Document(s) 14 of 21

INTRODUCTION

This chapter continues the universal service discussion begun in the previous chapter. Whereas Malik considered the design and implementation of a universal service fund, this chapter addresses an explicit regulatory intervention intended to support universal service in India: the Access Deficit Charge (ADC). It seeks to identify the key generalizable principles emerging from a critical analysis of the Indian experience.

The ADC is an amount given to an operator to compensate for the difference between the actual cost of providing a particular service and the mandated lower tariff for providing the service to a class of subscribers, usually rural. Even though theoretically defensible, implementations of ADC programs have proved problematic. Several countries have tried out ADCs at different stages of their telecom development process, but few have persisted, with most either discontinuing ADCs or amalgamating them with other less market distortionary programs.

Most of this chapter deals with the Indian experience of ADC, a controversial program that has been criticized for its bias towards the incumbent. We consider its rationale and analyze if, and to what extent, the initial objectives have been met. The analysis lays bare several inconsistencies between the original intention and implementation. Starting from the calculation of ADC, which was too complex for practical application, the chapter identifies a series of weaknesses in India's ADC implementation, indicating that ADC, at least in its Indian form, is not the most appropriate tool to achieve the universal service objectives. But it is conceded that the Indian ADC implementation perhaps has provided some 'affordability benefits' to a certain population segment (Moonesinghe et al., 2007). The technology bias of the Indian scheme made the ADC a means to tax private operators to subsidize the incumbent and precluded the emergence of 'local' innovative technology in rural areas while distorting the market.

Starting with a fundamentally irrational base decision, the Telecom Regulatory Authority of India (TRAI) tried to design a workable ADC, and things could have been much worse if a different organization, which was less consultative and had less expertise, tried it. Given the benefits a better structured intervention could bring to the rural population, a radical restructuring of ADC is proposed. Since this research was disseminated in multiple forms (inter alia to the TRAI), several of the recommendations have already been implemented.

The second part of this chapter examines the background of the Indian ADC and how it was structured. Then its implementation and the issues faced are discussed. Thereafter, the many dynamic changes the ADC went through are documented and suggestions for improvement are proffered. Finally, the key generalizable principles are presented.

BACKGROUND ON ADC AND ITS INDIAN INCARNATION

While there are a number of definitions of access deficit in telecom, it generally refers to the difference between the actual cost of providing a given telecom service and the mandated lower tariff for providing that service to a class of subscribers (Intven, 2000).

Traditionally, this deficit was internalized. Monopoly providers used cross-subsidies between profitable urban or long distance segments and unprofitable rural segments (due to the mandated, lower-than-cost-tariffs) to offset revenue differentials between the two. However, the opening up of markets to private sector participation resulted in significant reductions in long distance revenues to former monopolies, reducing the margins available to cross-subsidize access deficits.

The Indian case was no different. Given the evolving competitive market structure, TRAI amended the Interconnection Usage Charge (IUC) regime for origination, transit and termination in January 2003. The ADC was included in the origination and termination usage charges and was made payable to all basic service operators (BSOs) with the intention of keeping the rental and local calls affordable both in rural and urban areas.

The challenge was to determine a per-minute ADC. How much should it be? How should it be calculated? In the absence of actual cost data, TRAI used a proxy model to arrive at an amount. However, the incumbent Bharat Sanchar Nigam Limited (BSNL) protested, saying it should be much higher. Thereafter TRAI used BSNL data along with their detailed submissions to revise the calculations.

Based on these calculations, TRAI proposed that INR 249-259 per month per direct exchange line (DEL) be recovered through ADC. Based on the above, the per minute ADC was calculated to be INR 1.00 for local calls and INR 1.00 plus the carriage charge for long distance calls. But given tariff ceilings on local calls of INR 0.80, INR 1.00, or INR 1.20 per local pulse of two minutes duration, the portion of access deficit not covered by the local calls had to be recovered from long distance calls. Therefore distance categories were set as the following: up to 50 km, 50 to 200 km, 200 to 500 km, beyond 500 km, and international long distance calls. Accordingly, TRAI specified that for all BSOs, fixed line calls, either at one or both ends of the call, would attract ADC. However, TRAI noted that the absence of inter-carrier charge billing systems may cause difficulties in implementing the stipulated settlements. Therefore, in the interim period, it provided for two alternative models; one gave uniform ADC for inter-circle calls above 50 km and the other a differential ADC based on distance.¹

The result was a set of ADCs based on type of originating technology, type of terminating technology, on whether the calls were inter or intra-circle, and the distance band. The final ADC amount within India ranged from either zero, INR 0.50, INR 1.25, or INR 2.00 per minute. ADC for incoming and outgoing international long distance calls were set at INR 5.00 per minute.

