The Report of the Task Force on Financial Mechanisms for ICT for Development - A review of trends and an analysis of gaps and promising practices December 22, 2004 The World Summit on Information Society (WSIS), the first phase of which was concluded in Geneva in 2003, recommended that "while all existing financial mechanisms should be fully exploited to make available the benefits of information and communication technologies, a thorough review of their adequacy in meeting the challenges of ICT for development should be completed by the end of December 2004. This review shall be conducted by a Task Force under the auspices of the Secretary-General of the United Nations and submitted for consideration to the second phase of this summit." The Secretary-General asked UNDP to take the lead in setting up Task Force on Financial Mechanisms, in collaboration with the World Bank and the United Nations Department of Economic and Social Affairs and other key partners. The following report does not necessarily reflect the views of United Nations, which should not be held responsible for its contents. Table of Contents EXECUTIVE SUMMARY......................................................................................................................................1 FINDINGS .................................................................................................................................................................2 CONCLUSIONS..........................................................................................................................................................8 1.0 2.0 2.1 2.2 2.3 2.4 3.0 3.1 3.2 THE FINANCING ISSUE IN THE WSIS-GENEVA CONTEXT...........................................14 CONTEXT AND FRAMEWORK FOR FINANCING ICT FOR DEVELOPMENT ............15 THE DEVELOPMENT RATIONALE FOR A FOCUS ON ICT ........................................................................15 LEVERAGING ICT FOR DEVELOPMENT ...................................................................................................16 FINANCING ICT FOR DEVELOPMENT .....................................................................................................18 RECOGNIZING ACHIEVEMENTS & EXPLORING FINANCING CHALLENGES AND GAPS.........................20 FINANCIAL MECHANISMS: APPROACHES AND EXPERIENCE ..................................22 INTERNATIONAL RESOURCES AND MECHANISMS .................................................................................22 DOMESTIC RESOURCES AND MECHANISMS ..........................................................................................46 4.0 ICT FOR DEVELOPMENT AND FINANCING: CHALLENGES & PROMISING PRACTICES............................................................................................................................................................61 4.1 4.2 4.3 4.4 4.5 DEFINING POLICY FRAMEWORKS AND IMPLEMENTATION STRATEGIES ..............................................61 BUILDING BACKBONE INFRASTRUCTURES.............................................................................................67 ENSURING EFFECTIVE ACCESS...............................................................................................................72 ENRICHING DEVELOPMENT: APPLICATIONS AND CONTENT ...............................................................78 STRENGTHENING HUMAN RESOURCE CAPACITY, PROMOTING OPPORTUNITY...................................83 CONCLUSIONS:...................................................................................................................................................89 ACKNOWLEDGEMENTS...................................................................................................................................95 TASK FORCE MEMBERS ..................................................................................................................................95 ANNEX 1 ANNEX 2 ANNEX.3 DEFINITIONS OF ODA, OOF AND PRIVATE FLOWS ........................................97 THE MONTERREY CONSENSUS AND EFFORTS OF DAC MEMBERS...........98 SUMMARY OF AVAILABLE INSTRUMENTS AT MDBS ..................................... 100 ANNEX 4 DONOR ICT FOR DEVELOPMENT PROGRAMMES AND EXPENDITURES SUMMARY TABLE (AS OF SEPTEMBER 2004)..................................................................................103 ANNEX 5 SELECTED DONOR PROGRAMMES AND INITIATIVES .................................. 109 ANNEX 6 SELECTED UN ORGANIZATIONS ACTIVITIES/INITIATIVES ­ SUMMARY TABLE ............................................................................................................................................117 ANNEX 7 EXAMPLE OF COMPLEXITY OF FINANCING........................................................118 SELECTED REFERENCES...............................................................................................................................121 2 Executive Summary WSIS Context The WSIS Plan of Action requested the Secretary General of the United Nations to create a Task Force to study the issue of financial mechanisms for ICT and present a report to facilitate the discussions on the subject in preparation for phase II of WSIS: "While all existing financial mechanisms should be fully exploited, a thorough review of their adequacy in meeting the challenges of ICT for development should be completed by the end of December 2004. This review shall be conducted by a Task Force under the auspices of the Secretary-General of the United Nations and submitted for consideration to the second phase of this summit. Based on the conclusion of the review, improvements and innovations of financing mechanisms will be considered including the effectiveness, the feasibility and the creation of a voluntary Digital Solidarity Fund, as mentioned in the Declaration of Principles." The Secretary General asked the United Nations Development Programme (UNDP) to lead the Task Force on Financial Mechanisms in collaboration with the World Bank, UN DESA, and other key partners. Over the course of the past several months, the Task Force has conducted extensive consultations, research, and reviews of information surrounding the role and effectiveness of financial mechanisms to support ICT for development. The data, analysis, and findings presented in the report represent the Task Force's best understanding of the broad and constantly changing scope of the ICT sector and the use of ICT in the developing world from a financing and development perspective. In the report of the Task Force, the main areas of concern have been clustered into five general categories which relate to the WSIS themes as follows: TFFM Categories Enabling Environment and Policies *security & ethical dimensions are not explictly discussed in the report Infrastructure Access Content and Applications Capacity development WSIS Themes 4 -Building Confidence & Security, 5 - Enabling Environment, and 9 - Ethical Dimensions of the Information Society 1 - Information & Communication Infrastructure 2 - Access to Information and Knowledge 6 - ICT Applications in all Aspects of Life, 7 - Cultural and Linguistic Diversity, Local Content, and 8 - Media 3 - Capacity Building Background The financing of information and communications technologies for development (ICTD) needs to be placed in the context of the growing importance of ICT as a medium of communication and exchange that can contribute to a more inclusive global information society, and its role as a development enabler which can help to more effectively deliver the goals outlined in the Millennium Declaration. The achievement of these goals has become the focal point of subsequent policy and implementation initiatives by governments and international agencies around the world including most recently at WSIS-Geneva where the financing of ICTD was a central element of the discussion. The potential to facilitate a broad-based deployment and use of ICT has been ratcheted up by technological transformations that have dramatically lowered the cost of goods and services and expanded the range of technology choices and development solutions. This in turn has stimulated the entry of new players, principally the private sector. The new 1 technologies have also increased the opportunities for civil society, local communities and entrepreneurs to actively participate in the emerging social and economic processes. Traditionally, in developing countries, ICT infrastructure financing came either from Government budgets, including revenues generated by the state post, telegraph and telephone authorities (PTT), or from donor and international financial institution (IFI) programs that supported major capital infrastructure investments. But the transforming effects of the technological forces have resulted in a major shift in the financial strategies and options among ICT stakeholders, towards a significantly greater reliance on private capital. The changes in the roles of the different stakeholders and actors has also been accompanied by a sharply increased recognition of the critical importance of the enabling environment for ICTD to facilitate investment and allow actors including those at the bottom of the pyramid to participate in the new information society. Furthermore, as the effective use of ICT is becoming increasingly central to the development process, developing countries are faced with a whole new set of financing requirements with few roadmaps from the past to draw on. The rapid transformations in the technological and financing trends for ICTD are reflected in the analysis and findings of this report. The findings represent the key substantive results of the extensive research undertaken by the Task Force, as documented in the body of the main report and its supporting materials. The basic objective of the Task Force has been to identify sustainable ways to ensure the continuation of current trends and innovative approaches to accelerate the use and availability of ICT resources to a wider range of developing countries and to a broader, subset of the population in individual countries. Findings Development Context and ICT Trends 1. The global ICT sector is extremely dynamic and transformational; there is virtually no "status quo". Technology and especially the new ICT are in a state of constant, rapid change. Technological change has dramatically lowered the cost of ICT goods and services and expanded the range of technology choices and solutions. It has also stimulated the entry of new players ­ principally the private sector - and increased the opportunities for communities and the private sector to provide a range of services to the bottom of the pyramid populations. Our effort to examine the financing options facing developing countries as they facilitate the growth in the use and deployment of ICT recognizes that this process of transformation is likely to continue and the existing set of conditions may only be indicative of the future. ICT are rapidly emerging as a vital factor in economic and social development to facilitate innovative and scalable solutions for achieving major development objectives. The potential for ICTs to have a decisive impact on achieving fundamental development goals, including those articulated in the Millennium Declaration is increasingly recognized. Information and ICT-enabled services can serve to increase economic opportunities for the poor and disadvantaged, creating prospects for new jobs and small businesses along with increased knowledge to be applied in enhancing traditional livelihoods. Women stand to gain by being empowered through access to communication and learning networks. Health care systems can be vastly more effective. Learning can be enhanced and access to education made more equitable. Governments can provide more efficient and transparent services and respond to 2. 2 public needs more directly. The media and citizens are also able to empower themselves and become key players in local and national governance issues. Enabling Environment 3. Experience shows that attracting investment in ICT depends crucially upon a supportive environment and a level playing field for business as a whole, and on an ICT policy and regulatory environment that encompasses open entry, fair competition and market-oriented regulation. The explosion of ICT sector investment in most developing countries correlates closely with an improved environment for private investment to take place and the transformation of formerly closed, monopoly ICT markets to allow competitive entry. Where Governments have actively pursued an open, equitable market environment, investors have generally welcomed the opportunity to compete. The introduction and strengthening of independent, neutral sector regulation has helped to reinforce investor confidence and market performance, while enhancing consumer benefits. [0,1,2] There is evidence to suggest that the broad-based deployment of ICT also depends on a supportive development policy environment for ICTD particularly the establishment of national e-strategies and the integration of ICT into poverty reduction and/or other national development strategies and the PRSP process. Over 90 developing countries have developed or are in the process of completing national ICTD strategies. These strategies, typically designed on a multi-stakeholder basis, have been important in establishing national ownership and in outlining a set of key priority areas for intervention. Many of these have also linked to priorities outlined in the national poverty reduction or other development strategies, the success of which critically depends upon effective information management tools and applications, communication, and coordination across all public agencies and programs. The process and content of the poverty reduction and other development strategies are also key for donors who align their aid and partnership strategies to the priorities outlined therein. [3,4 ] Policy and regulatory incentives and more open access policies are also needed if private investment, CSO and community networks are also found to be effective in expanding ICT access to high cost (predominantly rural) and low income populations to address the "bottom of the pyramid" populations. Addressing policy barriers, removing restrictions on competitive entry by ICT companies and local community network operators, and permitting the use of cost effective technologies (e.g. VOIP, and on unlicensed spectrum), and other innovative practices have been found to be helpful in moving the network frontier to address the needs of currently under-served populations. Continued cooperation between various development partners and stakeholders can also help in addressing the problems of providing rural access using new technological applications including wireless broadband devices, offering incentives to Internet cafes, phone shops and community communications networks. [5, 5a] 4. 5. 