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Universalisation of Telecom Services: The Way Forward

Market forces and rapid technological developments have contributed to the phenomenal growth of telecom services in India, which however, remain concentrated in urban areas. This article examines the role of the universal service obligation policy in expanding rural telecom services.


Universalisation of Telecom Services: The Way Forward

Ch Sambasiva Rao

Market forces and rapid technological developments have contributed to the phenomenal growth of telecom services in India, which however, remain concentrated in urban areas. This article examines the role of the universal service obligation policy in expanding rural telecom services.

Economic & Political Weekly October 27, 2007

he universal service obligation (USO) policy for telecom services has economic, social and administrative rationale. The economic rationale is that when an additional person joins a communications network, existing members benefit because they can receive and make calls to the new customer. The equity (social) rationale is that telecom connectivity can help reduce “social exclusion” by enabling marginalised sections to exercise their social and political rights more effectively.

Telecom services help governments deliver public services universally and efficiently. Ensuring that people on low incomes, those living in remote rural areas, disabled and other vulnerable groups receive these services will go a long way towards removing inequalities in society. Therefore, the policy of making telecom services available, accessible and affordable to those who are otherwise not served by markets, is well supported. The effectiveness of the USO scheme is mainly linked to its ability to identify the menu of services to be supported by it and their beneficiaries. It is a prerequisite that the USO should not distort competition.

The USO was defined by the new telecom policy (NTP-99) as the obligation “to achieve nationwide coverage, non-discriminatory access and widespread affordability” of telecom services. The scope of the USO covers all telecom services that are essential but not sufficiently available at affordable prices. India’s USO policy came into effect on April 1, 2002. The USO fund received statutory status in December 2003 through an amendment to the Indian Telegraph Act. While initially limited to fixed line services,USOsupport was later extended (in

2006, by amending the Indian Telegraph Act, 1885) to mobile services and broadband connectivity in rural and remote areas. The required resources are raised through a universal service levy (USL), fixed at 5 per cent of the adjusted gross revenue of telecom service providers, barring the pure value added service providers.

Six Streams

Six streams of services are currently identified for support from the USO. Of these, providing, maintaining and upgrading shared and private telephones in identified rural areas have been implemented so far. Through the amendment referred to, constructing general and mobile telecom infrastructure, provision of broadband facilities and supporting new telecom technology induction, all in rural areas, are also now included in the scope of the USO. The purview of the USO scheme has thus been widened to include fixed, mobile and broadband services. This was in line with market and techno logy changes and have put in place a framework for creating a safety net for the rural population when market forces failed.

The progress taking place in telecom services in India is significant but skewed. A huge divide between urban and rural areas in terms of access to telecom services has emerged. The progress made in rural areas is mainly a result of support from the USO fund. However, this is


in significant in comparison to the marketled developments taking place in urban areas. Against this backdrop, it is required

(a) to evaluate the effect of USO services in fulfilling the USO objectives, (b) to modify the scope of USO support for bridging the increasing digital divide between urban and rural areas, (c) to blend USO with market forces, and (d) find ways for utilisation of accumulated funds collected from the USL.

Scope of USO Review

Evaluation of USO policies has either been completed or is under way in many countries. Australia reviewed its USO in 2004. Japan, UK and Canada initiated reviews of their USOs in 2005. The European Union and US are also reviewing their USO regimes. All these countries undertook the review with the main objective of assessing the effectiveness of their existing USO regimes in light of their USO policy goals. How to conduct USO in the new competitive environment has also constitutedan important aim of these reviews. To demarcate the required scope of the USO by understanding the extent of the operation of market forces in changing markets and technologies, especially new generation network (NGN), was also attempted. All these issues are relevant to a review of the Indian USO, and are discussed in detail below.

Assessing Effectiveness: There could be two approaches to this evaluation. The first is to measure the impact of the USO policy with specific reference to each of the stated objectives by actual field surveys of the beneficiary population. For this, suitable indices for measuring the impact in each area have to be devised.