Based on the above calculation, the total amount of funds to be paid to fixed line BSOs through the ADC regime was estimated to be INR 130,000 million per year. This amounted to an extraordinarily high 30 percent of total revenue of the telecom sector at the time. Was such a high ADC sustainable?

Any design of ADC should be simple, transparent, justifiable, and most importantly distortion-free. The original Indian design lacked almost all of the above elements.

IMPLEMENTATION OF ADC

As the implementation commenced, it became obvious that a non-level playing field had been created by bringing in complex and confusing calculations to determine multiple ADC amounts based on technology and distance. The problem was exacerbated by the use of unsubstantiated historical cost data from the incumbent.

In any case, TRAI pushed ahead with implementation. But the fixed-line tariffs submitted for approval by the incumbent BSNL showed that they were below the levels required to cover the IUC plus ADC amounts, that is, they were in effect below the costs embodied in the ADC regime. Even though this was the case, TRAI was 'forced' (in their own words) to accept these lower tariffs of the incumbent on the grounds that the proposed below-cost prices were necessary to survive in business, and hence were not predatory. Consequently, other BSOs also had to reduce tariffs to below-cost levels, thus, necessitating a re-examination of the entire regime.

Table 10.1 provides a comparison of the IUC plus ADC charges set by TRAI and the actual applied tariffs in the case of intra-circle tariffs.

Implementation did not proceed as smoothly as planned; instead it created a number of negative consequences for competition. In effect, the ADC was a mere levy on emerging private operators to prop up the fixed-line incumbent who was finding it difficult to compete in the market. In attempting to safeguard the fixed-line incumbent, the ADC created a fixed wire line bubble that would have burst unless continuously supported by ADC (or some other subsidy).

IMPLEMENTATION SOLUTIONS

TRAI was now in a difficult position with criticisms being leveled at them from industry as well as user groups. Facing the criticisms in a constructive manner, they considered how the mistakes could be rectified.

Table 10.1
Actual vs. Applied Tariffs for Intra-circle Calls in India
Comparison of Tariffs and IUC plus ADC Charges as Applicable under the IUC Regulation of January 2003

Source: TRAI (2003f).

F: Fixed or WLL-F Wireless Local Loop (Fixed); W: WLL-M (WLL Mobile); C: Cellular

ADC Calculations should be Forward Looking, not Historical

Industry suggested that instead of relying on historical cost data, TRAI should conduct its analysis based on Forward Looking Long Run Incremental Costs (FLLRIC), taking account of new, costeffective technologies.

TRAI agreed that the calculation should be based on FLLRIC, but ruled that it would not be wise to shift from historical costs abruptly. The argument was that BSNL had provided the bulk of rural services and supported low-paying subscribers. TRAI was of the view that with BSNL deploying new technology and lower-cost equipment, parts of the existing high-cost network would be gradually replaced by such equipment reducing the need for high ADCs. It decided to continue with historical pricing, but be current, as much as possible, in the prices and obtain costs from other BSOs as well.

While acknowledging the difficulties in implementing an FLLRIC regime, it is evident that TRAI's decision was biased towards protecting the interests of the incumbent. It did not promote competition using emerging technology.

ADC Calculations should be Adjusted for Various Concessions Granted by the Government to BSNL

Considering the reimbursement of various license fees and other concessions granted to BSNL by the government, TRAI admitted the error and made several changes in the calculations. These revisions alone caused the estimated access deficit to be revised downwards dramatically to around 10 to 12 percent of the sector revenue from the original 30 percent.

