December 30, 2007
 
Prabir Purkayastha

The spectrum wars have got curious and curiouser. The Department of Telecom and the minister have tied themselves in knots on how to allocate new licenses and spectrum. Having talked of a first-come first-served system, the date of first-come is now being changed. To make it worse, Reliance Infocomm, who it might be remembered received a mobile license after violating its WLL license, has jumped the queue of 575 new license applicants and secured GSM license and additional spectrum on the specious plea that as they have a CDMA license, they should be given a cross-over license for GSM. In the battle between the CDMA and GSM operators, a lot of skeletons in the closet have come tumbling out, as each side exposes what the other side has done. Missing in all the spectrum wars is the consumer, with the prime minister also talking of how the telecom sector can help in filling the national exchequer.

What is spectrum and why is it important for mobile telephony? Wireless signals need frequency bands which it utilises for transferring information. Any wireless signal can be made to carry information – the radio stations use certain frequencies to bring us voice broadcasts that we can listen to by tuning into those frequencies. The mobile telephony also uses wireless signals and does this tuning transparently for us. But behind the voice we hear in our mobile handset, is a wireless network that uses radio waves to transmit the voice. That is why turning the mobile handset to an FM radio is quite simple.

The problem of using the wireless frequencies or the frequency spectrum is that only a part of the total frequency spectrum can be used for mobile telephony. The international body, ITU decides the frequency band that is to be used for different services. If we want the hand sets and the switching equipment to be kept as global standards, we need to also allocate the same frequencies here for similar services. That means that there is limited spectrum available for any service – it is not an unlimited resource that can be given to anybody and everybody.

The question of spectrum was not important when the mobile services started in the country. The initial licenses that were given had the spectrum – called the start-up spectrum – bundled with it. The initial metro licenses were given away virtually at a pittance. The market value of these licenses are astronomical today.

GREAT LOSS TO EXCHEQUER

In the next round, the licenses again had the start-up frequency bundled with it. It was also mandated that all mobile services should be based on GSM technology. Though large license fees were promised, after securing the license, the private players all wriggled out of paying the license fees and went into a revenue sharing arrangement, courtesy the NDA government ruling then. The loss to the exchequer was of the order of Rs 40,000 crore. After the change to a revenue sharing regime, the freebies for the GSM operators did not stop. From the initial 4.4 MHz of start-up frequency, they now hold about 10 MHz each without paying any extra spectrum fees.

The initial mobile rates were kept artificially very high, even though the license fees were now no longer there and the capital cost per line was a fraction of the cost of installing landlines. There was virtually no license fee, no spectrum fee and only some money to be paid to the exchequer as a revenue share; this was cushy times for the GSM operators, who raked in the money with high call rates. It was only after the public sector players BSNL and MTNL were allowed to provide and other operators coming in with Wireless in the local loop (WLL) did costs for mobile services come down. It was at this time CDMA technology was also accepted and CDMA licenses were also issued. This led to the explosive growth of telecom we are seeing today. Before the government and the private operators claim the credit for this, the history of cartels, high call rates and a compliant TRAI must also be remembered.

DoT’s role is supposed to be one of setting the policy, while administering the license is TRAI’s responsibility. TRAI however has taken very little interest in enforcing license terms and conditions, which have been openly flouted by private operators. One such violation is not providing rural land lines as decreed under the license for basic services. The other is violating the long distance call rates by routing such calls to a local number and then pretending this to be a local call. Reliance has been caught on this and has got off with a rap on the knuckles. Similarly, Reliance also violated its WLL license to provide mobile services, for which it was again given a light penalty. However, administering the license is TRAI’s job, even though the minister and the Department of Telecom routinely claim it is their sphere.

INCREASING COST TO SUBSCRIBER

The current controversy is regarding new licenses and award of spectrum for the new entrants as well as the existing operators. Both TRAI and also the prime minister have expressed that there should be no restriction on new entrants. From what the PM has said, it also appears that he is in favour of an auction in allocating both the spectrum and new licences.

The problem here is that mobile voice services have seen an explosive growth only because the call rates have been brought down drastically. If we auction the spectrum and the licenses, we would increase the cost to the subscriber as it will be recovered from the subscriber through higher call charges. As the spectrum is a finite resource, an unlimited number of licences with fixed license fees would lead to a problem of how to allocate a limited bandwidth to any number of players. .

