Three letters that spell a big controversy

The telecom regulator proposes to impose an ADC, or access deficit charge, on all telecom services to ensure that fixed line call tariffs don't climb. That's plunged the telecom industry into yet another rumpus

The cellular service party is over, your mobile service bill will about to shoot up from August. And it's all because the Telecom Regulatory Authority of India (TRAI) wants to ensure that the tariff for fixed line phones won't go up.

TRAI wants to impose a cess, the so-called access deficit charge (see box), on all telecom services "� and the cess promises to plunge the entire industry into yet another fierce controversy. But don't blame the regulator too much "� it's caught in a cleft stick.

An ADC will raise the cost of cellular and long distance calls, but will keep fixed line call charges at current levels "� so ensuring that telephone calls remain affordable to the mass of the Indian public.

If an ADC is not imposed fixed line tariffs will go up. If it is imposed, analyst say that, depending on the quantum of the ADC, cellular service tariffs could go up by anywhere between 10 paise and Rs 2 a minute. Fixed line subscriber trunk dialling (STD) tariffs could be around Rs 5 a minute, up from the current Rs 4 a minute.

Not surprisingly, an ADC's biggest advocates are the state-owned Bharat Sanchar Nigam Ltd (BSNL)and Mahanagar Telephone Nigam Ltd (MTNL) and the private basic service providers. Together, they have some 40 million fixed line users.

Most of the ADC collected from cellular service companies and long distance companies like the Tata-run Videsh Sanchar Nigam Ltd will be passed on to BSNL and MTNL for continuing to provide subsidised local calls.

Equally predictably, private cellular service and long distance service companies are up in arms. They've rubbished the justification for the charge and accuse TRAI of holding a brief for BSNL.

The telecom regulator has justified the need for the cess on grounds that BSNL faces an annual deficit of nearly Rs 13,000 crore for providing subsidised local calls.

Private telecom service providers, however, hotly contest that figure. "TRAI's approach to the ADC is simplistic and ignores many alternative options. Its calculations for working out BSNL's access deficit assume that all the 40 million lines are incurring a loss because of the lower-than-cost- based rentals and the mandatory free calls. It wrongly presumes that there is no surplus on account of local call charges beyond the free calls limit," argues Umang Das, director, SpiceCorp, and chairman, GSM India, the Indian arm of GSM Association, the global body that represents the interests of global system for mobile operators.

Cellular and long distance operators claim that BSNL's deficit is not more than Rs 2,000 crore a year. A multinational cellular services company goes one step further "� its calculations show that BSNL has a zero access deficit.

"TRAI has to get the quantum of the deficit right. The higher the quantum of deficit, the higher will be the ADC imposed on operators. When this is passed on to consumers, it will mean higher tariffs for them," says Sidharth Ray, managing director, Data Access.

Responds BSNL chairman and managing director Prithipal Singh: "Let TRAI not take the numbers that we have given. Let them take the costs of a private operator and fix the ADC accordingly. We will accept that."

Cellular service companies also raise a more fundamental question. Isn't TRAI being unfair in asking subscribers to the services of private companies to fund BSNL's inefficiency and reward BSNL for populist government decisions taken out of political compulsions?

B K Syngal, vice chairman, BPL Mobile, points out dryly: "In spite of TRAI permitting a higher monthly rental of Rs. 280 and two minute call duration for fixed line to fixed line calls, BSNL and MTNL which control more than 95 per cent of the fixed line market have not been able to raise the rental or reduce the call duration per unit charge for reasons best known to them."

Quite rightly, the Cellular Operators Association of India (COAI) says that TRAI has no business suggesting that MTNL get ADC benefits. MTNL operates in the lucrative markets of Delhi and Mumbai and does not have any rural obligations. So MTNL can't have a loss-making phone connection.

In cities and towns, where telephones are used more, there is no justification for subsidising to fixed line network.

"Why should fixed line subscribers in the posh areas of south Delhi or Bangalore continue to get subsidised telephone charges? On the one hand, BSNL's books show a surplus of around Rs 6,000 crore when every other operator in the country is making losses. On the other hand, it is claiming financial support, that too, at our cost," says SpiceCorp's Das.

Counters BSNL's Singh: "Profits have nothing to do with subsidised calls. Are cellular operators saying that we are not entitled to make profits? Why should we subsidise our rural phones from the revenues that we get from urban users? We would like to make profit on each and every phone connection."

But the real reason basic operators are clamouring for an ADC is that with tariffs falling, cellular service companies have been able to grab more long distance calls than before, at the expense of fixed line service companies.

