Maximum Impact for Minimum Subsidy: 

Reverse Auctions for Universal 

Access in Chile and India 

Irene S. Wu 

FCC Staff Working Paper 2 

Federal Communications Commission 

Washington, DC 20554 

October 2010 

Revised November 15, 2010 

FCC Staff Working Papers are intended to stimulate discussion and critical 

comment within the FCC, as well as outside the agency, on issues that may affect 

communications policy. The analyses and conclusions set forth are those of the 

authors and do not necessarily reflect the view of the FCC, other Commission staff 

members, or any Commissioner. Given the preliminary character of some titles, it 

is advisable to check with the authors before quoting or referencing these working 

papers in other publications. Recent titles are listed at the end of this paper and all 

titles are available on the FCC website at http://www.fcc.gov/papers/. 
Abstract 

U.S. government funding for universal service and broadband support programs could be 

quicker and more efficient. To improve efficiency and speed in delivering subsidies, 

several countries successfully use reverse or minimum subsidy auctions to support 

universal service programs. This paper discusses the implementation of such auctions in 

the last 15 years in Chile and India. The programs ranged from rural public telephones to 

wireless broadband networks. While there can be drawbacks to such auctions, the 

advantages are that they can be quicker and more transparent than other approaches. 

In a minimum subsidy auction, the government identifies a project and a maximum 

subsidy. Companies compete for the project by bidding down the value of the subsidy. 

The bidder requiring the lowest subsidy wins. Based on these case studies, minimum 

subsidy auctions include the following elements: 

• Setting clear policy targets and methods for identifying projects; 

• Establishing a method for calculating maximum subsidy available per project; 

• Specifying minimum technical and financial requirements for bids and regulatory 

advantages or requirements; 

• Specifying procedures for awarding and disbursing of funds; 

• Maximizing the number of competitors; and 

• Implementing the auction by evaluating bids in terms of technical quality and 

selecting the lowest bid. 

In contrast to the request-for-proposals approach to contracts, with minimum subsidy 

auctions the government in advance states very clear criteria for technical evaluation; all 

qualified bids then move on to the auction. Two auction design challenges are defining 

projects and maintaining transparency in technical evaluation. A third design challenge 

is seeing that bidders comply with their commitments; in Chile and India, in early 

auctions rounds the incumbent won and then failed to build the infrastructure. 

 FCC Staff Working Paper 

ii 
Maximum Impact for Minimum Subsidy: Reverse Auctions 

For Universal Access in Chile and India 

Irene S. Wu1

U.S. government funding for universal service and broadband support programs 

could be quicker and more efficient. To improve efficiency and speed in delivering 

subsidies, several countries successfully use reverse or minimum subsidy auctions to 

support universal service programs. This paper discusses the implementation of such 

auctions in the last 15 years in Chile and India. The programs ranged from rural public 

telephones to wireless broadband networks. While there can be drawbacks to such 

auctions, the advantages are that they can be quicker and more transparent than other 

approaches. 

Introduction 

In a minimum subsidy auction companies compete to win a subsidy from the 

government by placing the lowest bid. The government identifies the contract to be 

auctioned; establishes a maximum subsidy level; and outlines any requirements on the 

bid proposals. The bidder with the lowest subsidy requirement wins. The objective is to 

use competitive forces to minimize the government subsidy required to achieve public 

objectives. 

Minimum subsidy auctions use the market to determine the subsidy level needed to 

make policy goals commercially attractive. Furthermore, a well-executed auction 

increases the incentives for government to release selection criteria in advance, which 

should enhance the transparency and efficiency in the award of subsidies. For example, 

in India, minimum subsidy auctions were used to disburse universal service funds that 

had been languishing for some years, collected but unspent.2

Need for Minimum Subsidy Auctions in the United States 

First, in general, auctions offer a quick and more economically efficient way of 

distributing resources. The current federal fiscal stimulus package includes funding for 

broadband networks that needs not only to be spent well but also to be spent quickly.3

 

Also, if universal service reform shifts funds toward broadband projects, now may be a 

good opportunity to consider a new way of disbursing subsidies. Indeed, looking back at 

the history of the Federal Communications Commission, speed of implementation was 

 

1

 Acting Chief Data Officer, International Bureau, FCC. While the views in this paper are my own, I 

benefited from the comments of Mindel De La Torre, Jerry Duvall, Carrie-Lee Early, Evan Kwerel, Patrick 

Boateng, Lily Hughes, Robert Tanner, Sharon Gillett and Carol Mattey. Thanks also to outside reviewers 

Bjorn Wellenius, Philip N. Howard, and Rekha Jain. I may be contacted at Irene.Wu@fcc.gov. 2

 Malik 11-13. 

3

 See American Recovery and Reinvestment Act, 2009. http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=111_cong_bills&docid=f:h1enr.pdf

 

1 

 FCC Staff Working Paper 
one of the primary reasons for shifting away from comparative hearing to auctions for 

spectrum licenses.4

 Second, as auctions are notable for increasing transparency of action, 

using a decidedly different technique such as auctions to disburse funds may mitigate the 

likelihood that old problems will arise again. 

Previous research 

While there is a considerable research literature generated in the United States 

focused on auctions in general, the vast majority of the literature focused on auctions for 

communications services public projects lies in the field of international aid and 

development economics. Most influentially, Bjorn Wellenius’ 2002 report written for the 

World Bank, describes in detail Chile’s successes in implementing minimum subsidy 

auctions starting in 1995. Following the precedent set by Chile, other countries such as 

Peru, Colombia, Kenya, Uganda, and India have implemented minimum subsidy auctions 

for universal service objectives. In a recent article, Scott Wallsten also provides an 

excellent overview of universal service subsidy auctions in Australia, Chile, Columbia, 

India, Nepal, and Peru. 5

 

The World Bank and regional development banks have recommended minimum 

subsidy auctions. In 2004, the Organisation of Economic Cooperation and Development 

(OECD) issued a paper, “Leveraging Telecommunications Policies for Pro-poor Growth: 

Universal Access Funds with Minimum-Subsidy Auctions.”6 Through its aid funding, 

the U.S. has recommended other governments implement minimum subsidy auctions; it 

seems reasonable that the U.S. government also consider the policy option for itself. 

