The Pacific Economic Survey

Earlier this week, Australia unveiled the Pacific Economic Survey here in Port Vila. Present for the event was a delegation from all around the Pacific Region, including Melanesia and Polynesia as well as senior politicians from Australia. AUSAid’s chief economist was also there to present the findings.

The report is the first of a series of annual surveys that will provide an overview and update of economic developments in the Pacific island region and Timor-Leste. It collates and summarises public data on various aspects of the region’s national economies, performs some comparative and collective analysis with the results, then provides a few basic recommendations.

The theme for this year’s report was Connectivity. The survey focuses on aviation, shipping and telecommunications. It argues that liberalisation, more input from the private sector, and a cooperative regional approach to the problems inherent in improving connectivity are keys to improving Pacific economies.

The findings in the area of telecommunications do much to validate the Government of Vanuatu’s market liberalisation strategy and provide every encouragement to expand upon them. It addresses some potential pitfalls that might be encountered, primarily where access to technical expertise is concerned. And that is where it risks missing the boat.

First, let’s take a look at some of the findings.

Competition has led to explosive mobile phone growth and lower prices,” states the report. The extent of this truth should prove very encouraging for people in Vanuatu, poised as we are to start tasting the fruits of market liberalisation.

In Samoa, only 1.5 per cent of the population had mobile phones in 2002; by mid-2007, this had increased to 46 per cent. During the same period in Tonga, competition increased mobile phone ownership from 3.4 per cent to 30 per cent. In PNG, the introduction of competition in mid-2007 led to a sharp increase in coverage and a doubling of mobile phone subscribers in a short period.

None of this is terribly surprising, of course, but it’s nice to see our sense of the situation validated. It’s especially encouraging to note the explosive growth rate in access to communications. In just a few short years, for example, nearly half of all Samoans have subscribed to mobile services.

The effects of this fundamental improvement in communications are transformative, to say the least. Papua New Guinea estimates that telecommunications liberalisation and the resulting benefits have already added nearly one percent to GDP growth. Arguably, the impact of such radical change on Vanuatu’s smaller economy might be even bigger. There is no doubt, however, that it will increase commercial activity in the islands. In some cases, it will make it possible for the first time in modern history.

Prices also tend to drop the most in liberalised telecoms markets. Currently, Vanuatu stands in third-to-last place where prices are concerned. Only the Solomon Islands and Telikom in PNG are more dear. In fairness, customers in PNG are free to use Digicel, which in 2007 charged about 35 vatu to Telikom’s 55.

Prices have fallen elsewhere when competition was introduced. But they haven’t fallen hugely in every case. In PNG, Digicel rates aren’t significantly less than we’re paying now to Telecom Vanuatu. While there’s every reason to believe that Digicel will charge less than we’re currently paying, we shouldn’t necessarily expect rates to plummet.

The report states, “Access to the Internet in the Pacific is increasing, albeit from a very low base. It remains limited outside capital cities [and] the majority of subscribers are institutional….” Vanuatu fares moderately well, relative to the rest of the countries in the study. It’s firmly in the middle of the pack where coverage and prices are concerned.

But that’s no compliment. Of all the Pacific nations, only tiny Palau has extended Internet access to more than 25% of its people. In Vanuatu, coverage is said to have reached about 10% of the population. Personal and anecdotal experience suggest that this might be a generous interpretation of data, and that the number of people who use the Internet on a consistent and active basis could be much lower.

The effect of market liberalisation on Internet prices is startling. In Fiji, personal broadband Internet is available for as low as 2000 vatu per month. Business class connections cost about 25% of what we pay here in Vanuatu. Even allowing for differences in population and economic activity, the contrast is stark.

The road to a liberalised telecoms market in Vanuatu has been a long one, and there’s a lot of ground to cover yet. Of the six major service areas available for liberalisation, only one has been opened so far. There’s been no visible motion so far on broadband and dial-up Internet, fixed-line telephone service, leased lines or international gateway services.

Vanuatu should absolutely not open the market pell-mell and all at once, of course. The pace at which the process has moved is a sober and reasonable – albeit frustrating – reflection of Vanuatu’s capacity to manage change.

To its credit, the Economic Survey recognises the reality of limited technical capacity, and provides some prescriptive relief. It rightly observes that market reform needs a watchdog to oversee the process and to arbitrate, if necessary, when disagreements arise. The benefits of such a process, even for tiny markets like Palau, are significant.

The survey authors further suggest that competition is the key to coverage:

New entrepreneurs tend to bring in additional capital and management resources and are often smaller and nimbler than incumbents—faster to adopt new, lower-cost technologies, more focused on customer needs and marketing, better attuned to local conditions and business opportunities, and better able to assess and deal with local risks.

This assertion, however is quickly hedged by the claim that government subsidies may be required in order for market entrants to justify services. Governments should be prepared to provide funds and incentives to telecoms companies to ensure the widest possible coverage area. Vanuatu’s Universal Service Fund, which makes millions of dollars available to improve coverage, is listed as an example.

Another important element of universal access is affordablility:

The more sustainable public-access approaches have proven to be subsidised village-phone-type initiatives where business risk is taken by the self-employed agent, rather than publicly-funded telecentre programs, where business risks are left with government.

‘Village phone’ projects have been rolled out in numerous countries. They typically involve providing a local person of proven acumen with one or more mobile phones, a signal repeater to reach areas that were previously un-serviced, and allowing them to pocket part of the charges for each call.

This micro-business approach ensures coverage in places of marginal profitability. Interestingly, network effects guarantee that the benefit to the phone company is well beyond whatever paltry income derives to the agent. Family in the capital will certainly originate most of the calls, meaning that they end up spending more than they would have on mobile services.

The Daily Post has observed that the survey lists Vanuatu as one of the healthiest economies in the region. But some commentators have cautioned that this relatively robust state of affairs could lead to complacency, which in turn could lead to poor management practices from which we all could suffer. We’ve seen this pattern in the past, where lax management processes have led to near disaster.

Technical experience and expertise is a particular liability in this regard. Australia’s response to this is to suggest the creation of a regional ‘pot’ of technical expertise, and to encourage all Pacific nations to work cooperatively, sharing learning and ideas.

The idea has some merit. It will almost certainly be necessary to create something like this for the short term at least. But it misses an important point: All the technical expertise in the world won’t save you if it’s not communicated effectively and fit properly to the individual circumstances of each individual nation.

The recommendation, in other words, does nothing to mitigate the need for the kind of human resource development outlined in this column recently. More about this next week.

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