The second, supplementary approach is to measure the overall economic impact of the scheme. Economic internal rate of return (EIRR), also known as economic analysis of projects, can be calculated in order to find out the benefits accruing to society as a whole. For this purpose, benefit and cost streams that arise due to USO services in rural areas to different types of users and non-users will need to be identified. The identified streams of benefits and costs are to be valued based on their shadow prices. The rate of return calculated using the benefits and costs to society would reveal the effectiveness of the USO services implemented so far.

Some of the possible issues that could be addressed while reviewing the coverage of USO are discussed below.

Scaling Up Successful Models: Information and Communication Technology (ICT) allows different services to be connected by various types of information technology hardware and software with telecom networks. At present, a number of isolated ICT initiatives are functioning with small geographical coverage in different parts of India. Some of these are serving as centres of information and effective means of empowerment and rural development.

One of the services enlisted for support under the USO is provision of broadband facilities in rural areas. It has been observed that the mere provision of broadband connectivity would not enable people to obtain full potential benefits through the USO. It requires that applications, especially income-generating ones, and services that lead to empowerment of rural people are provided over broadband facilities. The play of market forces in this aspect is limited owing to the projected limited business opportunity initially offered by rural areas, as compared to urban areas. To ensure active private sector participation, the USO subsidy support should cover the costs of hardware, the telecom network as well as the cost of designing the required location specific applications. The task involved is to identify suitable models of ICT and its applications and replicate them in all parts of the country with appropriate modifications.

Transition to NGN: The traditional public switched telephone network (PSTN) mainly facilitates voice communication. The growing variety of telecom applications and network technologies has resulted in a multitude of overlay networks like automatic teller machines, internet protocol (IP), integrated services digital network, etc. Complexities and inefficiencies involved in dealing with such multiple networks have given rise to NGN, which is an IP-based network platform capable of supporting full range of access technologies and providing all types of telecom services. NGN facilitates easier provision of advanced services at reduced costs. The industry has been seeing that voice and video services provided on PSTN are losing to IP-based services of voice-over internet protocol and internet protocol television. Alongside, competition among the existing operators is pushing them to shift to networks that require lower operational costs and allow them to meet the increased service demands of end-users. NGN requires broadband penetration as many converged services can be delivered only through considerable access bandwidth.

There is the danger that NGN will hurt the survival of a PSTN operator. If universal service operators happen to be using PSTN networks, their revenues will fall further. Moreover, the transition to NGN takes time because the access is capitalintensive. The paucity of funds coupled with low personal computer and broadband penetration will result in limiting the NGN roll-out to metros and major cities. The existing limited narrowband access network in rural areas could take many years to move to NGN. Many operators

A workshop on Industrial Economics, under the CAS programme, will be hosted by the Department of Economics, University of Mumbai, on March 6 and 7, 2008. Local hospitality will be provided. Young researchers are invited to submit hard copies of full texts of papers so as to reach the undersigned no later than December 31, 2007. Decisions will be communicated by January 5, 2008.

The Director Department of Economics University of Mumbai, Vidyanagari Mumbai 400 098

October 27, 2007 Economic & Political Weekly


with end-users connected to PSTN are migrating to IP-based transport, leaving the access part unchanged in rural areas. The uneven transition between urban and rural areas is a concern of the USO and it will be appropriate, in the review of the scope of the USO, to see how best this disadvantage can be mitigated.

Spectrum Fees for USO Operators: Ensuring access to mobile telecommunications services in rural India has evolved as an important policy objective of the government in India. To this effect, the support from the USO fund is now being extended towards general infrastructure, infrastructure for the provision of mobile services and broadband connectivity. Third generation (3G) communication systems represent a techno logy advance to the existing ones (known as 2G/2.5G) in the evolution of mobile phone communi cations. 3G systems provide converged services with greater speed and are also more spectrum efficient than the existing ones. 3G have improved economics, greater voice capacity, use valuable radio spectrum, and increased data capabilities more effi ciently compared to existing services.

