How to best finance ICT extension services in low and middle-income countries?


September 11th, 2018

The inherent functionality of ICT to easily transfer information helps to overcome barriers of traditional extension services. ICT extension services improve quality of agricultural information, reduce travelling time for visits, enable frequent communication between farmers and agents as well as increase accountability. More important, ICT extension services can reach large target groups – e.g. rural farmers and nomads – who otherwise excluded from the system, and for a fraction of costs of traditional extension.

ICT extension services face barriers similar to traditional ones. Fiscal sustainability is one of them. The question of “who has to pay for the service” has become troublesome especially for NGOs. Should farmers as the end-users of ICT extension services pay their fair share? Should it be the responsibility of governments who have the mandate to provide access to information? What if private sectors take over the operation of ICT extension services?  This post explores the subject and different pricing models that have been created to serve end-users in low and middle income countries.

Pressure over fiscal sustainability

ICT extension services can be divided into two categories according to its value: commercial and noncommercial[1]. Commercial ICT extension services are typically private funded or private operated. They earn profit for medium term operation, i.e. over two years period, by charging fee from transaction (e.g. mobile payment) and information provision (e.g. membership fee). Noncommercial ICT extension services do not charge fee to end-users – e.g. low income farmers. The focus is non-monetary benefits such as knowledge improvement and behaviour change. By design, noncommercial ICT extension services are fully dependent on public funding, either from governments and donors.

Fiscal sustainability remains a concern. Especially for noncommercial category that are often perceived as inefficient and financially unsustainable, mainly due to higher operational cost (than commercial ones), budget shrinks and weak political commitment[2]. Pressure to find alternative revenue streams has increased even though the circumstances are not always aligned with commercial goals. The flaw in the argument of “fiscal sustainability” is the focus: it often concentrates on how ICT extension services can make money instead of business model development/improvement.

Business model for ICT extension services

The concept of business model goes beyond economic value. Business model has other interconnected elements: the value of proposition, customer, internal capability, competitive strategy and growth[3]. These factors have positive or negative implications toward the use and repeat-use of ICT extension services, and ultimately its success. The value of proposition and customer elements are closely linked with system quality, information quality and service quality[4]. System quality is the desired characteristics such as usability, availability, reliability and response time, e.g. download time. Information quality deals with content issues such as personalized, completeness, relevancy, easy to understand and secure – if ICT extension services equipped with online payment. Information must include weather, price, tips, products and so on. Service quality is the overall support provided to customers, delivered internally or outsourced. Poor support will translate into lost customers or lost end-users.

Business model should be carefully planned and implemented in all stages of ICT extension service development [1], not by the end of funding circle. The pilot (proof of concept stage) designs a prototype, followed by rigours user acceptance testing for small target groups. Typically, services are available for free, and with main goal to gain access to market. If successful, stage 1 (scalability stage) will improve and expand services to larger market. For commercial ICT extension services, membership fee or transaction fee is applied in this stage. Noncommercial ICT extension services pledge to funders for increased financial support. ICT extension services have to demonstrate high value to justify the costs of scaling up. ICT extension services may need to cease their operation if evidence suggested otherwise. Stage 2 (sustainability stage) is when ICT extension services become profitable. While marketing efforts become a priority to attract investors, business plan has to focus on improving the quality of services to reach the scale required for profitability.

Pricing models for ICT extension services

Creating business case for ICT extension services, especially those aiming for the bottom of pyramid “BOP” consumers, is tough. The World Bank report on Mobile Apps for Agricultural and Rural Development[1] validates this thesis. Only 15 percent (out of 92 studied apps) generates revenues over shares of SMS, transaction fees, or membership fees. Other 85 percent is dependent on government, donor or CRS funding for startup and operation costs. Table below gives example of pricing models, some overlap with each other, employed by ICT extension services (see table).

Table: Pricing models of ICT extension services. (Source: adapted from the Qiang, et al., 2012 and GSMA, 2016).

