TELECOM POLICY — IDEOLOGY NOT REALITY GUIDES POLICY

The Government has at last released the long awaited guidelines on Private sector entry in Telecom. The private sector can now provide a competitive network to the existing Department of Telecom’s (DOT) network under an exclusive license of 15 years. The foreign equity can be up to 49% in such private operations. The size of each such competitive network will be that of a Telecom Circle — roughly co-terminus with a state. DOT and VSNL will continue to be the monopoly carriers for long distance and international traffic even though the policy guidelines promise a re-examination of this after some time. DOT will have to provide guaranteed access of their network to the local competitors. Though the guidelines do not spell out the method of division of revenue when calls originate from one network to another, presumably the new Regulatory Authority also announced at the same time, will work out these details.

With this, the Government has now put in place the ideological vision of its Telecom Policy. Ostensibly, the Policy is geared to meet a huge pent up demand for telephones in the country and provide a connection to every village. In practice, it is a confession that the Government has no intention of even trying to improve the quality of service. Instead, a little bit of private competition will be the magic wand that will improve DOT’s performance beyond measure. This also strikes a ready cord in the upwardly mobile and articulate middle classes, who are willing to pay more for better service. The Yuppie syndrome of trying to secede from the rest of society manifests itself here also — the belief that they will get better service through private operators while the rest make do with DOT. Unfortunately, infrastructure like Telecom has to improve as a whole for people to benefit. Telephones provide public connectivity, and unlike VCRs and Colour TVs, can not be enjoyed without addressing the external world. If the person you want to talk to is still with DOT, a super duper service on ones’ side means little.

Duplicating the Network — a National Waste

The idea of competitive companies for providing parallel network in the Indian scenario seems rather wasteful, given the scarce capital resources of the country. As DOT already has an installed base of more than 80 lakh lines, the country would be better served by extending the existing network. Even the ICICI Working Group on Telecom had concluded in its study that given the level of penetration in India, competition at the local level does not make economic sense. Of course the ICICI prescription was even worse. They had suggested splitting up the entire telecom network in to about 80 units and transferring DOT assets to private operators to provide exclusive operations in each of these areas. However, the key issue is at what level of penetration and revenue, is it feasible to introduce competition in Telecom. It does seem very extravagant to attempt to introduce competition in India at a level of penetration that is as low as 0.9 per hundred when countries with penetration of 30 to 60 are still hesitant to do so. Other structural reforms could have led to improved performance without involving such costly duplication of the network and would have provided a lower cost solution to increasing Telecom access.

Extra-territorial Control — a Security Risk

The foreign equity allowed for the private operators has also become a matter of controversy. In all advanced countries, the telecom sector has a cap on foreign investments. In EEC it is virtually zero. The US allows foreign ownership but restricts it to 20% of the total equity. Further, US also does not allow manufacturing companies to own operating companies anymore. With the current provision of allowing companies registered in India the freedom to enter the Telecom sector, foreign companies can therefore own and operate their independent network. The 49% cap on foreign equity has little meaning as even 25% of equity is enough for control, particularly if the rest of the share holding is fairly dispersed. The reason that most advanced countries do not allow foreign control in their network is because the communication network is considered crucial for national security. That is why extra-territiorial control of the Telecom network is not accepted in these countries.

Interestingly enough, GATS — a follow up on GATT for service — is discussing the issue of allowing Telecom access. Allowing foreign companies such unfettered access unilaterally also means a corresponding weakening of India’s bargaining position in GATS. With the current policy, the multi-national companies can own the private telecom operating companies, subjecting the Indian Telecom network to extra-territorial control. In addition, as the multinational Telecom equipment manufacturing companies are closely involved with the new private ventures, we are likely to see a multiplicity of equipment being dumped in the Indian network. No restrictions seem to have been proposed for prohibiting manufacturing companies to enter Telecom services and to see that Indian manufacturers get a fair chance to enter the new switching market that will open up.

