Colloquium: “Diversifying Participation in Network Development: Moving Beyond the Market”

Posted on May 20, 2005  /  8 Comments

Harsha de Silva & Payal Malik 20 May 6pm

Payal & Harsha

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 didn’t allow fair treatment—cause 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 don’t 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 price—it is not the case for rural areas. Most places use cross-subsidies (long distance revenues to rural access). India’s ADC regime has most of the features of ADCs in other countries. The ADC levy is extremely complex based on many factors—distance, 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 costing—there 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 up—billing system out of whack, CLID info was not available, couldn’t identify bypass etc. So TRAI said it wasn’t 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 2005—should 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 doesn’t 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.


  1. Hello from Canberra!

  2. Hey great you’re online. Malathy says hi.

  3. LIRNEasia members or others who wish to ask questions should do so here. I will transmit them to the speakers and type the response here.

  4. Where is the rest of the LIRNEasia community?

  5. This is not the easiest topic to blog or follow. Have we ever had this dense a colloquium? It’s too much even to take f-to-f.

  6. hanging in there so far (midnight)…maybe I should say goodnight?! downloads slow. Hi Malti

  7. Bye Sabina, goodnite!

  8. Let me put this case in a different perspective. Let’s consider some commodity other than telecom for simplicity. (I don’t over genarlise.)

    Let us assume there is a poor rural village, to which there is no milk supply. (I hope you would not ask me why I selected milk as an analogy – It directly came from ‘kolombata kiri – gamata kekiri’)

    Well, let us also assume that outside this village Milk is selling at a price of Rs. 3x per litre and, if someone wants to sell milk at this particular village it will cost Rs. 5x per litre (difference being transport and distribution costs.)

    So the government now wants to give milk to this poor village under its ‘Gama Perata’ programme. It can do this is several different ways:

    1.It is possible to provide a fixed monthly payment Rs. Y to each villager, and assume they will use it to buy milk. The money comes from taxpayers. Govt. does not have to worry about the distribution because if the villagers have money there will be a demand and that demand will attract vendors who will create distribution channels. (In other words this is another ‘Samurdhi’ model)

    2.It is also possible for the govt. to create a co-operative society store in the village, which will issue a limited amount of milk to each villager at a reduced price or free of charge. In this case the govt. creates the distribution channels. The money again comes from the Treasury. (This is a ‘Halpoth’ model)

    3.The government can approach some vendors and say “Okay you sell milk at this village at Rs. 3x for litre or less and we pay you the difference” The money comes from Treasury. (‘Pure Subsidy’ model)

    4.The Govt. Can ask the vendors to sell the milk at this village at Rs. 3x or less while the govt. allows the same vendors to sell milk at city at Rs. 6x or higher so that they earn the difference. (‘Cross Subsidy’ model)

    As far as it is milk, the most successful model I can think of is the second one. In fact, this model has worked well for some commodities like rice, flour and sugar till 1977. It will ensure finally the people will get milk. It will also make them happy.

    Now put milk = telecom. Will the model work? Yes, I think still it will.

    Finally, it will make JVP happy (The poor will no more be oppressed by American imperialists and NGOs and the clan.) and it will also make KKG happy. (It is the only way we can reach a ‘zero cost telecom charges’ as he suggests!) It is too much to expect, but let us assume this process will increase the volume of calls to such a level that the cost of an individual call will comedown to near zero levels, so that it will not be a big burden for the Govt.

    Bottom line: I believe in free markets and I believe in capitalism. However, if one still wants to practice socialism, it is better to do it in ‘their own way’ (than ‘our way’). After all their ways are time tested during the 70-77 period in Sri Lanka!