The issue of interconnect charges took another turn with private players seeking third-party intervention from TRAI and TDSAT against BSNL’s proposed hike in access charges. Industry observers comment…

In BSNL justified in increasing the interconnect charges for local, STD and ISD calls?

Taveesh Pandey
From BSNL’s perspective, the answer would be “yes”. The private operators obviously feel differently. BSNL has been unfortunately projected in the media as an insensitive bureaucratic ogre out to destroy the helpless, consumer-friendly private operators. The reality is somewhere in between. BSNL has revenue pressures like nay profit-oriented entity and is laden with the legacy of servicing a large, but not necessarily profitable, consumer base. Applying the Pareto principle to BSNL, we can conclude that in each of the circles that BSNL operates in, around 80 per cent of its revenues would come from 20 per cent of its customers, mainly the business community. This segment would in all probability be the target of private operators and this would adversely affect BSNL’s revenues. Therefore, BSNL’s decision is based on the simple premise of protecting its revenue base.

At one level, the decision to hike the long distance revenue share could be viewed as a mere spat between two operators. However, given BSNL’s earlier avatar as DoT, it is viewed more as an exercise in monopoly power and less as a commercial decision. Considering the unilateral nature of the announcement, the parties at the receiving end are correct in taking the former view. The broader question that needs to be answered is not whether BSNL is justified or not, but whether its decision would adversely affect rollout strategies. If the answer is yes, what effect would it have on the government’s objective of national connectivity which envisages the private sector as an equal partner.

The bigger worry is strategic in nature. What are BSNL’s views of the wired world? In the networked world, every operator depends on other carriers/networks to originate, carry and terminate traffic. Hence, cooperation, as defined by interconnection, access and carriage arrangements with others, is very short-term in nature. BSNL may win this battle but till it has a coherent long-term strategy in place instead of a free-fighting approach, it will not win the war. Today BSNL is the only DLD operator and is collecting around 40-45 per cent of the long distance charges from private operators. But tomorrow when calling volume increases, BSNL may actually get a lower share of this increased calling volume. Especially when, as is expected, private operators divert their long distance volumes to other carriers.

S. Ramakrishnan
We believe BSNL is not justified in unilaterally increasing the interconnect charge.

Mohit Saraf
BSNL operators over 90 per cent of the total phone lines. To keep the network functioning, its losses may have to be cushioned. Hence, a review of the interconnection agreement with an increase in interconnection charges would be necessary. The local call area has been extended to the entire SDCA. For this BSNL does not receive any compensation and is incurring heavy losses, which might justify increasing its revenue share to 50 per cent for local calls as against none in the current agreement. Current access charges for STD and ISD calls are below the cost incurred by BSNL for carriage and termination of these calls.

On the other side, all interconnect agreements have been mutually agreed to. Therefore, BSNL is not able to take any decision without the consent of the operators and in consultation with TRAI. Another important point is that the interim revenue-share arrangement framed by TRAI is effective till March 2002. No increase should be implemented before the expiry of the current agreement.

Diljeet Titus
Though commercial reasons seem to have compelled BSNL to increase interconnect charges, there is definitely merit in the reasoning of private companies that since they are operating under a strict price regime, they will be unable to share a greater percentage of the revenue. The key issue here is that with investments of over Rs.50 billion by private operators, it would be unfair to increase access rates without waiting for the tariff rebalancing exercise. Under the interconnection agreement, BSNL has to honour its commitment to continue to provide services till the matter is resolved. In view of this, since BSNL cannot disrupt services, it has hiked interconnection charges and expects additional revenue.

Mahesh Uppal
Interconnect charges in most countries are strictly controlled by regulators since they are at the core of the telecom business in a multiple-player environment. New players need fairly priced interconnection more desperately than the incumbent. Incumbents have less commercial incentive, since they provide access to large numbers of their customers but the new players have few subscribers to begin with.

Can private operators afford to pay BSNL’s proposed rates? Will this impact profitability?

Taveesh Pandey
The question has less to do with affordability and more to do with choice. The private operators will today pay the rates asked of them – however unfair – because they need access to BSNL’s network for long distance carriage. Should this change tomorrow when they have a choice, these private operators can and will shift their business to the new DLD and ISD operators. Without a doubt these proposed rates would adversely affect the cash flows of private operators, pushing their break even further into the future.

S. Ramakrishnan
We, prima facie, believe the increase is not justified by the cost structure. Private operators who are yet to build their backbone infrastructure will be severally affected in terms of profitability.

Mohit Saraf
The increase in revenue share for domestic, STD and ISD calls could be a deathblow to private basic telecom operators. Basic service operators are highly shocked. Most of them are already making losses and for some of them, the business could become completely unviable. This is due to another fact: the regulation does not permit them to charge more than Rs.1.20 per three minutes for a local call from the customer. Hence, it is not possible for them to pass on the increased revenue share to the end-user, which would be rather legitimate. Since the interconnection provider enters into a commercial relationship with the interconnection seeker, it would be legitimate for the interconnection charge to include a normal commercial return on the investment.

Diljeet Titus
The capital cost and the operating cost of unbundled network service for local calls, STD calls and ISD calls are still not separately available. TRAI has set up an expert committee to look into the matter and it is only on the basis of these costs that the tribunal can arrive at a cost-based tariff and that the parties wait for the findings of the TRAI committee. Also, the issue regarding whether this rate will result in profitable operations for private operators depends on their actual cost of operations.