It is this issue that has the ministry tied up completely in knots. They want any number of operators, do not want to auction the license or the spectrum. So what could be the mechanism? The ministry has some criteria of 'first come first served' basis of giving licenses. Apart from being an extremely poor way of giving out limited resources, the ministry has further compounded it by letting Reliance Infocomm not only jump the queue by offering it a “cross-over” license but also free spectrum. If the rest of the licenses are given now on a 'first come first served' basis, this would lead to real esate developers (Parsnath Builders, DLF) and stock broking companies (India Bulls) also securing telecom licenses, presumably for the purpose of re-selling their licenses (or their companies). A number of the 575 companies in the license queue are known to be dummy corporations, and the purpose is to make windfall profits by securing the licenses and later selling them at a high price. In other words, this would mean the subsidy in 2G of keeping the license fee and spectrum costs low would actually go not to the subscribers but to those entities who resell these at high prices. Or to companies such as Reliance, who are allowed entry into the GSM sector with again a double subsidy – jumping the queue and free start-up spectrum.

NEED FOR STRONG REGULATION

The GSM operators, who have been screaming blue murder at all these shenanigans, are also hiding the fact that they are either hoarding spectrum or making very inefficient use of it. Their spectrum utilisation is way below comparable global standards. The dropped calls, and frequent saturation of the network is due to not investing in more cells and other network equipment. What they hope is that if the CDMA operators, so close to the heart of the telecom ministry, is given various concessions, if they make enough noise, the telecom ministry will buy them off also with some further concessions.

If we take the issue of keeping GSM and CDMA costs low for the subscriber for the 2G segment, and not allow this intended subsidy to generate windfall profits for the license holder, then the regulatory regime that needs to be put in place will require to be much stronger. Otherwise, any scheme that does not choose the auction route will lead to inevitably windfall profits for the promoters of these telecom companies at the expense of the public exchequer and the subscribers. The current model that the minister is favouring including the cross over license to Reliance Infocomm is the worst of both worlds. It keeps the entry cost and the spectrum cost low while allowing huge speculative gains to be made by the promoters who receive such licenses. Neither is the PMO’s argument of unrestricted entry and auction appropriate for 2G as this would inevitably jack up the call rates for the subscriber.

The regulator should be given a mandate to work out the economic value of the spectrum and how it can be indexed to rising revenues. Instead of a one time fee, the spectrum price can be calibrated to the profits and revenues that these companies would be making. The TRAI should also work out strict norms and market restrictions for transfer of shares or mergers/acquisition of these companies. The spectrum that the companies have received gratis, needs to be costed and this cost realised for the future. Otherwise, this is a “hidden” asset for existing license holders.  

A 2G spectrum cost should be set by TRAI and any allocation should be based on criteria that TRAI should fix taking into account the cost of the spectrum and the efficiency of its utilisation. In no case should additional spectrum be given to existing operators without fulfilling this criteria and paying the additional spectrum charges. It is unfortunate that existing GSM mobile players have been given additional spectrum free, when it is not only a limited resource but has obvious market value. A proper enquiry should be conducted on who was responsible for giving away spectrum free. Those who have got the spectrum free should either vacate this or be asked to pay its price. No hoarding of spectrum should be allowed.

The government’s decision to allow Reliance to jump the queue for GSM services and give it free spectrum is further loot of public resources. The government seems going out of the way to favour CDMA players now after having favoured the GSM players earlier. As far the public is concerned, both set of favours are at the expense of the public and this mode of giving away spectrum free is nothing but allowing the continued loot of the exchequer.

Arguments are being advanced that BSNL and MTNL should also be charged for license fees as spectrum. It may be noted that it was only the introduction of BSNL and MTNL into mobile services that brought cellular rates down. Therefore, a public carrier which prevents collusion and therefore controls the tariffs is a must in the current environment. When the ADC rates were brought down by TRAI, the consequent benefits were not passed on to the subscribers, and the long distance call rates were actually increased. In the past, a number of cases of collusion and artificial rate setting has been used the cellular operators. Therefore, the spectrum and licenses given to BSNL and MTNL should continue in order to promote public good and curb profiteering.

Prabir Purkayastha 

April 22, 2000

THE recent case in Delhi High Court has brought into the open what has been always public knowledge – that Telecom companies have been flouting the FDI limits set by the law. During Vodaphone’s taking over of Hutchison Telecom’s shares, it has emerged that the Hong Kong based Hutchison Telecom effectively held more than 89 per cent shares in Hutch Essar, in complete violation of the 74 per cent FDI limit. Not only has the limit on foreign holdings been violated, there has also been violations of the Foreign Exchange Management Act (FEMA) and Benami Transaction (Prohibition) Act. While Hutch is not the only company in the telecom sector in this boat, it is certainly the biggest and the most obvious violator. 