Scarcity of Resources — a Myth Created for Private Entry

Is there such a large shortfall of resources as mentioned in the New Telecom Policy or a huge unmet demand? The New Policy has argued that in order to provide a telephone on demand within the 8th Plan period, an additional 25 lakh lines over and above the 75 lakh lines already targeted, will have to be installed. Further, the target for rural telephones is also to be revised upwards. Instead of 3.6 lakh villages envisaged earlier, all the 5.7 lakh villages will be connected through the Telecom network by the end of the 8th Plan. As the above measures will call for additional resources, there is no alternative — according to the Policy — but to involve the private sector in the basic Telecom services, i.e., allowing private companies to set up exchanges, install telephone lines and provide connections to users through their own network. The current guidelines only set the entry conditions for private sector networks.

The Policy figures predict that there will be over 17 lakh new registrants per year in the remaining period of the 8th Plan compared to the 9 lakh new registrants in the year 93-94. The basis on which the Government has calculated this extraordinary high demand is unknown. This demand can not certainly materialise overnight. If the 8th Plan targets are met, and they have been met in the first two years, there is every reason to believe that one of the objectives of the Policy, namely to provide a telephone on demand, would have been met. However, the New Policy itself will have no contribution towards this.

The case for rural telephone being the basis of the New Policy is even weaker. The capital cost for connecting all villages to the telecom network is a fraction of the cost for meeting the demand for telephones in the urban areas. The major problem regarding rural telephony lies in its lack of reliability — a problem that the New Policy does not even examine. It seems extremely unlikely that the private sector and the Government will be able to get their acts together for the rural sector to see any benefits in the two and a half year left for the completion of the 8th Plan.

The case for a lack of resources as argued in the New policy document is worse. Sukh Ram, in the New Telecom Policy submitted to the Parliament, has claimed that there would be a shortfall to the tune of Rs. 6,000 to 7,000 crore in meeting the 8th Plan targets. However, in the same period, Ministry of Communications had informed the Lok Sabha Standing Committee that DOT has already raised resources or committed to raise resources to the tune of Rs. 17,000 crore in the first three years of the Plan and had projected that it would raise a total of Rs.34,000-35,000 crore in the 8th Plan period (6th Report, Standing Committee, Lok Sabha Secretariat, April, 1994) as against the target of Rs. 25,500 crore. The total requirement as stated in the Policy to meet the revised targets is of the order of Rs.40,000 Crore. If we take into account the Rs.6,000-7,000 crore additionally available to DOT through a tender for leasing switching equipment, it would be clear that the resource crunch is a myth being deliberately created in order to justify the Policy. In the process, the Parliament and its Standing Committee is being taken for a ride by the Government.

Neglecting Quality of Service

The current problem of the existing network is not one of a large waiting list, but the quality of service. Though the New Telecom Policy has as its main thrust more connections, it does talk of a world class service as well. Low consumer satisfaction is one of the main problems of the existing network. The problems here are really two fold. One is poor maintenance of the existing capital stock while the other is the congestion in the network at peak hours. While peak hour congestion has reduced over time with improved call completion rates now, the faults and their maintenance is the one single element that causes largest amount of customer frustration. The current policy is based on the belief that competition will somehow galvanise a somnolent DOT without the Government needing to take hard decisions. S.M.Agarwal, a former Secretary in Ministry of Telecom, summed this up when he stated in a recent seminar that if poor customer satisfaction is the disease, the Government has found a different a cure — privatisation — for a non-existent disease, namely a lack of capital.

We do need to improve the crucial link — that between the consumer and the exchange, the major bottleneck today. Along side, there is a need to expand the transmission network that tends to collapse during peak hours. If these two can be sorted out, the existing network would see major improvements. The important issue here is that without these steps, the consumer would be roughly where he is today, as the major operator for the future would still be DOT. With more than 80-90% connections with DOT, any amount of fancy equipment with private operators, who would at best have only a minor share of the network, would still not improve significantly the state of communications in the country.

