Induction Of Private Sector In Basic Telecom Services

(Courtesy: Economic & Political Weekly February 7,1996)
The introduction of competition in telecom basic service has become mired in controversy. A major policy change of such nature should have seen a wide ranging debate and identification of national goals. Telecom services are no longer luxuries but vital instruments for development. The recognition of this along with the profound technological changes taking place in telecom is restructuring telecom services world over. Unfortunately, the Indian telecom reforms seem to be in quite a different direction from that taking place in advanced countries. If these were not enough, the entire process is vitiated by a lack of transparency and suspicions of crony capitalism. The current policy initiative may result in a better service for the business section of the users but unlikely to benefit the majority of the consumers or help in any major expansion of the telecom network. The high levy fees being quoted in the basic service tender are illusory and are transfers that DoT is making out of its own revenue to private operators. The tariffs for the majority of the consumers are bound to go up by at least two times as a result such transfers.

The International Scenario

The international trends in telecom policy are important as quite often they are trotted out to justify reforms at home. While the reforms in the advanced countries are taking place slowly and with changes in the legal and regulatory framework, they are being thrust on the developing countries at a much faster rate. The changes in Eastern Europe are even worse as public assets are systematically being handed over to either to multi-nationals or the local criminal cum bureaucratic nexus. It is important to know the trends in the advanced countries in order to understand the technological processes at work and examine their implications for India.

Until 1980s, the telecommunications services were regarded as natural monopolies and were the exclusive preserve of their respective national carriers. While in Europe, it was the Government that ran the telecommunications services as a part of the Post and Telegraph Department, in countries like US and Canada, it was in private hands[i]. The major change in this scenario took place due to technological development and the need of US and other manufacturers[ii] to seek external markets.

The technological development took place in two directions. One is that there were now multiple modes of communications as against only wire based communications earlier. The other was the growth of what are termed as value added services. The telecom services earlier were only voice services and the voices were carried as electric signals over physical wires. As the laying of wires and cables are only possible when the concerned parties are given the right of the way legally, this was the physical basis of the monopoly. Further, it is much easier to add an incremental connection to an existing network and not duplicate the same. The economies of scale are such that incremental cost of a connection is less than its average cost. In the age of voice telephony and cable based networks, monopoly was a natural corollary.

However, the growth of wireless, satellite and cable based TV networks made it possible for alternative means of communications. It is possible to provide a mobile telephone service based on wireless — the cellular phones. In this, a number of cells are laid along roads and the telephone connection is passed on from one cell to another as it moves. While the cellular phones are essentially for mobile services, it is also possible to provide stationary phones using fixed wireless systems. Satellite communications — using the satellite to support a number of telephone links are also possible, particularly for special applications. Similarly, the co-axial cable used for cable TV can also support telephone systems. The net result is that it is possible to provide competition to existing network operators using alternate technologies and alternate means without duplicating the existing physical network.

The other route to competition has come from the different kinds of services possible today over the basic physical layer — the telephone line. These services are e-mail, data communications, data base services, etc. All these use the basic signal and the phone lines of the existing system but overlay different kinds of service. Initially, the operating companies wanted to be the sole supplier of these services — called the value added services. However, it was soon realised that other companies could also provide these services through call up and leased lines from the operator. The issue then was to provide a level playing field between the various service providers and the basic network operator. It was easy for the network provider to freeze out all competition by charging exorbitantly for facilities that only they could provide leaving their service as the only viable one. Obviously, the service providers had to be provided protection from the network operator. For convenience, the network operator is the called the operator while the others are termed as the service providers. Thus DoT in India is the network operator while, for example, Business India which provides e-mail services, is a service provider.

The growth of wireless technology has seen an explosive growth of various kinds of systems based on this technology, the most important is of course the cellular technology. The wireless technology has the obvious advantage of not requiring a cable network required by the land based conventional system. However, its costs are still significantly higher while its through-put is low. With advances, it might also support data communication though the focus of such data services is still the land based network. Most equipment manufacturers are active in this area as it is opening out new markets in the advanced countries, faced as they are with saturation in conventional telephone systems.

