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Diversifying Participation in Network Development moving beyond the market. Study of India’s Universal Service Instruments Preliminary Findings Harsha de Silva and Payal Malik LIRNE asia , 20 May 2005, Colombo. Outline. Overview of the Regulatory and Policy Developments Status Access Gap

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Diversifying Participation in Network Development moving beyond the market

Study of India’s Universal Service Instruments

Preliminary Findings

Harsha de Silva and Payal Malik

LIRNEasia, 20 May 2005, Colombo


  • Overview of the Regulatory and Policy Developments

  • Status

  • Access Gap

  • Universal Service Instruments

  • Universal Service Fund: Progress and Issues

  • Conclusions on USF

  • ADC: Status and Issues

  • Conclusions on ADC

  • Discussion

Industry deregulation and liberalization

Declining tariffs and handset prices

Prepaid offerings

Implementation of CPP regime

Regulatory and Policy Developments of the Indian Telecom Sector:

Diminishing Market Efficiency gaps


  • Comprehensive spectrum policy

  • Unified License Policy:

  • Sharing of backbone

  • Tax Policies: Onerous license fees

  • Number portability

  • Connectivity of Wireless operators to carry inter-circle calls


  • Unified access license regime introduced to enhance competition and create a level playing field

  • Transfer of Wireless licenses allowed among operators

  • Intra-circle Wireless mergers allowed

  • IUC regime implemented

  • Lowering of ADC from 30% to 10% of the revenue


  • New Telecom Policy introduced

  • Entry of third and fourth operators in Wireless services

  • Free competition allowed in Wireline: WLL Introduced

  • NLD & ILD opened up to competition

  • First round of tariff rebalancing done: TTO

  • Operators moved from fixed to revenue-sharing license fee


  • TRAI established as an independent regulatory body

  • Wireless licenses allotted to private operators

  • Wireless services opened up to competition


  • Telecom Sector: benchmark for other infrastructure sectors

  • Teledensity 2 percent in 2000 now close to 10 percent

  • Urban teledensity 26.2 vs. rural teledensity 1.74

  • Increased focus on cellular mobile infrastructure deployment: 68.81 percent growth vs 6.6 percent

  • Rural DELs installed by BSNL through license fees relief

  • Roll Out Obligations failed

Access gap

  • 70% of population is rural: GDP per capita US $352

  • High costs of extending network to uncovered areas

  • Current ARPU’s/EBITDA’s inadequate to fund capex required

  • 5000 urban agglomerates: Mobile coverage 50%

  • Growth will be driven not so much by falling tariffs: increasing geographical spread essential

  • Additional investments: mobilized through intervention

  • Market Failure Arguments

Universal Service

  • Efficiency Vs. Equity Grounds

  • USO a special case of redistributive pricing: Tariff Policy

  • Policies can be optimal in a second-best setting: more efficient policies like direct transfers

  • Traditional funding: unworkable competition drives down supercompetitive price

Funding Mechanisms

  • USO Fund (USF)

  • Access Deficit Charge (ADC)

  • Government Funding: Grants and License fee waiver

  • Roll-Out Obligations: Access Providers to cover 50% of DHQs and NLDOs to set-up POPs in every LDCA

USO Fund Policy

  • Came into effect from April 1, 2002

  • USF: statutory non-lapsable Indian Telegraph (Amendment) Act, 2004

  • Expediting disbursements effectuating universal service policy

  • Administration: a separate administrative organization attached office of the Department of Telecom

  • Disbursement through least cost subsidy auction: subventions placing companies in competition through a system of inverse bids

Status of various USO Projects in India



Disbursement Schedule

Costing Model: Determination of Benchmark

  • Benchmark: Reserve Price for invitation of bids

  • Evolving of benchmark for each activity for different areas

  • Fully allocated current costs: costs for bulk procurement of latest technology-based equipment

    Determination of Net Cost (NC) for new facilities

  • Net Cost = [ {Annualized Capital Recovery + Annual Operating Cost} - {Annual Revenue}]

