Fig. 8. This
Fig. 8. Causal structure of demand and supply of a regional telecom system. then diminishes urban telephone investment and the number of

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Table 5
Performance of selected telecom policies in developing countries.

Policy Years

Telecom indicators 0 0 (N) 9 15

Base Run Rural telephone density 0.02 1.00 1.78 3.67
Urban telephone density 1.02 1.00 4.11 10.54
National telephone density 0.42 1.00 4.51 12.32
Telephone density gap (Rural/Urban) 0.02 1.00 0.41 0.35
Operating cost/Monthly rental fee (Urban) 2.50 1.00 1.00 1.00
Willingnes to pay for telephone access/Monthly rental fee (Urban) 1.00 1.00 1.10 1.40
Willingness to pay for telephone Service/Operating cost (Urban) 1.12 1.00 1.07 1.39
Willingness to pay for telephone service/Operating cost (Rural) 0.12 1.00 1.00 1.02
Financial resources (Millions) 10.00 1.00 0.95 3.86
1. Universal Service Obligation RIF ¼ 25% Rural telephone density 1.00 4.17 6.72
Urban telephone density 1.00 2.27 2.99
National telephone density 1.00 2.56 3.62
Telephone density gap (Rural/Urban) 1.00 1.88 2.35
Operating cost/Monthly rental fee (Urban) 1.00 1.00 1.00
Willingnes to pay for telephone access/Monthly rental fee (Urban) 1.00 1.10 1.40
Willingness to pay for telephone service/Operating cost (Urban) 1.00 1.02 1.04
Willingness to pay for telephone service/Operating cost (Rural) 1.00 1.00 1.00
Financial resources (Millions) 1.00 0.27 0.41
2. International Cross-Subsidy Monthly Rental Fee ¼ $ 0.5 Rural telephone density 1.00 1.17 1.28
Urban telephone density 1.00 1.63 1.87
National telephone density 1.00 1.79 2.20
Telephone density gap (Rural/Urban) 1.00 0.71 0.71
Operating cost/Monthly rental fee (Urban) 1.00 2.00 2.00
Willingnes to pay for telephone access/Monthly rental fee (Urban) 1.00 2.02 2.03
Willingness to pay for telephone service/Operating cost (Urban) 1.00 1.01 1.02
Willingness to pay for telephone service/Operating cost (Rural) 1.00 1.00 1.00
Financial resources (Millions) 1.00 0.09 0.15
3. Market-Clearing Pricing Rural telephone density 1.00 2.50 19.72
Urban telephone density 1.00 7.00 37.76
National telephone density 1.00 7.67 44.31
Telephone density gap (Rural/Urban) 1.00 0.35 0.53
Operating cost/Monthly rental fee (Urban) 1.00 0.46 0.80
Willingnes to pay for telephone access/Monthly rental fee (Urban) 1.00 0.53 1.50
Willingness to pay for telephone service/Operating cost (Urban) 1.00 1.17 1.93
Willingness to pay for telephone service/Operating cost (Rural) 1.00 1.01 1.08
Financial resources (Millions) 1.00 3.29 63.40
4. Market-Clearing Pricing with USO RIF ¼ 45% Rural telephone density 1.00 2.50 57.56
Urban telephone density 1.00 7.00 37.76
National telephone density 1.00 7.67 45.14
Telephone density gap (Rural/Urban) 1.00 0.35 1.53
Operating cost/Monthly rental fee (Urban) 1.00 0.46 0.76
Willingnes to pay for telephone access/Monthly rental fee (Urban) 1.00 0.53 1.48
Willingness to pay for telephone service/Operating cost (Urban) 1.00 1.17 1.93
Willingness to pay for telephone service/Operating cost (Rural) 1.00 1.01 1.08
Financial resources (Millions) 1.00 3.29 41.27

