The pitfalls of telecom deregulation

11 DECEMBER 2010

It is really amazing that different countries go through the same mistakes those before them have made, without learning from their mistakes. In the area of telecom deregulation, European Governments, too, initially sold the spectrum at very high rates (collecting $ 110b.) on the argument that spectrum was a scarce resource for which they needed to extract maximum value. As a result of the high price, mobile telephony failed to take off, until the Governments decided to switch over to revenue share.

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A few years later, when India first offered licences, it followed the same route, and learnt the same mistakes. Pricing spectrum as a scarce resource, it collected Rs 10,000 crores from sale of it, restricting entry to each circle to only two operators. Call charges were exorbitant, at Rs 16/minute, payable by both parties, and the telecom revolution appeared dead on arrival. Until the policy was changed to revenue share. Why did we not just study European deregulation history and avoid making the same mistake?

Spectrum can either be treated as a scarce resource, or as 'commons'. This is not a new debate, it has been going on since the 80s. The issues are beautifully brought out in the August 12, 2004 issue of the Economist.

One of the points the author makes in this article is that new technologies, available but not fully proven, are being discouraged by incumbents who have a vested interest in the existing technologies because of the cost paid for spectrum, the main resource. "Incumbent licence-holders—and above all the telecoms firms that have paid billions in spectrum auctions—naturally use the immaturity of these technologies as their prime argument against a headlong rush away from the property model and towards a commons approach."

This is at the root of the accusation last week, by Rajeev Chandrashekhar, who started BPL, and is now a sitting MP, against Mr Ratan Tata, which principally focuses on the permission granted to CDMA based fixed wireless technology, to enter the mobile telephony space. Mr Tata has befittingly responded.

The incumbents were resistant to the introduction of CDMA based fixed wireless technology and angered when the Government policy later permitted dual use technology by payment of the license fee.

A lot of these controversies would have been avoided had Government policy permitted trading in spectrum. Just like power is traded, spectrum can be, too. Then it would matter less who owned it. There is no technology problem to spectrum trading; only a legislative one. This also brings us to the issue over whether lobbyists are essential. They are, for bringing debate on policy issues. Policy, or law, cannot be static and has to evolve based on the situation and the needs of the people. What would be illegal is the use of money to promote a policy that was not beneficial to the interest of the nation or of its people. So the brouhaha over the Niira Radia tapes seem like a smokescreen to conceal whether any money had been paid to Government officials to have policies (such as out of turn allotment of spectrum).

The resultant leaking into public domain of tapped phone conversations justified on the basis of an investigation, is a bad portend. It only gives the ruling party additional ammunition to silence critics.

One is, however, encouraged, by the attempts to cleanse the system of corruption. In the judiciary, a judge of the Kolkatta High Court may be impeached. The Supreme Court has pointed at something rotten in the Allahabad High Court. In the judiciary, a former Chief Secretary of UP has been jailed for 4 years in connection with a land scam. In the political arena, former telecom minister, A Raja has been raided by the CBI. Years ago, Sukh Ram, another telecom minister, had been raided, which is ironical, for telecom is one of the success stories of deregulation!

Another thing the Government can do, to avoid future spectrum controversies, is to sell the right to use, but not to own, spectrum. If there are no ownership rights, there are no squatter rights. One recalls how entrepreneurs like Sivasankaran and Max cashed in immediately after obtaining the licence because the buyers saw value in the spectrum on which they squatted. This would be similar to oil blocks; successful bidders only have rights to use the blocks to exploit oil and gas whilst ownership vests with Government. Any sale of the rights to the block, or of controlling interest in the company owning these rights (e.g. Cairn) is subject to Government approval. Why can't we do this for spectrum?

If spectrum is allowed to be traded, and if the rights to it are conferred only for use and not for ownership, with a requirement of Government permission when the right is alienated, a lot of the controversies would have been avoided. Why not think about doing it now?

Economic fundamentals are strong. The index of industrial production grew 10.8% in October, after falling in the previous two months. Direct tax collections upto November are up 17.9%. Yet there are concerns, going forward. Crude oil has hit $ 90/b. and one can expect prices of petrol/diesel to be raised by Rs 2/litre. Banks are raising deposit rates, as liquidity is tight, and would get tighter when advance tax payments are to be made in the next two months.

In corporate news of interest, Cairn will, as a price for getting clearance for sale to Vedanta of a controlling stake, agree to giving ONGC a 10% ROI in its fields. ONGC, one would recall, has had to bear the entire royalty payment even though it owns only a 30% interest in the fields. The rising crude oil prices would also help its bottom line, in good time for its follow on offer.

The sensex gave a stomach churning dip on Thursday, when it lost 454 points. It ended the week at 19508, down 458. The Nifty ended the week at 5857, down 135.

The correction seems to be over, or nearly over and one could expect a bounce from here.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "The pitfalls of telecom deregulation"


Dec 16, 2010

As suggested in the article, it would be prudent if the ownership rights of the Spectrum are vested with the Government only as in the case of oil blocks. This would mitigate the problem to some extent.


Tikam Patni

Dec 12, 2010

Indian systems, laws, rules, regulations are all designed to necessisate use of bribes and lobbysts. All this hulla gulla is just a smoke screen to divert attention and fool the India public.

Three weeks of no parliament is a proof "who needs them" . Country is better off without them.


Sachin Wagal

Dec 11, 2010

Trying to seek an answer as to why ONGC bearing 100% of royalty burden as against its 30% stake.
Is something a miss over here too.



Dec 11, 2010

Every action has an equal and opposite reaction. Trust Mother Nature and do not defy it. Honesty has to start first start in our Home. If we are honest, then our family will become honest; if family becomes honest, the people of our country will become honest; and if we all people are honest, then our KING will also be one from us who will also be honest. GOD BLESS US WITH TRUE VALUES OF LIFE. Eventually we want our country to be HAPPY.

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