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. 

Broadband Planning in India-Missing the Wood for the trees

I reproduce below the text of my article with the same title. It was published in the Financial Express today.

In the recent TRAI consultation paper titled Delivering Broadband Quickly: What do we Need to do?, the issues delineated for stakeholder consultation give the impression that the solution lies in controlling or influencing technological choices or costs. In a liberalised sector, healthy competition accompanied by efficient regulation would mean that market dynamics guide appropriate technological and cost choices, without government intervention. When regulatory interventions go beyond what is necessary to correct market failure, they create and exacerbate market distortions, doing more harm than good. India’s abnormally low ratio of wirelines to wireless connections is part of the broadband problem. While the paper has fleetingly mentioned public sector monopoly in this segment, it has not related the same to poor and falling wireline penetration in our country. Nor has it mentioned the abysmal state of rural broadband penetration, which persists in being negligible in spite of billions of rupees of funding to the incumbent in support of its wireline services by way of access deficit charges and universal service funding.

The relationship between competitive service provision and innovation, quality, and long-term growth in telecommunications is too well known to ignore, and unless efforts are made to correct underlying regulatory problems and consequential market distortions, we may not be able to move forward.

Sadly, one of the most market-friendly initiatives of the government which is key to promotion of broadband—the Universal Service Obligation Fund (USOF)—has also fallen prey to the same lack of understanding. The USOF subsidy is given to willing market players (universal service providers or USPs) to cover the viability gap and hence encourage them to provide services in commercially unviable areas. The USOF subsidised facilities are owned by USPs rather than by the government. Thus, USOF is potentially a valuable tool for minimalistic, targeted interventions to achieve greater penetration of broadband in a competition friendly manner.

A very important aspect of preventing market distortion is ensuring technological neutrality and competitive neutrality. The former would imply defining deliverables to be achieved through the USOF subsidy, while leaving specific technology choices and configurations to USPs’ wisdom. The latter implies that no entity operating in an economic market should be subject to undue competitive advantages or disadvantages.

It is well known that while the government as regulator is supposed to ensure a level-playing field, the government as owner of public enterprises may face difficulties in balancing various conflicting commercial and non-commercial interests.However, regulatory neutrality, which encompasses both technological and competitive neutrality, is a sine qua non for economic efficiency or welfare maximisation.

From data available on the USOF website, it would appear that USOF’s present regulatory framework has been unsuccessful in this regard. USOF had disbursed R17,580 crore of subsidy up to January 31, 2014, of which rural fixed line telephony and broadband based schemes taken together account for about 95%. Yet rural teledensity at 43% is made up almost entirely of private sector wireless connections. Rural wireline teledensity is less than 1% and broadband penetration negligible. BSNL’s monopoly in the rural wireline and optic fibre segment has meant that majority of the USOF support (focused disproportionately on fixed lines) has been given to BSNL on nomination basis. The other technologies mentioned in the Trai paper would perhaps have been deployed by USPs long ago, had USOF’s schemes been technologically neutral.

The USOF website reveals that the roll out of deliverables by BSNL as USP has been delayed consistently. For example, against a target of approximately 8.8 lakh broadband connections and 28,000 broadband kiosks by January 2014 under the Wireline Broadband Scheme, BSNL had provided only about 4.3 lakh broadband connections and less than 11,000 kiosks. Despite its poor track record, BSNL was chosen as one of the three PSUs to partner in the National Optical Fibre Network (NOFN) project through the creation of Bharat Broadband Network Limited (BBNL).

NOFN’s tardy progress has been documented in the consultation paper. While dwelling on which model to adopt for rural OFC backhaul, the USOF model of reverse bidding with the lowest bidder (public or private) setting up open access networks under contract was considered, but rejected as being tedious and long drawn, as it involves subsidy benchmarking. Instead, the BBNL route was chosen. The result of this choice made three years ago is out there for us to see. BBNL has not made even a dent in the targeted roll out (2.5 lakh gram panchayats by 2014) and what’s worse is the reported doubling of estimated costs from Rs 20,000 crore (A crore is 10 million) to more than Rs 40,000 crore. 