Mahanagar Telephone Nigam Limited and Private BSOs should not be Given ADC in Light of Their Presence in Urban Areas and Unmet Roll-out Obligations

TRAI concluded that a number of BSOs, including Mahanagar Telephone Nigam Limited (MTNL, the government-owned incumbent in the major metropolitan areas of Mumbai and Delhi) continue to incur some access deficits, but that they were much smaller than the amounts calculated using their own cost data. TRAI also noted that many BSOs had not met their roll-out obligations, particularly for village public telephones (VPTs). TRAI observed that most of the rural DELs were provided by BSNL, which also provided connections to a relatively large number of low-paying users. It also pointed out that, in general, in other countries ADC is paid only to the incumbent and not to newcomers.

TRAI decided to implement a limited form of the IUC regime for non-BSNL BSOs, that is, they would retain the relevant ADCs for calls originating from them. The ADC that was to be collected at termination by fixed-line BSOs other than BSNL was, hence, removed.

ADC Base is too Small: Capture ADC from All Calls from Everyone

Given the large amounts of ADC to be recovered from long distance minutes involving fixed lines, the ADC per minute on fixed wire-line calls had to be large since the number of such minutes was a small proportion of the total minutes used (estimated at 22 percent).

Cellular and Wireless in Local Loop with Limited Mobility (WLL-M) service providers lowering tariffs for long distance calls reduced the demand for long-distance calls using fixed lines, which in turn would have meant a further increase in ADC per minute if collected only for fixed-line long-distance minutes. Therefore, the purpose of prescribing ADC to compensate BSOs for providing affordable service was in fact being defeated.

Hence, TRAI decided to apply ADC to all access providers barring intra-circle WLL-M and cellular calls, thus making the base larger. This ruling meant that it was immaterial whether one used BSNL services at all to originate, carry or terminate a call within (or outside) India; an ADC had to be paid to the incumbent on every call made except for WLL-M and cellular intra-circle calls.

ADC Funding should not be Permanent

The industry felt that with rapid changes in technology and reduction in equipment costs, the amount of funding required for ADC would decline.

TRAI agreed. It observed that over time it may be possible to do away with the ADC regime by merging it with the Universal Service Obligation (USO) regime. The implicit argument was that ADC was a kind of 'infant industry subsidy' being paid to the incumbent through a tax on its competition which would be removed when it was ready to compete in the open market. The issue, however, was whether the incumbent had not already recouped the historical costs through 50 years of monopoly.

Uniform and Differential ADC Schemes too Complicated to Implement

ADC calculation depended on distance in one scheme, and was independent of distance in the other. With the choice of scheme left to individual operators, a chaos ensued when operators in the same circle started adopting different schemes. Industry representatives argued that this difference was being misused by national long distance (NLD) operators to terminate cellular to fixed inter-circle long distance calls through points of interconnection with other cellular networks in terminating circles, depriving the BSOs of termination charges.

The two methods of calculating ADC were replaced by the escalating-by-distance methodology.

Review Possible Reduction in the Amount of ADC for International Long Distance Calls to Address Grey Traffic

The industry argued that the INR 5 ADC for incoming international traffic was too high and created incentives to bypass it.

TRAI reduced the ADC on international long distance (ILD) to INR 4.25 per minute, with further decreases promised over time.

BSNL Felt Discriminated by Common ADC to All Fixed Operators

BSNL argued that the ADC of private BSO was only INR 174 per month per DEL, whereas the ADC of BSNL was around INR 269 per month per DEL and it was unfair to provide non-BSNL basic fixed-line operators the higher BSNL figure.

TRAI revised the original IUC (and ADC) regime in October 2003, as depicted in Table 10.2.

Having made substantial revisions to the ADC regime, TRAI assured that it would soon review both the quantum and the beneficiaries of the ADC regime. TRAI suggested that it may consider funding ADC, based on a percentage of the annual revenues of operators, and that the ADC may be merged with the USO regime in three to five years.

By the revisions, TRAI agreed that the earlier formulation was detrimental to the very service provider it sought to protect (BSNL). In the earlier regime, 92 percent of the ADC revenues were being contributed by BSOs (primarily BSNL) and the ADC as a percentage of their revenues was about 40 percent. Instead of helping BSOs, particularly BSNL, the earlier regime could have driven them out of business.² These revisions were implemented in February 2004.

