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Conditions for success of least cost subsidies: the experience of Nepal

This study investigates conditions that need to be met in order to make smart subsidies successful in bridging access gaps in rural telecommunication services. Nepal’s Eastern Development Region project is the case under study.The study finds that while it is possible to use the smart subsidies option to provide rural communities with telecommunications services the real question is whether such services are optimal and whether these projects could be sustained in the medium to long term. The findings throughout the paper converge to the point that unless the right regulatory conditions are in place; particularly with respect to cost-based asymmetric interconnection agreements and effective regulation of incumbent’s anti-competitive practices, success of rural telecom service providers who are empowered by smart subsidies, would be questionable.

Besides an unfavourable regulatory environment, Nepal is currently undergoing a serious security problem. This has seriously impacted the already weak project threatening its very existence. From a policy perspective, the findings of this study leads to probing the wisdom of separating the “access gap” and the “market efficiency gap”, particularly in terms of sequencing smart subsidy projects and market liberalization programmes. The findings indicate that perhaps it would be more useful to consider addressing rural connectivity issues from an integrated and continuous regulatory-subsidy angle instead of separate solutions for the discrete two-gap problem. The Study was conducted by Harsha de Silva and R.K. Tuladhar. The final report, ‘Smart subsidies: Getting conditions right – The experience of expanding rural telecoms in Nepal’ can be downloaded HERE. Comments on the study can be posted HERE.

The preliminary findings from this research project have been presented at the following events:

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