Maran’s
OneIndia Plan: Attacking Rural
Telephony

Prabir
Purkayastha

THE
OneIndia plan, which the minister for Communications, Dayanidhi Maran has thrust
down the throat of reluctant BSNL and TRAI, has serious repercussions for the
telecom sector. If the problems of the sector is growing rural urban imbalance
and slowing down of landline penetration, this scheme can only make matters
worse. It also has gone back to the old days where the minister and the
government decided everything including tariffs. In this case, after some
initial resistance, TRAI has fallen in line with the minister and produced a new
ADC regime, which essentially complements the OneIndia tariff plan. The drop in
incomes of the two telecom PSUs – BSNL and MTNL — due to lower long distance
revenue and reduction of ADC transfer is likely to be of the order of Rs 5-7
thousand crore. This could completely erode their profit base. As it is clearly
BSNL that is providing any rural telephony today, such a scenario would hurt the
rural consumers the most, even though the justification for the OneIndia scheme
is its supposed benefit to such subscribers.

BASIC
THRUST OF THE
ONEINDIA SCHEME  

The
basic thrust of the OneIndia scheme is to bring down the costs of long distance
calls within India to Re 1 per minute from the earlier one of Rs 2.40. For those
availing of the OneIndia tariff plan, the rental has been raised to Rs 299 per
month and all free calls slashed. While the OneIndia plan lowers the tariff for
the well-off consumers, the tariff of the PCOs, the primary instrument used by
the less well-off consumer for long distance calls, have been left untouched: it
is still Rs 2.70 per minute or 170 per cent more than the OneIndia tariff.

As
those that do not wish to avail of the OneIndia facility would stay with the
current rentals and free calls, the drop in long distance revenue would have to
be made up by greater call volumes that might be generated by the lower call
rate. Such a high surge in volume to compensate for this large drop is unlikely.
Therefore, slashing long distance tariffs by a whopping
58 per cent — a possible loss of Rs 3,000 to 4,000 crore — can only affect
BSNL adversely.

The
second attack on BSNL’s revenue is lowering of the Access Deficit Charge that
BSNL gets from other telecom operators. In order to reduce the long distance
calls to Re 1 per minute, the Access Deficit Charge (ADC), which was a
substantial portion of every long distance call, had to be brought down
substantially. Earlier, 30 paise per call was an ADC levy, which resulted in an
annual transfer of about Rs 5,000 crore to BSNL for subsidising its rural
operations. TRAI finally has changed the ADC regime from a call based one to
revenue sharing and reduced this transfer by about Rs 1,800 crore. It has
provided for a revenue share of only 1.5 per cent of the total revenue of all
operators to go to the ADC account and also reduced international ADC rates by
more than 50 per cent: Rs 1.60 for incoming and Re 0.80 for outgoing calls.

The
net result of all this is that BSNL and MTNL are likely to lose Rs 3,000-4,000
crore of their long distance revenue even after higher landline rentals are
taken into account.
With the additional loss of Rs 1,800 crore from the lower ADC levy, at one
stroke, Maran has converted what were still thriving PSUs, even under a strong
competitive regime, to possible basket cases. Effectively, BSNL, which is the
only company providing rural telephony, is being asked to take a major hit in
its revenue, while companies that are wilfully flouting the terms of their
license of providing 10 per cent rural telephones get away scot-free.

It
is not that Maran’s idea of long distance tariff being based on a flat rate
rather than distance is without any merit. There is little doubt that the model
of telephony is changing from the earlier distance based circuit-switching
network (Point Switching Telecom Network or PSTN) to the current data based
packet switching networks. The Internet model and the earlier voice based
telephone models are quite distinct. In the earlier predominantly voice
networks, the distance was the basis for charges: the longer the distance, the
more you had to pay. However, the data networks do not care what is the distance
travelled: the Internet does not bother about either the route or the distance
that the data packets travel. As Internet and broadband increasingly dominate
the telecom scenario, with even voice calls being transmitted over the Internet,
the Internet model with its death of distance will emerge as the dominant
revenue model.

