Introduction

Universal service obligations (USOs) have been largely debated in the arena of public policy in most public utility sectors.1 In the United States, for instance, USOs were one of the major issues that were dealt with in the reform of the telecommunications sector. Indeed, the Telecommunications Act of 1996 devoted a large section to the reform of USOs and its regulatory agency, the Federal Communications Commission (FCC), has expended great efforts to implement the reforms. In other reforming countries, governments have also taken USOs seriously as a social commitment and implemented universal service policies in their regulatory reforms.

Even though most governments have committed to universal service policies to various degrees, the issue of USOs has also created considerable controversy in the reform process. Indeed, universal service policies raise many important practical as well as theoretical issues. Two important issues in the central debate of public policies are most relevant to developing countries. One is how the expansion of the network can best be promoted. Unlike industrialized economies, where penetration of basic infrastructure services is no longer an issue, developing countries have not yet created the infrastructures that are necessary for the provision of services to most people, particularly in rural areas. Expansion of the network therefore remains an essential dimension of universal service policies in LDCs. The other important issue in LDCs is the design of the pricing policy to implement USOs. In practice, since the necessary fiscal instruments are not available, policy makers often use pricing to achieve not only allocative efficiency but also a redistributive goal.