Themes > Features
25.01.2000
The Telecom Mess
Close on the heels of the Delhi High Court striking down
crucial "decisions" regarding service provision and interconnection taken
by the Telecom Regulatory Authority of India, the cabinet has decided to
institute via an ordinance a whole new regulatory framework. There are
three departures that are to be made in the new framework. First, a leaner
regulatory authority, which must be mandatorily consulted by the
government, is to be given well defined powers to investigate and make
recommendations with regard to a range of issues varying from conditions
and timing of entry and technology choice to service standards and
interconnectivity charges and tariffs. Second, these recommendations are
not to be mandatory on the government, which has the right to accept or
reject them. Finally, the TRAI has been stripped of its quasi-judicial
powers, but disputes relating to the policy or charges imposed must be
taken by service providers to a telecom dispute settlement and appellate
tribunal. Any appeal against the judgements made by the tribunal can only
be filed in the Supreme Court.
These revisions are expected to deal with the lack of clarity with regard to the TRAI's powers, as well as the fallout of the High Court judgement striking down the TRAI's controversial Calling Party Pays ruling with regard to calls made from fixed to mobile phones. The High Court reportedly held that: "TRAI cannot lay down the terms and conditions to service providers on introduction of telecom service, installation of equipment, technology and regulate in respect of the telecom industry." It said that the regulator's powers in this regard were only "recommendatory" and the Government was not bound to abide by the proposals.
Introducing greater clarity regarding the powers of different institutions constituting the regulatory framework is, no doubt, a positive step. Over the last three years, despite the existence of a TRAI Act, which defines the role, powers, and jurisdiction of the regulatory authority, the TRAI has repeatedly sought to extend its brief, putting it on a collision course with the government. In this it has implicitly and sometimes explicitly used three arguments. First, that by combining in itself the roles of policy maker, licensor and operator, the Department of Telecommunications has the ability to dilute or sabotage the government's liberalisation drive, which threatens the monopoly profits that service providers under its control have earned in the past. Second, that an inappropriate licence fee structure that had emerged out of the process of auctioning licences to the highest bidder, adopted before the creation of the TRAI had resulted in inadequate entry by private operators, especially in basic services. And third, that appropriate regulation requires the TRAI to have a say in the determination of all aspects of telecom policy, including licensing issues such as the introduction of new service providers, compliance with licence conditions and revocation of a licence. This implies that the jurisdiction of the authority covers not merely service providers, including the service providing divisions of the DoT, but also the DoT as a policy maker and licensor.
In addition, the TRAI has tended to behave as if its role in this enlarged jurisdiction is not merely one of advisor but a decision maker whose decisions are binding on both the government and the private operators alike. This unilateral interpretation of the law, which the TRAI went about implementing in practice, resulted in a most unsavoury situation. First, it led up to a series of disputes between the DoT and MTNL one the one hand and TRAI on the other, souring the relationship between the two. Second, it encouraged private operators, who found themselves unable to meet financial and other commitments made when bidding for licences, to use the TRAI as the means to stall permissible penal action against them. Influenced in part by its own conflict with DoT, the TRAI has tended in these instances to rule in favour of private operators, inviting the allegation of partisanship. In the event, the TRAI found itself dragged to the courts which were called upon to interpret the existing law defining the Authority's powers (See accompanying Box). The court's decisions thus far have made it quite clear that the TRAI had clearly gone beyond its brief, necessitating the current exercise to restructure the regulatory framework.
But the new initiative does little to resolve the issues that arose during the course of liberalisation and the TRAI's initial tenure, relating to the likely consequences of the opening up of the telecom sector (i) for the spread of the telcom network; (ii) social benefits of competition; and (iii) the objectives and feasibility of regulation.
The Court as Arbiter
The decision of the government that the TRAI would not have the power to adjudicate in disputes between the DoT as licensor and the private operators as licencees merely incorporates into the legal framework a judgment that had been arrived at by the courts in cases which challenged the TRAI's tendency to unilaterally assume such powers. Those cases were of two kinds. Those that challenged the TRAI's effort to intervene in disputes between the DoT as licensor and private operators as licencees, over issues regarding the implementation of the license agreement. And those that challenged TRAI's claim that it had the right to decide on the need and timing of entry of new operators.