3 Financing ICT Infrastructure and Access 6. Stimulated by the technological dynamism and profitability in the industry and opening up of market, since the early 1990s, the international private sector has quickly become the dominant player in infrastructure investment, and has catalyzed rapid growth of the sector in developing countries. The opening of markets and privatization of national telecommunications operators has led to an influx of tens of billions of US dollars into the ICT sector across many developing country markets, and has allowed access to fixed and mobile telephones, computers, the Internet, and other ICTs for over a billion people in the space of a decade and a half. Initially, the vast majority of this investment came from companies and institutional investors in the industrialized "North", pursuing expanded business and profit opportunities. The peak of "North-South" international investment in the ICT sector was around 1999-2000, following which the "crash" of the global telecom industry and of the "dot.com" boom resulted in significantly lower levels of new ICT investments in the developing world. This partly reflects the fact that many major investments (e.g., major operator privatizations and cell phone licenses) were already completed by 2000, combined with the drastically lower market capitalizations of major international technology companies and investment portfolios. Recent trends suggest that FDI is again increasing, and there remain numerous opportunities for foreign investors in developing country ICT infrastructure markets. [6] While private sector investment and financing in the ICT sector remains high as evidenced by the continuing and rapid roll-out in infrastructure, particularly in mobile telephony, there has been a shift in the nature of that investment towards domestic, regional, and south-south financing and investment. New investments by some of the major developing countries, such as Brazil, China, India, Malaysia and South Africa, and regional players combined with increasing reinvestment of existing operators, has continued to spur growth throughout the ICT sector, at rates that greatly exceed those in the developed world. Domestic companies, often financed by rapidly growing local financial and capital markets have been important in facilitating the growth of this sector in many countries. [7] New ICT investments in developing countries are also being stimulated by a variety of domestic financial mechanisms and multi-stakeholder partnerships, including pro-active and catalytic public sector financing and initiatives. Promising trends to build the domestic ICT sector in developing countries is also found to be dependent upon partnerships and cooperation between public, private, civil society organizations, community and financial stakeholders. These partnerships and investments have helped to mitigate risks, demonstrate market potential, enhance capacity, and stimulate demand for ICT. The support and development of local financial and capital markets, including capacity in new areas such as venture capital are also helping to spur entrepreneurship and innovation. [8,9] In the context of infrastructure financing, reflecting the growing importance of private sector investment, Multilateral Development Banks and International Donors re-directed public resources from direct financing to policy reforms and other mechanisms to support infrastructure development. Whereas public financing of basic infrastructure costs, particularly backbone telecommunications networks, was previously a dominant component of MDB and ODA support for ICT development, the trend toward private investment in this sector was viewed as greatly reducing the need for direct donor and IFI financing of such 7. 8. 9. 4 government-owned infrastructure in the majority of developing countries. ODA and public investment on ICT infrastructure declined substantially since the late 1990s. The MDBs refocused the bulk of their public support on encouraging and implementing market-oriented policy reforms to help encourage new private investment. The MDBs and other donor-supported private financing vehicles (including a large group of bilateral institutions) also considerably expanded the level and scope of support for private infrastructure rollout.1 Some bilateral donors and selected MDBs have also been exploring ways to enhance their support to developing countries in advancing their infrastructure development through taking pro-active roles to stimulate private investment through the use of creative financial mechanisms, incentives, and partnership initiatives to reduce risk and catalyze investment particularly in "backbones" which given their 'public-good' nature can facilitate the delivery of services and stimulate other private sector investment. [10,11] 10. National Universal Service/Access Fund and other mechanisms to lower costs of delivery to under-served markets and promote community access can play an important role in helping to address ICT access gaps, but require substantial institutional and implementation capacity to succeed. More than sixty countries have begun to establish Universal Access Funding mechanisms as a core component of their ICT development policies, to bring together financial resources in support of extending access beyond the market frontier. Successful models of UAFs introduced in Latin America and elsewhere have indicated that, when properly implemented in a competitive environment, these mechanisms can play a critical role in leveraging market forces to expand access to public telephone service, multi-purpose community telecenters, and other ICT facilities. Experience to date is mixed as this trend is very new in much of the developing world, and most countries are just beginning to address policy, regulatory, governance, institutional, and capacity issues required for successful management of these Funds. There are also possibilities for scaling up these funds through innovative financial mechanisms and schemes. Periodic assessment and evaluation of these mechanisms, together with other Universal Access development programs, can help define their future role in the sector within many countries. [12] Regional cooperation, multi-stakeholder partnerships, and seed financing appear to be critical elements for addressing critical infrastructure gaps and can in turn help promote further development of national backbones and last mile solutions in countries where gaps persist. In countries with relatively low population density and low per capita incomes (e.g. some of Africa's under-served sub-regions and Small Island States), financing constraints have become severe with neither the private nor the public sector being in a position to act alone. In these instances, regional infrastructures can also help serve national infrastructure in less developed regions, rural and under-served areas, and cost effectively leverage resources. In some cases additional partners can be brought into the process as well. Regional organizations and institutions can help facilitate cooperation and coordination and international financial institutions and donors can then play a vital role in seeding and facilitating the financing for such regional infrastructure projects. There is likely to then be increased market interest once the coordinated policy framework is in place. [13,14] 11. 1 Support for the private sector now represents 70% of the World Bank Group's portfolio in the ICT sector (through its private sector arm, IFC) and EBRD and EIB also provide support mainly to the private sector. This support in turn catalyzes private foreign and domestic investment by a factor of more than 5:1. 5 Content, ICTD Applications and Capacity Development 12. International Donors are seemingly redirecting their attention to both ICT policy and strategy development and mainstreaming of ICTD initiatives. While it is difficult to get an exact measure, it appears that many donors have also begun to increasingly shift their ICT program support toward the deployment of ICT within mainstream development projects such as health, education, and poverty reduction, while continuing to promote infrastructure development through ICT policy and regulatory reform-often through the provision of technical assistance and donor trust funds. [15, 15a] Current evidence indicates that ICTs that deliver relevant and valuable information applications, services and content are the most relevant to developing countries. The focus of these set of interventions is on ICT as a catalyst for both the achievement of development goals and the facilitation of access to knowledge and other global public goods. The overwhelming emphasis of ICT development and financing debate has focused upon infrastructure investments. However, ICT facilities and networks are ultimately only as valuable as the information and knowledge that they deliver to end-users. While there are many signs that the marketplace will eventually provide a variety of content and applications that can appeal to diverse populations, this segment has developed far more slowly than the supply of infrastructure and equipment. It would benefit from increased attention and creative initiatives across the developing world including expanding the public domain to ensure that knowledge can be disseminated where it is needed most and through providing support to community and local private sector for the development of locally adapted content. Also critical is the development of content and applications relating to the mainstreaming of ICT in the various development sectors, particularly in health, education and poverty reduction. These sectors while in a position to benefit from the use of ICT do not typically have budgets that would permit them to make the upfront investments required to leverage the gains of ICT for development. [16, 16a] Myriad ICTD initiatives and experiments are being financed by a wide spectrum of donors, NGOs, foundations, and international organizations; more may be better, but coordination and support for "scaling-up" strategies is urgently needed. New and innovative projects are being launched every day, and there are numerous encouraging examples of how strategic integration of ICT elements in development agendas can enhance education, health care, governance, business and job development, women's opportunities, and crisis intervention. This trend of broadbased, local level experimentation should be encouraged, even though some initiatives will inevitably fail to meet the ultimate goals of sustainability, scalability, and replicability. Greater coordination of programs, experience, findings, and ICTD financing in general is needed particularly in the context of national poverty reduction and ICTD strategies, to maximize the potential impact of limited resources and accelerate development benefits and the global learning curve. Creating conditions that would facilitate more open access to low cost technologies and ICT networks can also help to make many of the community based approaches to the "last mile" more viable. [17] The role of ICT in Government (and hence of Government in ICT) can be the lynchpin of successful "e-strategies"; enhanced international and domestic support for public sector ICT capabilities is thus a first-level priority. Public budgets in developing countries, however, are far from adequate to support wide-scale implementation of integrated systems although in the long run, efficiency 13. 14. 15. 6 gains should help offset the upfront costs of introducing new technologies. The international development community should thus actively consider the short- and long-term benefits to be gained from supporting selective public sector programs. Among the many target areas for ICT-based development interventions, the role of ICT in governance is arguably amongst the most crucial. In addition to the benefits of improved delivery of public and social services and increased participation, "egovernance" networks and facilities with multi-stakeholder partnership initiatives can help reinforce market opportunities, especially for start-up small and medium enterprises, as well as for service providers in remote locations while the proliferation of shared e-government programs and applications, stressing interoperability, sustainability and security, could help stimulate the development of domestic IT industries. [18] 16. Building human resource capacity (knowledge) at every level is a central requirement for achieving Information Society objectives. By their nature, ICTs depend upon, and reinforce, the knowledge and intellectual skills of those who use them. In the long run, a virtuous cycle of learning, innovation, adaptation, and growth can derive from access to expanding levels of knowledge and information, and the tools to take advantage of them. But for the overwhelming majority of people in developing societies, there are steep entry barriers to enjoying most of the benefits of advanced ICTs. With strong public awareness, basic education, specialized training, and other capacity building measures, everyone from young students and private employees to public officials can become active participants in the Information Society. Without this commitment to fundamental human resource capacity, however, the return on investment in hardware and software risks could be limited and the pace at which the digital divide is narrowed could be decelerated. [19] ICT-related capacity building needs in the public sector represent a high priority in all developing countries, and current financing levels have not been adequate to meet these needs. The demands on Government budgets and personnel in any country are always difficult, but in an area as dynamic and technically complex as ICT, public agencies and officials in the developing world confront an exceptional challenge. Public agencies must understand and embrace ICTs themselves before they can effectively integrate them in the range of development and poverty reduction strategies. Any realistic plans to pursue Information Society goals through strategic ICT policies must recognize the primary need for intensive and ongoing capacity building measures across the spectrum of these key public sector functions. In this important area, current trends suggest that available funding fall short of what is needed. Governments themselves have little budget flexibility to pay the added costs for training and high-skills personnel arising from new ICT policies and initiatives. Although donors, foundations, and the development banks support a wide variety of training and knowledge transfer programs as part of their ICT-related assistance, to date these have generally been insufficient to sustain the necessary levels of permanent capacity enhancement. Substantial increases in financial resources would be necessary, in most administrations, to establish capacity building programs commensurate with the goals and needs of effective e-governance and ICT sector policies.[20] 17. 7 Conclusions The Task Force's conclusions, based on the extensive research, analysis and discussions undertaken by the Task Force members, are a response to the substantive issues that were identified by the World Summit. They are organized into four main categories, which include a range of suggested priorities, options, and considerations for the participants in the Tunis Phase to take into account during their deliberations. C1. Concerning "fully exploiting" existing mechanisms: The scope and diversity of the existing financial mechanisms to support ICTD investments is quite extensive, as documented by the Task Force report. Many of the mechanisms studied are not unique to ICTD and are also supporting other development areas and sectors. While quite extensive, it appears that nevertheless, most developing countries are not yet been able to leverage the full benefits of these existing mechanisms. In the case of ICTD, most of the major financing mechanisms are primarily designed to promote the ongoing expansion of ICT infrastructure by assisting private companies to leverage public and private capital, to push back the access frontier and bring services to new customers. This is particularly true with respect to financing of "hard" infrastructure and access facilities to expand the availability and use of ICT among under-served, rural, lower income, and other marginalized populations. As barriers to such investments are eliminated, new entrepreneurs and additional funds are often quick to rush into newly opened markets. However, there are gaps, particularly where country risk (economic or political) is perceived to be unacceptably high and/or the enabling environment is weak. Investors may hesitate, and development financial institutions and donor support can assist by stepping in to provide technical support and financing to facilitate risk-sharing and stimulate additional financing and investment. In the context of infrastructure development and enhanced access to ICT, national Governments and other stakeholders have many tools and opportunities available to them to enhance the attractiveness of their ICT markets for investors and financiers: 1. Continued promotion of a level playing field for ICT investments and regulatory policies that entice open access and fair competition for enhanced service provision, and new entrepreneurial investment in under-served areas. 