On April 13, 2009, 71 economists signed a statement proposing that the United 

States government use reverse auctions to award funds allocated to stimulate broadband 

deployment. Their proposal heavily emphasizes using the lowest price as the main 

criteria for the auction and seeks to minimize government discretion in evaluating other 

aspects of bids.7 Both their proposal and the evidence gleaned from foreign countries’ 

actual implementation demonstrate that the gains in transparency come from the 

government making clear in advance its policy goals and bidding criteria. The bulk of 

the government’s decision making work is before the auction, not after, as would be 

expected with a request-for-proposals process. 

Relevance of auctions in Chile and India 

Minimum subsidy auctions have been used in a number of different countries. This 

paper discusses two countries. First, Chile has the longest history of using auctions for 

universal service and recently has embarked on auctions for fiber optic and other 

broadband networks, which are directly relevant to the United States. Second, India has 

been using auctions with both success and challenges. The size of India’s US$5.8 billion 

universal access fund and the scale of its programs make it an interesting example for the 

 

4

 Cramton on the history of spectrum auctions in United States. 

5 See Wallsten.

6

 See Perset, OECD. 

7

 See Milgrom, Paul; Gregory Rosston; Andrzej Skrzypacz; Scott Wallsten. 

http://www.techpolicyinstitute.org/files/procurement_auctions_for_bbd_stimulus%20final.pdf 

 

2 

 FCC Staff Working Paper 
United States. This paper discusses in detail the challenges and problems Chile and India 

experienced in preparing, organizing and staging their auctions. 

The Chilean section of this paper includes a discussion of how the government 

identifies potential projects through proposals submitted at the grassroots level. Also, 

there is a detailed discussion of the technical and economic requirements for bids, thus 

putting a brake on the tendency of bidders to minimize performance in an effort to offer 

the lowest bid. Through three phases of development starting in 1994, Chile has used 

auctions for public payphones, for community telecenters and, starting in 2006, to build 

out Internet infrastructure. 

India began minimum subsidy auctions in 2002 due to political pressure to spend 

quickly and effectively a substantial universal service fund that had remained 

underutilized for many years. Initially, the auctions ended up awarding subsidies to the 

incumbent. Later, a revised design that opened up bidding to a larger set of competitors 

and a variety of technologies ameliorated this problem. 

Lessons for the United States 

Implementing minimum subsidy auctions in the US for universal service and 

broadband subsidy programs would require several actions: 

• Set clear policy targets and methods for identifying projects. Specific policy 

targets clarify which projects are eligible for support. Projects can be identified 

top-down by the government, from grassroots recommendations, or both. 

• Establish method for calculating maximum subsidy available per project. Clarity 

in calculating the maximum subsidy increases transparency of the auction process.

• Specify minimum technical and financial requirements for bids and regulatory 

advantages or requirements, if any. These can include the prices for the services 

offered, minimum quality of service requirements, and any regulatory advantages 

that may apply. 

• Specify how funds are awarded and disbursed, with a timeline. These rules 

should be designed to encourage bidders to follow through with their 

commitments. For bidders, predictability of how they will receive subsidies is 

also crucial to success.

• Maximize the number of competitors. Allowing a range of technical options and 

types of companies attracts more bidders and improves the auction outcome. 

• Auction implementation. 

o First, technical evaluations create incentive for high performance. Some 

evaluation of the minimum technical quality of a bidder’s proposal is 

necessary to ensure quality. 

o Second, selecting the lowest financial bid. A commitment to select the 

lowest financial bid from among the technically qualified bids enables the 

government to discover better the true cost of subsidizing a project. 

 

3 

 FCC Staff Working Paper 
Chile 

Beginning in 1995, Chile has used auctions for public payphones and community 

telecenters. As a result of the minimum subsidy auctions, the population living in 

localities without any access to public payphones was reduced to 1% in 2002 from 15% 

in 1994. Starting in 2006, auctions were used to build Internet infrastructure. Auctions 

are administered by the regulator Subtel’s Fund for Telecommunications Development. 

The Fund was created in 1994 under Title 4 of the General Telecommunications Law.8 

Setting clear policy targets 

Initially, the types of projects that were typically subsidized were public pay 

telephones, but subsequent programs expanded to include call centers, information 

community telecenters, and broadband network infrastructure. The universal service 

fund has passed through three historical phases, as Table 1 shows below.

Table 1: Chile’s History of Minimum Subsidy Auctions 

Goals Dates Funds 

Rural public telephones 1994-2000 US$15.4 million 

Community telecenters 

for information 

2000-2006 US$10.8 million 

Access infrastructure: deploying 

fiber, mobile phones and 

broadband to the last mile. 

2006- present US$75.3 million 

Today, the Fund’s goal is to develop service in localities now have either no service 

or prohibitively expensive Internet service. The goal of the auction is to develop Internet 

services in rural areas in 1400 localities, which represent 20% of the population, at a 

price equivalent to other areas of the country and at a basic connecting speed of 1 mbps 

downstream. Hospitals and schools in those regions will get broadband access. The total 

subsidy is estimated at US$54 million for a total investment of US$116 million.9

 

Identify projects eligible for subsidy 

To identify projects, every year until July, the regulator Subtel, collects requests for 

payphones from local governments, neighborhood associations, telecommunications 

companies, and the general public.10 To identify a potential project, applicants file a 

 

8

 Chile, “Ley General de Telecomunicaciones,” No. 18.168, 

http://www.leychile.cl/Navegar?idNorma=29591 and 

http://www.subtel.cl/prontus_subtel/site/artic/20090806/pags/20090806105001.html. 9

 Bello. 

