BharatNet Phase-III: Towards the final digital inclusion of India’s hinterland

The National Optic Fiber Network (NOFN) initiative was approved by the Govt. of India in 2011 to connect 2.5 lakh Gram Panchayats (GPs) in the country. This connectivity could be extended to cover all 6.5 lakh villages in the country, providing services like e-gov, telemedicine, tele-education, e-health, etc. According to a report by Indian Council for Research on International Economic Relations, a 10 percent increase in internet penetration can increase the GDP by 1.08 percent adding ~US$ 17 billion to the country annually. As opposed to 103.95 internet subscribers per 100 population in the urban geographies, the internet penetration is only 37.25 internet subscribers per 100 population in rural India. Bridging the urban-rural digital divide, and creating learning and employment opportunities for youth in the hinterland could have far-reaching implications on the economy.

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After a slow start in the initial years due to planning (design) and coordination-related challenges amongst various executing agencies as well as supply of electronic equipment, the project finally commenced in 2014. NOFN project gained impetus under the Digital India initiative in 2015 and was renamed ‘BharatNet’. Driving digital inclusion through establishing Broadband Highways - a key program pillar of Digital India; encompasses rural broadband connectivity. The Telecom Commission approved the implementation of the NOFN project in three phases with defined set timelines in 2016.

National Optical Fiber Network or NOFN project gained impetus under the Digital India initiative of 2015 and was renamed ‘BharatNet’. Driving digital inclusion through establishing Broadband Highways - a key program pillar of Digital India.

Three envisaged phases of BharatNet (2016)

• Phase I: Central Public Sector Units (C-PSUs) including BSNL, Railtel, and PGCIL were appointed for implementation of the NOFN network in the first phase providing connectivity to 100,000 GPs by March 2017.
• Phase II: Phase II witnessed several deployment models across agencies for covering the remaining 150,000 villages including C-PSU-led, State led, and BBNL-led models as well as some PPP models. Further, it was planned to be completed by December 2018.
• Phase III: Phase III was envisaged for up-gradation of the fiber network laid across 2.5 lakh GPs to a futuristic ring topology between district to Block and Block to GPs.

Since then, 5.7 lakh KM of fiber has been laid and 1.77 lakh GPs have been made service ready through fiber or the use of satellite for connectivity to remotest parts of the hinterland. Phase I goals are completed, and Phase II is underway with implementation hampered in certain States.

Phases I & II were primarily driven under Engineering, Procurement, and Construction (EPC) models under various agencies with construction and procurement costs borne by the Govt. The focus was on network creation; network Operations and Maintenance (O&M) for varying time duration were included as part of the contract. The contracts were dominated by C-PSUs and EPC players who have collectively deployed 5.7 lakh KM of fiber and achieved the milestones (Phase I & II) as shown in Figure 2. in the domestic market for performing network creation and O&M of the network infrastructure.

Key challenges experienced in Phases I & II

Post network construction (deployment) completion; the network maintenance suffered due to delay in finalization of O&M contracts in one part and absence of service delivery/ monetization models in another; with an under-utilized network not mandating desired upkeep in terms of quality of service. with the hindered repair of fiber cuts, lossy fiber, and network Quality of Services (QoS) degraded over the period. The network was envisaged to provide non-discriminatory access to service providers for delivering services to end-users.

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However, with the network quality hampered, service providers leasing the fiber or bandwidth on BharatNet, experienced poor delivery of Service Level Agreements (SLAs) on quality and uptime. With the scope of BharatNet projects not including service delivery (for monetization of the network); whilst connectivity was provided till GPs, last-mile connectivity was not established to homes, institutions, and enterprises that would enable the delivery of digital services to end-users. The key challenges are indicated in Figure 3.

With the omission of the last mile in BharatNet and the service provider's inability to leverage the network, broadband services and delivery of digital services suffered. Approximately 2.14 lakh Fibre To The Home (FTTH) connections has been commissioned for 65% of the country’s population. BharatNet infrastructure was created with an outlay of approximately Rs. 42,068 Cr. remains largely under-utilized with no return on the investment.