urban telephone lines, which again reduces financial resources, as
observed in positive Feedback Loops 1 and 7. The diminution of
financial resources also decreases the gain of positive Feedback
Loops 2 and 8, which reduces the number of rural telephone lines
with respect to the base case.
5. Policies for improving regional telecommunications
Several experiments were conducted with selected pricing
mechanisms and USO policies. The efficacy of these policies was
evaluated using the performance measures of Table 5, which
summarizes outcomes under the listed policy options.
5.1. Market-clearing pricing
Market-clearing pricing is implemented by defining the
urban MRF as a function of the supply of additional urban tele-
phone capacity. The latter, as noted previously, depends on
available financial resources, and the demand of such capacity.
Fig. 9 describes the behavior of the urban MRF, which is either
fixed or equal to the market price. The base case assumes
a regulated and fixed monthly fee of one dollar. Fig. 10 shows the
feedback structure driving changes in this MRF.
When the market pricing mechanism is applied to urban areas,
urban MRF rises if supplied capacity falls short of the level
demanded, and falls under reverse conditions. Fig. 10 illustrates
these relationships. From Fig. 10, also note that an increase in urban
MRF tends to reduce the growth of potential subscribers and
improve the company’s resource levels. Diminution of the
subscribers clearly decreases the gain within positive Feedback
Loop 11. This, in turn, reduces the urban waiting list and, thus,
demanded capacity. On the other hand, improved resources
increase the supply capacity.
These conditions lead to a long run decrease in urban MRF, as
observed in Fig. 9. This raises potential subscribers, as indicated by
positive Feedback Loop 11 in Fig. 10. Also positively affected are
urban, rural, and national telephone densities, and company
resources.
It is observed in the normalized values of Policy 3 in Table 5
that an increase in the urban MRF through market pricing
considerably improves both the financial resources and telephone
densities of the company with respect to the base case. The
increase in urban MRF appears to have little effect on access

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10 B. Ramos et al. / Socio-Economic Planning Sciences xxx (2009) 1–16

3
Market-Clearing
Pricing with USO

Market-Clearing
Pricing

1.5

Base Case

0
0 45 90 135 180
Months
Fig. 9. Market and fixed monthly rental fees.

demand. Apparently, this result since it is relatively inelastic and Improvement in the level of financial resources resulting from
the urban willingness to pay is higher in the long run than is MRF. the above scenario reduces the strength of negative Feedback
This then improves company revenues and resources, which, in Loops 9 and 10 in Fig. 10. Resulting excess resources can then be
turn, raises urban and rural telecom investment, and the number used to satisfy the rural waiting list by increasing the RIF, thus
of telephone lines. improving rural telecom investment, as well as lines and density.
This situation also raises the gain of positive Feedback Loops 2 and
8 in Fig. 8, thus increasing the rural connection rate and the gain of
5.2. Market-clearing pricing with Universal Service Obligation
negative Feedback Loop 6, which subsequently reduces the rural
waiting list. At the same time, however, the increased investment
The policy considered here combines market-clearing pricing
diminishes available financial resources. This is seen in the
with an implementation of USO, where the latter increases RIF only
normalized values of financial resources corresponding to Policies
after urban telephone density reaches 30%. This level of connec-
3 and 4 in Table 5.
tivity occurs when urban telephone capacity equals that which is
demanded using a market-clearing pricing mechanism.
This combination strategy substantially improves rural tele-
6. Sensitivity of policies for improving rural
phone density while also reducing the rural-urban telephone gap
telecommunications
when compared to market-clearing pricing alone. Additionally, it
does not reduce urban telephone density, as shown in the
In addition to the policy instruments outlined in the previous
normalized values of Policies 3 and 4 in Table 5. In fact, this
section, we conducted experiments to test their sensitivity to
metric improves slightly. Once capacity and demand equate, the
changes in such key metrics as urban income per capita, cost of
resource level improves since telephone lines rise as a result of
providing service, deployment time of telephone lines, and the
positive Feedback Loops 1 and 7 in Fig. 8. Further, the waiting list
network externality impact. Note that the latter is a non-linear
is reduced in accordance with negative Feedback Loop 10
function of telephone density.
in Fig. 10.
The other three metrics were increased while externality
impact was reduced. (See Appendix B: The slopes of those curves
Urban that define impact in both urban and rural areas were reduced.)
Connecting Rate Urban per capita income was increased from 550 to 1500 US$,
+
deployment time was increased from two to four months in urban
+ - areas and from four to six months in rural areas, the cost of
Urban Connected -10 a telephone line was increased from 100 to 150 US$ in urban areas
Subscribers Urban Waiting
and from 500 to 700 US$ in rural areas. The simulation results of
List
Urban Potential + this sensitivity analysis are summarized in the normalized values
+
Subscribers of Table 6.
+ - From Table 6, note that the application of market-clearing
Financial +
+11 pricing to urban areas, shown in Policy 1, still improves both the
Resources Market Price
+ urban and rural telephone densities with respect to the base case.
-
- + The market-clearing pricing mechanism initially increases the
+ Urban Demanded urban MRF and later reduces it. This improves financial resources
Urban Supplied Telephone Capacity
-9 and the number of telephone lines, and reduces unmet demand. As
Telephone Capacity
+ noted previously our suggested Policy 2 involves market-clearing
pricing combined with USO when urban telephone density reaches
Urban Telephone
+
35%. This strategy appears to considerably increase both rural
Capacity
density and the rural-urban density gap in the long term compared
Fig. 10. Feedback loops affecting urban telephone capacity. with market-clearing pricing alone.

