Yesterday, the Telecom and Regulatory Authority of India (TRAI) released the Prohibition of Discriminatory Tariffs for Data Services Regulations, 2016. These regulations prohibit Telecom Service Providers from charging different tariffs from consumers for accessing different services online. A lot of debate has taken place around network (net) neutrality in India, in the past few months. This blog post seeks to present an overview of the developments around net neutrality in India, and perspectives of various stakeholders. Who are the different stakeholders in the internet space? To understand the concept of net neutrality, it is important to note the four different kinds of stakeholders in the internet space that may be affected by the issue. They are: (i) the consumers of any internet service, (ii) the Telecom Service Providers (TSPs) or Internet Service Providers (ISPs), (iii) the over-the-top (OTT) service providers (those who provide internet access services such as websites and applications), and (iv) the government, who may regulate and define relationships between these players. TRAI is an independent regulator in the telecom sector, which mainly regulates TSPs and their licensing conditions, etc., What is net neutrality? The principle of net neutrality states that internet users should be able to access all content on the internet without being discriminated by TSPs. This means that (i) all websites or applications should be treated equally by TSPs, (ii) all applications should be allowed to be accessed at the same internet speed, and (iii) all applications should be accessible for the same cost. The 2016 regulations that TRAI has released largely deal with the third aspect of net neutrality, relating to cost. What are OTT services? OTT services and applications are basically online content. These are accessible over the internet and made available on the network offered by TSPs. OTT providers may be hosted by TSPs or ISPs such as Bharti Airtel, Vodafone, Idea, VSNL (government provided), etc. They offer internet access services such as Skype, Viber, WhatsApp, Facebook, Google and so on. Therefore, OTT services can broadly be of three types: (i) e-commerce, (ii) video or music streaming and, (iii) voice over internet telephony/protocol services (or VoIP communication services that allow calls and messages). Prior to the recent TRAI regulations prohibiting discriminatory tariffs, there was no specific law or regulation directly concerning the services provided by OTT service providers. How is net neutrality regulated? Until now, net neutrality has not directly been regulated in India by any law or policy framework. Over the last year, there have been some developments with respect to the formulation of a net neutrality policy. TRAI had invited comments on consultation papers on Differential Pricing for Data Services as well as Regulatory Framework for Over-The-Top Services (OTT).[i],[ii] A Committee set up by the Department of Telecommunications (DoT) had also examined the issue of net neutrality.[iii] Internationally, countries like the USA, Japan, Brazil, Chile, Norway, etc. have some form of law, order or regulatory framework in place that affects net neutrality. The US Federal Communications Commission (telecom regulator in the USA) released new internet rules in March 2015, which mainly disallow: (i) blocking, (ii) throttling or slowing down, and (iii) paid prioritisation of certain applications over others.[iv] While the UK does not allow blocking or throttling of OTT services, it allows price discrimination. What do TRAI’s 2016 Regulations say? The latest TRAI regulations state that: (i) no service provider is allowed to enter into any agreement or contract that would result in discriminatory tariffs being charged to a consumer on the basis of content (data services), (ii) such tariffs will only be permitted in closed electronic communications networks, which are networks where data is neither received nor transmitted over the internet, (iii) a service provider may reduce tariff for accessing or providing emergency services, (iv) in case of contravention of these regulations, the service provider may have to pay Rs 50,000 per day of contravention, subject to a maximum of Rs 50 lakh, etc.[v] It may be noted that, in 2006 and 2008, TRAI had suggested that the internet sector remain unregulated and non-discriminatory (net neutral).