Should China create a Universal Services Fund?

For the past 15 years China has been successful in expanding both fixed and mobile networks out from the cities and into the towns and villages of its densely-populated countryside. Alongside this there has been a gradual liberalization of the telecoms market resulting in increased exposure to market forces. The Government is now rethinking its universal service policies and central to this is whether or not to create a Universal Service Fund (USF) as many other countries have done.

USFs have generally performed poorly elsewhere. They are funded by contributions from telecommunications services providers to the Government. Often the money goes directly to a specific entity charged by the Government with subsidizing the expansion of telecoms services to rural and other underserved communities. A fund contribution is different from a tax as it is collected for the specific purpose of subsidizing telecommunications.

A 2013 study by Ladcomm for the GSMA, the world trade association of mobile operators, found a dismal performance amongst the 64 funds surveyed. They collected billions of dollars through fees of 1% to 6% over gross revenues (or in some cases over net profits), but did not spend anything like what they collected. In Brazil, for example, the USF is sitting on a $4.6 bn cash mountain while its Indian counterpart has $3.9 bn tucked away. These funds are unlikely to ever be spent.

China has, until now, pursued a very different approach. Bai Chunxia, a senior researcher at the China Academy of Telecommunications Research (CATR), told a recent meeting of the ITU Asia Pacific Regional Forum in Bangkok of her country’s most successful universal services project so far. Named “CunCunTong,” it required all basic telecom operators to engage in an “area slicing contract system,” splitting universal service obligations to cover rural areas. The best performing would get awarded more rural areas. With little direct subsidy from the Government, the project had enormous success. She argues that this success was driven by three main factors:

– Political pressure: China’s state-owned telecom operators had “CunCunTong” implementation goals associated with the key performance indicators (KPIs) of their CEOs;
– Social pressure: delivering rural coverage was linked to state enterprises’ reputations;
– Long-term value of the rural markets: close to half of China’s people live in the countryside (636 million last year according to the World Bank), so rural markets are important for the economics of operators.

The debate over creating of a USF is because of the changing role of the Government in the Chinese telecoms sector. The Government is increasingly exposing the sector to market forces, and loosening the central control that allows it to push for universal services initiatives. Also operators’ ability to roll-out infrastructure in less attractive areas is being affected by stagnating revenues as over the top (OTT) players get an ever-increasing slice of the pie.

Based on the global experience of USFs, the short answer to the question of whether or not China should create such an entity is no. But there are alternatives which could be explored and adapted to the Chinese market. One such is universal services obligations embedded into the economics of the industry. China can draw on its already successful experience of rural expansion while not imposing universal services fees, which can easily become just another tax.