Labour unions of the
department of telecom services vehemently oppose its corporatization since
they would lose their status as government employees, with the attendant
benefits. To justify their stand they are arguing that a corporation would
not have the same commitment to rural telephony that a government
department does, and have emphasized that none of the private operators
are anywhere close to fulfilling the rural coverage mandated in their
employees are not alone in opposing corporatization. The labour unions of
many incumbent operators -- British Telecom, France Telecom, Deutsche
Telekom, Telecom Italia, Telefonica Spain, and Nippon Telephone and
Telegraph - had resisted corporatization, privatization, and
competition. They too had used the argument of universal service
obligation to justify remaining government departments operating as
monopolies, but were eventually forced to admit defeat.
Vail, then head of AT&T, developed the USO concept in 1914 to avoid
antitrust litigation by USA's department of justice. In return for
AT&T's monopoly being continued, Vail proposed that no person who
wanted a telephone connection would be denied one, no matter how remote
the area she lived in, how much it would cost AT&T to lay a cable to
her, or how few calls she made. Irrespective of the cost, AT&T would
provide her the same range and quality of services at rates identical to
those it charged in metropolises. Other USO terms were providing emergency
services at no charge and installing large numbers of public payphones.
to prove their pro-poor sympathies, several governments adopted the USO
concept. Since the prevailing economic wisdom then was that
telecommunications was a natural monopoly, they set up operators as
government departments or public telephone and telegraph systems. These
PTTs set tariffs according to social objectives, with no relation with
fixed or operational costs. They artificially kept tariffs for
international and long distance telephony very high to subsidize local and
rural telephony. Many PTTs provided local calls free. This was in spite of
a typical breakup of capital expenditure being approximately 50 % for the
local loop, 20 % for long distance circuits and 30 % for international
circuits, and the operational cost of a call depending mostly on the
volume of traffic at that particular instant. Since they generated very
little traffic, both fixed and operational costs in rural areas were
several times that in cities, but they were charged the same tariffs. The
capital cost to DTS for providing a new connection is about Rs 20,000 in a
metropolis, about Rs 100,000 in a typical village, and several times that
in remote areas. Nevertheless, the deposits, installation charges, monthly
rentals, and call rates charged by DTS are approximately the same in all
regions of India.
innovations in the 1980s enabled several value-added services to be
provided over the same phone line, rapidly changing the financial
structure of the telecom sector from economies of scale to economies of
scope. Legal battles in USA permitted the entry of competitors to AT&T
and eventually led to its breakup in 1984. Several countries followed
Margaret Thatcher's lead and opened their telecom sectors to
competition. In India too the Athreya Committee in 1990 recommended the
corporatization and privatization of the department of telecom.
who faced competition from new entrants demanded compensation arguing that
the latter had not incurred heavy expenditure for decades in fulfilling
USOs. Since most PTTs had no estimates of how much USO cost them, it has
been difficult for regulators to formulate appropriate solutions. Telstra,
Australia's erstwhile monopoly, submitted a USO reimbursement claim of
1130 million dollars for 1998-99 for serving 493,000 rural users. A new
entrant, Cable & Wireless Optus, countered that rural subscribers
numbered just 330,000, and that Australia's annual USO burden should be
no more than 112 million dollars.
have attempted several methods, with varying degrees of success. France,
Britain and Germany imposed USO on their erstwhile monopolies but not on
new entrants. Since it was more probable that a rural subscriber was
nearer a switch of the incumbent compared to one of a new entrant, it
would be cheaper for the incumbent to fulfill the USO. In addition, their
decades of monopoly gave them a head start which more than compensated
what they had spent on USO.
many developing countries with large rural populations imposed USO on new
operators but not on their erstwhile monopolies, arguing that the amounts
spent by their incumbents on fulfilling USO had not been recovered.