    (Where Annualized Capital Recovery = Aggregate of depreciation + return on equity plus interest on Debt)

  • Different Approach: 8.6 million rural DELs installed prior to 1.4.2002

  • Alternative Proxy cost model


  • Universal Access Vs. Universal Service: Payphones, broadband kiosks

  • Broaden the mandate: voice and low speed data to broadband connectivity

  • Technology “Neutrality”

  • Eligibility Criteria: Impact on the success of auctions, left huge rents for the incumbent

  • Costing Models and Auction Procedure

  • Market “Efficiency Gaps”: Regulatory levies

  • Spectrum Availability and Pricing

  • Sharing of Backbone

Conclusion of USF

  • Tend to be used by market players to extract too many concessions

  • Important strategic implications: effect the way firms compete against each other

  • Benefits from using auctions to assign USOs: difficult to have sufficient participants bidding against the incumbent

  • Asymmetry of information between the incumbents and new entrants

  • Financing these costs imposes distortions: try to minimize losses of allocative inefficiency

Background to ADC

  • Pre Reform

    • Cross subsidy from national and international LD tariffs

  • Reform

    • Falling prices in NLD, ILD, FL, WLL [M] and cellular

    • FL cannot sustain “social pricing” in rural areas; others have forbearance

  • Enter ADC

    • Normally [several other countries] a charge imposed on long-distance services and passed on to fixed-line access providers who are mandated to provide services below cost [but many are withdrawing ADC: US, UK, France, Canada, EU…]

    • Original implement date: 1 April 2003

    • Implemented 1 May 2003


ILD: Origination/Termination on FL: Rs 5.00/minute + 0.50 termination charge. None for WLL[M], Cellular


  • Objective is rapid growth in teledensity [affordable access to basic service NTPL 1999]; so cannot increase tariffs  ADC until market is large [stable] enough to do without.

  • Total access deficit in FL INR 130b [USD 3b]

    • Applicable rental < cost based rental

    • Free calls

    • Below cost LD [0 – 50 km]

  • Calculated using a return of 14% ROCE

    • BSNL 2001/2 ROCE  7.5%

    • 2002/3  1.1%

  • ADC as a share of TR of Telco. Sector: Chile 2.0%, France 2.5%, US 6%, SA 0.3%, India 30%

ADC: original thinking

  • Together with IUC [carrier, termination]

  • Connecting fixed and all else

    • [1] Uniform charge and [2] escalating with distance

    • Assumed cost per FL INR 424/mo [BSNL ADC INR 296]

  • Wide variation of call charges: particularly if FL-FL

  • Advantage to WLL [M] and Cellular

    • ADC only if FL; favored cellular-cellular the most

  • Could not apply IUC+ADC charges, TRAI authorized below cost tariffs to keep FL [incumbent] in competition. [Not predatory pricing]. Other FL BSO also followed suit

  • ADC questioned


  • TRAI had created a unequal playing field by bringing in complex and confusing arguments to determine ADC

    • Technology matters; distance matters

    • Choice of regime [Distance does not matter]

    • Unsubstantiated costs etc

  • BSNL complained that while they were the largest service provider in rural [>30%] they had the highest AD, but TRAI in its calculations did not consider this fact and specified equal ADC [based on BSNL costs].

  • Bias built in against FL

    • Cellular and WLL[M] was becoming much more competitive than FL

    • WLL[F] was considered FL

Problems continued

  • Consistency of IUC under various schedules

  • Who should get ADC

    • BSNL

    • Others?

  • Below cost FL tariffs [to compete with Cellular and WLL] and its sustainability

    • Vicious circle  cost is high; but keep tariff below cost to compete; deficit; apply ADC; high ADC makes FL less competitive; higher deficit…

  • Cost of NLD carriage > than TRAI specified cost

  • IUC of INR 5.50/min termination of IT  grey market

  • Led to May 2003 Consultation

Led to 2003 May consultation

  • Reassess ADC regime

  • Should BSNL and other BSO be given ADC?

    • given their urban presence and

    • unmet roll out

  • Should ADC be linked to roll-out?

