Infrastructural Develoment

COMMUNICATIONS

The telecom network in India, though not small at about 20 million lines, reflects a low penetration of 2 per 100 persons compared to the world average of 10. On a comparative basis, the number of connected lines and teledensity in China is 54 million (4.5), Thailand 4.2 million (7.0), the Philippines 1.8 million (2.5) and Malaysia 3.8 million (18). Similarly, penetration of cellular telephony in India is less than 0.1 per cent today (1 million) compared with 1.1 per cent (13.5 million) for China, 1.5 per cent (1 million) for the Philippines and 10 per cent (2 million) for Malaysia. The demand for basic services in India is expected to be 31 million lines by year 2001 and 64 million lines by 2006. Also, the demand for cellular mobile services in India is expected to be around two million lines by 2001, growing to five million by 2006. Further, demand from Internet subscribers is expected to increase from 0.15 million at present to over 8 million by 2002.

The benefits of communication, which will provide connectivity and improve the performance of other sectors, including the ability to provide services like distance education and tele-medicine in rural and remote areas, will be fully realised only with substantial investment in network growth. The estimated fund requirement, for basic and cellular services alone, is to the order of Rs. 190 thousand crore till 2006. Over half of this investment must come from the private sector, if the targets are to be achieved.

The Group suggests that the Government review the existing policies on a holistic basis. This would allow India to leapfrog other countries through proactive legislation that leverages the opportunities presented by the convergence of technologies. The Group believes that an appropriate policy framework will enable the Government to achieve its objective of spurring growth in the telecom sector and facilitating widespread availability of education and information services. This will also ensure that customers get access to integrated services at the lowest overall cost. The Group, therefore, suggests a regulatory framework that focuses on addressing the technology convergence issue, while extending the forward-looking liberalisation initiated with the ISP policy.

In line with this approach, the three major recommendations for the communications sector are detailed in the subsequent sections.

(a) Evolve an Integrated Communications Policy (ICP)

While regulatory frameworks exist for sectors like basic, cellular and some value-added services, no integrated policy framework exists for services comprising cable television, satellite communication, broadcasting, etc. Due to the absence of a stable policy framework, some of these sectors have attracted only limited attention from investors. To ensure rapid development of any sector, the Government must define a stable, forward-looking, integrated policy. Further, new policy announcements must be accompanied by changes in existing policies to ensure they are in tune with the proposed policies.

The convergence of technology permits all services (telephony, Internet, cable TV, etc.) to be carried on a common infrastructure. Therefore, the Government regulation banning ISPs from carrying voice traffic is technologically unsound. Already, Voice Over Internet (VOIP) is a reality and, in future, the Internet will be able to carry high quality voice traffic. Moreover, audio and multimedia, which have embedded voice content, are an integral part of Internet traffic. Hence, it will be impossible to prevent ISPs from carrying voice traffic. Moreover, the proportion of data traffic is expected to increase exponentially in the next five years. The most lucrative segments of the emerging telecom market will be integrated networks for corporate long distance data and voice. A telecom operator's competitiveness will depend on his flexibility to plan a network that can seamlessly carry both voice and data. With the ISPs able to access business users with 64 kbps lines, and residential customers through cable TV networks, both DoT and private basic service operators will have to face direct competition from the ISPs in their core segments.

Recognising this technology convergence, and with a view to facilitating optimum investment in infrastructure, the Government should evolve an Integrated Communication Policy (ICP) that comprehensively addresses all communications services including cellular, basic, Internet services, cable television, etc. In fact, a failure to move from individual sector-specific policies to an integrated telecom policy will require constant revisions in policy causing loss of investor confidence and compatibility problems in operating systems. The US Telecom Act 1996 could be used as a benchmark for formulating the new legislation.

The objectives of the ICP should be to embrace technology convergence to spur rapid growth in the telecom sector, and to improve value to the consumer through wide spread competition. The focus should shift from short term Government revenue maximisation, and attaining a teledensity target, to enabling world class service to customers at the lowest cost.

Since telecom is a rapidly evolving field, the Government needs to institute a body that will track emerging developments and ensure that the policy framework facilitates the achievement of its objectives, while ensuring that existing operators are not disadvantaged.

(b) Permit competition

The original policy structure assumed that the telecom sector will continue to develop as a series of vertical industries (eg. telephony, cable TV, etc.) with no competition across them. In this scenario the Government could restrict competition within a given vertical industry to ensure a monopolistic or duopolistic structure. Today, however, with the convergence of technology, all operators will be able to provide multiple services and, hence, the Government will not be able to guarantee limited competition in any particular service. In fact, as pointed out earlier, a policy that tries to prevent operators from offering multiple services over their networks will be technologically unfeasible to implement.

