(Sample Article) 62. REGULATORY FRAMEWORK FOR UNIVERSAL SERVICE IN INDIA—CAN WE LEARN FROM EU?

ARCHANA G. GULATI

PART I—BACKGROUND

UNIVERSAL SERVICE as a concept and funding mechanism is generally used as a part of the policy of “promoting or maintaining “universal” availability of connections by individual households to the public. telecommunications networks.” The progress of the telecom sector in the past few decades has proven that technological advances and market mechanisms supported by enabling regulatory and institutional mechanisms can greatly facilitate access even without public intervention (Eliassen, 2009). However, in spite of efficient market conditions, an access gap may persist on account of reasons such as uneconomic regions or populations which markets will not normally serve at affordable prices (Saabterl, Dymond & Juntenen, 2002). Universal Service Funds (USF) are tools that governments utilise to fund closure of this gap. Thus, universal service interventions address market failures and are not meant to harm effective competition which is an important element of efficient markets.

Universal Service and Competition

The evolution of explicit universal service regulation is itself closely tied to the introduction and growth of competition. Thus, the original notion of universal service evolved from the regulation of monopoly fixed line service providers and imposition of an obligation on them to provide below cost access to local telephone services, especially to underserved regions and populations, while allowing them to fund this activity through crosssubsidies by way of the higher charges for urban/long distance services/ premium rate services. With the onset of competition, this cross subsidization was no longer sustainable as competitors would easily undercut the erstwhile monopolist in liberalised markets where the latter was charging higher tariffs (Hoernig &Valetti, 2002). Thus tariff rebalancing became essential and other means of achieving universal service such as mandatory roll out obligations (as a part of licensing) and Access Deficit Charges (ADC) were resorted to. All these methods are considered ineffective/inefficient /introduce market distortions (Infodev, 2000). This has also been the experience in India where mandatory roll out obligations have been circumvented in various ways (Jain, 2001; Prasad, Singh et al, 2005) and ADCs have progressively been phased out by the Telecom Regulatory Authority of India (TRAI) in recognition of their relative inefficiency in comparison to USFs. USFs at least in theory represent a minimalist, transparent, targeted and theoretically less distortionary form of intervention. USFs are not intended as a substitute for private market incentives and investments and should not interfere with competitive market forces. Nor are they inconsistent with other market-based measures (privatisation, liberalisation, regulation) to improve universal service/access which may be implemented in parallel with other such measures (ITU, 2002a). It is in fact widely recognised that competition can bring about greater penetration of telecommunication services (Young, 2005). Affordable access to incumbent operators’ infrastructure (such as local loop) and other forms of service or inter-platform competition have been major contributors to especially broadband penetration in developed countries. Existing literature on impact of pro-competitive policies in OECD countries indicates that these are positively related to broadband adoption. (e.g., Ford & Spiwak, 2004; Distaso, (Lupi & Manenti, 2006). India’s draft National Competition Policy 2011 (NCP) defines competition as follows, “Competition refers to a situation in a market place in which firms/entities or sellers independently strive for the patronage of buyers in order to achieve a particular business objective, such as profits,sales, market share, etc. By responding to demand for goods and services with lower prices and higher quality, competing businesses are pressured
to reduce costs, innovate, invest in technology and better managerial practices and increase productivity. This process leads to achievement of static, dynamic as also allocative efficiencies and increased choices and lower prices for consumers”. Minimising competition distortions regardless of public policy objectives has been recognised as one of the important tenets of India’s proposed competition policy which also accepts that “competition is not automatic, and requires to be promoted, protected and nurtured through appropriate regulatory mechanisms, by minimising market restrictions and distortions and access to related productive inputs as markets, capital, technology, infrastructure services, human capital, etc”. (NCP, 2011). The NCP defines competitive neutrality in terms of establishment of a level playing field where government business compete with private sector and vice versa. This is especially important because “…. governments [as owners of public sector entities] also have to play a third [apart from policy maker] role of regulator, balancing the need for financial viability with customer protection through ensuring affordable and reliable services.” (Eberhard, 2006). The focus of this article is ex ante regulatory neutrality in the approach towards US interventions to ensure that these subsidies do not benefit one private/public market player or group of players over another. The ultimate aim is economic efficiency which promotes consumer interest as highlighted by draft NCP.