10 Subtel. “Fondo”. 

 

4 

 FCC Staff Working Paper 
simple form available on the Subtel website.11 Subtel collects these forms from local 

governments and groups them into projects, usually consisting of 20-50 locales that are 

geographically close and have technical solutions likely to be cost-effective.12 Subtel 

decides which projects will be subsidized and also defines key issues such as the 

maximum tariff and the maximum subsidy level.13

When it first began auctions, Subtel faced some challenges in implementing this 

grassroots call for project proposals. In the early 1990’s before the Fund was established, 

surveys of Chile had been conducted that identified 600 rural localities needing 

payphones. However, in the first round of requests in 1995, the Fund received payphone 

requests for 2429 localities. In 1999, to better screen requests, Fund administrators 

developed a more specific definition of the targeted population, namely, rural 

communities (i) with more than 60 people in the three lowest quintiles of income 

distribution and (ii) located at least 30 minutes away from the nearest public telephone. 

Even with this more targeted definition, however, problems remained in screening 

locales. Income distribution data were not always disaggregated enough, resulting in 

poor pockets of well-off communities becoming ineligible. For those who were 

submitting requests, information on population and distance to payphone was often 

unreliable and inconsistent. As a result, the Fund had identified 1.5 localities for every 1 

locality in the population census.14 To avoid these kinds of problems, substantial local 

data on population, geography, and other socioeconomic indicators should be collected in 

advance of making policy decisions. 

Estimating subsidy cost 

Once projects are identified, Subtel carries out a cost-benefit analysis to identify and 

prioritize projects eligible for subsidy and to set a maximum subsidy to be made available 

for each project. To obtain a net present value for each project, costs and revenues for 

the ten years of required service were forecast and discounted at prevailing interest 

rates.15 

For each project, both market value and social value were calculated. Market value 

indicates whether a private company is likely to undertake a project. If the market value 

is negative, it is unlikely; if the market value is zero or positive, profits are possible, and 

it is likely private firms would undertake them, and therefore, ought not to be subsidized, 

as shown in Table 2. Social value indicates the benefit accrued to the whole economy, 

not just to a private firm. Projects with negative social value should not be undertaken, 

but those with zero or positive social value would benefit the whole economy.16 

 

11 See discussion at 

http://www.subtel.cl/prontus_subtel/site/artic/20061229/pags/20061229173735.html.The form itself is 

“Formulario Solicitud de Servicios de Telecomunicaciones” 

12 Wellenius 2002. 

13 Subtel. “Fondo”. 

14 Wellenius 2002. 

15 Ibid. 

16 Ibid. 

 

5 

 FCC Staff Working Paper 
Table 2: Process for Identifying Projects to Subsidize 

Market Value Social Value

High Low 

High: Profitable or Break Even Not Eligible for 

Subsidy 

Not Eligible for 

Subsidy 

Low: Not Profitable Eligible for Subsidy Not Eligible for 

Subsidy 

Eligible projects were those with a negative market value, but a positive social value. 

The projects were ranked in priority in terms of their social value. Maximum subsidies 

were set at absolute value of the (negative) market value.17 

Setting interconnection regulations favorable to new entrants was also a key factor in 

the success of Chile’s auctions. Rural companies’ access charges are higher than in nonrural areas, but lower than that of mobile operators. Initially, access charges for rural 

companies were calculated based on the costs of new entrants as they began operation in 

a competitive environment. Later, the industry voluntarily adopted common access 

charges for all rural companies.18

Implementing minimum subsidy auctions 

This section will discuss two separate auctions in Chile. The first is an auction held 

in 2007 for a fiber optic network in Chiloé and Coyhaique, remote regions in southern 

Chile. Only one bidder participated; the network began providing service in January 

2008. The second is the largest auction run by the Fund in its history to build 

telecommunications and Internet centers (TIC) in about 1,500 rural areas throughout the 

country. The auction attracted four bidders and the winner, a new entrant, agreed to 

implement the project without any government subsidy. This auction concluded in 

March 2009. While the winner’s financing fell apart, the license was given to the runnerup and mobile broadband service began in September 2010. 

Chiloé and Coyhaique: auction for service in a remote area. The auction documents 

specify the minimum characteristics of the project such as the minimum service area, the 

quality of service, the maximum tariff, including necessary indices, the milestones for 

implementation, and the maximum subsidy. Details include the following auction 

characteristics: 

• Communities to be served by the fiber network. 

• Minimum standard quality of service. 

 

17 Ibid. 

18 Ibid. 

 

6 

 FCC Staff Working Paper 
• Technical solution, timeframe for work, details of equipment, and necessary 

certifications. 

• Financial issues: such as amount to be invested in infrastructure, projected 

income, details of costs for administration, operation, and interconnection. 

• Formula for converting proposals into points – based on the amount of subsidy 

requested. 

• Proposed tariffs, in this case for 64 kbps, 2 mbps, and 155 mbps service. 

• Maximum amount for subsidy is specified, payout procedures, and guarantees. 

Penalty for not reaching milestones. 

• Indication of what spectrum is available to provide the service. 

• Specification of minimum capacity of nodes in the fiber network. 

• Timeline – 3 months from auction to certification of payout.19

The documentation sets out three main stages for implementation of the auction. In 

the opening stage, Subtel evaluates the bids according to the minimum requirements. 

Proposals are assessed pass-fail. Proposals that pass then move on to the next stage. In 

some of Subtel’s past auctions, the bids are then simply ranked and the lowest subsidy 

wins. 

