The Indian Techonomist: bulletin

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Indian Supreme Court upholds telecom privatisation

February 19: In an unsurprising decision, the Indian Supreme Court upheld the right of the government to privatise telecom services and allow foreign participation (up to 49% holdings) in basic telephony. It also saw no reason to reverse the government's decision to set limits (called caps) on the number of licences awarded to a single bidder, and found no mala fide intentions in that decision. The government will now proceed with granting licences based on the bids.

The public-interest suit brought by a number of left-wing and labour organisations was augmented by the support of some opposition members of Parliament late last year. Although the general charge related to the alleged evils of private (and especially foreign) participation in such a "sensitive" area as telecom, the MPs accused the government of favouring one bidder, HFCL. The Court said it was not convinced that HFCL gained from the cap of three licences - set after the bids were opened - nor that the nation lost. This was not without basis - with the caps, HFCL has only saved losing its earnest money for the regions it could not have afforded to take, despite its optimistic bids. This earnest money amounts to some $50 million - not much compared to the $8.8 billion it will have to pay for the licences it does get (albeit over 15 years).

The government was naturally delighted. True, the Supreme Court had said that the matter of privatisation was policy and for Parliament to decide. But the ruling Congress party has a majority, and anyway the opposition is feeling too sheepish about the verdict to do anything. True also that the Court said its decision should not encourage the government to act against the public interest, and noted that the forthcoming Telecom Regulatory Authority (TRAI) could override government decisions in the public interest. But the government has already accepted the need for a completely independent regulator, and has issued an ordinance to set it up, perhaps within a month. So, far from being in the least chastised, the Communications Minister Sukh Ram has expressed his gratitude to the opposition MPs, as without any judgement the controversy over caps would have caused a "lurking suspicion" about his actions.

As it was, the Court found that the decision on caps was made not by the Minister, but by the Tender Evaluation Committee, against whom no charges of mala fide intentions were made (although the Committee was constituted by the government).

The Court ruling, though removing the main obstacle in India's telecom reforms, does not solve everything. As no one was willing to match HFCL's unusually high bids for regions it has now vacated (due to the caps), and on the other hand some bids were believed far too low, the government only decided on five licences from the first round of bidding. Four go to HFCL: Delhi, Haryana and Western Uttar Pradesh, as well as the eastern state of Orissa which, not being part of the wealthier A and B categories, is not subject to caps. HFCL, with its foreign partners Bezeq (Israel) and Shinawatra (Thailand) will pay close to $9 billion in licence fees over the next 15 years. The fifth, Maharashtra - which has Bombay as its capital - goes to Ispat, a steel company that has tied up with the US-based Hughes, for $4.4 billion. The government is also expected to give Hughes-Ispat the southern state of Karnataka (including state capital Bangalore) for $1.8 billion, and the desert state of Rajasthan to Shyam Telelink (foreign partner PTT Guangdong, China) for $354 million. These last two bids scraped past the government's reserve prices - announced after the opening of the bids.

A second round of bidding, this time with reserve prices announced in advance, took place last month, with a dismal response. Compared to 80 bids from 16 companies in the first round, the second attracted only five - five different companies for five different (and wealthy) regions - all just above the reserve price. This happened just before a Supreme Court hearing on the telecom case, so a poor response was expected. The bidders, whose foreign partners include US West, Nynex and AT&T, are likely to get their licences soon, after the bids are "evaluated" next week. This will leave eight regions without a private operator, along with the troubled state of Jammu and Kashmir for which no one bid in the first round either.

The government is talking about a third round of bids, perhaps with reduced reserve prices. The remaining regions are by and large small or poor, except perhaps for West Bengal (including Calcutta) and Kerala (supplier of labour to the Arabian Gulf). The Techonomist spoke to Dr N Ravi, who heads the telecom operations of Reliance Industries Ltd, the Indian partner of Nynex and the country's largest private-sector company. Dr Ravi, who has always been pessimistic about the smooth completion of the bidding process, now hopes that his company will soon be awarded the licence for the rich state of Gujarat, for which it bid in the second round.

Dr Ravi does not have high hopes for the third round - despite the fact that Reliance had once bid for all regions, and was the only bidder in many of those left - as the process has already drawn on for a long time. If the government lowers the reserve price significantly (something it is "looking into"), then it would help; in any case, the bidding will be limited to the 16 "shortlisted" companies - those who bid in the first round.

Meanwhile, the Communications Minister announced last week that the government has signed letters of intent with most of the winners of the licences for cellular services nationwide - except for the four major cities, each with two competing private cellular services already in operation.

For more on the first round of bidding last year, see here.