Inclusive Growth – Funding rural telecom projects

November 15, 2009 | Specials

Seventy per cent of the Indian population (820 million people) resides in rural India, consisting of 600,000 villages largely lacking in basic infrastructure and connectivity. The rural population is mainly engaged in agriculture, which has very low productivity. Even non-agricultural occupations in these areas are characterised by low productivity levels. Given this situation, there is no doubt that if India is to continue on its current path of healthy growth rates, efforts have to be made to ensure that this growth is inclusive. We cannot afford to neglect rural India.

Information and communication technology (ICT) connectivity is essential for mainstreaming the rural areas. It can help reduce isolation and increase the awareness level of the rural population. ICT can facilitate access to education, health and markets, and increase the knowledge and productivity levels of rural Indians.Broadband access, in particular, becomes important in situations where other infrastructure (roads, administrative machinery, etc.) is inadequate.

Liberalisation, competition and effective regulation have brought impressive gains to Indian telecommunications.However, these telecom reforms are not enough to bring about the desired level of telecom penetration in rural/remote areas which suffer from both supply-side and demand-side constraints such as difficult terrain, insurgency, lack of supporting infrastructure (roads, power), scattered populations, low income levels, etc.

In such a scenario, the Universal Service Obligation (USO) Fund plays an important and multi-faceted role: to incentivise telecom service providers to venture into rural/remote areas, to facilitate rural rollout, to reduce costs and hence end-user prices, and to increase the affordability of telecommunication services.

The USO Fund’s tools for fulfilling its objectives could include: subsidy support to reduce/close the viability gap, pursuance and liaison with the state/local authorities to facilitate rural rollout, encouragement and support for the adoption of innovative solutions to overcome constraints such as power and backhaul, encouragement to sharing of infrastructure at discounted rates, and building in special tariff plans for target beneficiaries where required.

Funding methodology

As of March 2009, the potential funding by way of the universal service levy balance was Rs 112.43 billion while disbursements had crossed Rs 94 billion as of September 2009. Funds are made available to the USO Fund through the budgetary process. These are to be utilised in accordance with USO Fund rules while abiding by the government’s policy directions and rules and regulations on financial propriety.

The subsidy scheme design is a multipronged process.

First, the overall scheme is conceptualised including decisions on service deliverables (to other service providers or to end-customers).

Second, the infrastructure elements to be created/augmented/shared (if any)are identified.

Third, the appropriate costing is decided based on prevailing market rates/historical costs.

Next, benchmarking is carried out to arrive at the maximum subsidy rate/ offered subsidy level.

Subsidy modelling is done to ensure the correct level and structure of incentives for long-term sustainability of services.

Then, a decision is made on the subsidy disbursement schedule and associated conditions (building in safeguards to ensure proper implementation).

Service rates too may be discounted appropriately to ensure affordability of telecom services for target beneficiaries.

Finally, the USO Fund carries out the tendering process.

The USO Fund is a comprehensive fund disbursal mechanism. It not only utilises an all-India network of departmental offices for subsidy disbursement but also carries out regular post-payment verification and closely monitors ground-level implementation of schemes. In this manner, effective utilisation of funds is ensured and leakages are avoided.

Lessons learnt and the way forward

USO Fund activities carried out since 2002 have served to provide valuable insights into planning and implementation issues. Some of these are:

Public access schemes have shown that it is best to organise service provision along commercial lines. A solid monitoring, awareness and feedback mechanism should be in place.

Experience with individual access (rural DEL) schemes suggests that the practicality of the monitoring requirement must be assessed carefully. Extending telecom coverage with a minimum quality of service is perhaps a better approach.

The mobile infrastructure scheme has demonstrated that rural areas hold tremendous potential for mobile services. However, there are several constraints too. For example, inadequate access to power supply is a key challenge for service providers. Land acquisition and backhaul are other difficulties encountered in rural rollouts.

Going forward, the USO Fund is coming up with various schemes and projects to overcome the challenges and provide much-needed telecom connectivity to the rural areas. That said, it is essential to note that the USO Fund is not a universal panacea. The USO Fund’s efforts must be supplemented by simultaneous programmes for overall rural infrastructural development including in the areas of IT, education and power. A greater level of coordination and mutual leveraging amongst various rural development programmes is called for.

Archana Gulati, Joint Administrator, Finance, USO Fund