In this auction, however, the bids moved on to a second, evaluation stage. Technical 

experts review the bids in terms of the conditions such as the facilities offered and service 

area coverage. The bids that qualify in this round are sent to the award stage when the 

bid with the lowest subsidy requirement wins.20 

This three-stage process is shown below in Figure 1, which was translated from the 

auction documents. For this auction, there was only one bid, submitted by Telefónica del 

Sur. The auction was conducted in March 2007. According to local news site Patagonia 

Digital, service began in January 2008.21

 

19 Subtel. “Bases específicas del concurso público para la asignación del proyecto de transmisión por fibra 

óptica para Chiloé y Coyhaique y su respectivo subsidio, correspondiente al programa anual de proyectos 

subsidiables del año 2007 del fondo de desarrollo de las telecomunicaciones.” 20 Subtel “Fondo.” 

21 Patagonia Digital. 

 

7 

 FCC Staff Working Paper 
Figure 1 

 

8 

 FCC Staff Working Paper 
Telecommunications and Internet Centers: auction for service in rural areas. In 2008, 

the Fund conducted a major auction to provide Internet service to 1,470 rural localities 

throughout the country, called the “Digital Infrastructure for Competitiveness and 

Innovation Auction.”22 The project is expected to benefit three million people, around 

850,000 households, and more than 800 schools in rural areas. Chile expects to jump 

from 71% to 92% population reached by telecommunications and information centers.23

The main document outlining the requirements for proposals was released in 

conjunction with the 15 local governments.24 It includes a variety of details such as the 

following: 

• The winner has differing obligations in three types of areas. The Service Zone is 

the area where the winner is authorized to provide service. The Coverage Zone is 

the area within the Service Zone where the winner is allowed to install systems. 

The Obligatory Service Zone is the area within the Service Zone where the 

winner is obliged to offer service according to the terms of the auction. 25 

• The Obligatory Service Zone is a defined geographic area; the service must meet 

technical requirements such as service to customers should be Internet service of 

at least 1 mbps downlink and 512 kbps uplink with quality specifications. Other 

aspects of the offer are specified. For example, if Internet service is bundled with 

other services, a stand alone Internet service must also be offered. Also, a prepaid 

offer should be considered.26 

• The price of the Internet service is priced at about US$26 per month.27

The calendar detailed in the document shows a quick completion of the auction 

process starting from October 2008 and concluding in January 2009. As Table 3 shows 

below, the call for bids was issued in October. The public had one week in which to 

submit questions. A public document detailing all questions and answers was released 

within two weeks. Businesses had about three months to develop bids. Once bids were 

submitted, a news conference to announce the winner was held within three months. 

Service to customers was expected to begin in October 2009, one year from the initial 

call for bids. 

 

22 Concurso Infraestructura Digital Para La Competitividad y la Innovación 23 Subtel. “Comienza proyecto de Internet rural que permitirá accesso al 92% de las personas del país.” 24 Subtel. “Bases específicas concurso público para la asignación del proyecto infraestructura digital para 

la competitividad e innovación y su respectivo subsidio correspondiente al programa anual de proyectos 

subsidiables de ano 2008 del fondo de desarrollo de las telecomunicaciones.” See title page. 25 Ibid, See Artículo 3, paragraphs 27-29. 

26 Ibid, See Artículos 40-41. 

27 Nixon. 

 

9 

 FCC Staff Working Paper 
Table 3: Auction Calendar28

 

Activity Start Finish 

Publication of call for proposals October 1, 2008 October 1, 2008 

Receive questions from the public October 8, 2008 October 8, 2008 

Reply to questions October 22, 2008 October 22, 2008 

Receive proposals January 15, 2009 January 15, 2009 

Opening for proposals for 3 groups January 15, 2009 January 15, 2009 

Subtel evaluation for 3 groups January 15, 2009 January 25, 2009 

Opening for proposals for 4th group January 26, 2009 January 26, 2009 

Winner returns the license and subsidy December 2009 

Runner up begins service delivery August 2010 

 

Four businesses competed and the winner was Chilean-Malaysian joint venture 

Inverca Telecom. They bid to invest US$93 million with zero subsidies. Competing bids 

were from Telefónica Chile for US$49 million of subsidies, Entel for US$38 million, and 

Comunicación y Telefonía Rural (CTR) for US$54 million. Telefónica and Entel 

proposed using 3G networks; CTR and winner Inverca proposed to use WIMAX. The 

government’s maximum subsidy offer was US$61 million.29 

Unfortunately, Inverca lost its Malaysian partner and the funding for the project fell 

apart. By December 2009, Inverca returned its license to the government. Subtel then 

gave the license and the subsidy to Entel, the runner-up in the auction. By September 

2010, Entel was offering 500 localities a 1 mbps mobile broadband service using 

advanced 3G technology at 14,900 pesos (US$31) per month. A remaining 1000 

localities should be connected over the next two years.30

Chile has used minimum subsidy auctions for universal service programs longer and 

more consistently than any other country. Particularly striking is the clarity of each stage 

of the auction. Compared to other countries’ universal service programs, Chile’s auctions 

are well documented, transparent, and predictable. Even in the midst of a global financial 

crisis when international financing slipped for the telecommunications and information 

 

28 Subtel. “Bases específicas concurso público para la asignación del proyecto infraestructura digital para 

la competitividad e innovación y su respectivo subsidio correspondiente al programa anual de proyectos 

subsidiables de ano 2008 del fondo de desarrollo de las telecomunicaciones.” See Annex 8. 

29 Nixon. 

30 Espinoza, Cristina. “Internet para todos,” La Nacion. August 20, 2010. Accessed www.lanacion.cl

September 24, 2010. Cony Sturm, “Chile: gobierno y Entel lanzan plan para llevar internet a localidades 

rurales.” www.fayerwayer.com August 29, 2010. Accessed September 24, 2010. 

 

10 

 FCC Staff Working Paper 
centers program, the auction process appeared resilient enough to recover and allow the 

selection of another company that successfully implemented Internet service around the 

country. 

