NOFN/BBNL-Back to Square One Almost

I have not written for a while. Been busy in another sphere of regulation. However, I was drawn back to my much neglected blog by TRAI's recent Consultation paper on Implementation Model for BharatNet (BBNL has been rechristened BharatNet.)

So, after almost five precious years down the line and with nothing to show except inflated project estimates and an unnecessary bureaucracy created by way of BBNL, India's National Optic Fibre Network (NOFN) plan is being subject to public consultation. Its almost a case of reinventing the wheel which is right there in front of you by way of the existing regulatory structure of India's Universal service Obligation Fund (USOF). USOF Rules require the Government to provide incentive to telecom operators (public/private) to venture into commercially non viable rural telecommunications by way of subsidy to close the viability gap. The projects are to be designed with appropriate bidding units in mind (state/district etc.), subsidy benchmarking is to be carried out and projects are awarded through reverse bidding with the subsidy benchmark acting as the upper limit.

Had this been adhered to 5 years ago, we would have had the village to block level OFC laid out on open access basis by now. Different segments  (say state wise village to block level OFC, if states had been chosen as the bidding unit) would have been owned by different operators but connected at the district level to existing nation wide networks. This would have provided much needed OFC back haul at village level to telecom operators who often had to rely on unreliable microwave back haul, and provided a strong impetus to large/niche/small players in the rural broadband space.

Even now the TRAI paper talks about Build Own Operate and Transfer as the one option that would come closest to the USOF model. Why transfer. Why must the Government own telecoms infrastructure in a liberalised environment and be saddled with this depreciating asset? The whole philosophy of Universal Service has been lost in translation in the Indian scenario.   The creation and compulsion of  continued survival of BBNL is perhaps the reason why the Government cannot discard the concept of ownership. This goes against international best practices that point to smart, targeted use of universal service funds to incentivise operators and then leaving them to manage their business.The idea was never to create Government owned assets or to use the USOF to pay salaries to a bureaucratic organisation like BBNL. Unless our goals are clear , we will never get this right.

Please also see my previous posts on NOFN and BBNL.

NOFN-Getting it wrong yet again

An editorial humorously titled "Optical Illusion" correctly points out that the latest government effort to revive BBNL/NOFN by way of appointing a private sector chairman etc. is not likely to make much of a difference. However  the newspaper gets it wrong in suggesting that the USOF which is funding NOFN/BBNL, should be scrapped.

On the contrary, BBNL should be wound up and the methodology to achieve the laying of a high speed rural OFC network should go back to the traditional USOF method of achieving rural penetration through multiple (regional) reverse bidding based projects open to both public and private sector.

Just scrapping USOF (funded out of license fees paid by service providers) and leaving more money in the hands of service providers will not guarantee provision of broad band services to commercially unviable rural areas.

 I have written extensively on the subject under the same key words/labels. Please see my previous blogs.

The Net Neutrality Debate in the Indian Context-A Pinch of Salt

I reproduce here my article on the subject, also available at this link

 It is easy to get swept away in the maelstrom of views and counter views, but difficult to arrive at an informed decision on the subject of net neutrality -- the uninhibited access to legal online content without broadband service providers (BSPs) being allowed to block, degrade, or create fast/slow lanes to this content that rides over the internet (OTTs).

The fundamental question is why fix the internet when it is not broken and that too for the wrong reasons? These include inter alia India's overwhelming dependence on mobile broadband due to abysmal wireline penetration, coupled with scarcity and high cost of spectrum and congestion of the internet due to bandwidth hogging free riders. 

To meet these challenges BSPs need tools to prevent congestion and shore up their revenues through levies on content or tie-ups with OTT providers so as to invest in infrastructure, improve service quality and make surfing affordable for the poor and bridge the digital divide. These theories demand a pinch of salt.

Reason One: India depends on wireless broadband. It is true that we have an abnormally high mobile to fixed broadband ratio of 4:1 and only 15.2 million wired broadband connections in a country of 1.2 billion. This has arisen from a legacy of overprotection of PSU incumbents (BSNL & MTNL) who would not allow private operators to access their infrastructure and neither was this mandated.

As PSU monopolies led to inefficiencies, but regulatory barriers made investing in wirelines unattractive, innovation driven, privately provided, wireless services took over. India has a fixed broadband penetration ratio of 1.2 per 100 as against the world average of 9.4 per 100. The incumbents continue to lose 2-3 million landline connections every year. 

