May 18, 1998

A tangle of snags is preventing private companies from getting a phone to your home.

By Shefali Rekhi

These days Sushma Swaraj finds that Sanchar Bhavan, the office of the Ministry of Communications, takes up most of her working hours, leaving little time for information and broadcasting. Not surprising, considering that the privatisation of basic telecom services is in a mess. Four years after the National Telecom Policy was announced in 1994, basic services in the private sector are yet to take off. Of the 21 circles for which bids were invited, licence agreements have been signed for only six. The cases of five circles are in court, while two are still at the negotiation stage (see box). In the remaining eight circles, the bids will be retendered as they have been declared invalid.

That's not all. Operators and lenders are now petitioning the Government for an overhaul of the privatisation policy. Red tape apart, they are pointing to inherent flaws in the licensing procedure as the main reason for the delay in their projects. Add to this the long-drawn legal battles over the issue of licence fees and the players' own miscalculations on profitability. Foreign partners in the sector today are a fidgety lot. Shake-outs, till now a phenomenon in the cellular services, are spilling over to basic services. In Andhra Pradesh, for instance, Bell Canada, partner in Tata Teleservices, has expressed its intention to pull out. "Business works on a risk-reward balance," says Zahid A. Baig, principal executive officer, Tata Services Ltd. "But while risks are mounting, rewards are sliding."

As it is, the operators have lost a lot of time. Shyam Telecom, which bid the highest for Rajasthan in August 1995, couldn't sign the licence agreement, let alone begin operations, till as late as March this year. This because the Department of Telecommunications (DOT) and the company arrived at different estimates of the net gain to the government, from the schedule of licence fee payable. Finally, a cabinet meeting resolved the issue. "Every day, there's a new charge from one department or the other," says a frustrated Rajiv Mehrotra, the company's MD. "I hope I can stick to schedule at least now."

To make the projects viable, the operators have been demanding:

Extension of the licence-fee period from 15 years to 25 years.

Replacement of the licence-fee arrangement with revenue-sharing after networks become operational.

Permission for multimedia services.

More powers to the Telecom Regulatory Authority of India (TRAI) to get (dot) to abide by its rulings and ensure a level playing field.

Any further delay in the commissioning of the projects will mean that much of a setback for growth. Already, the waiting list for new connections has increased from 2.29 million in 1992 to 2.88 million (March '97). On the revenue front, with even value-added services like cellular phones and paging faring poorly, the Government could get only about Rs 2,000 crore of the targeted Rs 3,600 crore licence fee in 1997-98.

Not that the government couldn't foresee this. Midway last year, it realised that it had to change tack. It decided to encash the bank guarantees in those cases where operators were not coming forward to sign the licences. The move backfired. Himachal Futuristic Communications Ltd, which bagged the prime circles of Delhi, Haryana, Uttar Pradesh (west) and Orissa, contested the Government's decision in court, which ruled in its favour. Soon, two other companies -- the RPG Group's Basic Teleservices which bagged the Tamil Nadu circle and Usha India's Techno Telecom (Bihar circle) -- followed suit. With the legal battles adding to delays, the Government is now considering out-of-court settlements.

The companies too agree on this route to expedite projects but say the problem cannot be resolved unless changes are made in the licensing system. Licence fees are now being charged from the operators from the zero year irrespective of when the project becomes operational. In other developing countries, the governments enter into a revenue-sharing arrangement with the private entrepreneur only after the infrastructure is in place. Says Mrityunjay Athreya, author of the Athreya Committee Report on telecom restructuring: "Revenue sharing is better as it is a burden proportionate to business growth. The operator should be subjected to normal taxes and competitive pressures."

The actual fee apart, the criteria for awarding licences has also resulted in distortions. Those who have bagged the licences are not those who will offer the cheapest services. Rather, they are the ones willing to give dot a higher fee. It is here that the operators went haywire with their calculations. They thought they could make good their returns with the huge demand-supply gap and the use of superior technology like fibre-optic cables. But with the Government yet to permit such transmission, the operators' projections have taken a knock. Besides, on the subscriber base, if the cellular industry is anything to go by, the results are far from encouraging. New subscriber additions are 20 per cent below target while in terms of air-time usage, subscribers are talking 50 per cent less than the estimated 250-270 minutes a month. "Operators did make a significant error in their assumptions," says Sushil Prakash, head of telecom, Bank of America.

The bankers, on their part, are unhappy because of the introduction of fresh levies, not part of the tender documents. For instance, dot decided to impose an "access" levy for use of state infrastructure every time a call flowed in from the private operator to a state network. Now municipalities and the Surface Transport Ministry have introduced charges for digging in their areas to lay cables. It was with such uncertainties in mind that the lenders suggested to Hughes Ispat that it float two separate companies in Karnataka and Maharashtra.While the promoters have a go-ahead in Maharashtra, the Karnataka project is still caught in red tape. One way or the other, the fact remains that not a single private basic service is in operation today. The way things are, Swaraj may soon be spending sleepless nights in office.

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