In rural areas of India, population is generally sparse, incomes low and the cost of setting up infrastructure very high. The Universal Services Obligation Fund (USOF) was set up in 2002 to improve the economics of providing telecommunications services in such ?high cost? areas. However, despite significant gaps in voice connectivity and virtually no broadband in urban, leave aside rural areas, over half of the approximately R37,000 crore collected by the fund since its inception, is unspent.
Admittedly, USOF money is not idle; the government allocates funds to USOF only against specific schemes. It cannot be anyone?s case that USOF must squander its resources by passing them to unworthy claimants. However, is it pursuing a better use of its huge resources? There are several reasons to believe it is failing in its primary economic task of addressing market failure in provision of rural telecommunications services.
We saw a rather dramatic proof of its failure to identify and correct market failure in 2007. In its auctions for erection and use of wireless towers for mobile services, companies asked for subsidies to build towers but offered to pay USOF for a right to deploy telecommunications equipment on towers constructed under the scheme. The USOF was asking if they needed subsidy as an opportunity!
Most operators know that, thanks to rapid expansion and aggressive competition between vendors, procuring telecommunications equipment or ?active elements? is cheap and easy. Their real bottleneck in rollout is the expense and effort in setting up towers and the diesel consumed, since grid power is scarce. Similarly, for wire-line broadband, the bottleneck is not the price of optical fibre but the difficulty and cost of permissions from municipalities to lay it on public or private areas, i.e., Rights of Way (ROW). The Telecom Regulatory Authority of India (Trai) has highlighted this recently in its recommendations on infrastructure.
USOF?s priorities seem inane by comparison. A case in point is its recent draft tender. USOF has invited UASL holders, i.e., mobile operators and Internet service providers to bid for subsidies for setting up wireless broadband services for rural areas ?by leveraging the existing telecom infrastructure, thus requiring incremental effort.? First, can setting up incremental infrastructure ever be a bottleneck that needs subsidies to overcome? Second, are operators who paid billions in broadband wireless spectrum auctions in line for subsidies for ?incremental effort??
Also, ?incremental? effort is insufficient to convert rural voice networks to broadband. It will likely require installing new towers and relocating some others. However, the tender bars infrastructure providers (IP-1) players who specialise in this. Compare this with Trai?s recent recommendation to permit IP-1 players to provide active and passive elements.
Indeed, the current USOF tender discourages the efficient use of subsidies. USOF?s design of the auction limits subsidies to two players in each bidding unit?one private player and the state-owned Bharat Sanchar Nigam Limited (BSNL). Including IP-1 players, who provide infrastructure for sharing, in the auction would have brought more competition for end users.
The special treatment to BSNL in this auction pales when you consider that it has received over 90% of USOF funding to date. BSNL, the only player in most villages, enjoys an advantage in bidding for subsidies. Its costs are lower due to its staff and infrastructure across India. Its competitors start from scratch. Expectedly, it has already won most USOF auctions. Abandoning even this flawed process and fair competition, DoT got USOF to refund BSNL?s licence and spectrum fees till 2005-06 (see table).
BSNL?s privileges would trouble less if its publicly funded infrastructure and rights of way (which could speed the rollout of fibre) were shared with other players to maximise public welfare. However, competing private players complain that it shares neither. This makes a mockery of the justification for public subsidies for BSNL on grounds that it is a public asset.
These glaring anomalies expose flaws in the design of USOF itself. USOF has an obvious conflict of interest since its parent, DoT, owns BSNL. An independent and competent USOF would complement Trai to nurture a viable ecosystem for telecom services by identifying and addressing bottleneck issues that markets do not or cannot address. It would fast-track the design of schemes to increase shareable towers across India. Its support for extending fibre connectivity to all towers would reduce reliance on scarce spectrum and also protect landscapes by promoting shorter towers. By financing renewable energy, it could reduce dependence on polluting fuels like diesel. Compensating municipalities for rights of way can accelerate the rollout of wireless and wire-line services. This is USOF?s natural task and, arguably, a better use for its unspent billions.
The author is a telecom expert