India 

Years of stalled progress toward achieving universal service objectives spurred the 

Indian government toward implementing minimum subsidy auctions. In 1999, in its 

National Telecom Policy,31 the government of India set very clear universal access and 

began amassing a universal service fund. By 2002, it was apparent that politically 

important goals, such as connecting a phone in every village, would not be achieved with 

the original plan to rely on competition in the market with universal access obligations 

attached to licenses. 

Progress in services related to minimum subsidy auctions 

India turned to auctions to push forward the development of telecommunications in 

rural and remote villages and to accelerate the disbursement of universal service funds 

which had been languishing for a time. Between 2002 and 2009, an estimated US$1.7 

billion was disbursed through auctions. 

The government of India established overall goals in its 1999 National Telecom 

Policy. The Telecom Regulatory Authority of India (TRAI) ensures that licensees comply 

with universal service obligations.32 After the government’s Universal Service Support 

Policy came into effect in 2002,33 funds collected from operators went into the national 

treasury and, therefore, were difficult to disburse. Not until 2004, when the Indian 

Telegraph Act was revised and the Universal Service Fund received statutory nonlapsable status, were funds releasable in practice.34 

In October 2004, TRAI released its consultation document “Growth of Telecom 

Services in Rural India: the Way Forward,” which sets out the framework for “least 

quoted subsidy bidding process.” 35 While TRAI makes policy recommendations, it is 

the Department of Telecom that decides on implementation. An office attached to the 

Department of Telecom administers the Universal Service Fund.36 The Department of 

Telecom is also responsible for overseeing the state-owned telecom operators. 

Role of minimum subsidy auctions 

The government of India turned to minimum subsidy auctions when it was criticized for 

collecting universal service fees, but failing to spend the money to achieve its goals. 

Between 2002 and 2007 there were five sets of minimum subsidy auctions with varying 

levels of success. 

 

31 See India, “National Telecom Policy 1999.” 

32 TRAI, “Consultation Paper on the Growth of Telecom Services,” 3. 

33 Malik 2008, 11. 

34 Malik and Da Silva 2005, 9. 

35 TRAI, “Consultation Paper on the Growth of Telecom Services,” 3. 

36 Malik and Da Silva 2005, 9. 

 

11 

 FCC Staff Working Paper 
In some cases, all subsidies were won by the incumbent wireline telecommunications 

operator. However, the most recent auctions in 2007 resulted in bids from companies for 

zero or negative subsidies. The Indian experience underscores the effect of auction 

design on outcomes. Table 4 below shows the difference between the collection and 

disbursal of funds since 2002. One of the successful aspects of the auction is the speedy 

disbursement of funds and implementation of projects, particularly in comparison to the 

years prior.37 

Table 4: Disbursement Schedule for USO Funds in India38

Funding Period Amount Collected Allocated and Disbursed

2002-2003 RS 16.53b (US$ 367 m) RS 3.00 b (US$66 m) 

2003-2004 RS 21.43b (US$ 476 m) RS 2.00 b (US$ 44m) 

2004-2005 RS 34.58b (US$ 768 m) RS 13.14 b (US$ 266m) 

2005-2006 RS 35.33b (US$ 785 m) RS 17.67 b (US$ 392m) 

2006-2007 RS 42.11b (US$ 935m) RS 15b (US$ 333m) 

2007-2008 RS 54.0b (US$ 1.2v) RS 12.9b (US$291m) 

2008-2009 RS 57.6b (US$1.3b) RS 16b (US$361m) 

Total RS 262b (US$5.8b) RS 79.7b (US$ 1.8b) 

Setting clear policy targets 

India’s 1999 New Telecom Policy identified several universal service goals: 

• Voice and low speed data service to all villages by 2002. 

• Internet access to all district headquarters by the year 2000. 

• Telephone service on demand in urban and rural areas by 2002. 

• Teledensity of 7 out of 100 by the year 2005 and 15, by the year 2010. 

• Increase rural teledensity from the current level of 0.4 to 4 by the year 2010 and 

provide reliable transmission media in all rural areas. 

• Encourage development of telecom in rural areas, making it more affordable by 

suitable tariff structures and making rural communication mandatory for all fixed 

service providers.39 

TRAI’s 2004 consultation paper on rural telecommunications development is clear 

that universal access obligations placed on licensed voice operators had gone largely 

unmet. Most of the village public telephones continued to be provided only by the 

incumbent operator BSNL. While competition had increased access to telephones in 

 

37 Malik and Da Silva, 9-10. 

38 Jain 2010. 

39 TRAI 2004, 11. 

 

12 

 FCC Staff Working Paper 
general, development of rural phones and the Village Public Telephone program had 

actually slowed.40 

The universal service goals were based on the 1999 National Telecom Policy. By 

2004, TRAI described the remaining, unfulfilled targets: 

• A village public telephone in all 6 million villages. 

• A second public telephone to be installed in villages with greater than 2000 

people. 

• Replacement of unreliable current village public telephones. 

• Upgrade 35,000 village public telephones to public telecom and info centers. The 

goal is one center within 5 kilometers of every village and in every village that 

has a post office. 

• Installation of 128 kbps high speed public telecom and info centers for teleeducation and tele-medicine. 

• Install household phones in high cost areas. 

To address these gaps, the government implemented minimum subsidy auctions, 

summarized in Table 5 below. The next sections will describe in more detail the early 

auctions for village payphones and the 2007 auctions for mobile phone infrastructure and 

service. 

 

40 Ibid, 9. 

 

13 

 FCC Staff Working Paper 
Table 5: India’s History of Minimum Subsidy Auctions41

Goals Dates Details

520,000 village public 

telephones – operate and 

maintain. March 2003 

Installed by incumbent BSNL and 

about 10,000 by six other operators. 

Operator bid and won exactly the 

benchmark. 

180,000 village public 

telephone - maintain. September 2003 

The subsidy went to BSNL with a 

zero cost reduction, bid exactly the 

benchmark. 