The first of these became a problem when the TRAI decided to hear a set of petitions filed by private operators in the paging and cellular businesses against the effort of the DoT to encash bank guarantees in lieu of unpaid licence fees and revoke licences in some cases on account of non-payment of licence fees. Among the cases before the TRAI were petitions filed by Netherlands India Communications Ltd, Fascel Ltd, ICNET, Marcstat Communications, Koshika Telecom, Reliance Telecom, Bharti Cellular and Modi Korea Telecom Ltd. The hearings in many of these cases had to be stalled because the DoT filed appeals in the Delhi High Court, saying that TRAI was not competent to hear disputes between DoT (the licensor) and the licensees. It argued that under the conditions of the licence, disputes were to be settled through arbitration by an arbitrator appointed by the licensor. Following this appeal, the Delhi High Court stayed further proceedings. TRAI on the other hand held that DoT should not invoke the arbitration clause in the interests of justice, since it was one of the affected parties.
The second controversy dragged to the courts was the decision of TRAI to insist that it had the right to decide on the need for and timing of entry by new operators into various telecom sectors. The clinching case in this regard was the was the controversy over the decision by Mahanagar Telephone Nigam Ltd. to launch cellular services based on the CDMA technology.
On the basis of a petition filed by cellular operators with the TRAI, the Authority issued an order in January 1998 directing MTNL to desist from launching cellular services till it has decided on the matter. Among the questions raised by the cellular operator's association was the right of the government to provide a licence to a new service provider without referring the matter to the TRAI. A month later the TRAI ruled that MTNL's licence to enter the cellular mobile and paging services business was invalid, since the Authority's recommendations were not sought before the licence was amended in October 1997 to include the above services. It held that the Government would have to mandatorily seek the recommendations of the Authority on all matters pertaining to licensing including those that involve introduction of a new service provider. The TRAI simultaneously held that "the Internet policy, which was formulated and announced by the Government without obtaining TRAI's recommendation... cannot held to be valid." The order also held invalid the revocation of licences of paging service operators, since no recommendations were sought from TRAI.
The DoT, as expected went on appeal against the TRAI to the High Court. In July 1998, Justice Usha Mehra ruled that the TRAI had no jurisdiction over disputes between the licensor and licencees. In her view, it could "safely be concluded that the authority (TRAI) fell in error in concluding that the power of the Government to grant or amend the licence is subject to the recommendation of TRAI or that these recommendations are mandatory in nature." Having arrived at that judgement, she went on to rule that she had "no hesitation to hold that the impugned order (relating to MTNL) suffers from legal infirmities."
With the ruling that the grant or amendment of licence does not fall within the jurisdiction of TRAI, all the cases in which private operators had obtained a stay from the TRAI on imposition of penalties by DoT for non-fulfillment of licence conditions proved infructuous.
The case against the TRAI expanding its powers into areas in which it had no mandate was finally sealed with the most recent judgment on the Calling Party Pays (CPP) regime notified by the TRAI. In its notification of September 17, 1999, which instituted the CPP regime, the TRAI "decreed" that incoming calls to a cellular subscriber would be free (not subject to airtime charges). The cost of the call from a fixed to a mobile phone, set at Rs. 3.60 a minute by TRAI, would be borne by the latter, and the revenue derived from these calls were to be shared between basic and cellular operators. The TRAI had said that cellular operators would receive 80 paise per local call. The CPP regime was challenged by an NGO, Telecom Watchdog, which argued that the new regime was unjustified and placed an excessive burden on fixed phone users. Later the Department of Telecommunication Services (DTS) and MTNL impleaded themselves in the case. Both challenged the reasonableness of the revenue share fixed by Trai and its rights to fix revenue shares.
