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Financing Rural Connectivity Through Universal Service Fund Support

Conference on Rural Telecom Market: Opportunities and Issues; Strategies and Solutions, The Imperial, New Delhi, September 15-16, 2009




Seventy per cent of the Indian population (820 million people) resides in rural India consisting of 0.6 million villages largely lacking in basic infrastructure and connectivity. The rural population is mainly engaged in agriculture which has very low productivity. Further, even non agricultural occupations in rural India are characterized by low productivity levels. Given this situation, there is no doubt that if India is to continue on its current path of healthy growth rates, efforts have to be made to ensure that this growth is inclusive. We cannot afford to neglect rural India.

ICT connectivity is especially essential for mainstreaming rural areas. It can help reduce isolation and increases awareness level of the rural population. ICT can facilitate access to education, health, and markets and increase knowledge and productivity levels of rural Indians. Broadband access in particular becomes especially important in situations where the other infrastructure is inadequate (roads, administrative machinery etc).

Liberalization, competition and effective regulation have brought impressive gains to Indian telecommunications. However these telecom reforms are not enough for bringing about the desired level of telecom penetration in rural/remote areas which suffer from both supply side and demand side constraints such as difficult terrain, insurgency, lack of supporting infrastructure(roads, power) scattered populations, low income levels etc.

In such a scenario, the Universal Service Obligation Fund (USOF) plays an important and multi-faceted role: a) To incentivise telecom service providers to venture into rural/remote areas, b) To facilitate rural roll out c) To reduce costs and hence end user prices and d) To increase affordability of telecommunication services. The USOF’s tools for fulfilling its objectives could include: subsidy support to reduce/close the viability gap, pursuance and liaison with state/local authorities to facilitate rural roll out, encouragement and support for the adoption of innovative solutions to overcome constraints such as power, backhaul etc, encouraging the sharing of infrastructure at discounted rates and building in special tariff plans for target beneficiaries where required.

Funding methodology: As of March 2009, the potential funding by way of USL balance is Rs 112.43 billion while as on Septembers 2009, disbursements had crossed Rs 94 billion. Funds are made available to the USOF through the budgetary process. These are to be utilized in accordance with USOF Rules while abiding by the Government’s policy directions and Government of India rules and regulations on financial propriety.

The subsidy scheme design is a multi-pronged process:

• First, the overall scheme is conceptualized including decisions on service deliverables (to other service providers or to end customers)

• Second, the infrastructure elements to be created/augmented/shared (if any) are identified

• Third, the appropriate costing is decided on, which is based on prevailing market rates/historical costs

• Next, benchmarking is carried out to arrive at maximum subsidy rate/offered subsidy level.

• Subsidy modeling is done to ensure correct level and structure of incentives for long term sustainability of services.

• Then, a decision is made on the subsidy disbursement schedule and associated conditions (building in safeguards to ensure proper implementation)

• Service rates to may be discounted appropriately to ensure affordability of telecom services for target beneficiaries

• Finally, the USOF carries out the tendering process.

The USOF is a comprehensive fund disbursal mechanism. It not only utilizes an all India network of departmental offices for subsidy disbursement but also carries out regular post payment verification and closely monitors ground level implementation of schemes. In this manner effective utilisation of funds is ensured and leakages are avoided.

Lessons learned and the way forward: USOF activities carried out since 2002 have served to provide valuable insights into planning and implementation issues. Some of these are:

(i) Public Access Schemes have shown that it is best to organize service provision along commercial lines. A solid, monitoring, awareness and feedback mechanism should be in place.

(ii) Experience with individual access (Rural DEL Schemes)schemes suggests that the practicality of the monitoring requirement must be assessed carefully. Extending telecom coverage with a minimum QoS is perhaps a better approach.

(iii) The Mobile Infrastructure scheme has demonstrated that rural areas hold tremendous potential for mobile services. However, there are several constraints too. For example, inadequate access to power supply is a key challenge for service providers. Land acquisition and backhaul are other difficulties encountered in rural roll outs.

Going forward, USOF is coming up with various schemes and projects to overcome challenges and provide the much needed telecommunications connectivity to rural areas. However, that being said, it is essential to note that the USOF is not a universal panacea. USOF efforts must be supplemented by simultaneous programs towards overall rural infrastructural development including the areas of IT, education, power etc. A much greater level of coordination and mutual leveraging amongst various rural development programs is called for.