Mahesh Uppal: Rural telephony: the missing link

The newly set up committee, headed by Montek Singh Ahluwalia, to oversee India's progress in infrastructure, would do well to review the status of rural telecom infrastructure, which seems precariously close to failing.

India's teledensity "" the number of phone lines per 100 people "" has seen an almost 10-fold growth in the past 10 years. The accompanying chart shows that out of India's roughly 76.53 million phones, about 13 million are in rural areas.

Almost half of India's phones are mobile. Growth in fixed phones is tapering off. The Telecom Regulatory Authority of India (Trai) recently estimated that mobile phones cover 20 per cent of India. Roughly 14 per cent of the 6,07,491 villages in the country have no phones. A high percentage is out of order at any given time.

The chart also shows that while mobile phones are increasing rapidly, the growth of phones in rural areas has actually fallen sharply in the past three years "" the lines added in 2003 are a third of 2002 and in 2004 they were half of 2003.

In the case of Village Public Telephones (VPTs) "" usually the first phone in villages without connectivity"" only 8,060 were added in 2004 although the number was 46,271 in 2003.

To its credit, BSNL has installed almost all of 12.20 million rural phones. Ironically, embedded in Trai's Performance Indicators for June 2004 is the fact that some private players like the Tatas and HFCL had actually removed some of their few VPTs.

Providing rural telephones and maintaining them is expensive. The terrain is tough, demand low, ability to pay limited and revenues generated often abysmally low.

Consequently, the service has almost always needed to be subsidised, though experts believe that much rural communications can be viable in a conducive regulatory environment.

The National Telecom Policy (NTP) in 1994 had argued that private funds would have to augment the government's limited resources if rural areas were to be connected (by 1997!).

The conditions devised in 1995 for private sector players to enter the basic services market required them to mention the number of rural phones they planned to deploy and used this number, with other parameters, to decide wining bidders. This approach came a cropper. Operators could neither pay the licence fees nor provide many phones in rural areas.

The NTP of 1999 proposed migration from the licence fee regime to a revenue-sharing one. Private rural phones still did not materialise. It would seem, on hindsight at least, that the policy succeeded in kick-starting mobile services where the market was new and deployment costs had dropped dramatically.

However, private fixed line services, especially rural, remained elusive. Perhaps unwittingly, the NTP-99, instead of providing further incentives to bleeding fixed line operators, such as reduced fees, lower duties, tax concessions and so on, allowed them to abandon their fixed line service and, consequently, the rural access business.

The Universal Service Obligation (USO) fund, into which major telecom operators pay typically 5 per cent of their gross revenues, was created in 2002 to fund rural telephony through an auction for subsidy. It is yet to fund a new connection.

In its wisdom "" perhaps because of the time required to do the necessary home work "" the fund started with funding operational expenses of existing VPTs and upgrading obsolete rural phones. Over 98 per cent of its funding has gone to BSNL.

Ironically, BSNL has itself been reluctant to participate in recent auctions. The large part of USO funds, estimated at $ 800 million, is yet to be utilised.

Last year, Trai proposed an Access Deficit charge (ADC) on private operators to compensate BSNL for providing loss-making fixed lines, a third of which are rural.

The methodology for ADC as well as data has seen frequent revisions in just one year. Operators and consumer groups alike have attacked the scheme since it taxes BSNL's competitors "" who pass the charges to consumers "" to fund even the large numbers profitable urban phones of BSNL.

Trai's recommendations in 2003 to unify fixed and mobile licences proposed, perhaps not unreasonably, that in view of the unification, the roll-out obligations of new unified access operators be no higher than mobile operators, who are not mandated to provide rural connectivity.

Following the acceptance of recommendations, almost all private access providers in the country went mobile (thus giving cities like Delhi and Mumbai more mobile operators than almost any city in the world!).

Perhaps unwittingly, these proposals, instead of providing more incentives to bleeding fixed line operators allowed them to abandon their fixed line service and, consequently, the rural access business itself. The new rules would seem to end any prospect of private telephones, or of competition in rural areas, in the foreseeable future.

The new draft Trai proposals on unification seem to deal somewhat with this problem but seem designed to fail. Trai has proposed to licence a separate category of "niche" operators to provide fixed line services in Short Distance Charging Areas (SDCAs) with less than 1 per cent tele-density. This approach has merit.

Experts believe that if only private entrepreneurs could be allowed to set up smaller networks and not be obliged to take a licence for a whole state, as at present, many could be interested. However, Trai's other recommendations make this goal unrealistic.

Trai, which justified unification of fixed and mobile licences on grounds that technology should not be curbed, has this time recommended that niche operators be restricted to providing fixed line services alone when in fact, providing new revenue streams may well be the only means to attract investments.

It adds insult to injury by suggesting that niche players share 6 per cent of their revenues with the government. This when it says in the same breath that radio trunking, paging and Internet players should not. The proposal could be the kiss of death for rural telephony.

The obsession with teledensity is costing rural India dear. With massive expansion of mobile phones, teledensity is now an extremely poor measure of access since it is a rare mobile user who does not have a fixed phone.

Assuming 99 per cent of all mobile users also have access to a fixed phone, then access to phones in India is a rather modest 4 per cent. Mobile phones, valuable as they are for productivity, convenience and entertainment, are not reaching the unconnected.

India's policy makers and Trai still seem to treat increase in teledensity as their chief objective. But the real issue is low access. While telecom policy objectives mention access, especially to rural areas, those that you would most expect to be sophisticated, treat access and tele-density as synonymous and treat mobile and fixed phones at par.

A report for development news agency Panos, published some weeks ago, has argued that growth of urban mobile phones in Africa has distorted universal service goals and questions the role of mobile phones in connecting rural communities.

BSNL is the sole provider of over a million rural phones in India barring a few provided by its private competitors.

It would have helped if, as best practices the world over indicate, BSNL was provided transparent and targeted support to provide rural telephones because it is only BSNL that has the reach to provide them. But the reverse has happened.

With private sector players targeting especially its lucrative long distance services and corporate customers, BSNL has changed tack. The message from the chart above is unambiguous. BSNL has stopped picking up the pieces.

Its officials openly admit that they cannot be expected to subsidise expansion of infrastructure when competitors threaten the very means to do so by poaching its best customers. A public sector undertaking has got to be commercially savvy. But how?

At least a part of the roughly $5 billion that has been invested in India's telecom sector in the past decade could have augmented the government's own small resources for connecting the unconnected.

They have, in fact, gone largely to provide mobile phones to those who already had access. The failure of regulation and policy is that it has failed to create incentives to invest in areas where the unconnected mostly live.

On the contrary, it has provided perverse incentives to keep away from these investments. Mobile telephony, in a manner of speaking, thrives at the expense of rural phones.

(The writer is a telecom consultant specialising in regulation and policy. He can be contacted at mahesh_uppal@tcisindia.com)