Subsidising your competitor

It's ironic, but at a time when the finance ministry is telling the state-owned Bharat Sanchar Nigam Limited to begin paying license fees of around Rs 4,000 crore (Rs 40 billion) a year, the Telecom Regulatory Authority of India is working on a proposal to get all private telecom operators to pay BSNL a whopping Rs 13,000 crore (Rs 130 billion) a year.

A recent TRAI consultation paper even considers the possibility that part of this could come from phone calls made from one WiLL mobile to another, or from one cellphone to another.

That is, you may not use BSNL's land-line network at all, but you'll still pay! Might as well charge people eating a burger at McDonalds, it is just as ridiculous. What's even worse is how this is fuelling the grey market in international long distance calls.

First, the so-called Access Deficit of Rs 13,000 crore. Broadly, what the TRAI is saying is that BSNL has 40 million phones, and should really be charging customers a rental of Rs 425 a month to break even, but since it charges an average of Rs 200, it loses Rs 10,800 crore (Rs 108 billion) on this.

Add to this, the amount it loses by giving customers free and below-cost calls, and the total adds up to Rs 13,000 crore.

Amazing isn't it, the politicians don't allow BSNL to hike tariffs to economic levels (a few weeks ago, BSNL had to withdraw a tariff hike of Rs 3,500 crore or Rs 35 billion), but want private firms and their customers to pay for these subsidies.

But before blaming the politicians, it's worth pointing out that the TRAI's calculations are themselves full of holes. For one, it gives the break even rental that BSNL should be collecting from consumers to cover costs, but forgets to take into account the fact that BSNL also earns a pretty sizeable revenue on these phones!

If you don't believe me, I'd recommend you visit www.trai.gov.in, and look at the consultation paper on IUC issues of May 15 yourself.

Take the revenue into account, and it's possible there may be no access deficit at all. Certainly this is what the cellular operators have argued to the TRAI.

Another firm, Data Access, has argued the Access Deficit can actually be reduced to Rs 4,500 crore (Rs 45 billion) by charging market prices from both urban and commercial users -- after all, why should the Business Standard's land-lines in New Delhi's Bahadurshah Zafar Marg be subsidised, even though, admittedly, we are providing a service of national importance?

As a carrier of international long distance calls, Data Access also points out that BSNL makes huge profits from the international long distance calls made. BSNL charges customers Rs 24 per minute for calls made to, say, the United States, but since it pays carriers like Data Access just Rs 6 to take it to the US, it makes a profit of Rs 18 a minute.

Multiply this by the amount of calls made, and it works out to over Rs 1,000 crore (Rs 10 billion) annually.

While it is clearly in the interest of the cellular firms and Data Access to exaggerate wildly, how else could BSNL have made a gross profit of over Rs 6,800 crore (Rs 68 billion) in 2001-02 if it wasn't for this kind of profiteering?

Let's move on to what this is doing to the international long distance market.

Let's take a call that comes in from New York to Delhi, typically at a cost of 25 cents. Now, a carrier like Data Access will get around 12 cents, or Rs 6 for taking the call to Delhi.

Earlier, Data Access would give BSNL around Rs 3 of this, as the call would eventually terminate in BSNL's network. But today, thanks to the TRAI asking firms to pay Rs 5.5 every minute for every ILD call to cover part of the so-called Access Deficit, Data Access' margin is badly squeezed.

That, of course, is hardly our problem, except that most ILD players estimate the size of the grey market ILD business has increased dramatically.

With profit margins virtually doubling if you can avoid paying the Access Deficit, a host of small players just set up illegal switches to provide grey market calls. In terms of revenues, that's a revenue loss of around Rs 1,800 crore (Rs 18 billion) annually.

But leave all this for the moment. Assume that it is the moral duty of the private telecom industry to subsidise its biggest competitor, BSNL, so that it can continue to not charge consumers economic rentals/tariffs on the land-lines that they have.

The sad part is that private industry does not know for certain what it is paying for, since BSNL does not keep separate accounts for anything. So, it doesn't know if it is subsidising the Business Standard type of commercial fixed-line customer, or whether it is an urban resident, or a rural one (rural phones, by the way, are funded by the USO fund already).

Worse, to the extent cellular firms are paying for the Access Deficit, for instance, they don't even know if they are funding BSNL's cellular business!

After all, BSNL's cellular tariffs are far lower than those offered by the private players -- BSNL had free incoming calls from its own land- lines long before the private firms bettered this -- and it is very likely that part of this is being funded by the competition.

One has heard of business rivals doing their best to destroy one another, but this is the first instance of them funding one another.

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