The Indian Techonomist: bulletin

Copyright (C) 1996, Rishab Aiyer Ghosh (
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Will Indian telecom privatisation be scrapped?

August 31, 1996: Well before the events of the past fortnight, when the former Communications Minister responsible for India's privatisation programme for telecom services was charged with corruption on a grand scale, doubts had arisen over the privatisation process itself.

It is, today, exactly one year after the opening of bids for basic telephony services - a term which includes wireline, fixed wireless, and potentially multimedia services - across the country. In the months since, the unusual clarity and transparency of a tender worth some $30 billion over the next 15 years in licence fees has been hidden behind a curtain of fog that started its descent immediately after the opening. Privatisation of cellular and pager services have proceeded to operate fairly smoothly, not a single licence for basic services has been issued. Pessimism is growing in the telecom industry - which has recovered, perhaps too hastily, from its elatively wild optimism at the time of the first tender - and people are beginning to mutter that the Department of Telecommunications (DoT) will scrap the basic service licences altogether.

That would be unwise, as the alternatives are not appealing - for the DoT, at any rate: the current process was never thought optimal for either telecom providers or their customers. After the retirement of R K Takkar, the top DoT bureaucrat during the tendering process, and the general elections the government has taken a vary lackadaisical attitude to the privatisation process, in particular the disagreements between private operators and the DoT regarding the terms for connectivity between their networks. Although the DoT has extended the deadline for operators agtreeing to its terms to September 12, nobody is likely to sign on the dotted line. What the DoT would do next is unclear - yet it does not have many options.

The government's choice

It could agree to operators' demands, or come to some sort of compromise. Many of its stipulations, such as one calling for private operators to pay for upgradations to its network - which will compete with one private licensee in each of 20 geographical circles - stem from its lack of finances to pay for rapid investment in infrastructure. None of the licence revenue will reach the DoT itself - everything goes straight into the treasury - and though India's DoT has one of the world's most profitable nationwide networks (providing the exchequer with a handsome surplus every year) its financial management is poor, as the latest report of the Comptroller and Auditor-General's office (the government's accountant) shows. Yet it cannot expect an understanding response from private providers if it continues to ignore blithely their own concerns - such as the need for immediate constitution of an independent telecom regulator, for which an Presidential ordinance has lapsed and legislation remains pending.

This compromise and getting on, for the DoT, would be the most attractive way out. It is the only practical way of laying a hand on the money from licence fees, although this will become more of a concern to the Finance Ministry as the DoT will never actually get to use it. The next option, of having yet more bids, perhaps by scrapping all those past - tainted politically by association with Mr Sukh Ram, the allegedly corrupt former Minister - is easily dismissed. The last round of bidding to take place received only one participant, and even if the DoT were to remove most of its demands - such as illogical reserve prices - a much better response it unlikely in any further tender. Potential bidders are simply exhausted.

An option occasionally favoured by the leading right-wing opposition party, the BJP, has been to return to the first, apparently corruption-free round of bids, scrapping all the controversial decisions (of Mr Sukh Ram) that led to two more, one to go (there are still 10 circles without any potential takers after numerous first-round bids were unnecessarily rejected). This is not going to cause much cheer in the industry; although some - BPL-US West and Birla-AT&T - will benefit from lucrative licences that were lost in the following confusion, others such as Tata-Bell Canada, RPG-NTT and Reliance-NYNEX will not enjoy losing their licences won in the second round of bidding. Besides, most of the first round bids are now widely thought to be too high, unless the DoT behaves itself on the matter of operational and interconnect agreements, of which there is no guarantee.

The choice of much of the rest of Asia, of handing out build-operate-transfer or similar arrangements to private companies based on subjective criteria will never pass India's Parliament and courts; and in terms of fairness and transparency, there is not much to say for such methods, however rapidly they may lead to actual project implementation. As a senior banking-industry source puts it, India had the "most structured privatisation process" in the Asia-Pacific region - until Mr Sukh Ram decided on a more active role for himself, that is. And more objective methods of selecting DoT franchisees are likely to face the same inertia as as tenders for independent, competing licensees.

There is one penultimate, very cynical option for the DoT - to do nothing. This would be an admission of the government's greed for licence revenues having absolutely overridden the country's need for investment, and would suit all those in the DoT who benefit, as did, allegedly, Mr Sukh Ram, from a monopsony's power to extort bribes from equipment suppliers. Thankfully, even the Communist parties, which jumped at the opportunity provided by the discovery of $1 million in cash in the former Minister's home to call for the total dismantling of the privatisation process have quietened down somewhat.

The case for free competition

Perhaps the only way out, then - and in all likelihood the only the mainly poorer circles left with no licensees so far - will be to issue multiple non-exclusive licences to all comers, without any competitive bidding to restrict licensees to one per region. It should be noted that this was never ruled out - the expensive cellular, pager and basic licences are all non-exclusive and the DoT retains the option to hand out more before the end of the licence term. A free-for-all approach (supervised by the independent regulator) will have its own problems, such as how to address the need to upgrade rural infrastructure. Ways can be found around this, partly by the DoT making more of an effort to demonstrate the potential of a 400-million plus market, currently with no access to - leave alone possession of - a phone. There could be rules governing technical standards and rural connectivity obligations - once again, administered by an independent regulator rather than the DoT itself, as the case is at present - while keeping revenue sharing very flexible, perhaps just limited to payment for accessing the DoT network.

This relatively free competition will need a major shift in the DoT's mindset, in particular a return to the recognition that the need of 900 million Indians for better communications surpasses that of the government for licensing revenue. It is, a pessimist would say, extremely unlikely to happen, as the DoT will do anything - even agree to a reasonable interconnect agreement! - to forestall free competition. But if the government were to take this solution seriously, it would be a remarkable feat even in the global context. It could even bring last year's optimism back.