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Telecom: Groping towards a Unified Market

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The past few weeks have been interesting times for the telecom sector, with the government announcing a slew of policy decisions that have far-reaching implications. Soon after the government threw open the national long distance segment to competition with an unlimited number of players, the Telecom Regulatory Authority of India (TRAI) recommended the entry of fresh operators into basic services, without any limit on the number of players. The government has accepted this recommendation. Then the government settled the strike called by employees of the different departments providing telecom services, removing the last hurdle in the path of corporatising government telecom services. The government allowed private Internet Service Providers to establish direct access to submarine cables for high speed external connectivity. Thereafter, the government slashed import duties on various items of telecom equipment. It said that there could be 100 per cent foreign investment in companies providing Internet services so long as they did not have their own external gateway. Foreign ownership up to 49 per cent of private ISPs would be allowed on an automatic basis. Then, before the prime minister's departure to the US, the government announced an end to Videsh Sanchar Nigam's monopoly over international calls two years ahead of schedule.

The net result is that the government is groping its way to a unified market for telecom services. Since the government is yet to formulate its policy on what should have been the starting point of telecom policy in the current era, viz, convergence of voice, data and video transmission, and continues with its ban on voice over the Internet, there are various anomalies within the amalgam of disjointed policies for different segments of the telecom sector. Take foreign ownership, for example. The government has restricted foreign ownership to 49 per cent in all segments save ISPs without their own international gateways, where foreign ownership could be 100 per cent. For an ISP to have its own gateway is no big deal. Whether it has a gateway of its own or uses somebody else's gateway, paying for the service would be immaterial once a sufficient number of international gateways come up. The removal of the silly ban on Internet telephony is merely a matter of time. Once that goes, we will have a situation of a foreign telecom company setting up a fully-owned subsidiary offering a full range of telecom services in India, in the guise of an ISP without its own international gateway, and paying exactly Re 1 a year as licence fee, entry fee and all other fees combined. Whatever one's views on the desirability of such a cent per cent foreign-owned operation, there can be little doubt that such an arrangement would be extremely unfair to other telecom service providers who pay enormous licence fees, on top of hefty entry fees.

The decision to open up basic services to as many players as qualify goes the longest distance in unifying the market. This means that all national long distance (NLD) licensees can carry intra-circle calls as well, provided they take a basic service licence for the circle concerned. This makes it possible for a single operator to have access to the entire national market for fixed line services by buying up a national long distance licence and 21 separate circlewise licences for basic service operations. The entry cost becomes substantial but access to a national market would now be established.

TRAI has recommended an unlimited number of players, restrictive entry conditions, sensible interconnect conditions, reasonable revenue sharing by all licensees including the government-owned operators, exemption of the government-owned telecom outfits from entry fees, exemption of infrastructure providers from licence fees and arbitrary licence fee exemptions for incumbent operators in the six circles where private basic services already exist.

Entry cannot be said to be unrestricted. The regulator's recommended licence fees would require someone who aspires to offer basic services in all 21 circles to pay up Rs 497 crore as entry fees and provide bank guarantees of around Rs 1,300 crore. This is a burden that many cannot bear. In any case, licensee firms would pass it on to their consumers in the form of higher tariffs and service charges. The government should accept lower entry fees.

Even more restrictive is the net worth conditions prescribed by TRAI. These go up to Rs 1,000 crore for category A circles. This is unwarranted. TRAI recognises provision of telecom infrastructure as being quite distinct from provision of telecom services. It does not want infrastructure providers to pay any licence fees. A service provider does not really require a huge net worth as it can lease or buy infrastructure services without owning the costly infrastructure. A service provider needs to network, interconnect, tie up the last mile and invest in switches. This calls for enterprise, rather than huge net worth.

The whole notion that non-serious players need to be kept out by deliberate policy is inexplicable. Non-serious players will get no funding to get going in the first place. The government should dilute entry conditions to make the sector truly competitive. The high net worth considerations work in favour of foreign companies and big Indian business houses.

Licence fees are not too onerous, at 12 per cent, 10 per cent and 8 per cent of gross revenues. A substantial portion of the licence fees so paid would come back to the companies as payments for fulfilling universal service obligations. And it is welcome that the MTNL and DTS, the government-owned service providers, too would have to pay licence fees. However, there is the danger that the government may decide to hike licence fees above the level recommended by TRAI, as it has in the case of cellular services in the metros.

TRAI has recommended that the existing private operators who have started providing service in six circles be exempted from paying licence fees for the next four years. This is arbitrary and unwarranted. The regulator has recommended such exemption on the ground that the entry fees that these operators have paid – the licence fees that they have already paid before migrating to revenue sharing in September 1999 being considered as such – is many times the entry fees required to be paid by the new entrants. This is wrong recompense. The sensible thing to do is to levy uniform entry licence fees and adjust the excess fees already paid by the existing operators against their future licence fee obligations. Since they have been given an early mover advantage, they need no further compensation.

Convergence calls for a unified market for communications. Policy hasn't quite reached there. Yet the present set of policies and their orientation do integrate the telecom market and provide ground for hope that a unified market for communications would emerge.

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