[vi][vii] What are some of the key issues and perspectives of various stakeholders on net neutrality? TSPs and ISPs: TSPs invest in network infrastructure and acquire spectrum, without getting a share in the revenue of the OTT service providers. Some have argued that the investment by TSPs in internet infrastructure or penetration levels would diminish if they are not permitted to practice differential pricing, due to a lack of incentive. Another contention of the TSPs is that certain websites or applications require higher bandwidth than others. For example, websites that stream video content utilise much more bandwidth than smaller messaging applications, for which the TSPs need to build and upgrade network infrastructure. The Committee set up by DoT had recommended that the TSPs may need to better manage online traffic so that there is better quality of service for consumers and no network congestion. Further, the Committee also said that in case of local and national calls, TSP (regular calling) and OTT communication services (calls made over the internet) may be treated similarly for regulatory purposes. However, in case of international VoIP calling services and other OTT services, it did not recommend such regulatory oversight. Consumers and/or OTT service providers: The Committee set up by the DoT said that the core principles of net neutrality (equal treatment and equality in speed and cost) should be adhered to. It also said that OTT services (online content) enhance consumer welfare and increase productivity in many areas. These services should be actively encouraged. In the absence of neutrality, the internet may be fragmented and not as easily accessible to those who are unable to pay for certain services. It has been said that discrimination of internet content by TSPs could be detrimental to innovation as the bigger market players would be able to pay their way out of being throttled. This could potentially result in TSPs restricting consumers’ access to small-scale, but innovative or qualitative OTT services (restricting growth and innovation for start-ups too). Now that regulations regarding price discrimination are in force, we do not know whether TRAI or the government will enforce rules regarding other aspects of net neutrality. Also, the extent to which these regulations would affect the business of TSPs and OTT service providers remains to be seen. [i] “Consultation Paper on Differential Pricing for Data Services”, the Telecom Regulatory Authority of India, December 9, 2015, http://www.trai.gov.in/WriteReaddata/ConsultationPaper/Document/CP-Differential-Pricing-09122015.pdf. [ii] “Consultation Paper on Regulatory Framework for Over-the-top (OTT) services”, TRAI, March 27, 2015, http://www.trai.gov.in/WriteReaddata/ConsultationPaper/Document/OTT-CP-27032015.pdf. [iii] “Net Neutrality, DoT Committee Report”, Ministry of Communications and Information Technology, May 2015, http://www.dot.gov.in/sites/default/files/u10/Net_Neutrality_Committee_report%20%281%29.pdf. [iv] “In the Matter of Protecting and Promoting the Open Internet: Report and Order on Remand, Declaratory Ruling, and Order”, Federal Communications Commission USA, February 26, 2015, http://transition.fcc.gov/Daily_Releases/Daily_Business/2015/db0403/FCC-15-24A1.pdf. [v] “Prohibition of Discriminatory Tariffs for Data Services Regulations, 2016”, TRAI, February 8, 2016. [vi] “Consultation Paper on Review of Internet Services”, TRAI, December 2006, http://www.trai.gov.in/WriteReaddata/ConsultationPaper/Document/consultation27dec06.pdf. [vii] “Recommendations on Issues related to Internet Telephony”, TRAI, August 18, 2008, http://www.trai.gov.in/WriteReadData/Recommendation/Documents/recom18aug08.pdf.
India’s urban population has grown by 32% from 2001 to 2011 as compared to 18% growth in total population of the country.[1] As per Census 2011, 31% of the country’s population (377 million people) live in cities, and contribute to 63% of the country’s GDP.[2] The urban population is projected to grow up to 600 million by 2031.2 With increasing urban population, the need for providing better infrastructure and services in cities is increasing.[3] The government has introduced several schemes to address different urban issues. These include the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Smart Cities Mission, Heritage City Development and Augmentation Yojana (HRIDAY), Pradhan Mantri Awas Yojana – Housing for All (Urban) (PMAY-U), and Swachh Bharat Mission (Urban).
Last week the Ministry of Urban Development released the next batch of winners under the Smart Cities Mission.[4] This takes the number of smart cities to 90. The government has also announced a few policies and released data indicators to help with the implementation of the urban schemes. In light of all this, we discuss how the new schemes are changing the mandate of urban development, the fiscal challenge of implementing such schemes, and the policies that are trying to address some of these challenges.
