Poor Teledensity: A Recipe For Backwardness

THE telecom sector, vital for the economic growth of the country is now entering a phase where the well off subscribers bills are being reduced, while the pace of telecom penetration reduces. The last year has shown that the new lines added in basic services –landlines – have been less than half that of earlier years. BSNL, the major landline operator has seen a huge number of phones, estimated to be of the order of 2.5 million being surrendered. If this continues, increasing telephone coverage (Teledensity) will not go up from its low figure of 4 to 15 by 2012 as projected. Even more worrying is that while cellular lines are growing, the landline penetration is not. Obviously, the well-off subscribers already using landlines are pushing the cellular market, while the number of new users is not increasing commensurately.

The telecom sector has seen major upheavals in the last few years. Neither the National Telecom Policy of 1994 nor the New Telecom Policy of 1999 has clarified matters. Worse, the Regulator is now playing second fiddle to the government on issues such as inter-connection charges, local mobility through Wireless on the Local Loop (WiLL) and the attempt by Reliance to make it into a cellular service, and other issues. Amazingly, the ministers concerned, first Pramod Mahajan and then Arun Shourie, have been organising meetings with all the service providers without the presence of either the consumers or the regulator. In any other country this would be considered as attempting to form a cartel and penalised. Here the ministers are leading this activity, bypassing both the consumers and the regulator.

DECLINING GROWTH OF TELEDENSITY

It is not surprising that at the end of the day, the users of landlines are seeing a sharp increase in their charges. Both the cellular lobby and now the WiLL lobby are picking the pockets of the landline users, with the active help of the TRAI and the ministers of Telecom. Worse, the surplus for expanding the basic network is steadily declining. The network expansion that was of the order of 22-23 per cent in the 90s has already dropped to about 16-18 per cent in the last two years. If the surplus declines further, as it is likely to after the latest TRAI decisions, the expansion of the network is going to decline even more. Increased competition, it is now apparent does not increase Teledensity.
DELs and Cellular Lines 92-02

Note: Figures taken from DOT’s Annual Report and COAI’s figures, websites www.dotindia.com and www.coai.com. Some of DOT’s figures have been modified by COAI figures.

The critical issue in the telecom sector was identified in NTP 94 as poor Teledensity and rural connectivity. Cutting the private parties in was supposedly for increasing capital investments, particularly in rural areas. Telephone on demand and connecting every village by telephones by 1997 was the aim of 1994.

Instead, the private operators have concentrated on providing phones only to the rich subscribers and have flatly refused to provide 10 per cent rural telephones stipulated in their license conditions. The basic service operators have provided only about 7,000 phones as against their commitment of 100,000 rural phones. The total number of telephones provided by all the basic private service providers is 1.07 million (March, 2002). BSNL and MTNL have added more than 20 times that number telephones in the same period, (22.986 million, 97-02).

If we look at the economics of the telecom network earlier, it was the surplus of the long distance network – both national and international long distance — that was providing the capital for expansion of the telecom network. Incidentally, the total budgetary allocation in the last 50 years for telecom from government’s funds for expansion of the telecom network is negligible: against the market value of its assets of about Rs 80,000 crore (at current replacement costs), the funds from the Government is less than Rs 200 crore. The entire expansion of the sector has taken place through the surplus generated from long distance calls.
The entire thrust of the earlier policies was to keep the cost of connecting to the network low and charge higher rates from long distance calls. The understanding was that the surplus from long distance calls, which are made by either business or well-off subscribers, should be used to expand the network. It can be argued that the long distance calls were being charged at an exorbitant rate and these rates need to come down. However, arguing for competition in long distance meant that the local calls and the cost of connections would increase, as the long distance operator would no longer underwrite the expansion of the basic network. Even after this, the surplus with the local operator would not be enough to expand the network substantially. And this is what the current scenario suggests. So when Arun Shourie suggests that not increasing the rates as allowed by TRAI will lead to BSNL’s surplus disappearing he is not wide off the mark. What he neglects to tell us that is precisely the objective of the BJP’s current policies. Opening the long distance to competition and handing over the most lucrative part of the network to – VSNL to Tata’s – was meant to reduce BSNL’s surplus while handing over the most profitable sectors of the network to various private operators.

DISAPPEARING SURPLUS

If the surplus disappears from BSNL’s account, what happens to the twin goals of increasing Teledensity and rural telephony, allegedly the reason for private participation in the first place? Some have suggested that the Universal access levy will take care of rural telephony. The figures suggest otherwise. Last year, BSNL suffered a loss of Rs 3,000 crore on its rural network. The entire Universal Access levy amounts to only Rs 1,300 crore, and even in this only Rs 300 crore has been given to BSNL. So obviously, the current provision of universal access does not cover even the current pace of expansion of the rural network, let alone the requirement of connecting all the villages in the near future. And if the surplus disappears, the only way to expand the network will be through borrowings at commercial rates of interest, pushing up the costs and finally the subscribers’ rates.