Charging fee to end-users, known as business-to-customer “B2C” approach, seems reasonable but difficult to apply in practice. Firstly, many end-users are farmers with low disposable income. Take into consideration, farmers still need to pay for capital costs, e.g. mobile phone, data connection or mobile credit, to access (noncommercial) ICT extension services. Secondly, farmers’ ability to pay and their willingness to pay do not always translate into actual payment. The experience of Tigo Kilimo, an agricultural value added service in Tanzania, demonstrates this dilemma[5]. Users increased by ten times within five months when SMS fee was removed. But when asked how much the service should cost, 80 percent of surveyed users agreed that the service should not be free (see chart). Thirdly, ICT extension services that rely on direct revenue from end-users can only attain fiscal sustainability through scale [6]. iCow service in Kenya charges farmers KES9 ($0.09) to receive 3 SMS tips per week; iCow’s  fiscal sustainability depends on recurring payment of 150,000 regular users and expansion into the region.

Chart: Tigo Kilimo user’s willingness to pay (source: GSMA, 2018)

To date, viable for B2C approach where end-users pay periodic subscription or through pay-as-you-go (PAYG) model are SMS, USSD, IVR and helplines. Any of them requires partnership with Mobile Network Operator (MNOs), and for two main reasons. End-users of ICT extension services are also MNO customers. MNOs are equipped with advance technology to reach the scale, both existing and potential end-users living in rural areas, and in a position to quickly implement the pricing models.

Rather than relying on single revenue from end-users, ICT extension services can opt for businesses-to-business (B2B) transactions. Typically, ICT extension services cross subsidies end-users in exchange for marketing purposes by adopting B2B approach. It is also possible for commercial ICT services to combine B2C and B2B approaches.

Digital Green which operates in several countries earns B2B revenues by creating videos, training and technology platforms for government, donor and private companies[7]. Digital Green determines pricing based on factors such as type of organisation, duration of engagement and support needs. For example, Digital Green covers costs of technology development and training while the government pays for the capital cost and operational cost. When working with private companies, all expenditures including technology development, training, capital and operational costs are covered by the partners.

The question whether ICT extension services are best financed by the private, public or through joint efforts depends on its characteristics and local situations[8]. This requires research, planning and investment. In principle, ICT extension services should balance the different interests, needs and motivations of stakeholders. Regardless the option, farmers should have control and protection about the information and services they need and receive. Furthermore, technology adoption and advancement should be supported with broader regulatory intervention to foster innovation and to minimise commercial risks.

Reference: 

[1] Qiang, C.Z., Kuek, S.C., Dymond, A. and Esselaar, S., 2012. Mobile applications for agriculture and rural development.

[2] Magesa, M.M., Michael, K. and Ko, J., 2014. Agricultural market information services in developing countries: A review. Advances in Computer Science: an International Journal3(3), pp.38-47.

[3] Morris, M., Schindehutte, M. and Allen, J., 2005. The entrepreneur’s business model: toward a unified perspective. Journal of business research58(6), pp.726-735.

[4] Delone, W.H. and McLean, E.R., 2003. The DeLone and McLean model of information systems success: a ten-year update. Journal of management information systems19(4), pp.9-30.

[5] GSMA, 2016. Agricultural Value-added Services (Agri VAS) Toolkit 2.0. How to design, develop and market next generation VAS for the rural market. Available at: https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2016/05/mAgri-VAS-Toolkit-2016.pdf [Accessed on 15 August 2018].

[6] GSMA, 2015. Agricultural value-added services (Agri VAS): market opportunity and emerging business models. Available at: https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/02/Agricultural-value-added-services-market-opportunity-and-emerging-business-models.pdf [Accessed on 15 August 2018].

[7] World Bank, 2017. Agriculture ICT Extension Services. Available at: https://www.innovationpolicyplatform.org/system/files/4_Agri%20ICT%20Extension_Agri_Nov20.pdf [Accessed on 1t August 2018]

[8] Anderson, J.R. and Feder, G., 2004. Agricultural extension: Good intentions and hard realities. The World Bank Research Observer19(1), pp.41-60.

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