Adopting Open Access Models

Today's newspaper carries a report about USOF India's project to provide mobile towers in naxalite affected areas. This project is being implemented by the incumbent PSU BSNL on nomination basis. The report states that BSNL is soon to finalise its tender for equipment which is being sourced from indigenous manufacturers.

I have written earlier on this topic in my post, "USOF India's Scheme for Mobile Towers in Disturbed Areas" under the label USOF India and mentioned that this project could have  been awarded based on  bidding basis as there is no information in the public domain that indicates that private operators were unwilling to compete for such a project.

In my view, competitive neutrality is possible even when security concerns are paramount and viability is non-existent in the short to medium run. 

Bidding could have been carried out for setting up and running of the sharable mobile towers at hundred percent government cost (as is being done in this case)  for a predeclared period covering at least the the life of the towers. Thus the company setting up the tower would be fully compensated for its costs and (possible) lack of tenants/customers. 

Additionally, the possibility of (other/multiple) service providers being willing to compete in the access segment could have been explored. The  underlying condition could have been the requirement for the infrastructure providing operator to provide non-discriminatory access to licensed mobile service providers. The latter would be enabled to  hoist their antenna on this tower free of cost and provide access to customers in this region. This would bring in competition both from economy in use of public funds (assuming that at present USOF would necessarily bear the cost of service provision by BSNL too) and from choice for customers.

Given that some of these areas may not attract service providers even with rent free passive infrastructure being in place, BSNL could have been asked by the government to be the provider of last resort on towers where no service provider came forth with due compensation.

Such a scheme would require more effort on the part of USOF in terms of design and implementation. It would however be worth the effort as it would lay the ground for access competition in in the medium to long run if not short run even in thsi disturbed region.

There is a need to learn from past experience regarding the easy option of monopoly service provision, especially when public funds are used.

More on USF Programmes with Tariff Discounts

In continuation of my earlier posts on the issue of USF schemes/projects having a tariff discount component, I would like to add some further thoughts. A view has been expressed by a  very experienced USF expert that tariffs discounts in case of voice services, can create artificial differences with non USF areas and discourage operators who must have a business case to invest. I would say that these arguments have merit. In addition to my comments cautioning against being too optimistic about tariff discounts at the bottom of  the post at http://ictsforall.blogspot.in/2013/07/a-discussion-on-tariff-discounts-for.html, I  would like to clarify as follows.

In my previous posts I had alluded to a rural tariff ceiling. This was  set by the telecoms regulator and is pan India. Thus, it covers all rural fixed line subscribers uniformly. However, the regulatory requirement at present is that this tariff plan must be made available. It need not be the only plan. Operators are free to offer other tariff plans. The idea is to ensure that the poor have at least some basic plan for affordable service. Both operators and subscribers have a wide choice in this case.

In India, rural subscribers mostly opt for prepaid plans which ensures that they do not pay more than their budgeted amount. This is true for both  voice (which is almost entirely wireless) and data.  

By discounts in case of USF schemes I mean making available at least some cheaper plans so that the poor can avail of some service. As mentioned above, in the case of voice (fixed) this was mandated by the regulator not by USOF.

In fact when USOF scheme for rural household fixed lines brought in competition from CDMA phones, the Universal Service Providers (USPs) offered extremely attractive prepaid tariff plans with generous free incoming components to attract customers, and with great success in terms of increasing subscription (but not revenue. (Please see http://ictsforall.blogspot.in/2013/06/ensuring-affordability-of-usf-supported.html ).

These plans were far cheaper than the regulator's tariff ceiling plan. Thus, in the case of voice, USOF India did not specify tariff discounts.The USPs responded voluntarily with tariff plans in response to market conditions.

As already explained in my previous post post  http://ictsforall.blogspot.in/2013/06/ensuring-affordability-of-usf-supported.html, for data services (Wire line Broadband Scheme), USOF required entry level plans to be made available during the OBA contract period but the USP could also offer any number of other plans. This has worked well as a means to attract new users who have subsequently upgraded to costlier packages with higher download limits. As far as the operators business case is concerned, USOF calculated subsidy benchmarks assuming that the bulk of rural subscribers would at least initially prefer the cheapest plan. Thus, USPs stood fully compensated for the discounted tariff plan.

A Discussion on Tariff Discounts for USF Supported Services

My esteemed colleague David Rogerson whose query had inspired my previous post on this subject titled "Ensuring Affordability of USF supported Services" has kindly shared his thoughts on the subject. My comments are a placed below his post.

Discount policy for Universal Access & Service Funds (UASF)

By David Rogerson

The objective of the UASF is to promote universal access and service (UAS).  It does this by subsidising network roll-out and customer access in situations where this cannot be achieved commercially.  The subsidy helps to extend the coverage of telecoms services and to make service affordable in these areas.  Such a policy not only benefits areas and customers that are newly connected to the network; it also benefits existing subscribers as they have increased opportunities to communicate with other network subscribers.  This is called a network externality effect. 