In its recent ruling on the case, the division bench of the Delhi High Court consisting of Chief Justice S N Variava and Justice S K Mahajan not only struck down the CPP regime, but also the interconnection regulation, issued by TRAI on May 28, 1999, which allowed the latter to issue interconnection orders overriding licence agreements between the government and private operators. The bench held that the TRAI had no powers to fix revenue sharing terms between service providers. It therefore asked the TRAI to work out a new regime in place of the CPP regime earlier notified. With this case the legal position on the matter of the jurisdiction and powers of the TRAI had been made amply clear, precipitating an immediate announcement of a restructuring of the regulatory framework by the government.
The Political Economy of Regulation
The Telecom mess stems not merely from jurisdictional battles and conflicting interests. It is primarily the result of the manner in which, having decided to open up an area which lends itself to domination by public monopolies, the government has, in practice, sought to muddle through towards formulating what increasingly appears to be an elusive policy framework.
The growth of the telecommunications services sector proceeds through many phases, with significant implications for pricing strategies. It starts with dominantly local traffic on fixed lines. Pure accounting rationality would suggest that at this stage, the pricing of access should cover average costs. As the network spreads, pricing strategies separate the price of minimal access at a fixed rental and charge intensive users separately for transmission and switching costs of actual use. Rentals are kept low to attract low income consumers onto the network.
When the network develops further and the demand for long distance traffic grows, the high usage value associated with such traffic paves the way for subsiding local traffic with revenues on charges on long distance traffic. The recruitment of new subscribers provides an externality to those linked to the network, since the utility of the network increases with size, accelerating expansion. It is after this stage that any effort at reducing subsidies or cross-subsidisation is warranted, with the focus not on increasing the cost of access, but of reducing the cross subsidisation of local traffic by long distance traffic. Meanwhile, new uses of the network result in diversification. Available and increased bandwidth allows the network to carry non-voice signals such as data, text and graphics. Here too it could be argued that strict accounting principles should not be applied, so that users are not discouraged from utilising devices and services (such as the Internet) which have great potential.
This need to abjure an accountant's view of pricing thus stems from a number of arguments. First, easy access to a telecommunications network is normally considered to be a second-order "essential good" which citizens are entitled to at a reasonable charge. Second, given the externalities (or direct benefits to other economic activities) associated with telecom access, the growth of the network is seen as yielding larger benefits to the system than the immediate benefit derived from usage by an individual consumer. Third, given the new uses generated by technological progress which can have far-reaching economic effects and implications, pricing should not be allowed to discourage diversification of uses of the network.
These arguments in favour of a pricing strategy not based on pure accounting rationality also make a case for leaving the telecommunications sector to public utilities. Given characteristics such as lumpy investment requirements and low profits at least at some locations, it is to be expected that the service is unlikely to be appropriately priced and satisfactorily provided by market channels. This is likely to be particularly true in developing countries, where the demand for such services is extremely uneven in spread.
If despite this case for provision through public utilities, private entry is advocated on grounds of competition aimed at improving service standards and on the basis of not-so-well-founded arguments that available public capital needs to be supplemented with private capital to efficiently meet the demand for telecom services, it becomes necessary to attach conditions to licence provision and to cap prices charged through a tariff-setting mechanism. A regulatory framework also becomes necessary because private entry in most telecom services allows the private entrants to earn rents on account of a number of reasons.
To start with, in areas like paging and cellular services, entrants are limited by the need to allocate frequencies from a limited frequency spectrum. This gives them an oligopolistic position which can yield rents. Second, since provision of basic services requires provision of the "right of way" to build the network crossing public property and using public assets (like telephone poles, say), excessive entry can lead to "congestion" with adverse social consequences. Here again those private operators permitted to enter become eligible for rents. Third, even though in liberalising mode, the government cannot allow unfettered entry into an area which inevitably involves large sunk costs in infrastructure. In the rush for occupying the market, the industry could get saddled with huge excess capacities leading to waste. Thus, though private entry was to be allowed, originally only two operators were to be permitted entry in each circle. Finally, since the idea of opening up the sector is not just to encourage the entry of private operators but also to expand the network, private sector entrants would have to be allowed to interconnect with the existing public utility network. Given the "externality" associated with a telecom network, which makes the utility of a network a function of its size, the private operator derives substantial "unpriced" benefits from interconnectivity.
