The Department of Telecommunications (DoT) has formulated a set of guidelines for disbursing and sharing of the Universal Service Obligation Fund. The main aim of the government is to ensure proper allocation and utilisation of the funds. Telecom analysts discuss the bidding process and related disbursement issues. Here are their views…
Should the bidding process for USO funds be restricted to licensed players only?
Archana Sassan: In terms of the Indian Telegraph (Amendment) Rules, 2004 read with the current USO Fund guidelines, “eligible operators” entitled to bid for the USO Fund are restricted to basic service operators, cellular mobile service providers, unified access service licensees and other entities as specified by the central government. Accordingly, the right to bid for support from the USO Fund is essentially limited to the licensed operators at this stage and should be restricted to licensed players only.
Rajat Sharma: The bidding process should encompass both licensed players and niche local players. Licensed players will see a business case for network set-up in rural areas not very far from the cities, while niche local players will penetrate extremely remote locations. Thus, both players together will diffuse telephony coverage to the rural sector quickly.
Prashant Singhal: The USO Fund size is expected to be over Rs 370 billion with disbursements of approximately Rs 200 billion over the next five years. With this level of disbursements and clearly having an objective to increase rural penetration to over 10 per cent by the year ending March 31, 2010, any restriction in the number of players to bid for the provision of rural telephony is bound to have an impact on achieving these targets. With a high level of clarity in the telecom market in India, and subsequent to the recent M&A activity, the number of licensed players is limited to single digits. In order to achieve a rural communications revolution, the USO Fund should explore options like separate infrastructure service providers for passive infrastructure, or a network outsourcing model, as some existing players have developed, and let the whole segment of new market players get interested in these models. Rural penetration can be fast achieved through specialisation of infrastructure development and deployment.
Mahesh Uppal: No, the bidding must be more broad based. Rural connectivity is a poor 15 per cent of urban connectivity. Therefore, a system is urgently required to ensure that any entity willing to provide, or significantly catalyse, telecom services in rural areas should be able to access the funds after satisfying clearly laid-out criteria. For instance, electronic services related to entertainment or health that will stimulate demand for rural networks will be a good candidate for USO Fund support since it will make otherwise low-yielding investments more viable.
Some care is clearly required to prevent abuse. However, with a little creativity much can be achieved. We need to pull allplugs for rural telecommunications. Fortunately, the USO Fund has considerable resources to do so.
How will the USO Fund actually be disbursed? How will the players be reimbursed, what will be the time-frame, etc.?
Archana Sassan: Disbursement from the USO Fund works by way of reimbursement on the basis of actual physical performance by the successful bidder, that is, the universal service provider. The terms of the disbursement, including the manner and frequency of the disbursement, are specified in the agreement executed between the universal service provider and the administrator of the USO Fund. Reimbursements are made on completion of the prescribed targets by the universal service provider and verification of the same by the administrator. Support from the USO Fund to the universal service provider comprises an initial lumpsum subsidy payment (front-loaded subsidy) and an equated annual subsidy amount payable over a period of seven years. The subsidy is paid from the date the rural household direct exchange line (DEL) is installed. The front-loaded subsidy is payable only for net addition of rural household DELs in a secondary switching area. The subsidy from the USO Fund is disbursed in four quarterly instalments during each financial year, subject to submission of a claim in the prescribed format by the universal service provider. A liquidated damages/ performance bank guarantee of Rs 5 million made in favour of DoT is required to be furnished by the universal service provider for ensuring performance and quality of services.
The universal service provider is required to cover at least 20 per cent of the target villages within one year from the effective date of the agreement signed with the administrator and a minimum of 60 per cent by the end of the second year. Further, there may be a deduction of the subsidy for periods where the facilities provided by the service provider remain non-functional.
Rajat Sharma: Since revenue generation in rural areas will not witness as blistering trends as witnessed in urban/semi-urban areas, the government should follow an antecedent disbursement policy. The government can provide the players with an estimated amount based on a preliminary project plan, whose guidelines and framework can be set by the government. Post-network implementation, the government along with the players can carry out detailed audits to estimate the actual amount. To ensure the funds are suitably utilised, the government can slap stiff penalties for any deviations from guidelines upfront.
Mahesh Uppal: It is premature to talk about this since the new USO Fund regime is still not formally in place as Parliament is yet to consider the revised proposals.
Will the method of USO Fund disbursal be market friendly?
Archana Sassan: The USO Fund was created to increase the country’s teledensity and to make available telecom services to a market where few service providers would normally want to go, that is, the rural areas. However, there is a wide view that actual disbursement of the USO Fund has not been as market friendly as contemplated under the New Telecom Policy (NTP), 1999.
Statistics reveal that of the Rs 107.53 billion collected by the government under the USO Fund since its inception in 200203, a substantial amount of approximately Rs 70 billion is yet to be disbursed. Various reasons have been cited for the underutilisation of the USO Fund. According to DoT, all funds collected by the government under the USO levy is credited to the Consolidated Fund of India. The budgetary allocation of funds from the Consolidated Fund of India to the USO Fund is inadequate. For example, in financial year 2005-06, Rs 17.5 billion was allotted by the finance ministry towards the USO Fund against a total collection of over Rs 35 billion from telecom operators. In the circumstances, it may be advisable for DoT and the government to revisit the method of disbursal from the USO Fund in order to ensure that the funds disbursed actually result in the creation of worldclass telecom infrastructure in the country.