Mahesh Uppal
How much an operator can afford to pay is difficult to say. But the new charges are bound to reduce the private operators’ profitability. However, profitability of the competitor is not the incumbent’s responsibility. It is the regulator’s job to ensure that interconnect charges are fair and that no side is able to abuse the market.

How can the issue be resolved amicably? Should the parties go for mutual agreements or wait for the TRAI verdict?

Taveesh Pandey
All parties have to be forced to sort out not only these issues but all outstanding issues. They have to view themselves as partners working towards a networked India – and where no one is a villain. To quote R.N. Goyal, a senior DoT official, in the Statesman: “Why do telecom companies behave like dogs? Barking at those who try to step into their territory, fighting and injuring each other. Why can they not instead work in partnership?” There is need for an attitudinal shift. BSNL has yet to establish its credibility with the operators as it continues to unilaterally decide on all bilateral issues. The ultimate objective is ensuring telephony access to the people through the development of communications infrastructure and not the profitability of XYZ operator. TRAI has to not only ensure that the consumer does not lose out but also to dilute the monopoly behaviour of BSNL and bring in a decision that is fair to the private operators and to BSNL.

S. Ramakrishnan
We had proposed even seeking the help of an external international consultant to help both parties come to an understanding. The suggestion was not adhered to. We were threatened with no more interconnections without an interim agreement. Hence, we had no choice but to go to TRAI and TDSAT. I believe involving a third party expert could help the two sides to come to an arrangement.

Mohit Saraf
According to the interconnection agreement, both parties have to make efforts to resolve a dispute. Another option is that basic operators try to convince BSNL to sign different contracts with different companies. However, this might be difficult since BSNL wants the same contract for all players and it would be difficult for all private operators to agree to the same terms. So far, numerous round of discussions between the two sides have failed to resolve the issue. Now a hearing is pending with the telecom tribunal. Taking the TDSAT route might enable BSNL to create further complications. But even in case of a verdict, the regulator might encourage the operators to settle interconnection rates through negotiations.

Diljeet Titus
Rather than taking a confrontationist stand both parties should postpone the date when new rates will be enforced till TRAI announces its decision. Also, since TRAI is framing the final interconnect agreement, both parties should refrain from altering the existing arrangement.

Mahesh Uppal
Only TRAI can resolve this issue since it has the mandate and technical competence to deal with it. Mutual agreements are good in principle but they hardly ever come about easily.

What, according to you, should be the criteria for fixing interconnect charges? How have other countries resolved this messy issue?

Taveesh Pandey
There is no one correct way. All new entrants in the telecom sector have faced their problem-the incumbent fights aggressively to protect its turf. The classic case of AT&T v/s MCI, BT vs. Mercury, Telecom New Zealand v/s Clear, etc. Interconnection should be mandatory – no operator can deny another an interconnect facility it any point on its network as long as it is technically feasible, installation costs should be shared fairly as both parties are likely to generate revenues from it, service levels should be contractually agreed upon, etc. Depending on the policy objective, one can have a number of options. In case the objective is to increase telephone penetration we can have a revenue share combination where the amount is divided between the originator, the carrier and the terminator. The standard option is for the originator to keep a proportion greater than half while the carrier keeps the balance. My suggestion would be to reduce the number of variables to the barest minimum – all STD and ISD calls defined as long distance calls and revenue share fixed for all.

S. Ramakrishan
I don’t believe there is any disagreement on the criterion – namely, the costs of rendering service between the two parties. The issue is an acceptable methodology to arrive at them. I am not fully aware of the experience of other countries. I guess the regulatory authorities’ practices are more matured in certain countries.

Mohit Saraf
There are two methods for charging for interconnection. One is through sharing of revenues among the interconnected operators, as is used in India. The second is to establish interconnection charges on the basis of costs. Most countries use cost-based interconnection charges. In this, there is no sharing of revenues between carriers. Instead, the operator from whom interconnection is purchased is paid for providing that interconnection.

As much as possible, the charging structure should be unbundled so that a telecom operator pays for what it uses and is not forced to pay for what it uses and is not forced to pay for what it does not use. For some services, the regulators might need to intervene in terms of specifying floors and ceilings, or leave the negotiation of the charges to the operators themselves.

Further, a normal commercial return should be incorporated and the interconnection charge should be below the enduser price. However, favorable treatment could be provided to newcomers till they achieve stability.

Different countries have used different methodologies for fixing interconnection charges. Nonetheless, the local interconnection rates between fixed to fixed operators in these countries have been within a narrow range. An important feature of the regime for interconnection charges in certain countries, like Australia and the UK, is that the system provides a preference in favour of the newcomer operator.

Diljeet Titus
In mot countries, except Japan (where the interconnection charge is based on revenue sharing) this charge is dependent on the distance of the call. For instance, the price charged can be based on “true distance dependency” as in the case of the UK and the US, “zone-dependent charges” as in the case of Australia and New Zealand, or “network elements used” as in the case of Sweden. In Malaysia, interconnection rates are a hybrid between fully distributed costs and top-down long run incremental costs. Before India adopts any of these models after making appropriate adaptations, it is important that a proper study is conducted.

Mahesh Uppal
It is accepted world over that interconnection charges must reflect the cost of providing the service. But this does not mean that they have to be equal to the costs. Regulators decide how costs have to be shared between the interconnecting operators.