  • Should ADC on ILD be reduced to discourage grey traffic?

  • Should ADC have a cut off date and/or merged with the USO regime?

2003 May Consultation

  • Was the calculation method correct [BSNL hist. avg]? Why not FLLRIC to account for technology change?

    • FLLRIC is necessary; but a single year shift would impact heavily on BSNL. So stick to historical [but 2002/3] audited BSNL a/c

    • However, BSNL shifting to lower cost wireless technology

    • Over a few years ADC to be merged with USO

  • GOI grants to BSNL for rural telecom need to be factored in the calculations of ADC

    • Reimbursement of license fees

    • Moratorium on capital and interest payments

    • Maximum 10% dividend etc.  lower WACC  lower ROCE

2003 May Consultation

  • Use of cost estimates and minutes of others [not BSNL] not yet possible

    • Un-audited

    • Inconsistent, but higher cost compared to BSNL [even MTNL]

    • In some cases “extreme” and “absurd”

  • Net AD for BSNL  INR 53b [including GOI comp.]

  • ADC for others higher with their own data, but lower with normalized for BSNL

  • Consider linking ADC to roll-out

  • For BSNL and MTNL  cover costs from high growth cellular [zero entry fee]

Revised ADC mechanism

  • Paid to  all BSO on a per minute basis

  • Paid by  Basic, Cellular, National LD, International LD service providers

    • ADC for fixed line operator or BSNL

Revised ADC

  • Implement date 1 Dec 2003; delayed 15 Dec 2003; delayed 1 Feb 2004

  • ADC is lower [include GOI support to BSNL]

    • Shall fund INR 53.4b

  • Scrap 2 ADC regimes; stick to escalating ADC

  • Applicable to all calls except FL-FL, 0-50km intra circle, intra circle Cellular/WLL[M] to C/W[M]

  • Non BSNL to keep ADC, but less than BSNL [limited for of IUC]

    • Originating: keep ADC

    • Terminating: keep ADC + Termination charge

    • No WLL[M]/Cellular to-from WLL[M]/Cellular

Cont… Revised ADC

  • ADC to be merged with USO in 3-5 years

  • All intra-circle INR 0.30 per minute; inter-circle INR 0.30, 0.50 or 0.80

  • Earlier 92% of ADC funded by BSO [BSNL]; 40% as proportion of revenue. Now down to 12% of revenue for FL, 9% for Cellular and 16% for WLL.

  • In the future  possibilities of ADC as a percentage of revenue?

Consultation June 2004

  • Serious implementation problems

    • Payments not made

    • Data questionable [INR 0.30 – 0.80, 4.25 for ILD]

    • Technical problems due to distance measures

    • BSNL billing system delays have made problem worse

    • Bypass [cannot identify calls from other networks]

  • Consider a simpler approach

    • Not distance based

    • Not call based

Proposed new ADC

  • ADC period

    • 10/2004 to 9/2005

  • Revenue share

    • Less complex and easier to implement

  • Revenues for relevant period

    • [avg. subscriber base march 2005] X [monthly ARPU]

    • At INR 200/mo rental  2.2%

    • At INR 156/mo rental  5.3%

Revenue share ADC shot down

  • Amendments to Rev Share ADC calculation rejected

    • Currently main ADC contributor ILD, if Rev. Share, tariff on local calls will increase; drop in ILD  illogical

    • ADC rev share would be on top of already rev share license fee

    • Later possible with increasing minutes and lower ILD share

  • New ADC from 1 February 2005 [previous method]

  • Given exceptionally high growth in minutes ADC per minute reduced, but total ADC unchanged

  • Only BSNL will receive ADC on incoming ILD and outgoing Cellular/WLL[M]. Others can on outgoing.

  • Over time USO will increase and ADC will decrease  merge

New ADC of 1 February 2005


  • Huge increase in traffic, so can bring down ADC per minute and still provide BSNL annually INR 50b in ADC.