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Table 6
Performance of market-clearing pricing polices for higher income per capita, implementation costs and deployment times, and lower network externality impact.

Policy Years

Telecom Indicators 0 0 (N) 9 15

Base Run Rural telephone density 0.02 1.00 2.83 18.22
Urban telephone density 1.02 1.00 7.39 36.8
National telephone density 0.42 1.00 8.10 43.24
Telephone density gap (Rural/Urban) 0.02 1.00 0.35 0.47
Operating cost/Monthly rental fee (Urban) 3.75 1.00 1.00 1.00
Willingnes to pay for telephone access/Monthly rental fee (Urban) 7.63 1.00 1.18 1.78
Willingness to pay for telephone service/Operating cost (Urban) 2.03 1.00 1.18 1.78
Willingness to pay for telephone service/Operating cost (Rural) 0.11 1.00 1.02 1.06
Financial resources (Millions) 10.00 1.00 6.19 141.60
1. Market-Clearing Prcing Rural telephone density 1.00 3.28 40.28
Urban telephone density 1.00 8.98 40.39
National telephone density 1.00 9.83 47.81
Telephone density gap (Rural/Urban) 1.00 0.35 1.00
Operating cost/Monthly rental fee (Urban) 1.00 0.47 0.80
Willingnes to pay for telephone access/Monthly rental fee (Urban) 1.00 0.58 1.55
Willingness to pay for telephone service/Operating cost (Urban) 1.00 1.26 1.80
Willingness to pay for telephone service/Operating cost (Rural) 1.00 1.02 1.07
Financial resources (Millions) 1.00 9.26 244.20
2. Market-Clearing Pricing with USO RIF ¼ 45 % Rural telephone density 1.00 3.28 161.33
Urban telephone density 1.00 8.98 40.39
National telephone density 1.00 9.83 50.52
Telephone density gap (Rural/Urban) 1.00 0.35 4.12
Operating cost/Monthly rental fee (Urban) 1.00 0.47 0.87
Willingnes to pay for telephone access/Monthly rental fee (Urban) 1.00 0.58 1.55
Willingness to pay for telephone service/Operating cost (Urban) 1.00 1.26 1.80
Willingness to pay for telephone service/Operating cost (Rural) 1.00 1.02 1.07
Financial resources (Millions) 1.00 9.26 130.20

