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