GROWTH MOMENTUM

While ADC was being debated, the Indian subscriber base was steadily expanding. However, as seen in Figure S3.1, the number of urban telephones per hundred inhabitants (fixed plus mobile) was 14 by end 2003 (at the time these revisions took place); the rural areas hardly saw any growth, moving from 1.2 at end 2002 to just 1.5 at end 2003. Most future growth was seen as coming from mobile, the sector that was being taxed by ADC to fund the fixed sector, which was not projected to grow rapidly.

FURTHER PROBLEMS AND SOLUTIONS

While urban and mobile growth were accelerating relative to rural and fixed line growth, the February 2004 implementation of the revised ADC regime ran in to trouble at the outset.

TRAI observed that only 'very few' settlements had taken place. It appeared that most operators had not raised relevant invoices and their call patterns seemed suspicious; some showed no ILD calls at all. The data reconciliation problem had been exacerbated because of BSNL's failure to complete its billing system upgrade on schedule.

After two attempts to improve the calculation, including extensive consultations, TRAI had learnt its lesson. It stated that 'experience suggests that it would be useful to evolve a simpler method of collecting ADC which does not involve distance-based and call-based ADC, and may also be subject to easier verification.'

Table 10.2
Revised Indian ADC Regime (2003)

Source: TRAI, 2003f.

TRAI proposed an interim regime from October 2004 to September 2005 based on revenue-sharing. However, the industry was unwilling to accept it. A number of stakeholders, primarily BSNL, opposed it on the grounds that it would increase rentals and local call charges. The argument was that the proposed ADC revenue-share regime would involve an additional imposition over and above the existing license-fee revenue share. This additional increase in rental and local call charges was shown to take place because the revenue share would not compensate for the existing asymmetrically high ADC contribution levied on ILD and NLD traffic.

In this background, TRAI once again revised the ADC to include the following salient features:

• Continue with a per minute ADC, but at a much reduced rate: with the number of minutes available for funding ADC increasing because of higher-than-anticipated subscriber growth, the required ADC amount could be collected with a lower charge per minute. Note, however, that this increase was driven by more minutes originating from cellular phones.
  
  
• Maintain the total ADC amount at the level notified in October 2003 for both BSNL and other fixed-line operators.
  
  
• The ADC regime simplified for domestic long distance calls by applying one figure to all calls.

TRAI had to grapple with the ADC to be levied across the board versus the ADC on ILD, given the competing objectives of reducing domestic call charges, reducing or eliminating grey market ILD calls, and ensuring that the benefits do not flow to foreign carriers and consumers at the cost of domestic consumers and operators. The assessment was based on the premise that for funding a given ADC, any reduction in the per-minute ADC charge on ILD calls would require an increase in the ADC on domestic calls. Likewise, any increase in per-minute ADC on ILD calls would result in a lower ADC on domestic calls. TRAI selected what it called an 'appropriate balance'; while specifying the new ADC with higher priority given the objective of reducing domestic tariffs to meet domestic consumer interest, and spurring sustained growth with supplementary measures (monitoring and penalty) to address the grey-market problem.

These changes resulted in a uniform ADC of INR 0.30 per minute for all calls across the nation (with the continued exception of intra-circle WLL-M/cellular to WLL-M/cellular), as depicted in Table 10.3.

Under the new ADC regime, all operators had to collect the now lower INR 0.30 ADC (with the intra-circle WLL-M/cellular to WLL-M/cellular exception) and pass it on to BSNL. Non-BSNL fixed BSOs were allowed to retain originating ADC as before.

With this reduction of ADC, primarily on international calls by 41 percent and on long distance calls by 61 percent, mobile subscriber bills on international calls fell by 11 to 24 percent while long distance call rates fell by 16 to 27 percent. Immediately after the announcement, BSNL claimed that it would incur a loss of about INR 12,500 million annually (calculated as INR 3,000 million from outgoing international traffic, INR 1,700 million on incoming calls, and INR 7,800 million from the reduction of ADC on long distance calls).

TRAI's objective of protecting the incumbent in the transition was achieved with a lower per-minute ADC, but a larger volume, given the massive increase in minutes, primarily from cellular.

FINAL CONSULTATION

The final consultation, inter alia, dealt with the justification of ADC on rural and urban fixed wireless lines, the applicability of ADC to non-BSNL fixed line operators, and a revenue-share methodology for ADC prior to unification with the universal service obligation fund.