However, this imbalance needs to be rectified through regulatory reforms rather than accepted as permanent; nor should it become a reason for interfering with net neutrality. It's important to note also that in terms of competition and performance, we don't fare too well in the wireless broadband space either, ranking 113th in the world with a penetration ratio of 3.2 per 100, performing worse than Nepal and Sri Lanka. 

We have one of the lowest broadband speeds in the world, both in wired and wireless broadband and broadband prices as a percentage of per capita incomes are higher in India than in Pakistan or Sri Lanka. The top four players command about 75 percent of the wireless broadband market. They are the new incumbents and predictably, they too would like to protect their turf. 

Applications like WhatsApp and Skype represent Schumpeterian creative destruction offering much cheaper messaging and voice services over the internet. To avoid going the landline way, mobile service providers must embrace technological progress, adapt, innovate and compete, rather than being allowed to thwart consumer access to applications or OTT providers' access to consumers. 

Reason two: Scarcity of spectrum. The scarcity of adequate and contiguous spectrum must be solved by better spectrum planning in the long run and the use of technology to enhance spectrum efficiency in the short run. The former includes freeing up spectrum held by defence and railways, and allowing spectrum trading and sharing. 

The latter includes employing techniques like multiple small cells to support more users with the same amount of spectrum and creating Wi-Fi hot spots to shift users from mobile broadband to unlicensed Wi-Fi spectrum, whenever feasible. If additional infrastructure costs must be borne to this end or if BSPs must be incentivised to do so by rationalizing indirect taxes or through subsidies, then so be it. Meddling with net neutrality is not the right solution. 

Reason three: Bandwidth hogging applications should cost more. BSPs in India offer multiple tariff plans with different browsing speeds and download limits. Beyond the download limit, the speed goes down drastically (fair usage). BSPs offer top ups, to maintain speed, albeit at a cost. 

While OTT players respond by continuously innovating to make their applications more bandwidth efficient, users are certainly not enjoying a free lunch at the cost of BSPs. The more they download, the more they pay. Also, growing data usage is a source of revenue for BSPS. Data revenue has nearly doubled, from Rs.3,057.83 crore in June 2013 to Rs.5,910.28 crore in September 2014.

Reason four: BSPs need a share of OTT players' revenues to fund universal connectivity. There are more transparent and less harmful ways to encourage investment in broadband infrastructure. India has a Universal Service Obligation Fund (USOF) to subsidise and promote rural telecom services. As per USOF rules, subsidy is available to both public and private sector players and is discovered through a transparent bidding process. This makes it the ideal means to bridge the digital divide.

Reason five: Free, or cheap content to allow a taste of the internet. The utility of the internet cannot be reduced to a few applications. Notwithstanding the harm this would do by way of discouraging innovation and distorting consumer choice, do we really want our price sensitive, digitally uninformed masses' internet experience to be limited largely to Facebook or Bing? 

We already rank below 11 African countries and among the Least Connected Countries on the ICT Development Index which includes ICT skills, usage and access. For deserving users, USOF can subsidise access to important applications (e-health, e-education etc.) in a transparent manner, leaving them to explore the rest of the internet as they please.

The transformative power of the World Wide Web lies in externalities created by its scale and scope - billions of users and a mindboggling array of information, products and services. Should we curb the freedom of this open exchange and that too for the wrong reasons?

Competition as an Integral part of Regulation

This post is inspired by an article that appeared in The Mint on January 7, 2014.Written in the context of the aviation sector in India (applauding a move to set price caps on domestic airfares) and telecom sector (problems of net neutrality), it was surprisingly simplistic in its assuming that what cannot be handled by post facto application of competition law can effectively be tacked through regulation. This view ignores the fact that regulation itself needs to be aligned to sound and well enunciated competition policy principles and bad regulation can do more harm than good.

Also available in the public domain recently are excellent articles about the problems of the Indian aviation industry which focus on poor regulation and the need for reforms. These are Spice Jet lessons for aviation  and another article on destructive effects of lobbying by private airlines. What becomes clear from the  views of sector specialists is that inept regulation that is not competitively neutral and interferes necessarily with markets, combined with regulatory capture can and has, done great harm to a liberalized sector like aviation in India with negative consequences for the entire economy.

I write mostly about telecommunications but the arguments in favour of competition, both ex ante (through policy and regulation) and ex post (through the application of competition law), are equally valid across sectors. Please see my previous posts and my article titled, "Why India Needs a Robust Competition Policy Framework."