2. Refinement and efficient implementation of targeted public finance mechanisms such as loan guarantees, Universal Access Funds, and partnership investments 3. Continued support and promotion of domestic, regional and South-South investment and increased sub-regional and regional cooperation to address current infrastructure and last mile gaps 4. Enabling tax, tariff, import, and business regulation policies designed to reduce risks and financial burdens for and provide incentives to ICT investors and financiers 5. Coordinated "e-governance" networking, service delivery, education and training, and procurement plans, which leverage ICT industry competition policies and private sector development to encourage new business opportunities In the context of ICTD initiatives and mainstreaming, securing funding from available (primarily ODA) resources have proved to be a challenge for many stakeholders and developing country governments. First, ICTD is a relatively new area and "mainstreaming" capacities within the development sectors of ODA departments and developing country stakeholders are still evolving. 8 Secondly, stakeholders also often confronted by "process" challenges ranging from a lack of easily accessible information about available resources and mechanisms to tap, to high transaction and information gathering costs and time lags in finalizing requests for ODA support. And finally, the list of "content" challenges include differing assessments of potential and risk, development priorities to be funded, and capacities to absorb, mainstream and effectively transition to self-financing, up-scaling and/or sustainability. Possible actions include: 1. Specification of the key role of ICT in national poverty reduction strategies (PRS), as identified in Poverty Reduction Strategy Papers, which clarify the high priority placed on ICT projects among broad development goals 2. Elaboration of national "e-strategies" in conjunction with PRS/P priorities, designating the specific key areas of policy initiatives and investment needs, including coordination of cross-sectoral infrastructure and service development plans 3. Peer-partner reviews to assess blockages as well as to collectively identify priorities, design effective approaches to support mainstreaming and learn from participant and action-oriented research 4. Encouragement to pool proposals on similar themes or from same region to enhance synergies and learning and to reduce transaction costs 5. Ensuring that initiatives proposed for funding explicitly build capacity and ensure a concrete focus business/development models to maximize efficiency and scalability 6. Commissioning shared e-government application frameworks for common applications such as procurement, accounting, and tax administration which can be collected in a global or regional resource and used by most developing countries. C2. Concerning the "adequacy" of existing mechanisms: The above considerations address means by which existing sources of financing can be more successfully exploited. However, even where these initiatives are ambitiously pursued, there remains the question of whether the existing array of financial mechanisms is "adequate" to "meet the challenges of ICT for development". As the Task Force Findings indicate, there are a number of areas in which current approaches to ICTD financing, by both the public and private sectors, have not devoted sufficient attention to date, and which represent fundamental challenges to the financial and development communities. These include: 1. ICT capacity-building programs, materials, tools, educational funding, and specialized training initiatives, especially for regulators and other public sector employees and organizations. 2. Communications access and connectivity for voice, mobile, and data services in remote rural areas, isolated islands, and other locations presenting unique technological and market challenges. 3. Regional backbone infrastructure to link networks across borders in economically disadvantaged regions requiring coordinated legal, regulatory, and financial frameworks and seed financing. 9 4. Broadband capacity to facilitate the delivery of services, catalyze investment and provide Internet access at affordable prices to both existing and new users. 5. Coordinated assistance for small islands and countries, in order to lower otherwise prohibitive transaction costs in access to international donor support. 6. ICT applications and content aimed at facilitating the integration of ICT into the implementation of development sector programmes particularly in health, education and poverty reduction. There is also a need to focus on applications and processes that can ensure development of content relevant to the needs of the developing world, including material in indigenous languages, information accessible to non-literate audiences, user-friendly and affordable software platforms and interactive applications, and diverse, locally produced multimedia content. The reasons that existing mechanisms and traditional approaches may not be adequately oriented to address these emerging needs are several: · · · · Private sector investors and businesses are often reluctant to commit capital to projects with high risk/low return profiles. Donors have taken initiatives in many of these areas, but do not have sufficient resources to cover the broad scope of needs across the developing world. Development Banks have to date focused on supporting private sector initiatives and concerning public financing have concentrated mostly on policy reforms. Governments have very limited resources and multiple commitments, as well as inexperience with many of the key areas of need. Many of these new areas of attention will depend greatly upon the active and creative participation of local entrepreneurs and SMEs, civil society, community groups, and others who are most intimately aware of the needs and opportunities of developing populations. This implies that a renewed emphasis on domestic modes of finance, including microfinance, venture capital, and small business development, must play a central role in filling many of the key gaps, particularly in such realms as content, applications, capacity building, and knowledge sharing, by stimulating and leveraging market demand together with public development initiatives. At present, domestic financial mechanisms, and financial systems in general, in many developing countries are far behind industrialized and international institutions; their level of "adequacy" is partly a function of their degree of experience, which will increase with more time, effort, and resources. Many of these, from private domestic banks and lending funds to public financial instruments and procedures, have the potential to improve their operations and expand their scope of influence substantially. Recently established Universal Access Funds and their equivalent, with proper political and organizational mandates, can play an important coordinating role for the channelling of both industry and outside funds toward a variety of complementary ICT development projects, and can also be scaled up through innovative financing instruments. All of these types of mechanisms offer the promise of shifting the emphasis of ICT finance and implementation increasingly toward local involvement, and deserve support and encouragement from the international community. The issue of the "adequacy" of the existing financial mechanisms for ICTD should be seen in the context of available financing for the broader set of development agendas and goals. From one vantage point, it seems clear that ICT, although unique in itself, is not the only "sector" or area that requires the attention of donors, IFIs/MDBs and private investors. On the other hand, ICT's importance lies in the fact that it is an enabler of development and 10 can contribute to meeting the broader set of development objectives. Its financing thus needs to be framed in the context of the Monterey Consensus and the Millennium Declaration that can be seen as overall drivers for development financing in the global and national contexts. Financing of ICTD at the national level needs to be framed within the context of priorities for PRS and PRSP processes and with regard to the broader goal of achieving the goals outlined in the Millennium Declaration. National ownership and priorities highlighted through a process of multi-stakeholder involvement should determine the role that ICT can play in the overall process. Most developing countries are indeed supporting ICT as a tool that can not only enhance their role in the global economy but also help them achieve the MDGs. Appropriate ODA, IFI/MDB and private investment should be ready to help meet these goals. C3. Concerning "improvements and innovations" to existing financing mechanisms: As the Task Force report has documented, nearly every major financial institution, organization, company, and Government agency that deals with the ICT development sector is almost constantly in some stage of self-evaluation, reorientation, and exploration of new and improved modes of operation. It is difficult to pinpoint specific changes that any individual or group of mechanisms should urgently undertake, which those institutions themselves are not already actively considering to one degree or another. On the other hand, the Task Force discussions have provided a unique forum for many of these stakeholders to exchange and propose ideas, both individually and collectively, for new initiatives and approaches that might be worthy of further consideration by the larger body of international ICTD players. While none of these options should be taken as officially evaluated or "endorsed" by the full Task Force or the affected participants, there has been at least significant discussion and open-minded consideration of a healthy range of prospects for enhancing the global ICTD financing dynamic. These include, inter alia: 1. Coordination: Greater cross-sectoral and cross-institutional coordination of financing programs and ICT development initiatives would improve effectiveness and make better use of resources. It was generally agreed that the onus for coordinating inputs rests primarily with national Governments (coordinating at the national, regional, and international levels), which should identify priorities and ensure multisectoral participation in ICT programs through strategic planning. Donors and other financial institutions should, for their part, be prepared to work within these national frameworks on a complementary basis, while making renewed efforts to coordinate planning, implementation, and evaluation on an international and regional basis as well. 2. Multi-Stakeholder Partnerships: The emerging trend of multi-stakeholder initiatives to support ICT development and financing needs should continue and expand, to enhance overall program coordination and ensure that diverse views and experiences are brought together to address sector challenges. Some specific options for new multi-stakeholder approaches on an international or regional level could include: · Establishment of a "virtual" financing facility to leverage multiple sources in support of identified investment objectives in key locations (notably broadband, rural and regional projects, and capacity building); Creation of a mechanism for coordinating research and analysis into enabling policy environments, to identify best practices and priority needs for shared action by financial actors; · 11 · · Development of a "rapid response" policy and regulatory support mechanism to intervene in support of short-term ICT sector policy initiatives; Coordinated programs by governments and major financial players to mitigate investment risks and transaction costs for operators entering less attractive rural and low income market segments; consideration of new paradigms for network and service development involving a separation of an `open-access' backbone and diverse service provision Coordinated programs by governments of small countries and major financial players to address otherwise prohibitive transaction costs in access to international donor support; Collective initiatives to engage regional, inter-governmental organizations together with diverse financial institutions and investors to create incentives for building regional infrastructure capacity; Creation of jointly financed international and regional programs for public sector capacity building and e-government applications development, offering low cost tools and training options to government ICT policy and implementation officials. Public-public and public-private approaches to support the upfront investment, capacity development and mainstreaming costs to facilitate the effective integration of ICT in health, education and other development sectors to permit the more cost-effective and broader delivery of public services. Continued exploration by donors and MDBs of new modalities ­ including the consideration of re-engaging in infrastructure investments - through which they can provide financial support to well designed public sector ICT projects and programmes, particularly when they have the potential to leverage additional private resources. · · · · · 3. New emphasis on domestic finance: Governments, bilateral donors, multilateral banks, as well as private sector contributors, can all help accelerate the growth of domestic financial mechanisms by providing more direct and creative support to local microfinance instruments, ICT small business incubators, public credit instruments, franchises, reverse auction mechanisms, community networking initiatives, and other innovations. Such approaches require a combination of outside seed funding assistance, technical expertise and best practice advice, risk mitigation, and commitments to support local entrepreneurs and investors, particularly in the startup stages of new projects. The finance and development communities must recognize that failures are inevitable in these newly emerging markets, but that the lessons of these experiments, together with selected, well-documented successes, can yield long-term benefits and self-reinforcing growth throughout the developing world. 4. Private sector support for locally relevant applications and content: Commercial private sector companies could help jump-start wider demand for ICT services by supporting local producers, programmers, artists, and small businesses in the applications and content fields. Collective contributions to international and national competitions and awards, film festivals, foundations, and similar programs that encourage creative content development could go a long way toward expanding the diversity and appeal of ICT-delivered information sources. 