The cable TV has brought a completely new contender to the telephone scenario. Cable TV grew mainly in competition with terrestrial TV and has now overtaken it with respect to viewership. It connects homes through co-axial cables that has the ability to carry a large number of TV channels. As the bandwidth required for voice telephones are quite low, the same cabling system can be used to provide telephone services also. Compared to the telephone companies, the sizes of the cable companies are quite small. However, they are the only other entities that have cabled most of the homes in the advanced countries. Given that the market for telecom services is ten times that of the cable TV companies, even a small share of the telecom pie will mean significant revenues for the cable companies. For the telephone companies, though the cable market is not a big one, they can not let the cable companies poach on their territory without also taking pre-emptive action. Further, nobody is sure of the future services that will be offered on the information highway. Therefore the need to cover all the angles and build into all available areas.

The competition in telecom is therefore shaping up due to a combination of parallel technologies and the multiplicity of services that are now being offered or to be offered through the future lines. The lines must support data communications, interactive TV, pay TV, apart from voice telephony. And these will be available either through wireless, the cable TV network or the telephone network.

Obviously, the regulatory framework built up in the time of sedate technological changes are being rapidly outdated[iii]. Earlier, telephone companies were granted monopolies just as the cable TV operators were also granted monopolies. As the wireless system could provide more than one operator, two or three operators were licensed in various countries. However, even here, the radio frequencies available are not capable of supporting any number of wireless operators. The regulatory and legal systems that had walled off various kinds of communications are now incapable of merging of various technologies and alternate means of communications for the same kind of end service. While the articulation is for fostering competition and better services, the real driving force of the regulatory changes are for building a framework to allow for the emerging scenario.

It is interesting that the communications arena is seeing massive mergers as the regulatory barriers are being lowered. Completely new alignments are being worked out with entertainment companies, cable TV companies, the computer software and hardware companies and the telephone companies all in the throes of mergers and acquisitions. The largest players are likely to be the entertainment companies and the telephone companies as they are the largest in size. The lowly Nintendo is bigger than the mighty Microsoft — the software market in entertainment is much bigger than in manipulating bits and bytes. Similarly, the telephone companies are likely to call the shots in building physically the future communication system, as only they have the necessary resources for the information superhighway.

The other pressure for competition comes from the saturation of the internal market of the advanced countries for conventional equipment. Hitherto, the major growth markets of the telecom equipment manufacturers have been their own internal market. As the network was entirely national, the global majors also concentrated on their home market. The saturation of their own internal market meant that they had to open up the emerging markets that were also following suit in having national carriers and favouring the home industries. For US, this was particularly important as they felt they had more advanced switching systems that they could sell in countries like Japan and Germany. Introduction of competition was directly in the interest of the US companies. The opening of the telecom market was resisted by the Europeans and the Japanese initially. However, as they also see the developing countries as the future market, they are falling in lock step with US, forcing a global system where there are no monopoly national carriers and the home markets are not protected. Countries like Sweden that had the most efficient telephone systems in the world with one of the lowest tariffs have been forced to introduce competition under threat that Ericsson, one of the major telecom equipment manufacturers will not be allowed to compete in US if they did not open the Swedish market to US equipment and US service providers. Competition is therefore seen as an instrument in opening others’ markets.

The legal and regulatory framework that has evolved in the last decade has been responding to these global forces[iv]. The major changes have taken place in are in UK and Australia. In US, the major change that came out of the Justice Department’s anti-trust action against AT&T and its consequent break up through the Modified Final Judgement. The major changes that are now contemplated are through changes in the state acts that regulate the local and trunk services within each state. More radical changes of abolition of the Federal Communications Commission set up in 1934 through the Federal Communications Act are being threatened by the Republican right. European Commission is now re-examining its legal, technical and regulatory structures as they will have to allow each national carrier access to others’ space from 1997. There is little doubt that major legal and regulatory changes are in the offing in all the advanced countries.

The recognition that telecom services are a pre-requisite to development has grown in the last decades and is becoming increasingly evident with the global inter-connectivity and access to information that the telecom services now provide. However, all countries that are introducing such changes are doing so after a series of studies and a blue print for the direction that they want to take for their telecom network. All of them have instituted major legal and regulatory framework for the introduction of competition. Thus European Union and US are discussing the major regulatory changes required and the legal framework under which such competition is to take place. Some of the key pre-requisites are:

  •         Re-structuring the existing monopoly provider of services so that it can meet competition
  •         A regulatory framework for fair competition
  •         Protection of consumer interests
  •         Universalisation of services
  •         Reciprocal access so that countries encouraging competition do not suffer
  •         Opening sectors to competition that do not duplication of resources.