  • Largest drop is in ILD  60% [attempt to check the grey market; private ISD call cost to drop by 11%, BSNL by 24%]. NLD  40%

    • Example AirTel to US: INR 16/min  14.24/min

    • BSNL: INR 7.20/min  5.45/min

  • Migrating to a Revenue Share and merged USO regime

Again, consultation March 2005

  • Yet another consultation in March 2005

    • Should ADC be restricted to rural FL?

      • Tariff ceiling only on Rural FL, AD very high in R-FL

Consultation March 2005

  • Should ADC be available to non-BSNL?

    • Actually no. No deficit once local call surplus is considered. But given part [outgoing ADC] now.

  • Why ADC for wireless access? [WLL[F] can be moved around just like WLL[M] or Cellular]

    • Private operators  80% fixed access through WLL[F]

    • Lower last mile cost, higher equipment cost [?]

    • But cannot distinguish b/w FL and WLL[F] so kept WLL[F] in ADC

  • Moving to Rev. Share

    • With reduced ILD ADC, and increasing overall minutes along with uniform ADC for domestic calls can TRAI shift to rev share?

Current status

  • 183 pages of responses [posted 17 May 2005?]. Summary of main responses…

  • BSNL opposes the ADC reduction

    • “telecom provider of last resort!”

    • Annual revenue loss of INR 12.5b [TRAI calculations]

    • INR 79b [BSNL calculations]; arrears INR 110b

    • WL service totally unviable

    • TRAI  too many consultations; confusion

    • TRAI not submitted calculations  non-transparent

    • ADC includes self-funding [calls w/in network 80%] but should be Net ADC [from external networks]

  • Also oppose revenue share

    • Higher local call costs

Current status

  • MTNL argues for urban ADC

    • Delhi, Mumbai 92% basic service [large legacy network]; annual loss INR 10.8b serving the urban poor [at below cost rental] without full ADC [INR 4.5b annually elsewhere]

  • But, no revenue share

    • Lower ILD  loss of forex., foreign carriers benefit

  • Tata/VSNL

    • In principle “market forces” but given social obligation need ADC support

    • Combine USO+ADC and subsidize all “below cost” service by everyone.

    • BSNL/MTNL got free entry to cellular; license fees reimbursed by budget grant etc.

    • WLL[F] is the way forward in rural in the future; need ADC support

    • TRAI does not create competition in FL

Current status

  • Reliance

    • No justification for ADC in India; if ADC then should be uniform across services and operators

      • No economic rationale’ [only notional]

      • Can apply only for FL in “rural area”

      • But BSNL earns revenue from various services, not stand alone [unfair advantage for BSNL]

      • Tariffs are based on forbearance except for rural FL

      • Define AD [rural access or affordable access]

      • Define “rural area”

    • Phase out ADC; USO is sufficient to meet social, economic and national objectives


  • BSNL network is unviable, they did spend enormous amount then, but

    • Should it be sustained at such a cost

  • Why cannot it be funded through [simpler] USO

    • All non-rural users [via operators] pay for rural roll out.

  • Why bias towards FL?

    • Is ADC paying for “technology mistakes of BSNL”?

    • Why not technology neutrality

      • Open doors for options such as Wi-Fi and Wi-Max also

  • ADC  “grey market”


  • Regulation should not hinder development through technological advancement and market forces

    • “Whenever there is a conflict between dumb regulation and consumer benefit, it is regulation that should yield space, not the consumer”[ET editorial 24 March 2005]

ADC in sum

  • Conceptually complicated

    • Objective not clear [definition; basic?]

    • Technology bias that defeats the purpose

    • Encourages parallel markets [by-pass]

  • Design flawed

    • Need detailed information from commercial entities

    • Junk in  junk out

  • Nightmare to implement

    • Keep changing rules of the game [2003 May, 2004 Feb, 2005 Feb, 2005 when again…] ~ not conducive for business

  • Should be merged with USO on a simple, technology neutral, revenue share model



  • www.lirneasia.net

  • Harsha de Silva

    • hdes1@yahoo.com

  • Payal Malik

    • payal.malik@gmail.com

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