While we will go into the shenanigans of Hutch, what concerns us more is the role that finance ministry has played in all this. When the government had mooted the idea that FDI cap should be raised from 49 per cent to 74 per cent, one of the arguments it had advanced is since these caps are in any case being flouted, let us give legal recognition to what is being done through backdoor means. The Left parties, in their note had stated that if backdoor means is being availed of by the telecom companies and this is known to the finance ministry, then the right course is bringing these companies to book and not rewarding them by legalising their illegal actions. It is precisely because the government preferred to wink at such violations that the same telecom companies who had violated their earlier cap of 49 per cent felt no qualms of violating the 74 per cent cap also. If the finance ministry gives the signal that if you violate the law, instead of punishing you we will change the law, it should not surprise anybody that this will only embolden lawbreakers further. 

METHODS OF LAW BREAKING 

First, the facts of the Hutch case. Hutchison Telecommunications International Limited, a Hong Kong based company (officially registered in Cayman Islands), acquired 52 per cent stakes in Hutchison Essar Limited, which in turn holds as 100 per cent subsidiaries, a number of other telecom operating companies in India. Hutch Essar already had 22 per cent foreign holdings through Mauritius based companies. So, according to Hutchison Telecom, the foreign holdings in Hutch Essar did not go beyond 74 per cent, the official FDI limit. What Hutch did not disclose is that it had already secured another approximately 15 per cent through separate transactions, bringing the foreign stake in Hutch to 89 per cent. 

The methods that Hutch has employed are well known and are used to hide the real stakes of a company. In this case, it reached an agreement with Ashim Ghosh, the current Managing Director of Hutch Essar and Analjit Singh, one of the founders of the company (Max India, which had originally 51 per cent stakes in the Mumbai operations), that they would hold shares in Hutch Essar on behalf of Hutch Telecom’s. The money for the shares was also bankrolled by Hutch, through a number of indirect transactions. The route chosen was that Hutch Telecom would give the security for Ashim Ghosh and Analjit Sing, while the financial institutions would lend them the capital required for acquiring these shares (Ashim Ghosh - 4.68 per cent and Analjit Sing - 7.58 per cent respectively). Similarly, a portion (2.77 per cent) of Hinduja’s stake of 5.11 per cent was shown as IDFC (Infrastructure Development & Finance Company Ltd), though originally it was bought by Hutch Telecom. All this put together, meant that an additional 15 per cent shares shown as domestic equity was in fact Hutch Telecom’s equity. 

Indian agencies were happy to be blissfully unaware of all these transactions. Unfortunately for them, Vodaphone’s acquisition of Hutch Telecom’s stakes brought all this out in the open. Both companies – Vodaphone and Hutch Telecom – acknowledged that the total equity changing hands was 66.99 per cent and not 52 per cent as Hutch Telecom had claimed before Indian agencies. The fiction of 74 per cent FDI cap being maintained was no longer tenable. However, neither the finance ministry nor the Department of Telecom, nor indeed the telecom regulator – TRAI – moved on this issue. It was only when a PIL was filed in Delhi High Court by Telecom Watchdog and the court directed the FIPB to examine this case, did the matters come to a head. 

ISSUES INVOLVED 

There are two issues that are involved here. One is that the government, while accepting the need for FDI caps in select areas, has no interest in implementing them. If they cannot get their way in lifting such caps, the government is willing to point out the various backdoor methods the companies can use. This was the meaning that the telecom companies read into the finance ministry’s response to Left party’s opposition to raising of FDI caps in 2005. Interestingly enough, the government had argued when lifting the caps that this will lead to “the availability of foreign investment in an open and transparent manner.” It is now clear that if FDI caps for 49 per cent are violated, there is no reason they would not be violated again by just increasing this to 74 per cent. The only way laws can be enforced is by proceeding against offenders and not rewarding them by changing the “offending” laws. The reason that the government does not follow this route is because it perceives such laws as forced on them by the Left and is therefore willing to connive with the lawbreakers. It also brings under question the larger assumption that liberalisation of capital flows and norms will bring in a greater transparency and better governance. All that it ensures is that the scale of the violations becomes even larger with liberalisation. 

