Economy: Telecom; Licence To Kill

Amidst ill-conceived contracts, a loss-laden industry, a weak regulator and a stubborn government, the consumer remains the casualty.

If the proposed changes in the rates of telephone calls and rentals are the only things that have caught your attention, you haven't even begun to understand what is now known as the Indian Telecom Trap. Ever since it unfolded with much fanfare in 1993 -- when telecom services were first opened for private participation -- disputes, losses and failures have dogged the sector far more frequently than settlements, successes and profits.

Till March 1999, Indian and foreign investors had spent an amount between Rs 14,000 crore and Rs 20,000 crore in basic telephone, cellular mobile communication and paging services. The return on investment? An accumulated loss of about Rs 4,000 crore. "An industry which is scrambling to generate cash flows to run day-to-day business has to garner money to pay licence fees," bemoans Rajiv Chandrashekhar, president of the Cellular Operators' Association of India and managing director of BPL Mobile.

TELE-TRAP

THE GENESIS
ťOver estimation of market size by private telecom companies.
ťLicensing based on highest fee, not lowest price to the consumer.
ťScant attention to future technological advances.
ťHalf-baked contracts signed between the industry and dot.
ťAn omnipotent DOT.

THE MESS
ťFour out of six private basic operators yet to start services.
ťCellular companies accumulate losses of about Rs 4,000 crore.
ťRs 3,500 crore due to the Government as licence fee.
ťA weak regulatory body -- the TRAI.
ťNo marked improvement in quantity, quality and prices of services.

THE WAY OUT
ťCapitalise outstanding licence fee.
ťAllow existing licencees to provide multiple services.
ťReplace licence fee system with entry fee for future bids.
ťAllow merger of the basic telephone circles.
ťGrant complete autonomy to TRAI.
ťCorporatise dot without delay.

The 40 cellular companies in operation owe Rs 3,000 crore as outstanding licence fee to the Department of Telecommunications (DOT). The six basic service providers, out of which only two have started service, owe DOT Rs 690 crore. The 24 radio pager operators, whose licensing fee arrangement is due for review in 1999, are confronted with stagnant markets and meagre revenues.

The first 10 days of March delivered two more blows. The Delhi High Court refused extension for payment of 20 per cent of the total licence fee due from telecom companies (approximately Rs 600 crore). Worse, the first ever tariff order of the Telecom Regulatory Authority(TRAI) was put on hold by Union Minister for Communication Jagmohan following a wail of protest in Parliament. While the court's judgement was not unexpected, the reaction to TRAI's order shook investor confidence. For the Government has yet again demonstrated its inability to defend the autonomy of TRAI, which is key to the telecommunication sector's future growth. Says Virat Bhatia, managing director, Birla AT&T: "TRAI's independence as a regulator is the first step towards ending the prolonged policy uncertainty and reducing the risk perception of investors."

This is not the first time the Government has let down TRAI. In October 1998, the regulatory body had suggested a two-year moratorium on licence fee with certain other provisions to settle the raging dispute over licence-fee arrears. DOT dismissed the recommendation. By commission or omission, every communication minister has tended to favour DOT, perpetuating its monopoly and its unfairly omnipotent roles of a service provider, a policymaker and a regulator. Jagmohan is no different. By insisting on adherence to the licensing agreement in letter and spirit and by his inability to support TRAI's tariff order, the minister has strengthened DOT and undermined TRAI. Says TRAI Director Rajat Kathuria: "This is the reverse of what the Government should be conveying -- a stronger regulator and a competitive DOT."

The industry too is responsible for its present plight. Every single investor in telecommunication is guilty of overestimating the size and growth of the Indian market by a wide margin. Moreover, in their attempt to acquire a licence, companies outbid each other, instead of putting up a joint front against the unfavourable terms and conditions on which the licences were being given. "By failing to get its act together, the telecom companies allowed DOT to divide and rule," chides Pranob Sen, Planning Commission adviser who was associated with the forming of the 1994 Telecom Policy.

Unfortunately, the pace of telecom technology has also been a spoilsport. In fact, while the Government and industry have been squabbling over adherence to licensing agreements, newer technologies have made the licences outdated. Today it is possible for Internet-service providers or cable-TV operators to walk away with a chunk of the basic-service operators' market. Similarly, the growth of the grey market in Internet telephony (use of the Internet to make long-distance calls) is also eating into the market of basic telephones. Claims S.C. Khanna, general secretary, Association of Basic Telecom Operators: "These developments breach the duopoly (two-service provider) agreement between basic-service providers and DOT."

Yet, all is not lost in the telecommunication sector. Since 1992 the number of basic telephone connections has grown by 19 per cent a year. The low density of telephones (less than two per 100 people), substandard quality of services, and high prices of long-distance calls leave a large scope for profitable private participation. But for that to fructify, the Government and industry have to sort out a few issues. The first being the licence fee. True, any relaxation in licence-fee agreement, however desirable, may not be feasible since that could open the floodgates of litigation which may stall the entire reform process. But there is scope to provide a breather to private operators without altering agreements. A way to do it is to capitalise the outstanding licence fee. In simple terms, this would entail charging interest on outstanding amounts till such time the fee is fully paid. This way, while the companies get time to generate funds, the Government is compensated for the delayed payment.

The existing subscriber base of over a million is not adequate to sustain 40 cellular companies currently operating in the country. "A shakeout through mergers and acquisitions is imminent, which will pave the way for consolidation," predicts Sen. The Government could facilitate the process. For basic services the size of licensed circles (area within which a service provider can operate) could be too small to generate profits, especially with the advent of competition from the Internet and cable TV. The Government could allow companies to merge circles and expand markets. More important, policy has to be technology-friendly. Says Chandrashekhar: "World over, telecommunications are the hotbed of innovation in technology and marketing. In India government policy scuttles such innovations."

To set its own house in order, the industry expects the Government to fulfil its promises without further delay: complete autonomy to TRAI and separation of DOT's role as a policymaker from that of a service provider. Hopefully the new telecom policy likely to be announced before the end of March will incorporate most of these elements. Or else any further improvement in India's telecommunications will be on hold.