All About Bangladesh

3.2 A business case for rural telecommunications

Rural telecommunication planners tend to focus on several key factors in order to establish and analyze the business case scenario:

• population density (telecom investments tend to go to high density areas)
• per capita income (a rule of thumb is that 1.5 to 2% of PCI is spent on average on telecommunication, although this amount is typically much higher in rural areas)
• cost per line installed (which depends on the technological package; WLL tends to average $4,000 USD/line)
• topography (the flatter the territory, the better)
• teledensity in terms of the number of telephone lines per 100 population (suggesting how saturated the market may be; there is a positive correlation between teledensity and per capita income; see Figure B)
• willingness to pay (an indicator of demand) and consumer surplus (indicator of how much a user saves when using a phone, mainly in terms of avoiding time/income loss and transportation costs)

A review of indicators from Bangladesh shows how unique this context is ¹²:

Population density: 850 people per square kilometer (among the highest in the world)

Per capita income: $220/year¹³ average with a lower average of $171/year for rural areas (among the lowest in the world)

Cost per line: As low as $1,000/line (among the lowest in the world for implementation)

Topography: Flat river delta with recurrent flooding

Teledensity: Between 0.2 and 0.3/100 people (among the lowest world-wide)

Willingness to pay: 54% of Grameen Bank member phone users in the current survey indicated that they were willing to spend between 100 to 300 Taka ($2 to $6 USD) for a three-minute phone call involving a financial matter with a family member overseas, and 27% said they were willing to spend between 300 to 600 Taka ($6 to $12.25 USD) for this kind of call. Given an average reported monthly income of 5,000 Taka ($102 USD) for respondents' households, these figures represent significant proportions of monthly household income ranging from 2% to 12%.

Consumer surplus: The Bayes study shows savings of no less than 70 Taka per call, which is a very high figure (Bayes et.al.1999). Survey findings for our report show savings of between 132 to 490 Taka ($2.70 to $10 USD) for calls that substitute for travel between a village and Dhaka.

Facts and Figures

• Per rural line revenues are very high. Sheba Telecom's revenue from 1,500 rural subscribers (mostly personal fixed phones used as Public Call Offices) brings in the same amount of revenue as 12,000 urban GSM subscribers. This is equivalent to $240 USD/month; the average annual revenue from rural phones is $1,000. BRTA reported PCO bills of 3 laks/mo ($6,000) and Sheba of 2.5 laks/mo ($5,000). Some of the BRTA PCO lines are in use for up to 18 hours each day: an astonishing level of use. Sheba Telecom reported Erlang¹⁴ counts far beyond their original estimate¹⁵. Telephones in the Grameen Village Phone programme bring in 3 times as much as urban phones (an average of $100/month versus $30/month).

Phones are becoming much more in demand in rural and remote areas

The rural market is practically untapped. With a population density ranging from 750-1000 people per square kilometer, Bangladesh has one of the highest population densities in the world. With an adjusted rural annual per capita income of $171 (contrasting with the national average of $220 -using 1997 data- and with an average of $1,100 in Dhaka), along with phone line installation costs as low as $1,000/line (according to BRTA prices), it is estimated that there is a business case for one phone for every 183 people (Kayani and Dymond, 1997). The current teledensity in Bangladesh is 2-3 phones per 1000 people, suggesting a market that is practically untapped16. An expansion to one phone per 183 people would raise the teledensity to 5.46. Rural network expansion. The main constraint for rural network expansion is the lack of interconnection to the Bangladesh Telegraph and Telephone Board (BTTB) system. Restricted expansion is not caused by a lack of investment capital, as many believe. While most operators have, or are planning to build their own backbone network, they still need to interconnect to BTTB.

