Universality of Infrastructure Services-Legal, Policy and Regulatory Framework (Telecom) Mohit Saraf Partner Luthra and Luthra Law Offices TERI REGIONAL CONFERENCE DECEMBER 6, 2004

6th December 2004Luthra & Luthra Law Offices ©2 Importance of USO obligation Level Playing field for everyone Different level of infrastructure offers different opportunities for growth

6th December 2004Luthra & Luthra Law Offices ©3 However there is enough evidence to show that teledensity is positively correlated with GDP growth Therefore in order to increase teledensity there is a need to drive telecom penetration in rural areas Today’s rural markets do not appear to be viable However what may not be viable today may become viable tomorrow. USO fund can bridge viability gap by providing cushion needed for initial investment in rural telecom Need for Universalising Access

6th December 2004Luthra & Luthra Law Offices ©4 Vast potential for exploiting telecom facilities in rural areas  Increase access to info on urban markets for farmers  Showcase rural products and tourism  Schools, hospitals and other public services can be improved with access to internet Empirical evidence of faster growth of poorest 20 percent in telecom intensive economies FDI flows are also higher in telecom intensive economies Need for Universalising Access

6th December 2004Luthra & Luthra Law Offices ©5 Various options to finance USO Direct support from Government Budget Seed finance by development bank or agency Licensing or spectrum fees and auctions Operator Revenue Contribution [INDIA] Interconnect levies Virtual Fund Transfers

6th December 2004Luthra & Luthra Law Offices ©6 Pre USO Fund Scenario in Indian Telecom Sector Pre-USO support for rural obligations  Access Deficit Charges (ADC) to support subsidized low cost rural telecom tariffs  Reimbursement of license fees and government grants to incumbent to support ‘legacy’ networks

6th December 2004Luthra & Luthra Law Offices ©7 The USO Fund Advantage Post 2002 we have chosen to adopt a USO Fund supported by transparent levies on all operators supplemented with government grants. Disbursement is through a bidding process Purpose of USO fund and bidding process is to make the subsidy smart Ensure that there is no pilferage and that the entire subsidy gets to the market Deviates from the user pays principle but achieves larger goals Smart subsidies also ensures that the cost of subsidy paid out is minimal

6th December 2004Luthra & Luthra Law Offices ©8 USO – Legal and Policy Framework Overview New Telecom Policy 1999 (“NTP 99”) spelt out guiding principles and targets for USO Enactment of enabling statutory provisions in 2004, with retrospective effect from 2002 Part IIA, of the Indian Telegraph Act, 1885 inserted by Indian Telegraph (Amendment) Act, 2003 constitutes USO Fund Part X, Indian Telegraph Rules, 1951 inserted by Indian Telegraph (Amendment ) Rules 2004 details administration of the USO Fund (“Rules”) Guidelines for implementation of Universal Service Support issued by DoT(“Guidelines”)

6th December 2004Luthra & Luthra Law Offices ©9 USO Fund Controversy over statutory basis of USO Fund and its disbursement  Attempt to make USO fund operational without enabling statutory framework  Since USO Fund did not exist MoF unable to release USO proceeds  Enabling legislation and rules made in 2004 wref from 2002  Approx INR 3400 collected from 2002 will be available for disbursement from this year

6th December 2004Luthra & Luthra Law Offices ©10 Major Legal, Policy and Regulatory issues relating to USO  Issues relating to the purpose for which the USO Fund is used  Ensuring that USO disbursements are made in a transparent and non-discriminatory manner  Ensuring accountability of Universal Service Provider (“USP”)  Enabling Universal Service through non-USO Fund based options

6th December 2004Luthra & Luthra Law Offices ©11 Defining USO Objectives The definition of USO in Policy not strictly technology neutral  No rationale for prescribing low speed data services  Does not clearly envisage the possibility of new developments like Voice over Internet Protocol (VoIP) But TRAI recommended Rules have created enabling framework even though there were gaps in Policy

