Development Co-operation Report 2021

41. Financing options for the future of digital

Mark Williams
Digital Development Global Practice, World Bank

Oualid Bachiri
Digital Development Global Practice, World Bank

Abstract

Access to the internet remains unattainable for many – the combined result of coverage and usage gaps. Mobilising finance to address both gaps is a challenge for countries who pursue digital transformation. While private capital is the main source of funding for digital transformation, the public sector has a role using both direct and indirect measures. International organisations can scale funding for a range of priority areas, leverage the organisations’ convening power at global and country levels, and maximise co-ordinated action to achieve impact at scale.

Key messages

• Universal broadband coverage of a minimum quality will require USD 428 billion, with significantly more needed for 5G universal coverage.

• Policy leaders in low- and middle-income countries should focus on creating a climate that maximises private investment in different aspects of the digital ecosystem.

• Public funds, complemented by concessional finance and other financial support, can provide additional resources or incentives to cover areas or groups with limited commercial viability.

• Governments and DFIs have an essential role in nurturing the digital ecosystem by convening, co‑ordinating and scaling an array of multi-party and cross-sectoral efforts.

Access to the internet remains unattainable for many – the combined result of coverage and usage gaps. The ‘coverage gap’ refers to the significant proportion of the population, especially in the poorest countries, who live out of reach of communication networks. But even though nine out of ten people are covered by 3G networks, half of the world’s population is still not online (UN Broadband Commission for Sustainable Development, 2021[1]). The ‘usage gap’, therefore, describes individuals who do live within the reach of such networks, but do not use them.

Mobilising finance to address both gaps is a challenge for countries that pursue digital transformation. While private capital is the main source of funding, the public also sector has a role. On the infrastructure side, direct mechanisms such as public expenditure on infrastructure rollout or specific obligations placed on contracting firms deliver technology to underserved regions and populations where economic incentives are weak. Indirect mechanisms, such as licensing terms and regulatory fees, can affect the costs of a project and further bring down barriers to investment.

Governments should prioritise policies and regulations that attract private capital and encourage it to be invested in the most effective way. Initially, this should focus on maximising investment in communication infrastructure. Meanwhile, public funds and development finance institutions (DFIs) should target areas or groups that offer limited commercial viability (Development Committee, 2017[2]). Government and DFIs can optimise the use of scarce public resources by allocating concessional finance to mitigate investment risk and mobilise private capital. DFIs also play a role in orchestrating regional collaboration and devising innovative financial products, such as loss-guarantee schemes, that mitigate financial and political risks for public and private investors alike.

Digital infrastructure is only the beginning

The coverage gap arises because it can be costly to deploy and maintain communications networks in low-population-density areas often characterised by challenging geography and scarce infrastructure for power and transportation. These areas are also usually characterised by low household incomes, further reducing the financial incentives.

The usage gap arises because of many factors. The price of services or end-user devices might be beyond the purchasing power of households and firms. The skill level of individuals and workers might be insufficient to make effective use of digital technologies. The range of applications that potential users might find useful may be too limited to induce uptake. Concerns about online safety and privacy might discourage online participation. All these difficulties can be further compounded by market failures such as a lack of consumer financing that allows people to buy end-user devices on credit.

Affordability is critical for digital adoption. In high-income countries, handset subsidies and financing as part of data plans drive mobile broadband (OECD, 2013[3]). In developing countries, this is more difficult because of predominant pre-pay retail models, underdeveloped consumer credit markets and low purchasing power. Moreover, as markets transition from mobile voice to mobile broadband, the cost of end-user devices increases. The average selling price of a smartphone is 3 to 18 times that of a feature phone (Chen, 2021[4]). While competition in manufacturing these devices is driving prices down, they remain unaffordable for many. A 2021 study of 187 countries found the global average cost of a smartphone to be around 26% of average monthly income. In the least-developed countries (LDCs), the average person would have to spend over half of their monthly income to buy a smartphone (A4AI, 2021[5]).

Finally, digital literacy and skills are essential to enhance the public’s capacity to use digital technologies. Surveys find that lack of digital literacy is the most frequently cited reason in developing countries for not using the internet. Solutions for low-skilled users would respond to the needs of individuals and firms in the most vulnerable groups. Overcoming this challenge requires mobilising significant financial resources over an extended period. The International Development Association’s 2019 Commitments (IDA, 2020[6]) emphasised support for digital skills and specified that at least 60% of IDA19 financing operations for digital skills development must support women’s access to higher-productivity jobs, including online work (World Bank, 2021[7]).