5. Strengthening capacities to enhance the potential of securing funds and utilising them effectively 6. Encouragement of increased voluntary, consumer-based contributions: Many consumers in the wealthy countries of the world (including immigrant expatriates) 12 would be receptive to the introduction of new voluntary mechanisms for donating small contributions toward ICT-based development. New vehicles should be explored to facilitate such contributions on a simple, technology-driven basis, while ensuring that any funds collected are devoted directly to pertinent development needs, including support for creative applications and low-price access to services for the poor and access /service cooperatives owned by communities themselves. In summing up, the Task Force found that there is both a strong development rationale as well as incentives for governments, private companies, civil society and international and other development organizations to work together on multiple levels to ensure the rapid and efficient mobilization of resources across the spectrum of existing and innovative financial mechanisms, to take maximum advantage of the potential of ICT to facilitate an inclusive society for all and the unique and golden opportunity to contribute to the achievement of critical objectives as outlined in the Millennium Declaration. With a view to enhancing the achievement of the development agendas outlined in the Millennium Declaration, the digital solidarity agenda of WSIS, and related national development strategies, proposals have been made at the global, regional and national levels to increase the effectiveness of existing ICTD financing mechanisms and to raise additional resources through reaching out to new constituencies and/or more effectively leverage resources through putting in place a variety of cooperation and coordination mechanisms. The Task Force's mandate was to look into existing mechanisms so as to facilitate a discussion at WSIS-Tunis on the question of financing including a consideration of new mechanisms such as the proposal to setup a voluntary Digital Solidarity Fund (DSF). Findings and a number of options based on an analysis of existing trends and proposals for improving the effectiveness of existing mechanisms have been outlined in the report. A voluntary Digital Solidarity Fund (see http://www.dsf-fsn.org), announced at the time of WSIS, is described and presented in the report in the section on multi-stakeholder partnerships and emerging initiatives. Initial contributions to the fund were made by a number of local authorities such as cities, departments, provinces, regions, and provinces (Länder), in addition to contributions from some nation states. Endorsements have continued, including most recently from the Francophonie. The involvement of local authorities and actors in this effort was seen as a potentially innovative dimension of the DSF initiative, since it could encourage interactive collaboration between cities and municipal governments, including between local authorities of different developing countries, as well as provide a platform and opportunities for other types of North-South and South-South cooperation. However, since this mechanism is yet to be operational and its more concrete goals and objectives are still evolving, the Task Force felt that it was not in a position to assess its role among the various ICT financial mechanisms. 13 1.0 The Financing Issue in the WSIS-Geneva Context The Geneva phase of the World Summit on the Information Society articulated a digital solidarity agenda in its plan of action with a focus on "putting in place the conditions for mobilizing human, financial and technological resources for inclusion of all men and women in the emerging Information Society." 2 The plan of action points out that: "close national, regional and international cooperation among all stakeholders in the implementation of this Agenda is vital. To overcome the digital divide, we need to use more efficiently existing approaches and mechanisms and fully explore new ones, in order to provide financing for the development of infrastructure, equipment, capacity building and content, which are essential for participation in the Information Society." In terms of priorities and strategies, it recommends that: " a) National e-strategies should be made an integral part of national development plans, including Poverty Reduction Strategies" and "b) ICTs should be fully mainstreamed into strategies for Official Development Assistance (ODA) through more effective donor information-sharing and coordination, and through analysis and sharing of best practices and lessons learned from experience with ICT-for-development programmes." To mobilize resources, it highlights the following: "a) All countries and international organizations should act to create conditions conducive to increasing the availability and effective mobilization of resources for financing development as elaborated in the Monterrey Consensus. b) Developed countries should make concrete efforts to fulfill their international commitments to financing development including the Monterrey Consensus, in which developed countries that have not done so are urged to make concrete efforts towards the target of 0.7 per cent of gross national product (GNP) as ODA to developing countries and 0.15 to 0.20 per cent of GNP of developed countries to least developed countries. c) For those developing countries facing unsustainable debt burdens, we welcome initiatives that have been undertaken to reduce outstanding indebtedness and invite further national and international measures in that regard, including, as appropriate, debt cancellation and other arrangements. Particular attention should be given to enhancing the Heavily Indebted Poor Countries initiative. These initiatives would release more resources that may be used for financing ICT for development projects." Recognizing the potential of ICT for development, it furthermore advocates: "Developing countries to increase their efforts to attract major private national and foreign investments for ICTs through the creation of a transparent, stable and predictable enabling investment environment; Developed countries and international financial organisations to be responsive to the strategies and priorities of ICTs for development, mainstream ICTs in their work programmes, and assist developing countries and countries with economies in transition to prepare and implement their national e-strategies. Based on the priorities of national development plans and implementation of the above commitments, developed countries should increase their efforts to provide more financial resources to developing countries in harnessing ICTs for development; The private sector to contribute to the implementation of this Digital Solidarity Agenda." 2 http://www.itu.int/dms_pub/itu-s/md/03/wsis/doc/S03-WSIS-DOC-0005!!PDF-E.pdf, p12 14 In terms of development cooperation, it proposes that "e) In our efforts to bridge the digital divide, we should promote, within our development cooperation, technical and financial assistance directed towards national and regional capacity building, technology transfer on mutually agreed terms, cooperation in R&D programmes and exchange of know-how." The plan of action, also focuses on the need for countries that have not already done so, to establish domestic financing mechanisms to further access, particularly in underserved rural and urban areas: "g) Countries should consider establishing national mechanisms to achieve universal access in both underserved rural and urban areas, in order to bridge the digital divide." The digital solidarity agenda provides some of the main organizing elements for the report. 2.0 2.1 Context and Framework for Financing ICT for Development The Development Rationale for a focus on ICT Increasingly, access to telecommunications and IT networks are viewed as essential components of the set of economic network infrastructures (including energy and transportation services) critical for national development, the failure to modernize which are seen as undermining investment, growth and the delivery of public services. For remote communities and regions, access to communication services helps to bridge distances and remoteness, provides access to information and can empower rural populations, deliver services and stimulate opportunities to create livelihoods. However, the interactive potential of ICT and the continually diminishing costs arising from its expanded use makes it different from these other more traditional infrastructures. In this context it is a vital constituent of the social framework of development. The uniqueness of ICT is that it cuts across all economic and social sectors: information is an indispensable input and resource for every program, whether local or global in scope, and communication is vital to link governments, development agencies, field workers, local organizations, and communities with common goals and agendas. Given the increasingly prominent role of information-driven trade and business activity, economists and social scientists have also begun discussing the emerging of "knowledge-based" economies, in which ICT can be integrated with and enhance traditional and new forms of economic activity, to accelerate growth and social development.3 The characteristics of knowledge as a public good, and the role that ICT networks play in facilitating production and access to it, has strengthened support in various quarters for making access to ICT networks widely available. This is also because, as is the case with other network technologies, as more regions and actors are integrated into the network, benefits from their use for commercial and non-commercial uses grows, suggesting that everyone stands to benefit from investments in and expansion in access to ICT and ICTenabled services. 4 The role of ICT networks as a public good is also emphasized with regard to the range of services it can help to deliver. Both indirectly through the public goods lens and directly, there has been growing interest and research into the means, both See UN Economic and Social Council, High-level segment, "Development and international cooperation in the twenty-first century: the role of information technology in the context of a knowledge-based economy, " Draft ministerial declaration, 11 July 2000. A public good is defined as one the consumption of which is "non-rival" ­ in the sense that use by any one person does not reduce the amount available to be used by somebody else. The Internet is viewed as being a public-good in part because it a carrier of knowledge which is a public good (here the Internet is a complementary/intermediate public good) and in part because it too has public-good characteristics. Not all goods that are good for the public are public goods (Barder, 2003). 4 3 15 direct and indirect, by which ICT can help attain key development objectives and contribute to the achievement of the MDGs.5 For these reasons, ICT-based initiatives have the potential to accelerate, as well as integrate, progress on multiple fronts simultaneously, especially if strategies can be coordinated to maximize their impact and cost-effectiveness. Taken together, ICT networks, tools and ICT-enabled services are beginning to transform the ways in which enterprises, governments, and other organizations deliver their goods and services, the ways in which society expresses itself, different constituencies are mobilized, and social, economic and political processes take place. New models of capacity development and business models based on peer-to-peer learning and networking are emerging which allow for a shortening of the learning curve, enabling adaptation and innovation, and supporting brain-circulation between Diaspora and national communities.6 For developing countries, access to e-mail, telecommunications and ICT services are not a luxury but a critical element of a development toolkit with which they can address traditional development challenges and benefit from the potential for increased integration and cooperation in various domains. In recent years, transformations in the economic and social development domain have almost moved in parallel with the ICT revolutions and there has been a renewed focus on the multi-dimensional nature and interconnectedness of economic and social development. Spearheaded by the adoption by the General Assembly of the United Nations in September 2000 of the Millennium Declaration, the world's governments and international institutions have injected new urgency into the quest to relieve poverty and elevate the opportunities and living standards of billions of people. The Millennium Declaration established the central global objectives for development for this generation, the Millennium Development Goals (MDGs), which have become the focal point of subsequent policy and implementation initiatives by governments and international agencies around the world. The MDGs target specific, quantifiable changes in the human dynamic, such as reducing by one-half the proportion of the world's people who live in poverty or suffer from hunger, achieving 100% universal primary education and equal access to schools for all girls and boys, cutting maternal mortality by three quarters and child mortality by two-thirds, halting and reversing the spread of HIV/AIDS and malaria, all of these and more by the year 2015. 2.2 Leveraging ICT for Development In order to leverage ICT and foster broad-based access countries have sought to put in place a range of development policies and strategic frameworks. The initial focus of decision-makers was on policies to facilitate the development of telecommunications infrastructure and enhance access to ICT, responding to the opportunities to avail of both new technologies and new players. More recently countries have complemented these policies with the adoption of comprehensive e-strategies which outline a framework and implementation approach to address the broader range of issues required to foster broad-based use of ICT for development, particularly capacity development, priority areas for content and applications, access and infrastructure development amongst others. Close to 90 developing countries 5 For e.g., UNDP, Accenture & Markle Foundation (2001); World Bank (2003); ITU (2002, 2003 & 2003a) especially WDTR, Chapter 4; DFID (2002); Development Gateway website on the subject. See Anna Lee Saxanian and Ha-Zoon Song (2003) on the concept of brain circulation and the importance of networking Diaspora and national communities to foster development. 6 16 have embarked on developing national e-strategies, with over 35 of them being in Africa alone.7 In parallel, many national governments established formal strategies for poverty reduction and developed Poverty Reduction Strategy Papers (PRSP). The latter are a requirement to access concessional finance from the international financial institutions such as the World Bank and the IMF.8 The priority areas outlined in these strategies provide a key signal for development partners who align their own aid and partnership strategies to the country's PRSP either in terms of direct budget support or in terms of contributing to the financing particular components. It is only recently that national governments have begun to incorporate explicit reference to ICT development objectives as a key part of their poverty reduction strategies, stressing such factors as rural telecommunications expansion, the role of information technology in education, and to transform the national economic base. 1996-2000 Telecom Policy 1998-2002 ICT Policy 2002-2004 e.Strategies 2000ICT in PRSPs & for MDGs Sector reform Telecom law Regulatory framework Access Infrastructure Applications HRD/Capacity Enabling Environment ICT Access e.development e.commerce e.government/ governance. ICT for Poverty Reduction Education Health Private Sector Development Governance Gender/Youth Source: Adapted from Gaston Zongo (2003) For example, Rwanda's PRSP states in part: "251. The Government of Rwanda recognises the role that Information Communication Technology (ICT) can play in accelerating the socio-economic development of Rwanda towards an information and knowledge based economy. The emerging information revolution offers Rwanda a window of opportunity to leap-frog the stage of industrialisation and transform her subsistence economy into a servicesector driven, high value-added information and knowledge based economy that can compete on the global market. 252. The Government has therefore established the Rwanda Information Technology Agency (RITA) and developed a twenty- year strategy ICT-led socio-economic development framework and an integrated plan for 2001-5."9 For Africa, see UNECA's benchmarking of status of NICI strategies and presentation by UNDP at the regional e-strategies meeting held in Mozambique in 2003 8 7 These strategies describe each country's proposed macroeconomic, structural, and social policies and programs to promote sustainable growth and reduce poverty, as well as associated external financing needs. See, e.g., the World Bank, "Poverty Reduction Strategies" OECD Global Forum on Knowledge Economy, "ICT in PRSPs as of January 2004," CCNM/GF/DCD/KE(2003)4. 