The second issue is India missing the Telecom Bus while seeing one of the highest growths in the telecom sector in the world. If we take the case of China and India, the way we have dealt with this vital sector will become clear. Both have seen dizzying growth in telecom, particularly in the mobile segments. In both countries, the mobile sector has overtaken the fixed line segment and has been the main driver of increased teledensity. Today, China is the largest telecom network in the world, with India in the third place. However, the resemblance ends here. 

The key difference between China and India has been how China has protected both the service sector as well as the manufacturing sector, building up domestic capability. The Chinese mobile companies today have 461 million subscribers with an annual increase of 60 million additional subscribers per year. The Chinese mobile companies are State-owned enterprises with more than 70 per cent of the shares held ultimately by the finance ministry. It has sold some of the equity in the stock exchange and has been able to raise huge amounts by sale of small amounts of equity, while retaining control. China Mobile and China Unicom, the two major mobile operators are the largest and third largest mobile operators respectively in the world today. Vodafone holds only 3.27 per cent stock in China Mobile, valued at $3.25 billion. It is the cash transfusions of this kind that has helped China Mobile and China Unicom to leverage their expansion.

Contrast this with India. If BSNL is taken out of reckoning, Indian telecom sector is coming increasingly under foreign dominance. The problem here is that Indian companies tend to sell out early – they take their money and run before their equity is really worth something. Hutch today has sold its 67 per cent share of Hutch Essar for $11.1 billion to Vodafone, a gain for Hong Kong billionaire Li Ka-Shing of reportedly $9.6 billion! The Indian companies who sold out early, sold their shares in Hutch for less than a billion. If the cap had remained in place as the Left parties had asked, if nothing else the capital gains tax on a part of this transaction would have come to finance ministry’s coffers. Though the IT Department is chasing Hutch Telecom for $1.9 billion in capital gains tax, knowing the finance ministry’s soft corner for Mauritius (Hutch Telecom’s equity investment was routed through Mauritius), this may not last the distance. 

TELECOM MANUFACTURING 

The other part of the Telecom story that is so different for India and China is the telecom manufacturing. Using the clout that the Chinese government has on purchasing equipment – all the operators are public sector entities – Chinese government could force technology transfers from the MNCs to local domestic companies. They also forced the major players who manufacture handsets and switches to set up local subsidiaries and move manufacturing to China. Today, China dominates the telecom manufacturing sector –– it not only is flooding the global market with its cheap handsets, but is also competing in more sophisticated network equipment. Companies such as Bird (collaboration with Siemens), TCL (collaboration with Alcatel) have emerged as major players in the telecom market. ZTE and Huawei are Chinese companies that are not only raking up major international sales, they are offering prices that very few international telecom majors can beat. In India, it was the Motorola-ZTE bid, which had to be disqualified under dubious circumstances for others to get an opportunity. 

Not only has Chinese domestic industry kept the investments in telecom expansion within the domestic economy, but it has also resulted in dramatic fall in prices, driving the telecom expansion even further. 
Contrast this with India. The benefits of lower prices were not on passed on to the consumer for a long time. The government’s belief that 100 per cent FDI in telecom manufacturing would automatically bring in telecom manufacturers has proved to be a chimera. Even the duty structure is such that it penalises those who manufacture as against those that import or assemble the final equipment. All in all, a dismal picture compared to the rapid strides that China has made in telecom manufacturing. 

An obvious strategy for any country that wants to promote its industry is to use its market, particularly if it also happens to be one of the fastest growing and largest markets in the world. The Chinese could do this as they controlled the domestic market for telecom through the control of the telecom operators. This could then be leveraged to force telecom manufacturers to move shop to China and also part with technology. This combined with a philosophy that the next steps would be taken by Chinese themselves – upgrading their technology by tying in R&D institutions to these technology transfers – has today resulted in China emerging as not only the biggest manufacturing base for telecom by virtue of its domestic market but also a major global player in all markets! 

The question now is what should be done in the telecom sector? The smaller issue should be quite clear. The law on 74 per cent equity caps needs to be implemented and all the parties that have been flagrantly violating the law need to be brought to book. The entire ill-gotten gains of the benami transactions have to be disgorged by the parties concerned. However, this is only the tip of the iceberg. The government needs to take the issue of implementing its own laws more seriously, instead of the nudge and wink policy it has been pursuing with the offenders. 