The International Telecommunication Union (ITU) estimates that USD 428 billion is needed to close the coverage gap with universal broadband of a minimum quality (International Telecommunication Union (ITU), 2020[8]), and significantly more for 5G rollout (World Bank, forthcoming[9]). But financing is also required to close the usage gap through measures that promote uptake of digital services for productive uses (Digital Development Partnership, 2021[10]), including improving affordability, promoting digital literacy and content development. Digital transformation therefore requires investment and policy initiatives across the foundations of the digital economy: infrastructure, financial services, public platforms, innovation and entrepreneurship, and literacy and skills.

Direct measures enhance technology and complementary infrastructure, and consumer uptake

Much attention on financing digital transformation focuses on infrastructure deployment and maintenance. Of the USD 428 billion required for universal broadband coverage, close to 60% is capital expenditure, with most of the rest required to operate and maintain the network (International Telecommunication Union (ITU), 2020[8]). The private sector is expected to finance around 75% of the total (International Telecommunication Union (ITU), 2020[8]). This would be consistent with historical trends: globally, network operators invested more than USD 2 trillion in each of the past three decades (Shabelnikova, 2020[11]). But governments also directly influence their country’s communication networks by supporting rollout in underserved areas, co-financing infrastructure deployment and/or imposing specific obligations on firms.

Of the USD 428 billion required for universal broadband coverage, close to 60% is capital expenditure, with most of the rest required to operate and maintain the network. The private sector is expected to finance around 75% of the total.

For example, Universal Service Funds (USFs) are designed to extend network coverage into marginal areas. Their funding comes primarily from the private sector through levies on telecom companies (which are ultimately billed to the consumers). Expenditure from the funds is determined by governments, which can also supplement the funds through general taxation (World Bank, 2018[12]). However, the track-record of these is mixed. Many countries experienced incomplete or non-transparent allocation of the resources earmarked for infrastructure investment (UN Broadband Commission for Sustainable Development, 2019[13]). Closing the coverage gap may therefore require improvements to USF functioning and alternative approaches to both financing and implementation. Pay-for-play schemes that facilitate implementation by operators and co-investments by operators are possible alternatives.

In terrestrial networks, public funds encourage high-capacity, long-haul connectivity in areas that would otherwise be commercially unviable. But in doing so, the public sector should not crowd out private financing and distort competition. In Malawi, the deployment of long-haul terrestrial optical fibre networks, part of the World Bank’s Regional Communications Infrastructure Program (RCIP), aggregated government bandwidth demand into a single competitive tender (Hub, 2018[14]). In response, the winning company, SimbaNet, built a nearly 900 km network of overhead fibre optic cable, connecting internationally via Tanzania and Zambia. Telecom operators and internet service providers connect to the SimbaNet network on an open-access basis and enjoy reduced costs for wholesale bandwidth. The contract anchors other private sector investment, enabling the company to launch new services at lower costs.

Public-private partnerships (PPPs) can contribute to the development of digital networks in specific situations. Submarine cables are predominantly developed and financed by the private sector, but PPPs are used selectively to extend their reach into low-income countries, for example in East and West Africa (World Bank, 2018[12]).

Furthermore, financing bottlenecks can arise in complementary areas of infrastructure, such as power supply, that affect investment decisions (World Bank, forthcoming[15]). While data centres and cloud services are generally financed by the private sector, public-sector financing to strengthen power supplies could stimulate further private investment in the digital sector.

Finally, to close the broadband usage gap, a range of initiatives is needed, including risk-sharing credit guarantees to facilitate more asset-financing schemes, and other programmes such as direct subsidies to lower costs for consumers. Asset-financing schemes are limited in developing countries. The public sector could intervene by subsidising the cost of consumer loans for devices, and possibly also connectivity. Argentina’s Plan Mobile Internet Access channels subsidies to either direct beneficiaries or third-party operators (GSMA, 2017[16]). In the private sector, mobile operators can partner with financial intermediaries to improve affordability by expanding their retail options and offering consumers loans to pay for the devices along with connectivity services. In Pakistan, Warid Telecom collaborates with Bank Alfalah to offer an instalment plan for purchasing handsets (GSMA, 2017[16]). Such initiatives do not necessarily lower the cost of devices to customers but they do enhance affordability by spreading payments out over time.