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Thus, it became imperative to leverage private sector capabilities for the execution, maintenance, and utilization of the network. Hence Phase III earlier envisaged in the approved BharatNet plan by Telecom Commission transitioned to a Public-Private Partnership construct with a focus on network creation, upgrade, operations, and maintenance as well as monetization (service delivery) offering incentives to the private sector to choose network topology and architecture and focus on service delivery outcomes Based on the experience of previous phases, it was also imperative to ensure State participation in providing Right of Way (ROW) and provisioning of government services.

The Hon’ble Prime Minister on 15th August 2020 in his Independence Day speech announced connectivity to all inhabited villages through Optical Fiber Cable (OFC). Thus, the mandate of BharatNet was revised to extend the connectivity from GPs (as in Phase-I and Phase-II) to all inhabited villages, thereby enhancing the scope of BharatNet to provide connectivity to all ~6.4 lakh inhabited villages as well as focus on creation, maintenance and utilization of the network.

BharatNet under the PPP model (first round)

Based on the new scope for BharatNet, the Govt. rolled out the tender encompassing connectivity to approximately 3.61 lakh villages in 16 States. The States where BharatNet is being executed under State-led models were not included in this tranche). The BharatNet project in 16 States was divided into 9 packages based on geographical synergies and size. The scope included creation, upgrade, O&M of the network as well as enhancing utilization by providing end-user connectivity (to homes and enterprises) as well as leasing of dark fiber. The overall period of the PPP model was envisaged to be 30 years extendable by 5 years by mutual agreement. The packaging, scope, and salient features of the tender are indicated in Figure 5.

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The Govt. had estimated the project cost for the project based on certain network design and architectural principles arriving at an Estimated Project Cost (EPC) of Rs. 29,432 Cr. with Value Gap Funding (VGF) of Rs. 19,041 Cr which would be 60% of the EPC.

The estimated project cost does not include the operational costs. It would be pertinent to note that the cost estimation was based on futuristic ring-based architecture delivering improved capacity, performance, quality, and services to cover 80% of the population in the rural areas. The Concessionaire (could be either an engineering procurement construction agency, a telco, an ISP, any business entity meeting the eligibility criteria or consortia) was required to deploy requisite network architecture as per the GP/ village segregation based on population (future ring-based topology or linear network topology) to deliver network and service delivery service level outcomes defined in the RFP.

Ownership model for creation of infrastructure is similar to the ownership model for PPP projects in infrastructure sector such as roads etc. in India.

Furthermore, Value Gap Funding (VGF) of 60% far exceeded the previously established threshold for PPP models. As per Department of Economic Affairs (DEA) guidelines; the VGF maximum threshold is 40% (even after adding additional grant assistance at the discretion of sponsoring ministries) for PPP for the infrastructure sector. Recognizing the importance and need for building this digital infrastructure as well as encouraging private participation, the threshold was extended to 60% for BharatNet. The tender allowed open and competitive global bidding, subjected to the Foreign Direct Investment (FDI) policy of the Government of India

The ownership of the network was envisaged to remain with the Govt. and the Special Purpose Vehicle (SPV) created under the PPP model for execution of the scope would work under Design- Build-Operate-Finance-Transfer (DBFOT) with handover at the end of the concession period. It would be noteworthy that this ownership model for the creation of infrastructure is similar to the ownership model for PPP projects in the infrastructure sector such as roads etc. in India. Considering the vast investment by the Govt. and the view of this digital infrastructure of the hinterland as a strategic asset for the nation, the ownership principle might have merit. However, this PPP model for the creation of broadband infrastructure in rural geography is in stark contrast to the PPP model deployed in the United States, where the ownership of the network is intended to be passed to the private player at the end of the concession period. However, the PPP model bidding in the U.S. was based on reverse auction a (whereas BharatNet was on least-cost selection model) maximizing the private sector participation in bearing the cost burden whereas in the case of India 60% of the VGF was being provided by the government.

