By staff reporter Wang Yichao and intern reporter Hu Taotao

Every time a group of tourists arrive in Yading, a tiny Tibetan village in southwestern Sichuan Province, Mr. Zeng, the local tourist guide, gets a headache. As his customers gasp at the beauty of the small community, surrounded by three snow-capped mountains and dubbed by locals as "the last Shangri-la," he has to worry about his guests’ return tickets. But there is no telephone line or cell phone coverage in the village, and he has to battle at least two hours of mountain roads to get to the nearest phone.

Now all that is going to change, thanks to China’s latest drive to provide affordable telecommunications service to its vast unconnected population. "They will soon build a mobile base station and we will have cell phones here," Zeng told Caijing in late July.

Despite the fact that the Chinese lead the world in the number of fixed-line and mobile phones they own - 650 million in all - the sweet electric rings still have not been heard in as many as 70,000 rural villages.

The Ministry of Information Industry (MII) said in May that it intended to expand telecom networks to at least half of those villages by the end of this year. By then, residents in 95% of rural villages will be enjoying phone services at the same rate as city dwellers. This has given rise to discussions of a "universal service fund," which will help the government foot bills for building new networks.

Xu Junqi, an official at the MII’s Telecommunications Research Institute, said that provincial telecom companies showed their reluctance to expand their customer bases in remote areas as early as 2000. Although the state-owned telecom group companies encourage their local branches to boost rural service, the poor infrastructure and extremely high costs for network construction there have proven daunting barriers for local operators, he said.

The entire telecom industry has spent over 200 billion yuan (US＄ 24.15 billion) each year in fixed-asset investment since 2000, but spending on rural service has slowed to a trickle.

Rising competition between several state-owned telecom giants such as China Telecom, China Mobile and China Unicom has generated more pressure on them to focus resources on the much more profitable urban markets, analysts say.

During its campaign to launch an IPO in Hong Kong, China Mobile was grilled repeatedly on the matter of who will shoulder "universal service" expenses. Although the company assured investors that the its state-owned parent, instead of the listing vehicle, would pay the bills, many investors and market watchers remain skeptical. China Netcom, the China Telecom spin-off that took over the latter’s market in the northern part of China and is now actively seeking an IPO overseas, is facing the same problem.

By law Chinese telecom operators are responsible for providing universal service to their customers. In September 2000 the MII incorporated the principle into the Telecommunications Regulations. A year later, the State Council called for the establishment of a "universal service fund."

But slow cooperation from the telecom companies dampened the government’s hope for speedy progress. As a compromise, the MII unveiled a blueprint of the so-called "village to village project" in July 2003, under which unconnected rural areas across the country were grouped into regions and assigned to one of the six major telecom operators (China Telecom, China Netcom, China Mobile, China Unicom, China Railcom and China Satcom) in accordance with the company’s size and financial capacity.

The State Council approved the plan in January 2004, and it soon began nationwide. China Mobile took over 6,112 villages in Sichuan Province, where Yading is situated. China Telecom’s share included 3,457 villages in Inner Mongolia, and China Unicom assumed responsibility for building telecom networks in 1,680 villages in Guangxi. China Railcom and China Satcom, two of the smallest operators, were assigned 193 villages in Henan and 132 in Sichuan, respectively.

Both state regulators and the telecom companies, however, have since acknowledged that the plan was unfair.

Liu Lingjun, a marketing officer for China Railcom, complained that the company’s cost for building networks in Henan province was much higher than its competitors, because many of the province’s counties, unlike those of other provinces, were not pre-laid with fiber-optic cables.

"Others can simply put in only 5 kilometers of cable, from the nearest county seat to the village, but we may need 50 kilometers, or even 100," he said.

A telecom analyst at an investment bank, who declined to be named, told Caijing that it is very difficult to pre-estimate the cost of universal service. "Only through tendering a bid can you discover the real cost," he said. Arbitrary assignments by the government are both unfair and opaque, he said.

Hu An’gang, a professor at Tsinghua University and a key policy consultant to the central government over the years, submitted policy recommendations to the State Council in March and April calling for the establishment of a fund to support universal service constructions in rural areas.

Sources say vice premier Huang Ju responded positively to the recommendations, and the State Council is pushing for the fund to start operating as early as the beginning of 2005. The universal service fund will officially replace the "village to village project."

The Ministry of Finance will be responsible for managing the fund, while the MII will draft plans for the money to be injected into various projects, sources say.

Professor Hu had recommended that the state develop the fund by charging a fee equal to 5 percent to 10 percent of the telecom operators’ revenues. But the telecom companies have unanimously declared the rate "too high."

According to figures publicized by their listed companies, China Mobile’s net profit rate in 2003 was a whopping 22 percent, whereas that of China Telecom stood at 21 percent. China Unicom, on the other hand, reported only a net profit rate of 6.2 percent for that year. China Railcom, which was not listed, managed a mere 1 percent.

Sources say the MII has tentatively set the starting fee at 1 percent to 2 percent, and expects to rake in some 5 billion to 10 billion yuan (US＄ 603.86 million to 1.21 billion) each year. The MII will also review and adjust the rate annually.

English version by Wang Feng