Least cost subsidy auction indicates Indian rural areas commercially viable

Posted on March 28, 2007  /  1 Comments

The Indian government held least cost subsidy auction (lowest bid for subsidy is the winner) in two parts to disburse the world’s second largest Universal Service Obligation Fund (USOF) for rolling out mobile services in rural areas across the country. For the purposes of the auction, India has been divided into 81 clusters. Part A of the auction disbursed funds for passive infrastructure like towers and Part B dealt with the actual deployment of mobile services.

The bidding has been intense for deployment of mobile services (Part B) and most of the bids were for zero subsidy fund and in some cases negative bids were made! This strongly indicates that mobile operators in India perceive deploying mobile services in India’s rural areas to be commercially viable. Of the 81 clusters, results have been declared for 24 clusters that have been won by BSNL, Dishnet Wireless and Reliance. The remaining 57 clusters have to be re-bid because of tie between the third and fourth operators! The absence of Bharti from the list is a bit surprising.

The results of Part A of the auction for deploying passive infrastructures like towers and base stations were more uneven. BSNL has won 80% of the $570 million USO fund to deploy passive infrastructure like mobile towers in rural areas across the country.  BSNL won 63 of those clusters and will be deploying around 6000 mobile tower, the remaining clusters were won by other operators.

The USO least cost subsidy auction for fixed lines that was held in the past also resulted in BSNL bagging the majority of the clusters. However, unlike the previous auction the current auction resulted in bids being about 30% lower than the benchmark bidding rate due to “severe competition and bidder interest.” That is indeed a positive development.

More from the Hindu.

1 Comment

  1. From the Economist, March 29:

    [..]But something rather odd happened in India: in 38 of the 81 regions on offer, many mobile operators bid zero. In other words, they asked for no subsidies at all. In 15 regions, India’s biggest operator, Bharti Airtel, even offered to pay. As a result, barely one-quarter of the 40 billion rupees ($920m) available in subsidies is likely to be allocated. If operators reckon there is money to be made running mobile networks even in some of the poorest parts of the world, have USFs had their day?

    Not exactly. Although Indian operators are rejecting subsidies for network equipment, they will still benefit indirectly from the fund, since it is also used to subsidise the establishment of shared sites for mobile-phone base-stations. Even so, India joins other countries, such as Nigeria and South Africa, where commercial mobile networks are rapidly expanding into areas previously considered uneconomical.

    In countries where mobile mania is less acute, USFs can help to get the ball rolling. They have been particularly successful in Latin America. A recent study found that Peru’s USF helped to reduce the rural population’s average distance from a telephone from 56km (35 miles) in 1999 to 5.7km in 2002. This kind of achievement has encouraged countries in Asia, the Middle East and Africa, from Mongolia to Morocco, to establish funds. Around 2-5% of the world’s population lives in areas where mobile services can be provided only at a loss, according to a report from the GSMA, an industry lobby group, and Intelecon, a consultancy.

    As a result there remains a need for USFs, says Andrew Dymond of Intelecon. But funds are often managed inefficiently. Some governments collect huge sums which they then fail to spend. In India, around 5% of operators’ revenues go to the USF; Brazil has yet to spend any of the $2 billion it has collected. Elsewhere, regulators have chosen to allocate the funds to extending fixed-line networks, rather than cheaper mobile networks.

    The advent of broadband-internet connections is also changing attitudes to USFs. Since broadband links can carry both voice and data, some countries (such as Chile) are starting to subsidise broadband roll-out instead of just concentrating on phones. And with so much of its 75 billion rupee fund unspent, India’s government is drafting proposals to subsidise the provision of broadband to every village.

    But not everyone agrees that this is the right approach. Rather than subsidising village broadband, funds should be used to provide high-speed access at a district level, says Juan Navas-Sabater of the World Bank. It is then possible for a market to develop in which schools, hospitals and local councils buy capacity and entrepreneurs can establish self-sustaining private telecentres. This model is already taking hold in Uganda, Mongolia, Burkina Faso and Malawi. For universal-service funds and for telecoms in general, the trend is clear: phones first, broadband later.