Most countries that have allowed such competition have restricted it to cellular and long distance traffic but not in basic local services. Even Mercury, British Telecom’s competitor, does not address the domestic market in UK. The competition that is being discussed in the European pertains to cellular services and data communication services. Even these are being talked of in 1997 [v]after the necessary framework has been first put in place and the respective national carriers restructured for meeting the new challenges.

Telecom Services in India and the National Telecom Policy
In India, the telecom network was made fully state owned in 1943 with the taking over of the few licensees that existed at that time. The system was expanded rapidly after independence. Today, the Indian telecom network is amongst the 10-12 largest networks in the world. However, the major thrust came with the 7th Plan where it was recognised that telecom access was key to economic growth and removing of regional disparities. The 7th Plan saw a much larger outlay and a major thrust towards digital switching technology. The expansion of the network and the improvement in quality of services was the result of this thrust.
The Eighth Plan also made increasing telecom access as a key element in its planning. With this in view, a major thrust was created for expanding the network and changing over completely to digital switches. While the registered demand had generally outstripped the number of connections provided, there has been a slackening in recent years. The OYT scheme has very little waiting list, the major waiting list now being confined to the ordinary category. Obviously, the people on the waiting list are either booking second two telephones or find the cost of Rs. 15,000 too high. The Eighth Plan targets were not only fulfilled in the first three tears, but the DoT actually exceeded their targets. The chart below shows that the original targets of the Eighth Plan and the actual performance of DoT.

Table 1: net additions of dels during eighth plan  



net addition of dels total dels end of year
1992-93 986,800 6,796,700
1993-94 1,228,900 8,025,600
1994-95 1,769,700 9,795,300
1995-96 2,926,000 12,721,300*
1996-97 2,600,000 15,321,300*

Note: The figures marked with asterisk are estimated by DoT in their current projections[vi].

The interesting facts that emerge from these figures are the following:

  •         DoT had increased its target from 75 lakh Direct Exchange Lines (DELs) to 95 lakhs at the end of Eighth Plan.
  •         The additional resources were generated internally as DoT has not taken budgetary support for quite some time.
  •         The Waiting List would have been fully met by the end of Eighth Plan by DoT alone.

The National Telecom Policy with its proposal of inducting private sector in basic telecom services was introduced in May 1994[vii]. The National Telecom Policy (NTP) stated that the demand of 10 million additional lines in the Eighth could not be met by DoT alone and there is an urgent need to introduce private sector in basic telecom services. This was to provide an additional 2.5 million Direct Exchange Lines (DELs) over the 7.5 million being installed by DoT and cover 2 lakh villages that DoT was not in a position to cover. The entire argument in the NTP was not the need to re-structure telecom to meet the tasks of today but the need to provide additional coverage by 1997 and therefore to add to existing resource base by introducing private sector. The thrust was quite different from the forces of change in other countries that was to meet the requirements of new technologies and new services. However, the current figures show that DoT has exceeded its planned targets and is likely to add 9.5 million lines instead of the original Eighth Plan target of 7.5 million DELs. Further, there is no likelihood of the private sector rolling out its services in a big way by 1997. Considering the current projections of demand, the waiting list for telephones is going to be wiped out by DoT itself. The village coverage has also ceased to be a major objective and if the roll out plan of the private vendors for basic services is taken into account, it is not likely to be more than 40,000 villages — a far cry from the original target of 200,000 lines. Clearly, the agenda of NTP was quite different from its stated objectives.

Following the NTP, a number of articles[viii] appeared which analysed the nature of demand and the required resources for meeting this demand. Such analysis clearly showed that the required demand could easily have been met by DoT, provided the current pace of expansion was maintained. It was also shown that the resource constraint did not exist in reality as DoT had been able to meet their requirement for Eighth Plan without any budgetary support and was willing to raise more through leasing in equipment from manufacturers. In any case there was no possibility of inducting private sector on a large scale by 1997 even if the licenses could be disbursed quickly. However, the Government contended that they would be able to complete the licensing within a short period of time and the target of large scale induction of private sector in basic services is very much within their reach.