6th December 2004Luthra & Luthra Law Offices ©12 Enabling framework created by Rules  Areas not clarified in Policy spelt out in detail in Rules  Telecom facilities which would qualify for USO Fund support clarified  Possible because Rules laid before Parliament  Bidding mechanism laid down in Rules enables USO Funds to get ‘value for money’ and incentivise efficient technology-cost mix Defining USO Objectives

6th December 2004Luthra & Luthra Law Offices ©13 Defining USO Objectives  However further clarity in the statutory framework would be desirable  Priority of Stream I (Universal Access) over Stream II (Universal Service) as per TRAI recommendations and as provided in Guidelines (DoT) not enunciated in Rules (Rule 525)  Detailed bidding procedure provided in Guidelines don’t find mention in Rules (multi layered bidding).  Need to examine whether some of the provisions mentioned in the Guidelines can be incorporated in the Rules

6th December 2004Luthra & Luthra Law Offices ©14 Principles of Subsidy Regulation Law,Policy & Regulation should ensure that  Subsidies are targeted  Subsidy disbursements are transparent  Non- Discriminatory/Level playing field  Avoid Duplication  Subsidies obtain maximum value for money  Universal Service Providers are held accountable for proper discharge of their obligations

6th December 2004Luthra & Luthra Law Offices ©15 USO Fund – A Smart Subsidy Presently Rules provide for bidding process among eligible operators thus making the USO a ‘Smart Subsidy’  Ensures that USO Fund disbursements are transparent and made in a non- discriminatory manner  Ensures that the services are allocated to most efficient service provider and thus introduces benefits of competition  Reduces reliance on approximate cost estimates  Ensures matching of costs and subsidies

6th December 2004Luthra & Luthra Law Offices ©16 USO Fund Disbursements Stage set for phasing out of non-USO Fund subsidies  Incumbent currently beneficiary of Access Deficit Charge (ADC), reimbursement of license fees and grants for providing low cost rentals and maintenance of legacy networks  Since post 2001 USO commitments to cover capex as well as opex, above benefits to be phased out  Will minimize overlapping of subsidy provisions and ensure that incumbent is not overcompensated

6th December 2004Luthra & Luthra Law Offices ©17 Accountability of Universal Service Providers Experience with Fixed Service Providers Rural Roll out obligations  Earlier, Fixed Service Providers had not discharged USO obligations  Rural Roll out obligations were a condition of FSP Licence.  Fixed Service Providers preferred to pay LD’s rather than perform their obligations

6th December 2004Luthra & Luthra Law Offices ©18 Administrator to enter into Agreement with Universal Service Providers. There is also a suggestion for creation of ‘niche operator’ under the proposed Unified Licensing Framework who may be required to roll-out networks in rural areas The Licenses/Agreements should be carefully drafted to adequately provide for safeguards in case USP/niche operators unable to fulfil obligations Accountability of Universal Service Providers

6th December 2004Luthra & Luthra Law Offices ©19 Universal Service beyond USO Fund  Present Fund corpus and accruals in coming years not likely to be sufficient for fulfilling all Universal Service Targets  TRAI has therefore suggested number of options  Niche operators  Waiver of Spectrum Fees and  Sharing of Infrastructure

6th December 2004Luthra & Luthra Law Offices ©20 Niche Operators  Introduction of Niche operators with reduced license fee  Need to safeguard against cherry picking by appropriate bundling of areas with right to consumer to demand service provision (‘distribution licensee’ in electricity sector)  Better to limit number of operators so that unviable market is not further fragmented  License can be awarded to operator who quotes highest license fees  Further competition can be introduced after a fixed number of years (say 5) after the area ceases to be a Net Cost area.

6th December 2004Luthra & Luthra Law Offices ©21 Universal Service beyond USO Fund TRAI options (contd)  Waiver of Spectrum Fees  If across the board then this would make the rural market viable without introducing market distortions  Sharing of infrastructure  If incumbent is made to unilaterally required to share infrastructure might raise concerns of compensation and non-discrimination  Therefore alternatively sharing of infrastructure through models of ‘open access’ (Electricity Sector) could be utilized

6th December 2004Luthra & Luthra Law Offices ©22 THANK YOU!