It is the existence of rents in all these forms that justifies the levy of a licence fee on private entrants. The question remains, however, as to how this levy should be computed. The problem is that all the benefits derived by private operators are not from "goods" that have markets. Hence the market itself cannot compute these gains on the basis of prices it generates. It is essential that the government or any of its regulatory arms should, on the basis of a detailed investigation, normatively impute a cost to the benefits being handed over to private operators. Rather than resort to such a procedure, and in keeping with its belief in liberalisation and the benefits of the market mechanism, the government decided to let private operators themselves 'price' these gains by bidding for the licences on offer in the different telecom circles.
The result of that auctioning procedure is now history. Private operators, driven by the liberalisation fever into speculation, based on over-optimistic projections of market potential and counting on unusually low costs of operation, made bids that were irrational both in terms of the number of circles which were sought by individual operators and the size of the bid in monetary terms. Once the bids were opened and licences offered to the highest bidder, three consequences followed. Some potential operators (like Himmachal Futuristic) withdrew their offers in many of the less promising circles, delaying the process of identifying the potential operators. Yet others bidders were soon convinced of their folly by their inability to obtain support from financiers for their proposals. And finally, of those who went ahead with their projects, quite a few found themselves unable to meet the commitments they had made themselves. Tables 1 and 2 provide the licence fee commitments made by those operators who remained in the fray after the initial withdrawals and Tables 3 and 4 provide the amounts which remained due as on 31 March 1999.
These revisions are expected to deal with the lack of clarity with regard to the TRAI's powers, as well as the fallout of the High Court judgement striking down the TRAI's controversial Calling Party Pays ruling with regard to calls made from fixed to mobile phones. The High Court reportedly held that: "TRAI cannot lay down the terms and conditions to service providers on introduction of telecom service, installation of equipment, technology and regulate in respect of the telecom industry." It said that the regulator's powers in this regard were only "recommendatory" and the Government was not bound to abide by the proposals.
Introducing greater clarity regarding the powers of different institutions constituting the regulatory framework is, no doubt, a positive step. Over the last three years, despite the existence of a TRAI Act, which defines the role, powers, and jurisdiction of the regulatory authority, the TRAI has repeatedly sought to extend its brief, putting it on a collision course with the government. In this it has implicitly and sometimes explicitly used three arguments. First, that by combining in itself the roles of policy maker, licensor and operator, the Department of Telecommunications has the ability to dilute or sabotage the government's liberalisation drive, which threatens the monopoly profits that service providers under its control have earned in the past. Second, that an inappropriate licence fee structure that had emerged out of the process of auctioning licences to the highest bidder, adopted before the creation of the TRAI had resulted in inadequate entry by private operators, especially in basic services. And third, that appropriate regulation requires the TRAI to have a say in the determination of all aspects of telecom policy, including licensing issues such as the introduction of new service providers, compliance with licence conditions and revocation of a licence. This implies that the jurisdiction of the authority covers not merely service providers, including the service providing divisions of the DoT, but also the DoT as a policy maker and licensor.
In addition, the TRAI has tended to behave as if its role in this enlarged jurisdiction is not merely one of advisor but a decision maker whose decisions are binding on both the government and the private operators alike. This unilateral interpretation of the law, which the TRAI went about implementing in practice, resulted in a most unsavoury situation. First, it led up to a series of disputes between the DoT and MTNL one the one hand and TRAI on the other, souring the relationship between the two. Second, it encouraged private operators, who found themselves unable to meet financial and other commitments made when bidding for licences, to use the TRAI as the means to stall permissible penal action against them. Influenced in part by its own conflict with DoT, the TRAI has tended in these instances to rule in favour of private operators, inviting the allegation of partisanship. In the event, the TRAI found itself dragged to the courts which were called upon to interpret the existing law defining the Authority's powers (See accompanying Box). The court's decisions thus far have made it quite clear that the TRAI had clearly gone beyond its brief, necessitating the current exercise to restructure the regulatory framework.
But the new initiative does little to resolve the issues that arose during the course of liberalisation and the TRAI's initial tenure, relating to the likely consequences of the opening up of the telecom sector (i) for the spread of the telcom network; (ii) social benefits of competition; and (iii) the objectives and feasibility of regulation.
