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Universal Service: India Case Study

The co-principal investigators of this project are Harsha De Silva and Payal Malik . The final report, titled Diversifying Network Participation: Study of India’s Universal Service Instruments is now available for download in PDF, HERE .

Comments on this study can be posted HERE .

Diversifying Participation in Network Development: Moving Beyond the Market
One of the possible area of research, as proposed in this year’s WDR theme is to review various types and methods of investment funding for network development, the factors determining their availability and application, and the conditions influencing their success or failure. To this end, we propose to review the current subsidy mechanism for expansion of rural telephony in India. This mechanism is implemented through two instruments: (a) Access Deficit Charge (ADC), which is a surcharge on Interconnection fees to compensate the [primarily] the incumbent for below cost regulated tariffs in the rural areas and; (b) Universal Service Fund (USF), a fund created through a statute to finance network expansion in net high cost rural areas. The disbursement from this fund is made through a competitive least-cost subsidy mechanism.

2. Background
The Indian telecom growth has become a benchmark for other infrastructure sectors in India, which are attempting to replicate the telecom success story. Between July 20003-04, the cumulative position of the number of phones changed from 61.1 million to 82.95 million phones, recording an impressive growth of 35.76 percent. The gross subscriber base consisting of fixed as well as mobile telephones reached 86.79 million at the end of September 2004, translating into an overall teledensity of 8.10. However, despite rapid growth in the past decade, India falls short of universal access by most measures. This is evident in the wide disparities in the rural and urban direct exchange lines (DELs). As on June 30, 2004, the total urban DELs were 31.18 million and rural DELs including Village Public Telephones (VPTs) were 12.32 million. Crudely, this means that 30 percent of the population had a little more than 70 percent of the phones and 70 percent of the population had less than 30 percent of the phones. While a conducive regulatory and policy environment can improve network expansion, it is well recognized that rural telephony and extending telephony to the poor is necessarily prone to market failure. If the market fails on account of network externalities then there is a case to intervene in the market to serve these specific groups of people who have a low willingness to pay. Provision of rural telephones and their maintenance is expensive. The terrain is tough, demand low, ability to pay limited and revenues generated often abysmally low. Consequently, the service has almost always needed to be subsidised, though experts believe that much of rural communications can be viable in a conducive regulatory environment. For instance, in the Indian case the following ‘market access gaps’ still exist (a) entry into the telecom market has been made difficult for small players who may be willing to serve the rural areas but on account of high licence fees are not able to do so; (b) the anti-competitive practices of the incumbent have put the other competitors at a disadvantage and ironically ADC is one of them (c) the tax policy of the government in telecoms inhibits growth ; and (d) Lack of clarity on Infrastructure sharing. The New Telecom Policy (NTP)’99 of India envisages provision of access to basic telecom services to all at affordable and reasonable prices through a subsidy mechanism. The resources for meeting the subsidy requirement of the Universal Service Obligation (USO) is generated through a Universal Service Levy (USL) at a prescribed percentage of the revenue earned by the operators holding different type of licences (which currently is 5 per cent of the Annual Gross Revenue). Almost USD 2 billion corpus is expected for the USF disbursement schemes during the 10th plan (2002-2007). A sum of USD 150 million has been so far disbursed as subsidy for schemes initiated from April 1, 2002. In order to disburse the collected funds, a least cost subsidy auction mechanism has been adopted where the operators already having a presence in the short distance calling area (SDCA) are eligible to participate in the auction. In the first round this subsidy is provided for the provision of VPTs to be extended later to rural DELs. The other method of financing the subsidy is through incorporating ‘access deficit charges’ (ADCs), into interconnection charges to be paid directly to the incumbent state-owned enterprise (BSNL) in order to compensate it for providing below-cost service in rural areas. How well have these instruments fared and what have been the associated problems in their implementation? Do these instruments stand the test of an efficient subsidy scheme i.e. are they well targeted and create the least possible market distortion? What level of competition exists in their allocation, are the focus of the proposed research.

3. Research question
The focus of the study will be to analyse the two subsidy instruments employed to extend coverage to the unconnected rural households in the context of the existing policy and regulatory framework. The study, will therefore, analyse the regulatory constraints to network expansion which would otherwise have taken place even in the absence of the subsidy. This is important as it is not clear whether low rural teledensity can be attributed entirely to market failure, or a non-conducive regulatory and policy environment is partly to be blamed. A corollary research assessment that requires attention is to see whether these instruments i.e. the ADC and the universal service fund contributions and other extra-market transfers do not contribute to the attenuation of competitive forces in the rural market. It will be ironical if the above happens and the instruments will be self-defeating. For instance, operators and consumer groups alike have attacked the ADC since it taxes BSNL’s competitor ‘who pass the charges to consumers’ to fund even the large numbers profitable urban phones of BSNL. On the other hand in the presence of a non-liberal and a tight licensing regime, the least-cost subsidy auction has not allowed the best possible price discovery. By restricting participation in the auction to already existing phone companies meant that it hugely favoured the incumbent that was omnipresent. This exclusivity provision meant that the auction failed to create competition for the market. Consequently, the provision of the subsidized service mostly by the incumbent, who will receive a large portion of the subsidy will discourage new firms from entering [as they will not be able compete without subsidy] and preclude competition in the market.

4. Methodology
The research is be based on analysing publicly available material on these issues in addition to extensive interviews with the relevant stakeholders i.e. the regulator, the USF administrator, the operators and also industry analysts. Brief but relevant theoretical analysis supplements the empirical analysis that has been used.

The findings from this research project have been presented at the following events:

  • WDR Expert Forum, 30 September 2005, The Elizabeth, Singapore
  • LIRNEasia Networking Meeting, 2 October 2005, Jakarta Hilton, Indonesia
  • Pro-Poor, Pro-Market ICT Policy and Regulation forum at the WSIS, 17 November 2005, Kram Center, Tunis, Tunisia.
  • Usable Knowledge for Growing the Sector: ICT Policy & Regulation Research from LIRNEasia, 19 December 2005, Galle Face Hotel, Colombo, Sri Lanka

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