Currently, support from the USO Fund is available only to subsidise specified types of telecom services in rural areas, such as village public telephones (VPTs) and individual household phones, which fall in the category of fixed line services. Subsidy support is not available for the creation of much-needed telecom infrastructure in the rural areas. Lack of available infrastructure precludes smallto medium-size players, who may otherwise have innovative contributions to make to rural telephony, from entering the rural market. This is a non-market-friendly scenario. Perhaps to remedy this scenario, TRAI has recommended the diversion of USO subsidies away from the aforesaid current target and towards the establishment of telecom infrastructure.
Rajat Sharma: The antecedent disbursement method is market friendly. The responsibility of making disbursed funds a success lies both with the government and the players.
Prashant Singhal: With disbursements of over Rs 15 billion per annum from the USO Fund, it is important to have a seamless process of subsidy disbursement, which would not only help operators take initiatives to increase rural telephony, but also make it a success. While the existing process is good, it leaves a lot more to be desired ?? the disbursement only happens on the submission of an audited certificate, which by itself is a fairly long-drawn project for companies.Further, the issues on the front-ended subsidy are whether or not the operator would be operating the DELs for a five-year period or not operate the DELs once the subsidy is disbursed to them. With the intention of working on different models to achieve the rural telephony targets, the method needs to be far friendlier.
Mahesh Uppal: The auction of subsidies to those who bid the least is seen by markets as a transparent method of identifying recipients. But this may not be enough. The USO Fund has not been a runaway success till now.This would imply that the subsidies, or the accompanying terms, still do not provide investors with the required confidence to connect rural areas effectively.
Should more telecom players and services be subsidised?
Archana Sassan: The underlying philosophy behind the NTP, 1999 was to allow free play of market forces by not restricting the number of operators in almost all segments, subject to certain prescribed entry conditions.This was to ensure that only serious players with financial strength would make a market entry, and not rent seekers in a restricted licensing regime primarily interested in trading of licences. The entry conditions were also reasonable and rational, and did not pose any undue initial financial burden.
Contrast the aforesaid free market objective of the NTP, 1999 with the statistics that have emerged from the USO subsidy auctions. Out of all the players submitting bids for the USO subsidy auctions, BSNL was the winner in the largest number of territories.
Private sector players won few territories in comparison to BSNL. Though the auction mechanism was transparent, concerns have been voiced that BSNL being the incumbent operator had inbuilt strategic advantages to win these auctions. BSNL’s existing large rural network (built over many years with public funds) meant that its only cost, relevant to the bids, was the last mile cost. However, for new private sector entrants the cost of building a rural network amounted to a major component of their bid-related costs and adversely affected their ability to compete in the subsidy auction. To add to this is BSNL’s reluctance to share its existing rural infrastructure with private players which would have resulted in a lowering of costs for private players. The aforesaid has resulted in a strategic imbalance between BSNL and the private players in the rural telecom market. This has precluded private players (with potentially innovative and affordable technologies and products) from entering the rural telecom market on the scale envisaged in the NTP, 1999. Therefore, there is an argument in favour of providing incentives to private players with a view to overcoming the disadvantages faced by them and increasing the scale of their participation in providing rural telecom services.
Currently, USO funds are restricted to supporting the provision of specified fixed line services only, such as VPTs and household phones. Since alternative technologies like broadband, wireless, etc. are available, the USO Fund should be made available to any service provider who can fulfil the basic standards of rural telecom services, irrespective of the technology used.
It is pertinent to mention here that there have been recommendations by TRAI for providing support from the USO Fund to “niche operators”. In terms of these recommendations, niche operators may be given support from the USO Fund in specific circumstances, such as if the licensees fail to meet the benchmarked price in the subsidy auctions. However, DoT is still silent on the concept.
Rajat Sharma: The services will have to be subsidised further in remote areas to ensure that the real value of telephony coverage is understood and later adopted. However, the actual potential lies in subsidising players who form an essential part of the active and passive infrastructure providers’ value chain. Encouraging local business set-ups to be a part of the broader telecom ecosystem will raise the economic performance indicators for a region.
Prashant Singhal: The USO Fund, as in other countries, should also target some of the other segments and ensure that they have the fundamental right to communication. In Chile, Australia and the UK for example, the USO Fund ensures that phones are available for physically handicapped people, low-income groups (in urban areas) and/or there are enough public telephony booths. The above are only a few of the countries and subsidies that the USO Fund provides, but the ambit of the fund is fairly large across nations. Clearly, for India to grow and ensure that all segments and strata of society grow, the USO Fund should play a very important and active role. At the end of the day, communication is the first step towards change and telephony is one of the most popular methods of communication, which kills distances with the speed of voice and data transfer.
Mahesh Uppal: Yes, we need a USO Fund regime which can be accessed by all genuine risk-takers and investors in rural telecommunications services.