The Court as Arbiter
The decision of the government that the TRAI would not have the power to adjudicate in disputes between the DoT as licensor and the private operators as licencees merely incorporates into the legal framework a judgment that had been arrived at by the courts in cases which challenged the TRAI's tendency to unilaterally assume such powers. Those cases were of two kinds. Those that challenged the TRAI's effort to intervene in disputes between the DoT as licensor and private operators as licencees, over issues regarding the implementation of the license agreement. And those that challenged TRAI's claim that it had the right to decide on the need and timing of entry of new operators.
The first of these became a problem when the TRAI decided to hear a set of petitions filed by private operators in the paging and cellular businesses against the effort of the DoT to encash bank guarantees in lieu of unpaid licence fees and revoke licences in some cases on account of non-payment of licence fees. Among the cases before the TRAI were petitions filed by Netherlands India Communications Ltd, Fascel Ltd, ICNET, Marcstat Communications, Koshika Telecom, Reliance Telecom, Bharti Cellular and Modi Korea Telecom Ltd. The hearings in many of these cases had to be stalled because the DoT filed appeals in the Delhi High Court, saying that TRAI was not competent to hear disputes between DoT (the licensor) and the licensees. It argued that under the conditions of the licence, disputes were to be settled through arbitration by an arbitrator appointed by the licensor. Following this appeal, the Delhi High Court stayed further proceedings. TRAI on the other hand held that DoT should not invoke the arbitration clause in the interests of justice, since it was one of the affected parties.
The second controversy dragged to the courts was the decision of TRAI to insist that it had the right to decide on the need for and timing of entry by new operators into various telecom sectors. The clinching case in this regard was the was the controversy over the decision by Mahanagar Telephone Nigam Ltd. to launch cellular services based on the CDMA technology.
On the basis of a petition filed by cellular operators with the TRAI, the Authority issued an order in January 1998 directing MTNL to desist from launching cellular services till it has decided on the matter. Among the questions raised by the cellular operator's association was the right of the government to provide a licence to a new service provider without referring the matter to the TRAI. A month later the TRAI ruled that MTNL's licence to enter the cellular mobile and paging services business was invalid, since the Authority's recommendations were not sought before the licence was amended in October 1997 to include the above services. It held that the Government would have to mandatorily seek the recommendations of the Authority on all matters pertaining to licensing including those that involve introduction of a new service provider. The TRAI simultaneously held that "the Internet policy, which was formulated and announced by the Government without obtaining TRAI's recommendation... cannot held to be valid." The order also held invalid the revocation of licences of paging service operators, since no recommendations were sought from TRAI.
The DoT, as expected went on appeal against the TRAI to the High Court. In July 1998, Justice Usha Mehra ruled that the TRAI had no jurisdiction over disputes between the licensor and licencees. In her view, it could "safely be concluded that the authority (TRAI) fell in error in concluding that the power of the Government to grant or amend the licence is subject to the recommendation of TRAI or that these recommendations are mandatory in nature." Having arrived at that judgement, she went on to rule that she had "no hesitation to hold that the impugned order (relating to MTNL) suffers from legal infirmities."
With the ruling that the grant or amendment of licence does not fall within the jurisdiction of TRAI, all the cases in which private operators had obtained a stay from the TRAI on imposition of penalties by DoT for non-fulfillment of licence conditions proved infructuous.
The case against the TRAI expanding its powers into areas in which it had no mandate was finally sealed with the most recent judgment on the Calling Party Pays (CPP) regime notified by the TRAI. In its notification of September 17, 1999, which instituted the CPP regime, the TRAI "decreed" that incoming calls to a cellular subscriber would be free (not subject to airtime charges). The cost of the call from a fixed to a mobile phone, set at Rs. 3.60 a minute by TRAI, would be borne by the latter, and the revenue derived from these calls were to be shared between basic and cellular operators. The TRAI had said that cellular operators would receive 80 paise per local call. The CPP regime was challenged by an NGO, Telecom Watchdog, which argued that the new regime was unjustified and placed an excessive burden on fixed phone users. Later the Department of Telecommunication Services (DTS) and MTNL impleaded themselves in the case. Both challenged the reasonableness of the revenue share fixed by Trai and its rights to fix revenue shares.