The latest TRAI’s Consultation Paper on Interconnect Charges brings out the problems with the current telecom policies. TRAI has calculated that the landline operators have a deficit of Rs 13,000 crore currently based on the current rentals and call charges. One may question whether this deficit (called Access Deficit) is as high as TRAI has projected, but there is little doubt that after reducing long distance charges, there is now increasing pressure of raising the local call rates and rentals to cover this deficit. It substantiates what we have said all along that the current path of telecom development would lower the rates of well-off subscribers and raise the rates for the low-end consumers.

The TRAI has attempted to cover this access deficit of the local network by imposing high interconnect charges. The net result of this is that now there is an enormous advantage of restricting the calling to one operator who then do have not to pay interconnect charges. Already, Reliance has offered very low rates to corporate houses who are taking a large number of connections so that they can restrict their calling each other only to the Reliance network. The high interconnect charges therefore will see a large number of corporate subscribers desert the local operators unless hey are offered similar terms. Trying to compensate the fixed line operators of their drop in long distance revenue by high interconnect charges do not seem to be practicable either.

Are their alternative ways of covering the access deficit? A simple way would be to introduce differential rates for peak time and off peak time rates. By this, the domestic consumer can have low calling rates if he calls at night or in the mornings while the business consumer would pay for higher peak time charges. This is also eminently fair, as the peak time user is the one who causes the congestion in the network and the need of the network to be upgraded. The second, is to not charge the interconnect based on calls but introduce it as a capital cost in the networks: each operator has to bear this cost and not the subscribers.

This will ensure that whether the call is limited to his network or across two networks, the cost of the call remains the same. This will eliminate attempts to offer attractive rates for restricting the calls to one network. Finally, TRAI has to move for a single license for the operators and leave the technology choice cellular, WiLL or fixed landline to the operator. This will ensure that the call rates are uniform and not have the kind of complexities we are seeing with multiplicity of operators separated in different types of regimes.

It can of course be argued that cellular services should no longer be looked at as premium services. Given the costs of the cellular network, which is roughly of 1/5th that of the landline cost per line, there is a strong argument for not regarding cellular services as a premium service. In that case the cellular rates have to come down substantially, and be in line with the landline rates. In such a scenario, the calling party pay regime and equitable interconnect charges would be simple. It is having a high cellular charge as well as asking the landline subscriber to bear this burden when she calls the cellular subscriber that is patently unfair. And it is this policy that TRAI has introduced which will push up the bills of the landline subscriber.

INCREASING RATES

The last few years have seen the rates of landline subscribers go up through a variety of means. One is reducing the pulse rate from 5 minutes to 3 minutes. Another is increased rentals and reducing free calls. The last has been the imposition of a Calling Party Pay regime through the interconnect charges by which the call of the landline subscriber to a cellular one is charged at a high rate. In effect, the low-end landline user is being asked to subsidies the more well off cellular services.

We are reducing the surplus of the long distance network without any considerations of how we will find the money for expanding the network. And if the local call charges go up as they are doing, this will mean that either the Teledensity will go down because the local service providers will not have any surplus or the new subscribers coming into the network will drop as the people will not have money to pay for the phones. There is an obvious relation between the cost of connecting to the network and the per capita income of the population. If the cost of accessing the network is high as a proportion of the per capita income, then also Teledensity is low.

If local network is treated like any other commercial activity, the service providers can set high tariff and generate high profits. In such a scenario, the Teledensity is bound to be very low. Sahel region in Africa, one of the poorest regions in the world has the lowest Teledensity and has one of the highest profit per subscriber in the world. So if Teledensity is the objective, we are looking at keeping the access costs low and realising the revenue from those who the network intensively. Instead, the current policies, while paying lip service to Teledensity is putting in place a set of policies that will progressively slow down telecom penetration. The well off users will benefit as the long distance rates come down, but the price will have to be paid through lower Teledensity. That this is already happening is clear from the table given earlier: the lines added by BSNL and MTNL in 01-02 were less than half that provided by them in 00-01. The warning signs could not be louder.

The future of BSNL is critical for the country. This is not only an issue of privatisation but of increasing telecom penetration in sectors and areas where without BSNL, there will not be telecom access. The private operators will go only there where they can make profits. They will neither go to rural areas nor provide telephones in those areas that are economically backward. Similarly, providing phones in far flung remote areas do not make commercial sense for private operators. However, if these areas are not connected by telecom services, we are condemning them to continued backwardness. For all these sections, BSNL provides the only hope as also its continuation in the public sector. The last few years have seen the rates of landline subscribers go up through a variety of means. One is reducing the pulse rate from 5 minutes to 3 minutes. Another is increased rentals and reducing free calls. The last has been the imposition of a Calling Party Pay regime through the interconnect charges by which the call of the landline subscriber to a cellular one is charged at a high rate. In effect, the low-end landline user is being asked to subsidies the more well off cellular services. We are reducing the surplus of the long distance network without any considerations of how we will find the money for expanding the network. And if the local call charges go up as they are doing, this will mean that either the Teledensity will go down because the local service providers will not have any surplus or the new subscribers coming into the network will drop as the people will not have money to pay for the phones. There is an obvious relation between the cost of connecting to the network and the per capita income of the population. If the cost of accessing the network is high as a proportion of the per capita income, then also Teledensity is low. The future of BSNL is critical for the country. This is not only an issue of privatisation but of increasing telecom penetration in sectors and areas where without BSNL, there will not be telecom access. The private operators will go only there where they can make profits. They will neither go to rural areas nor provide telephones in those areas that are economically backward. Similarly, providing phones in far flung remote areas do not make commercial sense for private operators. However, if these areas are not connected by telecom services, we are condemning them to continued backwardness. For all these sections, BSNL provides the only hope as also its continuation in the public sector.

