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INDIAN INSTITUTE OF MANAGEMENT

AHMEDABAD

Project Report

On

Universal Service Support Policy

Submitted to

Prof. Rekha Jain

Academic Associate: Vidhee Avashia

In partial fulfilment of the requirements of the course

Infrastructure Development and Financing

By

Group-7 IDF-B

Deeksha Kakkar

Chirag Dureja

Shyam Sundar Singh

Rigveda Kadam

Ganisetti Phani Kumar

Sonam Choudhary

Anu Dogra

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Contents

Indian Telecom Sector and the evolution of USOF.................................................................................3

Rural Teledensity ................................................................................................................................3

Phasing out of Access Deficit Charges ...............................................................................................3

Universal Service Obligation Fund.....................................................................................................4

USOF Administration (About USOF) ............................................................................................5

USOF Framework Design ................................................................................................................7

Activities supported by USO Fund ..................................................................................................8

Implementation status of schemes ...................................................................................................... 9

Ongoing schemes ............................................................................................................................9

Planned USF Schemes ..................................................................................................................13

Review mechanism of USOF............................................................................................................14

Methodology of monitoring ..........................................................................................................15

Issues with USOF .........................................................................................................................15

The way ahead for sustainable USOF scheme ..............................................................................16

US Universal Service Fund (USF)........................................................................................................18

Issues surfacing in USF ....................................................................................................................19

Recently proposed Reforms ..............................................................................................................21

Comparison of USF and USOF...............................................................................................................22

Recommendations: ...............................................................................................................................24

Exhibits .................................................................................................................................................26

Bibliography .........................................................................................................................................33

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Indian Telecom Sector and the evolution of USOF

Rural Teledensity

From the past few years, India is experiencing significant growth in telecom services

primarily driven by mobile services. But the growth in telecom services is mainly happening

in the urban areas. The overall telecom growth rose from 1.3% as of March 31, 1996 to

43.5% as of September 30, 2009. The number of phone subscriptions increased from 44.9

million to 509 million in the period from March 31, 2002 to September 30, 2009. The urban

teledensity is 102.8% while the rural teledensity is as low as 18.5% as of September 30, 2009.

As we can see that the rural teledensity is not able to keep the pace with that of urban

teledensity and the gap between rural and urban teledensities is growing. (Jain & Raghuram,

2010)

The main factors leading to the low teledensity in rural areas are low population, low per

capita income, more distance between population clusters. The factors namely low population

and large distance between the clusters results in less demand for telecom services thereby

increasing the creation and maintenance costs of infrastructure. Low per capita income

represents the fact that the rural population has less or no ability to pay for the telecom

services. As a result of the above factors, increasing rural teledensity is a major challenge

and should be addressed carefully in order fill the growing gap between urban and rural

teledensities. (Jain & Raghuram, 2010)

Phasing out of Access Deficit Charges

Access Deficit is defined as the loss made by telecom operators by providing their access

lines as a standalone business. Mathematically, it is calculated as the difference between the

fully allocated costs of providing access lines and the revenues attributed to providing access

lines. Typically, this is calculated as regular line rentals plus installation charges. (ICT

Regulation Toolkit, 2009)

In the past, fixed line monopolies such as BSNL commonly set line rentals well below any

reasonable estimate of the relevant costs. They recovered costs primarily through

international call charges, which were commonly set well above cost. ADC is a levy paid by

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private players to BSNL to facilitate rollout of telecom network in rural areas. The private

players pay around Rs 5,000 crore to BSNL as ADC per annum. (Business Standard, 2008)

The Telecom Regulatory Authority of India (TRAI) has phased out Access Deficit Charges

(ADC) on domestic calls and slashed ADC on international calls to 50 paise from the present

Re 1, effective April 1, 2008 by amending the Interconnection Usage Charges (IUC)

regulation. This phase-out is expected to accrue annual savings of Rs 700 crore for the

telecom industry as a whole. This is expected to help in addressing issues like promoting

competition, removing market distortions, minimising the grey market in international calls

and providing comprehensive benefit to all consumers. (Business Standard, 2008)

TRAI expects that the service providers will utilize whatever savings accrue from phasing out

of ADC for the growth of telecom sector. The private owners had raised concerns about the

operations of BSNL which was using ADC for fostering its own telecom growth.

TRAI itself noted that it was difficult to establish a direct and transparent nexus between the

savings on account of ADC and reduction of tariff. It also analysed that a correlation between

reduction of ADC on incoming international calls and the direct and immediate benefits to

telecom consumers in India was difficult to establish. ADC had given rise to arbitrage

opportunities and hence grey market operations in international incoming calls. (Jain &

Raghuram, 2010)

The savings to a subscriber as a result of the phasing out of access deficit charges is very less.

For example, if a subscriber uses Re 1 for a call, the phase-out of the ADC will make his call

cheaper by 0.75 percent. This will result in his call being around 99.25 paise. Thus on a Rs

500 monthly bill, the total savings for a subscriber would be around Rs 4 which is hardly

visible.