Urbanisation in India
The Jawaharlal Nehru National Urban Renewal Mission (JnNURM), launched in 2005, was one of the first urban development schemes implemented by the central government. Under JnNURM, the central government specified certain mandatory and optional reforms for cities, and provided assistance to the state governments and cities that were linked to the implementation of these reforms. JnNURM focused on improving urban infrastructure and service delivery, community participation, and accountability of city governments towards citizens.
In comparison, the new urban schemes move beyond the mandate that was set by JnNURM. While AMRUT captures most of the objectives under JnNURM, the other schemes seek to address issues around sanitation (through Swachh Bharat), affordable housing (through PMAY-U), and technology innovation (through Smart Cities). Further, the new schemes seek to decentralize the planning process to the city and state level, by giving them more decision making powers.2 So, while earlier, majority of the funding came from the central and state governments, now, a significant share of the funding needs to be raised by the cities themselves.
For example, under the Smart Cities Mission, the total cost of projects proposed by the 60 smart cities (winners from the earlier rounds) is Rs 1.3 lakh crore.[5] About 42% of this amount will come from central and state funding towards the Mission, and the rest will be raised by the cities.[6]
The new schemes suggest that cities may raise these funds through: (i) their own resources such as collection of user fees, land monetization, property taxes, etc., (ii) finance mechanisms such as municipal bonds, (iii) leveraging borrowings from financial institutions, and (iv) the private sector through Public Private Partnerships (PPPs).[7]
In 2011, an Expert Committee on Indian Urban Infrastructure and Services (HPEC) had projected that creation of the required urban infrastructure would translate into an investment of Rs 97,500 crore to Rs 1,95,000 crore annually.[8] The current urban schemes are investing around Rs 32,500 crore annually.
Financial capacity of cities
Currently, the different sources of revenue that municipal corporations have access to include: (i) tax revenue (property tax, tax on electricity, toll tax, entertainment tax), (ii) non-tax revenue (user charges, building permission fees, sale and hire charges), (iii) grants-in-aid (from state and central governments), and (iv) debt (loans borrowed from financial institutions and banks, and municipal bonds).
While cities are now required to raise more financing for urban projects, they do not have the required fiscal and technical capacity.8,[9] The HPEC had observed that cities in India are among the weakest in the world, both in terms of capacity to raise resources and financial autonomy. Even though cities have been getting higher allocations from the centre and states, their own tax bases are narrow.8 Further, several taxes that cities can levy are still mandated by the state government. Because of their poor governance and financial situation, cities also find it difficult to access external financing.8,7
In order to help cities improve their finances, the government has introduced a few policies, and released a few indicators. Some of these are discussed below:
Policy proposals and data indicators
Value Capture Financing (VCF): The VCF policy framework was introduced by the Ministry of Urban Development in February 2017.[10] VCF is a principle that states that people benefiting from public investments in infrastructure should pay for it. Currently when governments invest in roads, airports and industries in an area, private property owners in that area benefit from it. However, governments recover only a limited value from such investments, constraining their ability to make further public investments elsewhere. VCF helps in capturing a part of the increment in the value of land due to such investments, and use it to fund new infrastructure projects.
The different instruments of VCF include: land value tax, fee for changing land use, betterment levy, development charges, transfer of development rights, and land pooling systems.10 For example, Karnataka uses certain value capture methods to fund its mass transit projects. The Mumbai Metropolitan Region Development Authority (MMRDA), and City and Industrial Development Corporation Limited (CIDCO) have used betterment levy (tax levied on land that has gained in value because of public infrastructure investments) to finance infrastructure projects.
Municipal bonds: Municipal bonds are bonds issued by urban local bodies (municipal corporations or entities owned by municipal bodies) to raise money for financing specific projects such as infrastructure projects. The Securities and Exchange Board of India regulations (2015) regarding municipal bonds provide that, to issue such bonds, municipalities must: (i) not have negative net worth in any of the three preceding financial years, and (ii) not have defaulted in any loan repayments in the last one year.[11] Therefore, a city’s performance in the bond market depends on its fiscal performance. One of the ways to determine a city’s financial health is through credit ratings.
