tele.net’s first cover story took stock of the sector’s progress since the introduction of the National Telecom Policy, 1994 and outlined the need for world class telecom services to enable the country to plug into the global economy.
January 2000: It was almost six years ago, in 1994, that the government announced its National Telecom Policy with a great deal of fanfare. The development of telecom services, it decreed, would be given the highest priority to achieve the objectives of telephone on demand, reduction in waiting list, increase in telephone penetration, and upgradation of network. Importantly, this was to be achieved by 1997 with the help of the private sector.
At the end of 1999, most of these goals have still not been met. Except in a couple of metros, telephone on demand is nowhere in sight. Many of India’s 600,000 villages still do not have a phone line. Tele density is close to 2.2 (lines per 100 people), well below the goal of 2.5. China’s tele density, in comparison, is over 5.6 and Malaysia’s over 19.
Except in parts of Madhya Pradesh, Mumbai, and Andhra Pradesh, basic telephone service remains a de facto monopoly of DoT and MTNL. The quality of service is still very poor. The customers of state-owned telephone monopolies still complain about overbilling and extortion by the employees.
Indian consumers continue to pay almost the highest tariffs in the world for long-distance and international calls. A call from Delhi to Mumbai still costs Rs 30 per minute. A call from New York to Los Angeles, more than twice the distance, costs less than Rs 4.50 per minute. A call from India to the US costs from Rs 60 to Rs 80 per minute. A call from the US to India, on the other hand, can cost as low as Rs 20 per minute.
To be sure, cellular telephone services are widely available. But their charges are also relatively high between five and 25 times the cost of a fixed line phone call. Despite these high tariffs most of the private operators are losing money. The number of subscribers is still below 1.3 million. China, in comparison, has almost 27 million.
The primary purpose of reforms was to get consumers more, better, new and less costly services. Safe to say, we have not met those goals. India has become something of an example of how not to open a government-monopolised telecom sector.
What went wrong? To begin with, the government chose the strategy of managed competition in preference to a free for all. Its objective, right from the start, seemed to be maximising revenue rather than reducing prices or expanding choice. It dictated the use of technology and restricted the number of operators.
The reforms were also poorly sequenced. The government began to award licences before setting up a regulator. This may have simply been an error of judgement. Or, more likely, an attempt by the bureaucracy to retain power and control. It allowed DoT to play the role of licensor, as well as that of policy maker and service provider.
The bidding process was far from flawless. The initial tenders suffered from complicated and subjective evaluation. As for the result, the decisions were often challenged in courts and awards were delayed. Over time, the licence fee became more important. But here too, there were problems. Basic services bids in the first round were rejected on the grounds that they were lower than the reserve price. The problem was that DoT had forgotten to mention or disclose this reserve price in the tenders.
Then there was the tendency to levy fees and charges not mentioned in the tenders. The whole licensing process was lopsided in favour of DoT. It tended to focus on the rights of DoT and obligations of private operators. If a delay was caused by the operator, the penalties were substantial. If they were caused by DoT, they were negligible.
Meanwhile, caught up in the excitement and the hype, most of the operators bid way too high. Later, some did not take up the licences. Others realised that the market just could not sustain the licence fees they had committed to pay. As a result, many operators could not secure financing. Most are yet to achieve financial closure.
When telecom services were opened to the private sector, DoT did not allow operators into domestic long-distance or international calling. It placed all kinds of restrictions on other services. Data services using VSATs could be provided only to closed user groups. VSAT operators could use only the extended C Band and interconnection between private cellular networks was not allowed.
The tariff reforms should also have taken place before the sector was opened to investment. DoT continued to subsidise local calls with high long-distance charges. But private operators could not do that as they could not offer long distance. This too created problems and adversely affected their results.
Red tape made the situation worse. Private operators had to get all kinds of approvals and clearances from agencies like the Foreign Investment Promotion Board, the Standing Advisory Committee on Frequency Allocation, the Telecom Engineering Centre, and so on. Meanwhile, while they were waiting for these permissions to set up their networks, they were asked to keep paying the licence fee.
