Post on 14-Jan-2016
description
Diversifying Participation in Network Development
moving beyond the market
Study of India’s Universal Service Instruments
Preliminary Findings
Harsha de Silva and Payal MalikLIRNEasia, 20 May 2005, Colombo
Outline
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
1999-2002
•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
Future
•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
2003-05
•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
1994-98
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
Status
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
Project Implementation Dates Comments
Operation and Maintenanceof Village Public
Telephones(VPTs) in the revenue
villagesidentified as per Census
1991
Approximately 520,000villages
March, 2003 Includes support for 9171VPTs installed by the SixPrivate BSO and remaining5.09 million VPTs installed
byBSNL. This provides
coverageof more than 90% of thevillages where VPTs. are to
beprovided. Firms
participatingin this auction bid exactly
thebenchmark
Replacement of Multi Access
Radio Relay Technology VPTs
installed before 1st April 2002.
1, 80,000 MARR VPTs
September, 2003 Since VPTs were mainly BSNL’s, subsidy went to BSNL with a zero cost reduction: bid exactly the benchmark
...contd.
Provision of additional ruralcommunity phones (RCPs)
in areas after achieving the
targetof one VPT in every
revenuevillage (2nd VPT).
46,253 RCPs.
September 30,
2004
Out of300SecondarySwitching Areas (SSAs), BSNL was the successful bidder in 184,
Reliance Infocom won 97 Competition between two service providers in only 115 SSAs. The competitive bidding has resulted in bringing down the cost of the project by about 17% from the reserve price
Provision of VPTs in revenue
villages as per Census 1991
without any public telephone
facility. No. of villages covered :
66,822
November, 10,
2004
BSNL emerged successful for 12 service areas where six companies participated. BSNL one-to-one competition with Bharti Cellular Ltd.
in three service areas. A reduction of 15-20 percent In nine service areas BSNL was the sole bidder BSNL emerged the winner in all
Service Areas
…contd.
Provision of rural household direct exchange lines (rdels) in specified short distance charging areas
March 15, 2005
The project covers 274 (SSAs), competitive bidding in 215 SSAs, BSNL emerged the most successful bidder winning in 171 SSAs across 19 States, Reliance Infocomm emerged the winner in 61 SSAs spread across 15 States while Tata Teleservices got the project in 42 SSAs across 9 States, competitive bids have brought down the cost of the project by 60-75 per cent
Disbursement Schedule
Year Amount Disbursed/ Provision
2002-2003 Rs. 300 crores (66 million USD) of the Rs.1653 crores (USD 367 million) collected
2003-2004 Rs. 200 (44 million USD) crores of the estimated Rs. 2,143 crores (476 million USD) collected
2004-2005 Rs. 1200 crores (266 million USD)
2005-2006* Rs. 1200 crores (266 million USD)
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
Issues
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
ADC
ILD: Origination/Termination on FL: Rs 5.00/minute + 0.50 termination charge. None for WLL[M], Cellular
ADC
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
Problems
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
Expectation
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
Issues
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”
Issues
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
Discussion
Contacts
www.lirneasia.net Harsha de Silva
hdes1@yahoo.com Payal Malik
payal.malik@gmail.com