Universal Service Obligation Fund

The Universal Service Support Policy came into effect from April, 2002. DOT issued the

guidelines for universal service support policy. After that, the Indian Telegraph (Amendment)

Act was passed in December 2003 giving statutory status to the Universal Service Obligation

Fund (USOF). The Fund is to be utilized exclusively for providing access to telegraph

services at affordable prices to people in the rural and remote areas. It was established

with the fundamental aim of providing ‘basic’ telegraph services. Subsequently, the Indian

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Telegraph (Amendment) Act 2006 was passed to enable provision of all types of telegraph

services. (Office of the administrator, USOF)

Indian Telegraph (Amendment) Rules (originally put in place in 2004) are the rules for

administration of the fund. Later in 2006, the rules were changed to enable support for mobile

services and broadband connectivity in rural and remote areas. In 2008, another set of

amendments are done to the rules to provide subsidy support to eligible operators for

operational sustainability of Rural Wireline Household DELs installed prior to April, 2002,

for a period of 3 years subject to a ceiling of Rs. 2000 Crore per annum for the

country. (Office of the administrator, USOF)

To provide access to services mentioned above, funds are raised through a Universal Service

Levy (USL) which is currently fixed at 5% of the Adjusted Gross Revenue (AGR) of all

Telecom Service Providers except the pure value added service providers like Internet, Voice

Mail, E-Mail service providers etc. In addition, the Central Govt. may also give grants and

loans. The annual revenue share licence fee shall be reduced to the extent of reduction in

contribution towards USOF levy if the licensee in service area(s) meets the prescribed

qualification. At the end of the financial year, balance to the credit of the Fund will not lapse.

(Office of the administrator, USOF)

The implementation to provide services can be carried out by the “eligible operators”

(public/private sector companies) according to Indian Telegraph (Amendment) Rules

including Basic Service Operators, Cellular Mobile Service Providers, Unified Access

Services Licensees and Infrastructure Providers (IP-I). (Office of the administrator, USOF)

USOF Administration (About USOF)

• The administrator of USOF was appointed in June 2002

• The USOF administrator office is an attached office of DOT

• An Inter-Ministerial Advisory Committee has been formed under the USOF

Aministrator. This committee includes representatives from Indian IIT, Chennai, IIM,

Ahmedabad, Ministry of Finance, Minsity of Law and Justice, Planning Commission,

TRAI and DOT

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USOF Organization Chart: (About USOF)

Stakeholders:

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USOF Framework Design

The design of the USOF framework comprised of the following elements:

1. Viability Gap Funding: The Viability Gap Funding Scheme is a Government of India

initiative administered by the Ministry of Finance which provides financial support in

the form of grants to infrastructure projects undertaken through public private

partnerships to make them commercially viable. Based on the net cost of the schemes

which is the difference between the sum of annualized capital, annual operating cost

and annual revenue, the USOF provided viability gap funding.

2. Competitive Selection of Operators: A multi-layered bidding process was put in place

to decide the winning bidders for any program based on the least quoted subsidy

support basis. UASL, fixed and cellular service providers could bid for services in

their areas. Infrastructure providers could bid only for infrastructure provision.

3. Auction Design: Bidders who qualified for subsidy over three rounds of bidding were

eligible to bid under a multi-layered “Informed Descending Auction”. In the first

round, a starting reserve price for the bid was specified. For the next two rounds, the

bidders had to quote their subsidy amount which was to be less than or equal to the

reserve bid amount.

Support for Both Public and Private Services: Support was extended for both private and

public services by the USOF. (Jain & Raghuram, 2010)

Functions of USOF Administration: (About USOF)

• To formulate and launch USOF projects under the various streams

• To design the bidding process and carry out tendering

• To enter into agreements with Telecom Service Providers for implementation of

USOF projects

• To disburse subsidy and to monitor the implementation of USOF projects

• To design the format of various records to be maintained by telecom service providers

• To review the USOF projects after the implementation

• Budgeting and Auditing of USOF Activities

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• To maintain relations with similar international organizations of other nations

Activities supported by USO Fund (Office of the administrator, USOF)

• Public Telecom and Information Services

o Operation and Maintenance of Village Public Telephone in the revenue

villages identified as per Census 1991 and Installation of Village Public

Telephone in the additional revenue villages as per Census 2001

o Provision of additional rural community phones in areas after achieving the

target of one Village Public Telephone in every revenue village. In villages

with more than 2000 population & no public call office existing, a second

public phone shall be installed

o Replacement of Multi Access Radio Relay Technology Village Public

Telephone installed before 1st day of April 2002

• Provision of household telephones in rural and remote areas

• Infrastructure for provision of Mobile Services in rural and remote areas

• Provision of Broadband connectivity to villages in a phased manner

• General infrastructure in rural and remote areas for development of

telecommunication facilities

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• Induction of new technological developments in the telecom sector in rural and

remote areas

Implementation status of schemes (USOF, Implementation status of schemes)

Ongoing schemes

• Public access

o Village Public Telephones – In March 2003, agreements were signed with

BSNL and 6 Private Basic Service Operators (namely RIL, TTL, TTL MH,

Bharti, HFCL & Shyam Telecom) for operation and maintenance of existing

VPTs in the revenue villages as per Census 1991. About 5.69 lakh villages out

of 5.93 inhabited villages, as per Census 2001, have been provided VPT

facility as on June 30, 2010. Table 1 gives the breakup of the funds allotted for

the VPTs across the country. Over the years, the funds allotted do not follow

any particular trend. They are based on the amount required for the installation

of technology in various VPTs. In the first three years, uncovered villages

under the program were not allocated any subsidy for the setting up of VPTs.

