Diversifying Participation in Network Development

India’s Universal Service Instruments

Payal Malik and Harsha de Silva

WDR Expert Forum 1 October 2005, Jakarta

Outline Achievements of Telecom Sector Reform in

India

Perceived Access Gaps

Research Questions

Universal Service Obligation: Findings Concerns

and Way Forward

Access Deficit Charges: Issues

Conclusions

Perceived Access Gaps 70% of population is rural: GDP per capita US

$352

PCGDP holds higher teledensity potential

5000 urban agglomerates: Mobile coverage 50%

Current ARPU’s/EBITDA’s inadequate to fund

capex required

Operator can make profits at ARPU as low as $5

Perceived Access Gaps Urban teledensity 26.2 vs. rural teledensity

1.74

Rural demand stronger than revealed in the state-owned monopoly era; heterogeneity in rural areas

Roll out obligations failed

Rural DELs installed by incumbent through license fees relief: reliance on a dominant carrier not the most efficient way

Additional investments: mobilized through intervention: Universal Service Fund

Research Questions Context Any member of the WTO has the right to define the kind of universal service

obligation it wishes to maintain. Such obligations will not be regarded as anti-

competitive per se, provided they are administered in a transparent, non-

discriminatory and competitively neutral manner and are not more burdensome than

necessary for the kind of universal service defined by the member

Questions we address:

How well do the Indian universal service instruments stand the test of:

(a) not being anti-competitive

(b) being transparent in their administration; and

(c) non-discriminatory and competitively neutral

Findings Transparent multi-layered reverse bidding process

1.48bn USD collected 376mn USD disbursed

Significant lowering of benchmark subsidy RDELs: rates

down to 65 to 70%

Incumbent won almost 75 percent of auctions

BSNL (1267 SDCAs), Reliance Infocom Ltd (203 SDCAs),

Tata Teleservices (172 SDCAs), Tata Teleservices

(Maharsashtra 43 SDCAs)

Absence of network competition incumbent can leverage

its vertically integrated status even in a transparent

disbursement mechanism

Concerns Benefits from using auctions: difficult to have

sufficient participants bidding against the

incumbent

Incumbent in an advantageous position bidding

against operators relying on transfer or lease of

assets from their competitor

Tend to be used by market players to extract

too many concessions

Important strategic implications: effect the way

firms compete against each other

Concerns Restricted participation to already existing

phone companies: left huge rents for the

incumbent

Did not maintain incentives for competing

networks and/or technologies

Asymmetry of information between the

incumbents and new entrants

Concerns Auction design disregarded commercial, legal

and regulatory implications of the fact that the incumbent had a fair amount of network

Presence of high endogenous costs of doing business: onerous burden of various regulatory levies

Can affect the viability of the existing operators as well as the entry process in those areas; reduces entry

Way Forward

Sustainability of universal service: remove

regulatory barriers to competition

A liberal minimalist licensing regime: Entry of

more firms sine qua non of universal service

Effective, non-discriminatory access regime for

sharing of backbone

Impose special obligations regulations on

dominant operator and enforce its compliance:

counterbalance its market power

Way Forward Spectrum Assignment and Pricing

Maximise development of all technologies and

services

Avoid a subsidy laden universal service

programme

Gains from an elaborate USF will be marginal

Sound regulatory design and competition

cornerstone of universal service

Back

Access Deficit Charge ADC is to compensate for the difference

between the actual cost of providing service and the mandated lower tariffs for providing subsidized access services to a class of subscribers

TRAI logic for Indian ADC

to make basic telecom services affordable to the “common man” to promote universal access as per NTP’99

Implemented 1 May 2003, to enable affordability in terms of Rental and concessionary local call charges in the

rural areas (also free calls etc.)

What ADC is not Indian ADC at no time was specified as a “rural

subsidy” Some interpret it that way since urban tariffs were

forborne

Calculation and applicability of ADC

ADC = Cost based average monthly rental less average monthly recovery per DEL for entire network Data only BSNL; accuracy Methodology and detail: distance, technology

To BSO if either end of the call connected to a fixed line Collect ADC on applicable calls and pass on to BSNL

(and other FL operators)

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Why others less Tariff rebalancing Higher affordability

Brought down to 12% and now 6%?

Implementation BSNL not receiving sufficient ADC

ADC base increased Increase ADC base to all calls except cellular intra-

circle Reduce per minute ADC

Finally; INR 0.30

Concerns

Should ADC be rural only? ADC objective is not a “rural subsidy” What matters is historical costs of providing rural

access Should non-BSNL FL operators get ADC?

ADC not a legal obligation to anyone For smooth transition of BSNL to new regime New operators have hardly any ADC

Why not a simple revenue share Greater reliance on ILD ADC. With RS, unable to

maintain bias; would increase ADC on non-ILD calls But, possible with increasing minutes

Findings

ADC not a means to participate in network development Not an incentive to roll out rurally Only a safeguard for BSNL FL network (including rural)

built at a high historical cost To protect the BSNL copper wire BSNL (prior to that, DoT) monopoly provider for

number of years. What happened to monopoly profits?

Findings Reduces incentives for local (innovative)

technology in rural areas; distorts market Low cost innovative solutions can charge low market

clearing tariff in rural areas But, ADC increases the final cost Thus, unable to provide

Private operators compensating BSNL’s “wrong” choice of technology? Years ago, no choice Not in the recent past; not at the present time

Findings How ADC is helping universal service not clear

Technology bias: FL BSO FL BSO not growing

Not urban Not rural

How then, universal service (access)? Should it not be better to merge with USO if to

be used for network development Why not give to everyone to cover below mandated

cost operations without tech bias?

Findings

Too complex, could have been much simpler from the beginning Difficult to calculate, to implement and to monitor

Encourages greater by-pass High ADC on ILD

Created a FL bubble Cannot maintain without ADC or some other form of

subsidy (until legacy equipment fully depreciated)

Findings

Seems like a quasi-politically motivated tax on private operators to protect the incumbent during what seems like a very long transition period to competition

What happens when the ADC is phased out in total? If BSNL has then grown up to face a competitive

market well and good If not, does it mean that all the taxes extracted from

private operators to keep BSNL afloat would have been a complete waste?

Findings

Regulation should not hinder development through technological advancement and market forces “Whenever there is a conflict between regulation and

consumer benefit, it is regulation that should yield space, not the consumer” (Economic Times editorial 24 March 2005)

Way forward

Merge ADC with the USO Simple, technology neutral, revenue share model

Disburse from the combined fund to compensate mandated below cost services Anywhere? Any operator?

Phase out ADC USO will continue to grow New technology would reduce access deficit

Moving to a “network expansion” model… Mr Rajendra Singh, TRAI (30 September 2005)

Thank you.

www.lirneasia.net Harsha de Silva. desilva@lirne.net

Payal Malik. payal.malik@gmail.com