Despite the tremendous growth of mobile services in most developing countries, these have largely remained limited to urban areas. This has further aggravated the existing urban and rural divide. Policy makers and regulators perceive the need for an effective regulatory and policy environment to reduce the gap, as there are several market challenges in this endeavor, including low commercial viability. However, most such interventions have had little success.

This paper outlines India.s experience of increasing rural teledensity, including its recent policy initiative to increase penetration through creation of a Universal Service Obligation Fund (USOF) that supported a variety of innovative initiatives. USOF.s most ambitious program to date had been the design and deployment of mobile services in rural areas.

This paper analyses the outcomes of various programs, especially those of the mobile service provision component of USOF. Despite the innovative design of the USOF program, it had little impact on increasing rural teledensity. On the other hand, positive policy steps that reduced the costs for service provision (revenue shares, duties, ADC) and competition facilitated greater rural penetration. This raises the issue of role of government vis-à-vis private sector in increasing rural teledensities.

The lack of accountability arising from the relationship between the government owned incumbent and the USOF administrator and proper evaluation of USOF, the non-ring fencing of the fund and poor quality project management contributed to the low impact. Non-involvement of private operators at an early stage, inability to suitably enforce any penalties for violation of contracts, and non-existent review and feedback mechanism have not allowed USOF to leverage the benefits of an early start. In Peru, strict penalties in non implementation of contracts led to more timely schedules (Cannock, 2001).

Since USOF is a highly visible program, it is important to generate high impact outcomes. On the strategic front, USOF needs to be managed by an independent body that is made responsible for outcomes. Third party assessments and greater enforceability of contracts are necessary operational elements of thisdesign. Without this operational framework, the strategic elements of design will not provide the value that was envisaged.

This paper also provides a framework for assessment of USOF and relates it to the experience in other countries. USOF must be treated as one among many instruments for increasing rural teledensities and efforts should be made to facilitate policy outcomes on a variety of dimensions.