The government has also decided to auction 3G licences through an international competitive bidding process. Spectrum auctions possibly extract licensee rents but impose social costs because bidders are guided by shareholder value and not by consumer welfare. The succ e ssful bidders are likely to concentrate provision of 3G services in urban areas. This will leave rural customers with inferior 2G services. However, the success of ICT as a catalyst of rural development depends on providing broadband and converged services. This can be facilitated by extending support from the USO fund for meeting the 3G licence fee to operate in rural areas.

Ensuring Competition: The existence of the huge digital divide between urban and rural areas can be attributed to either limited or zero contestability in the USO support bids. Many factors have contributed to this situation. First, rural customers are scattered and hence investments that are required for serving customers are heavy compared to those in urban areas. Household incomes and telecom usage levels are

Economic & Political Weekly October 27, 2007

lower in rural areas compared to urban areas. Second, the lower proportion of business and industrial telecom customers in rural areas leads to less revenue for the provider. Third, in remote and rural areas, most telephone networks are to be laid afresh or require major upgradation to provide reliable telephone services. This involves huge investments in backhaul and switches along with access loops. However, the USO subsidy covers the costs incurred in only the non-traffic sensitive parts of the network. As the costs incurred in the traffic sensitive portion of the network are not covered by USO support, private operators, due to the absence of their network in rural areas, could not participate in the bidding for USO subsidies in many areas.

However, of late, the saturation of the urban market and existence of huge unmet rural demand have been cited as factors relevant to the context of rural telephony. Increasing the USO subsidy coverage to include elements of traffic sensitive portions of the telecom network is an approach for introducing real competition in USO. This could encourage operators, who choose not to provide services in rural areas owing to the loss they might incur in providing the service would be greater than the USO support, to participate in the USO.

In addition to increasing USO support, generating competitive service provision conditions in rural areas will depend on the removal of disincentives to invest and barriers to entry. The required policy changes that enable addressing such issues need to be reviewed.

The above are some options that should be considered in the proposed review of the USO. Based on the economic impact analysis mentioned earlier, further possible options could be considered or the above ones could be suitably modified.

Unutilised Funds: As noted, the government had collected Rs 14,276 crore till the end of February 2007, through the USL. Of this amount, the USO fund has spent Rs 4,556 crore. The wide margin gives rise to the issue of how best to utilise the available funds. This requires finding other services that qualify for support from the USO. Once identified, how can they be provided in a user friendly way in rural and remote areas?

Other Issues: In many countries, the USO is not limited to providing access to peo ple in rural and remote areas; it is also an integral USO objective to enable all consumers, particularly low-income consumers to use the facilities regularly. This is mainly achieved through providing special tariff schemes for customers with low incomes. Similarly, providing suitable services for customers with disabilities is also considered under the USO. Provision of free emergency numbers and communication to medical centres, which very much comes under the USO, is required. In India, there is also a separate rural tariff package, which is common for all identified rural exchanges. A more targeted service for identified customers needs to be evolved for achieving the USO objectives.

Some Reflections: As mentioned in the preceding paragraphs, reviewing the USO scheme involves two tasks. The first one is the calculation of the EIRR. The EIRR looks at a project from the perspective of the entire society and measures the effects of the project on society as a whole.

After identifying with and without project situations, the analysis identifies the streams of costs and benefits, both direct and external. The costs and benefits are valued based on their shadow prices. This is because market prices seldom reflect the economic values of inputs and outputs. The required information for carrying out EIRR is collected from carrying out a sample survey designed exclusively for assessing the benefits and costs occurring to society. This could also throw up needs and options for a differentiated approach so as to pump resources into economically backward areas of the country. The second task is learning from the experiences of other countries that have been imple menting USO schemes for telecom services. Further, developments taking place in the telecommunications sector and in the socio-economic conditions of the society need to be studied.

Thus, a critical assessment of the USO fund is needed in order to make it compatible with the market and technological developments taking place in the telecommunications sector.


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