Infrastructure Regulation and the Market Efficiency Gap

An article caught my eye today. It is titled "Biting the Silver Bullet" in the Economic Times and is about the need to improve regulation of infrastructure (utilities) which speaks of dismantling superfluous ministries and concentrating on strengthening regulatory institutions in India and doing it now when a (political) revolution of sorts is underway and change is perhaps possible. Significantly he points out the need to improve infrastructure rather subsidize services to make them accessible to all.

Personally I believe that much of the lag in telecom penetration in India is the consequence of poor regulation especially in the fixed line segment. There is a pressing need to undo some of the competitive neutrality issues in USOF regulation too. 

My views on this subject can be seen in posts under Market Efficiency Gap and Competition

Is this what NOFN was Meant to Do?

Another article appeared today in the Economic Times about NOFN/BBNL  plans to acquire an ISP license to provide e-services based on Wi-Fi in rural areas.

I had written earlier about the proposal to provide Wi-Fi for India's rural local Government offices and my worries on this count. 

Firstly focusing energies on the Village Panchayat Telephone or Government sponsored Common Service Centres(for internet) has not met with notable success in the past. What has succeeded  is the creation of a conducive environment for services and applications to flourish on a commercial basis.

 Thus, in the pre-mobile revolution era, India's subsidised Village Public Telephones which were supposed to be the village life line were often found to be lying in disrepair or being used as private phones of rural elite but once wireless appeared on the scene, commercially run public phones did roaring business.

Secondly, I fail to understand why the Government must select the technology and service provider to deliver e-Government services to citizens. If this was bid out with desired specifications, the lease cost solution could be selected. This would be conistent with the regulations laid down for Universal Service Funding in India

Thirdly, public money (USOF) is being used to fund NOFN/BBNL's OFC roll out which was meant for areas that markets would not serve. Thus, the network was to provide high capacity backhaul from villages to blocks on a non discriminatory basis. NOFN was never meant to be a service provider. If the argument is that its viability is uncertain, well, that is exactly why it is being fully subsidised. If  USOF was to float another tender for broadband access in non viable areas, then the selected access providers would need  back haul and BBNL would get its business and revenues. Ignoring competitive neutrality today means a heavy cost in terms of poor telecommunications in the future. We have already seen this pan out in the case of fixed lines and rural broadband in India.Should we be repeating the same mistakes?

Please also see my posts on NBN and lessons for NOFN.

Limiting Public Funding to Access Gaps

It is reported that the fact Sing Tel Optus has plans to roll out fibre to the  "basements of apartment buildings and shopping complexes [ and use] [t]he existing copper wiring within the buildings .. to deliver faster, NBN-like broadband speeds is being seen as a threat to NBN's viability. There are apparently other operators with similar plans too.

My question is why should the Government sponsor/fund NBN like roll outs in cities where markets may (and will) serve customers? Why should NBN's business model have factored in markets where competition cannot be ruled out?

It has been stated that,

Breaking NBN Co’s business model could force it to be reclassified from a profitable investment to a multibillion-dollar expense on the federal budget... NBN Co’s entire business model ran on the assumption of a flat national price for all customers. Labor’s NBN was designed to act as a cross-subsidy system where the higher revenues generated by city users paid for broadband in the bush.

This business model was discarded with the onset of  competition in  erstwhile monopolistic and fixed line based telecoms markets across the world. I have written earlier about the flawed and "Back to the Future" feel of ambitious National Broadband Plans based on incumbent centric National Broadband Networks.

Again there are lessons for India's NOFN which is basing its arguments of veering way from its original mandate of strictly (actual access) gap filling based on similar fallacious business viability models.

The NBN Debate Continues-Lessons for India's NOFN?

It is reported that an independent review of NBN ordered by the new Coalition Government of Australia has found that NBN costs and time lines have been understated and revenues overstated.

The news report states that,

"'The  full cost of Labor's original National Broadband Network plans would blow out by $29 billion and be completed three years late, the strategic review has found.

Communications Minister Malcolm Turnbull released details of the review he started 60 days ago on Thursday.The review found the fibre-to-the-premises NBN under Labor would have cost $73 billion, $29 billion more than forecast, and not be completed until 2024.It also found the current NBN Co corporate plan had overestimated revenues from the network by $13 billion.While the review found the cost and timing of the original plans would blow out, Opposition communications spokesman Jason Clare challenged the review's findings.He released an internal government analysis of the Coalition's plans, which he said revealed the new government's plans were "the wrong approach", and would not achieve the promised speeds.