THE
BASIC ISSUE

The
issue here is not that revenue models have to change from a distance based one
to a data based model but the timing and extent of this change.
In all telecom networks, the long distance revenue has always been used to keep
the cost of telecom access low. The simple argument for doing this is that
unless the telecom network expands, the call rates and consequently, the revenue
cannot grow. Only the rich calling each other does not generate enough traffic;
they also need to call a whole range of other people who may not be willing to
pay for high cost connections. So if we want increased telecom penetration and
high teledensity, we need to keep the costs of connecting to the network low.
Once we have achieved high teledensity, we can then afford to raise the costs of
telecom access. But if it is done before this, it is likely to deter a number of
people from going in for installing telephones. So instituting a telecom regime
where the long distance calls do not provide any surplus for the local network
can only force the local call rates and access charges to rise and would work
against the immediate goal of increased teledensity.

It
is not that the long distance call rates in India are high. They have come down
dramatically in the last few years and are well below most countries today. It
costs less for a mobile subscriber in Germany to call India than to make a local
call there. Therefore, the argument of needing to lower long distance rates here
and now makes very little sense. It is true that that as we go forward with
Voice Over Internet Protocol (VOIP) etc., a model free of distance would need to
be implemented. The question here is when should do this be done and after
making the tariff distance free, what should it actually be? Maran’s decision
of imposing a 1-rupee tariff without addressing how to pay for the low cost
access required to increase teledensity, could cost the country dear. And if it
also means bankrupting BSNL, the only ones providing rural telephony, this would
be a double disaster.

RURAL
URBAN GAP

If
we look at the telecom scenario currently, we will see that the telecom boom has
not only passed the rural subscribers by, it has widened sharply the rural urban
gap. As TRAI itself has noted “the large differential between rural (1.94
per cent) and urban teledensity (31.1 per cent) cannot be sustainable. The
authority recognizes that without focus on rural areas, sizeable growth in
telecom sector would not be possible.” (TRAI Press Release, October 3, 2005). The
second disquieting trend in telecom is the virtual stagnation of landlines while
the mobile sector is still maintaining its rapid growth. Of the 32 million
new connections between April 2005 and January 2006, 31 million were mobile
phones. Obviously, the structure of voice telephony market is shifting rapidly.

TRAI
has also noted in its Consultation Paper on Interconnection Usage Charge Review,
March 17, 2005 that the installation of Village Public Telephones has come down
from around 60,000 in 2001-02 to about 15,000 in 2004 and rural lines added in
the same period have also dropped by about 40 per cent.
In the same period, the mobile “revolution” has passed over the rural areas
and the smaller towns. As the table below shows, the rural areas have virtually
no coverage and only cellular networks cover about 1700 towns out of 5,200 towns
in the country.

Table
1

Present Coverage
of Mobile Networks

(Population
Coverage 20 per cent)

Source:
TRAI Consultation
Paper No. 4/2005 Interconnection Usage Charge Review, March 17, 2005

RURAL
TELECOM GROWTH
PATTERNS

Let
us look at the rural telecom growth patterns. It is obvious that rural
telephones are more costly to install and generate lower revenue. Unless there
are either penal provisions or other incentives, telecom service providers would
not readily install rural telephones. TRAI Consultation
Paper No. 4/2005 Interconnection Usage Charge Review, March 17, 2005 shows that
not only have the private Basic Service Operators not provided rural telephones,
bigger the player, the smaller the rural telephone lines they have provided.
Major players like Reliance and Tatas have not even provided fixed lines. They
have preferred to use the Wireless route in order to keep their capital costs
low and attack the high–end market. As against less than 1 per cent rural telephones being provided by
private Basic Operators, fully 35 per cent of state-owned BSNL lines are in
rural areas. Obviously, without BSNL, we would not have any rural phones in
the country.

The
private players have willingly paid a penalty, pegged more as a rap on the
knuckles than a serious one, than fulfil their license terms and conditions of
10 per cent rural lines. Both TRAI and DoT have preferred to wink at this
continued violation by private players while bemoaning about poor rural
teledensity.

While
the issue of flat rate and ADC are important as they pertain to the current
evolution of the network, there are larger structural changes taking place that
also needs to be addressed. It is now obvious that voice traffic will
increasingly shift to the mobile networks. So how do the PSUs with their huge
legacy investments in copper cables compete in the market? It is time the PSUs
realise that what they view as their sunk costs – the copper cable network –
is precisely their strength. They need to think that in the future, data
networks will largely be the land based while the voice network will be
wireless. The focus for their landline operations has to therefore shift to
Internet and Internet based services. Here again, MTNL and BSNL are
concentrating on only numbers and leaving the high value segment to be gathered
up by the private players. Unless they can generate a business model that takes
into account the emerging structure of the telecom market, just a defensive
battle is not going to be enough. They have to learn that business as usual
does not work when the usual business is changing.