TRAI Recommends Handing Long Distance Telephony to Private Operators

It is well known that the long distance calls in telecom networks are the most lucrative and provide the revenue for rural telephones and connecting far flung, economically backward areas. The BJP Government had committed in the New Telecom Policy of 1999 to open long distance telephony to competition by 2000 even though this is what has provided the revenue for the expansion of the Indian network. The Government asked TRAI to submit its recommendation on the terms of such competition. TRAI, true to its ideological predilections, has suggested that any party willing to enter long distance telephony should be allowed to do so at a nominal license fee 5% of the revenue and a net entry fee of Rs.100 crore. Thus, TRAI is recommending that a huge private bonanza be given to private operators at virtually no cost to them.

The crucial issue that various public bodies and individuals had raised before TRAI in its consultative process was that if long distance telephony was opened to competition, the surplus available with Department of Telecom Services (DTS) and Department of Telecom (DoT) for rolling out its rural network or to provide connectivity to areas such as North East, will decline sharply. If that happens, how will the country provide telecom access to people living in these areas? The provision of access to telecom facilities irrespective of where we live is known as Universal Access. It is now well recognised that Universal Access is an obligation of the state and flows from the fundamental right to live anywhere in the country. If basic infrastructure is not available in various parts of the country, this constitutes discrimination in some form. That is why all countries, including India, have Universal Access as a part of their telecom policy.

Universal Access demands that areas, which are not economically viable, should still be connected to the telecom network. Thus, it is unlikely that rural telephony will pay its costs for a long time to come, if ever. The costs of taking lines to villages and remote areas, and economically backward areas such as Northeast, Kashmir, Himachal, etc., are certainly higher than most optimistic projections of revenue income. If however we do not provide even basic telecom facilities there, we either invite completely dysfunctional urbanisation or increase the alienation of states such as Kashmir, Northeast etc. Therefore, not only is Universal Access (as other forms of physical and social infrastructure) a desirable goal, it is also a necessary one if we want to continue as a nation. Otherwise, we will have continuous migration of the rural population to crumbling cities or have to live with more separatist movements.

TRAI, as has its usual practice, has of course not bothered to address this issue. In its two years of existence, its single-minded obsession has been to introduce competition and sacrifice every other objective of the national telecom Policies—either 1994 or 1999. The latest recommendation is another example of competition policy gone completely hay wire. The vital question of providing Universal Access and how to finance it has been left completely unaddressed in the current recommendations. Thus, with DoT/DTS now being forced to part with its monopoly in long distance telephony, we can safely expect rural telephony and connecting remote areas to be given a quick burial. Certainly, it is not one of TRAI’s priorities even if the stated objective of competition was to bring in additional resources and provide rural telephony. TRAI has been promising to give us a paper on Universal Access. We are still to get such a paper while the basis of providing such access through the surplus of long distance telephony is being given up.

Even if we forget about Universal Access, the actual terms of the recommendations have no redeeming feature. Thus long distance s to be virtually handed over to private sector at a minimal entry fee of Rs.100 crore. There is a provision for an additional security of Rs.400 crore, which will be given back to the operators with progressive roll out of their network. The annual license fee of 5% of revenue is a joke considering that long distance telephony provides very large profits. Three of the seven member board disagreed on the issue of 5% license fee and had suggested at least a 16% revenue share should be fixed instead of the paltry 5%. The entry fees could have been realised through an open auction to give us a market value of the licenses and a much higher revenue percentage could have been fixed. These sums then could have been available for expanding network in backward areas or for other socially productive expenditures.

If this is not enough, TRAI has also recommended that DTS should spin off its long distance telephony arm as a separate organisation and this organisation should pay similar entry fees and license fees. However, DTS, which is the only entity that today provides access to commercially non-viable areas, need not be provided any special privileges. Thus, while private parties should be handed over the riches part of the telecom pie at a nominal entry fee and a negligible revenue share, DTS however, should continue to carry the burden of Universal Access.

Apart from revenue share, the other point of contention within TRAI was the number of parties that should be allowed to enter such services. RRN Prasad, one of the members of the TRAI, had argued that the entry should be restricted to two private operators and DTS for the first five to seven years. He also argued that long distance is a “natural oligopoly if not a duopoly,” in view of economies of scale and huge investments required. However, all others of the seven-member board disagreed with him on this point.

How will the competition in long distance telephony help the consumer? It has been generally argued that competition lowers prices, and TRAI has argued that the telecom users will also benefit from the introduction of competition. This appears logical as well, as more options a consumer has more the pressure on service providers to reduce prices.

 However, our current experience with telecom competition in local telephony has shown that there is sharp rise in prices with the introduction of competition. This is due to two reasons. The first is a simple one: the market in telecom does not fix prices, the regulator does. In this case TRAI will fix the telecom tariffs. All that the private parties have to argue is that they are incurring high costs and therefore high tariffs need to be fixed. If such an argument is made, DTS is likely to along, as its interest as an operator is best served by higher prices. Thus the chances are that TRAI will set a higher price than the costs really warrant.

Why should the costs private parties be higher than the corresponding DTS prices? There are two economic reasons for this, apart from the fancy book keeping that the private parties are bound to indulge in. One of this is that DTS has a very large investment that it has made over the last 50 years. Thus, any addition to the network today only requires an incremental cost. Any party coming in today has to first make that initial investment before it can achieve similar incremental costs. This is the reason why the average cost of a new service provide is higher than the incremental cost of the incumbent provider. If the telecom prices are computed on the basis of making the entrant viable in order to provide the necessary competition, the prices for the consumer is bound to be higher.

The second reason for the higher cost is that once the network is split up amongst a number of players, there are large transaction costs associated with it. Thus if a call is made from a subscriber A to subscriber B, this could involve two local operators and two long distance providers. Thus the amount that the subscriber pays has now to be apportioned between these four parties. This means large capital costs for interconnection and metering these calls and costs of accounting for each such call.

This capital and running expenditures are not required in a unified network. Thus, economies of scale lead to lower costs in areas such as telecom. It is this economy of scale that we lose when we move to a competitive framework.

We have argued earlier that it is not the needs of the people that are guiding either the telecom policies of the country or the direction that TRAI is taking. The people require cheap telecom access and a rapid expansion of the network to cover rural and remote areas. Instead, we are getting higher prices and no attention to rural telephony, the alleged objectives of telecom reforms. It is clear that the actual goals of the so-called telecom reforms is to privatise the telecom network and raise costs for the low end subscriber while providing subsidies to business users. This is the core of the telecom reforms as practised by the Government and TRAI. The recommendations of TRAI on long distance telephony are another step in this direction. We hope that the people, the telecom workers and various political parties will be able to put pressure on the Government that such retrograde measures are not adopted and fight for genuine telecom reforms.