In its recent ruling on the case, the division bench of the Delhi High Court consisting of Chief Justice S N Variava and Justice S K Mahajan not only struck down the CPP regime, but also the interconnection regulation, issued by TRAI on May 28, 1999, which allowed the latter to issue interconnection orders overriding licence agreements between the government and private operators. The bench held that the TRAI had no powers to fix revenue sharing terms between service providers. It therefore asked the TRAI to work out a new regime in place of the CPP regime earlier notified. With this case the legal position on the matter of the jurisdiction and powers of the TRAI had been made amply clear, precipitating an immediate announcement of a restructuring of the regulatory framework by the government.
The Political Economy of Regulation
The Telecom mess stems not merely from jurisdictional battles and conflicting interests. It is primarily the result of the manner in which, having decided to open up an area which lends itself to domination by public monopolies, the government has, in practice, sought to muddle through towards formulating what increasingly appears to be an elusive policy framework.
The growth of the telecommunications services sector proceeds through many phases, with significant implications for pricing strategies. It starts with dominantly local traffic on fixed lines. Pure accounting rationality would suggest that at this stage, the pricing of access should cover average costs. As the network spreads, pricing strategies separate the price of minimal access at a fixed rental and charge intensive users separately for transmission and switching costs of actual use. Rentals are kept low to attract low income consumers onto the network.
When the network develops further and the demand for long distance traffic grows, the high usage value associated with such traffic paves the way for subsiding local traffic with revenues on charges on long distance traffic. The recruitment of new subscribers provides an externality to those linked to the network, since the utility of the network increases with size, accelerating expansion. It is after this stage that any effort at reducing subsidies or cross-subsidisation is warranted, with the focus not on increasing the cost of access, but of reducing the cross subsidisation of local traffic by long distance traffic. Meanwhile, new uses of the network result in diversification. Available and increased bandwidth allows the network to carry non-voice signals such as data, text and graphics. Here too it could be argued that strict accounting principles should not be applied, so that users are not discouraged from utilising devices and services (such as the Internet) which have great potential.
This need to abjure an accountant's view of pricing thus stems from a number of arguments. First, easy access to a telecommunications network is normally considered to be a second-order "essential good" which citizens are entitled to at a reasonable charge. Second, given the externalities (or direct benefits to other economic activities) associated with telecom access, the growth of the network is seen as yielding larger benefits to the system than the immediate benefit derived from usage by an individual consumer. Third, given the new uses generated by technological progress which can have far-reaching economic effects and implications, pricing should not be allowed to discourage diversification of uses of the network.
These arguments in favour of a pricing strategy not based on pure accounting rationality also make a case for leaving the telecommunications sector to public utilities. Given characteristics such as lumpy investment requirements and low profits at least at some locations, it is to be expected that the service is unlikely to be appropriately priced and satisfactorily provided by market channels. This is likely to be particularly true in developing countries, where the demand for such services is extremely uneven in spread.
If despite this case for provision through public utilities, private entry is advocated on grounds of competition aimed at improving service standards and on the basis of not-so-well-founded arguments that available public capital needs to be supplemented with private capital to efficiently meet the demand for telecom services, it becomes necessary to attach conditions to licence provision and to cap prices charged through a tariff-setting mechanism. A regulatory framework also becomes necessary because private entry in most telecom services allows the private entrants to earn rents on account of a number of reasons.
To start with, in areas like paging and cellular services, entrants are limited by the need to allocate frequencies from a limited frequency spectrum. This gives them an oligopolistic position which can yield rents. Second, since provision of basic services requires provision of the "right of way" to build the network crossing public property and using public assets (like telephone poles, say), excessive entry can lead to "congestion" with adverse social consequences. Here again those private operators permitted to enter become eligible for rents. Third, even though in liberalising mode, the government cannot allow unfettered entry into an area which inevitably involves large sunk costs in infrastructure. In the rush for occupying the market, the industry could get saddled with huge excess capacities leading to waste. Thus, though private entry was to be allowed, originally only two operators were to be permitted entry in each circle. Finally, since the idea of opening up the sector is not just to encourage the entry of private operators but also to expand the network, private sector entrants would have to be allowed to interconnect with the existing public utility network. Given the "externality" associated with a telecom network, which makes the utility of a network a function of its size, the private operator derives substantial "unpriced" benefits from interconnectivity.