Anti-monopoly measures were added to the tender whereby maximum bidding by one bidder was restricted to four of the nine packages.

Non-participation by industry in the tender

When the tender was floated, around 50 companies, including telcos, internet service providers (ISPs), EPC players, original equipment manufacturers (OEMs), etc. engaged with the government during two rounds of bid interactions. The government issued clarifications for around 3,000 queries from the prospective bidders. However, the tender saw no participation by the industry and was canceled subsequently. The agencies have gone back to the drawing board and focused on revising the PPP strategy and model to garner interest and participation from the industry. There was a thorough consultation process with the industry and several aspects were highlighted that hampered participation.

• Low estimated project cost: The project cost estimated was deemed as underestimated by the industry. There was a need to re-look at the design assumptions.
• Viability of the project: The private sector had apprehensions about the project viability with mobile broadband penetration in rural areas. The revenue potential was uncertain. This could translate to an expectation of greater value gap funding from the Govt.
• Large packages requiring significant investment: The package size amplified the investment requirements and there was a suggestion from the industry to fragment the packages. Smaller ISPs have a higher penetration in rural areas and can offer business models for last-mile delivery. However, they would be incapable of raising vast amounts of credit needed to invest and participate in the BharatNet tender
• Service level agreements for connections: Service levels defined for a number of connections were indicated as a challenge with the uncertainty of uptake.
• Onerous terms and conditions: The tender had design conditions as well as service-level outcomes with penalties in addition to terms and conditions which were too onerous. The industry expectation is around relaxation around the design conditions. Typically, the industry demands pertain to greater thresholds for use of alternate technology (instead of fiber connectivity) for remote GPs/ villages, greater flexibility in the deployment of network architecture, and relaxation of network QoS-related service levels.
• Stringent implementation timelines: The implementation (construction) timeline of 18 months from the date of appointment was challenging for the creation of connectivity to uncovered GPs/ villages.
• Revenue sharing model: The revenue-sharing model proposed was deemed unsustainable and later eliminated in the corrigendum to the RFP.
• Assistance for ROW permissions: Based on experience from past BharatNet projects, the industry sighted challenges related to obtaining Right of Way (RoW) permissions, particularly from central agencies such as forests, railways, and highways; and sought greater assistance in the area (single-window clearances)

The implementation (construction) timeline of 18 months from date of appointment was challenging for creation of connectivity to uncovered GPs/ villages.

Way Forward

Department of Telecommunications (DoT) recently highlighted that the government might choose to assume the revenue risk for the second round of bidding. The agency indicated that bidders would only have to bring in the capital expenditure and operational expenses for the project without worrying about the fluctuations associated with revenue. This could potentially mean that the scope of BharatNet might get segregated with the creation, upgrade, and O&M of the network up to GPs/ villages as one part and enhancing utilization of the network in the second part. The scope for enhancing utilization through last-mile service delivery might be covered in a subsequent tender.

With the second round of bidding for creation, upgrade, and O&M of the network up to GPs/ villages, the mid-mile will be created over which service can be delivered to end customers.

The Govt. is striving to convert this Digital India dream into reality by driving the build of the broadband highways that would connect the hinterland and drive digital inclusion. For service delivery and driving utilization as well as return on investment on this massive infrastructure, the private sector needs to come forward.

With already significant investment and arguably decent success in connecting over 70% of the GPs; the labor required to create the world’s largest rural broadband network cannot be understated but the Govt. is pushing to achieve the goal where the fruits of this labor will be reaped by its people. The willingness to make those investments and invite private sector participation would possibly overcome the challenges witnessed in previous phases and provide that monumental push and impetus to the program and its success.

Aditya Khaitan1

Nikhil Srivastava1

By Aditya Khaitan, Partner, Deloitte India

Nikhil Srivastava, Associate Director, Deloitte India

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