7. Conclusions Appendix A. (Equations)

Governments and international organizations often attempt
to achieve universal service and increase/improve rural telecom
infrastructure in developing countries by implementing USO
and ICS policies. These organizations, however, often have
a less-than-clear understanding of the implications and impacts
of such policies. Thus, USO policy increases the percentage of
investment in rural areas, while reducing the percentage in
urban areas. ICS policy sustains high prices for international
service while keeping urban MRF below operating costs and
willingness to pay for telephone access. Not surprisingly,
therefore, we found that these policies can be counterproduc-
tive as they limit growth in service due to the very financial
constraints they create.
Our simulations suggest that market-clearing pricing applied to
urban areas are able to considerably improve the number of rural
and urban telephone lines and the financial resources of the rele-
vant telecom company. However, if USO policy is also implemented,
given that urban telephone density reaches 30%, and available
demanded capacity are equal, then a considerable increase in
telephone density will be realized.
The findings of this research are useful for telecom operators
and regulators since they can identify the specific impact(s)
cross-subsidies may have on dispersion of their telephone
services. However, actual implementation of these policies and
strategies in real circumstances requires that the model be
constantly updated in order to capture changes and shifts in
telecom policies and technologies. Additional research under
new and varying scenarios is thus needed in order to identify
possible alternative approaches to changing conditions. This
could involve, for example, the design of new pricing mecha-
nisms and service combinations for improved telephone pene-
tration. Finally, the impact of increasing competition and demand
for greater quality of service could be addressed by extending our
proposed model.
Equations of the telephone demand sector
It is assumed that the number of connected subscribers (CS) is
increased by the connecting rate (CR) and decreased by the connected
customers attrition rate (AR). CR is a function of the fraction of lines
connected per month (FLC) and telephone capacity (TC), which
represents those telephone lines recently deployed and ready to be
allocated to a customer in the waiting list. In addition, AR is assumed
a function of demand adjustment (DA), which represents the
discrepancy between indicated demand (ID) and actual demand (AD).
AD adjusts towards ID via an adjustment time (TAD). The demand
adjustment (DA) can be positive or negative; when it is negative AR is
greater than zero. Subscript i refers to the two sectors, urban (u) and
rural (r), while superscript j represents the type of telephone service,
local (l), long distance (ld), or international (t):We then have:
ðd=dtÞCSi ¼ CRi  ARi
CRi ¼ TCi FLCi PPWLFi
(1)
DAi ¼ ðIDi  ADi Þ=TAD
ARi ¼ DAi ðIf IDi < ADi Þ
The waiting list (WL) is increased by the rate of new customers
(RNC) and decreased by CR. RNC, in turn, is a function of the
number of potential customers who are willing to pay for the
monthly rental fee, but have not yet decided to pay for the acti-
vation fee and telephone device costs (PC), or the delay to accept
the activation fee and telephone device costs (DAAF). We thus have:
ðd=dtÞWLi ¼ RNCi  CRi
(2)
RNCi ¼ PCi =DAAFi
PC is increased by the new potential customer rate (NPCR) and
decreased by RNC. NPCR is, in turn, a function of DA. When the
latter is positive, NPCR is greater than zero. Thus:

