January 2008

Connecting the Next 500 Million: Challenges-Opportunities

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Introduction
According to the 11th five year plan, the target of connecting people has been set as 500 million of the government of India in 2010 and 650 million by 2012. However there are several challenges in reaching this target considering the fact that majority of the subscribers are expected to come from the rural segment. This article examines these challenges and explores opportunities for further growth.

The contribution of telecommunications sector to the national GDP has been increasing from 1.7 percent in 1997 to more than 2.7 percent in 2006.  Gross Value Added (GVA) of the industry as a percentage of GDP has increased from 0.8 in 2000 to 1.8 in 2006. Direct employment by Indian telecoms stood at 432,771 in 2006 with government companies employing the bulk of approximately 85 percent of the total. This share is falling with private sector employment increasing by 11 percent annually as well as new employment opportunities being generated through network deployment. The telecom sector with 106 services in the tax net has had a lion's share in the service tax revenue and still contributes the largest share of service tax to the exchequer, with contributions of Rs 5186 crores in 2006. It is estimated that a one percent growth in the number of telephone subscribers will lead to an exponential growth of close to two percent in its contribution to the service tax revenue collected by the government. To achieve the target of 650 million subscribers by 2012 inclusive economic growth that leads to a knowledge economy and uplifts living standards, focus on rural markets is imperative.

However as mentioned earlier realising the target is not easy. Transparent and supportive policy environment, better management of spectrum, innovative methods to address infrastructure issues and support and incentives to drive the rural telecom emerge as the challenges that needs to be addressed.

Recommendations to address these challenges

1. Supportive Policy Environment

Improved coordination amongst different government agencies help in creative conducive environment for the sector. Cost of delay of decisions can impact a direct cost Rs 16.81 crores per day on the Indian economy an indirect cost could be substantial as telecom sectors of major export earners such as IT, IT Enabled Sarvices (ITeS), etc. Government has decided to permit auctioning of 3G spectrum and has said it would give away 3 licenses. As evident from Norwegian and other European countries experiences, Department of Telecommunications (DOT) should recognise that market structure is more important than informational issues on which auctions are based. 3G spectrum should be categorised into different sizes as license can be valued differently. License “A” can contain 2.15 MHZ paired spectrum with 5 MHZ unpaired. Other combinations of paired & unpaired spectrum for different groups should be targeted. Moreover, simultaneous ascending auction (with no undue favor for WiFi or other technologies) must be pursued to ensure the allocations are smooth and roll outs are faster. From a rural telephony perspective, allowing 'roaming' which ensure a new entrant has access to incumbent 2G network is very important.

The current method of spectrum allocation is based purely on the criteria of customer base. A new hybrid model has been suggested where in a combination of comparative selection and auctioning would be used to enable a fair and transparent allocation policy. This would also aid in determining the price of the spectrum which has been under priced according to international prices. In addition, the current licensing policy bundles licensing with spectrum prices- a factor that forces an operator to pay for a spectrum that he might not use to provide services. Therefore it would be better for the regulator to be technology neutral and de-link the spectrum from the license.

The de-linking of spectrum and license is essential as the operator who obtains a license might not need it at all. The shortage of spectrum forces operators to increase their cost between 25-50% depending on the amount of spectrum required and the existing customer base. This could transform into tariffs for subscribers. Therefore it is imperative that the spectrum allocation is performed efficiently. One way of dealing with spectrum efficiency is to add more subscribers under the spectrum band using new emerging technologies like micro or Pico cellular networks. Strategic Spectrum review needs to be initiated. A hybrid model of comparative selection and auctioning ensures all players to compete on a level playing field. The comparative selection could be used exclusively for Tier I players where the criteria for selection could be based on; a) rural coverage area, b) Quality of Service and c) Customer base. Moreover, commercial spectrum (not the defense spectrum or other government spectrum) should be managed by TRAI. The recent media spat between government and TRAI is not very healthy for the growth of the sector. In order to reach the required target of 650 million subscribers by 2012, more coordination is required between government and TRAI.

2. Taxation
The contribution of operator by way of taxes stands between 19% and 28%, one of the highest compared to the neighbouring countries. Government should address two areas immediately; one is to consider a uniform revenue share license fee at a nominal level for all telecom circles.  It should also do away with the multiple levies imposed on the sector and introduce a single levy instead. Implementing these suggestions will reduce the administrative burden on the sector and the government as well as ensure transparency.   Operators in turn will pass the benefits of reduced levies to the customers which will help in hitting our 650 million target by 2012.



The government may provide tax subsidies for operators whose coverage in rural areas is high. The contribution to USO Fund which forms nearly 5% has accumulated to an excess of 85% after disbursement, Rs.9917.54 crores. The disbursement could have been covered even if the contribution was only 2% of the AGR.

Malaysia which has one of the highest penetration rates has set its tax levels at 6.5%. Similarly Pakistan which has a high penetration rate of 45% has tax rates around 3%. This indicates that India should reduce taxes levied on operators thereby contributing to further reduction of tariff prices especially for rural subscribers.