The attraction of privatising BSNL is of course great. At one stroke its huge assets can be given away. Its huge assets and surplus can then be used to fund the friends of the government in the private sector. Stiglitz, the former Chief Economist of the World Bank has called this privatisation programME as briberisation; and this is exactly the nature of the game that the BJP government is pursuing. The employees of BSNL have the task of not only competing with the private sector, but also making people of this country aware of the need to have BSNL and MTNL in public hands. It is this unity – between the employees and the people — that we have to create in order to beat back the current right wing offensive. It is not only saving assets built using public money, but also the economic future of the country that is at stake.

29th June 2003

The last few years have seen the rates of landline subscribers go up through a variety of means. One is reducing the pulse rate from 5 minutes to 3 minutes. Another is increased rentals and reducing free calls. The last has been the imposition of a Calling Party Pay regime through the interconnect charges by which the call of the landline subscriber to a cellular one is charged at a high rate. In effect, the low-end landline user is being asked to subsidies the more well off cellular services. We are reducing the surplus of the long distance network without any considerations of how we will find the money for expanding the network. And if the local call charges go up as they are doing, this will mean that either the Teledensity will go down because the local service providers will not have any surplus or the new subscribers coming into the network will drop as the people will not have money to pay for the phones. There is an obvious relation between the cost of connecting to the network and the per capita income of the population. If the cost of accessing the network is high as a proportion of the per capita income, then also Teledensity is low. The future of BSNL is critical for the country. This is not only an issue of privatisation but of increasing telecom penetration in sectors and areas where without BSNL, there will not be telecom access. The private operators will go only there where they can make profits. They will neither go to rural areas nor provide telephones in those areas that are economically backward. Similarly, providing phones in far flung remote areas do not make commercial sense for private operators. However, if these areas are not connected by telecom services, we are condemning them to continued backwardness. For all these sections, BSNL provides the only hope as also its continuation in the public sector. If the surplus disappears from BSNL’s account, what happens to the twin goals of increasing Teledensity and rural telephony, allegedly the reason for private participation in the first place? Some have suggested that the Universal access levy will take care of rural telephony. The figures suggest otherwise. Last year, BSNL suffered a loss of Rs 3,000 crore on its rural network. The entire Universal Access levy amounts to only Rs 1,300 crore, and even in this only Rs 300 crore has been given to BSNL. So obviously, the current provision of universal access does not cover even the current pace of expansion of the rural network, let alone the requirement of connecting all the villages in the near future. And if the surplus disappears, the only way to expand the network will be through borrowings at commercial rates of interest, pushing up the costs and finally the subscribers’ rates. If we look at the economics of the telecom network earlier, it was the surplus of the long distance network – both national and international long distance — that was providing the capital for expansion of the telecom network. Incidentally, the total budgetary allocation in the last 50 years for telecom from government’s funds for expansion of the telecom network is negligible: against the market value of its assets of about Rs 80,000 crore (at current replacement costs), the funds from the Government is less than Rs 200 crore. The entire expansion of the sector has taken place through the surplus generated from long distance calls. The entire thrust of the earlier policies was to keep the cost of connecting to the network low and charge higher rates from long distance calls. The understanding was that the surplus from long distance calls, which are made by either business or well-off subscribers, should be used to expand the network. It can be argued that the long distance calls were being charged at an exorbitant rate and these rates need to come down.

However, arguing for competition in long distance meant that the local calls and the cost of connections would increase, as the long distance operator would no longer underwrite the expansion of the basic network. Even after this, the surplus with the local operator would not be enough to expand the network substantially. And this is what the current scenario suggests. So when Arun Shourie suggests that not increasing the rates as allowed by TRAI will lead to BSNL’s surplus disappearing he is not wide off the mark. What he neglects to tell us that is precisely the objective of the BJP’s current policies. Opening the long distance to competition and handing over the most lucrative part of the network to – VSNL to Tata’s – was meant to reduce BSNL’s surplus while handing over the most profitable sectors of the network to various private operators.  Note: Figures taken from DOT’s Annual Report and COAI’s figures, websites and . Some of DOT’s figures have been modified by COAI figures. Note: Figures taken from DOT’s Annual Report and COAI’s figures, websites and . Some of DOT’s figures have been modified by COAI figures. Note: Figures taken from DOT’s Annual Report and COAI’s figures, websites and . Some of DOT’s figures have been modified by COAI figures.