Should ADC be Applied only to Rural Wire-lines?

From the beginning of the ADC regime, TRAI did not consider ADCs a 'rural subsidy' and the deficit was calculated as an average of all fixed lines in both urban and rural areas.

Table 10.4 illustrates the role played by BSNL in the provision of rural fixed lines in rural India (as at end September 2004).

TRAI noted that in the context of ADC the rural versus urban distinction was less meaningful than the implications of the network's distribution of urban/rural lines in terms of costs and revenues. Also, the complexity in obtaining and authenticating data for calculating cost-based rural ADC, particularly with respect to non-BSNL operators, was a major practical problem, given that investments were lumpy and not necessarily clearly demarcated as urban or rural.

Table 10.3
Further Revised Indian ADC Regime (2003)

Source: TRAI, January 6, 2005.

Table 10.4
Provision of Rural Fixed Lines in India by Operator and Technology
Percentage Distribution of FWT Lines in the Total Fixed Subscriber Base of Fixed Operators and Percentage of Rural Lines in Total Fixed Lines Provided by Fixed Operators as on September 30, 2004

Why should Operators other than BSNL not Receive ADC?

TRAI was of the view that access deficit compensation 'did not arise out of any legal right but out of consideration of smoothening the transition process during competition, that is, providing support during the transition period, when costs of access are not fully recovered from the revenues from access line monthly rentals under the existing tariff regime due to competition in the market and other factors'.

TRAI calculations indicated that considering the total areas of operation, the access deficits of non-BSNL fixed line operators were much lower than BSNL's, if not zero.

Why should WLL-F be Treated Similarly to Fixed Wire-line?

For ADC purposes, calls to and from WLL-F (Wireless Local Loop-Fixed) had always been treated the same as calls to and from fixed lines. In fact, fixed wireless lines had become the primary method of expansion of the non-BSNL fixed line operators, as seen in Table 10.4. But, the question had arisen whether WLL-F could be equated to fixed because WLL-F deployment was similar to mobile services.

TRAI accepted that the access deficit of WLL-F was negligible and that misuse in terms of physical movement of WLL-F phones was taking place. But given the inability to distinguish calls originating from fixed lines and WLL-F, it concluded that the regime should be maintained until the technical problem was solved. In the meantime, TRAI directed that WLL-F phones be locked (to a particular section of the base station) to limit physical movement of the phone.

Should a Revenue-share Scheme be Introduced to Calculate ADC?

Another recurring issue was the shift to an ADC regime based on revenue share. Here, a crucial factor was the large transition that would be required if the ADC amount per minute for international calls was computed as a revenue share. TRAI was, correctly, of the opinion that the transition would be easier if the corresponding per-minute amount was lower and could be distributed more easily over a larger base of minutes and revenues. This would become possible as the increased subscriber base would generate a larger number of minutes-yielding ADCs, even as the ADC rate decreased. Thus, the 'large transition' could be avoided.

UNRESOLVED ISSUES WITH ADC

The ADC, even after repeated revisions, continued to be conceptually complicated, discriminatory, technologically biased, and opaquely calculated. Some issues that require remedial action are discussed here.

ADC has a Specific Objective that does not Include Any 'Rural Obligations'

The government and TRAI are on record that ADC is required to make basic telecom services affordable to the common man. Some in the industry have interpreted this at different times to be a 'subsidy' required to provide access to rural and remote areas of the country where revenues do not cover the cost of providing such services because rentals are fixed by the regulator at levels below cost.

From November 5, 2003, urban tariffs were forborne by the regulator, that is, are not regulated. Thus, ipso facto, ADC was perceived as compensation for below-cost tariffs in rural areas. Moreover, given that urban tariffs for basic services had been left to market forces, TRAI should not have allowed urban fixed lines to attract ADC.

But ADC had a far broader rationale; to give the incumbent sufficient time to recoup its stranded costs. Otherwise, a substitution of technologies may have occurred, penalizing the incumbent for its previous choice of copper for the local loop. It would also drive up demand for scarce spectrum, improperly priced, and therefore, difficult to manage properly.

The objective of ADC must be made very clear as not including a rural obligation. It has a rural bias because the access deficit is higher in rural areas because of affordability constraints and regulated below-cost tariffs. Also, it must be made clear that ADC is based on the overall access deficit.

