Copyright (C) 1996, Rishab Aiyer Ghosh (rishab@techonomist.dxm.org)
A4/204 Ekta Vihar, 9 Indraprastha Extension, New Delhi 110092
INDIA
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July 16, 1996: It is now nearly one year since the bids for basic telecom and cellular services were opened by the Indian government (on August 31 and 5 respectively). While most winners of cellular tenders have signed licence agreements with the government, and hope to start service as early as October this year, no licence for basic telecom has been issued.
Basic services (comprising local or circle-wide long-distance wireline and fixed-wireless) have been subject to caps on licences per bidder, and have seen two further rounds of bidding (in January and April). Ten definite and two likely licensees have been selected, and were given letters of intent (LoIs) indicating their selection by the Department of Telecommunications (DoT) several months ago. But the DoT did not sign the two essential agreements to effectuate the licences - a licence agreement, actually granting the right to provide service, and an inter-connect agreement, covering the links between private basic and cellular services and the DoT's own network, which will operate in competition. The agreements hiccuped through the months of bickering and retendering, as well as India's general elections held in May. Along the way they leaked strategically to the press, causing much concern among potential licensees.
Meanwhile, the DoT asked bidders to extend the bank guarantees given towards earnest money for their bids - originally valid for only six months - by another six months, as allowed for in the tender documents. The extension were to expire on June 22, so the DoT asked for a further extension to be provided by June 17. All LoI holders meekly accepted, but HFCL-Bezeq, which became famous for its very high bids (totalling to $27 billion) refused, and the DoT decided to encash the guarantees. On June 24, accusing the DoT of being indecisive and arrogant HFCL-Bezeq appealed to the Delhi High Court.
The court immediately issued an order restraining the guarantors - the Industrial Development Bank of India (IDBI) and State Bank of India (SBI) - from acting on the DoT encashment request. The order was extended last week.
Beyond the purely immediate result of HFCL's suit - saving it some time, perhaps; worrying the DoT - was its wider impact on the basic telephony bids. On the face of it, HFCL's objections - that the bank guarantees were valid for no more than one year, that the DoT has been wilfully delaying the issuing of interconnect and licence agreements - had the desired effect. Within a week, the draft agreements were cleared by the Law Ministry (a traditional scapegoat for governmental delays) and distributed to the various service providers to sign.
But service providers have not signed, for they are unhappy, especially with the interconnect agreement. This is entirely one-sided, insisting that, among other things, private providers pay for any upgradation needed to DoT equipment at point of connect between networks; private providers pay penalties an order of magnitude greater than the DoT for delays in implementing interconnectivity obligations; private providers pay the DoT large fees for low bandwidth (2 Mbps) communication channels. Nobody wants to simply accept DoT's terms, yet service providers were undecided and disunited over whether to launch a frontal attack on the DoT, or try patience and cunning instead.
The patient would like to sign both agreements right away, so that at least they can start planning their networks - like the cellular licensees, to whom the interconnect applies but is less crucial to operations. They hope to appeal against the more unreasonable aspects of the agreement to the yet-to-be-constituted Telecom Regulatory Authority of India. Although last month the new government's Cabinet cleared the TRAI Bill so that it can be voted on in Parliament - it was earlier issued as a presidential ordinance in January and since lapsed, twice, without the necesssary Parliamentary ratification - this authority does not seem to be a great priority with the government at the moment.
It may well take months for the authority to be actually set up, even assuming that the Bill is enacted in the current politically contentious Budget session of Parliament. Relying on the TRAI will have to become a way of life for private telecom operators - for the moment the parts of policy-maker and regulator are played by their competitor, the DoT - but it may not be a good idea to greet its inception with a major dispute on basic interconnectivity.
The alternative is to negotiate, persuade, bully and hope that the DoT succumbs. This requires tact, for holders of potentially lucrative (yes, despite the new pessimism caused by DoT's antics and severe difficulties with financing) telecom licences do not particularly want to stick their necks out. Fortunately most of them do not have to - little HFCL has done it for them.
Ever since the day its remarkable bids were announced, this consortium between a small Indian telecom equipment manufacturer, and two far from giant foreigners (Israel's Bezeq and Thailand's Shinawatra) has been the subject of rumours, most centering around its alleged inability or unwillingness to retain its still unsigned licences. For many, HFCL's suit was the final proof, particularly its argument in court that its original bid was only valid for 180 days (actually, this was the minimum period specified in the tender; no maximum limit to the bids' validity was specified).
HFCL, like everyone else, has been hard put to come up with financing - a result of high fees for licences which, being non-transferable are difficult to treat as assets for collateral. Although recently leaked plans for its financial restructuring (calling for a holding company to bypass the 49% limit on foreign equity, with a large stake from US insurance major AIG Inc) may help, the cloud of suspicion never really lifted. Still, on June 29 - just before the DoT actually released the draft agreements - a top management source in the company said on conditions of anonymity that HFCL was only "protesting against delays" and was "not interested" in giving up the licences. Of course, HFCL would say that anyway.
As with all conspiracy theories, the simple alternative is probably correct. HFCL in all likelihood went to court for the reason it gave - it had more too lose from delays than others, thanks to its high licence fees, and was, to put it bluntly, a little desperate (HFCL complained that while the DoT was sitting pretty on the bank guarantees and draft agreements, it was rapidly upgrading its network taking away potential HFCL subscribers). It, more than others, needed certain, fair terms with the DoT, simply to make its licences a viable proposition. It had little to lose by this action - at worst its earnest money in the bank guarantees would go, a small amount of under $30 million, much less than the $9 billion in licence fees it risks if it operates its network in unfavourable conditions.
HFCL's high bids, the conspiracy theory goes, were political in nature, based on the "insurance" the Communications Minister of that time would provide. That would have been a tremendous mistake, if true, as the fall of the Congress Party government was not unexpected, and it would have been foolish to expect one in power throughout the 15-year licence term. Far more likely seems a smaller, but more rational mistake, of overvaluing the market potential.
Therefore, HFCL's court case - which has not been withdrawn despite the DoT's hurried publication of the draft agreements - is probably just a useful pressure tactic. By keeping DoT hands away from the bank guarantees, and threatening the continuing validity of the basic telephony bids, perhaps licence and interconnect agreements more favourable to HFCL and other private providers will be arrived at. This is what the less daring private providers hope, and the DoT would like to avoid. If it happens, though - possibly due to a favourable court ruling - it will be good for everyone, not just HFCL. It may even cheer up the pessimists, and make HFCL's high bids appear less unreasonable after all.
See also list of bids and licences for basic and cellular services at http://dxm.org/techonomist/news/bids.html
India's general elections slow telecom reform: bulletin of May 2 at http://dxm.org/techonomist/news/02may96.html