BRTA plans to double its subscriber base from 20,000 to 40,000 and the Deputy General Manager reported having a warehouse of equipment ready to install if/when the interconnection issue was solved. As well, Sheba Telecom is expanding its wireless local loop network. It is noteworthy that several sources reported that all private urban and rural operators have come together to offer BTTB free investment capital for an upgrade to its switching capacity, as an incentive for BTTB to increase interconnection lines.
• Rural phone prices. The price for a Sheba Telecom phone and line ranges from 35,000 to 48,000 Taka. The price depends on the signal reception that stipulates the need for an indoor or outdoor antenna. A BRTA phone and line range from 10,120 Taka for a phone that only connects to the NWD, to 20,120 Taka for one that allows ISD, and up to 27,750 Taka for a WLL that links to both NWD and ISD. A Grameen Telecom Village Phone costs 15,000 Taka. We believe that Sheba and BRTA phone costs include both the set and the installed line costs, while the Village Phone cost does not include the installed line cost of the cellular infrastructure.
• Topography. Not only does Bangladesh have a very high population density, but it is also predominantly a flat river delta. Wireless technology with a line of sight distance of 30-40km means that the entire 144,000km² territory could be covered by a handful of towers (as few as 15 with a 50km radius). For this reason, both rural operators - BRTA and Sheba Telecom - are making extensive use of wireless local loop (WLL) technology. GrameenPhone, in contrast, relies on the fibre optic cable along the 1,800km length of railway track. While this encompasses a very large coverage area, there is still a substantial part of the country that lies beyond this backbone. For GP, extending beyond the fibre optic backbone is strategically important and WLL technology, in combination with the fibre optic cable, may become attractive if/when expansion is possible within its license frequency.

Estimated Demand for Rural Telephone Lines

The above facts would suggest that there is a market for at least 100,000 rural telephones in Bangladesh, and this is a very conservative figure. Based on the International Telecommunications Union's (ITU) typical model for rural service, we can expect that people in rural Bangladesh will spend not less than 1.5% of GDP per capita on telecommunication services (ITU, 1994) "if they are appropriately deployed" (Kayani & Dymond, 1997: 9). Kayani and Dymond (1997) estimate rural income at $171 USD per person per year (based on an estimate of an overall GDP per capita of $220 USD¹⁷). This suggests $2.57 USD per capita expenditure. Given a conservative estimate of rural population of 80 million people, this translates into a potential rural telecommunication revenue of $205 million USD per year. And, as Kayani and Dymond (1997) note, rural expenditures can often exceed expectations because of the high cost of alternative forms of communication such as travel by vehicle. If we assume that each line needs to generate $1,000 USD per year to be financially viable, then this would equate to a total of 205,000 rural lines!

Rural women gather to use local Village Phone services

3.3 Current operators and competitive environment

The following table summarizes the current telephone operators in Bangladesh, their license types, their technological solutions, and their client base coverage.

Table 3.A Bangladesh rural telephone operators, licenses, technology and coverage

All telephone operators reported ambitious expansion plans; however, all are constrained by an interconnection bottleneck with BTTB. At the time of our visit (October 1999), the four GSM mobile operators were finalizing an agreement with BTTB that would allow them to become investors in a switching upgrade. This would enable them to expand their interconnections and respond to the urban and rural market demand.

A further indication of the scope for a competitive market is the high elasticity of demand for rural phone calls. In other words, people are aware of price differences and are willing to walk some distance to save a few Taka on a single phone call. We witnessed how one road-side PCO operator (just outside Dhaka district) offered different phone rates through different phones (BTTB line and GrameenPhone mobile) for different call destinations at different times of the day. The following chart demonstrates the different rates that may be charged by service providers:

Table 3.B Range of telephone charges: high elasticity of demand

In Comilla District, during the period of our research, GrameenPhone did not have a direct connection to Dhaka. Instead, calls must go though Chittagong, thus making a call to Dhaka an expensive long-distance call. In this situation, only the calls made with VP service to Chittagong were more competitive as were the international incoming calls, both of which were charged at Tk.5/minute.

Table 3.C Range of telephone charges caused by infrastructure and rate structure

This variable price situation is bound to improve when GrameenPhone authorizes a flat Tk.15/minute rate for all NWD calls.

3.4 Regulatory constraints

The two licenses granted for rural telephone provision in Bangladesh effectively provide BRTA and Sheba Telecom with monopolistic rights to service the north and south portions of the country respectively. The fact that both licenses give exclusive rights for a 25-year period suggests an assumption: at the time of granting the licenses, rural telephony did not appear to BTTB to offer a profitable business case. However, our conclusions suggest that there is a very good business case for rural telephony, and both BRTA and Sheba Telecom stand to gain substantial profits if and when they can address the interconnection problems with BTTB.

