Tariffs and affordability gap of mobile telephony services in Latin America and the Caribbean

The Regional Dialogue on the Information Society (DIRSI) has conducted periodic surveys of mobile telephone tariffs in the principle markets of Latin America and the Caribbean since 2007, using the method of mobile services baskets developed by the OECD. The objective is to follow the evolution of tariffs as markets mature, and to estimate affordability of mobile services for low-income sectors. This estimate is fundamental to the design of universal access strategies, since the level of affordability determines the borders of market efficiency. In other words, without an empirical analysis of the levels of affordability of services, it is not possible to determine which markets are commercially viable without the need for subsidies. DIRSI's surveys, therefore, seek to suport the design of policies that expand the market's borders while at the same time minimising public subsidies.

 

In light of this objective, this study focuses on the affordability of the OECD's low usage basket for mobile services, which includes 360 calls and 396 SMS text messages per year, of standard duration, time of day, and destination. In other words, we compare the monthly cost of telephone service for a user who makes approximately one call and sends one SMS message per day with a prepaid service plan. Given that our main interest is to estimate affordability of the basket of services for users at the bottom of the income pyramid (BOP), we use two indicators: 

All of the data is from mid 2009. The main findings of the study are:

• In a some countries the entry of new firms in the region has brought about significant tariff reductions, and, as a consequence, higher levels of affordability, even in low income contexts. In Paraguay, Bolivia and Guatemala, Tigo (Millicom International Cellular) has achieved a significant market share by employing a low cost business model similar to the one used by South Asian operators. The rest of the region's markets have high degrees of concentration and tariff structures that inhibit use of mobile services, which in turn limits the expansion of markets toward value added services oriented to bottom of the pyramid users.
• There is significant price dispersion of tariffs in the region, with the cost of the low usage basket ranging from US$45 in Brazil to US$2.20 in Jamaica (in current dollars). Average cost is approximately US$15 .
• For consumers of the low usage basket, prepaid is less expensive than postpaid in 13 of the 20 markets in the sample. In other words, there does not appear to be a “poor penalty” in mobile telephony. Since prepaid service not only allows low income users to adjust the amount of service used, it is, in general, more economical than postpaid.
• The general level of mobile telephone tariffs in Latin America is significantly higher than in OECD member countries or in other emerging economies. In the expanded sample of sixty-two countries, eight of the ten markets with highest tariffs (in PPP dollars) are in Latin America (six of ten is current US dollars). The average cost of the low usage basket (US$24 PPP) is almost double the average in OECD countries (US$13) and triple the average found in South Asian markets (US$7). This means that a low usage user in Latin America requires, on average, three times the effort than a South Asian to acquire the same basket of mobile services.
• A consequence of the high tariffs is a low affordability level for users at the bottom of the pyramid. The only country in the region in which mobile telephone services can be considered affordable by the poor sectors is Costa Rica. In the rest, the cost of the low usage basket is well above the threshold of 5% of income that is generally considered the level that potential telecommunication service users are able to pay.
• In an environment marked by low affordability in the region, we can identify three groups of countries: a) countries with adequate affordability, because of low tariffs and low levels of inequality of distribution of income (Costa Rica); b) countries with a moderate affordability gap as a result of low tariffs (Ecuador, Jamaica and Paraguay) and/or lower levels of inequality of income distribution (Venezuela and Uruguay); c) countries with low or very low levels of affordability as a result of a combination of high tariffs (especially in the case of Brazil) and high levels of inequality of income distribution (notably the cases of Nicaragua, Honduras, and Peru). In this group of countries, 90% of the population has to spend more than 5% of their income to buy a low usage mobile telephony basket.
• As a result of the low level of affordability, the high level of penetration of mobile telephony in the region contrasts with a low level of use of the service and persistent gaps in its universal use by poor sectors. On average, users in Latin America and the Caribbean make less use of mobile service than in other regions (116 minutes per month), below the average in Africa (129 minutes) and well below that in the Asia Pacific region (290 minutes).

A variety of reasons explain the region's situation, although it is worth noting some of the main ones: 1) the high level of market concentration in Latin America, especially at the regional level; 2) the lack of clear policies for interconnection among operators, 3) the heavy tax burden that exists in most countries on this service. 

Despite achievements regarding service adoption, the results of this study put an emphasis on a persistent and significant affordability gap which limits the use of mobile telephony services for the majority of the region’s population. This is a reason for proceeding with the efforts and initiatives undertaken to reinforce market competition. Among the recommended instruments for reinforcing competition we stress implementing number portability, making more spectrum available, reserving frequencies for new operators, fostering infrastructure sharing and implementing interconnection policies that will favour tariff reductions in the medium term. Also, the heavy tax burden faced by mobile services throughout the region should be revised, for it not only distorts consumer’s decisions but it also is of a regressive nature since it imposes a tax on those who own least.