Diversifying Participation in Network Development

1. Diversifying Participation in Network Development India’s Universal Service Instruments Payal Malik and Harsha de Silva WDR Expert Forum 1 October 2005, Jakarta

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.)

14. 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

15. 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)

16. ADC comparison; at implementation • Why others less • Tariff rebalancing • Higher affordability • Brought down to 12% and now 6%?

17. 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

18. 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

19. 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?

20. 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

21. 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?

22. 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)

23. 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?

24. 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)

25. 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)

26. Thank you. www.lirneasia.net Harsha de Silva. desilva@lirne.net Payal Malik. payal.malik@gmail.com