Going forward, a focus on regulatory neutrality would be the order of the day and a major part of what needs to be done.

Lessons from Down Under

An article titled "Australia's Last Chance for Infrastructure Competition" describes failed opportunities as far as introducing competition in the wire line broadband market. This is said to be in stark contrast to the mobile telecoms segment where competition and innovation have flourished. The article states that the government is now looking to promote platform competition in high speed broadband.(HSBB)

I am always sufficiently wary of superimposing models from the developed world on to the Indian telecoms scenario because apart from many other aspects, regulatory structures and capacities and penetration levels are different, but I do believe that we can learn something from their experience.

I have written earlier under the same labels as this post in favour of a technology neutral and multi-operator, approach to high speed broadband penetration in India. Getting NOFN / BBNL off the ground in my view would be a Herculean effort whose success in the near future if at all is doubtful. The earlier USOF approach of tendering out region-wise HSBB network projects would work much better as it would allow many operators other than the incumbent to participate. Investment and innovation would take off and the roll out would be much quicker bringing much needed broadband to our young aspiring population,especially in rural India.

Previous USOF OFC schemes suffered from flaws such as overspecialization of technology but had several progressive features such as mandatory open access and even allowing the selected Universal Service Provider to complete the project by renting  bandwidth from existing players to  (rather than necessarily laying fresh OFC). USOF India needs to think beyond PSU led nation wide OFC networks if we are to progress. A technology mix in wire line broadband would be welcome. Please see my previous posts in this regard.

If wishes were horses...

It is reported that,

" [t]he cabinet on Wednesday approved the ambitious Digital India programme that aims to connect all gram panchayats by broadband internet, promote e-governance and transform India into a connected knowledge economy......The vision of the programme is centred on three key areas: digital infrastructure as a utility to every citizen - digital identity, mobile phone and bank account, safe & secure cyber space; governance & services on demand - services available in real time on online and mobile platform, making financial transactions electronic and cashless, & digital empowerment of citizens - all documents, certificates available on cloud.Digital India envisages connecting 2.5 lakh villages by broadband and phones, reduce import of telecom imports to zero, wi-fi in 2.5 lakh schools, all universities, public wi-fi hotspots for citizens and creating 1.7 crore direct and 8.5 crore indirect jobs. Other impact points include training 1.7 crore citizens for IT, telecom and electronics jobs, and delivering e-governance and e-services."

As usual the programme that comes at a hefty cost of more than Rs one billion hinges on the success of USOF India's National Optic Fibre roll-out for broadband delivery.

All one can say is good luck with that! The same news item explains why I hold this view:

"Soon after assuming office, IT and telecom minister Ravi Shankar Prasad had said that the new BJP-led government will on priority take up the plan to connect 2,50,000 gram panchayats through the optic fibre network. The government plans to connect 50,000 gram panchayats this fiscal year itself ending March 31, 2014, one lakh in the next fiscal year and a similar number the year after.      The Rs 21,000-crore NOFN project - fully funded by the USOF - was unveiled by the UPA to digitally connect 2,50,000 gram panchayats. However, the project has not progressed much so far - delayed by over three years - due mainly as the cable laying and ducting process is yet to be finished. Among the pillars is mobile connectivity for all, which includes covering all the about 42,300 unpenetrated villages at a cost of Rs 16,000 crore to be completed by 2017-2018."

Views on the manner of planning and execution of NOFN / BBNL and alternative means of achieving broadband  roll outs through USOF are documented in previous posts. 

Interestingly, years after the project was initiated by way of an SPV of three public sector companies, the telecom regulator while commenting on the Digital India Plan has reportedly stated that the NOFN project is running over three years behind target and only 8% of the 0.18 million  kms of optic fibre has been rolled out. He says that private sector should be involved in NOFN roll out and that,

"Investment of private players could significantly reduce the cost of the entire   the project and therefore final tariffs"

The regulator also rightly points out the need for detailed planing of the actual content for the envisaged e-government services rather than limiting the plan to vague terminology such as e-health,e-education and the need to involve private sector in content development (rather than just depending on strengthening/ revamping the state agencies  as a means to achieve the plan.)