The question of building up a viable telecom manufacturing sector still remains. It might be noted that hidden in the license terms and conditions, is not only the forgotten clause of rural telephony but also promoting domestic manufacture. It is time that the Department of Telecom puts in place a plan for the domestic industry. Otherwise, it is only the Nokias and ZTEs that will benefit from the Indian telecom expansion. 

Prabir Purkayastha

April 16, 2006
 
THE OneIndia plan, which the minister for Communications, Dayanidhi Maran has thrust down the throat of reluctant BSNL and TRAI, has serious repercussions for the telecom sector. If the problems of the sector is growing rural urban imbalance and slowing down of landline penetration, this scheme can only make matters worse. It also has gone back to the old days where the minister and the government decided everything including tariffs. In this case, after some initial resistance, TRAI has fallen in line with the minister and produced a new ADC regime, which essentially complements the OneIndia tariff plan. The drop in incomes of the two telecom PSUs – BSNL and MTNL --- due to lower long distance revenue and reduction of ADC transfer is likely to be of the order of Rs 5-7 thousand crore. This could completely erode their profit base. As it is clearly BSNL that is providing any rural telephony today, such a scenario would hurt the rural consumers the most, even though the justification for the OneIndia scheme is its supposed benefit to such subscribers.

BASIC THRUST OF THE ONEINDIA SCHEME 

The basic thrust of the OneIndia scheme is to bring down the costs of long distance calls within India to Re 1 per minute from the earlier one of Rs 2.40. For those availing of the OneIndia tariff plan, the rental has been raised to Rs 299 per month and all free calls slashed. While the OneIndia plan lowers the tariff for the well-off consumers, the tariff of the PCOs, the primary instrument used by the less well-off consumer for long distance calls, have been left untouched: it is still Rs 2.70 per minute or 170 per cent more than the OneIndia tariff.

As those that do not wish to avail of the OneIndia facility would stay with the current rentals and free calls, the drop in long distance revenue would have to be made up by greater call volumes that might be generated by the lower call rate. Such a high surge in volume to compensate for this large drop is unlikely. Therefore, slashing long distance tariffs by a whopping 58 per cent --- a possible loss of Rs 3,000 to 4,000 crore --- can only affect BSNL adversely.

The second attack on BSNL’s revenue is lowering of the Access Deficit Charge that BSNL gets from other telecom operators. In order to reduce the long distance calls to Re 1 per minute, the Access Deficit Charge (ADC), which was a substantial portion of every long distance call, had to be brought down substantially. Earlier, 30 paise per call was an ADC levy, which resulted in an annual transfer of about Rs 5,000 crore to BSNL for subsidising its rural operations. TRAI finally has changed the ADC regime from a call based one to revenue sharing and reduced this transfer by about Rs 1,800 crore. It has provided for a revenue share of only 1.5 per cent of the total revenue of all operators to go to the ADC account and also reduced international ADC rates by more than 50 per cent: Rs 1.60 for incoming and Re 0.80 for outgoing calls.

The net result of all this is that BSNL and MTNL are likely to lose Rs 3,000-4,000 crore of their long distance revenue even after higher landline rentals are taken into account. With the additional loss of Rs 1,800 crore from the lower ADC levy, at one stroke, Maran has converted what were still thriving PSUs, even under a strong competitive regime, to possible basket cases. Effectively, BSNL, which is the only company providing rural telephony, is being asked to take a major hit in its revenue, while companies that are wilfully flouting the terms of their license of providing 10 per cent rural telephones get away scot-free.

It is not that Maran’s idea of long distance tariff being based on a flat rate rather than distance is without any merit. There is little doubt that the model of telephony is changing from the earlier distance based circuit-switching network (Point Switching Telecom Network or PSTN) to the current data based packet switching networks. The Internet model and the earlier voice based telephone models are quite distinct. In the earlier predominantly voice networks, the distance was the basis for charges: the longer the distance, the more you had to pay. However, the data networks do not care what is the distance travelled: the Internet does not bother about either the route or the distance that the data packets travel. As Internet and broadband increasingly dominate the telecom scenario, with even voice calls being transmitted over the Internet, the Internet model with its death of distance will emerge as the dominant revenue model.

