India: Universal Service Fund may fail to lift off

April 3, 2002 – According to The Hindu Business Line, only days after the Department of Telecommunications (DoT) announced guidelines for Universal Service Obligations (USO), the proposed fund, to be set up to compensate service providers for their unremunerative operations, may be a non-starter. Sources say the proposed Universal Service Fund (USF), to be made up of a fixed portion of the revenue-sharing licence fee being collected from the operators, may get no contributions from the largest telecom company – Bharat Sanchar Nigam Ltd (BSNL).

The sources noted that both of the State companies – BSNL and Mahanagar Telephone Nigam Ltd (MTNL) – are the major contributors to the licence fee kitty and have a near monopoly across the country. BSNL would be paying close to Rs 1,000 crore in licence fees this year and MTNL around Rs 400 crore. However, the BSNL licence fees already paid to the DoT have been reimbursed in full as part of the terms of its privatisation in October 2000.

The DoT has not yet announced whether BSNL will continue to be reimbursed. If it is, the fund could remain virtually empty. The private basic operators, who have just commenced operations, will require a number of years to reach the revenue levels of these two PSUs. Their contributions in the form of licence fees are therefore minimal. The DoT, in its enthusiasm to start the USF, has not yet determined the finer details of the guidelines, which could ultimately make or break the fund.

The sources also pointed out that the Telecom Regulatory Authority of India (TRAI) had recommended the creation of a USF administrator and an independent board to oversee the fund. Instead, the DoT has decided to administer the USF itself, leaving no scope for transparency.

Service providers would obtain funding through a multi-layered bidding process on a Least Quoted Subsidy support basis. The lowest bid requiring the least subsidy shall be accepted subject to the ceiling of the benchmark cost, as calculated by the DoT. The DoT has further noted that the first round of bidding will be amongst the existing access providers in the concerned service areas. Where no bids are received from a BSO in a given area, or the lowest bid is higher than the benchmark, there will be a new round of bidding in which all operators in the country can participate.

Some observers believe that if the existing provider is unwilling to provide connections in unremunerative areas, it is unlikely that an operator from another area would wish to do so, especially if there is insufficient incentive. On the other hand, the incumbents have been very slow in reaching rural villages and, in principle, the USF should enable newcomers to serve areas which are unspoken for. However, the key will be whether the USF is truly organised to offer this option, and whether TRAI is able to enforce interconnection rules that would make it possible for new entrants to thrive.