Credit rating of cities: In September 2016, the Ministry of Urban Development started assigning cities with credit ratings.[12] These credit ratings were assigned based on assets and liabilities of the cities, revenue streams, resources available for capital investments, accounting practices, and other governance practices.
Of the total 20 ratings ranging from AAA to D, BBB– is the ‘Investment Grade’ rating and cities rated below BBB– need to undertake necessary interventions to improve their ratings for obtaining positive response to the Municipal Bonds to be issued. By March 2017, 94 cities were assigned credit ratings, 55 of which got ‘investment grade’ ratings.[13]
Credit ratings indicate what projects might be more lucrative for investments. This, in turn, helps investors decide where to invest and determine the terms of such investments (based on the expected returns).
Earlier this month, the Pune Municipal Corporation raised Rs 200 crore through the sale of municipal bonds, to finance water supply projects under the Smart Cities Mission.[14] The city had received an AA+ credit rating (second highest rating) in the recent credit rankings assigned by the central government.
Other than credit ratings, the Ministry of Urban Development has also come up with other data indicators around cities such as the Swachh Bharat rankings, and the City Liveability Index (measuring mobility, access to healthcare and education, employment opportunities, etc). These rankings seek to foster a sense of competition across cities, and also help them map their performances year on year.
Some financing mechanisms, such as municipal bonds, have been around in India for the last two decades, but cities haven’t been able to make much use of them. It remains to be seen whether the introduction of indicators such as credit ratings helps the municipal bond market take off. While these mechanisms may improve the finances of cities, the question is would more funding solve the cities’ problems. Or would it require municipal government to take a different approach to problem solving.
[1] Census of India, 2011.
[2] Mission Statement and Guidelines, Smart Cities, Ministry of Urban Development, June 2015, http://smartcities.gov.in/writereaddata/SmartCityGuidelines.pdf.
[3] Report on Indian Urban Infrastructure and Services, March, 2011, The High Powered Expert Committee for estimating the investment requirements for urban infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.
[4] “30 more smart cities announced; takes the total to 90 so far”, Press Information Bureau, Ministry of Urban Development, June 23, 2017.
[5] Smart Cities Mission, Ministry of Urban Development, last accessed on June 30, 2017, http://smartcities.gov.in/content/.
[6] Smart City Plans, Last accessed in June 2017.
[7] “Financing of Smart Cities”, Smart Cities Mission, Ministry of Urban Development, http://smartcities.gov.in/upload/uploadfiles/files/Financing%20of%20Smart%20Cities.pdf.
[8] “Report on Indian Urban Infrastructure and Services”, March, 2011, The High Powered Expert Committee for estimating the investment requirements for urban infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.
[9] Fourteenth Finance Commission, Ministry of Finance, February 2015, http://finmin.nic.in/14fincomm/14fcrengVol1.pdf.
[10] Value Capture Finance Policy Framework, Ministry of Urban Development, February 2017, http://smartcities.gov.in/upload/5901982d9e461VCFPolicyFrameworkFINAL.pdf.
[11] Securities and Exchange Board of India (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, Securities and Exchange Board of India, July 15, 2015, http://www.sebi.gov.in/sebi_data/attachdocs/1436964571729.pdf.
[12] “Credit rating of cities under urban reforms begins”, Press Information Bureau, Ministry of Urban Development, September 6, 2016.
[13] “Credit Rating of Urban Local Bodies gain Momentum”, Press Information Bureau, Ministry of Urban Development, March 26, 2017.
[14] “Pune civic body raises Rs200 crore via municipal bonds”, LiveMint, June 19, 2017, http://www.livemint.com/Money/JOOzaSTKnC6k1EZGeFh8LJ/Pune-civic-body-raises-Rs200-crore-via-municipal-bonds.html.