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ðd=dtÞPCi ¼ NPCRi  RNCi the average connection rate (ACR), the telephone capacity planned
(3)
NPCRi ¼ DAi ðIf IDi > ADi Þ (TCPL), TC, and TDIP, divided by the delay to adjust telephone
capacity (DAT):
Indicated demand (ID) is a multiplicative function of the pop-
ulation of telephone subscribers in the region (PTS) and the ðd=dtÞTCi ¼ TDRi þARi  CRi  DRi
demand fraction (DF): TDRi ¼ TDIPi =TDDi (12)
DRi ¼ ACRi þðTCi þ TDIPi  TCPLi Þ=DATi
IDi ¼ PTSi DFi (4)
TDIP is increased by the new orders of telephone deployment
AD is the sum of PC, WL and CS, as shown in (5). (NOTD) and decreased by TDR. NOTD is a function of ACR, TCPL, TC,
TDIP, and DAT:
ADi ¼ PCi þ WLi þ CSi (5)
DF is a multiplicative function of the effect of price on demand ðd=dtÞTDIPi ¼ NOTDi  TDRi
(EPD) and the effect of attractiveness on demand (EAD). The former (13)
NOTDi ¼ ACRi þ ðTCPLi  TCi  TDIPi Þ=DATi
is equal to the monthly rental fee fraction (MRFF), while EAD is
equal to the network externality impact (NEI): ACR is a first order exponential average of CR. The averaging
process uses the time constant T1, where m1 is the first order
DFi ¼ EPDi EADi exponential average:
EPDi ¼ MRFFi (6)
EADi ¼ NEIi
ACRi ¼ m1 ½CRi ; T1  (14)
MRFF is a function of the discrepancy between the actual (MRF)
and normal monthly rental fee (NMRF): TCPL is a conditional function of the supplied telephone capacity
(STC) and demanded telephone capacity (TCD):
MRFFi ¼ f 1i ðMRFi =NMRFi Þ
(7)
where f 01i < 0 TCPLi ¼ STCi ðIf TCDi > STCi Þ
(15)
Further, NEI is a function of the telephone density fraction (TDF). TCPLi ¼ TCDi ðIf STCi > TCDi Þ
As explained earlier, the impact of network externality on demand TCD is a multiplicative function of WL and the number of tele-
in urban areas is higher than that in rural regions. This character- phone lines per subscriber (LPS):
istic is represented by the non-linear function f 2 in (8):
TCDi ¼ WLi LPS (16)
NEIi ¼ f 2i ðTDFi Þ
(8)
where f 02i > 0 STC is a division function of the financial resources allocated for
telephone investment (PTI) and the deployment cost of a telephone
TDF is function of the urban and rural telephone density (TD), and line (COT). PTI is, in turn, a multiplicative function of the telecom
coefficients a1 and a2. These coefficients determine the weight of cash balance (TCB) and the telephone investment fraction per
urban and rural telephone density, respectively, on network exter- region (IFR):
nality. It is assumed that most of the value of a telephone network
derives from the same regional network. It has been established that STCi ¼ PTIi =COTi
(17)
a high proportion of the rural traffic is sent to the urban network, PTIi ¼ TCBIFRi
which suggests that the rural population places a high value on the
urban network [15]. Furthermore, it is also assumed that the urban
population values less the size of the rural network than the rural
population values the size of the urban network. For this reason, it was
considered that coefficients a1 and a2 were, respectively, 0.9 and 0.1,
Equations of the telephone traffic sector
and 0.5 and 0.5, for urban and rural areas. Thus:

TDFi ¼ TDu a1i þ TDr a2i (9) The telephone traffic per service (TTS) adjusts toward referential
telephone traffic per service (RTTS) during a telephone traffic
Note that TD is the ratio of CS to the population of telephone adjustment time (TTAT). RTTS is, in turn, a function of the telephone
subscribers (PTS), as given by (10): traffic expenditure per service (TES), the price of telephone traffic
per service (PRTS), and the free minutes consumed per service
TDi ¼ CSi =PTSi (10)
(FCS):
Further, NMRF is the difference between subscriber expenditure h i.
on telecommunications (SET) and the expenditure on traffic per ðd=dtÞTTSji ¼ RTTSji  TTSji TTAT
subscriber (ETS). See (11). Both factors are functions of income per

j j

j
(18)
RTTSi ¼ TESi =PRTSi þ FCSi
subscriber (IPS), as noted below, in the discussion of Telephone
Traffic Sector equations. TES is a multiplicative function of the expenditure on telephone
traffic per subscriber (ETT) and the percentage of traffic expendi-
NMRFi ¼ SETi  ETSi (11)
ture per telephone service (PTES):

Equations of the telephone deployment sector TESji ¼ ETTi PTESji (19)

TC is increased by the telephone lines deployment rate (TDR) ETT is a multiplicative function of the normal expenditure on
and AR, and decreased by CR and the telephone discard rate (DR). telephone traffic (NETR) and the telecom expenditure increase
TDR, in turn, is a function of telephone deployment in progress fraction (TEI). The latter is equal to the telecom expenditure
(TDIP) and telephone deployment delay (TDD). DR is a function of increase from size of the network fraction (TEISN):