In the year 2005-06, plans were made to setup VPTs in uncovered villages and

subsidy was allocated for the same. Wireless broadband and mobile Phase-I

were also allotted subsidy in the year 2008-09 and 2009-10. (Refer Table 1 for

activity wise subsidy disbursement)

Table 3 shows a summary of VPTs provided by BSNL and PBSOs. The

number of VPTs provided depended on the reach of BSNL and the

identification of uncovered villages by the USOF. BSNL having the largest

network infrastructure presence in the country could cover a large number of

villages and provided VPTs in these villages. The number of VPTs also

depended on the size of the state and the number of villages it encompasses.

(Refer Table 3 for the summary of VPTs provided by BSNL and PBSOs)

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o New VPTs in the Uncovered villages - In November 2004, agreement was

signed with BSNL to provide VPTs in 66822 uncovered villages as per Census

1991 excluding villages with population less than 100. Subsidy support will be

provided for a period of five years from the date of installation of the VPTs.

The VPTs were to be provided in phases covering 20%, 40% and 40%

respectively over a period of three years. Table 4 gives a summary of the

number of uncovered villages in the various states. From the table, we can see

that some states have no uncovered villages while others have villages which

do not have VPTs. This may be because of the focus of the various bodies

involved the identification and development of VPTs in various states. We

also see that almost all the uncovered villages in various states have been

provided VPTs after identification.

(Refer Table 4 for Summary of uncovered villages as on 31.03.2010)

o New VPTs to be provided in the remaining villages as per Census 2001.

Agreement was signed with BSNL for the provision of VPT facility in about

another 62,443 uncovered villages as per Census 2001. Table 5 indicated that

the proportion of cumulative achievement of providing VPTs up to march

2010 to uncovered inhabited villages is very varied across different states like

very low in case of Mizoram and Arunachal Pradesh and 100% in case of

Tripura despite these being sister states. This huge difference in

implementation status in different states can’t be attributed to a single cause

but one of the reasons can be lack of interest of the implementer.

(Refer Table 5 for Provision of VPTs under new agreement as on 31.03.2010)

o Replacement of MARR based VPTs - A large number (1,85121) of VPTs

installed before April 2002 & working on Multi Access Radio Relay (MARR)

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technology have become non functional and are to be replaced by reliable

technology equipment.

o Provision of Rural Community Phones - In September 2004, agreements were

signed with BSNL and RIL to provide 24,822 and 21,431 RCPs respectively

in villages with population exceeding 2,000 and without a Public phone

facility over a period of three years. Table 6 provides the circle-wise progress

reports of RCPs. From the table, it is noted that the number of RCPs

(reconciled figure) to be provided is completely in sync with the number of

RCPs actually provided. Thus, the achievement rate quoted from the table is

100% for all the states. Thus, the plan was implemented in an effective

manner for the provision of RCPs in the states across the country. (Refer Table

6 for Circle-wise progress report of RCPs as on 31.03.2010)

• Individual Access

o RDELS - Agreements were signed with BSNL, RIL, TTL and TTL (MH) in

March 2005 for installation of Rural Household Direct Exchange Lines

(RDELs) to be installed during 2005 to 2007. Support has also been extended

to 18.65 lakhs rural lines installed between 2002 & 2005 and 90.5 lakhs

installed prior to 2002. For enhancing the access of telephone to individuals,

the USOF provided a one-time subsidy support for 9 million Rural Household

Direct Exchange Lines (RDELs) in specified short distance charging areas

(SDCAs) to various service providers like Reliance, Tata Indicom etc.

o Rural Wireline Household DELs - Subsidy support for the operational

sustainability of Rural Wireline Household DELs installed prior to April

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2002 owing to ADC being phased out. This support shall be provided for a

period 3 years subject to a ceiling of Rs. 2000 Crore/annum.

• Infrastructure support for Mobile services

o In 2007, agreements have been signed with successful bidders who will be

provided subsidy support for setting up and managing 7436 towers in rural and

remote areas, where there is no existing fixed wireless or mobile coverage.

USOF has launched a scheme to setup mobile towers in 500 districts across 27

states in the country on a sharing basis by three service providers. This scheme

will provide coverage to the rural and remote areas which currently have no

access to mobile of fixed wireless services.

• Rural Broadband Schemes

o USOF has launched a scheme to provide broadband services in rural areas by

utilizing existing telecom infrastructure to benefit the local population. In

2009, an agreement was signed with BSNL for providing 8, 61,459 wire-line

Broadband connections to individual users and Government Institutions over a

period of 5-years.

• Creation of General Infrastructure

o In 2010, BSNL won the agreement through bidding for augmentation, creation

and management of intra-district SDHQ-DHQ OFC Network on the condition

that it will be shared with other Telecom Operators at the rates prescribed in

the Agreement.

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• Pilot Project Scheme

o In order to promote new technological developments in the telecom sector,

USOF has launched a scheme to induct new technological projects on a pilot

basis. These pilot projects will be provided subsidy (upper cap of 0.5 million)

by the USOF and will have three parties, namely, the technology provider,

USOF and the Telecom Service provider.

