World Dialogue on Regulation

Research conducted by LIRNEasia shows that the telecom subsidy mechanism operationalized through India’s Universal Service Fund (USF) has unduly served the interests of the government owned incumbent telecom company Bharat Sanchar Nigam Limited (BSNL).

For the disbursement of the USF operators were asked to bid for the least amount of subsidy they required to roll out in the rural areas. However, the least-cost subsidy auction favored the incumbent and resulted in the attenuation of competition. Prima Facie the mechanism was transparent, but the auction design restricted participation only to operators already present in the defined service areas.

The auction would have led to minimal distortions in the market only if all the bidders had non-discriminatory open access to the essential facility, i.e. the backbone infrastructure. This kind of access regime is a precondition for the existence of competitive markets across infrastructure sectors, including telecom. However, BSNL was the only operator with the infrastructure in place; it foreclosed fair participation in the auction by refusing to lease out its infrastructure on cost-oriented and non-discriminatory terms. Not surprisingly, the incumbent leveraged its advantageous vertically integrated status and won 75 percent of the auctions. The regulator had not set in place an effective access regime in place prior to the auctions.

Ms Payal Malik, Senior Researcher at LIRNEasia and Senior Lecturer in Economics at the Delhi University, conducted the research on the Indian USF, which is the largest is the world that is available at on the World Dialogue on Regulation website, along with her op-ed piece on the subject in the Indian Express.

Ms Malik stated that, in the presence of a very restrictive licensing regime, few firms participated in the auction precluding competition for the market (as opposed to competition in the market). According to her, “the provision of the subsidized service mostly by the incumbent, who will receive a large portion of the subsidy, will discourage other operators from entering, as they will not be able compete without the subsidy, and would therefore preclude competition in the market.”

The Telecom Regulatory Authority of India (TRAI) has attempted to address these anomalies in its recent recommendations on the Growth of Rural Telecom Services (see www.trai.gov.in). TRAI has recommended that Universal Service Fund disbursements be used for building infrastructure. In addition, it has made a very progressive
recommendation that all newly constructed and already existing infrastructure be shared on open and non-discriminatory terms, Ms Malik said. TRAI’s recommendations are currently under consideration by the government India. Ms Malik stated that “the Government of India should go ahead and implement these recommendations if it is
serious of closing the digital divide and not engage in sheer populism by just making lip service to rural telephony.”

Ms Malik said that all over the world the attention of policy makers is beginning to focus on the crucial importance of open access regimes for backbone infrastructure. “The lessons of the Indian USF least-cost subsidy auctions are relevant for all South Asian
countries including Sri Lanka,” Professor Rohan Samarajiva, executive director of LIRNEasia said. “The efficacy of the least-cost subsidy auction for regional telecom networks in Sri Lanka depends on an effectively enforced open-access regime for Sri Lanka’s existing fiber optic ring,” he emphasized. Without that, the auction could
introduce serious anti-competitive distortions into the Sri Lankan telecom market, Professor Samarajiva said.

Download the report.

For more information:
Payal Malik
Rohan Samarajiva