Soon after, in September 1994, the Guidelines[ix] for private entry were released in which a competitor to DoT was sought to be licensed with one telecom circle as the basic unit. The telecom circles are more or less equivalent to states. There were two major departures from the NTP in the Guidelines. Whereas NTP had talked of supplementing or complementing DoT efforts in basic services, the Guidelines talked of introducing a competitor to DoT. The implication of this is that earlier schemes had visualised the Secondary Switching Area (SSAs), roughly co-terminus with districts, being opened to private operators and the entire long distance traffic to be with DoT. With the circle as the unit of operations, the lucrative intra-circle long distance traffic would be transferred to the private operator. As we shall see later, this has very serious implications with respect to revenue and the cross subsidies that the DoT has to provide the more backward sections. Further, the NTP had stated that only Indian companies would be allowed to enter basic services. The Guidelines elaborated this to mean any company registered in India with up to 49% foreign equity.

The initial focus of NTP was on supplementing and complementing DoT. If we accept that DoT was short of resources as argued by DoT, a case could be made for inducting private sector to fill this gap. However, introducing competition in basic services was completely different. Competition in basic services, particularly local telephones, has not been introduced in any of the advanced countries. It means a costly duplication of resources and providing right of the way to multiple operators. Wherever competition is being introduced, it is coming in with alternate technologies like wireless, cable TV network or in value added services that ride on top of the network.

The decision to offer the circle as a unit had the other implication that a portion of the long distance revenue would also be available to the private sector. The importance of long distance revenue is that it is the basis of the provision of cheap telecom access to the subscribers. In the initial development of a network, the most important aspect is the expansion of the network. This expansion help in the overall growth of revenue as connectivity allows a much higher volume of traffic. If access is made expensive, then profit per line could be high but telecom growth low. Therefore the long distance traffic is used to subsidise the expansion of the network and provision of cheap connection to backward areas and less affluent section of the subscribers.

A number of committees had examined this aspect of telecom network — the Murthy Committee[x], the ICICI Telecom Working Group[xi], the Joshi Committee[xii] All of them had recommended that the long distance network should continue to be with DoT and provide the necessary revenue for this cross subsidy and only Secondary Switching Areas be given to private operators. Making the circle as the unit of operations meant that this portion of the revenue would not be available for extending the telecom services to less well off subscribers. As we shall see later, this was a huge transfer of revenue — for only 10 states this transfer to the private operators is equal to more than Rs. 70,000 crore

Tender for Basic Services in Telecom
From the beginning, it was clear that more than any other goal, the Government wanted to finish the process of award of license as early as possible. Sukh Ram even talked of the tendering process being completed within three to four months. A tender document was prepared in a hurry and floated by January 1995[xiii]. Soon after, the bidders raised a number of queries to the tender document, a whole range of them pertaining to the evaluation criteria that DoT was going to adopt and the nature of the regulatory body that would be set up for functioning of the sector. The total number of such queries came to over 500 and the Government found itself in difficulty over answering clearly many of the queries.

There were significant departures in the tender terms and conditions from the NTP objectives. There were also certain new features that were introduced. The major departure in the tender was the insistence that the party bidding must have in the consortia a company with experience of 5 lakh DELs and such a party must have at least 10% equity. As Indian companies have not been allowed into to basic services, this made foreign participation mandatory and gave the foreign partner a leverage well beyond its equity contribution. The second was to deny even the biggest of public sector units in telecom an opportunity to enter telecom services while opening the doors for foreign companies. The third element was to whittle away the importance of Village Telephones by restricting this obligation to one Village Public Telephone per village. The telecom tender also categorised each Circle as A, B, and C based on their revenue potential.

However, the regulatory regime within which the private operators and Government would compete, was left completely open as also the criteria for evaluating the bids.

The major problem of the telecom tender lay in its inability to identify the nature of the regulatory regime that would be responsible for functioning of the telecom services. World over, telecom services are regulated and a competitive market in telecom requires such regulation both for protecting the consumer and ensuring fair competition. The other issue lay in that no financial bid can be given if the parameters of evaluation are not known. Sukh Ram initially was reluctant to release the criteria for evaluation before submission of bids.

