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Asian Backbone Study

WDR’s dialogue theme for 2004/05 is Diversifying Participation in the Different Elements of Network Development, which was selected to build on and expand the focus of 2003’s theme on Stimulating Investment in Network Development. The range of possible sources of investment for network development, the opportunities they provide and the barriers they must overcome have not been comprehensively documented or systematically examined. The Asian Backbone Study will address this lacuna.

Following the extraordinary results achieved by South Korea through public finding of backbone networks and the assurance of open access to those networks and the increasing realization that the lack of cheap long-haul capacity was stifling the provision of connectivity, especially by new entrants, many have begun to address the problem of backbone capacity with fresh eyes. The objective of this research project is to examine the general principles and implications of constrained backbone access.

The final report, Asian Backbone Study: A General Model Applied to India , by Harsha Vardhana Singh (with assistance from Rohan Samarajiva and Ayesha Zainudeen), Version 1.7 is available for download HERE .

Executive Summary:

The lack of adequate backbone or adequate access to backbone curtails potential benefits of telecom services to the end user. With technological developments, especially with the growth of the Internet and broadband, absence of adequate backbone implies that even greater opportunities for economic and social enhancement are foregone. The reasons for lack of adequate backbone are not just economic. Policy that is not conducive to optimal utilization and/or buildout and ineffective implementation through regulation contribute to the problem. To the extent that policy and regulation are major reasons for non-availability of backbone or access to it, it is important that the situation in various countries be studied and remedial actions identified.

In addition to the availability of backbone across the country, it is also necessary to ensure that appropriate conditions of access to the backbone exist, if the potential benefits of market competition are to be realized.

Since a country’s telecom sector normally has an incumbent with an established backbone and an entrenched market position, and because backbone involves large, upfront investment, the terms and conditions for access to the prevailing backbone becomes crucial for sustaining competition, which will in turn generate telecom sector growth.

Backbone is part of the network used to provide communications services; distinctions can be made between national and international backbones, or cable or fiber and radio based backbones, or terrestrial and satellite links, as well as the level of coverage (entire country or partial). Various types of backbones exist; technologies are constantly being upgraded and the per-unit cost constantly is coming down.

The original decisions regarding open access to backbone were based on recognition of the significance of backbone, that backbone networks are essential facilities. Such essential facilities were commonly assumed to be controlled by one/more operators, but it that was necessary to ensure that competitors be given non-discriminatory and cost-oriented access to them because it was not economically/technically feasible to build a substitute. However, a backbone network does not necessarily have to be owned by one entity in most cases. Open access to backbone is most important in the early stages of market opening when entrants are much smaller than incumbent.

Backbone can be established and provided by two different types of operators: one is the “pure infrastructure provider” who establishes and leases out the backbone, and does not provide any other telecom service, especially at the retail level; the other is a “infrastructure and service provider” (hereafter referred to as ‘infrastructure provider’ and ‘service provider,’ respectively), who establishes and leases out the backbone and also uses it to provide retail telecom services in the market.

Backbone can be established as a commercial investment, through government assistance, through roll-out conditions or by complete or partial government financing.

Infrastructure providers and service providers have different incentive structures with respect to installing backbone and providing access to others. Pure infrastructure providers are likely to favor greater access, compared to those who also provide services, in competition with the bulk customers.
Establishment of a backbone, or access to the backbone, depends on the returns from such activities. The highly capital intensive telecom industry requires relatively large investments in backbone, and since the gestation period for obtaining adequate returns is long, there are substantial uncovered costs, especially in the initial years. For the investment to be viable, the net present value must be greater than or equal to zero. In addition, the investor may also consider whether the pay-back period or the break-even period is adequate in view of the conditions in the financial market, i.e. availability of funds over different periods of time.

The lump sum level of investment implies that there is a threshold level of demand below which the investment is not commercially viable. In the case of India, in some areas and for some operators (primarily for the incumbent) demand appears to exist in range of the threshold; in many areas, especially rural and underserved areas, demand and supply are not in line with threshold demand, requiring different forms of policy and regulatory intervention

The more time it takes to reach this threshold level of demand, greater will be the additional costs (due to losses in the initial years) to cover, and the payback period will become extended, particularly due to the discounting applicable net revenues of different years.

There has been considerable emphasis on open access models for promoting the establishment of the telecom backbone. Important reasons for this include the lower costs these operators have and the incentives they have to provide others with access to their backbone. However, to expect the infrastructure provider to have greater incentive to establish the backbone, on the grounds that its costs are lower, would not be correct in general. There will be situations when the incentive for a service provider to invest in the backbone is going to be greater than that for the infrastructure provider, and still both the types of operators would invest in the backbone. In other situations, depending on the relative revenues and costs, we can have either only the service provider investing in the backbone, or only the infrastructure provider investing in the backbone.

