broadband strategies handbook.pdf - Khazar University

The principles for estimating economic and financial costs and benefitsare well known, but applying these principles in practice is subject toassumptions about market and technology development. This can be a challenge,especially when some players (for example, incumbent operators)have more detailed information and analytical capabilities than others (forexample, government authorities, new entrants). To some extent, this limitationcan be overcome by using the calculus of costs and benefits to provideguidance on fiscal support, but relying primarily on market mechanisms(for example, minimum subsidy auctions) to reach the final decisions onsupport awards.When costs and benefits can be measured in monetary terms, economiccosts and benefits can be derived from financial costs and benefits.Transfers from one part of the economy to another, such as sales taxes orcustoms duties, are excluded from the cost stream. Prices that are distortedby market interventions, such as unskilled labor, foreign exchange,capital, and the radio spectrum, are adjusted to reflect their real scarcityin the economy. External costs (for example, business losses resultingfrom digging up streets to install fiber) should be quantified, to the greatestextent possible.Benefits can be harder to calculate. Starting from the financial analysis ofnetwork and service providers, economic benefits can be estimated by addingconsumer and producer surpluses to the revenue streams. For example,U.S. consumers have been increasingly willing to spend more money forfixed broadband connectivity than they are actually paying. This resulted ina consumer surplus of about US$32 billion in 2008, up 58 percent fromabout US$20 billion in 2005. Higher speed is expected to add a furtherUS$6 billion for existing customers. The study underestimated the widereconomic impact of broadband, as it excluded business users and wirelessaccess (Dutz, Orzag, and Willig 2009).Comparing costs and benefits. The net present value (NPV) of the expectedbenefits is the discounted monetary value of benefits minus costs over time.For the government, which values costs and benefits to reflect real scarcitiesin the economy, an economic NPV > 0 means the project would have a positiveeffect on the country’s welfare. For a private company, which valuescosts and benefits at market prices, NPV > 0 means the project could becommercially viable. This analysis can be applied to the broadband strategyas a whole as well as to each major separable component.Projects that have negative economic NPV should not be supported.Projects that have positive financial NPV do not need support. Componentsthat have positive economic NPV but negative financial NPV would68 Broadband Strategies Handbook