Importance of ex ante Regulation

In theory, USFs are preferred over roll out obligations, cross subsidies and access deficit charges as being a more transparent, competition neutral and effective mechanism to achieve the aim of universal access to telecommunications facilities. In practice, the working of USFs has often been criticised for being nefficient and not always transparent or competition neutral to the required degree. The design of niversal service interventions apart from the manner of funding universal service can infact potentially “affect the very nature of competition that can be sustained in the sector. It can affect the viability of the existing operators as well as the entry process in the industry.” (Malik & de Silva, 2005). However, it could also be argued that most of these demerits arise from the manner in which universal service is defined and applied rather than the notion of universal service. A comparison of the related legal framework of India and European Union (EU) is made in this context.

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PART II-BENCHMARKING INDIAN US REGULATION AGAINST THAT OF THE EUROPEANS UNION

Legal Framework of USOF

The legal framework of India’s Universal Service Obligation Fund (USOF) is the sum of legislation and the institutional set up to implement the same. USOF is governed by The Indian Telegraph (Amendment) Act 2003 (Act) under which the Fund was created retrospectively with effect from April 1, 2002 and the Indian Telegraph (Amendment) Rules 2004 (Rules) . The Act lays down the definition of Universal Service Obligation (USO) and manner of funding of USOF activities. The Rules govern the scope of activities; type of subsidy support and the choice of the implementing agency or the Universal Service Provider (USP) were notified on March 26, 2004. USOF was established with the fundamental objective of providing access to ‘basic ’ telegraph services. The Act and Rules were subsequently amended in 2006 (when the word “basic” was removed from the definition of USO in the Act) in order to enable support for mobile services, broadband connectivity and general infrastructure in rural and remote areas of the country. The Rules were again amended in 2008 for providing subsidy support to eligible operators for operational sustainability of Rural Wire line Household Connections (RDELs) installed prior to April
1, 2002. As per the Rules, the following services shall be supported by the Fund, namely:

Stream I: Provision of Public Telecom and Information Services
Stream II: Provision of rural household telephones (RDELs) as may be determined by the Central Government from time to time:
Stream-III: Creation of infrastructure for provision of Mobile Services in rural and remote areas
Stream-IV: Provision of Broadband connectivity to villages in a phased manner:
Stream-V: Creation of general infrastructure in rural and remote areas for development of elecommunication facilities:
Stream-VI: Induction of new technological developments in the telecom sector in rural and remote areas:

The only part of the legal framework where the issue of competition is overtly addressed is the provisions in the Rules governing selection of USPs. Rule 526, states that the selection of the USP shall be made by a bidding process from amongst the eligible operators. There are two exceptions to this tenet. One being the support for rural household telephones installed before April 1, 2002 and the second being the Stream VI pilot projects. Here the USP may be selected by means other than bidding. There is a sound rationale for both. The former would logically consist of rural telephones provided entirely by the public sector incumbent operator Bharat Sanchar Nigam Ltd. (BSNL) making bidding pointless and the latter is expected to deal with unique projects where qualitative rather than quantitative factors would govern choice. Other protections available in the legal framework include the scrutiny exercised by the Parliament and by the Finance Ministry as a part of the budgetary process. Stakeholder consultation takes place by way of pre-bid meetings with service providers. Further, an inter-ministerial Advisory Committee advises the USOF on its schemes. USOF functions within the Government of India’s framework of rules and regulations including those on financial propriety and procurement procedures as embodied in the General Financial Rules. Its activities and performance are subject to regular audits by the Controller and Auditor General of India.

Institutional set-up of USOF India

It has been said that “Institutions are formal rules and informal constraints based on principled ideas, which produce a certain kind of behaviour. For example, formal rules, informal conventions, or a combination of formal and informal conventions, could secure property rights for private individuals”. (Mukherjee, 2000). The USOF Administration functions as an attached office of the Department of
Telecommunications. The institutional set up and system of command and control has important implications on design and implementation of USOF schemes and consequently on their competitive impact. It is significantly noted that TRAI’s recommendations had envisaged the creation of an independent and empowered USF Administration Board with the administrator as its Chairperson. Apart from the administrator, the other six members were to be drawn from the fields of economics, finance, telecom engineering and administration, management, law, and consumer welfare. The expenses of the administration were to be met from the USL (TRAI, 2001 pp. 39, 40). As the role of TRAI in this matter is recommendatory and the final decision was to be taken by the government, the Telecom Commission took a view that the DoT should control the USOF as fulfilment of telecom policy and social obligations is the direct responsibility of the government, which is also responsible to the Parliament. Thus, as approved by the government, the office of the Administrator USOF was created as an attached office of DoT.

