1. Regulating Networks – The Indian Telecommunication Experience ICRIER SEMINAR – JUNE 2006

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3. 2 Stages of Telecom Regulation Stage I - Monopoly provision by State incumbent : No regulation 1948-1998 Stage II - Cost – plus tariff regulation 1998-2003 Stage III- Competition regulation 2003-2006

4. 3 Cost plus Tariff Regulation to Competition Regulation Stages: Till 2003, Telecom Tariffs were fixed/permitted by the Regulators. In a number of other countries, even today, tariffs are approved by the Regulator These tariffs are mostly fixed on a cost plus basis – on the incumbent’s data This is done by the Power Regulators in India also. USA and UK Power Regulators did this till a few years back. We made the change of moving to Competition Regulation in place of Tariff Regulation in 2003. This step made all the difference to the Indian Telecom Sector.

5. 4 Components of Competition Regulation Technology neutrality Appropriate Interconnection Neutrality To increase competition between operators working in the same network - Cost based rentals - Cost based ICU charges – no profits - Termination charges lowest possible based on actual termination cost - Entry fee – 2G, 3G case - Equal Access to scarce resources – spectrum, ROW, Towers, Last Mile etc. - Removal of barriers to efficient network build up e.g. infra- structure sharing restrictions - Critical network resources available at fair and non-discriminatory prices - Establishing network elements at fair prices - Fair play conduct - Mergers and acquisitions – transparent rules -regulate only those who are Significant Market Players (SMPs)

6. 5 What does Cost plus lead to?  1999 : Rs. 32 per minute tariff  2003 : Rs. 4 per minute tariff  High ADC – Rs. 8 per minute etc  No ADC for mobiles  Very high Domestic Leased Line Tariffs due to monopolistic conditions  Very high IPLC tariffs due to monopolistic conditions  In other sectors, cost plus tariffs have led to :- - Power Sector - inappropriate fuels, locations and technology - padding of cost and taxation - No efforts at cost reduction both for equipment and fuel - Steel Sector - Prices determined by public sector’s cost - Inappropriate locations and technology - Fertilizer - Retention price policy continues - Inappropriate technologies - Input prices continue to be high leading to higher subsidy bills - Imported - Very high cost Fertilizer- No incentive for efficiency in handling and sale Handling

7. 6  TRAI facilitated huge reduction in forborne tariffs in 2003-05  Measures indicated in boxes – and by increasing competition  Also, by allowing handsets sales in instalments.  Mobile growth stepped up significantly – once mobile and fixed line tariffs became equal  Mobile then became the telephone of the working class  Mobile growth in 2003-04 and 2004-05 > average mobile growth in earlier years X 12 0.85

8. 7 PSU’s Operators Subscriber base  Growth 1998-2005 = 34.28 million subscribers Fixed 40.70 million Mobile 16.47 million  5million/year in comparison to 0.35 million/year in pre-reform period. Only difference – competitive environment  PSU operators have shown remarkable growth in competitive environment. Phase IPhase II

9. 8 Private Operators Subscriber base  Growth 1998-2005 = 45.45 million subscribers Fixed 8.22 million Mobile 59.46 million  Private operators have contributed very largely to post 1998 growth  Private operators have contributed primarily in mobile growth due to lower costs  Liberalisation aimed at private participation and investment in telephony  Private telephones overtook public telephone in July 2005 only a few years after liberalisation  This was possible due to appropriate regulatory regime Phase IPhase II

10. 9 Investment in Telecom Sector and Subscriber Numbers Approximate Investment upto March 2005 (Rs. In Thousand Crores) No. of Subscribers Market share (%age) PSU Operators 9457.1745.79 Private Operators 51.567.6854.21  Aim of liberalization was more investment/growth.  Has this been fulfilled in telecom sector?

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12. 11 As ARPU has fallen, revenues have grown 0 200 400 600 800 1000 1200 1400 FY 2000FY 2001FY 2002FY 2003FY 2004FY 2005 APRU (Rs./month) 0 5000 10000 15000 20000 25000 30000 Revenues of Mobile Operators (Rs. Crore) ARPU (Rs./month)Revenue of Mobile Operators (in Crores of Rs.)

13. 12 Name of the country Call charge per minute Minutes of Use per subscriber per month ARPU (Average Revenue Per User) Termination rates per minute FixedMobile US$MinutesUS$ Australia 0.24159430.0160.152 Brazil0.1192110.0200.080 China0.04261100.0100.025 Switzerland0.45119590.0170.163 Japan0.33156630.0220.130 India0.04*309110.007 Call charges per Minutes of Use, ARPU and Termination Rates per minute for mobile service in different countries (June 04)  * Has come down to 0.03 in 2005 – lowest in the world  Since the tariffs are low – there is huge unmet mobile demand in rural areas – only mobile towers have to reach  Some low end ARPUs being offered by operators are $ 4 per month and entry cost (handset price) $35  At these rates, huge market is waiting to be tapped  Our lowest termination rates encourage aggressive competition at origination of calls