9 17 For the least developed countries, the challenge for policymakers is not only to integrate ICT and its various enabling roles into their development agendas, but also to refine and expand the position of ICT in those strategies and the national e-development or ICTD strategies, in tandem with the evolving industry itself. Perhaps more than any other sector, ICT is a moving target with major implications for the development sectors, whose functioning it increasingly underpins. New innovations and shifting market forces regularly disrupt yesterday's conventional wisdom calling into question traditional conceptions not only about what infrastructure needs to be financed and supported (e.g. what does "backbone" mean in the era of wireless backhaul and satellite technologies?10) but also how public services will be delivered, and how production, consumption and social processes will be organized in the era of the global network economy and society and converging technologies. Are the various cutting edge ICT solutions becoming part of a set of feasible solutions that even developing economies can consider in addressing their development needs and challenges?11 2.3 Financing ICT for Development The issue of financing is at the core of all development discussions, as adequate financial resources are obviously an indispensable ingredient for alleviating poverty and securing sustainable development. At the Monterrey International Conference on Financing for Development, in March 2002, global leaders adopted the Monterrey Consensus12, which committed all signatory nations to intensify their efforts mobilize international financial resources in support of the MDGs. Many of the principles and objectives cited in the Monterrey Consensus are directly relevant to the pursuit of adequate and appropriate financial mechanisms to promote ICT development as well and are reflected in the structure of the Digital Solidarity Agenda in the WSIS Plan of Action.13 These include the need for public sector reform, the critical role of the private sector, and the essential role of financial institutions and donors. In the era of limited resources for development financing, the focus has also shifted to a search for new and innovative financing mechanisms to address a variety of development objectives including global hunger.14 The Economics Research (WIDER) has issued a preliminary report on "Innovative sources of financing for development"15. This report considers a wide range of options for new and innovative financial mechanisms to augment existing funding sources in support of development objectives, including global "taxes" on energy and currency transactions, establishment of new Special Drawing Rights from the International Monetary Fund, encouragement of increased private donations and expatriate remittances, and even global lotteries. The underlying purpose of these exercises is ultimately to spur creative thinking about means to channel funding toward the basic goals 10 11 See for e.g. ITU (2004) Birth of Broadband Strategists in the public sector seeking to grasp the latest trends have far fewer resources available than industry planners, who themselves are often behind the curve. Can emerging Wireless Fidelity (WiFi) and WiMax access technologies enable low-cost broadband data services for the masses? Will VOIP (voice over IP) do away with a need to focus on both telecommunications and IT infrastructures? Will experimentation with intelligent agents or voice recognition yield new breakthroughs in interactive applications? Will Global Positioning Satellite (GPS) systems, Geographic Information Systems (GIS) and VSAT networks combine to help link even the most isolated and nomadic populations to the rest of the world? How will digital videography influence the evolution of indigenous cultures? United Nations, "Report of the International Conference on Financing for Development," Monterrey, Mexico, 18-22 March 2002 United Nations · New York, 2002. A/CONF.198/11. WSIS plan of Action, please also refer to chapter 1 of this report Most recently, see discussion of innovative financing to support "action against hunger and poverty" 12 13 14 15 UN General Assembly, Fifty-ninth session, Follow-up to and implementation of the International Conference on Financing for Development, A/59/272. 18 of the Millennium Declaration, taking into account changing global trends, habits, and public-private dynamics. Some see this as the thinking behind the proposal of the Digital Solidarity Fund at WSIS-Geneva. The issue of financing ICT for Development is both similar and different to financing other development objectives. On the one hand, IT infrastructure (principally telecommunications before the age of convergence) has been viewed as a critical component of economic infrastructures. Here, the issue of development financing it was not viewed as being radically different in principle to financing water or energy infrastructures and countries have chosen a variety of means to finance such infrastructure combining domestic and external financing, and public and private sector actions with successful instances for the different types of models.16 In recent times, there has been a much greater emphasis on a role for the private sector in infrastructure development. The ICT sector was perceived to be particularly attractive and profitable ­ at least in certain areas such as mobile telephony. In all of these instances investment is viewed as being responsive, in large part, to a similar set of variables that include a stable and predictable supportive enabling environment, and comparable/acceptable costs of doing business.17 This is aside from specific assessments of market potential, profitability, predictable risks, macroeconomic conditions, institutional and capacity issues.18 But ICT for Development is not limited to communications or infrastructure development. It also encompasses content and applications, capacity development and the strategic deployment of ICT to enhance the achievement of development objectives, deliver public services and foster inclusion. Many of these areas are dependent upon the use of public resources. The issue of Financial Mechanisms in relation to ICT and development, however, is arguably quite different from financing of development concerns relating to poverty, hunger, and other primary development goals. Information and communication are themselves fundamental resources, inputs to the development process rather than outputs, in this sense analogous to financing itself as much as to that which is financed. The ICT sector worldwide, even in some of the least developed countries, has proven to be a highly "profitable" sector in many areas, to which financial resources are naturally drawn, given the opportunity for a favorable return on investment, particularly in the case of mobile telephony. The ROI on poverty reduction and disease eradication may be positive, too, in the long run, but there is no "market" for such investments. While the private sector can provide the great bulk of resources because most investments have a strong positive financial rate of return, nonetheless there remains a role for governments because some ICT projects have a high economic rate of return even while the financial rate is not high enough to attract private investment. To this extent, the goals for expanding financial resources available for ICT development, therefore, do not necessarily amount to a trade-off with financing for more direct and urgent forms of support, such as for food, medicine, emergency relief, and so forth. In 16 17 See examples of promising practices in section 4 of this report. See for example, Commission on the Private Sector and Development (2004) "Unleashing Entrepreneurship: Making business work for the poor"; World Bank (2004) "Reforming Infrastructure: Privatization, Regulation, and Competition"; World Bank (2005) Doing Business in 2005: Removing Obstacles to Growth; ITU (2003) Investing in Telecommunications and ICTs in Developing Markets: Shifting the Paradigm. This has led some to ask the question of how the development needs of countries w/ small market size as well as perceptions of higher commercial risk might be better addressed, particularly in instances where even the suggested enabling policies have been put in place. 18 19 principle, the greater part of the funds that go into enhancing ICT resources should ultimately pay for themselves, through a combination of business returns and economic gains (increased efficiency in the use of existing resources and additional gains from new and innovative use of ICT) for the recipient societies.19 Nevertheless, the need for substantial financial resources in support of ICT for development is undeniable. ICT networks and facilities are by nature highly capital intensive, often requiring large upfront investments and long payback periods, and the economic benefits may often be diffused throughout society rather than directly returned to investors. While countries have evolved a variety of dedicated (e.g. national universal access or telecommunication development funds) and non-dedicated mechanisms to finance access, financing of ICT deployment within the context of health and education remain to be addressed. While such integration is proceeding, it is in many instances, still at the pilot level with limited commitment of domestic public resources since ICT integration is viewed as competing for financial resources available to the development sector. Even where value-added of ICT for development can be established in the sense of making it possible to provide services better or at a lower cost or in enabling organizational transformation and empowerment there are few resources or mechanisms available to facilitate capacity development, scaling-up, innovation or adaptation. With the emergence of the new more cost-effective wireless technologies and other technology options the feasibility of facilitating access and providing services using ICT has increased as have the models and approaches with which to achieve these objectives. 2.4 Recognizing Achievements & Exploring Financing Challenges and Gaps ICT Infrastructure and Access: Access to ICT, particularly mobile telephony has grown dramatically including in some of the poorest countries of the world, particularly through private investment in infrastructure development. While access still remains uneven and unaffordable for many, coverage has increased dramatically: Telephone subscribers, w or ld, m illions Annual change, World, % Forec as t 2,500 2,000 1,500 1,000 500 25 20 15 Telephone subscribers GDP Fixe d- line 10 5 M obile 0 1982 85 88 91 94 97 2000 03 0 1980 1983 1986 1989 1992 1995 1998 2001 While effectively used, ICT can create efficiencies and contribute to variety of kinds of value-added, ICT has often being integrated in a manner that works against leveraging such benefits. See most recently, Robert Schware (2004) has emphasized the points earlier made by Richard Heeks (2003) with regard to e-governance projects. Indicators to track the development impact of ICT are only recently being developed. 19 20 Source: ITU World Telecommunications Indicators Database, IMF. However, with market driven provision of ICT, there can be significant "gaps", particularly in serving low income and remote populations (see graph on the following page) and in facilitating national and regional backbone development and inter-connectivity. Box (Source: ITU WTDR 2003) Trends in financing though the different mechanisms are described in Section 3. Challenges and promising practices are described in Section 4. ICT for Development While the integration of ICT in development sectors has been proceeding, the urgent need to create locally relevant and developmentally targeted information content and applications, and to strengthen human resource capacity at all levels of society to allow people and institutions to embrace the potential of ICT will not be readily provided on a broad scale by the private sector alone and public budgets have proved to be far from adequate to wide-scale integration and development. There are thus strong incentives for governments, civil society, international development institutions, and private companies to work together on multiple levels to ensure the rapid and efficient mobilization of resources across the spectrum of existing and innovative financial mechanisms, to take maximum advantage of this unique and golden opportunity to transform the paradigm of human development, through human technological ingenuity. 21 3.0 Financial Mechanisms: Approaches and Experience This section presents an overview of the various types of mechanisms that exist for financing ICT for development, including summary data on the levels of financing, types of programs, and general experiences of each category. For ease of understanding, the following definitions are generally employed in the analysis: Box 3.1 Definitions - ICT and related terms The confusion that surrounds the ICT concept is reflected in the different ways the term is used and defined. The distinction between ICT as a sector and ICT as a theme is particularly important in the context of this paper. Information and Communication Technologies (ICT) consists of the hardware, software, networks and media for the collection, storage, processing, transmission and presentation of information (voice, data, text, images), as well as related services. ICT can be split into ICI and IT. Information and Communication Infrastructure (ICI) refers to physical telecommunications systems and networks (cellular, broadcast, cable, satellite, postal) and the services that utilize them (Internet, voice, mail, radio and television). Information Technology (IT) refers to the hardware and software of information collection, storage, processing and presentation. ICT Applications are hardware and software solutions that utilize ICT to meet business, public administration, social and other goals; these are also sometimes referred to as informatics. This term deals with ICT as a theme, a tool, a way of doing things (e.g. ICT in Education, egovernment). A word of caution needs to be put here before looking into various types of financing mechanisms. In a rapidly changing socio-economic environment and further with technological innovations, no one financial mechanism nor instrument can support one specific project nor program.20 In order to make successful implementation, available financial instruments as well as other expertise and capacities are brought together according to the specific needs of various phases of the project or program. This can be exemplified by one internationally well-known "Grameen Village Phone Program" in Bangladesh. (For more information, see Annex 7.) Emerging issue of multi-stakeholder partnerships and multi-sector initiatives, not simple "co-financing," is reviewed in depth and from a different perspective in section 3.1.4 below. 3.1 International Resources and Mechanisms These mechanisms involve cross-border investments and financial support, at the global or regional level, with emphasis on the participation and contribution of companies, governments, and international agencies primarily from the industrialized world, and their investment in and support of ICT financial needs in less developed countries. 3.1.1 Private Sector Without question, the engine of ICT development and finance over the past two decades has been private sector investment, especially foreign direct investment (FDI) by an increasingly diverse and competitive array of multinational and regional ICT sector corporations. 