• Renewable energy initiatives

o USOF is taking initiatives to provide solar charges in VPTs to ensure effective

functioning in these areas. It is also undergoing many pilot projects to use

renewable energy to support the mobile infrastructure in the rural areas.

Planned USF Schemes

• Public Access

o Infrastructure Support for Mobile Services (Phase-II) - About 11000 towers

are proposed to be installed to cover the uncovered areas through mobile

services

o Wireless Broadband Connectivity for Rural Areas- Government is also

considering to provide subsidy support for Broadband connectivity to Gram

Panchayats, Higher secondary schools and primary health centers so as to

provide e-governance and data services to the rural areas.

o Wireline Broadband Connectivity for Rural Areas

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o Augmentation, Creation and Management of OFC Network in service areas

other than Assam- This scheme considers OFC Network augmentation

between the blocks' HQ and Districts' HQ.

• Pilot Projects

o To establish new technological developments which can be deployed in the

rural and remote area.

o For renewable energy resources (solar, wind,diesel hybrid solutions) for 20

sites on pilot basis

o For establishing mobile charging stations in 5000 villages through TERI

projects of Lighting a Billion Lives (LaBL).

• Extent of involvement of private sector -The involvement of private sector

operators was very limited in the implementation of the USOF project in India. In

Gujarat, under the public-private partnership framework for infrastructure

development, the private players are given a choice to put forward its proposal for

a particular project. The projects put forward by the private players are then put

into the public domain and bids are invited for the same by the Gujarat

government. If a lower bid is proposed by the bidder or if he can match the lowest

bid, the bid is awarded to the proposing entity else it is given a compensation for

developing the proposal and the lowest bidder gets the project. The involvement

of private operators in the selection of sites for the project makes the project more

commercially viable.

• The attempts for the involvement of private players in the USOF schemes has not

been successful in the past because of the mismatch between the assessment of

costs in providing fixed wireless and fixed line services by the private players and

the penalties imposed by the government. The operators had less incentive to

provide the fixed lines as the penalties imposed by the government were lower

than the cost to provide fixed lines. (Jain & Raghuram, 2010)

Review mechanism of USOF (DOT, May 2010)

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Basically two things have to be monitored:

1. Sharing of infrastructure

After the completion of roll-out of infrastructure, a physical verification is done by CCA (for

mobile infrastructure scheme) and by technical experts (for OFC scheme).

2. Customer service

Periodic monitoring is done for tariffs being charged to other operators and customers,

grievances redress, service quality and customer satisfaction.

Methodology of monitoring

For physical and documentary verification, subsidy payments and claim authentication

function is handled by 22 CCA offices. Special verifications drives are conducted by finance

wing of USOF time-to-time to prevent widespread irregularities.

Issues with USOF

Following issues came out from the feedback provided by CCAs to USOF:

Critical issues about Village Public Telephone (VPT) Scheme

• Lack of public access

• Lack of public awareness – advertisements in newspapers

• Lack of public display of tariffs, timings, complaint mechanism, STD facilities and

charge related information - VPT directories with contact details of officers. Boards

and charts at more places, toll free numbers for complaints

• Frequent faults and poor grievances redress

• Billing problems

• Rural electricity shortage and so consequent battery run out – solar charging devices

Critical issues about mobile towers

• Problems related to land acquisition, SEB connections, local permissions,

• Issues with site security

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• No-payment of OPEX charges by USPs

• No roll-out of mobile services even after the deadline

Issues about wireless broadband

• Lack of new DSLAMs

• Unauthorized recovery of charges towards installation, registration and security

deposit

• Slow internet speed

Issues with New VPT

1. Duplication within BSNL and with RCL – for example, in Gujarat, two universal

service providers, BSNL and Reliance Communications, have installed VPTs. About

2000 VPTs of Reliance Communications on corDECT are non-functional since

beginning where no subsidy has been paid to such VPTs and so they are coming

under ‘covered’ category. CCA office is trying to eliminate subsidy payment to non-

eligible VPTs, but is hampered by the absence of any common field like Village

Census Code as New VPT 6 agreement is based on 2001 census unlike other

agreements.

2. Non-compliance with agreement conditions –many equipments like display boards,

charge indicators, solar charging device are not available in the new VPTs, which

inhibits their full operations.

The way ahead for sustainable USOF scheme

1. Focus on providing content – to increase reach of internet in the rural area,

government needs to educate people about the benefits from internet. To arouse initial

interest, it should make information regarding education, healthcare, agriculture and

governance available on internet. To do so in this linguistically diverse country,

content development is very important. The content and applications should be

relevant to the needs of local population. It should be in the language and format

suitable for general public. It should provide following information:

a. Tele-education

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b. Tele-medicine

c. Agriculture – weather, marketing etc

d. Information on employment opportunities

e. Disaster warning and management

f. E-ticketing

Future projects should give high priority to development of suitable content. It can be

done in conjunction with the other network and facility projects financed by USOF.

2. Training of kiosk operators – village-level entrepreneurs can act as the catalyst for

change and so their training is important for the future.