It is the existence of rents in all these forms that justifies the levy of a licence fee on private entrants. The question remains, however, as to how this levy should be computed. The problem is that all the benefits derived by private operators are not from "goods" that have markets. Hence the market itself cannot compute these gains on the basis of prices it generates. It is essential that the government or any of its regulatory arms should, on the basis of a detailed investigation, normatively impute a cost to the benefits being handed over to private operators. Rather than resort to such a procedure, and in keeping with its belief in liberalisation and the benefits of the market mechanism, the government decided to let private operators themselves 'price' these gains by bidding for the licences on offer in the different telecom circles.
The result of that auctioning procedure is now history. Private operators, driven by the liberalisation fever into speculation, based on over-optimistic projections of market potential and counting on unusually low costs of operation, made bids that were irrational both in terms of the number of circles which were sought by individual operators and the size of the bid in monetary terms. Once the bids were opened and licences offered to the highest bidder, three consequences followed. Some potential operators (like Himmachal Futuristic) withdrew their offers in many of the less promising circles, delaying the process of identifying the potential operators. Yet others bidders were soon convinced of their folly by their inability to obtain support from financiers for their proposals. And finally, of those who went ahead with their projects, quite a few found themselves unable to meet the commitments they had made themselves. Tables 1 and 2 provide the licence fee commitments made by those operators who remained in the fray after the initial withdrawals and Tables 3 and 4 provide the amounts which remained due as on 31 March 1999.
In such a situation, there are two approaches which can be adopted. Within the logic of the liberalisation ethos, it could be argued that the state should maintain its distance and make the investor pay the price for foolhardiness. Bankruptcy and closure would follow. The bidding process can operate again, and the new winners may be the same groups or others who may buy up the infrastructure created by the original players. The second approach would be one which recognises that the premise on which much of liberalisation works - that markets are efficient - was and is wrong. This would require a transition out of the current licence fee regime to one which allows operators to remain viable. This was what the government had decided to do, through a scheme involving a revenue sharing agreement between DoT and the private operators, rather than a fixed licence fee.
Mr. Jagmohan, in his brief tenure as Communications Minister, was clear on both these counts. He backed a scheme involving a one time entry fee and a revenue sharing agreement, to implement which there would be a new round of bidding in which existing operators could participate. The idea was that, if the existing operator lost out in that bidding process, he would be bought out by the winner at a price arrived at by an independent valuer. But the transition to that scheme was to be prospective. Meanwhile, companies had to pay up a minimum of 20 per cent of their outstanding dues and securitise the remaining part. Some operators agreed and obliged. Others like Koshika amd JT Mobile held out, leading to a cancellation of their licences and a termination of the connection to the DoT network. When the action was challenged in court, the judges backed the Communications Minister.
Yet, when the government finally decided to make the transition, it chose to sacrifice its Communications Minister, who was moved out of his job, and let the operators get away without paying for their folly. They were required to pay a sum equal to their dues on fees on existing licences as on 31 July 1999 as an entry fee into the revenue sharing regime. They were also expected to subsequently pay a revenue share (tentatively fixed at 15 per cent) to the government. The actual estimation of a reasonable licence fee was left to be computed by the TRAI at a later date. This surrender to the private operators was the first blow to the credibility of the government's regulatory framework.
But there was more to come. The next setback to the regulatory framework was a result of the way the TRAI went about its task of fixing tariffs. In its first consultation paper on Telecom Tariffs issued in November 1997, the TRAI proposed that existing rentals on basic or fixed line services should be increased by 63 to 140 per cent for different categories of subscribers, the number of free call units allowed during a bimonthly billing cycle should be reduced from 250 in rural areas and 150 in urban areas to 120 and that a uniform charge of Rs. 1,30 per extra call should be insttuted in lieu of the existing sliding scale in which call rates increase from Rs. 0.60 to Rs. 0.80, Rs. 1.00, Rs. 1.25 and Rs. 1.40 as the number of calls made increase. In addition, it proposed a reduction in long distance call charges by upto 60 per cent.