BSNL is Provided ADC for High Historical Costs, so other Fixed Line Operators do not Qualify for ADC

If the access deficit is defined for fixed lines, a strong case is made for providing ADC support regardless of whether the service provider is BSNL or not. However, TRAI contends that ADC is there to smoothen the transition to competition for BSNL.

The counter argument is that BSNL was created out of the Department of Telecom (DoT) after enjoying decades of monopoly profits and that the transition to a competitive market should by now be complete. For DoT's provision of services in rural areas prior to 1995–1996, private operators cannot be penalized.

TRAI contends, however, that BSNL does not have any accounts for the period when it was a unit of DoT and that it can be assumed that BSNL did not earn monopoly rent that would have covered its large and costly rural roll-out obligations. However, this argument is suspect because the outcomes, not only of universal service, but of roll-out in general were poor as evidenced by long waiting lists. Also, it is widely believed that the incumbent is burdened by large organizational inefficiencies which are being subsidized by ADC.

The Existing ADC Regime Reduces Incentives for Lower-cost Technology Solutions in the Rural Areas

The continuation of ADC in the current format also needs to be reconsidered because of its technology bias. BSNL has, for a long time, provided rural services using wire-line technology. However, the cost of providing the same service using wireless technology is lower, as is being observed by non-BSNL operators. Even though BSNL was free to deploy new wireless technology after private operators were allowed to adopt WLL as an access technology in 1998, it did not do so in a significant manner, as shown in Table 10.4.

But, ironically, ADC is calculated based on the historical cost of providing the more expensive fixed wire-line services. The question then is whether TRAI should penalize operators for deploying latest technologies vis-à-vis BSNL's choice of older and more expensive technology. The present mechanism compels private operators to compensate BSNL for its 'wrong' choice of technology. Some stakeholders go as far as to argue that BSNL should refund the ADC for all DELs it added after October 2000. If BSNL were to increase deployment of wireless technology, the costs that need to be supported by the ADC would diminish.

The present ADC regime stifles the introduction of lower-cost technology by new operators in rural areas where market driven lower tariffs may not provide sufficient revenue to make such solutions viable on top of ADC to be paid to BSNL for their high-cost and subsidized solutions. In effect, the present ADC regime precludes the emergence of niche networks using innovative technologies in rural and remote areas.

Is the Argument Supporting ADC for Basic, Stand-alone Services Valid?

Many in the industry argue that internationally accepted pre-requisites for establishing an ADC regime have not been satisfied in India: the service must be stand-alone, the tariff must be fixed by the regulator, and revenue from the service must be below costs.

Whether the service provided by BSNL is a stand-alone product or a part of a bundle of other services—such as long distance, international and value-added services—is questionable. In fact, it is alleged that BSNL is using common infrastructure for its fixed and mobile services in remote and rural areas, thereby spreading the capital expenditure and revenue recovery over a wider range of services. This provides BSNL with an advantage over its competitors.

But at a broader level, the question is why only basic services? At the time ADC was initiated (2002–2003), basic telecom service providers who had cross-subsidized rural low revenue areas from high long distance tariffs, were no longer able to do so because of eroding margins in the long distance segment. The ADC was designed to cover the gap between tariff and costs. The emphasis on basic service operators was because the number of fixed-line subscribers far exceeded the mobile subscribers at that time, and the available forecasts showed dominance by the incumbent basic service operators (BSNL and MTNL) for the next few years. However, circumstances have changed. The growth of fixed and mobile subscribers during 2004–2005 in comparison to earlier years is shown in Table 10.5.

The number of mobile subscribers exceeded the number of fixed subscribers by end 2004, weakening the rationale for placing an emphasis on basic telecom services.

Therefore, there may be merit in eliminating the bias towards fixed wire-line access services. However, this would reorient the ADC objective from that of protecting BSNL to network development in rural areas.

Table 10.5
Growth in Indian Fixed and Mobile Subscriptions

Does the ADC Regime Encourage Parallel Markets?