Moreover, a policy which tries to prevent competition across various telecom services will restrict the innovative and efficient use of technology to offer quality service to customers in a cost-effective manner. Hence, the telecom sector should be opened for free and unrestricted competition, with operators being allowed unrestricted entry in all types of services (telephony, data services, Internet services, Cable TV, etc.). However, the number of competitors in wireless applications (eg., Cellular, Fixed Wireless, Satellite Communications) would be limited based on the availability of sufficient bandwidth in the appropriate frequency spectrum. Accordingly, an acceptable ‘Spectrum Policy’ should be evolved in conjunction with the free competition policy.

(c) Develop a common spectrum policy

Any operator providing a wireless application (such as Cellular Mobile, Fixed Wireless, Radio Trunking, etc.) requires the exclusive right to use a part of the frequency spectrum. Since the total available frequency spectrum is fixed, the number of competitors who can offer wireless applications needs to be restricted. As of now, the frequency spectrum available for use is limited to the GSM 900 MHz band for mobility and the 824 MHz band for fixed wireless. This must be extended to cover alternative technologies for providing mobility services or fixed wireless applications including, for example, the 1800 MHz bandwidth. Having determined the available spectrum, it is essential to make it available, in a transparent manner, based on international best practices, to all operators, bearing in mind the need to cater to the relative growth of market participants.

Further, an appropriate mechanism for charging the operator for spectrum utilisation must be determined. Charges for spectrum utilisation must be payable irrespective of end application like cellular or wireless in local loop. As of now, Spectrum Charges are levied as a fixed flat rate per subscriber. Going forward, an appropriate Spectrum fee may be determined through a competitive bidding mechanism monitored by TRAI.

(d) Shift to service tax based licence fee

As explained earlier, technology convergence exposes basic service operators to competition from ISPs in a large portion of their market. Further, while the basic operators are restricted to the given telecom circles, ISP operators are allowed to establish national networks. Hence the assumptions behind the existing basic licence regime are no longer valid. In fact, the current regime discriminates against the basic service operators by imposing a very heavy licence fee on them, while exempting ISPs from any licence fee. Therefore, it should be modified to ensure a level playing field amongst all competing operators.

The Group recommends that, instead of the existing licence fee structure, the Government participate in a form of revenue sharing arrangement based on the levy of a service tax on all services including voice, data, Internet, etc. This uniform levy will ensure a level playing field and also prevent discrimination between various operators including DoT / MTNL.

A viewpoint has been expressed that the licence fees were the result of commercial decisions by private operators, hence, no relief is warranted, and any modification might invite litigation. Further, the licence fees are being viewed as an important revenue inflow for the Government and, it is felt that any alternative would deprive the exchequer of this critical source of revenue.

This approach presupposes that operators will survive and continue to meet the licence fee obligations. However, most of the bids submitted by private operators, based on international market experience, have turned out to be unrealistic. The high licence fee structure has vitiated the viability of most projects, and private participation in subsequent rounds of bidding has been limited. Many private operators have defaulted on licence fee payments and some may be forced to exit the business soon. The participation of MTNL/DoT in service provision without an equivalent licence fee obligation is discriminatory and only worsens the situation. If it continues, most ventures, all of which have foreign equity participation, are likely to wind up and the actual licence fee collected by the Government from the telecom sector is likely to be substantially lower than the theoretical values assumed.

Addressing the issue of litigation, it is believed that, if the existing licence conditions are formally terminated, and the market opened to all under a new set of conditions which eliminate the previous licence fees, the result would be fair market conditions for all participants. Therefore, the market is likely to welcome such an open transparent move. Further, it will help attract considerable investment to this sector.

The Group believes that the service tax model will ensure the long term vibrancy of the sector, and that the national economy will benefit from the resultant multiplier effect. The following graph illustrates the difference between expected Government revenues under the existing and the proposed models.

The legacy of on-going liberalisation efforts raises the need to implement a mechanism to transit the existing operators from the present regime to the free market regime. Since the private operators have paid part of their licence fee commitments, the Group suggests that the licence fees already paid by the private operators be treated as an advance payment against their service tax and spectrum charge obligations, as applicable.

In case of cellular operators, different licence fee structures exist for metros and other circles. To ensure an equitable post-transition licensing regime, the Group suggests that the spectrum charges (as determined by TRAI under the policy) be applied commonly on all operators prospectively from a common date. The historical licence obligations, for the first three years, for all cellular operators (metro and circles) must mirror the structure applied for metro licences. Since the basic operators are just commencing service, the licence fee could be limited to service tax and spectrum charges only from date of licence. Any excess licence fee paid should be adjusted against future service tax and spectrum charge dues.

2. Corporatise and Privatise DoT

3. Strengthen and Enhance the Role of TRAI

Summary

• Evolve an Integrated Communications Policy, addressing all telecom services (eg., telephony, Internet, cable TV, etc.).

• Permit open competition in all services.

• Evolve a Spectrum Policy.

• Modify the licence regime from a flat fee to a service tax based approach.

• Meet Social Obligations through a collective initiative.

• Evolve uniform interconnect guidelines.

• Corporatise and privatise DOT.

• Strengthen and enhance the role of TRAI.