Impact of Present Legal/Institutional Framework

It would appear that USOF’s present legal and regulatory structure may have failed to prevent potentially harmful, anti-competitive interventions and their negative impact on the rural telecommunications sector. USOF’s avowed purpose is affordable rural telecommunications. USOF has disbursed Rs 175.73 billion up to September 30, 2013. However, in spite of the fact that rural fixed line telephony and broadband based schemes account for 98.59 per cent of USOF subsidy disbursement as on January 31,2013 (USOF Website), the rural teledensity at 39.85 per cent is made of almost entirely of wireless connections and rural broadband penetration continues to be negligible. BSNL’s monopoly in the wire line segment has meant that most of this support (focused disproportionately on fixed lines) has been given to BSNL on nomination basis. Thus it is not USOF interventions that have really driven the growth accomplished in voice penetration and nor has USOF succeeded in increasing data connections in rural India.

Outcomes expected from USOF

Rural telephony and broadband access are high on the Government’s agenda with targets of 70 per cent rural teledensity by 2017 and 100 per cent by 2020 and the intention to connect every village panchayat to a thorough Optical Fibre within three years. The National Telecom Policy 2012 (NTP 2012) states that it has, “the vision Broadband on Demand and envisages leveraging telecom infrastructure to enable all citizens and businesses, both in rural and urban areas, to participate in the Internet and web economy thereby ensuring equitable and inclusive development across the nation”. It lists as one of its objectives, the aim to “[p]rovide high speed and high quality broadband access to all village panchayats through a combination of technologies by the year 2014 and progressively to all villages and habitations by 2020”. The Policy recognises broadband connectivity as a basic necessity like education and health and commits to work towards ‘‘Right to Broadband”. It is clear that broadband is a national priority and that USOF has its work cut out.

Explaining Poor Results

The possibility that the reasons for USOF’s poor performance in terms of desired outcomes, can be traced to its legal framework is evident from the fact that its scheme design and implementation have been criticised by experts. It has been observed that while the rules favour bidding which is theoretically competitive, USOF’s “auction process has generally favoured BSNL and is probably not the most effective mechanism for either minimising the state subsidy or identifying the most efficient provider.” (Noll & Wallsten, 2006, p. 255). This is substantiated by facts as the USOF website indicates that cumulatively BSNL has received more than 87 per cent of USOF subsidy. Clearly BSNL’s monopoly in the rural wire line segment has harmed rather than helped penetration. “Global experience” with subsidy auctions “has revealed that ‘the subsidies required are generally less than incumbents had previously led policy makers to believe”. Further, “[t]he role of the incumbent in the design of these [subsidy] auctions”, experienced elsewhere and problems thereof occur in the case of USOF too. (Wallsten, 2008, pp. 381-381) It is observed that at least for the initial auctions “the cost data” used for calculation of benchmarks rather than being based on industry standards of incremental cost were based on BSNL data which suffers from lack of appropriate disaggregation. Further, these very (rural fixed line) costs also affected the quantum of BSNL’s subsidies by way of ADC, further encouraging overstatement. Also the pre-existence BSNL’s infrastructure in the bidding areas gave BSNL a cost advantage (Wallsten, 2008, p. 387). Malik has commented that “these costs were not linked to optimal network design….but were based on the incumbent’s norms of network design” though TRAI had recommended development of “proxy cost model(s)” to avoid overestimation of “cost figures” by operators. It has been said that “overspecification [of technology] in [USOF’s] law…have yielded large rents for the incumbent.” (Malik, 2007, pp.17-18). It has also been commented that the outcome of a single operator receiving subsidy across national markets also constitutes an “impossible” barrier to entry for other firms (Noll and Wallsten, 2011, p.52). Notably, there has been however no attempt to systematically relate the shortcomings of USOF interventions directly to its legal framework or to make specific recommendations in this regard. This article attempts to explore this aspect.