The Finance Ministry put considerable pressure for releasing the evaluation of criteria before the financial bids were given. It also brought out a hidden Government agenda to the fore. The weightage given to various factors for evaluation would also bring out the intentions of the Government in inducting private sector in basic services. While the initial reason given for bringing in private sector was the need for expanding coverage and rural telephones, the weightage finally announced in the Clarifications issued by DoT[xiv] was almost entirely based on the license fees. In other words, the Government was mainly interested in raising revenue by auctioning the license rather than in expending services.

It is interesting to analyse the objectives and selection criteria given in the NTP and compare it to the weightage given for the same in the clarifications to the tender document. This will bring out the road the current telecom policy is traversing. While rural telephones and low cost expansion of services had a higher priority in the NTP with commercially attractive terms being the last on the list, the evaluation criteria made this with 72% weightage as the deciding factor. The tender award has followed suit and even where the party that had scored higher using other weightages, the party with higher license fee has been chosen for award. The license fee has been the virtually only criterion for selection of the parties. In Table 2, below, we have summarised the shifts that have taken place in the Policy — from the NTP, Guidelines, Tender Document and the Clarifications issued.


Apart from the criteria for evaluation announced, the other major issue was the reduction of access charges in the clarifications. In the original tender, for any long distance and international call, DoT had to be paid a certain amount — Re.0.64 for STD and Re.0.87 for ISD — for the use of the DoT network. This was reduced to 0.50 and 0.70 in the clarifications. As we shall see later, this amounted to a huge transfer of DoT’s revenue to the private operator.The financial bids were opened on June 23rd, 1995. The bids of Himachal Futuristics Company Ltd., (HFCL), overshadowed all others. They had quoted a license fee of Rs. 85,500 crore over the 15 year license fee period, which was higher by Rs. 55,000 crore from the next highest bids in these circles. Out of the twenty circles, HFCL was highest in nine. A number of circles attracted very few bidders, with Reliance being the only bidder in 6 of these circles. Jammu and Kashmir found no takers.The bids of HFCL were widely seen to be much higher than potential of revenue in those areas — for the 9 states their bids were higher by Rs. 55,000 crore than the next highest bidders. DoT had the alternative of awarding all 9 circles to HFCL and face the possibility of its reneging on the bids or doing a rescue act by imposing a cap — restricting the number of circles. It chose to introduce a cap — no party would get more than 3 circles in A or B category circles. In category C, they introduced no capping. Predictably, these moves were seen to be an act of questionable benevolence to HFCL with consequent furore in the Parliament. In the past also, HFCL’s connections with DoT had been questioned. This was clearly to much of a coincidence and raised the ire of all opposition parties.The Tender Evaluation Committee[xv] (TEC) also made certain other recommendations which have become controversial. They worked out reserve prices for each circle and rejected all bids below the reserve price. HFCL was also allowed to choose the circles it wanted. With HFCL vacating five of the circles, the second highest bidders refused to match the prices of HFCL. As a consequence of this, only 5 circles out of 20 could be selected for award and 13 circles opened for rebid. The bids for two circles–namely Rajasthan and Karnataka — were rejected by the Evaluation Committee, but are under consideration by the Government. The results of the rebid and the final position of the bidders are also given in Table 3. Table 4 below gives the final levies as a result of the original bid and the re-bid.
table 3: Levies Quoted and Reserve Price Computed by TEC
Circles H1
Levy(Rs. Crore)
Levy(Rs. Crore)
-able Levy
(Rs. Crore)
H1 Rebid
Levy(Rs. Crore)
in Rebid
Delhi 15,085 HFCL-BEZEQ 11,200 Birla AT&T 6,088.3  A
U.P. (West) 6,580 HFCL-BEZEQ 2,698 Hughes Ispat 2767.01  B
Haryana 4,060 HFCL-BEZEQ 3,150 Modi-T-ASIA 1,312  B
Maharashtra 13,909 Hughes-Ispat 11,550 Tata Bell Canada 10,950  A
Orissa 2,065 HFCL-BEZEQ 8.4 Usha Tel Moscow 692.46  C
Rajasthan 1,110 Shyam-Guondong 13.65 Reliance Nynex 1700.67  B
Karnataka 5,796 Hughes-Ispat 3,990 Tata Bell Canada 6,528  A
Andhra Pradesh 15,365 HFCL-BEZEQ 3,528 United Jasmine 4,035.8  A 4,200 Tata Bell Canada
Gujarat 15,085 HFCL-BEZEQ 2,835 Birla AT&T 3,369.9  A 3396 Reliance Nynex
Tamil Nadu 4,520.25 BPL-US West 3,500 RPG NTT 8,208.2  A 11,620 RPG
Punjab 9,065 HFCL-BEZEQ 3,675 Bharti-Stet 2,287.3  B 4,593 Essar
Bihar 2.44 Usha Tel
13.65 Reliance Nynex 602.22  C 266.57 Usha Tel Moscow
Kerala 9,555 HFCL-BEZEQ 1,260 Shyam Goundong 7,880.5  B ——- ——-
West Bengal 9,065 HFCL-BEZEQ 1,165 Tata Bell Canada 4,226.7  B ——- ——-
Andaman & Nicobar 3.3 Usha Tel
0.35 Reliance Nynex 81.8  C ——- ——-
Assam 4.41 Reliance Nynex ——- 294.22  C ——- ——-
Himachal Pradesh 1.785 Reliance
——- 323.84  C ——- ——-
Madhya Pradesh 29.4 Reliance Nynex ——- 897.43  B ——- ——-
North-East 1.785 Reliance Nynex ——- 145.567  C ——- ——-
U.P (East) 13.65 Reliance Nynex ——- 1,924.4  B