3. Maintenance of facilities – greater weightage to equated subsidy relative to front

loaded subsidy can create suitable financial incentives for operators to maintain the

facilities properly. The front loaded subsidy is given at the end of the quarter in which

VPT is installed and made functional. The equated annual subsidy is disbursed in

four quarterly instalments during each financial year.

4. Physical setting of kiosk – locating facilities in Panchayat offices has not been

successful as they remain closed most of the times. They often result in only private

benefit, not public access. Attention should also be given to greater sensitivity to

gender and social issues while locating facilities.

5. Solar powering VPTs – issue of acute power shortage in rural areas in the country is

well known. USOF should promote the use of solar power and alternative fuel

specifically for telecom sector by providing subsidies to such operators.

6. Passive infrastructure sharing – mobile service providers should share the passive

infrastructure like towers, while expanding the network. This would bring the down

the cost of providing the service.

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US Universal Service Fund (USF)

The Universal Service Fund or USF was introduced under the guidelines of the

Telecommunications Act 1996 in the US. The aim of the fund was to meet the mandate of the

act – “all schools, classrooms, health care providers, and libraries should, generally, have

access to advanced telecommunications services…… As of the first quarter of 2010, the USF

fee equals 14.1 percent of a telecom company's interstate and end-user revenues.” (Universal

Service Fund, 2010). The USF consists of four programs targeted at – High Cost, Low

Income, Rural Health Care and Schools and Libraries. (Universal Service Fund, 2010)

Post the creation of the USF, the Universal Service Administrative Company (USAC) was

created to disseminate the funds allocated to the USF. This was done to ensure that there was

a central agency that could be accountable for the funds. The tasks for the USAC include

administering programs “by providing subsidies for high cost telephone companies serving

rural areas, low-income consumers, rural health care providers, and schools and libraries.”

(Universal Service Administrative Company, 2010) One of the significant funding

achievements of the USAC has been the E – Rate program. This program targets the school

and libraries faction and aims at making available Internet and telecommunications at a

reasonable price. However, the equipment has to be provied by the entities themselves. (E-

Rate, 2010)

To address the growing importance of Internet in the field of telecommunication, some

changes were sought to the existing act. It was suggested that emphasis should be laid on

making available broadband and mobile access widely. Also, such an inclusion in the bill

would bring an entirely new group of companies – VOIP, mobile, broadband, under the

mandate of the Fund. The inclusion of broadband internet was a debated topic, since targeting

such a large mandate would involve extensive investment and might endanger the stability of

the fund. (Universal Service Fund, 2010)

One of the issues faced by the implementation of this act is the need to differentiate between

wireless and wired line service. “Voice and video services can now be provided using

Internet protocol and thus might be classified as unregulated information services, but these

services compete directly with regulated traditional voice and video services. Moreover, these

digital technologies do not recognize national borders, much less state boundaries.”

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(Universal Service Fund, 2010). Another issue is related to the structure of the subsidies that

fund the USF. Initially, they were implicit subsidies, then the regime moved onto above cost

charges. This move however, favored new entrants over incumbents and so a move was

sought to explicit contribution to the fund. (Universal Service Fund, 2010) This has however,

only partially been implemented.

The goals of the act have been spelt out as:

“* To promote the availability of quality services at just, reasonable, and affordable rates,

* To increase access to advanced telecommunications services throughout the Nation,

* To advance the availability of such services to all consumers, including those in low

income, rural, insular, and high cost areas at rates that are reasonably comparable to those

charged in urban areas,

* To increase access to telecommunications and advanced services in schools, libraries and

rural health care facilities,

* To provide equitable and non-discriminatory contributions from all providers of

telecommunications services to the fund supporting universal service programs.” (Universal

Service Fund, 2010)

As mentioned earlier, the Universal Service program centres around the following four

activities:

• High cost: This aims at making available telephone services, which otherwise would

have been prohibitively expensive and hence non accessible, in rural areas.

• Low income: This aims at allowing the low income households across America have

access to telephone services. It does this through the aid of two programs-

o Link up – which subsidises installation costs for the services

o Lifeline Assistance - “provides discounts on basic monthly service at the

primary residence for qualified telephone subscribers” (Universal Service

Fund, 2010)

• Rural Health care: This aims at providing healthcare via video conferencing so that

people in remote areas can use Internet to get access to decent healthcare.

• Schools and Libraries: As mentioned, E-Rate provides schools and libraries with

subsidies to set up and maintain basic Internet access, etc.

Issues surfacing in USF

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• In high cost rural areas, wireless carriers receive same level of funding as that of the

incumbent wireline carriers. Incumbent wireline carriers have higher costs because of

an obligation called ‘carrier of last resort’. Under this requirement they have to

service every customer in the entire region. All of this is being followed under CETC

(Competitive Eligible Telecommunications Carrier) program through which wireless

carriers receive USF funding. (Engebretson, USF tug of war, 2010)

• Big telcos like AT&T and Verizon ( from FCC released data about USF) are getting

scarce US funds for serving areas where they could have served even without

government support. (Engebretson, the real story of latest USF data, 2010)

• Small telcos like Weavetel which are serving just very few lines (17 lines) are getting

high amounts of funding. It is an uneconomical prospect because the cost to serve per

line becomes unusually large. (Engebretson, the real story of latest USF data, 2010)

• High cost, low density areas should rather be served through satellite service than

through a highly subsidized expensive landline service which just leads to excesses of

USF.

