Universal Service: Regulation, Competition and Contemporary Issues

Its been a long time since I wrote. An invitation to speak at a Conference on Universal Service in India in the context of India's broadband plan gave me the opportunity to put together some thoughts on Universal Service Regulation in India.  The use of Universal Service funding is in theory market friendly and complements liberalisation and competition. However, in practice, particularly in the context of roll out of national broadband networks, the design of USF interventions can do much harm to telecommunications sector by creating winners and losers, creating/exacerbating barriers to entry and distorting the competitive scenario. In the long run this would impede dynamic efficiency and harm the very objective of universal service.
Please see the slides here

Hitting the Nail on the Head

It was a delight to read an article titled, "Net neutral, shift gears" It reiterates strongly the reasons why hard won net neutrality must be preserved and safeguarded from anti-competitive attempts to introduce divisions within the internet. Yet, it urges India to bridge the digital divide and connect every Indian immediately.

The only point where I disagree is the present idea/version of NOFN. I believe that universal broadband coverage can be achieved much faster and in a much more cost efficient manner by sticking to the original USOF concept of bidding out districts/states/regions in a technology neutral , competitive process that enables interested telecom operators to provide connectivity as defined by the Fund, with a limited smart subsidy.

The creation of a huge administrative set up by way of a megalithic government organisation and funding it from USOF ; expecting it to deliver any better than a monopolistic government department  in pre-liberalisation India, is in my view a wasteful, pipe dream. Please see my previous blogs on NOFN/BBNL.

NOFN-Do we need PPP or plain USOF subsidy?

I reproduce below a news item regarding TRAI recommendations on NOFN 

I have previously pointed out that the simplest and fastest route to funding optic fibre roll out in rural areas would have been to faithfully follow the USOF model of bidding out service areas based on reveres auctions with open access conditions. This was done by USOF for the North Eastern states. That would have been akin to PPP based on BOO model rather than BOOT.

There is absolutely no reason for the ownership of the network to be with/transfer back to the government unless it is to justify the huge paraphernalia that has been created by way of BBNL.  The whole  idea of Universal Service Funds is to provide a minimal smart subsidy and let markets take over. 

Issues such as fair open access and Right of Way cannot necessarily be solved only by public equity participation. NOFN/BBNL  at present under public ownership has failed to deliver for past 4 years (including solving the RoW problem) and its cost has trebled. 

I have examined this debate earlier in my post "Broadband Networks through Infrastructure Sharing Route"  (also placed under the label NOFN). 

Its time we dusted the departmental files containing the original idea of universal service funding based on international best practices and allowed the Indian USOF to deliver as per its own original rules of competitive neutrality. 

The news article:

The Telecom Regulatory Authority of India (Trai) has recommended a public-private partnership (PPP) model for BharatNet, an ambitious project involving setting up a broadband network in rural India.

A model with private incentives and long-term service delivery similar to the build-own-operate transfer or build-operate-transfer models of implementation would be the preferred means of implementation, Trai said in its recommendations announced on Monday.

“PPPs seek to combine the private sector’s capacity for delivery with the Government’s role as an enabler and regulator to overcome market failures. PPPs must be viewed as not just an instrument for easing finance and capacity constraints, but as an effective tool towards ensuring competition in service delivery and improvement in quality of service,” Trai said.

A special purpose vehicle, the Bharat Broadband Network Limited (BBNL), under the telecom ministry is now handling rolling out the optical fibre network being executed by BSNL, Railtel and Power Grid.

The previous government had approved a project cost of Rs 20,000 crore for laying optical fibre network in 2011 but progress has been poor. It is expected that BharatNet will be completed by 2017-18, after missing many deadlines. Even the project cost has increased to about Rs 70,000 crore over the years. The project was earlier named the national optical fibre network but later renamed BharatNet by the current government.

Trai said the concessionaires should be given the job of deploying the optical fibre cable and other network infrastructure as well as operating the network during the period of contract. The contract period should be of 25 years which can be further extended in block of 10, 20 or 30 years.

The national optical fibre network (NOFN) project had failed in achieving its original objective of increasing broadband subscription in the country. The task of rolling out a broadband network should be given to a concessionaire selected through reverse bidding. Funding should be done to bridge the loss incurred due to higher operational expenses and lower commercial accruals, Trai said.

It can be safely concluded that the NOFN has failed in achieving its original objectives, the regulator said. Focusing on the design of the finance and investment model for future roll-out of broadband is critical.

The National Telecom Policy of 2012 (NTP 2012) envisaged broadband on demand by 2015, and 175 million broadband subscribers by 2017 with a minimum speed of 2 Mbps and up to 100 Mbps on demand. As of September 2015, the total number of broadband (defined as download speeds >=512 Kbps) subscribers stood at 120.88 million (largely concentrated in Andhra Pradesh, Delhi, Karnataka, Kerala, Maharashtra and Tamil Nadu), with only 27.20 million rural subscribers. This “internet divide” between rural and urban India has become more relevant as the scope of activities carried out on the Internet has expanded beyond what was previously imagined, Trai said.

Moreover, rural broadband access will help address multiple service deficits that arise due to other infrastructure related constraints widespread among the rural population. The potential gains from increasing such access are tremendous — the Report of the Committee on NOFN in its projections of the economic benefit from BharatNet estimated that an additional 25 million Internet users by 2018-19 would result in economic benefits of Rs 66,465 crore due to the direct, indirect and spillover benefits of Internet access.

It also recommended that the central and state governments become anchor clients of this project and purchase a bandwidth of 100 megabytes per second at market rate.

To ensure that the concessionaire does not discriminate between service providers in granting access of optical fibres, Trai has recommended arm's length relationship between concessionaire and service providers, adding that 50 per cent of the optical fibre should be reserved for telecom and cable service providers.

Besides, the government should become a minority partner of the concessionaire with 26 per cent stake as this would lower financing cost and risk. "In addition, this can help the government check monopolistic behaviour on the part of the concessionaire," Trai added.