Table 4 Total Levy and CIRCLE WISE Successful Bidders

The high levy fees being promised by the bidders have had a big impact on the people. The levy bonanza has appears to be a precious gift at a time when the national exchequer is bankrupt. Very few have analysed that the levy essentially will have to come from the pockets of the consumers[xvi]. An analysis has been done here regarding the access charges that DoT has reduced to help the private operators. The base figures have been taken from the Tender Evaluation Committee Report for 10 of the states. A computation has also been done of  the transfers made to the private operators by making the Circle as the basis which was in contradiction to all the expert committee recommendations. The amount that has been transferred to private operators is given in Table 5 The figures are revealing — against the levy promised of Rs. 72,000 crore over the next 15 years, the net transfers on the above counts work out to Rs. 118,000 crore! In other words, the levy is less than the amount that DoT is transferring to the private operators. If we take only the amount that DoT is transferring to private operators by reducing access charges, the amount thus transferred is Rs. 48,600 crore against the levy of Rs. 58,600 crore for these 10 states. Thus the net levy is only Rs. 11,000 crore over the next 15 years with 1/35th of this comin in the first few years. Table 5: computing TRANSFER from dot to private operator by reduction of access charges and intrA-circle long distance FOR TEN STATES — 15 years (all figures in  rs. crore)
Notes:1. The access charges for the above 10 states are based on TEC’s computations of access charges. Intra circle traffic for Delhi is not there.2. The division between STD and ISD has been assumed to be in the ratio of 2:1. The reduction in access charges have been Re.0.50 from Re.0.64 for STD and Re.0.70 from Re.0.87 for ISD.3. The Intra circle long distance component has been assumed to be 65% of inter circle long distance traffic. This is an under-estimate as the actual traffic pattern currently indicates that the intra circle STD revenue is 65% of the total STD revenue.4. The reserve prices are as computed by TEC. The actual reserve prices have been kept almost same except for a few states like Punjab and Bihar.The current subscriber base is heavily lopsided — about 5 % users generate the major portion of the revenue. In other words, if the private operators concentrate on this narrow segment of the population, they can do what is called cream skimming and generate enough profits. This will leave DoT with the uneconomic sector of the traffic and the backward states that do not generate enough revenue. With the reduction of access charges, the revenue to sustain these segments will also not be there. Either DoT will also have to target the same revenue generating segment or become sick. In either case, the majority of subscribers will see a deterioration of their service and an increase of their tariffs. The much awaited enthusiasm that the middle class has evinced is unlikely to be fulfilled by matching service.
While the high revenue earning states have found bidders, there are 8 states for which no bids have been received. As rural telephones were one of the major thrusts of the National telecom Policy, it is worthwhile to see the impact of a lack of bids for these states. the number of villages in these states are tabulated below as Table 6
Table 6 Villages Not Covered by Telephones in States where no Bids have received
States Villages Uncovered by Phones
Jammu & Kashmir  5,564
Madhya Pradesh  52,887
Assam  19,568
Himachal Pradesh  12,307
North east  11,987
UP (East)  50,000 (estimated)
West Bengal  38,034
Total 190,347
Note: Figures taken from Tender Documents issued by Department of Telecom
The other major problem with the Tender Evaluation Committee’s Report has been the computations of reserve price it has done for every state. Initially, each state had been categorised as ‘A’, ‘B’ or ‘C’ based on its revenue earning potential. The net worth of the bidders and the earnest money was also fixed in proportion, the higher category circles having a higher requirement of net worth and earnest money. However, the reserve price calculations were quite different. As Table 7 below shows, the reserve prices for ‘B’ category states like West Bengal and Kerala were much higher than that of ‘A’ category states like Gujarat and Andhra. Even worse were the projections of per DEL revenue. After 15 years, it was projected that West Bengal would have a per DEL revenue of about Rs. 92,000 while states like Punjab and Madhya Pradesh per DEL revenue of about Rs.18,000 and Rs. 7,500. The entire computation of reserve prices has no co-relation to any known parameter. The Government’s reply before the Supreme Court was that the categorisation and reserve prices had been worked out on two different bases. However, no basis was furnished to the Court.
Delhi 28,62,998 51,135 14,639 6088.37 A
Andhra 35,03,609 33,708 11,810 4,035.8 A
Kerala 65,98,048 41,868 27,624 7,885.58 B
Karnataka 35,15,409 61,052 21,462 6,528 A
Maharashtra 52,52,564 61,772 32,446 10,950 A
Punjab 33,68,430 18,122 6,104 2,287.33 B
Madhya Pradesh 32,26,936 7,557 2,438 897.43 B
West Bengal 12,45,950 92,914 11,526 4,226.77 B
Tamil Nadu 41,89,587 54,662 22,876 8,208.2 A
Gujarat 33,65,721 28,554 9,609 3,369.93 A