There were also stories of corruption. During the period of bidding, there were rumours of suitcases of money being delivered to certain politicians and ministers. Concessions were granted to some of the bidders in clear violation of tender and licence conditions. For example, though it was mandatory to have a foreign partner, licences were awarded to companies which clearly had foreign partners only on paper.
The telecom regulatory agency was not established till 1998. Thereafter, it was consistently undermined by court challenges from DoT and MTNL. Perhaps, TRAI flexed its muscles more than it should have and sought more powers than the act provided. But it was only doing what was expected of an independent regulator. The DoT challenges and the resultant Delhi High Court rulings reduced the role of TRAI to a mere tariff-setting body. Lately, even that role has been challenged by MTNL.
The government has tried to solve many of these problems through its New Telecom Policy. To begin with, it has sought to correct the problem of unsustainably high licence fees by shifting to a revenue-sharing regime. New licences are to be awarded on an entry-fee and revenue-sharing basis. The government has temporarily set the revenue-sharing level at 15 per cent, which is far lower than what state-owned operators or private metro cellular operators pay. The final terms will be based on the recommendations of TRAI.
The existing operators are to be allowed to switch to the new arrangement provided they pay all their outstandings by January 31, 2000; and provided both operators in a particular circle agree to switch. The latter could prove tricky: Reliance Telecom, for example, is paying low licence fees and will find little reason to switch.
The government has also agreed to many of the other demands made by private operators. Licence terms have been increased from 10 to 20 years. The effective date of the licence has also been shifted by six months to compensate for delays in obtaining clearances.
The New Telecom Policy also decreed that long-distance be opened up to the private sector by January 2000, under conditions determined by TRAI. However, VSNL’s monopoly is likely to continue until 2004.
The government has also liberalised operating conditions. Cellular companies can provide all kinds of services including voice, non-voice, data and long distance within their service areas. Importantly, direct interconnection with other service providers and sharing of infrastructure is allowed, as is the use of foreign satellites. VSAT operators can also utilise the Ku band frequency.
There has also been an attempt to reduce the red tape and modernise the telecom bureaucracy. For example, the Wireless Planning and Coordination Wing will be modernised and upgraded with the help of the World Bank.
The new policy document, however, does not address the question of converting DoT from a government department to a state-owned agency, though it does propose separating its licensing functions from service functions.
Although the document also does not explicitly clarify the role of TRAI, the government seems to have decided to seek the agency’s recommendations on the number and timing of all new licences. It has also been given powers to resolve all disputes between service providers (including DoT).
In return for bailing out the existing operators, the government has asked for a few concessions. To qualify for the new revenue-sharing regime, existing operators must agree to allow multiple operators in their circle and withdraw any legal suits they may have filed. The existing shareholders must also agree to lock in their investments for five years (although new investors can be brought in).
The existing operators are not happy with some of these conditions. They are concerned that one set of challenges will be replaced by another. The bureaucratic hurdles and regulatory barriers may be gone, but they will be operating in a difficult and weak market – with even more competition, and no quick way out.
Investors see opportunities but also have concerns. They are willing to come in and play the game but only if there is a true level playing field. They are looking for the government to strengthen the role of TRAI through legislative action.
It is not just a matter of amending an act. It is also important that DoT be told to accept the principle of regulation in full spirit and desist from constant undermining of regulatory authorities. As of now, it has negated all the positive signals that have emanated from the Prime Minister’s Office (PMO).
The corporatisation and privatisation DoT need to be speeded up. This will require political will and courage. Hopefully, the PMO and the new communications minister will be up to the task.
It is also important that in framing the legislation, the government consider the revolutionary changes in information technology and the growing convergence of communications industries.
None of this is new advice. The different task forces have all recommended these steps. At various conferences, the ministers too echo the words. Action, however, has been sorely lacking. It is time now to implement the policy.