Regulatory Issues — Missing the Boat

The Regulatory issues in Telecom have had little attention hitherto as the Government was the sole operator as well as Regulator. One of the major issues raised by private and other operators have been DOT’s unfair role as a Regulator. For value added services, for instance, where private and other public sector units have been allowed entry, the services have not taken off due to unduly restrictive role that DOT has played. The setting up of an independent Regulatory Authority has been on the cards for some time. The question is the nature of the Regulatory Authority — how independent should it be. In US, the Federal Communications Commission (FCC) is an independent body with quasi-judicial powers. In certain other countries, the Ministry of Telecom has both regulatory and operational functions under it. Though theoretically independent, in practice the Regulatory Authority is then subject to undue pressures to regulate the way that the Government wants it to. With Mr. Sukh Ram’s name already tainted in the earlier sugar muddle, one has to question the role of a Regulatory Authority that will be subservient to the Ministry of Communications. This however is not the only problem of having the Regulatory Authority under the Ministry of Communications. Increasingly, Telecom and Broadcasting are merging together. A Regulatory Authority that has only one half, namely Telecom, can not sort out all the issues involved. A recent example is that of radio paging. Both DOT and All India Radio have floated tenders for radio paging license as both have a part of the wireless spectra. Obviously, a Statutory Authority, on the lines of the Election Commission with judicial powers, would have had the authority and the credibility to resolve such conflicts. Unfortunately, the current proposal falls far short of future requirements and is destined to be another missed opportunity to address such problems.

Competing to Push up Telecom Tariff

One of the major tasks that the new Regulatory Authority will have to take up is the thorny issue of division of telephone tariff. Obviously, with 18 private operators and DOT, a number of calls will originate within one network that may be routed to other networks. This is particularly true for long distance traffic, where two local operators are involved apart from the trunk operator, DOT. The problems of accounting and keeping tab on such calls to the mutual satisfaction of all parties are only a part of the problem. Currently, the local calls costs less while long distance calls cost more under a policy of cross subsidisation. This is not specific to India alone but is practiced widely. AT&T did this in US when it was a monopoly operator with the logic that a low telecom access is important in generating a higher traffic. A well-off son could call up retired parents and generate long distance traffic only if the parents had Telecom access. Therefore cross subsidisation to provide cheap connectivity is not an altruistic measure to help the poor or the needy but merely a mechanism of generating more revenue. When almost all homes are covered, this method of cross subsidisation does not have much meaning and a change in tariff philosophy to reflect true costs is possible without affecting traffic volumes. However, with the extremely low Telecom penetration that we have in India today, telephone connectivity at true costs is bound to impinge upon the growth of traffic itself and possibly affect development. However, unbundling of local and trunk operations as is being done under the new Policy, will have to lead to a re-balancing of tariff — local tariffs will rise while long distance rates may go down. While cross subsidisation may be continued initially by giving the local operators a larger share of the long distance traffic originating within their network, there is little doubt that such subsidies will reduce over time leading to increase of local tariff. Mexico has seen a four fold growth of the local tariff after such unbundling. If the consumers suffer due to higher tariffs, they can then be told that Indian tariffs are still much lower than global prices, even if the consumer has no money to pay for the same.

The question of tariff is not merely that of division of revenue between different operators. The Telecom sector is a classic example of a “natural monopoly” due to economies of scale. With a large “sunk” cost in the existing network, the cost of providing an additional connection is lower than the average cost of the connection. In economists’ jargon, the marginal cost here is lower than the average cost. However, a new entrant will have to make a very large initial investment to duplicate the existing network before they reach a similar situation. If we examine the costs of the network today, DOT has another advantage — the “sunk” costs at book value may not be very high — but their replacement costs are many times that of the costs on the books. This means that a new entity will have to incur much higher costs for providing telephone connections today than DOT will incur with its network already in place. As the new entities will have to survive under such conditions, they can only do so if the local tariffs are raised possibly to three times their current levels. And the private operators will have to be shielded from competition from DOT by the Regulator. Otherwise, if DOT charges the consumers based on its marginal costs, the private operators will never get off the ground. The biggest beneficiary of the New Policy will be DOT itself. Even if a twenty per cent telecom base migrates to the private operators, the upward revision of local tariffs will bring about a bonanza to DOT. With long distance monopoly, DOT is unlikely to lower trunk tariffs. The net losers will of course be the consumers. The much awaited competition will raise the cost of Telecom access and local tariff manifold, while the benefit of a better service remains distinctly dubious.

