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Is this Wild West or was this needed?

January 17, 2004 15:37 IST

There have been suggestions at times that frequent changes in the regulatory environment in India inhibit further investments.

But whether the telecom network could have grown to its present size and acquired such a growth potential, without regulatory intervention, is a question of debate. Central to this debate are fundamental issues like whether we have such a regime.

To my mind there have been three key regulatory interventions: in 1999, 2001 and 2003. The first intervention had its genesis in the licence auction system prevalent in 1995-96, wherein the mobile operators had bid very high licence fees and the initial peak tariffs were fixed at more than Rs 16 per minute.

Very soon it was realised that, with these tariffs, there would be no growth and a number of companies would go bankrupt.

After considerable debate, in 1999 the government decided to reduce mobile operators' licence fees from Rs 20,000 crore (Rs 200 billion) to Rs 5,000 crore (Rs 50 billion) and converted the regime into revenue sharing.

Such a step to facilitate industry viability was taken by the government despite a lot of criticism, and even litigation.

Also, while licensing basic service operators, wireless in local loop was recognised as the preferred last mile technology, but no mobility was permitted under the licence.

This led to a telephone that could move and, as technology evolved, the length of the last mile increased while the size of the fixed instrument reduced considerably.

Taking into account the demand for mobility, which could be offered using the same equipment, and the need to give a fillip to tele-density, the government allowed limited mobility in 2001.

The issue of debate was the extent of limited mobility, which was decided to be an SDCA i.e. the local call area. Interestingly, some countries have allowed limited mobility within a tower's range.

In 2003 again, technology issues arose when one of the operators, using call forwarding and multiple registration, converted limited mobility to almost full mobility. It was not strictly a breach of the licence condition, though the spirit of the sanction of the licence was definitely violated.

The regulator at that point of time had to choose between banning the service (which would have led to endless litigation) and levying an entry fee equivalent to the full amount for a cellular licence in lieu of full mobility but no extra spectrum.

As the second option had the benefits of reduced litigation in the sector and increased income to the government, the regulator's choice was obvious.

For the breach of the spirit of the licence, one of the operators was made to pay heavy penalty.

Even the New Telecom Policy 1999, which has brought about a turnaround in the telecom sector, recognised that "Â…convergence of both markets and technologies is a reality Â…convergence now allows operators to use their facilities to deliver some services reserved for other operators, necessitating a relook into the existing policy framework."

Therefore, the intervention of 2003 was in line with the policy framework.

Regulatory experience has shown that changes on account of technological developments often build the basis for disputes and litigation.

This litigation has its base in agreement/implicit contract and often results in claims against the government for compensation.

The introduction of the unified access licences, which had their roots in NTP'99, entails unification of WLL, cellular and basic services as the inevitable first step for initiating a complete unified licence regime.

The forthcoming unified licence would be an automatic licence where the licensee would work in accordance with published guidelines.

It would mean much greater flexibility to operators, and is expected to reflect in greater consumer choice and better quality. At the same time the tax-payer would be saved from the perpetual claims of the licensees to provide compensation, whenever technology changed.

Concerns have been expressed that the cellular licensees, who had entered the service after bidding, were unfairly treated. It is pertinent to mention that at the time of migrating to revenue share, the cellular operators had agreed to work in a multi-operator regime with unlimited competition.

This agreement clearly allowed entry of more players. However, the key issue was of ensuring a level playing field. This was always addressed during the changes in 2001 & 2003.

If we recall, at the time of introducing WLL(M) services, the government gave a number of concessions to the cellular players, which included reduction in annual licence fee as revenue share, from 15 per cent to 12-10-8 per cent in category A,B,C circles (losses to government -- Rs 15,000 crore (Rs 150 billion)), permission to retain 5 per cent of pass through revenue paid to basic service operators, and the flexibility to offer fixed services as well as PCO services using their GSM infrastructure.

In 2003 again, the WLL operators were asked to pay the fee equivalent to cellular operators while being permitted to operate as a cellular service.

Despite this, the question about unfair treatment was repeatedly raised by cellular players in the media, leading to questions like 'India's Regulatory Wild West.'

Even as the due compensation was provided, the cellular players raised a further demand of Rs 18,000 crore (Rs 180 billion).

Though these concessions do not stand to reason, the government in its keenness to reduce legal disputes, increase tele-density and make the service cheaper, agreed to provide further concessions.

Further tariff decreases would give a further demand push and India should be able to compete with China in its telecom penetration.

While in other sectors such as CTV, TV receiver, computers and passenger cars, the ratio between India and China is 1:3, there is little reason for the ratio being 1:15 (2002) in case of mobile telephony.

One of the inputs to the regulator, when it decided to encourage aggressive competition, was the India-China comparison. Interestingly, in the automobile sector, India has been able to perform better than China, primarily because of aggressive competition and entry level tariff subsidies.

These interventions have created a win-win situation for all where the operator stands to gain from growth, the consumer from the reduced tariffs and the economy from the telecom penetration, which has reached a point of inflexion with both GDP and telecom penetration chasing each other.

The cellular mobile connections increased from about 10.6 million at the end of 2002 to about 29 million at the end of 2003.

The positive impact that such growth in telecom services has on GDP growth has already been established through various studies. Based on the growth in the last few months of 2003-2004 it has been possible to prepare a 100 million mobile telephone plan for the telecom sector.

The 100 million plan requires funds of the order of Rs 50,000 crore (Rs 500 billion) in the next two years.

Data from financial institutions suggest that out of a consolidated sanction of Rs 8,480 crore (Rs 84.80 billion) to cellular operators, Rs 2,664 crore (Rs 26.64 billion) are still outstanding.

It is thus apparent that the size of the cake is big enough for both cellular and WLL(M) players and, left only to cellular players, the goal to achieve 100 million mobile telephones by the end of 2005 cannot be realised.

Questions have also been raised about the sustainability of such low tariffs. If we leave aside TRAI's judgement, we have reports from financial institutions such as a Morgan Stanley report, which suggest that "Even at monthly ARPU (average revenue per user) of $5, wireless operators can make money ". Present ARPUs are close to $10.

Financial analysts have argued that there have been far too many changes in India's regulatory regime. To my mind, had there been no interventions a number of operators would have wound up and the tele-density of 7, which has been achieved two years ahead of schedule, would have been a distant dream.

The win-win situation that we witness today for operators, consumers and the economy is all a result of the timely regulatory interventions.

Is this the Wild West or was this required?

Pradip Baijal is chairman, Telecom Regulatory Authority of India.

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Pradip Baijal