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ETTi ¼ NETRi TEIi OC is a multiplicative function of the telephone capital costs

(20)
TEIi ¼ TEISNi (TCCO), the percentage of capital costs as operating costs per year
(PCIOC), and the monthly fraction of operating costs (MFOC):
TEISN is a non-linear function of NEI (See Appendix B):
OCi ¼ TCCOi  PCIOCi  MFOC (32)
TEISNi ¼ f 3i ðNEIi Þ
(21)
where f 03i > 0 TCCO is the sum of CS, TC, and TDIP, multiplied by COT:

NETR is a multiplicative function of IPS and the fraction of the TCCOi ¼ ðCSi þ TCi þ TDIPi ÞCOTi (33)
income per subscriber as expenditure on telephone traffic (FISETR):
TINV is a multiplicative function of NOTD and COT:

NETRi ¼ IPSi FISETRi (22) TINVi ¼ NOTDi COTi (34)

SET is a multiplicative function of the normal expenditure on
Formulation of market-clearing pricing
telecommunications per subscriber (NETS) and TEI:

The market-clearing pricing mechanism (MCP) adjusts this price

SETi ¼ NETSi TEIi (23) towards IMRF during a time to adjust market price (TAP). IMRF is
NETS is a multiplicative function of IPS and the fraction of the a multiplicative function of MRF and a non-linear function of the
income per subscriber as expenditure on telecommunications ratio between STC and TCD (See Appendix B). TAP is, in turn,
(FISET): a function of a referential time to adjust market price (RTAP) and
this non-linear function:
ðd=dtÞMCPu ¼ ðIMRF  MCPu Þ=TAPi
NETSi ¼ IPSi FISETi (24)
IMRF ¼ MRFf 4 ðSTCi =TCDi Þ (35)
The incoming international traffic per line (IIT) is defined as TAPi ¼ RTAPð1 þ f 4 ðSTCi =TCDi ÞÞ; Where f 04 is < 0
a multiplicative function of the outgoing international traffic per
line (TTSti ) and the incoming-outgoing international traffic ratio
(IOIR):
Appendix B. (Behavioral relationships)
IITi ¼ TTSti IOIR (25)
Monthly rental fee fraction
Equations of the financial resources sector
MRFFi ¼ f1i (MRFi/NMRFi)
TCB is increased by the telecom income (TI) and decreased by
MRFF i = f 1i (MRF i / NMRF i)
the telecom expenses (TE) of the telephone company. TI is the sum
of the income from telephone traffic (ITR), net settlement (NS),
activation income (AI), and the income from monthly rental fee 1
(IMRF). TE is the sum of the operating costs (OC) and telephone
investment (TINV) in urban and rural regions:

f 1u
ðd=dtÞTCBi ¼ TI  TE
TI ¼ ITR=NSþAI þ IMRF (26)
TE ¼ Si ðOCi þ TINVi Þ
ITR is the sum of the income from telephone traffic per service
(I), which includes the income from local, long distance, and
outgoing international traffic: 0
1 2 3
MRF u / NMRF u
 
ITR ¼ Sj Iju þ
j
Ir (27)

I is a multiplicative function of CS, PRTS, and the difference 1

between TTS and the free minutes granted per service (FS):
 
j j j j
Ii ¼ TTSi  FSi PRTSi CSi (28)
f 1r
NS is function of CS, the imbalance of international traffic per
subscriber per month (IMIT), and the settlement rate (SR):

NS ¼ Si ðCSi IMITi SRÞ (29)

AI is function of CR and the activation fee (AF):
0
1 2 3
AI ¼ Si ðCRi AFi Þ (30) MRF r / NMRF r
IMRF is function of CS and MRF:
IMRF ¼ Si ðCSi MRFi Þ (31)

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14 B. Ramos et al. / Socio-Economic Planning Sciences xxx (2009) 1–16

Network externality impact Telecom expenditure increase from size of the network fraction

NEI i = f 2i (TDF i) TEISN i = f 3i (NEI i )