The tender in basic services has brought out that it has little to do with the introduction of competition in telecom as is being done in the advanced countries. There the competitive regime is being introduced after enacting an appropriate legal and regulatory framework. Further, care is being taken to restrict the competition to only those areas that do not involve duplication of resources. In all such introduction of competition, universal access is a key element. The European Union has gone on record to state that license fee should not be the main criteria in giving licenses but the expansion of the network at lowest costs.
The other issue has been one of reciprocal access. The GATT agreement could not conclude the telecom service access question which was then put under GATS and expected to be completed by 1996. Every advanced country has made reciprocal access a pre-condition to granting access to either service providers or equipment manufacturers. This is the reason that all regulatory changes in Europe and USA are slated for 1997, after the GATS agreement is concluded. In the Indian case, no such consideration has been taken into account, with the current tender in basic services mandating a foreign partner. One of the major instruments for transfer of technology and capital in China and Korea has been the intelligent use of their internal markets. Unfortunately, the short sightedness of DoT has meant another lost opportunity.

The telecom reforms in India are therefore following a completely different trajectory from that of the advanced countries. Staring from the premise that private sector should be inducted for providing a greater coverage, particularly in rural areas, the license fee has now become the sole reason d’être for private entry. This is not an attempt to expand telecom services but to raise revenue by auctioning licenses in basic services. To make this lucrative, successive transfers of revenue from DoT’s account have been made. The revenue thus foregone is far larger that the license fees that the state will receive. As the license fee is likely to enter the general Budget account, this will mean a huge transfer of revenue from the telecom subscribers to the general account. The telecom tariffs are bound to rise under such a competitive regime.

The only way DoT can continue to service backward regions and worse off sections is by raising charges. In a country where people do not regard telephone as a necessity, the expansion of the network will slow down considerably with higher tariffs. There are enough international examples to bear this out. Mexico raised its local tariffs by 3-4 times after “rebalancing” traffic. The Sahel countries have the lowest per capita density of telephones but the highest revenue per line. These are all indicators that the telecom policy currently being adopted are likely to end up the same way.