• In areas where there is high number of competitive carriers serving the same

population, the USF support given to each of them on per line basis contributes to the

fund’s excesses without making any significant contribution to the increase in area

covered under broadband.

Currently, the total unutilized amount under the USOF is Rs. 15,000 Cr. The government

is considering several options to effectively utilize this money. On 11th July 2010,

government set up an India Telecom Innovation Fund (ITIF) to support 20 start-ups in

telecom sector and to incubate technologies in the sector. This fund will seed its money

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from USOF, and premier educational institutes and top telecom companies will be roped

in to develop start-ups.

Government is also considering setting up a national Public Innovation Network to make

technology easily accessible. This will also be done by utilizing USOF funds. Another

idea with government is to carve out Rs. 5000 crore from the USOF to set up a dedicated

fund to promote companies which indigenously manufacture telecom equipments and to

carry out research and development. USOF money can also be utilized in laying out

optical fiber networks in the rural areas. Apart from Rs 15000 crore from USOF, Rs

13000 from NREGA can also be utilized to carry out this task. This will help in laying out

broadband and wi-fi network in rural area. (K.A., 2010)

In a new initiative, USOF is also considering upgradation of rural telecommunication

infrastructure e.g. Next Generation Networks (NGN).

Recently proposed Reforms

(Engebretson, FCC officials outline proposed Universal Service reform, 2010)

1. Universal Service Reforms in National Broadband Plan:

• The transitioned replacement of the high-cost Universal Service Fund with a new

Connect America fund and the creation of a mobility fund. The mobility fund

would be aimed at “extending 3G service in areas lagging behind the national

average,”

• Freezing support to small rate of return carriers

• Funding to be determined on a “provider and technology-neutral basis.”

• The phase-out of the per-minute access charge system, beginning in 2012. Instead

service providers will be encouraged to develop an alternative methodology for

compensating one another similar to what Internet-based providers have

established for interconnections.

• Targeting areas where market conditions do not support commercial broadband

build outs

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2. Reverse Auctions/ Competitive Bidding wars: Carriers who bid for the lowest subsidy

level will be given subsidy according to its bid in areas where are commercially not

viable.

Comparison of USF and USOF

The comparison of USOF with the Universal Service Fund (USF) of Unites States draws

some interesting parallels. The USF has similar objectives – to target certain set of people

utilizing the funds collected as fees from the telecom companies. Since its introduction in

1996, USF has changed and evolved regularly, and it has been largely a successful model.

Exploring this model and comparing it with USOF will shed some light upon the strengths

and weaknesses of USOF.

USF USOF

Goals: (USAC, 2010)

• To promote the availability of quality

services at just, reasonable, and

affordable rates

• To increase access to advanced

telecommunications services throughout

the Nation

• To advance the availability of such

services to all consumers, including those

in low income, rural, insular, and high

cost areas at rates that are reasonably

comparable to those charged in urban

areas.

Goals :

• To provide access to telegraph services

to people in the rural and remote areas at

affordable and reasonable prices. (USOF,

Implementation status of schemes)

• To increase teledensity in rural areas

Resources:

All telecommunications carriers that provide

Resources:

The resources for implementation of USO

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service internationally and between states

pay contributions into the USF. Typically,

the FCC releases the contribution factor for

the quarter between the 2nd and 15th day of

the month preceding the quarter. Using this

information, carriers calculate the amounts

they will owe for USF. (USAC, 2010)

are raised through a Universal Service Levy

(USL) which has presently been fixed at 5%

of the Adjusted Gross Revenue (AGR) of all

Telecom Service Providers . (USOF,

Implementation status of schemes)

Types of programs:

Focus on 4 types of consumers:

• rural areas

• low-income consumers

• rural health care providers

• schools and libraries

Types of programs:

(Office of the administrator, USOF)

• Access : Community (VRT/RCP)

and Individual ( RDEl/Mobile

Tower)

• Hardware : Customer premises

equipment, Computing devices and

Kiosks

Focused not just on rural but on any less

connected area

More focused on rural connectivity and rural

areas

Voice –focused program which in turn

promotes broadband connectivity too

Emphasis now on broadband connectivity

e.g Village entrepreneur program where

target are facilities like checking market

rates, health care, paying bills and booking

tickets online

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Recommendations

1) Handset subsidy: Handset cost is one of the major hurdles that is being faced in order to

increase the teledensity. Government can subsidize mobile handsets (for rural and urban

poor) which will increase the teledensity and connectivity which fulfils one of the objectives

of USOF. (Jain & Raghuram, 2010)

2) Linking of handsets with operators: This happened in U.S and some other countries

where the handset is tied up with operator and it will be available at a discounted price.

Therefore it will be easy for rural and urban poor to own a handset. This will help increase

the connectivity teledensity.

3) Increasing towers: USOF can bargain with operators to provide connectivity in rural

areas. Connectivity can be increased by constructing more towers. This can happen if USOF

collects less percentage towards USOF from the operators who provide connectivity to some

limited number of villages a year etc.

4) Broadband connectivity: Apart from providing internet facilities in villages through a

village entrepreneur, USOF should also provide facilities in Hospitals, Schools etc.