In contrast, the business case for the urban cellular market is more evident. The urban environment is highly competitive, and the projections for growth are substantial. For example, GrameenPhone has a target to double its urban subscription base every year for the next few years. Moreover, the demand for mobile phones is so large that several GSM operators have succeeded in marketing cell phones that only interconnect to other mobile phones. This is effectively creating a parallel phone system that does not rely on the BTTB trunk.

All phone operators, urban and rural, are constrained by the limited number of interconnections provided by BTTB. In addition, they are subject to a monopolistic control by BTTB that limits revenue sharing arrangements for ISD calls and denies them for NWD calls. Also, a refusal by BTTB to allow other technologies to be used, such as VSAT, is a further restriction.

There have been many calls for a review of interconnection agreements and revenue sharing arrangements. The lack of an independent regulator has thus far allowed BTTB to maintain a monopolistic behaviour in these two areas. In April 1998, GrameenPhone accepted an arrangement involving no revenue sharing with BTTB's network, although this agreement contradicted international norms and the Government's official policy (GrameenPhone, 1998). While this phenomenon is a clear constraint, evidence from other countries suggests that market forces could eventually overcome this situation.

The resident representative of the World Bank to Bangladesh described the country's telecom challenge in a nutshell:

"Fast, effective telecommunications are the lifeblood of modern societies and economies. To join the global information revolution and exploit its potential for accelerated growth, Bangladesh must, first, concentrate on adopting high-level telecommunications technology and investing in infrastructure; second, undertake institutional reforms enabling competing private operators to meet demand and effectively deliver services; and, finally, develop an appropriate, autonomous regulatory framework to assure consumers and providers alike a predictable environment in which to do business. These challenges amount to major departures from current practices." (Temple, 1999)

The telecom sector in Bangladesh is still regulated by the Telegraph Act of 1885, and the Wireless Act of 1933. These outdated acts are inadequate in dealing with Bangladesh's challenges today. Readers interested in a short review of Bangladesh's Telecommunications Laws and Regulations can view an attached summary.¹⁸

The Government has responded to the inappropriateness of laws with a proposed Bangladesh Telecommunications Act that the Ministry of Posts and Telecommunications (MOPT) presented to private and public stakeholders during a workshop in December 1998 (GrameenPhone, 1998). However, as of December 1999, very little progress regarding the establishment of an independent telecom regulator had been made. Although Cabinet, in principle, approved the draft law in September to set up the Telecom Regulatory Board, it is yet to be placed before Parliament for passage. Critics say the draft approved by Cabinet is a watered down version of the one originally planned. However, once it is placed in Parliament, there may be a debate leading to some amendments. Meanwhile, the Telecom Regulatory Commission is doing the job of overseeing the sector during the interim period. It is headed by a BTTB official on deputation and is controlled by the MOPT.

FOOTNOTES

9. This section is a summary of Chapter 2 of the report by Bayes, A. et.al. (1999) Village Payphones and Poverty Reduction: Insights from a Grameen Bank Initiative in Bangladesh
10. $240 USD is the per capita income quoted throughout Bayes et.al. (1998). Based on 1998 World Bank figures, Bangladesh's GNP per capita income was $350 USD.
11. The exchange rate at the time of writing the TDG Report was Taka 49 per 1 USD.
12. Bangladesh is listed as number 144 in the UNDP Human Development Index, a composite of development and human development indicators (Sierra Leone has the lowest index, 175; and Canada has the best, 1). Please see Figure B.
13. United Nations, 1995-96. 1998 World Bank Figures calculate Bangladesh's GNP per capita income at $350 USD.
14.An Erlang is a measure of telephone traffic density. One Erlang indicates 100 percent busy condition during one busy hour. It is normal to assume a network-wide average traffic of 0.03 to 0.08 per subscriber, although business lines typically average 0.10 to 0.15. (Kayani and Dymond, 1997: xi)
15. Sources include interviews with: Abu Sadat M. Sayem, Sheba Telecom Senior Executive; Maj. Mashiur Rahman Siddiqui, Deputy General Manager, BRTA; N.H.M. Sarif Uddin (Nazmul), Senior Manager, Grameen Telecom.
16. Other countries' teledensities. Canada= 59.0, India=1.0 (UNDP 1997 Human Index Report)
17. Source - United Nations, 1995-96
18. Source - ADB (1997) p.38