The tender for inducting private sector in basic services in telecom has become the centre of a raging controversy. Transparency or the lack of it has become the focus of a concerted attack, particularly as one of the companies, Himachal Futuristics Company Ltd (HFCL) appears to be the major beneficiary of changes introduced in the tender conditions at the evaluation stage. However, apart from the possibility of underhand dealings, the telecom tender is particularly important as another example of ill thought out polices which threaten to burden the consumer with high tariffs without improving the services of the majority of the consumers.

The key question here is why is India following such a path? The answer lies in the current paradigm of globalisation. The Indian state has decided that it is not capable of servicing the country. That is why the hurry to induct multi-nationals in every sphere of development. The World Bank and IMF have already their prescriptions irrespective of the disease. The question is can the Indian people continuously countenance such sell outs? The power controversy has already shown that the policy of private entry has huge “rent” incomes associated with it. The current telecom controversy shows that crony capitalism has become endemic to the Indian state. The Indian people have quite often confounded their rulers. The series of scams associated with liberalisation can have unexpected electoral results. The Mexican case and the Italian magistracy have led to some cleansing of the political system. Similar cleansing is long overdue in the Indian system. A few more of telecom tenders may perhaps wear out the patience of the Indian people and help accelerate the process.

Acknowledgement: I must record my deep appreciation to Shri D.K.Sangal who has taught me a lot about telecom. I also owe a debt of gratitude to Nandita Haksar who has been instrumental in bringing out a lot of the issues in telecom privatisation. The Delhi Science Forum had filed a writ petition[xvii] challenging the tender for prinate entry in bascic services. A major part of the above material can be found in the writ petiton.

[i]ITU, World Telecom Report, 1994, pp 50-70.
[ii] ibid, pp 15-16.
[iii]A number of countries are modifying their regulatory and legal framework. Australia, U.K, and USA are some of the fore-runners. The states in US are also recasting their regulatory system. Some of these are : Telecommunications Act, 1991 in Australia, Public Utilities Commission of the State of California’s Draft legislation for introducing competition in Telecom. The European Union and ITU are also examining these issues and ITU has produced draft guidelines for such reforms: “Guidelines on Regulations” UNDP/ITU, Bangkok, 1995.
[iv] P.Purkayastha, “Infrastructure Sector and Withdrawal of the State”, EPW, August 26, 1995.
[v]The European Union has been discussing the introduction of competition in Telecommunications and has produced a number of resolutions and studies towards this. The Directorate-General XIII, European Commssion has circulated the same in a CD-ROM (CD-91-95-043-3A-Z) which contains all the relevant resolutions and studies on the subject.
[vi]D.K.Sangal, “New Telecom Policy and Basic Telecom Services Tender — A Supplement to the Critique”, 1995, (mimeo) pp.3. The figures have been compiled from DoT’s Annual Reports and the Reply to Rajya Sabha Unstarred Question 2265.
[vii]National Telecom Policy, 1994.
[viii]Purkayastha, P “New Telecom Policy –Rushing in Where Angels Fear to Tread”, EPW, August 13, 1994. S.M.Agrawal, former Secretary, Telecom had pointed out the fallacy of the so-called demand gap in a number of articles and talks he delivered at that time.
[ix]Guidelines for Induction of Private Sector into Basic Telecom Services, 1994.
[x]G.S.S.Murthy Committee Report, 1993, pp 4-6.
[xi]ICICI Working Group on Telecom “Report on Entry Conditions for Basic Telecom Srevices”, 1994, Clause 2.4-2.6, pp 2.6-2.7.
[xii]Mukund G. Joshi Committee Report, 1994, pp 5-6, 46-47.
[xiii]Tender Documents for Private Entry into Basic Telecom Services, Tender Document No.: 314-7/94-PHC, 1994
[xiv]Replies to Queries to Tender Document No. 314-7/94-PHC, 1995.
[xv]Tender Evaluation Committee Report, 1995.
[xvi]D.K.Sangal, “Basic Telecom Services Bids — A Study into Operating Results at Delhi”, 1995 (mimeo); also “ Basic Telecom Services Tender — a Study into the Levy/License Fee Offered”, 1995 (mimeo)
[xvii]Delhi Science Forum Vs. Union of India, Writ Petition (Civil) No. 691/95 in the Supreme Court of India.