THE BASIC ISSUE

The issue here is not that revenue models have to change from a distance based one to a data based model but the timing and extent of this change. In all telecom networks, the long distance revenue has always been used to keep the cost of telecom access low. The simple argument for doing this is that unless the telecom network expands, the call rates and consequently, the revenue cannot grow. Only the rich calling each other does not generate enough traffic; they also need to call a whole range of other people who may not be willing to pay for high cost connections. So if we want increased telecom penetration and high teledensity, we need to keep the costs of connecting to the network low. Once we have achieved high teledensity, we can then afford to raise the costs of telecom access. But if it is done before this, it is likely to deter a number of people from going in for installing telephones. So instituting a telecom regime where the long distance calls do not provide any surplus for the local network can only force the local call rates and access charges to rise and would work against the immediate goal of increased teledensity.

It is not that the long distance call rates in India are high. They have come down dramatically in the last few years and are well below most countries today. It costs less for a mobile subscriber in Germany to call India than to make a local call there. Therefore, the argument of needing to lower long distance rates here and now makes very little sense. It is true that that as we go forward with Voice Over Internet Protocol (VOIP) etc., a model free of distance would need to be implemented. The question here is when should do this be done and after making the tariff distance free, what should it actually be? Maran’s decision of imposing a 1-rupee tariff without addressing how to pay for the low cost access required to increase teledensity, could cost the country dear. And if it also means bankrupting BSNL, the only ones providing rural telephony, this would be a double disaster.

RURAL URBAN GAP

If we look at the telecom scenario currently, we will see that the telecom boom has not only passed the rural subscribers by, it has widened sharply the rural urban gap. As TRAI itself has noted “the large differential between rural (1.94 per cent) and urban teledensity (31.1 per cent) cannot be sustainable. The authority recognizes that without focus on rural areas, sizeable growth in telecom sector would not be possible.” (TRAI Press Release, October 3, 2005). The second disquieting trend in telecom is the virtual stagnation of landlines while the mobile sector is still maintaining its rapid growth. Of the 32 million new connections between April 2005 and January 2006, 31 million were mobile phones. Obviously, the structure of voice telephony market is shifting rapidly.

TRAI has also noted in its Consultation Paper on Interconnection Usage Charge Review, March 17, 2005 that the installation of Village Public Telephones has come down from around 60,000 in 2001-02 to about 15,000 in 2004 and rural lines added in the same period have also dropped by about 40 per cent. In the same period, the mobile “revolution” has passed over the rural areas and the smaller towns. As the table below shows, the rural areas have virtually no coverage and only cellular networks cover about 1700 towns out of 5,200 towns in the country.

Table 1

Present Coverage of Mobile Networks

(Population Coverage 20 per cent)

     By area    Population Coverage
 Towns     ~1700 out of 5200   ~200 Million
 
Rural areas    Negligible     Negligible
 
Source: TRAI Consultation Paper No. 4/2005 Interconnection Usage Charge Review, March 17, 2005

RURAL TELECOM GROWTH PATTERNS 

Let us look at the rural telecom growth patterns. It is obvious that rural telephones are more costly to install and generate lower revenue. Unless there are either penal provisions or other incentives, telecom service providers would not readily install rural telephones. TRAI Consultation Paper No. 4/2005 Interconnection Usage Charge Review, March 17, 2005 shows that not only have the private Basic Service Operators not provided rural telephones, bigger the player, the smaller the rural telephone lines they have provided. Major players like Reliance and Tatas have not even provided fixed lines. They have preferred to use the Wireless route in order to keep their capital costs low and attack the high–end market. As against less than 1 per cent rural telephones being provided by private Basic Operators, fully 35 per cent of state-owned BSNL lines are in rural areas. Obviously, without BSNL, we would not have any rural phones in the country.

The private players have willingly paid a penalty, pegged more as a rap on the knuckles than a serious one, than fulfil their license terms and conditions of 10 per cent rural lines. Both TRAI and DoT have preferred to wink at this continued violation by private players while bemoaning about poor rural teledensity.

While the issue of flat rate and ADC are important as they pertain to the current evolution of the network, there are larger structural changes taking place that also needs to be addressed. It is now obvious that voice traffic will increasingly shift to the mobile networks. So how do the PSUs with their huge legacy investments in copper cables compete in the market? It is time the PSUs realise that what they view as their sunk costs – the copper cable network – is precisely their strength. They need to think that in the future, data networks will largely be the land based while the voice network will be wireless. The focus for their landline operations has to therefore shift to Internet and Internet based services. Here again, MTNL and BSNL are concentrating on only numbers and leaving the high value segment to be gathered up by the private players. Unless they can generate a business model that takes into account the emerging structure of the telecom market, just a defensive battle is not going to be enough. They have to learn that business as usual does not work when the usual business is changing.