46,253 rural community 

phones – install new in 

villages that already have one 

public phone. 

September 2004 

Incumbent BSNL won 184 service 

areas; Reliance Infocom, 97. 

Competitive bidding in 115 of the 

300 areas. The project price fell 

17% below the benchmark. 

66,822 village public 

telephones – install new in 

villages without phones. November 2004 

Incumbent BSNL won all 12 bids. 

In the 3 service areas where Bharti 

Cellular competed, the subsidy was 

reduced 15-20%. 

Rural household phones - 

install. 

March 2005 

Incumbent BSNL won 171 areas; 

Reliance Infocomm, 61; and Tata 

Teleservices, 4. The cost of the 

project was reduced by 60-75%. 

Part A: Build passive 

infrastructure for mobile 

telephone service in rural and 

remote areas. Rules require 

that competitors may access 

infrastructure. 

March 2007 

BSNL won about 80% of the 

tenders to install 6,125 mobile 

towers. Reliance and others won 

the remaining tenders.

Part B: Provision of mobile 

services in specified rural and 

remote areas by sharing the 

infrastructure created by part 

A of the scheme; open only to 

licensed service providers 

March 2007 

Government offered subsidy of up 

to US$187 million, but most bids 

committed to generating revenue for 

government instead. Based on the 

operators’ bids, the government will 

receive US$23,000 a year.

 

41 Adapted, Malik 2008.

 

14 

 FCC Staff Working Paper 
Village payphones 

Identify main criteria for eligible bidders. The TRAI originally restricted who could 

bid in the auctions. The government divides the Indian telecommunications market into 

20 circles and companies are issued licenses to operate within these circles. For the 

universal service auctions, only those companies with a license in a circle were allowed 

to bid for subsidies in that circle. Furthermore, only fixed line operators were permitted 

to bid until 2007 when mobile operators were also permitted to participate.42 

Identify regulatory requirements. For the village public telephone and information 

centers, the main characteristics required of the service were: 

• Availability: service had to be whenever and wherever required by customers, 

even in remote and rural areas. 

• Accessibility: Non-discriminatory tariff in the service area regardless of 

geographic location. Also, non-discrimination in terms of service quality. 

• Affordability: Price had to be reasonable from the users’ perspective.43 

Estimate subsidy cost. In general, the fund is designed to reimburse the net cost of 

providing rural telecom service. To account for varying costs among regions, separate 

auctions determine the actual reimbursement in different areas.44 For the goals related to 

installation, replacement, and upgrading of village public telephones, the universal 

service fund supports both capital and operational costs. For installation of household 

phones in high cost areas, funds support capital and operational costs of the access 

network with more limited support of individual lines.45 

Implementing the auction. Within each of the 20 telecom circles, operators bid for a 

subsidy. The firm with the lowest bid won, as long as the bid was no higher than the 

benchmark established with cost information from the incumbent telecom operator. For 

the first auctions in 2003, for support for village public telephones, in 19 of the 20 circles, 

the incumbent BSNL was the only bidder, and the bid was for the benchmark amount. 

The subsidy is for seven years, with the possibility of a three-year renewal.46

Noll and Wallsten in their analysis of this first set of auctions identify several 

problems with these auctions. First, by limiting participation to those companies already 

serving a particular circle, possible innovations by other operators were excluded and 

new entry foreclosed. Second, since the incumbent BSNL receives cross-subsidies 

through an access deficit charge program, it had the opportunity and incentive to distort 

the cost data it gave to the TRAI to calculate the benchmarks. Consequently, it is 

difficult to see how the benchmarks could be set appropriately.47 

 

42 TRAI 2004, 38-41. 

43 Malik and da Silva 2005, 8-9. 

44 Noll and Wallsten, 9. 

45 TRAI 2004, 39-41. 

46 Noll and Wallsten, 9. 

47 Ibid, 10. 

 

15 

 FCC Staff Working Paper 
A second auction in 2003 related to maintaining already installed village public 

telephones was also entirely won by incumbent BSNL at the benchmark subsidy level. In 

2004, there were two auctions that attracted more bidders. These auctions were to 

provide new village public telephones and also to install a second phone in some villages 

with already one public telephone. While incumbent BSNL still won most of the 

auctions, the competitive bidding did decrease the subsidy level awarded. 

This also proved true for an auction held in 2005 to install rural household phones. 

BSNL won nearly two-thirds of the areas auctioned, but subsidy cost was reduced 60-

75% below the benchmark level. The prominent competing bidders in these auctions 

were primarily Reliance Infocom, Bharti Cellular, and Tata Teleservices.48 

Mobile phone infrastructure and service subsidies 

Setting policy goals. In 2007 India designed an auction to subsidize construction 

and operation of 7871 cell towers in 500 districts across the country. Part A of the 

auction subsidized infrastructure; Part B subsidized service for five years. The cell tower 

sites were grouped into 81 clusters. There was a separate auction for each cluster. 

Identifying the projects. The government identified the location where subsidized 

towers would be built by mapping the coverage of existing tower sites, as of March 31, 

2006. Any village qualified for a subsidized cell tower site if it had more than 400 

households and was not within five kilometers of a CDMA tower or within ten kilometers 

of a GSM tower. The government used a radio propagation model to plan the precise 

location of the tower site.49

Estimating cost of the subsidy. The government calculated a benchmark subsidy for 

each cell tower site which took into consideration the cost of building and operating 

infrastructure to provide basic telecommunications service. The calculation also took 

into consideration existing towers and population. The same benchmark applied to all 

towers within a single cluster.50

Regulatory requirements. The winner of an infrastructure subsidy was required to 

have 50% of the sites operational within eight months, and all sites operational within a 

year. Winners of the service subsidy were required to begin providing service within two 

months of time the towers were operational. There were some provisions to allow 

infrastructure and service providers to negotiate the precise location of sites. Service 

providers charge the lower of two tariffs – either tariffs set by the regulator or the 

prevailing tariff of the incumbent operator. If there are interruptions to service, the 

government can deduct subsidies.51 

 

48 Wallsten, 13-14. Malik 2008. 

49 Jain 2008. 

50 Ibid. 

51 Ibid. 

 

16 

 FCC Staff Working Paper 
Identify main criteria for eligible bidders. In 2007, the rules limiting participation 

only to fixed line operators already in rural areas were changed, and wireless operators 

were permitted to participate.52

Implementing the auction. The auction was sealed bid with multiple rounds. For 

each cluster the government specified a starting benchmark subsidy per site. Participants 

put forward an earnest money guarantee for each cluster they intended to bid on. 