Artificial Competition — the Case of British Telecom

Though a number of countries have privatised their network, this has largely been through sale of shares to the public in the erstwhile state monopolies. It has been a conversion of state monopoly to private monopoly, even though the characterisation here of private is mostly notional. The shares have been sold to the public and are so widely held that they are not in any sense owned by specific group or industrial houses. Even here, the number of countries going in for this mode of private ownership is not more than 20. Amongst EEC countries, only Italy and Germany have proposed to privatise the existing state monopoly Telecom set-up — only through sale of shares and not by allowing private competition.

Advanced Countries — Practice Different from their Preaching

Why is it that the even the ardent supporters of competition otherwise, US and EEC countries, do not advocate it for the Telecom sector? The reason lies in the nature of the Telecom network — the physical infrastructure. Telecom connectivity largely consists of telephone wires coming to the consumer’s premises. Though wireless does provide an alternate, the bandwidth of wireless communication — the amount of information — remains low for such connections. With increasing technological pressures to drastically enhance bandwidths, the physical connection is the fundamental bottleneck in the system. Data communication and video images require very high information flows. The urgent need in the network is to upgrade the physical layer to support such high information flows. The world is therefore moving towards Information Super Highways — very high bandwidth transmission network capable of supporting interactive TV, data communication, multi- media (video and audio) transmission. Nippon Telecom has promised to provide a fibre optic cable connection to every home in Japan by 2005. Taking into account the technical road map of the future, obviously, very large investments will be required by the advanced countries for upgrading their existing network. This is precisely why most countries are not prepared to duplicate the existing Telecom network in the name of competition. The EEC union has as one of its conditions the right of member states to compete in each other’s territory after 1997. In this context Tele Denmark’s position, which is representative of a number of EEC countries, is worth noting. They have explicitly argued that the basic infrastructure — the switching and the cabling system should not be duplicated.

India has now embarked on the rather perilous course of fragmenting its fragile network and introducing competition. If the US and UK experience are any guide, these measures are unlikely to bring about any benefits to the consumer in terms of service. The strategy chosen may see an even slower growth of the Telecom network as various companies and the fledgling Regulatory Authority struggle with the complex issues of revenue sharing and access charges. While the private operators fail to take off, DOT may also lose momentum with sources of financing preferring to wait for the dust to settle. Even if competitive networks do bring about a greater Telecom access, the cost to the consumer will be much higher than the current costs. A restructuring of DOT to introduce greater autonomy and accountability would have been a lower cost option of expanding and improving the existing network. Instead, we have a policy which is tailored to the ideological vision of privatisation as the goal rather than improved Telecom access.

Competition and unbundling in infrastructure have become the new buzz words. The World Bank has vigourously pushed these in the World Development Report, 1994. UK is commonly put forward as a case where providing competition to British Telecom by allowing Mercury in the trunk routes and subsequently in the local exchanges also, led to improved Telecom services. It is extremely doubtful that the creation of Mercury had anything to do with improving British Telecom’s performance. Mercury is a classic case of artificial competition. It was created by Margaret Thatcher’s Government by bringing together Cable & Wireless, British Petroleum and Barclays’ Merchant Bank. It was a planned Government initiative. And to make it succeed, British Telecom was forced to carry all the social subsidies while Mercury secured a segment of most lucrative long distance traffic. Mercury’s competitive edge was really the British Government’s intervention on its behalf — intervening in the market in order to prove that markets are best judges of performance! On this flimsy structure, the edifice of beneficial effects of competition has been built. It is important to note that UK is the only EEC country that has taken this route. No other EEC country has done so. The US has also considered competition, but only on the trunk routes and not at the local level. Only a handful of countries have more than one company in the basic Telecom services, and even then, the numbers of such competitors are restricted to two or at most three. Though a number of countries have privatised their network, this has largely been through sale of shares to the public in the erstwhile state monopolies. It has been a conversion of state monopoly to private monopoly, even though the characterisation here of private is mostly notional. The shares have been sold to the public and are so widely held that they are not in any sense owned by specific group or industrial houses. Even here, the number of countries going in for this mode of private ownership is not more than 20. Amongst EEC countries, only Italy and Germany have proposed to privatise the existing state monopoly Telecom set-up — only through sale of shares and not by allowing private competition.