There will likely be many situations when investment in the backbone will not be commercially made by both the service provider and the infrastructure provider, and the government will have to take specific measures to assist the process, including providing incentives. To consider the various possible situations, we denote prevailing demand with “D”, the threshold level of demand with “DT”, and prevailing supply of backbone with “S”. The following tables summarize the situations for which investment in backbone would be commercially unviable (Table 1) as well as commercially viable (Table 2)

Table 1, Executive Summary: Asian Backbone Study, 1.7

Table 2, Executive Summary: Asian Backbone Study, 1.7

Thus we see that in certain situations, we need to focus only on addressing the supply constraint and that increasing the prevailing demand in the market will not help increase the backbone. On the other hand, we see that in a number of situations, the supply of backbone will not increase unless the prevailing demand in the market rises.

Likely growth in backbone, and requisite policy response in situations for which the investment in backbone is commercially UNVIABLE

If there is excess demand in the market and/or likely growth in demand, it is possible that the capacity demanded will exceed the threshold level for attracting investment in the backbone. Infrastructure sharing can increase incentives for investment, as the costs can be allocated amongst the various entities sharing the infrastructure. The effective cost of the backbone to the user is reduced and is more likely to happen when the backbone is installed by an infrastructure provider than when it is installed by a service provider. USO funds and government programs to expand and promote broadband can change the viability frontier; improved interconnection and access revenues can also increase viability, making backbone viable in areas that were previously commercially unviable.

There also exists a ‘price threshold level,’ that is the price level below which the extent of increase in demand would be so large that the stimulus from this large market demand would make investment in backbone self-sustaining and viable, even for several erstwhile cases of non-viable investments. It may therefore be desirable to take steps to create the situation for prices to decline below the price threshold level.

Once the market reaches the relevant price threshold, the future growth in demand and revenue sources (through value added services, Internet, and broadband) would ensure that the attractiveness of the investment increases. Further, it is possible that with competition and introduction of new technologies, the price would decline due to market pressure itself.

With respect to the adequacy of telecom backbone in the country, the nature of analysis will depend on the particular situation prevailing in the country. For this purpose, we could have three possible situations:
(a) The backbone in the country is adequate. In this situation, within our framework, the policy focus needs to be on access only, including through policies related to infrastructure sharing.
(b) Backbone in the country is generally adequate, but there are some areas with inadequate backbone supply. Where supply of the backbone is adequate, the focus would be on access to the backbone; where supply of backbone is inadequate, policy analysis would focus on both the establishment of the backbone as well as access to the backbone.
(c) Supply of backbone in the country is inadequate. Both the establishment of the backbone as well as access to the backbone have to be examined.

The model applied to India

India’s liberalization of its telecom market began in the early 1990s, beginning with the equipment sector. The National Telecom Policy of 1994 (“NTP 1994”) recognized a need to open up the telecom sector to private entry to increase teledensity, and to provide modern and affordable services to the people. Since then, the Indian telecom story is one of progressive liberalization, dealing with emerging problems, and devising policy regimes which focus on affordability, utilization of the telecom network, and growth.

India has experienced massive growth in telecom over the recent years, not only across the country, but also within the circles. Only four out of 23 circles have less than a million fixed plus mobile customers. However, unless infrastructure sharing is practiced (either through commercial arrangements or regulatory mandates), the total number of subscribers is not relevant; threshold levels of demand (for each provider’s potential investment in backbone) will not be reached. The incumbents, BSNL and MTNL, with their high levels of subscribership (for example, more than a million per circle in 18 of their circles on fixed) on fixed as well as mobile have the incentives to build backbone. In contrast, fixed entrants have more than half a million subscribers only in 8 out of 23 circles; mobile entrants have more than half a million only in 9 circles out of 23.

With regard to supply of backbone in India, not all of the fiber may be lit. It is important to note that dark fiber can be lit easily if the fiber has already been laid, and capacity can be upgraded easily.

The total domestic backbone in India as at 2005, was almost 900,000 Route km, of which the bulk was accounted for by the incumbent, BSNL. As at March 2005, total backbone supply by operators (Fiber plus microwave, including leased capacity) was 662,920 route km; the majority of this was with the incumbent, BSNL. The total backbone supply by infrastructure operators (as at Q1, 2005) was over 50,472 route km.

It is estimated that 1 route km will cost USD 4500-5500 (INR 200,000-250,000) to lay. Long-distance ARPUs [average revenue per user] in India are USD 14/yr (INR 600). Thus, revenues from 140 subscribers are needed to make fiber viable in India.

According to this analysis, at present, for Reliance Infocomm India as a whole is unviable to build backbone; however, with 10 per cent growth per year, a very realistic target, supplying backbone for India as a whole will become a viable option for Reliance Infocomm.

This research has been presented at the following events:

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