In some areas the benefits of USF subsidy, including both the direct benefits to the customers in the newly-connected area and the indirect network externality benefits experienced by all existing subscribers, will be maximised if a tariff discount is offered in the UAS area.  The reason is illustrated in Exhibit 1

Exhibit 1: Justification for tariff discount in UAS areas

The logic of Exhibit 1 may be described as follows:

• The tariff discount will increase demand in the UAS area, as lower prices are more affordable
• The increase in demand will (at least up to a certain point) increase profitability within the UAS area, since the costs of providing service are largely fixed whereas revenues are primarily a function of demand.  
• By setting the discount at the right level the amount of the subsidy required for the area may be minimised.  The level of the discount should theoretically be set at the level that maximises profits: beyond a certain point the loss of revenue from all subscribers in the UAS area paying the lower tariff will outweigh the increase in revenue from the additional subscribers who only come onto the network because of the discount.
• The increase in demand that results from the discount will have two other effects:
• It will increase the network externality benefits
• It will result in economic development within the UAS area . (Academic studies, including those of the World Bank, have shown a close correlation between GDP per head of population and telecom network penetration (i.e. subscribers per head of population).   
• Both of these additional effects are relevant in the construction of a discount policy:
• The increase in network externality benefits may be used to justify the discount policy in the first place
• The increase in economic development may be used to justify the reduction of the required discount level over time.  

A lot more work would be required in order to provide a detailed justification of the actual level of discount that should be provided.  Such work is beyond the scope of the present exercise.  However, based on the existing practice we may propose the taxonomy shown in Exhibit 2.  This suggests that the initial level of discount is established with reference to the ratio between average income levels in the UAS area compared with the nation as a whole; and the evolution of the discount level over time depends on the ratio between network penetration levels in the UAS areas compared with the nation as a whole.  Given that there is likely to be a time-lag between penetration increases and economic development, we further suggest that the discount level for each area is established for a period of 3-5 years at a time.

Exhibit 2: Evolution of UAS tariff discounts over time

My Comments:

David has presented  an interesting  and though-provoking analysis. Some additional considerations may be  as follows:

1. The assumption of incremental or marginal cost per additional subscriber being nominal (per se or compared to the loss of revenue on account of discounts) may not be applicable to all telecommunications services-take for example the case where the last mile involves copper line or OFC connectivity. 

2. Additional customers need not always translate into higher revenues as for example when customers in poor rural areas use the phone mainly to receive rather than make calls. A real example of this was seen in India where CDMA telephones were offered  by USPs with 3 year incoming free prepaid tariff plans (on voluntary basis) to lure more customers.(Additional upfront subsidy was paid for each additional customer added and  maintenance subsidy for customer  retention.) However, the USPs ended up having to pay for minimal recharges to avoid disconnection of these phones, which would have impacted the their subsidy disbursements under the USOF contract. The poor in rural areas would simply not make outgoing calls. They were happy to receive calls as for example from earning family members in urban areas.

3. However, there is no denying the network effect and positive externalities of  having hitherto unconnected citizens join the network. Hence, USF schemes must at times go beyond purely economic cost-benefit analysis at least in the short run and justification for the roll out or discounted tariff may have to encompass a wider socio-economic cost-benefit analysis. In any case, telecommunications services are proven to increase a nation’s competitiveness in the long run making a strong economic case for USF interventions.

4. In some cases as in the case of USOF’s Wire line Broadband scheme (discussed at  http://ictsforall.blogspot.in/search/label/Tariff   the discount strategy pays off in terms of giving customers a taste of a new service. While some subscribers may continue with an entry level plan, others do migrate to the available higher download (more costly) plans, giving the USPs revenues a boost and compensating for the discount and then eventual  withdrawal of subsidy.

5. The smart subsidy concept referred to in my earlier post at  http://ictsforall.blogspot.in/search/label/Tariff,   would thus take into account subsidy needed to fill the revenue gap, including that caused by discounted tariff.

6. If demand projections can be made with some degree of accuracy for the target area/population, an assumption about percentage of disposal income that would be spent on telecommunications (say 2.5-3%) could help us calculate the required discounted tariff to encourage subscription. As a USF Administrator, I would  be more concerned about using the modeled demand projections to calculate a tapering subsidy requirement keeping discounts fixed during the OBA contract period and leaving it to the USP to retain or dismantle discounts thereafter as per its business case. There could be customers who would not be able to afford the non-discounted tariff at least in the short/medium run. Thus, I may have to mandate that some discounted tariff plans continue beyond the contract period or I may have to subsidise these customers on an on-going basis even after the Output Based Aid contract comes to an end.