Cell-to-cell STD calls now cost Rs 1.99 a minute versus the Rs 4 a minute for STD calls via fixed lines. So long distance traffic on cellular service networks has gone up by 25 per cent in recent months. This, in turn, will mean a further increase in the ADC per minute.

Fumes S C Khanna, general secretary, Association of Basic Telecom Operators (ABTO): "This is against the interest of 40 million fixed line consumers and detrimental to the fixed line business which is dependent on long distance calls for recovering revenue. " ABTO notes that if an ADC is slapped on cellular calls, the difference will narrow.

Das, however, argues that when technologies that can bring down costs considerably for basic operators exist, there is no reason for BSNL to claim losses "The functionality of fixed line telephones is substitutable by cellular or WLL (M) networks. There is, therefore, no justification in giving any protection to fixed line networks and forcing other competing networks to provide subsidies to BSNL through an ADC," says Das.

BSNL officials, however, say that the new technologies can be adopted for new connections. Who, then, will fund the existing lines, they ask.

The cellular services camp replies that the solution lies in giving BSNL additional financial support from the Universal Services Obligation (USO) fund the government set up to finance rural phones.

"All operators are already giving 5 per cent of their revenues to the USO fund which amounts to around Rs 1,500 crore annually. The deficit in the rural sector which is not likely to be more than Rs 2,000 crore can be partly funded by the USO," says Syngal.

But Prithipal Singh says that the USO fund can be used to fund expansion and maintenance of loss making phone lines. An ADC, on the other hand, recovers the entire cost of providing subsidised phone calls. Here ABTO point to the Australian example where service providers have been paying the USO fund and an ADC separately.

Complicating matters, Reliance and Tata Teleservices, both members of ABTO, are individually not too keen on an ADC because it will be more favourable to their key competitor, BSNL.

Tata executives suggest that TRAI could slap an ADC for a few years and the phase it out as tariffs stabilise.

If so many divergent interests are at work, how does a fair regulator resolve the problem?

That's a tough one, but TRAI could, if it wishes to be wise, usefully look at an International Telecommunication Union paper (ITU Regulatory Colloquium No. 4, Geneva, Switzerland - 19-21 April 1955, "The Changing Role of Government in an Era of Telecom Deregulation") which says: "In principle a surcharge on interconnection pricing (ADC) is by no means the only way to make good the incumbent PTO's "social" deficit, and in principle by no means the best way."

Says a senior Bharti executive: "It is educative to note that for the UK and European Union, the European Commission, after analysing the inefficiencies and the market distortions caused by the ADC regime, proposed a complete elimination of the ADC."

They also underline the Commission's views, as noted by the Lemay-Yates report: "Access deficit contribution schemes always provide inefficient investment signals and raise overall industry costs. They are also administratively cumbersome and lack transparency."

Even in Australia, where all operators have been paying ADC for the last few years, the regulator is reviewing it. Over to TRAI chairman Pradip Baijal.

Access deficit defined

To meet the social obligations of providing cheap telephone services, the government has forced fixed line operators to offer subsidised tariffs.

The gap between the revenue per line that an operator gets and the cost of putting up that line is called the access deficit.

The Telecom Regulatory Authority of India (TRAI) reckons that the monthly cost per subscriber of a fixed line phone is around Rs 425.

But a fixed line operator is allowed to charge an average monthly rental of Rs 200 per subscriber. This implies that the gap between the cost and the revenue is Rs 225.

Till recently, basic operators could make up for this deficit by charging exorbitantly high long distance call tariffs.

But with competition driving tariffs down from Rs 24 to Rs 1.99 for national calls and from Rs 42 to Rs 16 for international ones, the deficit has widened.

One way of eliminating the deficit is to increase fixed line tariffs to the point where they cover the cost incurred. But that would be tough to do, because the government would face a political rumpus.

So TRAI has chosen the softer option: impose an access deficit charge on all telecom service providers.

One question here: this will help keep charges down for fixed line service subscribers. It won't help subscribers to cellular and long distance services because their tariffs will now go up.

So should they subsidise fixed line phone users? That's the big question -- and it's a question that has triggered off the latest row in India's fractious telecom industry.

ADC elsewhere

Malaysia: Malaysia does not quite accept ADC primarily because this could lead to major changes in the current tariff structure. Malaysia believes that individual lines of business of a telecom operator should be able to, individually, make an identifiable profit.

Australia: Australia has introduced ADC but the Competition and Consumer Commission is reviewing the need for it. According to Optus, one of the key operators in Australia, an access deficit charge distorts market prices for long distance, international and all other services.

Hong Kong: Hong Kong introduced an access deficit contribution (ADC) arrangement in 1993 in preparation for the introduction of fixed network competition. It was introduced with a three-year life, which expired on 31 July 1996.