It should be obvious that the intent of this exercise was virtually to do away with two kinds of cross-subsidisation considered acceptable in telecom pricing strategies: first, the subsidisation of poorer, lower end users who are to be attracted into the network by lower rentals and lower call charges for less-intensive use; and, second, cross-subsidisation of local traffic with revenues from long distance traffic. While it is true that as a network matures, an effort must be made to reduce the extent of cross-subsidisation, it could not be claimed on the basis of telephone and call densities that the network in India had reached that level of maturity. Nor was the extent of reduction of cross subsidisation even in countries like France as much had been proposed by the TRAI.
It is not surprising, therefore, that the proposal which would have adversely affected low-end users and benefited well-to-do business subscribers was seen as a way of increasing the revenues of new private basic services operators investing in local networks through an inequitous rationalisation of the tariff structure. Despite calls for a moderation in reduction of cross-subsidisation from Parliamentarians, the TRAI chose early in 1999 to issue a note on the new tariffs and leaked to the press the fact that it had issued such a notification. This again resulted in an unnecessary brush with the Communications Minister and Parliament, which was finally resolved with a structure which reduced cross-subsidisation to a lesser degree but still provided some "relief" to new private operators and high-end users.
The TRAI's actions cannot even be defended on the grounds that its tariff setting principles are scientific. This comes through for example from an anlysis of its tariff setting procedures for cellular operators. The basic principle adopted by the TRAI is that rentals should cover capital costs, while call charges should cover operating costs. Our earlier discssion made clear that this does not tally with any economic reasoning on how a utility like telecom access should be priced given its characteristics
But what is even more disturbing is the fact that when calculating costs, there was no effort to make a normative assessment of what such costs should be. Consider the case of capital expenditures on cellular lines to be recovered through the rental. Capital expenditures consists of depreciation computed assuming a 10 year life span of equipment and weighted average interest costs placed as high as 20 per cent. Capital cost per subscriber is computed after taking utilisation of equipment into account. To make the calculation the TRAI seems to have unquestioningly relied on estimates provided to it by the cellular operators themselves. The absurdity of this comes through when we look at how estimates of capital expenditure per mobile line varied between circles and metros and even across operators in metros (Table 5).
To deal with variations between metros and circles the TRAI decided to base their recommendations on the metro calculations. But how is the variation within metros to be dealt with ? The appropriate procedure would have been to make a normative estimate of costs, which would have brought the estimate closer to the lowest figure in the set, since the nature of equipment used is more or less the same. The use of mormative costing procedures is routine in the case of organisations like the Bureau of Industrial Costs and Prices. Rather than opt for that procedure, what the TRAI did was to ignore the abnoramally high maximal value and then take the median value of the rest of the figures to arrive at the capital cost with which rentals are to be computed when some apropriate level of utilisation as been reached. This procedure is clearly indefensible and would have inflated capital costs as well as the derived rentals. It was on this basis that the TRAI came to the abnormally high rental figure of Rs. 400 to Rs. 484 per month, as compared to the Rs. 156 which prevailed under the original tariff structure.
The above instance is just quoted as an example to illustrate how there is nothing scientific about what the TRAI has done, making the debate between it, the government and users a battle between those who want "economic" costing and those who want subsidies, as it is often presented to be. The problem with the regulation and tariff setting framework which had the TRAI at the centre was that there was no internal way to monitor the "monitor". This is what explains the repeated recourse to the courts and the periodic clash between the TRAI on the one hand and the executive, the Parliament and the consumer on the other.
The TRAI, of course, held that its procedures were correct and that without hiking tariffs the process of introducing competition in the telecom sector would be aborted. If that is accepted, then the message which remains is that from the point of view of society and the individual consumer the price of competition is too high and therefore liberalisation is not warranted.
© MACROSCAN 2000