February 23, 2006 was an important date on the telecom industry calendar. After months of mulling and days of debate, the access deficit charge (ADC) was finally revised in favour of operators and end-users.
India, Asia’s third largest economy, which boasts of the cheapest local call rates in the world, has much higher international and domestic long distance charges to subsidise Bharat Sanchar Nigam Limited’s (BSNL) unprofitable foray into the villages. To level the playing field, the Telecom Regulatory Authority of India (TRAI) had pitched for a sharp cut in the ADC, “to primarily give further relief to domestic consumers”, a TRAI statement noted.
More than a year ago, TRAI had revised ADC charges downward. Subsequently, it recommended major changes in the ADC regime, which have now been accepted by the Department of Telecommunications. The revision, which is expected to push down tariffs considerably, has come into effect from March 2006.
Under the new regime, the ADC will be charged on a revenue share basis as opposed to the prevailing per-minute, percall practice. An ADC of 1.5 per cent of the adjusted gross revenue (AGR) will be applicable on all fixed line and mobile calls.
The revenue share component of the ADC will also be applicable to international long distance (ILD) calls. TRAI has reduced the ADC on outgoing ILD calls to Re 0.80 per minute from Rs 2.50 per minute. For incoming calls, the ADC has been reduced to Rs 1.60 per minute from Rs 3.25. This cut, if passed on to the user in its entirety, will translate into a near 23 per cent drop in ILD tariffs. For incoming ILD calls, however, there will be no impact on tariffs, though international carriers may choose to pass on the reduction to their subscribers, making calls to India cheaper for them by Rs 1.60 per minute. “The reduction will definitely help in curbing the grey market, which is commanding almost 40 per cent share of all incoming ILD minutes,” notes Pradip Baijal, TRAI chairman.
TRAI has also reduced the carriage charge for national long distance (NLD) calls, with an upper ceiling of Re 0.65 per minute from the present Rs 1.10 per minute for calls beyond 500 km. For calls within 0-50 km, there is no change ?? the carriage charges will remain Re 0.20 per minute. The reduction in NLD carriage charges has made private operators drop long distance tariffs at par with BSNL and Mahanagar Telephone Nigam Limited OneIndia tariffs which allows NLD calls at Re 1 for a one-minute call.
In a move that raised considerable debate between TRAI and the Ministry of Communications, as it was expected to hamper BSNL’s rural rollout, the total ADC amount has been reduced to Rs 33.5 billion per annum from over Rs 50 billion. Of this, the amount that would go to BSNL would be about Rs 48 billion. With the idea of phasing out the ADC regime over the next two years, the admissible ADC to BSNL for 2006-07 should not be more than two-thirds of Rs 48 billion, that is Rs 32 billion, according to TRAI’s calculations. The ADC revision thus implies a direct hit of over Rs 16 billion to BSNL’s revenues.
Therefore, under the new system, BSNL would get Rs 32 billion of the Rs 33.5 billion. More than Rs 12 billion would come from incoming ILD calls, over Rs 2 billion would come from outgoing international calls while over Rs 15 billion would be contributed by NLD calls. The rest of the ADC amount would be distributed to fixed line operators on the basis of the number of fixed lines provided by them.
The regulator’s rationale in reducing the ADC kitty for BSNL is that the lower ADC would decrease long distance tariffs which would, in turn, increase traffic volume. The total revenue share collected would thus increase on account of the change in calling pattern. Also, the regulator expects that BSNL’s rural rollout will not be adversely affected as eventually the Universal Service Obligation (USO) Fund would kick in to subsidise rural funding.
The other significant change effected in the new ADC regime is that no ADC would be charged on operators’ rural revenue in order to encourage rural penetration. TRAI would also invest in strengthening its monitoring mechanism with regard to ADC payments from operators. Moreover, Baijal stated that TRAI would reduce the total ADC amount further to Rs 16 billion for 2007-08 before abolishing it completely the year after.
The end-users are obviously going to be the biggest beneficiaries of the ADC revision. They can expect a fresh round of tariff cuts. Most operators, including Reliance and Idea, have welcomed the move. And Bharti officials claim they will not retain any part of the reduced ADC. “This is a step in the right direction,” observes a Bharti official. “It will lessen the burden on customers and private telecom operators, who will now be able to enjoy lower tariffs, especially for long distance calls. As always, we shall be passing on the benefit of this latest policy initiative to our customers. We are also pleased to note that the time frame is clearly set for complete abolition of ADC by 2008-09. It will be the industry’s desire to see this time frame shortened.
The Cellular Operators’ Association of India (COAI) also views the move in a positive light. “1.5 per cent revenue share represents a significant reduction in the ADC burden on the industry and in turn, on the consumer,” says T.V. Ramachandran, director-general, adding, however, that “the carriage charge of Re 0.65 is still on the higher side, considering the 70 per cent reduction in the cost of domestic leased circuits”.
The only operator that appears unhappy is BSNL. The state-owned PSU is looking at a likely loss of more than Rs 15 billion (though the exact financial impact is still being worked out). As a BSNL official puts it, “It is not exactly a dole that we are asking for; it is tough to blend social responsibility with commercial needs.”
Overall though, operators and analysts believe the ADC revision ?? a longstanding demand of the industry ?? is a good decision. In terms of rural rollout, analysts are clear this will not be hampered as over 60 per cent of the USO Fund, which amounts to roughly Rs 70 billion, is still lying unused. And eventually the USO Fund and ADC would merge to subsidise rural telephony.
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