THE OneIndia plan, which the minister for Communications, Dayanidhi Maran has thrust down the throat of reluctant BSNL and TRAI, has serious repercussions for the telecom sector. If the problems of the sector is growing rural urban imbalance and slowing down of landline penetration, this scheme can only make matters worse. It also has gone back to the old days where the minister and the government decided everything including tariffs. In this case, after some initial resistance, TRAI has fallen in line with the minister and produced a new ADC regime, which essentially complements the OneIndia tariff plan. The drop in incomes of the two telecom PSUs – BSNL and MTNL --- due to lower long distance revenue and reduction of ADC transfer is likely to be of the order of Rs 5-7 thousand crore. This could completely erode their profit base. As it is clearly BSNL that is providing any rural telephony today, such a scenario would hurt the rural consumers the most, even though the justification for the OneIndia scheme is its supposed benefit to such subscribers.

BASIC THRUST OF THE ONEINDIA SCHEME 

The basic thrust of the OneIndia scheme is to bring down the costs of long distance calls within India to Re 1 per minute from the earlier one of Rs 2.40. For those availing of the OneIndia tariff plan, the rental has been raised to Rs 299 per month and all free calls slashed. While the OneIndia plan lowers the tariff for the well-off consumers, the tariff of the PCOs, the primary instrument used by the less well-off consumer for long distance calls, have been left untouched: it is still Rs 2.70 per minute or 170 per cent more than the OneIndia tariff.

As those that do not wish to avail of the OneIndia facility would stay with the current rentals and free calls, the drop in long distance revenue would have to be made up by greater call volumes that might be generated by the lower call rate. Such a high surge in volume to compensate for this large drop is unlikely. Therefore, slashing long distance tariffs by a whopping 58 per cent --- a possible loss of Rs 3,000 to 4,000 crore --- can only affect BSNL adversely.

The second attack on BSNL’s revenue is lowering of the Access Deficit Charge that BSNL gets from other telecom operators. In order to reduce the long distance calls to Re 1 per minute, the Access Deficit Charge (ADC), which was a substantial portion of every long distance call, had to be brought down substantially. Earlier, 30 paise per call was an ADC levy, which resulted in an annual transfer of about Rs 5,000 crore to BSNL for subsidising its rural operations. TRAI finally has changed the ADC regime from a call based one to revenue sharing and reduced this transfer by about Rs 1,800 crore. It has provided for a revenue share of only 1.5 per cent of the total revenue of all operators to go to the ADC account and also reduced international ADC rates by more than 50 per cent: Rs 1.60 for incoming and Re 0.80 for outgoing calls.

The net result of all this is that BSNL and MTNL are likely to lose Rs 3,000-4,000 crore of their long distance revenue even after higher landline rentals are taken into account. With the additional loss of Rs 1,800 crore from the lower ADC levy, at one stroke, Maran has converted what were still thriving PSUs, even under a strong competitive regime, to possible basket cases. Effectively, BSNL, which is the only company providing rural telephony, is being asked to take a major hit in its revenue, while companies that are wilfully flouting the terms of their license of providing 10 per cent rural telephones get away scot-free.

It is not that Maran’s idea of long distance tariff being based on a flat rate rather than distance is without any merit. There is little doubt that the model of telephony is changing from the earlier distance based circuit-switching network (Point Switching Telecom Network or PSTN) to the current data based packet switching networks. The Internet model and the earlier voice based telephone models are quite distinct. In the earlier predominantly voice networks, the distance was the basis for charges: the longer the distance, the more you had to pay. However, the data networks do not care what is the distance travelled: the Internet does not bother about either the route or the distance that the data packets travel. As Internet and broadband increasingly dominate the telecom scenario, with even voice calls being transmitted over the Internet, the Internet model with its death of distance will emerge as the dominant revenue model.

THE BASIC ISSUE

The issue here is not that revenue models have to change from a distance based one to a data based model but the timing and extent of this change. In all telecom networks, the long distance revenue has always been used to keep the cost of telecom access low. The simple argument for doing this is that unless the telecom network expands, the call rates and consequently, the revenue cannot grow. Only the rich calling each other does not generate enough traffic; they also need to call a whole range of other people who may not be willing to pay for high cost connections. So if we want increased telecom penetration and high teledensity, we need to keep the costs of connecting to the network low. Once we have achieved high teledensity, we can then afford to raise the costs of telecom access. But if it is done before this, it is likely to deter a number of people from going in for installing telephones. So instituting a telecom regime where the long distance calls do not provide any surplus for the local network can only force the local call rates and access charges to rise and would work against the immediate goal of increased teledensity.