Mr Turnbull has pledged download speeds of 50mbps by 2019 under the Coalition's plan, which will rely on copper connecting to fibre nodes, rather than brining the higher-speed fibre direct to all homes.

But Mr Clare said the analysis should the two stage approach - with 25mbps promised by 2016, expanding to 50mbps by 2019 - was unworkable.

He said the government's fibre-to-the-node plan would lower revenues from the network by 30% and the actual cost of fixing the existing Telstra-owned copper network, and was "unknown".

But Mr Turnbull said the review found the Labor network was "never achievable", and the results of the review would be "a crucial input into government policy".

Clearly the debate can go on forever. Nevertheless a mid term policy/projectreview and corrective steps are a good idea for any ambitious national broadband network roll out. India's NOFN/BBNL is already in difficulties. Ironically though it is being heavily subsidized because it is supposed to be financially nonviable and the PSU SPV route was chosen to cut red tape in Right of Way and other such causes of delay; the three PSU implementation partners in charge of this project are now citing the very same reasons for their difficulties and delays. Time for a review of costs and revenue projections and last but not lease scheme design? 

A Historic Pact or Something to Worry about?

Newspaper articles are hailing a historic infrastructure sharing pact  between two telecommunications bigwigs namely Bharti Airtel and Reliance Jio.This will reportedly  include optic fibre network – inter and intra city, submarine cable networks, towers and internet broadband services. The Times of India reports that,

"The cooperation is aimed at avoiding duplication of infrastructure, wherever possible, and to preserve capital and the environment. This will also provide redundancy in order to ensure seamless services to customers of the respective parties,"...."In future, the arrangement could be extended to roaming on 2G, 3G and 4G, and any other mutually benefiting areas relating to telecommunication, including but not limited to jointly laying optic fibre or other forms of infrastructure services. ..The pricing would be at 'arm's length', based on the prevailing market rates,"

While infrastructure sharing sounds good in theory, my worry is the lack of competition oversight when such agreements are entered into. Where is the ex ante scrutiny to ensure that other operators/subscribers are not put to disadvantage by such agreements among giant service providers which could easily have a detrimental impact on  competition in  end user service delivery. 

Competition and the PSU Incumbent

For the first time in the history of competition regulation in India, the Competition Regulator of India or Competition Commission of India has penalised a public sector monopolist (Coal India Limited)  for abuse of dominant position (in supply of dry fuel). A news item titled,  "'CCI slaps Rs.1,773 cr penalty on CIL" tells us that,

"As per CCI, CIL and its subsidiaries have been found to be “imposing unfair/discriminatory conditions in fuel supply agreements (FSAs) with the power producers for supply of non-coking coal.” Such conditions violate fair trade norms. Apart from issuing a cease and desist order against Coal India and its subsidiaries, the CCI has directed modification of FSAs. Besides, the regulator has asked the company to consult all the stakeholders for making the modifications in the FSAs. In recent times, CIL has drawn flak for fuel shortages that have been hurting power generation.

This is a positive step as much of what ails the Indian economy arises from monopolies in critical (input) sectors." We need to keep an eye on this aspect as far as telecommunications go too. 

Competition & Consumer Welfare-Infrastructure Provision

I salute the contents of two interesting news items from the Business Standard dated December 7, 2013. The first is titled "Try and Introduce Competition". It suggests that the dismantling of the government monopoly in power supply in New Delhi and replacing it by three area wise private sector monopolies has not sufficiently addressed consumer welfare and that we also need competition in each sub market for lower tariffs and quality of service rather than expecting the present regulated prices to substitute competitive markets. 

The second is a report on an interview with the Civil Aviation Minister and its title says its all- "I am not Minister for Air India." The article tells us that the Minister when questioned about his promotion of private competition made it clear that his job is consumer welfare rather than protection of the public sector incumbent. 

It would be good if the telecom sector were to recover from their past follies and pick up a cue rather than blunder ahead in a manner that harms competition. This is especially so when it comes to public funding/Universal Service.