Indirect measures use regulatory reform to lower costs for suppliers

Governments influence the financing of the telecommunications sector indirectly through regulatory rules on issues such as spectrum licenses and infrastructure sharing. Regulatory reform can reduce deployment and operational costs, and allow for coverage expansion to be financed by the private sector.

For example, competitive auctions to set licensing fees are the most common way to assign spectrum licenses. The terms governing coverage, quality of service and technical specifications impact the costs that telecom operators sustain and thus their maximum bid to obtain the licenses. The reduction in revenues that governments see from spectrum auctions represents an indirect form of finance for coverage gaps. Other regulatory fees paid by operators can also influence the amount they spend on building and operating networks. Governments and regulators must therefore weigh the benefits of additional revenue from regulatory fees against the impact on the sector.

Other regulatory decisions also impact the costs of network rollout and, therefore, the financing requirements. Urban planning policies and regulatory rules that reduce the cost of property on which to build sites impact the economics of network rollout and operation, particularly in marginal areas. Regulatory rules can be used to encourage network sharing, a common way for operators to reduce costs. But the cost savings must be weighed against the risk of operators co-ordinating to soften competition. This risk is generally lower in the case of passive infrastructure (non-electronic components like ducts, cabinets, air conditioning plant, security, etc.) than for active infrastructure (electronic components like antennas, switches, servers, databases, radio access nodes, and transmission equipment).

Development finance institutions can leverage their power to convene diverse players and scale funding

DFIs are expanding their role in financing information and communications technology investment in developing countries. This role traditionally focuses on digital infrastructure, with financing channelled directly to private sector partners and indirectly via national governments. Furthermore, in developing countries, especially fragile and conflict-affected states, DFIs support investment through development financing, guarantees and political risk insurance. DFIs also facilitate knowledge sharing and capacity building for policy design and implementation of needed regulatory reforms.

For example, the World Bank’s Identification for Development (ID4D) initiative is channelling more than USD 1.5 billion in financing to over 40 developing countries to build digital ID and civil registration systems. Digital ID is a foundational element of digital transformation, given the need for secure and accurate authentication. But an estimated one billion people lack official ID ( (World Bank, 2018[17]) and an additional 3.5 billion might have ID that is not digitally enabled (McKinsey Global Institute, 2019[18]), representing more than half the world population. In low-income economies, more than one in three people aged 15 and over lack an official ID, and 44% of women do not have an ID, compared to 28% of men (World Bank, 2018[17]). Enabled by infrastructure that brings people and organisations online, digital ID systems can be leveraged by government and commercial platforms to facilitate transactions and service delivery.

Partnerships managed by international organisations can scale funding for a range of priority areas, leverage the organisations’ convening power at global and country levels, and maximise co-ordinated action to achieve impact at scale. The Digital Development Partnership (DDP) administered by the World Bank lets public- and private-sector partners drive inclusive and secure digital transformation in developing countries. DDP support remains critical to facilitate deployment of digital infrastructure and adoption of technologies to expand connectivity, coverage and quality of service, while safeguarding data privacy, governance and online security. DDP has adopted an ecosystem approach to digital transformation, focusing both on the foundational elements of the digital economy – including digital infrastructure, digital platforms, digital skills – and digital applications across critical sectors while ensuring protection of personal data, mitigating cybersecurity risks and aiming for a truly inclusive digital economy for all.

Over the past five years, DDP saw its portfolio grow to more than 100 programmes spanning 80 countries. For clients and DDP partners alike, World Bank lending maximises the impact of seed funding provided through DDP grants. In 2021, DDP lending leverage reached USD 9 billion, representing USD 950 lent for every dollar of donor funding.

In 2021, DDP lending leverage reached USD 9 billion, representing USD 950 lent for every dollar of donor funding.

Going forward, DDP will continue to focus its work on improving integration of technology into development solutions in the context of green, resilient and inclusive COVID-19 recovery (World Bank, 2021[7]). The crisis highlighted the need to go beyond digital access toward digital adoption by facilitating innovative approaches and business models for increased internet usage, tackling barriers around affordability, inclusion, digital skills and relevant online content. Other strategic priorities include digital and climate change, data ecosystems, the digital gender divide and mainstreaming digital applications across sectors.

Mobilising financing and knowledge from both public and private partners will remain critical for operationalising the digital agenda. A co-ordinated, collaborative approach is needed – one that includes governments, businesses and development institutions working together to support countries in taking advantage of the benefits of digital transformation while mitigating the risks.

References

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