Meanwhile, elsewhere in the world, the telecom revolution is continuing at a furious pace. Telecommunications as we know is slowly being replaced by “networking”. The huge decline in the cost of communicating, the increase in the power of computing and the shift to digital technology are leading to a convergence of communication industries.
To begin with, the cost of communicating has declined dramatically. The cost of voice transmission circuit, for example, over the years has fallen by a factor of 10,000 in last 20 years. This is a result of development of fibre optics, cheap electronics, and smart wireless. Optic fibre has extremely high capacity and has thus reduced the cost of signal transmission. Cheap powerful, microprocessor-based electronics have made possible intelligent networks which improve capacity utilisation, lower the cost of maintaining switches and create new services such as virtual private network. Fixed wireless too has reduced the costs by using a range of clever compression techniques which can squeeze many conversations into a given frequency.
The second important diver of the information revolution has been the relentless increase in the power of computing. More importantly, the increase in power has been accompanied by a decrease in costs because of the development of integrated circuits and microchips, because of increasing transistor density on microchips and because of economies of scale of production.
The third and perhaps the most important driving force has been digital technology. Digitisation is causing the merging of telecommunications, information technology and media industries into a “bit” industry that manipulates voice, image, video and computer data in binary form.
The information regulation is changing the rules of the game. Communication and information services are being delinked from their underlying delivery infrastructure. Telephone services can be delivered through co-axial cable. Data services and internet access can be delivered through telephone lines. And cable TV programming can be offered through direct broadcast satellite. It is now possible to receive the radio broadcast over the internet (using telephone networks) and telephone services can be provided by companies in cable TV (a broadcasting medium).
At the same time, the assumption that the best way to deliver service to customers is through utility is no longer valid. For years, telecom operators have been natural monopolies because of the very big initial investment required to establish the local loop. But wireless and other technologies are changing that. Wireless is not only cheaper than wireline but its cost curve is much flatter. In this world, size no longer brings overwhelming cost advantage. It is possible to have several competing providers of local service without raising the network’s overall cost.
Other old ways of doing business are falling by the wayside. Almost universally, the charges for telephone calls used to depend on the length of conversation and the distance involved. These charges often bore no relation to real costs. Tariffs for international calls, for example, nearly always exceeded the cost of providing such a service. As long as they had a monopoly, telecom operators could carry on doing that. But the new technology has created opportunities for new players who are offering new services like call back, calling card and internet telephony. As a result, the cost of international calls has fallen dramatically.
In the future, the charges are likely to be based on bandwidth rather than time and distance. Transmission capacity and bandwidth will become tradable commodities. One can imagine a spot market in which capacities are bought and sold in half-hour slices and megabit-per-second tranches. There could even be a futures market on which contractors will allow operators to hedge future positions.
It is difficult to imagine today’s mastodon operators who now cover everything from bulk transmission to value-added services in such a world. Instead, the market would segment into wholesalers who would invest in and sell capacity; retailers who would be in contact with the final consumers; and traders and brokers, who would intermediate supply and demand in capacity.
Already, in the west, the old monopoly of telecom sector is fast disappearing. Telecom markets are fragmenting into a multiplicity of niche markets. National barriers have fallen. Many new operators are emerging, each targeting the segment that best corresponds to their competitive advantage. In this new networked, “bit” industry, the future of incumbent telecom companies is not at all assured. New, more nimble players will emerge as the market shifts from under the feet of the existing operators.
Preoccupied as we are with the problems and issues of the day, it is critical that we do not ignore these developments elsewhere in the world. Convergence can open up huge opportunities for a country like India. It can accelerate the roll-out of connectivity to its population, urban and rural. But this would require the use of innovative technologies and private sector-led investment in a competitive mode.
Our goal should be access to the latest and cheapest technology. Cheaper communications will offer Indian businesses new possibilities to be internationally competitive and to plug into the global economy. If India is to be a major economic player in the twenty-first century, its businesses will need the very best of telecom and IT services. The way to get there is not through controls and licences but through competition and choice.