It is not that the long distance call rates in India are high. They have come down dramatically in the last few years and are well below most countries today. It costs less for a mobile subscriber in Germany to call India than to make a local call there. Therefore, the argument of needing to lower long distance rates here and now makes very little sense. It is true that that as we go forward with Voice Over Internet Protocol (VOIP) etc., a model free of distance would need to be implemented. The question here is when should do this be done and after making the tariff distance free, what should it actually be? Maran’s decision of imposing a 1-rupee tariff without addressing how to pay for the low cost access required to increase teledensity, could cost the country dear. And if it also means bankrupting BSNL, the only ones providing rural telephony, this would be a double disaster.

RURAL URBAN GAP

If we look at the telecom scenario currently, we will see that the telecom boom has not only passed the rural subscribers by, it has widened sharply the rural urban gap. As TRAI itself has noted “the large differential between rural (1.94 per cent) and urban teledensity (31.1 per cent) cannot be sustainable. The authority recognizes that without focus on rural areas, sizeable growth in telecom sector would not be possible.” (TRAI Press Release, October 3, 2005). The second disquieting trend in telecom is the virtual stagnation of landlines while the mobile sector is still maintaining its rapid growth. Of the 32 million new connections between April 2005 and January 2006, 31 million were mobile phones. Obviously, the structure of voice telephony market is shifting rapidly.

TRAI has also noted in its Consultation Paper on Interconnection Usage Charge Review, March 17, 2005 that the installation of Village Public Telephones has come down from around 60,000 in 2001-02 to about 15,000 in 2004 and rural lines added in the same period have also dropped by about 40 per cent. In the same period, the mobile “revolution” has passed over the rural areas and the smaller towns. As the table below shows, the rural areas have virtually no coverage and only cellular networks cover about 1700 towns out of 5,200 towns in the country

Table 1

Present Coverage of Mobile Networks

(Population Coverage 20 per cent)
 
 By area
 Population Coverage
 
Towns
 ~1700 out of 5200
 ~200 Million
 
Rural areas
 Negligible 
 Negligible
 
Source: TRAI Consultation Paper No. 4/2005 Interconnection Usage Charge Review, March 17, 2005

RURAL TELECOM GROWTH PATTERNS 

Let us look at the rural telecom growth patterns. It is obvious that rural telephones are more costly to install and generate lower revenue. Unless there are either penal provisions or other incentives, telecom service providers would not readily install rural telephones. TRAI Consultation Paper No. 4/2005 Interconnection Usage Charge Review, March 17, 2005 shows that not only have the private Basic Service Operators not provided rural telephones, bigger the player, the smaller the rural telephone lines they have provided. Major players like Reliance and Tatas have not even provided fixed lines. They have preferred to use the Wireless route in order to keep their capital costs low and attack the high–end market. As against less than 1 per cent rural telephones being provided by private Basic Operators, fully 35 per cent of state-owned BSNL lines are in rural areas. Obviously, without BSNL, we would not have any rural phones in the country.

The private players have willingly paid a penalty, pegged more as a rap on the knuckles than a serious one, than fulfil their license terms and conditions of 10 per cent rural lines. Both TRAI and DoT have preferred to wink at this continued violation by private players while bemoaning about poor rural teledensity.

While the issue of flat rate and ADC are important as they pertain to the current evolution of the network, there are larger structural changes taking place that also needs to be addressed. It is now obvious that voice traffic will increasingly shift to the mobile networks. So how do the PSUs with their huge legacy investments in copper cables compete in the market? It is time the PSUs realise that what they view as their sunk costs – the copper cable network – is precisely their strength. They need to think that in the future, data networks will largely be the land based while the voice network will be wireless. The focus for their landline operations has to therefore shift to Internet and Internet based services. Here again, MTNL and BSNL are concentrating on only numbers and leaving the high value segment to be gathered up by the private players. Unless they can generate a business model that takes into account the emerging structure of the telecom market, just a defensive battle is not going to be enough. They have to learn that business as usual does not work when the usual business is changing.