Infrastructure should be created in order to provide broadband connectivity. Village

entrepreneur should also take responsibility to create awareness among the villagers

regarding the facilities of internet.

5) Internet Awareness: USOF should educate and create awareness in the rural areas

regarding the facilities provided by internet. Demonstrations should be given about paying

bills, booking tickets, checking market rates for commodities via internet. This will let them

know the benefits of using internet as it saves transaction costs, transportation costs and with

time it will increase the usage of internet facilities.

6) Subsidized Broadband facilities: Broadband connectivity is still expensive in India.

Unless broadband connectivity is subsidized, the positive externalities provided by it will be

undermined by its cost.

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7) Combinational bids: The main problem behind low rural teledensity is less commercial

viability for the players to provide telecommunication services in rural areas due to several

factors. To encourage service providers to enter rural areas, in some of the developing

countries, combinational bids comprising a profitable area and an area with lower revenue

potential (rural area), have been used to extend the universal service obligations

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Exhibits

Interview Transcript with Mrs Darshana Momoya Dabral, Controller of communication

accounts, Gujarat Circle

Q) How is USOF formed and please explain the objectives of USOF?

A) USOF is a decade old project. It will be funded by transferring 5% of the levy charged

to the operators. In the beginning of USOF, the primary objective is to provide

connectivity. Now it encompasses a lot of schemes.

Q) Is it uniform across all the states in India?

A) Actually it has been easy to work in Gujarat, Punjab and Kerala. This is because of

proper road facilities and electric connections. In villages of the above three states, power

cuts are very less when compared to the other states of India. In other states the road

facilities are very poor. Therefore the success of our schemes is more prominent in these

three states.

Q) What are the schemes under USOF?

A) The first one was VPT. It involves providing a telephone facility for the public in the

village panchayat office. But the public telephone was used by panchayat like a private

telephone and the use of it by the public was limited. Afterward we decided it will be

optimal to provide public telephones near groceries etc which will be frequented by

public. Then we concentrated on providing individual telephones to public. After that we

are working to increase teledensity through wireless and wire line connectivity. We are

also working to provide broadband connectivity.

Q) How is USOF working towards providing broadband connectivity?

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A) We have selected some villages and created infrastructure consisting of a room,

computer system with broadband facilities etc. A person is appointed to take care of the

system and create awareness among the villagers regarding the facilities of internet. The

above person is named village entrepreneur.

Q) What are the hurdles you are facing in the above scheme?

A) This scheme is apparently facing problems in many villages because in the last

inspection we found that there are mismatches in the infrastructure on paper and in the

villages. There will be frequent power cuts and also the connection was very slow in

many villages. Slow connection leads to more loading time of pages and in paying bills

thereby leading to the frustration and loss of enthusiasm by villagers. Another challenge

would be to provide content in local languages so that the villages can easily read it.

Q) What are you working on now to provide broadband connectivity?

A) Now we are working towards giving individual broadband connections. We are also

trying to provide kiosks targeting facilities to check market rates, health care and ticket

bookings etc.

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Table 1 Activity wise subsidy disbursement as on 31.03.2010

(Office of the administrator, USOF)

Table 2 Universal Service Obligation Fund position as on 31.03.2010

(Office of the administrator, USOF)

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Table 3 VPTs provided by BSNL and PBSOs as on 31.03.10

(Office of the administrator, USOF)

Summary of VPTs provided by BSNL and PBSOs as on 31.03.10

Sl.

No. NAME OF SERVICE AREA Provided by BSNL Covered by PBSOs

1 ANDAMAN & NICOBAR 337

2 ANDHRA PRADESH 23333 845

3 ASSAM 23992

4 BIHAR 38891

5 JHARKHAND 27733

6 GUJARAT 16905 1130

7 HARYANA 6683

8 HIMACHAL PRADESH 17300

9 JAMMU & KASHMIR 5994

10 KARNATAKA 27419

11 MADHYA PRADESH 51986 0

12 CHATTISGARH 18101

13 MAHARASHTRA 39319 878

14 MEGHALAYA 3428

15 MIZORAM 704

16 TRIPURA 858

17 ARUNACHAL PRADESH 1677

18 MANIPUR 2079

19 NAGALAND 1260

20 ORISSA 43222

21 PUNJAB 12061 0

22 RAJASTHAN 38803 572

23 TAMILNADU 13826

24 CHENNAI METRO CITY 1655

25 UTTAR PRADESH (EAST) 74123

26 UTTAR PRADESH (WEST) 23636

27 UTTARANCHAL 14814

28 WEST BENGAL 33484

29 CALCUTTA METRO CITY 567

30 SIKKIM 398

31 KERALA 1372

TOTAL 565960 3425

GRAND TOTAL 569385

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Table 4 Summary of uncovered villages as on 31.03.2010

(USOF, Implementation status of schemes)

VPT provided

Sl.