Many experts feel that the ADC on international calls should continue on a per-minute basis until the overall ADC requirement declines significantly. However, this requires the policing of bypass. The main problem with the ADC scheme is that it rewards those who can evade its pricing and payment rules. Rapid technological development and convergence have made prohibitions of some types of bypass of ADC regulations unenforceable. ADCs will encourage the use of technologies that do not have to pay ADCs or pay ADCs for only one part of the service, such as can occur when a mix of packet and switched technologies are used. The use of VSAT, private networks, call-back, and possibly off-peak transmission over cellular and fiber infrastructure owned or leased by mobile operators, are other examples of ways the rules can be, and are, avoided.

ADC Needs Greater Calculation Transparency

BSNL continues to argue that many errors have been committed in calculating ADCs payable to BSNL and that compensation is due. This amount is said to be some INR 64,650 million which is in addition to the arrears due to BSNL of approximately INR 110,000 million, because their billing systems could not accurately identify ADC-eligible calls.

Related to this point is the transparency of calculating the ADC. There have been complaints that TRAI has been unwilling to share data and methods. Responses to the consultation paper point out that under the Act, TRAI is required to ensure transparency while exercising its powers and discharging its functions. They point out that having issued the Access to Information Regulations in March 2005, which upholds the rights of all stakeholders to have access to the information obtained or received by the TRAI, the Authority has not been forthcoming with certain information, referring to the VSNL vs. TRAI vide Appeal No. 5 of 2005 decision of 28.4.2005.

Private operators further argue that with BSNL being the beneficiary of the subsidy, it should face scrutiny and justify the quantum being claimed, more so because it is a fully state-owned enterprise.

Difficult to Implement

Implementation of the ADC regime continues to be onerous. Having started in December 2001 and having issued the first order in May 2003, the implementation was revised and re-implemented in February 2004 (delayed from December 2003), and again in February 2005. But, as of mid-2005, the implementation problems continue.

WAY FORWARD WITH ADC

While conceding that BSNL has been and continues to be the principal provider of telecom services to rural users of India, it has been established that the current ADC regime provides an undue competitive advantage to BSNL and subsidizes inefficient technology at the expense of its competitors.

To meet the objectives of the Government of India and TRAI, the simplest solution would be to merge the ADC and the existing USO on simple, technology-neutral, revenue-sharing principles. Disbursements from the combined fund could be made to compensate for mandated 'below cost' services being provided by any operator in any location (depending on where tariff ceilings are in place).

CONCLUSION

This chapter sought to critically analyze the Indian experience, provide recommendations for Indian regulation and identify generalizable principles for adoption of ADC elsewhere.

The analysis suggests that, notwithstanding the many explanations TRAI has provided to industry, India's ADC appears to be a politically-motivated tax levied on private operators to protect the incumbent, its employees and its copper-wire access network during a very long transition to competition. Based on this irrational foundation, TRAI has tried to design a workable ADC. The results would have been much worse if a different organization, which was less consultative and had less expertise, had tried it. Through repeated consultations and revisions, TRAI succeeded in grinding away at the most pernicious parts of the scheme.

ADCs have sustained BSNL's high cost operations, not due solely to its high-cost access network that TRAI refers to, but also due to its bloated staff and inefficient processes. The reason why ADCs have not more seriously harmed private operators has little to do with TRAI's purported safeguards. The damage has been minimized because the massive growth in the mobile sector generated a large volume of minutes which allowed a reduction in the ADC rate.

ADCs appear to have created a fixed wire-line bubble that would burst unless continuously supported by ADC or some other form of subsidy. But such subsidies cannot be sustained for long without distorting the entire market. What happens when the ADC is phased out completely? If BSNL has then 'grown up' to face a competitive market, well and good; if not, does it mean that taxes extracted from private operators to keep BSNL afloat were a complete waste?

The following generalizable principles emerge from the discussion in this chapter.

Clearly Articulate the Objective of ADC

If the implementation of an ADC is being considered, the objectives of such a program must be clearly articulated and industry buy-in obtained. In the Indian case, the ADC was and continues to be considered as a politically motivated tax levied on private operators to keep the incumbent afloat. This has created an environment of animosity, which is harmful to progress.

Ensure that the ADC Design does not Distort the Market, and does not Penalize Efficient Technology and Reward Inefficient Technology

Any ADC should not end up distorting the existing and potential market by penalizing the use of innovative, low-cost technology to serve rural communities; the very places the ADC is intended to serve. Calculating the ADC based on the historical cost of providing expensive fixed wire-line services gives this result.