As far as the subscribers are concerned, the service tax has a direct implication of 12.36% on tariff. The reduction in service tax to 8% could help in reducing tariffs to Rs 3688 from Rs.4020 per subscriber annually.

3. Improving Telecom infrastructure
Current infrastructure is not adequate to meet the needs of nearly additional 400 million subscribers. The state of wireless technology is slightly better with 110,000 mobile base stations in place. However, there is a need of about 100,000 towers in place to achieve the set target of subscribers. It would be prudent of operators to make use of the infrastructure sharing policy that has been recently introduced. More and more operators should resort to infrastructure sharing to enable mobile penetration. Telecom service providers buy and sell (fiber) capacity of each others network, referred to as  Indefeasible Rights to Use (IRU). It is an agreement whereby one party (user)  obtains the rights to use specified network facilities and/or fiber of   another   partner  (grantor)  on  lease. Applying  Indian  GAPP  or International Financial Reporting Standards (IFRS), is not straight forward for  passive  infrastructure  sharing  such  as towers, etc. Industry needs clarifications  whether such IRU arrangements shall be allowed as lease and hence  appropriate  arrangements under IFRS  such  as  IAS-17 or IFRIC -3 determine  the case. Leasing helps telecom service providers manage growth, and provide investment option to acquire and maintain latest equipment.  If not  a lease, it has to be ascertained whether the arrangements constitutes sale of goods  or  delivery  of services. The accounting consequences for lease, sale of goods and service rendering are quite different and impact the  growth  of  passive  infrastructure. Government  needs  to  spell out appropriate mechanism to drive passive infrastructure sharing and growth.

Fixed to mobile substitution and convergence models are the best suited to current needs of subscribers. Advanced Wireless Services may be a good option to provide telecom services as it enables voice, video and data through one connection. These services are seen to help the operators in recovering their ARPUs. However the success of these services lies in the development of a strong VAS market. Regional content and key applications are also necessary for AWS to be accepted.



Currently BSNL and MTNL combined have in excess of 37,000 towers across India, 80% of which are within B & C circles.  With infrastructure sharing the investment to roll out rural telecom infrastructure would be lower and it will also increase the competitive efficiency of rural markets by bringing in  private operators to access rural areas and hence assist government in hitting the 650 million number much before its proposed date of 2012.  To support a 500 million subscriber base by 2010, we will require about 330,000 towers. 

Today this number stands at 130,000. Sharing of resources would also allow private service providers to extend rural telecom under the Bharat Nirma Yojana.   The government could further facilitate this by reducing  the USO fund levy for operators who wish to share infrastructure in the rural areas. Another incentive that the government could provide is to reduce the tax and levies in the rural areas both for the operator as well as the consumer.

4. Rural telephony
Regression analysis of rural teledensity and rural income for the same period reveals that a 1 percent increase in rural teledensity increases rural income by 0.2 percent. This impact is significant at 95 percent level of confidence.

Although increasing potential customer base in the rural markets is the objective of the USO fund contribution, the disbursement of the funds have not been performed efficiently. The unutilized amount last year was estimated to be roughly around Rs.9,917.54 crores. The utilized amount could have been realized at just 2% of the AGR alone. In this context, a better policy would be to reduce the USO contribution based on the coverage of rural areas. As far as the disbursement of USO fund goes, the money from the fund may be allocated to enable subsidies to operators operating in rural areas through reduced pricing schemes.

The impact of 12% service tax is directly faced by the customer. Reducing the service tax for telecom services would enable easy adoption of these services especially in the rural markets.

It is not the only the onus of the regulator but also that of the operator to approach the situation holistically. The main issues with rural deployment are infrastructure (tower and power), affordability, availability of skilled resources and access devices. The operators may come up with innovative pricing schemes wherein they may bundle their connections with low cost access devices. They can come up with innovative financing options of interest free loans from banks to easy pay zero interest EMIs to facilitate access device penetration, which is a major restraint to the growth of telecom sector.

The second major issue is the tariff plans. The operators could come up with reduced tariff plans. Although this would impact their revenue during the initial years, the growth in volume of traffic would eventually enable them to recover the losses from reduced tariff plans.

The operators in conjunction with the government could set up training schools to impart training to the local residents. This would not only improve the local skill set but also spread awareness of the telecom services available. Speaking of awareness, the telecom services may be linked to people's livelihood thereby adding value to rural lifestyle and revenue.

Conclusion
Conquering the rural market is a huge challenge and hence can be considered a significant achievement if successful. Although this does not seem to be impossible, it is indeed a daunting task. In addition, the time taken to achieve is unknown as it involves a holistic approach from all factions and stakeholders.

However efforts are already on to tap the rural markets from all major players in the industry, but the acceptance by the common man to these technologies is of great concern. Of course, the presence of technologies would eventually compel a rural user to experiment and eventually adopt them. On this optimistic note, lets hope that the end is sooner than expected.

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