Participants then submitted two bids for each cluster they were interested in – a prequalification bid and a financial bid.53 

In the first round, pre-qualification bids were opened first. Then, for all who prequalified, their financial bids were open. For the infrastructure subsidy (Part A), only 

half the bids – up to a maximum of four bids – moved on to the second round. For the 

service subsidy (Part B), a maximum of four bids moved on to the second round. Since 

for the service subsidy there were three separate providers allowed for each cluster, if 

there were fewer than four bids, all would be declared winners.54

For the second round, the new benchmark was the lowest bid from the first round. 

Rounds continued until there was one lowest bidder for the infrastructure subsidy, or the 

three lowest bidders for the service subsidy. For any particular cluster, the infrastructure 

subsidy would not be finalized unless there was at least one successful winner of the 

service subsidy.55 

The contracts for these auctions were finalized in June 2007. For the Part A 

infrastructure subsidy, 21 companies participated, of which seven won subsidies. 

Incumbent BSNL won over 75% of the clusters; Reliance was next with 6% of the 

clusters. The subsidy committed was 69% less than the benchmark originally set for the 

auction. For Part B, 18 companies participated, 12 of which won service subsidies. 

Table 6 below shows results for service subsidy auctions for selected clusters.56

 

52 Ibid. 

53 Ibid. 

54 Ibid. 

55 Ibid. 

56 Jain 2010. 

 

17 

 FCC Staff Working Paper 
Table 6: Sample of Service Subsidy Auctions (Part B), Selected Clusters57

State Cluster

Number

Number

of Sites

Number

of

Bidders

in  

Round 1

Number

of

Bidders

in

Round 2

Bench­ 

Mark

Subsidy

per Site

(US$)

Reserve

Price­ 

Second

Round

(US$)

Winnin

g Bid  

(US$)

Maha­ 51  113  6  4  3424  0  ‐36 

rashta

52  125  5  4  3961  0  ‐34 

Andra 1  96  6  4  3218  0  ‐0.27 

Pradesh

4  101  6  4  3068  0  ‐0.32 

Kerala 33  46  5  4  2356  0  0 

Jammu 24  88  3  3  4568  NA  2284 

and

Kashmir 25  90  3  3  5163  NA  2593 

In the immediate aftermath of the auction, the actual construction of cell tower sites 

has been good for all operators except BSNL, as Table 7 below demonstrates. A year 

after the auction, all operators had substantial progress in building sites except BSNL. 

Fifteen months later, however, BSNL’s progress appears to have accelerated. 

Table 7: Results of Infrastructure Auctions (Part A)58

Company Towers awarded 

2007 

Towers in operation 

10/31/2008 

Towers in operation 

2/28/2010 

BSNL 5794 790 5481 

Reliance 407 251 396 

GTL 412 390 409 

KEC 377 153 373 

Vodafone Essar 309 262 309 

QTIL 88 88 88 

 

57 Adapted from Jain 2008. 

58 Jain 2010. 

 

18 

 FCC Staff Working Paper 
Jain and Raghuram speculate that had bidders been able to combine clusters, both 

infrastructure and service providers could have leveraged economies of scale to offer 

lower bids.59 Also, the Telecommunications Regulatory Authority of India is considering 

whether operators outside the auction process should also have access to the passive 

infrastructure built in Part A.60 

India continues to face a range of universal access challenges today. One of the 

major issues is that the Universal Service Obligation Fund is a unit that reports to the 

government’s Department of Transportation, the same department that oversees the stateowned incumbent operator BSNL. Consequently, critics argue the Universal Service 

Fund does not sufficiently incorporate the views of the independent regulator, users in 

rural areas, and other industry members. Under these constraints, the minimum subsidy 

auctions at least has improved the government’s ability to discover the subsidy level 

required to meet some of its rural targets and, especially in the area of mobile services, 

leverage public funds to encourage private investment.61

Discussion 

The experiences of both Chile and India with their minimum subsidy auctions for 

universal service highlight a range of challenges. Among the most important of these 

challenges are (1) how to identify which projects to subsidize, (2) handling risk, and (3) 

potential effect on competition. 

 

Identifying which projects to subsidize. The minimum subsidy auction process 

places a premium on good project selection and definition. Projects can be generated 

top-down or bottom up. In Chile, while the government takes into account demand 

information collected from localities, decisions are still made top-down by government 

staff. In India, if the government had consulted industry more thoroughly before the cell 

tower site auctions, perhaps the government would have focused more on the sites less 

likely to be commercially profitable and reduced the number of clusters that went to zero 

or negative subsidies. Governments can first build partnerships between community 

service organizations and companies with technical expertise, and then consult them on 

projects to be subsidized. Such a bottom-up approach might not only improve project 

selection, but also support stronger adoption of the technology once it is built.62

Allocation and mitigation of risks. With minimum subsidy auctions, the government 

shoulders some of the risks normally borne by private investors. These risks include: 

• Construction risk – if the winner fails to follow through with commitments. 

• Quality of service risk – if the winner provides inferior service while taking 

subsidy. 

• Commercial risk – if the winner abandons service if finances falter. 