20 Example of complexity of financing ICTD could be viewed at OECD-DAC document: "Grameen Phone Revisited: Investors Reaching Out to the Poor" [DCD/DAC/POVNET(2004)8/REV1]: http://www.oecd.org/dataoecd/36/6/33962074.pdf 22 Box 3.1.1 Definition ­ Foreign Direct Investment (FDI) Foreign investment takes the form of direct investment, portfolio investment, reserve assets or other investments. A foreign investment is classified as a direct investment if the foreign investor holds at least 10% of the ordinary shares or voting rights in an enterprise and exerts some influence over its management. Any investment amounting to less than 10% of ordinary shares is classified as portfolio investment. All OECD countries except Turkey have adopted the threshold of 10% of assets or voting rights held in a company as the rule for distinguishing between direct and portfolio investment. However, FDI statistics in some countries (e.g. Belgium, Iceland, Japan, Korea, Mexico, Norway, Poland, Portugal, Switzerland) include transactions between a resident enterprise and its direct investor when the investor has an effective voice in management, even though the investor does not own 10% or more of the enterprise's assets. By definition, direct investment flows do not include investment via the host country's capital market or via other financial sources that do not pass through the investor country, although in some cases this may represent over half of the total investment. For this reason, data on the activity of foreign affiliates provide more complete information on the importance of foreign investment in each country. (Source: OECD). Telecommunications Sector Following the early waves of privatization of national PTTs and opening of markets in the industrial countries ­ led by the breakup of AT&T in the United States and the public offerings of shares in British Telecom in the United Kingdom and NTT in Japan in the mid1980s ­ the newly established corporate telecom giants eagerly rushed to expand into new markets. With the spectacular growth of international telephone traffic and revenues that took hold in the early 1990s, compounded by the equally explosive Internet and cellular revolutions, the leading telecom industry conglomerates (the Baby Bells, NTT, the major European incumbents, etc.) found they had money to burn, and launched a race to establish worldwide service and investment strategies. This eagerness to invest was often more than welcome across a wide spectrum of developing countries which were struggling under heavy public debt, currency and inflation crises, and under-funded public telephone operation, for which infusions of millions in foreign hard currency represented life-saving medicine. Meanwhile, all of these conditions coincided with the geopolitical transformations of the 1990s, which saw the broad ascendancy of free market principles in international trade and national economic policies as never before. Thus, beginning in Chile (1988), Argentina (1990) and Mexico (1990) many national governments around the world, encouraged and assisted by multilateral development banks, finance institutions, and others, initiated a trend of partial or full privatization of state-owned telephone operators (as well as other public enterprises), whose echoes continue to the present day. The resulting influx of international private investment to the telecommunications sector of numerous developing countries during the 1990s was without precedent. Some highlights included21: · In 1988, Chile sold 49% of shares in the local operator, CTC, to foreign investors, for US$270-million, and 45% of ENTEL, the long distance operator, to a combination of Telefonica de Espaņa, Chase Manhattan Bank, and employees and pension funds for a further 36% of ENTEL was sold the following year. In 1990, the Government of Argentina sold 60% of its interest in the two major regional telephone operators, to two different international consortia, one led by · 21 Data from ITU Privatization Database. 23 STET and France Telecom, the other led by Telefonica de Espana, for a combined total of US$1.17-billion. · In 1990, some 25% of Telefonos de Mexico (Telmex) was sold to a consortium of local investors plus France Telecom and Southwestern Bell (SBC), along with employee equity, for nearly US$2.1-billion. When another 15.7% of shares were sold in -May 1991, the market price again exceeded $2.1-billion, for a substantially smaller amount of equity; meanwhile, SBC was able to exercise an option to buy an additional 5.1% of shares for only $467-million, or less than 2/3 of the market price. In all, the first two privatization stages brought some US$4.6-billion in equity investment (with an estimated market value, by 1991, of over US$6-billion), for less than 50% ownership Telmex. The PTT privatizations were only the first wave in the flood of FDI into developing country ICT sectors. The second came along with the revolution in mobile telephone technology, primarily the introduction of digital GSM cellular services in the mid-1990s. The costeffective, modular nature of cellular networks, combined with the market innovation of affordable pre-paid service options, created an unanticipated boom in demand in both the industrialized and the developing world, and fueled a renewed rush to invest, this time in entirely new network infrastructures. As with PTT privatizations, governments saw the mushrooming market for mobile licenses as a "win-win" scenario: an opportunity to install new telecommunications services that their citizens desired, while extracting millions in additional hard currency funds ­ in the form of license fees auctioned to the highest bidder ­ to deposit in the national treasury. In combination, the trends of PTT privatization, cellular network licensing, and other private ICT investment opportunities resulting from the opening of markets have drawn over US$250-billion in private funds into the infrastructure of the world's developing economies in just over a decade. Private Investment in Telecommunications Projects $80, 000 Tot al investment [US$ millions] $70, 000 $60, 000 $50, 000 $40, 000 $30, 000 $20, 000 $10, 000 $0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 SSAfric a Sout h Asia Middle East and NAfrica Lat in America and Caribbean Europe and Central Asia Eas t Asia and Pacific [Source: World Bank PPI Database] There are some important caveats to these trends, however. The patterns of the past do not necessarily tell a complete story, especially with regard to what can be expected in the 24 future. First, as mentioned, a significant proportion of the funds that have been "invested" in existing or new telecommunications networks through privatization and licensing have actually gone to purchase existing government-owned assets or for mobile license fees, rather than to construct new facilities. These payments represent one-time entry fees for those companies seeking to participate in the market, but do not constitute actual financing of new investments in infrastructure and equipment, or other costs of network development. Exact breakdowns of the amounts are not available, but the actual magnitude of true infrastructure financing by foreign investors ­ which would more closely indicate the degree of ongoing commitment to capital investment in the sector ­ has been significantly less than the overall numbers would imply. 22 More important, the patterns of FDI in ICT/telecom infrastructure in recent years show a marked decline in such investments, following the euphoric period of the 1990s boom years. From a peak of some US$70-billion in 1998, telecom infrastructure investments in developing countries declined to less than US$15-billion in 2001, and barely US$5-billion in 2002. This has also been the trend for all forms of FDI, which mirrored the global economic downturn beginning in 2000-2001.23 UNCTAD has recently predicted a turnaround in private foreign inflows to the developing world, although these are unlikely to return to the heights of the late 1990s any time soon. Production of Hardware, Peripherals and other ICT goods There are other components of ICT for development besides telecommunications infrastructure that can attract significant foreign direct investment, although precise figures are difficult to quantify. Many of the manufacturers of computer hardware and peripherals, and particularly microchips, have begun locating plants in developing countries, in particular to Asia and within that to China.24 Intel, for example, has established a major chip production plant in Costa Rica. The objective of these operations is not necessarily to provide domestic equipment supply to the host country, but to take advantage of favorable labor and other costs to produce mass supplies for export around the world. Nevertheless, the introduction of such local manufacturing plants has several intrinsic benefits: training of the workforce in high-tech processes, establishment of attractive "anchor" facilities and services that other foreign technology companies can build off, and, not insignificant, availability of wholesale-level prices for the locally produced components within the domestic ICT sector. Software & IT Services There has also been a growing trend among firms to relocate product development to India, China, as well as countries across the other regions particularly among computer software, IT services, call center operators amongst others who are taking advantage of cost-effective educated workers, supportive business conditions etc. This new business service models utilize the characteristics of ICT at their fullest by reducing the effect of distance which was a traditional bottleneck for many industries. ICT-enabled services are expanding rapidly with rapid influx of FDI but also expanding with partnerships with domestic resources. In addition to such outsourcing activities by major ICT and related services corporations, other transnational companies that establish offices in developing countries tend to infuse local suppliers and resellers with investment capital for their own, internal communications and information technology needs. There are numerous examples of small, specialized IT equipment and services firms that have been built around the needs of international (and 22 23 24 UNCTAD. 2004. "World Investment Report 2004: The Shift Toward Services", p.117 UNCTAD, "World Investment Report, 2004: The Shift Towards Services". Naughton, Barry (2002) 25 domestic) companies for locally available technical support. Many independent Internet Service Providers, for example PlaNet Online in Laos25 and CENATRIN in Burkina Faso26, grew out of specialized private and public local computer distribution and installation operations. Foreign companies also contribute financially to the viability of mainstream communications media (broadcasting, press), chiefly through commercial advertising, which constitutes one of the highest categories of international spending by transnational corporations. (One study, for example, purported to document that expenditures in Kenya for soap advertising were higher than government expenditures for rural health care.27) Domestic branches of international businesses are also obviously important customers of the local telephone companies and Internet Service Providers, whose spending on these services can strongly influence technology deployment, training, and industry development. FDI also strongly contributes to technology transfer and capacity building, particularly where national economic strategies encourage such investments.28 The path ahead: There are many fundamental questions about the role and potential for new private, foreign investment in both telecommunications and other ICT markets in the developing world over the next five to ten years. Are the recent sharp downward trends long-term in nature, or will there be renewed growth spurts in the sector? How will major international companies, including new players from emerging markets, address the risks and potential rewards of delivering services to the vast untapped potential demand in the developing world? Will new technological solutions yield the next wave of upwardly spiraling investments? Will there be new pockets of market opportunity, akin to the "Asian Tigers", in different regions of the world? How strongly will the recent trends of outsourcing of IT services and manufacturing continue? Most of these questions focus upon optimistic growth scenarios, but there are potential minefields for the global ICT industry as well: Will there be any new shocks to the sector that will cause further setbacks such as witnessed in 20002001? How will policies and practices regarding Intellectual Property rights, data security, and Antitrust regulation influence corporate willingness to expand investment in new markets? Will global industry consolidation lead to cartel-like pricing and a decline in competitive options? The goal for development policy, in any event, should be clear. The private sector will actively seek out opportunities where demand is growing, markets are underserved, and the investment climate is attractive. The lesson of the past decade is that strategic investment ultimately rewards itself, as markets which are exposed to new technologies and communication capabilities become increasingly hungry for more, rewarding those who foresee the openings earliest and pursue them most creatively. Any initiatives, therefore, which enhance access, awareness, capacity, and economic opportunity for developing populations will also increase the size and appeal of the commercial ICT markets as well. Forward-thinking private investors thus share essentially the same development goals as public officials and the international community: the win-win scenario in which profit and development are mutually reinforcing. 25 26 27 28 http://www.planetonline.laopdr.com/main.htm http://www.cenatrin.bf/ Mueller, Barbara, International advertising. Belmont, CA: Wadsworth Publishing Company, 1996, p.256. See UNCTAD, "Investment and Technology Policies for Competitiveness," 2003. 26 3.1.2 International Finance Institutions All Multilateral Development Banks (MDBs) are involved in financing ICT in the developing world or in emerging and transition economies29. This section looks at: - the World Bank Group (WBG) - the European Bank for Reconstruction and Development (EBRD) - the Asian Development Bank (ADB) - the African Development Bank (AFDB) - the Inter-American Development Bank (IADB) and - the European Investment Bank (EIB) Table 3.1.2.1 provides summary statistics of ICT commitments per financial year. MDBs offer a wide range of financial instruments to finance ICT, as further described in the Annex.3.30 Several MDBs encounter difficulties in tracking commitments and expenditures in the ICT sector as a whole. Indeed, investments in the sector may include infrastructure projects, support to the IT industry, and also ICT applications. Where ICT is only a component of the total project (as opposed to a standalone project) there may be issues with tracking and monitoring of commitments. Project coding may not always reflect the ICT content of a particular project - examples are e-education projects that are coded simply as `education', or regulatory reform coded as `central government'. This leads to incomplete or inconsistent reporting. For MDBs where there are fewer stand-alone ICT projects, but an increasing number of projects including ICT components ­ for example, the WB - this raises issues as to the adequacy of the existing tracking frameworks31. MDBs recognize this difficulty and are exploring ways of addressing it. The instruments available to finance the sector are by and large available across sectors, Box 3.1.2.1 ICT specific instruments managed by MDBs Existing: Japan Fund for ICT: supports ICT-related activities that promote the poverty reduction strategy and other related development aims of the ADB, encourage private sector participation in ICT development, and improve regional and international cooperation through ICT applications InfoDev: consortium of public international development organizations and other partners, facilitated by a secretariat at the World Bank, whose mission is to help developing countries and their international partners use information and communication broadly and effectively as tools of poverty reduction and sustainable economic growth E-Asia Fund: Announced by the government of Korea and to be administered by ADB ICT Innovation Program for E-Business and SME Development (ICT4BUS): IADB Multilateral Investment Fund (MIF), working with Information Technology for Development Division, provides grants to non-profits (i.e., chambers of commerce, industry federations, et al) that assist small and medium-sized enterprises to use ICT to improve productivity and competitiveness. IDB ICT for Development Trust Fund: Multi-donor instrument to assist countries channel resources to specific ICT for development activities. New: - - and are not specific to ICT; exceptions include InfoDev, the Japan Fund for ICT (JFICT) administered by the ADB and some newly announced mechanisms (see Box). Although 29 30 Based on contributions by WBG and other Multilateral Development Banks (ADB, AFDB, EBRD, EIB and IADB). Additional information on the specific instruments available in the different development banks, as well as on their regional focus and ICT strategies is available in background documents provided to the TF by some MDBs.. 31 As a consequence, although the perception at the World Bank is that projects increasingly include ICT components, the reporting system cannot confirm this trend. 