ADC Calculations should be Kept Simple

For an ADC regime to succeed, its calculations must be kept simple. When the calculation is complex, practical problems of implementation multiply. Complexity also creates opportunities for evasion of payment, which has a corrosive effect on the entire sector.

ADC Calculations should be Justifiable and Transparent

One of the important lessons from the Indian case is that it does not pay to use accounts of only one player in the market when there are multiple players. Any ADC calculation should be based on justifiable cost figures and must be transparent.

Do not Introduce an ADC if its Objectives can be Met by an Existing Program

The most important generalizable principle is that countries need not introduce ADC if the objectives of such program can be met otherwise, particularly by a universal service obligation or fund. There is little value in multiple programs attempting to meet the same general objective; in fact, they can work at cross purposes. In the Indian case, the simplest approach would be to merge the ADC with the existing USO on a simple, technology-neutral, revenue-share basis.

NOTES

¹ India has 21 telecom circles. Intra-circle means calls within a circle and inter-circle means calls between circles.

² TRAI notification, October 29, 2003, p. 73.

REFERENCES

COAI (Cellular Operators Association of India) (2004). Response on the TRAI Consultation Paper on ADC Regime. July 14, 2004. Retrieved October 17, 2007, from http://www.coai.in/docs/COAI%20Response%20on%20the%20TRAI%20Consul tation%20Paper%20on%20ADC.pdf

Intven, H. (Ed.) (2000). Telecommunications Regulation Handbook. Washington DC: infoDev.

Moonesinghe, A., de Silva, H., Silva, N. and Abeysuriya, A. (2007). Telecom Use on a Shoestring: Expenditure and perceptions of affordability amongst the financially constrained. In W.H. Melody and A. Mahan (Eds.), Diversifying Participation in Network Development: Case studies and research from WDR Research Cycle 3 (pp. 33–42). Montevideo: LIRNE.NET.

TRAI (2003a). Telecom Regulatory Authority of India Consultation Paper on IUC issues. Consultation Paper No. 2003/1, May 15, 2003.

TRAI (2003b). Telecom Regulatory Authority of India Notification. New Delhi, January 24, 2003.

TRAI (2003c). Telecom Regulatory Authority of India Notification. New Delhi, March 27, 2003.

TRAI (2003d). Telecom Regulatory Authority of India Notification. New Delhi, November 25, 2003.

TRAI (2003e). Telecom Regulatory Authority of India Notification. New Delhi, December 12, 2003.

TRAI (2003f). Telecom Regulatory Authority of India Notification. New Delhi, October 29, 2003.

TRAI (2003g). Telecom Regulatory Authority of India Notification. New Delhi, June 16, 2003.

TRAI (2004a). Growth of telecom services in rural India: The way forward. TRAI Consultation Paper No. 11/2004.

TRAI (2004b). Consultation Paper No. 13/2004. Telecom Regulatory Authority of India, Consultation Paper on Access Deficit Review. New Delhi, June 23, 2004.

TRAI (2005a). Consultation Paper No. 13/2004. Telecom Regulatory Authority of India Press Release No. 3/2005, January 6, 2005.

TRAI (2005b). Telecom Regulatory Authority of India Responses received on Consultation Paper no. 4/2005 dated March 17, 2005 on Interconnection Usage Charge Review.

TRAI (2005c). Consultation Paper No. 4/2005. Telecom Regulatory Authority of India Consultation Paper on Interconnection Usage Charge Review. New Delhi, March 17, 2005.

TRAI (2006). Telecom Regulatory Authority of India. February 23, 2006 Press Release No. 16/2006 TRAI Issues Amendment to Interconnect Usage Charges Regulation, 2006.

Zainudeen, A., Samarajiva, R. and Abeysuriya, A. (2006). Telecom Use on a Shoestring: Strategic Use of Telecom Services by the Financially Constrained in South Asia. WDR Dialogue Theme 3rd cycle Discussion Paper WDR0604, Version 2.1. Retrieved October 14, 2007, from http://www.lirneasia.net/wp-content/uploads/2006/02/Zainudeen%20Samarajiva%20Abeysuriya%202006%20teleuse%20strategies.pdf

Document(s) 14 of 21