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June 16, 2000

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Devangshu Datta

Paswan's benevolence

Many trees have been chopped down and sold to the raddiwalla as waste paper, and millions of page views worth of Internet hours have been spent since the debate started over Ram Vilas Paswan's handout. The free connection and call package may cost around Rs 12 billion, according to some estimates. These are based on cost per connected landline and lost billings on the free calls.

We also learnt that, given an earlier handout promised by Sushma Swaraj, the Department of Telecom (DoT) employees could soon be eligible for 1000 free calls/billing cycles instead of only 250 free calls. This is a retirement benefit. It kicks in the moment they cease to be government employees. This happens, in legal terms, the instant DoT is corporatised. DoT employees would then cease to be employed by the government and become public sector employees instead.

What amazes me is that in the middle of all the debate and general condemnation about the wasted cash, everybody forgot one significant word. It shows how desensitized we have become as a nation of consumers. Yes, it's the C-word that was missing.

It doesn't really matter a jot how much the package costs compared to the precedent it sets in terms of how to treat the consumer. If the DoT had spent Rs 12 billion instead on streamlining procedures so as to hand out phones quicker and improve bandwidth, one would have called it an excellent measure. If DoT had simply cut charges across the board, one would also have been very happy.

What does matter is that there are plenty of people who have queued up (3.6 million under MTNL alone), paid large deposits and now await their connections. These connections will be delayed until the free packages have been handed out to DoT employees. And note that DoT/MTNL does not pay any interest whatsoever on the initial deposit.

By any service standards except those of the Indian public sector, this is appalling business practice. Of course, Air India regularly chucks passengers off in order to carry its own staff and Alliance diverts flights to Patna because there are Bihari politicians onboard. Electricity board employees rarely pay their bills if they can help it, going by the number of Delhi Vidyut Board employees recently detected running tampered connections.

So Indians as consumers of monopoly public utilities are de-sensitised because it seems natural that the paying customer will be the last person to be served. It should not escape your notice that India is probably the most expensive place in the world in terms of power and telecom charges. One major reason is that paying customers subsidise non-payers.

Another particularly irritating point is the official defence of the package. If it was handed out as a sweetener for employees to accept corporatisation, it hasn't worked. The unions explicitly deny a quid pro quo and state that they will continue to oppose corporatisation. The other excuse proffered was that the issue of free connections would ensure 24-hour service from telecom employees. Give us a break! One can't even begin to critique this without running foul of the obscenity clauses in the IT Bill.

Even if one decides that the consumer can be ignored in a service industry, the costs have also been severely under-estimated. There is a huge implicit cost, which nobody is calculating.

Let us say DoT loses Rs 12 billion, as per the consensus estimate. The valuation in the intended sell-offs of PSU telecom equity will drop by several multiples of that loss. One cannot really quantify this since the sell-off would necessarily come after the corporatisation and the whole process is yet to start.

But the loss in valuations would obviously be a multiple of the cost of the package. As a possible benchmark, MTNL at a turnover of about Rs 53 billion in 1999-2000 and net profit at Rs 13 billion gets an approximate market valuation of Rs 137 billion. At a possible valuation ratio of 2.5 it would mean a loss of Rs 30 billion in valuation. With the government contemplating a 74 per cent sale, this could mean about Rs 22.5 billion less in the way of cash in lieu of DoT equity.

The other hidden cost can be explained easiest in terms of the apparently abstruse ICOR or the Incremental Capital Output Ratio. The ICOR is supposed to be the measure of the additional units of investment required to generate each additional unit of output. It is normally used as a measure of national accounting.

For the Indian economy, the ICOR is generally reckoned to be around 4.5, which means that Rs 4.50 in new investments is required to produce an extra rupee of output. If that is so, one could intuit that the ICOR specific to the telecom industry is lower. That is, fewer rupees worth of investment in telecom lead to greater output than the national average.

This is because telecom is basic infrastructure for the IT industry, which has such high growth and profitability. However if telecom infrastructure is handed out free to DoT employees whose productivity increase is nil, ICOR for the specific investment jumps to infinity. So there is a hidden loss of perhaps Rs 2.66 billion (1200/4.5) or more in GDP. Unless, of course, the recipients of the free packages promptly lease them out at market rates to other consumers whose productivity increases as a result. Let us hope this happens in practice!

There could be a few redeeming features to the whole exercise. One would be if the entire billing system changed as a result of this controversy and the probable legal action that could follow in the wake of public interest litigations such as the one filed in Kerala.

The highest Internet penetration and fastest IT growth has occurred in telecom environments with flat rental structures and unlimited or very high quantities of free local airtime - as in Finland and the US. Maybe, just maybe, if DoT is asked to change its billing methods and up the number of free calls for everyone, the resultant enhancement in productivity would compensate. DoT would not even lose out because any cut in charges will lead to an increase in traffic.

Devangshu Datta

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