27 some of the bilateral Trust Funds at AfDB are earmarked for specific sectors ­ including ICT ­ so far none has been used for that purpose.32 Leading Through Private Sector Investment Support Large amounts of investment will continue to be needed to accelerate and sustain information infrastructure development. The private sector has shown its ability and effectiveness in mobilizing resources and expertise in this area. All MDBs acknowledge the growing importance of the private sector in undertaking and sustaining investments in ICT. There is, in most of them, a strong focus towards Private Sector Development (PSD). Support for private investment represents 70% of the World Bank's portfolio in the ICT sector (through the IFC and MIGA) and also both EBRD and EIB provide support mainly to the private sector (see Table 3.1.2.1). Although these institutions have dedicated considerable amounts of resources to the ICT sector, these remain a comparatively small percentage of their total portfolio (see Table 3.1.2.1). These investments also represent a fairly small percentage of total financing in the sector. Only sixteen percent of the projects listed in the Private Participation in Infrastructure (PPI) Database at the World Bank over the 1990-2002 period involved an international financial institution. MDB support to the private sector must be seen as a catalytic investment. For many of the Banks (e.g. AFDB, EIB, EBRD, IADB IFC) their investments must be only a part of the total investment in the project. This ensures investments are a complement, but not a substitute, of existing or alternative funding and avoids crowding out private investment. It also ensures that there is a significant catalytic impact of MDB support, with each dollar of IFC investment in the sector attracting approximately $9 of outside funding, for example. In addition to directly supporting the private sector, MDBs also play a key role in bringing in additional resources from the private sector, through resource mobilization: EBRD, AFDB, IADB and IFC provide these type of services. IFC's syndications amount to 15% of the WBG commitments in the sector. Furthermore, MDB investments appear to have played an important counter-cyclical role, providing support in the post-2000 period even as flows from the private sector diminished. 32 For AfDB: a number of bilateral Trust funds are available earmarked for specific sectors or a number of sub-sectors. ICT funding (such as policy studies, ICT components of projects, etc.) are included in MOU between the donor country and AfDB. These include the Indian Trust Fund, Dutch Trust Fund and the Canadian Trust Fund. So far none has been used for that purpose. 28 Table 3.1.2.1 Summary statistics of ICT commitments per financial year & additional information ICT commitments per Financial Year Additional information % ICI vs IT vs ICT apps % Public vs. Privat e focus 30% public, 70% private 35 na 90% public, 10% private mainly private 16% public 84% private 5.8% 7.1 0.5 14.4 13.1 n.a. 35.1 597.1 Global Loans mostly to SMEs in IT services 6 100% private 24 % of MDB total portfoli o for last 5 years No of countrie s with ICT activitie s over last 5 years MDB 33 2000 2001 2002 2003 2004 Total What is included WBG ($ m) $ 479 $ 981 $ 789 $ 417 $ 505 $3,171 Numbers are mostly for ICI 34 sector . Includes syndications, but not TFs na Projects where ICT forms a major component Includes only loans and standalone ICT projects Individual Loans mostly in ICI - 2.3% 36 80 AfDB ($ m) $387 $45 $78 $30 $340 $16 $350 $24 na $56 $1,155 $202 na - na 0.7% na 23 ADB($ m) EBRD ( m) 88 211 206 151 na 656 ~8% 14 EIB ( m) Individual Loans Global Loans 369 93 50 50 n.a. 562 94 9 IADB na na na na na na na na na na na Major Barriers for the sector and private investment Regarding MDB support of private sector initiatives in ICI, few significant supply-side barriers to increased support were identified. Nonetheless, there are often bottlenecks/barriers/difficulties that preclude sector growth and constitute barriers to investment. Some of the general barriers encountered in the telecommunications sector are related to: · Overall business environment and legal barriers to financial products. The overall business environment, high custom duties, taxation, rules and restrictions on FDI and other legal barriers to financial products constitute important barriers. For example, regulatory restrictions related to financial products may prevent the creation of more sophisticated cross-border transactions that could allow borrowers access to deeper and more liquid foreign capital markets, or market interventions such as interest rate caps may prevent MDBs from appropriately pricing transaction risk. Lack of financial strength and/or technical capabilities of the Project Sponsors. Otherwise financially viable projects can lack Sponsors who possess the necessary · The WBG financial year runs from July 1 to June 30, whereas for AfDB, ADB, EBRD and IADB the financial year runs from 1 Jan st to 31 Dec. 34 In view of the difficulty of documenting WBG financial support for ICT applications, the main focus of this report and of the data collected is on Information and Communications Infrastructure (ICI) and related activities (e.g. capacity building, etc). 35 Not accounting for IFC syndications 36 For this calculation have not used AAA or IFC B-loans, since these are not accounted for when calculating the Bank's total portfolio. 33 st 29 · · financial capacity to shoulder cost overruns or early market setbacks. Alternatively, it may be that the Sponsors lack sufficient experience in the sector. Need to strengthen reputation of Project Sponsors. MDBs tend to have high standards of business ethics and expect the same of their partners. In telecommunications, where conflict of interest issues can arise around politically well-connected Sponsors, MDBs (e.g. IFC, EIB and EBRD) tend to be particularly conservative. Development of capital markets and other external factors, a situation complicated by the decreasing appetite of the private sector in telecommunications on a global scale. However, MDBs consider that although the situation is improving in a number of countries, a major barrier for sector growth and for further investment in support of private sector in many countries is the lack of an adequate ICT policy and regulatory environment, including: (1) lack of coherent, accountable, transparent and predictable regulation (2) lack of an independent regulator and no plans to create one; (3) significant barriers to entry; (4) weak government commitment to reform and liberalization of the telecommunications sector; and (5) suboptimal regulation and incentives schemes. Supporting Public Sector Policy and Investment Given the importance of sector policy and regulation in attracting private sector investment in the ICT sector, it is unsurprising that a primary role for donor support to governments is to provide assistance in the development of a pro-competitive policy and regulatory environment for the sector through the removal of policy and regulatory bottlenecks which constrain sector development, and could extend the boundaries of service provision. The World Bank, for example, has been actively involved in supporting over 80 countries in the basic ICI reform agenda opening up the sector to private, competitive, well regulated provision. With regard to donor funding of ICI investments, MDBs, in particular the WB, believe that investment financing should continue to come predominantly from the private sector, and consequently generally advise against the use of scarce public funds. . Nonetheless, specific investments in the sector may be supported where and when these will be a catalyst for further private investment and growth in the sector, in emergency situations, when the market alone cannot meet access objectives (e.g. rural access), or when access to ICT infrastructure is considered a public good37. MDBs also play a considerable role in financing ICT applications for governance and government services (for example, the IADB ICT for Development Trust Fund). It is usually the case, however, that this support is provided under sector-specific projects (such as ICTs in schools under an education project), which is one reason for the difficulty of quantifying this involvement. For the World Bank, support for ICT applications in sectoral projects has been traditionally estimated at upwards of $1 billion a year. Table 3.1.2.2 contains information about the process that countries/borrowers have to go through to gain access to funds, along with the potential constraints faced. With respect to public sector funding, for at least the WBG, IADB and the ADB, Ministries of Finance or Development have to agree with the concerned Bank on priority sectors for public lending through a Country Assistance Strategy/Program. This means that the ICT sector needs to be formally recognized as an integral part of the overall assistance strategy to the country in order to gain access to funds. In this case, ICT competes directly with other sectors (e.g. education, health, etc) to have access to funds, and the relative importance of each of these sectors will determine the share of funds dedicated to ICT. The EBRD does not formally require such a process, but still engages in policy dialogue with its clients. Also the AfDB is considering as a possible future action to ensure, in this context, that ICT is integrated in the Country Strategy Papers. 37 The ADB is in agreement with the above, but does sometimes assist LDCs. The last major ADB ICI public loan was in 1996. 30 Table 3.1.2.2 Process to access resources (and constraints faced) Bank Public Need to go through Minister of Finance. ICT sector needs to be formally recognized as an integral part of the overall Country Assistance Strategy (CAS) in order to gain access to funds. ICI/ICT needs to be recognized as priority sector, and competes for funds with other sectors. Competition for Concessional loans/grants is higher, since there is limited supply. Limited by country creditworthiness For OCR/ADF involvement, ICT needs to be a priority in Country Assistance Program (CSP). ICI/ICT needs to be recognized as priority sector, and competes for funds with other sectors. Access to Trust Funds governed by criteria established by the specific donors Private Needs to be sound, viable, business criteria, etc. Eventually limits on country or sector exposure Limited by company creditworthiness For equity IFC generally subscribes between 5% and 25% of project equity, and is never the largest stakeholder, in order to ensure participation of other private investors WBG ADB Need to be a sound, viable business. Participation limited to 25% or $75million The total amount of Bank assistance to any enterprise, does not normally exceed 1/3 of the total cost of the project, and the Bank's equity investment will not normally exceed 25 percent of the share capital of any enterprise. Bank should normally not be the single largest financier in a project. Although the Bank may open exceptions, the total project cost should at least amount to US$ 9 million for the project to be considered by the Bank to prevent Bank from competing on smaller projects with local banks, which are in a better position to respond to small business. For equity investments EBRD often makes the investment alongside, and in close collaboration with, an equity fund. Ensure additionality to private sector investments - that is testing that investment are not crowding out the private sector EIB financing outside the EU are geared to priorities defined jointly by the EU and beneficiary countries EIB financing must be only part of the total project cost, in order to be a complement, but not a substitute, existing or alternative funding EIB has not defined any particular policy for the ICT sector. Projects shall be sound and viable, with transparent procurement procedures and not negatively affecting the environment. AfDB Any ICIs are normally stand-alone projects and should be a priority for the country or it should be a Bank priority as a regional project. ICT, as components of projects, are financed within the project and does not attract particular attention so long as the Bank and the borrower have agreed to the component. EBRD Do not require Ministry agreement, but still undertakes policy dialogue on the ICT sector EIB Only accessible to commercially run public sector EIB has not defined any particular policy for the ICT sector. Projects shall be sound and viable, with transparent procurement procedures and not negatively affecting the environment. IADB Loans governments of can access loan resources by official request to include a particular project in "country programming process". Operations must be consistent with "country strategy" as established in the "country paper". Technical Cooperation Governments and civil society organizations can access non-reimbursable financial resources to undertake priority pilot projects, base studies and other priority areas, consistent with the overall development goals of Bank's member countries Loans: Private sector enterprises from borrowing member countries may access debt-financing from the Bank's Private Sector Department or the Inter-American Investment Corporation (IIC) Issues with current public financial instruments and adequacy In the information collected, MDBs have not identified any adequacy issues as such for the instruments available to finance the ICI sector. Some new financial mechanisms are being put in place (see Box 3.1.2.1) and some of the planned increase in ICT applications support, for example, (see e.g. ADB) will be completed within the framework of the existing financial mechanisms. There may be, however, some barriers or bottlenecks. Several MDBs - the WB, EIB and ADB ­ have indicated that they believe that there is no financing constraint for non-concessional loans (i.e. loans that follow market rates), and financial resources generally seem to be more than adequate to meet the demand for ICT related projects (i.e., these banks are able to mobilize resources if needed). Borrowing 31 capacity is limited by country's and/or companies' creditworthiness, and eventually country and sector exposure limits. At the same time, the current financial resources for ICT grants may be insufficient, and not all the demands of grant financing for ICT related projects are met. This is as a result of both the limited funding levels, and the competing needs for grant sources from other sector and thematic areas. Demand for grants ­ for obvious reasons - tends to be unlimited. Concessional loans (such as IDA credits, and Africa Development Fund or Asian Development Fund loans), are part grant and part loan38 or have grant characteristics, because they are provided below market rates. Similar rationing schemes as for grants are thus needed. For at least the WB and ADB, in the case of public funding the main responsibility for setting priorities among sectors or themes (including ICT) for grants and concessional loans rests with the beneficiaries, i.e. mainly the governments of developing and transition countries. Where there is a limited availability of funds for these types of instruments, if countries raised the priority of ICT in