Competitive Neutrality in Liberalized Sectors of the Economy

I have been blogging about the need for competitive neutrality mostly in the context of  broadband networks. However, the importance of regulatory neutrality would apply equally to any other liberalized sector be it say, power or airlines. I have written about this in a paper titled,

"Of Airwaves, Incumbents and Good Governance - The Urgent Need for a Robust Competition Policy Framework"

Interestingly, though seldom do papers in India comment on this problem in the context of telecommunications, I find mention of the issue in the context of power transmission. Thus the Financial Express has reported that,

The central power regulator’s bid to end public sector dominance in the transmission sector by putting in place a system to award new projects based on tariff-based competitive bidding (TBCB) is threatening to unravel with the power ministry deciding to virtually persist with the previous regime where the projects are given on a platter to the state-run Power Grid Corporation (PGCIL).

According to sources, the ministry has invoked a provision in the relevant Central Electricity Regulatory Commission (CERC) rules to give eight new transmission projects with an estimated cost of Rs 36,000 crore to PGCIL....The provision of “compressed time schedule” vests discretion with the ministry to nominate PGCIL for executing projects if it is convinced that the bidding route could delay projects that are of critical nature, requiring time-bound execution.

An industry official said: “Any incumbent that continues to have 70-80% market share will have a natural advantage over new entrants in terms of winning even future projects being bid out. Moreover, if that incumbent is a PSU, then it will have clear financing advantages which private players cannot match under current circumstances.”...

Criticising the government’s decision, an executive of a private firm involved in the transmission sector told FE on condition of anonymity that it was the need of the hour to encourage private participation in transmission so that it can bring global technologies to complete projects in compressed time schedules. 

This echoes what I have written about NOFN/BBNL. I particular in my paper titled,  "The State of Broadband in India: A Call for Regulatory Neutrality" wherein I have specifically mentioned that,

"Public funding in a developing nation has to  be undertaken with particular care on account of the opportunity cost of allocating scarce resources. Subsidy schemes are designed to minimise costs and avoid duplicating expensive infrastructure. This could explain BSNL’s nomination in the Wireline Broadband scheme, its winning the bid in the Assam OFC scheme and its role in the forthcoming NOFN.  While this approach makes apparent sense in terms of short term financial prudence, its impact on the long term growth of the sector is unlikely to be positive given that it stifles competition and all its concomitant benefits. From a bureaucratic perspective, relying on public ownership or funding the incumbent is also perhaps more attractive in the short run in terms of relatively less time and effort estimated to commence roll outs (as against tendering/auction), even if we were to assume that public sector could and would deliver. However, the long term impact of monopoly ownership of even open access networks (on competition and accompanying aspects such as innovation/customer service/technological neutrality) merit consideration. If nothing else, our experience with monopoly in wire lines should have cautioned us. USOF had almost got it right with its regional OFC schemes, but it needs to be rescued from over specification of technology and incumbent -centric scheme design through regulation which insists inter alia on competitive neutrality. Thus, rather than doing away with USOF as is the demand of the aggrieved private sector, a relook at its regulatory structure and a focus on competitive neutrality would be the order of the day..." 

NOFN-Better Late than Never?

My last post was about NOFN and the government considering private sector involvement. Not much has been reported about that realization being actually put into practice. Today's Financial Express does report however that,

 Industry analysts have all along being critical of the project from the point of view that its implementation is being done by PSUs rather than awarding work to private sector agencies on a turnkey basis.

In fact, with the delays and a realisation in the top echelons that the deadline would be missed, DoT is also considering roping in private agencies. Under it, the plan is to divide the the entire country into zones and allocate private players to lay the network. In this outsourcing model, [USOF model] the role of the government would be only supervisory, setting benchmarks, providing incentives for completion of work on time and levying penalties in case of delays.

Well what can one say, I have blogged about this a lot. In my view such expensive mistakes are a problem of the (lack of) regularity neutrality problem we face.  Please see my recent paper titled,  "The State of Broadband in India: A Call for Regulatory Neutrality" at
http://circ.in/pdf/Regulatory-Neutrality-in-Broadband-India.pdf

An update on NOFN

My last post "Broadband Planning in India-Missing the Wood for the Trees" had highlighted the tardy progress of the all important NOFN project. I had mentioned  the rejection of the USOF bidding model which would have enabled private sector participation.Now it is  reported the government is contemplating a larger role for the private sector.