Harsha de Silva & Payal Malik 20 May 6pm
PM: specifically looking at subsidy mechanisms for diversification, hence ‘moving beyond the market . Instruments looking at are hte universal service obligation fund (USF) and hte access deficit charge (ADC). There has been a diminishing of market efficiency gap (i.e, efficiency is improving). Slide # 3 shows the major improvements in efficiency in the market. However there are still further improvements that can be made. Increased focus on cellular mobile infrastructure deployment: 68.81 percent growth vs 6.6 percent Rural DELs installed by BSNL through license fees relief – about Rs. 1 m has been compensated, in the form of reimbursements from license fees Access gap is evident, and affordability is a concern. current ARPU are inadequate to fund necessary capital to expand to rural areas. Mobile operators and others have come to accept that the only way to grow is expanding service, rather than reducing tariffs. operators come to accept taht the only way to grow is via network exansion (thus need capital) rather than lowering tariffs any further. USOs are imposed b/c traditional funding mechanisms (based on cross-subsidising) don’t work in competitive environment. 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 (not been very successful) [Slide# 8]one achievement of hte USO policy has been the Expediting of disbursements effectuating universal service policy Status of various USO Projects in India: 1. Village Public Telephones – Approximately 520,000Villages, but most not working, ie, not getting support. 2. Replacement of Multi Access Radio Relay Technology VPTs installed before 1st April 2002. 1, 80,000 MARR VPTs the technology was defunct, thus these VPTs were replaced. 3. Provision of additional rural community phones (RCPs) in areas after achieving the target of one VPT in every revenue village (2nd VPT). (1st time it went below the benchmark) 4 Provision of VPTs in revenue villages as per Census 1991 without any public telephone facility. this was a Greenfield project. 5. Provision of rural household direct exchange lines (rdels) in specified short distance charging areas private phoes to rural households. biggest achievement is that the bidding brought down the cost of the project by some 60%. before april 2002, no funds were disbursed. funds were tricking through by 2004. after 2004, Rs. 1200 crores (266 million USD) have been disbursed. have almost 6,000 lying in fund, only 1700 spent, 1200 pledged — inefficient. Costing Model: Determination of Benchmark: – most of the data has been provided by the incumbent Alternative Proxy cost model selected b/c its more inclusive. Issues that we have identified I believe access via public phones is a better way to provide universal service rather than subsidy provision for private telephones. USO disbursement were not technological neutral. Costing Model: Determination of Benchmark: – most of the data has been provided by the incumbent The auction mechanism have given advantages to the incumbent. Costing models didnt allow fair treatmentcause costing data was based on incumbent data. The auction process itself was very complex and not very transparent. There are huge amounts of market efficiency gaps in India. If it were reduced it will result in greater affordability and general efficiency. the last point is about backbone is extensive in India. GAIL, Railways etc have also backbone. If you have effective cost-based access regime you will have lower costs in terms of USO projects and also greater usage of backbone lying fallow. Marketplace is distorted by subsidies and many cases dont allow for more efficient market-based solutions. There is greater asymmetry between incumbent and newcomers when they are auctioning for USO. The next section on ADC by Harsha de Silva. Giving access to rural people through ADC is another mechanism for extending network. ADC is subsidy per minute for high cost areas. Is there wisdom for having a price ceiling in rural areas? Is having tariff ceiling necessary? The problem is the government created inefficient system. So unlike urban area where there is a market clearing priceit is not the case for rural areas. Most places use cross-subsidies (long distance revenues to rural access). Indias ADC regime has most of the features of ADCs in other countries. The ADC levy is extremely complex based on many factorsdistance, which circle, whether mobile, fixed or WLL etc. The ADC regime favored technologies differently and hence created unequal paying field for the players. It also created a system that was extremely complex. The whole calculation was based on BSNL costingthere are lots of budget grants etc. one needs to take into account all these things to have a accurate picture of the cost of doing business. Question asked was should ADC be restricted to BSNL and fixed line operator or also to mobile operators and others. The 2003 consultation outcome was that the cost calculation was wrong and should no to be based on historical costs of BSNL but forward looking costs. But said they would transition to forward looking costs in the future. In feb 2004 it was implemented. There were many problems that cropped upbilling system out of whack, CLID info was not available, couldnt identify bypass etc. So TRAI said it wasnt working and said lets simplify by not including distance in the model and proposed a new ADC. They came forward with revenue sharing model. But this proposal was torpedoed by operators and others. So TRAI reverted back to existi g plan of cost based. So a new tariff structure was developed. So subsidy was one figure –30 paisa. The drop in international drop was nearly 60% drop and national long distance drop was 40%. Then the most pertinent was asked in 2005should ADC be only for rural fixed line? 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 MTNL asks for urban ADC. Which doesnt make much sense. Tata asks for combination of ADC and USO. Reliance argue that there is no econ rationale for ADC in India. Reliance is arguing that to go only with USO and scrap ADC. Some issues: ADC is creating a grey market, Whenever there is a conflict between dumb regulation and consumer benefit, it is regulation that should yield space, not the consumer. ADC is conceptually complicated and the bjective not clear. Technology bias defeats the purpose of extending access. ADC also encourages parallel markets ADC is a nightmare to implement and the constant changing of the rules of the game [2003 May, 2004 Feb, 2005 Feb, 2005 when again ] ~ not conducive for business We recommend that ADC should be merged with USO on a simple, technology neutral, revenue share model.