their country assistance strategies, increased financing could be available for the sector. Need for incentives to implement sector reforms One area where a demand-side bottleneck may limit the flow of donor resources to ICI in particular is that, although sector reform represents a significant bottleneck, some countries are reluctant to borrow money for Technical Assistance. One could envision a Sector Reform Technical Assistance Facility to specifically provide quick action for regulatory and policy support to assist countries with reform and capacity building in this area39. There may also be the need for stronger incentives for policy makers to implement the basic reform of their ICI sectors in a transparent and open manner. In addition, even after implementing the basic ICT reform agenda, some countries may still have trouble attracting private investment. Several options are available to address this issue, and would need to be further explored: - an advisory facility that would help countries implement the needed reforms. - a facility that would finance ICT applications/IT industry/rural access in those countries that have implemented the basic reform agenda but that are still having trouble attracting private investment to the sector. - making increased use of existing instruments, including investment, capacity building, Technical Assistance loans - using adjustment type lending schemes, with `conditionality clauses' to create incentives to reform, by making availability of funds conditional to making necessary reforms Prohibitive transaction costs for small countries Finally, major issues arise when dealing with small and relatively low-income countries in particular countries in sub-Saharan Africa, as well as in the Caribbean and Pacific islands, Central America or Caucasus and Central Asian countries. The transaction costs for international donor support is high both for the donor and the recipient, making it difficult to provide in-time support. Exploring schemes to pool resources and lower transaction costs 38 For IDA a concessional loan typically carries no interest and offers a much longer grace period and maturity than other forms of financing could provide. IDA's standard concessional loan (called a `credit') does not require principal repayments until 10 years after it is signed, with a final maturity of 40 years. Therefore, a country effectively repays only about 40% of a regular IDA credit, after applying a discount rate to convert credit repayments over 40 years into today's prices. EBRD administers donor funding for a Technical Cooperation program that provides technical assistance to countries committed to undertake a major reform of their telecommunications policy. 39 32 would be beneficial in improving the access of these countries to financing resources for ICT. The MDBs acknowledge the need for coordination among themselves, for example in what concerns ICT financing and related issues. Increased dialogue has already been initiated. Following a meeting of MDB representatives at the World Summit on the Information Society (WSIS) in Geneva, an MDB exchange platform has also been established through the Development Gateway to facilitate MDBs' dialogue.40 3.1.3 Development Assistance and Cooperation41 The international financial mechanisms that fall under the category of Development Assistance and Cooperation include a broad scope of government and international agencies and institutions, which engage in a variety bilateral (government-to-government including the European Commission) and multilateral (e.g., United Nations Agencies) aid programs for developing countries.42 The most prominent among these are the official development assistance (ODA) programs (see Annex 1 for its definition) of the industrialized nations that make up the Organisation for Economic Co-operation and Development (OECD). Total donor funding for development, and ICT for development in particular, from these countries and programs constitutes the overwhelming volume of international aid financing of this kind. Some of the larger (e.g., China, India) and more affluent (e.g. Saudi Arabia) developing countries themselves have also begun to contribute financially and in other ways to the needs of other developing countries. However the overall magnitude of these "South-South" co-operation programs remains comparatively small to date.43 44 The 1990s generally witnessed a trend decline in aid contributions to developing countries from international donors in the developed world as measured by net ODA from countries that are members of the Development Assistance Committee (DAC)45 of the OECD. Between 1992 and 1997, total net aid flows from DAC member countries to developing countries and multilateral institutions fell by over 20 percent from US$60.9-billion (1992) to US$48.3billion (1997). Aid flows recovered slightly in 1998 and 1999, but the increase reflected only temporary factors and did not signal a reversal of the trend decline in aid flows during the 1990s. This reversal has only come since 2001 ­ see below. Nevertheless, taking a longer perspective shows that ODA flows from DAC countries to developing countries have been rather stable compared to other official flows and in particular private flows (Chart 1 and see Annex 1 for definitions of ODA, OOF and Private Flows).46 40 At this meeting, it was proposed that MDB's share information on ICT-related activities and policies more closely and that the Development Gateway serve as a platform on which to do this. MDB Exchange is an on-line portal dedicated to staff of multilateral development banks (MDBs) on which MDB staff can share documents and ideas that relate to information and communication technologies (ICTs) and development. 41 42 43 44 Based on contributions from OECD/DAC and its members, including the OECD-DAC Donor ICT Strategies Matrix (see Box). European Commission is a member of the DAC but its development assistance is categorized as multilateral. For recent India-Africa cooperation, see http://www.aegis.com/news/ap/2004/AP040920.html ODA from Non-DAC Donors: Non-DAC donors provide roughly 5% of all known ODA flows. In 2002, DAC donors provided USD 58,274 million and Non-DAC donors USD 3,201 million. Non-DAC donors are categorised as OECD Non-DAC (Czech Republic, Iceland, Korea, Poland, Slovak Republic and Turkey), Arab countries (Kuwait, Saudi Arabia and United Arab Emirates) and other donors (Israel and others). China and India also provide aid, but the numbers are not yet reported internationally. The members of the DAC are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, the United States and the Commission of the European Communities. Source: OECD-DAC database (www.oecd.org/dac/stats). 45 46 33 Several factors accounted for the shrinking of aid budgets. First, there has been a general tightening of government budgets in donor countries since the early 1990s. Second, past recessions in many of these countries have shifted the attention of public opinion inwards to such issues as domestic unemployment and social safety nets. Third, public opinion in some countries has also been increasingly skeptical about the effectiveness of aid. Fourth, aid has been re-directed to other sectors or in some cases has been shifted away from earmarked to direct budgetary support payments to countries, leaving it to them to decide how resources should be allocated. However, in the context of the 2002 Monterrey Conference on Financing for Development, most DAC members committed themselves to significant increases in their ODA volume. As a result, the real increase in ODA of 12% recorded over the last two years has reversed the declines in aid of the previous decade and on current commitments, ODA is due to rise by a further 27% by 2006. For more detailed information, see Annex 2 on the Monterrey Consensus and efforts of DAC members. Chart 1: Total Net Resource Flows from DAC Countries to Developing Countries 200.000 180.000 160.000 US $ million 140.000 120.000 100.000 80.000 60.000 40.000 20.000 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 0 I. ODA II. OTHER OFFICIAL FLOWS III. PRIVATE FLOWS Source OECD/DAC Donor ICT Assistance: OECD-DAC's previous efforts of information collection exercises had already shown that it is difficult, if not impossible, to come up with an overall figure of the investment DAC members have made in the field of ICT for development. The recent attempt for the TFFM discussion has not proved different from the previous ones. Its summary outcome on DAC members' ICTD programmes and expenditures is included for reference in Annex 4 along with more detailed summary of selected donor programmes and initiatives in Annex.5. Because the financial data are not comprehensive or compatible, the aggregate figure cannot be calculated. However, some reported figures (including some non-ODA) should be highlighted: 34 · · · · · · · · Canada estimates a minimum expenditure of US$ 33 million per annum. European Commission has 250 million commitment of multi-year ICT-specific programmes in addition to 110 million from the European Development Fund and 750 million from the European Investment Bank (1999-2003). France committed about 40 million (2002-2005) to global programmes over and above its country programmes and other facilities. Germany supports at present ICT applications with an amount of approximately 180 million. Japan launched its Comprehensive Cooperation Package for bridging the digital divide which consists of non-ODA and ODA funding with a total of US$ 15 billion over 5 years (2000-2005). Sweden spent approximately US$ 18 million in 2003. The United Kingdom currently has multi-year ICT-specific programmes and projects, amounting to approximately a total of US$ 83 million. The United States estimates its spending of ICT for development at more than US$ 200 million in 2003, and through leveraged or matching outside resources a further US$ 240 million was mobilised. In the following, we provide ODA trends in two dimensions, ICT infrastructure investment, for which sound ODA statistics are available and other donor ICT assistance, where the information comes from the research mentioned above. ICT infrastructure investment:47 Box 3.1.3.1: ICT Infrastructure In this section, ICT infrastructure means "communications infrastructure" as classified in the OECD/DAC document "Reporting Directives for the Creditor Reporting System".48 It is composed of three categories of activities: · Communication policy and administration management ­ Communications sector policy, planning and programmes; institution capacity building and advice, including postal services development; unspecified communications activities. Telecommunications ­ Telephone networks; telecommunication satellites; earth stations. Radio/television/print media - Radio and TV links; equipment; newspapers; printing and publishing. · · The decline in aid flows is pronounced with respect to infrastructure investments, including ICT infrastructure. Bilateral ODA commitments for economic infrastructure generally (energy, transport, ICTs, irrigation, water supply and sanitation as well as infrastructure components of rural and urban development) have followed an overall downward trend since 1996, declining from US$15.175-billion to US$8.174-billion in 2002. At the same time, the relative share of infrastructure allocations in total ODA commitments fell since 1997 from 26% to 14% in 2002 (see Chart 2). 47 Based on the research conducted by Ms. Susanne Hesselbarth for the Task Team on Infrastructure for Poverty Reduction of the DAC Network on Poverty Reduction. (See details at: www.oecd.org/dac/poverty) www.oecd.org/dac/stats/crs/directives 48 35 Chart 2: Trends in Bilateral ODA Commitments to Economic and ICT Infrastructure 70,000 1,600 1,400 1,200 1,000 40,000 800 30,000 600 20,000 400 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Total ODA commitment (bilateral) Total bilateral ODA committment for infrastructure ICT (right scale) 2000 2001 2002 60,000 50,000 US $ million 10,000 0 This declining trend is the consequence of a reorientation of infrastructure assistance by bilateral and multilateral donors toward strengthening the role of private investment in infrastructure development and focusing ODA both on leveraging private investments and supporting schemes with more direct poverty alleviating impacts. At the same time, the need to deal with the Asian, Latin America and Russian financial crises in the mid- to late 1990s, and a stronger focus on social sector investments to reduce poverty, accelerated the move of donor assistance away from economic infrastructure. The ODA commitments for ICT infrastructure show an even more dramatic decline over the period 1990 to 2002. From a level of US$1.2-billion in 1990, bilateral commitments increased slightly to around US$1.5-billion in 1992, but since then declined steadily to a level of US$194-million in 2002. Chart 3 illustrates the magnitude of DAC bilateral donor commitments to the ICT infrastructure in total values and as a share of DAC countries' total bilateral sector allocable ODA. Over the period 1990 to 2002, the share of aid for the ICT infrastructure dropped from a high of 4.5% of total bilateral sector allocable ODA to a low of only 0.6% in 2002. The rationale for the decline in commitments for infrastructure generally is also behind the dramatic decline in commitments for ICT. Given the dramatic shift of telecommunications infrastructure investment in particular from public ownership to the private, market-driven model, both multilateral and bilateral donors as well as the governments in the partner countries substantially reduced their role in funding capital investments in the sector. 36 US $ million Chart 3.3: Total DAC Donor Bilateral ODA Commitments to ICT Infrastructure 40.000 35.000 30.000 US$ million 25.000 20.000 15.000 10.000 5.000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ICT Infrastructure Total sector allocable bilateral ODA ICT Infrastructure as a % total sector allocable bilateral ODA 5,0 4,5 4,0 3,5 2,5 2,0 1,5 1,0 0,5 0,0 % share 3,0 Source OECD/DAC This declining trend in bilateral ODA commitments for ICT infrastructure has not been uniform across all bilateral donors. Chart 4 presents the commitments to ICT infrastructure by individual donor and shows the drastic decrease between 1990 and 2002. The strong decline in commitments for ICT infrastructure from an annual average of around US $1,200million during the 1990-93 period to an average of US $500-million for 1994-98 and to US$266-million for 1999-2002 can mainly be related back to the strong reduction of a focus on infrastructure by some of the countries. Japan, by far the largest donor over the years with a share between 30% and 68% of total allocations between 1990 and 2000, sets the downward trend. Overall commitments from Japan have declined from a high of US$550-million in 1991 to a low of US$40-million in 2001. In 2002, commitments to ICT infrastructure from Japan showed a slight increase to US$52-million, but were still far below their levels in the early 1990s. While in value terms the global downward trend is mainly linked to Japan, the chart shows that there were similar substantial decreases for the majority of donors. Commitments from France dropped from a high of US$264 million in 1991 to a low of US$9-million in 2002, and their relative share of total bilateral donor commitments declined from 23% to 5% over the same period. A similar trend can be observed for Germany with a decline from US$178-million in 1993 to US$19-million in 2002. 37 Chart 4: Bilateral Donors' Commitments for ICT Infrastructure 1,600 1,400 US$ million 1,200 1,000 800 600 400 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 France Austria Italy Spain Germany Belgium Luxembourg Sweden United Kingdom Denmark Netherlands Switzerland EC Finland New Zealand United States Canada Greece Norway Japan Australia Ireland Portugal Source OECD/DAC In terms of specific mechanisms, bilateral ODA commitments for ICT infrastructure in general have shifted in recent years. The relative importance of loan instruments has fall