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15. 14 Mobile coverage beyond the urban population in selected countries, by region, 2002. RegionCountryPop. Covered by mobile signal AfricaCape Verde90% Togo90% Zambia50% AmericasEucador86% Mexico90% Arab StatesJordan90% Morrocco95% Asia-PacificKorea-Rep.99% Malaysia95% Philippines70% EuropeAzerbaijan94% Czech Republic99% Slovak Rep.98% India20% Source:- ITU World Telecommunication Indicators Database If mobiles can cover high population % in other developing countries, in India also they can Once higher population coverage is achieved, growth will be further accelerated For larger mobile coverage we have to go to rural areas, where 70% of our population lives

16. 15 Present Coverage of Mobile Networks (2004-05) (Population Coverage 25-30%) ____________________________________________________________________ By areaPopulation Coverage ____________________________________________________________________ Towns ~1700 out of 5200~275 Million ____________________________________________________________________ Rural areas NegligibleNegligible ____________________________________________________________________ Proposed Network Coverage by 2006; operators plan (Population Coverage 75%) ______________________________________________________________________________________________________ By areaPopulation Coverage _______________________________________________________________ Towns~4900 out of 5200~300 Million _______________________________________________________________ Rural areas~350,000 out of ~450 Million 607,000 villages ______________________________________________________________________________________________________

17. 16 Substantial Growth for all Excerpts from Morgan Stanley Report: Are present tariffs predatory? “Even at monthly ARPU of US$5, Wireless Operators can make money” “ … with telecom equipment cost having fallen globally, and most of the GSM operators being allotted higher spectrum, the incremental capex/sub in India has fallen.” “ We have performed a sensitivity to capex cost and ARPU. A consumer yielding a monthly ARPU of US$5 provides incremental ROCE of 16% based on capex/capacity of US$60.” The present ARPU is around $9 per month, hence operators can profitably expand into non-covered and rural areas. In any case operators are already offering $ 4 / month ARPU tariff packages.

18. 17 No. of households with key durables (in million) S. No. All India Urban + semi-urban RuralUrban + semi- urban Rural Total Households (Millions) 19254138 1Bicycle44%46%43%24.8459.34 2Radios35%44%32%23.7644.16 3Television32%64%19%34.5626.22 4Two wheelers (Scooters & Motorcycles) 12%25%7%13.59.66 The rural areas have demand Demographical Analysis (2001): Penetration of households with key consumer durable assets

19. 18 Urban/Rural income-wise distribution of households (In millions) Income GroupRural HouseholdsUrban Households Lower5887 (47.94%)931 (18.96%) Lower Middle4277 (34.83%)1658 (33.76%) Middle to High2116 (17.23%)2322 (47.28%) Total12281 (100%)4911(100%)

20. 19 Number of cable homes and number of fixed line telephone subscribers Figures in million – (Year 2003) S. No. Name of the country No. of cable TV + DTH subscribers No. of fixed line connections 1Australia1.5510.82 2China105.00 #263.00 3United Kingdom10.5034.90 4Japan8.1071.15 5Korea11.9422.88 6Taiwan5.3013.36 7Thailand0.436.60 8Unites States94.97181.6 9India*6147  India numbers are for 2005.  There is no country other than India where cable TV connections exceed fixed line phones  This indicates a huge demand in India for entertainment and multi-sourced news and information  Hence triple play networks in India will be hugely successful

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23. 22 Collection and Disbursement of USOF

24. 23 ParametersKoreaMalaysiaChinaIndia Internet connections per 100 persons 2712.22.70.46 Broadband connections per 100 persons 260.681.50.02 Charges per 100 kbps per month (US$) 0.257.613.0715.63 GDP (US$ Per capita)10,0004,000965465 OVERALL ICT PENETRATION IN INDIA STILL LAGS BEHIND OTHER COUNTRIES Key internet and broadband indicators June 2004

25. 24 Service providerApprox. Capacity – Dark & Lit Fiber (2005) Present Lit Capacity (2004) Utilization Tata (SAFE, SMW3, SMW4, Indicom) 5.150.014Less than 0.010 Tbps Bharti (i2i, SMW4)8.50.160 Reliance (FLAG, FALCON)3.00.005 Total16.70.180 SUFFICIENT INFRASTRUCTURE ALREADY EXISTS AND IS GROWING, BUT UTILIZATION NEEDS TO BE INCREASED International Connectivity Capacity in Tbps; 1 Tb = 1,000 Gb National Connectivity 670,000 route KM of fiber has been deployed across the country BSNL alone has reached 30,000 of its 35,000 exchanges with fiber There is a possible capacity of up to 20 Gbps to each of these 30,000 locations Using wireless, satellite and other technologies, these 30,000 exchange locations can be leveraged as hubs for distributing broadband connectivity to all the surrounding villages Many routes between major cities (approx. 150) with > 1 Tbps capacity, and utilization less than 3 Gbps on average

26. 25 THANK YOU