 

59 Jain 2008. 

60 Malik 2008 and Wallsten, 13-14. 

61 Jain 193. 

62 I am indebted to comments from Bjorn Wellenius, Philip Howard, and Rekha Jain. 

 

19 

 FCC Staff Working Paper 
These are risks that should be taken into account when the auction is designed and 

the contracts drawn up between the government and the subsidy winners. Another 

tension to consider is whether the auction design should encourage new competitors to 

enter the market. For example, requiring financial guarantees tends to favor established 

players over new ones. On the one hand, new competitors without past records of 

reliability may be considered riskier. On the other hand, in both Chile and India, 

incumbent telecom operators won subsidies in the early days of subsidy auctions and then 

failed to implement their commitments. 63

Potential effect on competition. Subsidizing a new broadband service undermines 

existing providers of dial-up Internet service, for example. The subsidy available to one 

operator constitutes a barrier to entry for others willing to compete in the market. 

Sometimes even the potential of a subsidy can change behavior. In India, the longexpected prospect of universal service subsidies may have delayed mobile operators entry 

into some regions that were just marginally commercially viable, as companies waited in 

hope of government support. Another alternative to consider, for example, is subsidizing 

demand rather than supply.64 

On a final note, this paper was conducted entirely on the basis of documents 

collected from governments and academic research; further investigation through field 

interviews and site visits would no doubt bring further clarity to what works and does not 

work with minimum subsidy auctions. Furthermore, there are minimum subsidy auctions 

in other countries that have not been covered in this paper that would be worth exploring 

in detail. 

Conclusion 

A review of Chile and India’s experience with minimum subsidy auctions for 

communications service projects reveals certain key elements for successful 

implementation. 

• Set clear policy targets and methods for identifying projects. For India, targets 

were identified in its National Telecommunications Policy. For Chile, in addition 

to objectives established at the national level, local authorities and civil society 

groups were able to ask for projects through a process that is simple and quick. 

• Establish method for calculating maximum subsidy available per project. Each 

country developed and publicized a method for calculating maximum subsidy 

available for each project. If winning bids for projects are below the maximum 

subsidy allocated for them, there may be subsidy funding left over. Therefore, it 

would be useful to develop a prioritized list of projects that could be funded from 

this remainder.

 

63 From comments by Wellenius and Howard. 

64 From comments by Wellenius and Jain. 

 

20 

 FCC Staff Working Paper 
• Specify minimum technical and financial requirements for bids and regulatory 

advantages or requirements, if any. Chile and India all had specific details for 

infrastructure and service performance requirements. In Chile’s projects for 

Internet infrastructure, bidders are asked to specify the prices consumers will be 

charged for levels of service. Time frames for project completion are also 

specified and disbursement of funds can be tied to these milestones.

• Maximize the number of competitors and range of technical options. In India, the 

first minimum subsidy auctions were open to a limited number of operators, 

which contributed to the result that the incumbent won most of the bids. Opening 

up the pool of bidders and allowing inclusion of wireless as well as wireline 

proposals increased competition in later auctions and contributed to downward 

pressure on the subsidy awarded for projects. 

• Auction implementation. Chile’s public documents detailing the requirements for 

bids give a picture of how auctions can be designed to encourage high 

performance investments at low cost. 

o First, technical evaluations create incentive for high performance. Before 

bids go into the auction, they are reviewed by technical experts at the 

regulator. It appears that only the bids ranked as performing the highest 

from a technical perspective are forwarded to the auction. This may give 

bidders an incentive not only to minimize the requested subsidy, but also 

at least achieve and perhaps exceed the technical and service requirements 

for the project at hand. 

o Second, the minimum subsidy auction method creates incentive for lower 

subsidies. Once the best proposals, on a technical basis, are forwarded to 

the auction, the final selection is based on the bid with the lowest subsidy 

requirement. This encourages bidders to create proposals that balance 

high technical performance with cost-effective strategies. 

The primary difference between minimum subsidy auctions and the current requestfor-proposals method often used by government is that with auctions the review of the 

technical and financial specifications for a project takes place earlier, before bids are 

placed. The cases of Chile and India suggest that the minimum subsidy auction can be a 

useful technique to disburse funds quickly for a targeted list of communications services 

projects in a manner that captures the advantages of competition to minimize the subsidy. 

 

21 

 FCC Staff Working Paper 
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24 

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25 

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Other Recent Staff Papers 

All Titles Can Be Downloaded at 

http://www.fcc.gov/papers/

“Transformative Choices: A Review of 70 Years of FCC Decisions,” Sherille Ismail, 

FCC Staff Working Paper 1, October 2010. 

“A Market-Based Approach to Establishing Licensing Rules: Licensed versus Unlicensed 

Use of Spectrum,” Mark Bykowsky, Mark Olson, and William Sharkey, OSP Working 

Paper 43, February 2008. 

 

 “Modeling the Efficiency of Spectrum Designated to License Use and Unlicensed 

Operations,” Mark Bykowsky, Mark Olson, and William Sharkey, OSP Working Paper 

42, February 2008. 

“Enhancing Spectrum's Value via Market-Informed Congestion Etiquettes,” Mark 

Bykowsky, Kenneth Carter, Mark Olson, and William Sharkey, OSP Working Paper 41, 

February 2008. 

“Competition Between Cable Television and Direct Broadcast Satellite - It's More 

Complicated Than You Think,” Andrew S. Wise and Kiran Duwadi, Media and 

International Bureaus, January 2005. 

“The Scarcity Rationale for Regulating Traditional Broadcasting: An Idea Whose Time 

Has Passed,” John W. Berresford, Media Bureau, March 2005. 

“A Survival Analysis of Cable Networks,” Keith S. Brown, Media Bureau, December 

2004. 

"Traits of an Independent Communications Regulator: a Search for Indicators," by Irene 

Wu, International Bureau, June 2004. 

"The Limits of Economic Regulation: The U.S. Experience," Peyton L. Wynns, 

International Bureau, June 2004.