1 2

f 2u f 3u

1
0 1 0
1
TDF u NEI u

1 1.5

f 2r f 3r

1
0 1 0
1
TDF r NEI r

Non-linear function of the ratio between supplied telephone capacity and demanded telephone capacity

f 4i (STC i / TCD i)

10

f 4i

0 2
STC i / TCD i

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B. Ramos et al. / Socio-Economic Planning Sciences xxx (2009) 1–16 15

Appendix C [21] Makhaya G, Roberts S. Telecommunications in developing countries: reflection

from the South African experience. Telecommunications Policy
2003;27(1):41–59.
Values of key parameters in the base run are as follows: [22] Milne C. Measuring affordability of telecoms. In: World Telecom/ICT Indicators
Meeting, January 15–17, 2003, Geneva, Switzerland: International Telecom-
munication Union, Available from: http://www.itu.int/ITU-D/ict/WICT02/doc/
Model parameters Base case
pdf/Doc30_Erev1.pdf.
1. USO 3.50% [23] Nepal Telecommunications Authority. Telecommunications policy. Available
2. Monthly rental fee $1 from: http://www.nta.gov.np/telecom_policy_2060.htm; 2004.
4. Urban income per capita $550 [24] Peha JM. Tradable Universal Service Obligations. Telecommunications Policy
5. Rural income per capita $309 1999;23(1):363–74.
6. Urban cost per line $100 [25] Potter A. Zones of silence: a framework beyond the digital divide. First
7. Rural cost per line $500 Monday(5). Available from: http://firstmonday.org/issues/issue11_5/potter/
8. Urban deployment time 2 months index.html, 2006;11.
[26] Plaza JL. Data provided by José L. Plaza, Manager of External Plant, Pacifictel
9. Rural deployment time 4 months
S.A. in January 2005.
10. Initial urban lines 204,750
[27] Primo CA, Forestier E, Stern PA. Developing Countries and Accounting Rates
11. Initial rural lines 5,250
Reform-A Technological and Regulatory El Niño?. Washington, DC: The World
12. Initial urban waiting list 180,000 Bank Group. Finance, Private Sector, and Infrastructure Network; 1999.
13. Initial rural waiting list 20,000 [28] Ramos B, Gerstenfeld A. Planning rural telecommunications in developing
14. Total population 200,000,000 countries and its impact on the increase of rural teledensity. The International
15. % Rural population 60% Journal of Business Disciplines 2004;15(1):47–63.
16. Urban population growth rate 2.3% [29] Ros AJ, Banerjee A. Telecommunications privatization and tariff rebalancing:
17. Rural population growth rate 0.2% evidence from Latin America. Telecommunications Policy 2000;24(1):233–52.
18. Initial cash balance $10 Million [30] Saeed K, Honggang K. Infrastructure development as a policy lever for
sustainable development. A handbook of sustainable development planning:
studies in modelling and decision support. Cheltenham, United Kingdom, and
Northampton, MA: Edward Elgar Publishers; 2004.
[31] Saunders RJ, Warford JJ, Wellenius B. Telecommunications and Economic
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[10] Goldschmidt D. An analysis of costs and revenues of rural telecommunications
systems. Telecommunications and rural development. The AID rural satellite Boris Ramos is Professor of Telecommunications and System Dynamics and the Tel-
program. Washington, DC: Agency for International Development; 1987. ecom Engineering Program Director at Escuela Superior Politecnica del Litoral (ESPOL)
[11] Goussal DM, Udrı́zar MS. Network decompensation and regional imbalances in Guayaquil, Ecuador. He earned a B.S.E.E. from ESPOL, and an M.S. in Computer
in rate reform processes: a case study in South America. Telecommunications Science and a Ph.D. in Telecom Planning and Policies, and System Dynamics, both from
Policy 2000;24(1):669–98. Worcester Polytechnic Institute, Worcester, MA. Professor Ramos’ research interests
[12] Hank I, McCarthy T. Telecommunications regulation handbook. Washington, include telecom policy, system dynamics, wireless communications, and telecom
DC: The World Bank; 2000. simulation. He acts as a consultant for the Government of Ecuador’s telecommunica-
[13] Hudson HE. When telephones reach the village. The role of telecommunica- tions sector. He is a member of the Information Science and Information Systems
tions in rural development. Norwood, New Jersey: Ablex Publishing Corpo- Special Interest Group of the System Dynamics Society. His research has appeared in
ration; 1984. The International Journal of Business Disciplines, The International Conference of the
[14] Jensen K, Trill S, Brady A. Dynamic modelling of demand and supply in tele- System Dynamics Society, The Proceedings of the 2003 ASEE Annual Conference (Best
communications. The Journal of The Communications Network 2002;1(3): Paper Award), and several international conferences on telecommunications.
52–8.
[15] Kayani R, Dymond A. Options for rural telecommunications development. In:
World Bank Technical Paper, No. 359. Washington, DC: The World Bank; 1997. Khalid Saeed is Professor of Economics and System Dynamics at Worcester Poly-
[16] Laffont JJ, N’Gbo A. Cross-subsidies and network expansion in developing technic Institute, MA. He earned a B.S.E.E. from University of Engineering and Tech-
countries. European Economic Review 2000;44(1):797–805. nology, Pakistan, an M. Eng. from Asian Institute of Technology, Thailand, and a Ph.D. in
[17] Littlechild SC. Elements of telecommunications economics. London, England: System Dynamics and Economic Development from MIT and is widely recognized for
Institution of Electrical Engineers; 1979. his work on computer modeling and experimental analysis of developmental, orga-
[18] Lyneis JM. Corporate planning and policy design. Cambridge, MA: The MIT nizational and governance-related issues. Professor Saeed has previously served on the
Press; 1980. faculty of Asian Institute of Technology, Thailand and also held visiting and adjunct
[19] Lyneis JM, Weil HB. Tactical vs. strategic approaches to competitive positioning faculty positions at Curtin University, Australia, Dartmouth College, Northeastern
– an example from the telecommunications industry. In: Proceedings of the University, Lulea Technical University, Sweden, and Lahore University of Management
1994 International System Dynamics Conference, Stirling Scottland, 1994. Sciences, Pakistan. He has worked as a consultant with, among other organizations,
[20] Madden G, Coble-Neal G, Dalzell B. A dynamic model of mobile telephony UN-ESCAP, UNDP, Asian Development Bank, World Business Council for Sustainable
subscription incorporating a network effect. Telecommunications Policy Development, Booz Alan Hamilton, and McKinsey & Company. He has written two
2004;28(1):133–44. books and numerous articles and book chapters on sustainable economic