Further, since new operators installed the latest technologies, they would
skim off the best paying customers.
countries, including India, imposed USO on all operators as part of their
license conditions -- failure to implement USO would lead to cancellation
of their licenses. In practice, this has not worked since operators use
their political clout to avoid having their licenses cancelled. DTS has
installed only 374,600 village public telephones in 120 years of its
existence. Even though the 1999 Telecom Policy mandated that all villages
would be provided voice and low-speed data services and that telephones
would be available on demand in all parts of India by 2002, 292,000
villages still do not have even a single VPT. The record of private
operators has been far worse. Tata Teleservices has not installed even a
single VPT in Andhra Pradesh; nor have Hughes Ispat in Maharashtra, Essar
in Punjab, Reliance in Gujarat and Shyam Telelink in Rajasthan. Bharti
Telnet has installed just 12 VPTs in Madhya Pradesh. They have all put
forth the argument that cancellation of their licenses would cause immense
hardship to their subscribers. This has also occurred in Brazil, Thailand,
and Philippines. However China has implemented this approach successfully,
adding around 35 million phones annually in rural areas.
France, Australia, and Argentina established national funds to compensate
USO providers. These were financed by having all operators contribute a
certain percentage of their revenues (typically 3 to 4 per cent) or by
imposing access charges on long distance operators. In India, since
imposing USO as part of license conditions has not worked, the 1999
Telecom Policy proposed the formation of a USO fund: "Resources for
meeting USO would be raised through a universal access levy. UAL would be
a percentage of the revenue earned by all operators under various
licenses. This percentage would be decided by the Government in
consultation with the Telecom Regulatory Authority of India. UAL is
required for providing VPTs and rural telephones and should cover both
capital expenditure and recurring expenses. USO for rural and remote areas
would be undertaken by all fixed service providers who shall be reimbursed
from the funds raised from the UAL. Other service providers shall also be
encouraged to participate in provision of USO subject to technical
feasibility." TRAI is currently holding public hearings on these issues.
though India's private operators are willing to compensate DTS for
taking over their USO burden, a USO fund may turn out to be litigious.
Operators in USA, Australia and France are in constant disputes with each
other and with regulators over reimbursements. Federal Communications
Commission of USA, following disputes over reimbursement claims by local
service providers from its 1.8 billion dollar USO fund, recently opened an
investigation into the mathematical models used by them to calculate
costs. FCC's Jack Zinman stated that the models currently used by Baby
Bells substantially overestimated their actual expenses. Ken Rust,
director of federal regulatory affairs of Bell Atlantic countered that it
drastically underestimated them. Iain Osborne, director of regulatory
affairs of Global TeleSystems Group, stated that the USO costs calculated
by all European incumbent operators were severely distorted. In view of
these disputes, Germany, Brazil, Spain and Portugal are currently
reconsidering their earlier decisions to start USO funds.
1994, Chile pioneered a solution which has worked well -- auctioning of
the USO burden. Bidders were asked how much subsidy they required from the
public exchequer to provide USO. The lowest bidder in each province was
given a license to provide basic and value-added services. It has cost
taxpayers only 17 million dollars over five years to provide universal
service in Chile.
most remarkable success is from Bangladesh where Grameen Telephone Company
has provided universal mobile access to 100 million villagers in 70,000
villages. Grameen Bank gave soft loans to village women to purchase GSM
cellular handsets, who then charged villagers for making and receiving
calls. GTC is one of the few rural telephony companies that are profitable
and paying dividends.
India should emulate the successful approaches of Bangladesh and Chile, though they may not work to the same extent in a large country. India should be wary that the UAL being finalized by TRAI might lead to further litigation over calculation of USO costs, especially since DTS has not kept accurate accounts.
in The Telegraph, Calcutta,
India, on Tuesday, 18 July 2000, Edit Page
http://www.telegraphindia.com, Click on Archives, Go to issue dated 18 July 2000, Click on Editorial, Click on "Old Obligations Are Costly".
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