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)

ADC comparison; at implementation  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. Harsha de Silva. Payal Malik.