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Economic Planning Sciences (2009), doi:10.1016/j.seps.2009.08.003
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16 B. Ramos et al. / Socio-Economic Planning Sciences xxx (2009) 1–16

development, governance, and system dynamics modeling. His research has appeared
in a wide variety of refereed journals, including Journal of Economic Issues, System
Dynamics Review, Simulation and Gaming, Global Business and Economic Review, Human
Systems Management, Socio-Economic Planning Sciences, and Industrial Engineering
Journal. Professor Saeed received the Jay Wright Forrester Award for his work on
sustainable development in 1995 and an honor citation from the Asian Institute of
Technology Board of Trustees for his service to the Institute in 1997. He is a past
President of System Dynamics Society, and has served as an Editor of System Dynamics
Review, UNESCO Encyclopedia of Life Support Systems, and System Dynamics.
Oleg V. Pavlov is Associate Professor of Economics and System Dynamics at Worcester
Polytechnic Institute, MA. He earned a B.S. in physics and computer science and a Ph.D.
in economics, both from the University of Southern California, Los Angeles. Before
joining WPI, he was a postdoctoral fellow in Information Systems at Boston University
School of Management. Professor Pavlov’ research interests include the economics of
information systems, economic growth, and institutional economics. His research has
appeared in the Journal of Economic Issues, System Dynamics Review, and Communica-
tions of AIS.

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