Rural Telephony

For the disbursement of the USO subsidy all the licensed operators had to participate in an auction, stating the subsidy (the “bid”) they required for extending access to rural areas. The operator who bid the least amount as a subsidy requirement won the auction. The operator had to consider two major components of its cost while arriving at its bid. One is the cost of infrastructure, i.e., the network, and second was the cost of the access to the rural area from this network, also known as the last mile. The bids were evaluated against a pre-specified benchmark.

Though the mechanism was transparent, there are concerns that the incumbent operator BSNL was in a strategically advantaged position to win these auctions. As BSNL already had a huge network, built over many years with public funds, the cost relevant for its bids was essentially the last mile cost. However, for new entrants the cost of building a duplicate network was a major component of their costs, which adversely affected their ability to compete in the subsidy auction. It is not surprising, therefore, that almost 75 per cent of the subsidy auctions were won by the incumbent.

Competing for the rural market might have been viable for the new entrants had the incumbent BSNL shared its infrastructure in a cost-based non-discriminatory fashion. This is not unusual as infrastructure is an essential facility that the dominant operator can be asked to share. Non-discriminatory open access is the cornerstone of competition in network industries like telecom and power. This regulatory intervention is mandated by standard economic doctrine, which teaches us that sunk costs should be irrelevant for allocational decisions at the margin. After all, bygones are bygones. Moreover, there are no private property rights issues involved as BSNL is a public entity and its infrastructure properly belongs to all citizens.

Had this strategically imbalanced situation not existed, the extent of participation in rural telephony by new operators would have been enormous. Rural demand, as we have seen for products like consumer durables and FMCGs, is not as low as perceived, so long as the product is tailored to be affordable. Small and medium operators would have come up with innovative and affordable last mile technologies on their own, as opposed to the current policy wherein the USO policy is restricted to the provision of fixed phones. With wireless and other cheaper technologies like Voice over Internet Protocol (VoIP) available, the impact on rural telephony can be explosive with a small subsidy restricted only to infrastructure creation. It is estimated that Rs. 17,000 crores are needed to fund the current USO projects, which will result in rural teledensity of just 4 percent, compared to urban teledensity of 30 percent. However, if the subsidy is designed properly, then the cost coverage ratio will be more favourable.

TRAI has made progressive recommendations when it links subsidy provisioning away from Village Public Telephones and individual phones to the creation of infrastructure. The most important recommendation is that, once this infrastructure is created, then all new and existing infrastructure would be mandated to be shared on reasonable terms, with adequate incentives for sharing put in place. This will ensure that no single operator as an owner of a large network can exploit its monopoly position. Moreover, as the scope of the subsidy has been expanded to include “niche” players and not merely the large licensed players, small and medium service providers may also participate in the rural telephony market. The assumption is that once the huge sunk cost component of the infrastructure is shared the market will take over and the urban telephony model can be replicated. However, in order for this to become a reality, the government will have to translate these recommendations into a new policy. The regulator has done its job and the buck now stops at the door of the government.

The writer is a senior lecturer of Economics at the University of Delhi. Email her at payal.malik@gmail.com