Even as the access deficit charge (ADC) regime is being re-evaluated by the Telecom Regulatory Authority of India (TRAI), the minister for communications and IT has made it clear that a subsidy of Rs 50 billion must be provided for Bharat Sanchar Nigam Limited (BSNL) annually, essentially to ensure that it meets its rural telephony mandate.
Rollout of rural telecom services has become a top priority for the government. And increasingly, private players too are showing keen interest in taking telephony to the rural areas. With urban markets saturating rapidly, operators are eyeing this sector as the future adopter of mobile communications.
A multi-pronged offensive is on to bridge the digital divide. The build-out of rural networks has begun and new services are being introduced to win over this segment. The government, meanwhile, has restated its commitment to the rural sector by embarking on, among other initiatives, the Bharat Nirman project announced in the Union Budget 2005-06, with an emphasis on rural infrastructure development. The project focuses on six infrastructure sectors, of which rural telecom features high on the agenda. The aim is to provide telephony services to the 66,822 villages that are so far unconnected. The budget has also set aside Rs 12 billion from the USO Fund for rural telephony.
What is driving this new interest in rural connectivity? India’s teledensity has increased from 3.6 per cent in March 2001 to 9.4 per cent in June 2005. The mobile sector especially has been witnessing rapid growth over the past few years. It has maintained a compounded annual growth rate (CAGR) of 85 per cent per annum over the last six years, helped by the more than 37 per cent fall in tariffs, which has made these services much more affordable to the masses.
However, despite this, India ranks 39 out of 104 countries on the Networked Readiness Index (NRI). The NRI is a measure of the degree of preparedness of a country to participate in and benefit from information and communication technology developments.
India’s ranking is even worse on IDC’s Information Society Index for 2004, where it ranks 51 out of 53 countries. This index is a measure of the ability of a country to participate in the knowledge economy. No surprises here, given that 76,875 of the 6.07 million villages are not covered by village public telephones (VPTs) as of March 31, 2005. The VPT is the first phone set up in a village with no telecommunications infrastructure.
Therefore, although the teledensity has increased, the gap between the rural and urban teledensity has in fact widened. While urban teledensity has reached 26.2, rural teledensity is an abysmal 1.74. This in itself is sufficient reason to increase the focus on rural connectivity. Also, studies have found that in developing countries, an increase in 10 mobile phones per 100 can boost GDP growth by 0.6 percentage points. Several social benefits can accrue as a result of these developments as well.
While the government’s participation in the process of improving rural teledensity is understandable, even private service providers have suddenly woken up to the potential of this sector. While in the past the private operators have failed to meet their rural rollout obligations, they are now actively looking at this as an opportunity for expansion. With the government setting a target of 250 million telephones by end-2007, the next 36 months need to see a growth of about 5 million subscribers per month. The last few months have seen an increase of up to 2 million only. The deficit needs to be made up from somewhere. Operators see small towns and rural areas as their new hope.
This is because there is believed to be a latent demand for telecom services in the rural areas. If 43 per cent of rural households can own a bicycle and 32 per cent a radio, in an environment where handsets are available for $35, there may be a demand for mobile phones too. As it is, studies based on a sample of Indian villages indicate that, on an average, 3 per cent of the household income is spent on telecom. With new choices available, this figure may actually increase.
Besides this, private operators have now reached a size where they are enjoying economies of scale. The costs associated with bulk deployment of services are less than in the previous years. Hence, with the present ARPU around $9 per month, operators can profitably expand into non-covered and rural areas. According to TRAI, some are already offering $4 per month ARPU tariff packages.
Also, funds from the USO Fund to subsidise rural telephony seem to have made a business case for such activities more viable. This is the reason why September 2004 saw two operators actually bid for provision of such services.
Under the first tender of the USO Fund, BSNL and Reliance Infocomm bagged orders to provide telephone connections to 48,310 villages across 300 districts. Of a total of 300 secondary switching areas (SSAs), BSNL bagged the contract for 184 SSAs while Reliance Infocomm won 97 SSAs. There was enough competition in this project to bring costs down by 17 per cent from the reserve price.
Similarly, competitive bidding between operators brought down the cost of another project by 60-75 per cent. This was the USO Fund-supported Rs 8 billion project which aimed to provide 6 million fixed line telephones in rural households by 2007. Unlike other projects, this project did not aim at setting up VPTs but at setting up phones in households.
The competition between operators allowed the rollout of 8 million telephone lines instead of 6 million lines proposed by the project. While the government had worked out a cost of Rs 17,000 per line, the operators quoted between Rs 4,500 and Rs 7,000 per line. BSNL, Reliance Infocomm and Tata Teleservices bagged the project. However, they were not the only bidders. Bharti Tele Ventures and Himachal Futuristic Communications Limited also bid but failed to win the competitive bidding. BSNL bid for all the circles, while Tata Teleservices, Reliance and Bharti bid for 16, 15 and 11 circles respectively.
The degree to which competitive bidding has brought down prices indicates the eagerness of operators to enter this sector. One such operator is Reliance Infocomm. It has initiated an expansion plan which aims at connecting 400,000 villages across the country by the end of 2005. The company has installed VPTs as per its licence obligation covering 59 talukas. It is also receiving support from the USO Fund to subsidise 3,599 VPTs every quarter.
As far as rural community phones (RCPs) are concerned, Reliance Infocomm has committed to install about 22,000 RCPs covering 61 districts in 11 states. In fact, the company plans to install about 15,000 RCPs before the end of 2005 and the rest by 2006. It will also provide rural direct exchange lines in 61 districts covering 203 talukas. Of these, 61,000 are expected to be rolled out by September 2005.
Finally, the company plans to provide high speed public tele-information centres (PTICs) which will provide facilities such as tele-education and tele-medicine in block headquarters and in villages with a population exceeding 2,000. These “information kiosks” and high speed PTICs will be set up in a phased manner and will cover roughly 100,000 villages in three years.
The Bharti Group is also making moves in this direction. It has recently signed a contract worth $250 million with Ericsson for setting up and maintaining its cellular network in 3,000 towns and villages in 15 regions. This is part of Bharti’s initiative to roll out its network in rural India. The outsourcing contract will allow faster deployment of services with minimum payback time in rural areas where ARPUs are lower. Ericsson’s Expander solution for rural coverage will optimise capital and operational expenditures and ensure minimal total cost of ownership. Bharti is also part of the cellular group that has worked with Motorola to develop a low-cost handset priced at Rs 1,700 that can be used in the low end of the market.
Besides telecom service providers, VSAT providers like HECL have also taken initiatives in the rural segment. For example, HECL is the VSAT service provider and partner in an ITC project for setting up 4,000 e-choupals or information centres. HECL has installed over 2,000 VSATs for e-choupal connectivity in the last 15 months. Similarly, under the GRAMSAT project, which connects different blocks across Orissa, Hughes technology has been used to provide the VSAT solution.
Thus, a number of private operators are entering the rural arena as they look at new segments to target their services. What is worth highlighting, however, is that despite the new initiatives by private operators, so far, out of the 530,616 VPTs that exist as of March 31, 2005, as many as 518,801 have been deployed by the public sector BSNL.
While BSNL added 6,172 VPTs in the quarter ended March 31, 2005, Bharti actually reduced its VPTs by 607 and MTNL by 191. Even Reliance Infocomm added only one VPT in the quarter mentioned. Therefore, it is important to acknowledge the role of BSNL in this arena.
At the same time, it is also important to recognise the fact that private companies are still at very early stages of entry into the rural areas. It will take them some time to acclimatise themselves to working in a rural environment where they will face a different set of challenges.
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