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Telecom: A perplexing regulatory environment - Views on News from Equitymaster
 
 
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  • Feb 9, 2002

    Telecom: A perplexing regulatory environment

    While everyone seems to be focusing on disinvestment and the robust growth in subscriber base, both in cellular as well as basic telephony, there is one major factor, which to a certain extent is hampering growth prospects of the Indian telecommunication industry i.e. the regulatory environment. Though due credit should be given to the regulatory authorities for removing several bottlenecks, there is lot to be done for the industry to evolve as the fastest growing telecom sector in the world, ahead of China.

    First, consider in brief, the history of telecom deregulation. The government initiated the step to open up the telecommunication sector way back in 1991 when it invited bids from private sector players for providing cellular services. As always, when change is imposed, there ought to be resistance. After debating as to whom should the license be issued for more than two years, cellular licenses were granted to two private sector players in 1993-94. Without clear-cut strategy and vision, it is close to impossible to accelerate growth. So in 1994, the government formulated the first National Telecom Policy (NTP-94) with the basic objective of increasing penetration levels across various segments like basic telephony, cellular, Internet and upgrade the existing infrastructure so as to improve service levels. It was also deemed to be the roadmap for deregulation.

    In line with the first NTP’s objective, the government opened up the basic telecommunication segment in 1994 and invited bids from private players for the four metros. Hitherto, there were only two basic operators in the country viz. Mahanagar Telephone Nigam Limited (MTNL), which was providing basic service in Mumbai and Delhi and Department of Telecommunications (now BSNL) in all other circles. In the initial phase, the government invited bids for one new license in each of the 21 circles. But private players were hesitant to commit funds sighting higher license fee and abnormally high cost of funds as the key reasons. Against the targeted fixed line of 8.7 m, we managed to achieve just 7.5 m lines by 1997.

    Eventually, private cellular players started providing services initially in the metros on a commercial basis in 1995 and gradually increased coverage to other circles as well. However, the tariffs were at very high levels (Rs 16 per minute), as a result of which penetration levels hardly improved. So realising the need to bring down tariffs progressively and increase the scope of competition, the Telecom Regulatory Authority of India (TRAI) was set up 1997 with the principle objective of regulating the telecommunication sector.

    But the most forward-looking policy, which gave a fillip to the sector, was NTP-1999. Though NTP-99 had predetermined targets similar to the one before, among the major decisions was to increase private sector participation. Against the current penetration levels of around 2.6% in the fixed line segment, NTP-99 has targeted penetration levels of 7% in FY05 and 15% by FY10 i.e. doubling the base every five years. The regulatory authorities did not only make promises but lived upto expectations. However, there were overlaps in licenses, which we would consider later.

    To make even the public sector undertakings like BSNL accountable, corporatisation was proposed. Instead of a fixed license fee, which was a big burden for new entrants (as they had to shell out huge amounts even when networks were not in place), a revenue sharing regime arrangement was implemented. Following this, the TRAI also slashed tariffs for both domestic and international long distance telephony (DLD and ILD). Instead of one new operator per circle in basic and cellular segment, multiple operators were allowed entry. ILD sector is also slated to be open for private players with effect from April 2002 with VSNL’s monopoly being brought forward by two years.

    From then on, there was no looking back for both the private sector participants and the telecom sector, as a whole. The NLD sector, which hitherto was dominated by BSNL, was also opened up and a number of players evinced interest in this segment in light of its huge growth potential (the market is expected to grow at a CAGR of 15% per annum). Competition not only resulted in higher growth in subscriber base but also brought down user charges by atleast 60%-70% thus increasing the attractiveness of the service. Even public sector behemoths were forced to upgrade infrastructure and quality of service. Also, even PSUs showed that they have some zeal by entering into segments where private sector players were dominating.

    The circle mix…
    Circle Oct'01 Nov'01 Dec'01
    Metros 39.1% 39.3% 39.4%
    Circle 'A' 34.5% 34.3% 34.2%
    Circle 'B' 22.9% 22.9% 22.9%
    Circle 'C' 3.5% 3.6% 3.5%
    Total 100.0% 100.0% 100.0%

    And the results are apparent. Against the cellular base of 3.2 m in January 2001, the current base stands at 5.5 m, a 67% growth. The most encouraging aspect is that the growth in subscriber is higher in category ‘A’, ‘B and ‘C’ circles. Though metros still account for a large portion of the country’s cellular subscriber base, growth in the Eastern and Southern regions are impressive. Similarly, the number of fixed lines in the country has already crossed the 3.3 m mark as compared to around 2.5 m in FY01. But it needs to be mentioned that China adds close to a million subscribers per month. So we have a long way to go.

    Having said all this, there are a lot of issues on the regulatory front that needs to be addressed if we were to achieve the targets set by the NTP-99. We still have separate licenses for basic, cellular, ISP, DLD and VSAT services, which has resulted in huge conflict of interest between operators who have presence in cellular and basic telephony and for players who are venturing into broadband applications. For example, while cellular operators are against Wireless in Local Loop (WiLL) services, basic operators are hesitant for a higher revenue share for cellular players in case of DLD calls. If rural tele-density has to be increased from 0.5% currently to 4% by FY10, basic operators should be allowed to offer limited mobility services. WiLL has one key advantage i.e. the operators need not set up infrastructure in remote corners of the country, as this is a costly proposition. Instead, by setting up cell sites in these places, connectivity can be established, though in a limited way. It is generally believed that almost 50% of the world population has never used a telephone and one will not be surprised if a sizable portion of this population is based in India.

    Besides, BSNL is still the monopoly provider of inter-circle DLD services in the country. At present, private licensed service providers are allowed to carry DLD traffic within their service areas only. For all traffic terminating outside their service areas, they have to interconnect with DoT. Why have this regulation in the first place? TRAI recently came out with a suggestion that calls could be routed through BSNL and Bharti’s network on alternate days. BSNL has confronted this by saying, who is TRAI to decide how to route calls? Though there is a valid point in these arguments, complications are galore.

    It must be noted that the telecommunication sector has been one of the largest contributor of foreign direct investment (FDI) in the country. According to estimates, India has attracted close to Rs 47 billion as FDI in the telecom sector till financial year 2001. Of this, close to 50 percent of the actual FDI was accounted for by the cellular industry.

    So, the role of organisations like TRAI should shift towards a more of a facilitator rather than a regulator. It is well known that the present ministry and the regulatory authorities have done a wonderful job and one hopes this to continue in the future also.

     

     

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