No. Name of the Service Area

No. of villages to be

provided VPTs

under Bharat

Nirman On DSPT On other technologies

VPTs

provided

1 Andaman & Nicobar 0 0 0 0

2 Andhra Pradesh 675 0 675 675

3 Assam 8775 0 8775 8775

4 Bihar 0 0 0 0

5 Jharkhand 1564 0 1564 1564

6 Gujarat 4097 25 4072 4097

7 Haryana 0 0 0 0

8 Himachal Pradesh 1000 36 964 1000

9 Jammu & Kashmir 1753 43 1501 1544

10 Karnataka 0 0 0 0

11 Kerala 0 0 0 0

12 Madhya Pradesh 11854 20 11834 11854

13 Chhattisgarh 3509 120 3363 3483

14 Maharasthra 6275 225 6045 6270

15A Meghalaya (NE-I) 1504 538 641 1179

15B Mizoram (NE-I) 93 42 50 92

15C Tripura (NE-I) 75 0 75 75

16A Arunachal Pradesh (NE-II) 646 326 302 628

16B Manipur (NE-II) 861 314 547 861

16C Nagaland (NE-II) 28 1 27 28

17 Orissa 4122 978 3144 4122

18 Punjab 0 0 0 0

19 Rajasthan 11924 98 11822 11920

20 Tamil Nadu 0 0 0 0

21 Uttar Pradesh (East) 0 0 0 0

22 Uttar Pradesh (West) 0 0 0 0

23 Uttaranchal 3547 915 2591 3506

24 West Bengal 0 0 0 0

Total 62302 3681 57992 61673

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Table 5 Provision of VPTs under new agreement as on 31.03.2010

(USOF, Implementation status of schemes)

Sl.

No. Name of the Service Area

Uncovered inhabited census-2001

villages as per new USOF

Agreement

Cummulative achievement up to

31.03.2010

1 Andaman & Nicobar 321 157

2 Andhra Pradesh 5871 2844

3 Assam 2067 1070

4 Bihar 2412 2271

5 Jharkhand 2607 1078

6 Gujarat 3125 1882

7 Haryana 395 314

8 Himachal Pradesh 1399 1205

9 Jammu & Kashmir 388 214

10 Karnataka 1056 994

11 Kerala 0 0

12 Madhya Pradesh 2172 2042

13 Chhattisgarh 994 769

14 Maharasthra 5851 3752

Meghalaya (NE-I) 1944 49

Mizoram (NE-I) 23 19 15

Tripura (NE-I) 136 136

Arunachal Pradesh (NE-II) 2431 266

Manipur (NE-II) 318 110 16

Nagaland (NE-II) 161 143

17 Orissa 5803 2345

18 Punjab 301 61

19 Rajasthan 4903 4232

20 Tamil Nadu 682 671

21 Uttar Pradesh (East) 6536 6436

22 Uttar Pradesh (West) 1481 1391

23 Uttaranchal 1964 1362

24 West Bengal 7102 3146

TOTAL 62443 38959

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Table 6 Circle-wise progress report of RCPs as on 31.03.2010

(USOF, Implementation status of schemes)

To be provided

(As per Agreement)

To be provided

(Recoinciled Figures) Achievement S. No.

Service Area BSNL RIL Total BSNL RIL Total BSNL RIL Total

1 Andaman & Nicobar 0 0 0 0 0 0 0 0 0

2 Andhra Pradesh 3677 1865 5542 3671 1761 5432 3671 1761 5432

3 Assam 1913 0 1913 1913 0 1913 1913 0 1913

4 Bihar 1302 3254 4556 1224 3243 4467 1224 3243 4467

5 Jharkhand 451 0 451 448 0 448 448 0 448

6 Gujarat# 1829 272 2101 1461 66 1527 1461 66 1527

7 Haryana 145 626 771 88 402 490 88 402 490

8 Himachal Pradesh 95 0 95 36 0 36 36 0 36

9 Jammu & Kashmir 122 0 122 56 0 56 56 0 56

10 Karnataka 1528 669 2197 1528 451 1979 1528 451 1979

11 Kerala 1 0 1 1 0 1 1 0 1

12 Madhya Pradesh 1759 0 1759 1730 0 1730 1730 0 1730

13 Chhattisgarh 627 0 627 627 0 627 627 0 627

14 Maharashtra 3140 305 3445 1735 185 1920 1735 185 1920

15 North East-I 505 0 505 256 0 256 256 0 256

15A Meghalaya 28 0 28 28 0 28 28 0 28

15B Mizoram 21 0 21 21 0 21 21 0 21

15C Tripura 456 0 456 207 0 207 207 0 207

16 North East-II 193 0 193 186 0 186 186 0 186

16A Arunachal Pradesh 7 0 7 7 0 7 7 0 7

16B Manipur 95 0 95 89 0 89 89 0 89

16C Nagland 91 0 91 90 0 90 90 0 90

17 Orissa 936 0 936 936 0 936 936 0 936

18 Punjab 43 225 268 43 183 226 43 183 226

19 Rajasthan 1416 0 1416 1413 0 1413 1413 0 1413

20 TN & Pondichery 1424 1769 3193 1416 1441 2857 1416 1441 2857

21 Uttar Pradesh ( East) 2295 4721 7016 1770 4062 5832 1770 4062 5832

22 Uttar Pradesh (West) 344 0 344 344 0 344 344 0 344

23 Uttaranchal 5 3183 3188 4 3075 3079 4 3075 3079

24 West Bengal 1072 4542 5614 1072 3867 4939 1072 3867 4939

Total 24822 21431 46253 21958 18736 40694 21958 18736 40694

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