Alternatives to FDI

Left party activists protest against the government decision. - RAVEENDRAN/AFP

In deciding to increase the FDI limit in the telecom sector to 74 per cent, the UPA government has ignored other important options to increase investment in the sector and played into the hands of the private operators.

THE United Progressive Alliance (UPA) government's decision to increase the foreign direct investment (FDI) limit in the telecom services sector to 74 per cent, ostensibly to mobilise the massive investment it requires, came almost simultaneously with the hike in the rate of interest on the Employees Provident Fund (EPF) deposits to 9.5 per cent for 2004-05. In the light of the debates in the past on these two issues, some observers saw in these move a "carrot and stick" policy of the UPA towards the Left parties or a trade-off between the two. The Left parties support the UPA government on the basis of a Common Minimum Programme (CMP).

However, the fact is that the government's claim that it had addressed the objections raised in two notes submitted by the Left parties, which highlighted the threat to national security from an increase in FDI, failed to impress the latter and prevent them from launching a nationwide protest. An increase in FDI would render the government powerless in monitoring any kind of intelligence gathering within the country. In fact, its primary concern and responsibility should be towards bridging the telecom divide between the rich and the poor and the urban and rural areas.

Clearly, the government ignored the Left's suggestion that India should first attempt to raise internal resources to meet the investment requirements in the telecom sector. Reforms in the sector will succeed only by ensuring competition and optimum use of national resources. Reforms should not mean the replacement of a national monopoly by private and foreign companies acting in concert.

Compounding the worries of the Communist Party of India (Marxist) and the Communist Party of India is a situation wherein the government is not implementing policies to improve the lot of the economically weak as enunciated in the CMP. In the telecom sector, the UPA government took only nine months to do what the Bharatiya Janata Party-led National Democratic Alliance (NDA) government could not do in five years. Besides increasing FDI limits, it lowered the Access Deficit Charges (ADC) payable to public sector telecom companies and doubled the call charges made at the public call offices (PCOs) that cater to the communication needs of the poor. The poor are effectively paying higher amounts so that India can shine for the rich, who are now enjoying cheap telecom services.

THE telecom lobbies represented by the private telecom players, both domestic and foreign, have succeeded in their central objective of weakening government-controlled operators such as the Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) in order to share the lucrative Indian market among themselves.

Pertinent issues that could help the country reap the benefits of competition and liberalisation, even within the framework of the World Trade Organisation (WTO), were not considered for achieving the objectives of the National Telecom Policy, 1994 (NTP-94) and the New Telecom Policy, 1999 (NTP-99). By opting for the FDI route, the government has ignored other, more important, options to increase investments, such as increasing competition through niche licences, strengthening the Telecom Regulatory Authority of India (TRAI), mobilising national investment by encouraging the manufacture of indigenous equipment and promoting public-private partnership.

The government also failed to take stock of the strategy of telecom lobbies by evaluating the past ten years' reforms in the sector. Over this period, the private telecom sector emerged as a dominant player in the Indian market. In 1991, in the first phase of economic reforms, the Government of India opened the telecom sector to private investment. Since then the government has implemented a series of measures, influenced by the private telecom lobby. These include migration from the licence fee regime to a revenue-sharing one in 1999, which resulted in huge losses to the government; raising the FDI limit to 49 per cent; relaxing the requirement to serve rural areas, through a decision to create a Universal Service Fund; and privatising Videsh Sanchar Nigam Limited (VSNL).

The TRAI's recommendation for a Unified Licensing Regime (ULR) prepared the ground for the elimination of the basic operator who would have been largely dependent on indigenous equipment manufacturers. This, in turn, has brought such manufacturers to the verge of ruin.

High on the agenda of the private lobby is the total removal of the ADC, which will further undermine BSNL, the only remaining threat to its dominance. TRAI has not been able to monitor the evasion of ADC obligations by private operators and enforce payment to BSNL, estimated at Rs.1,000 crores to Rs.1,500 crores for 2004. The litigation going on in the Delhi High Court against Reliance Infocomm is just one instance that puts this issue in focus. Reliance Infocomm is alleged to have illegally routed international calls and passed them off as part of domestic traffic in order to avoid ADC payments running into hundreds of crores. It is still a mystery why MTNL, which too has not been paid ADC dues, has not filed any complaint.

THE decision of the Union Cabinet to increase the FDI cap overlooks the fact that telecom in India is a high-profit, high-growth industry. Domestic investments could have been sought through the instrument of public issue to realise the necessary capital.

The TRAI's final recommendations on Unified Licensing for increasing access, affordability and competition in the telecom sector through a bottom-up strategy of niche licence could do away with the very necessity of large capital investment. (The recommendations were submitted for the consideration of the government in January.) The Niche Licensing Policy for rural areas at the level of a Short Distance Charging Area (SDCA), if implemented earnestly , could result in the creation of over 3,000 micro-entrepreneurs.

Unfortunately, TRAI has placed two conditions that militate against this scheme. It restricts the number of SDCAs in which a niche licence can be given on the basis of teledensity. Second, it places restrictions on the choice of technology for niche licences. This effectively restricts niche licensing to low-teledensity and low-profit areas, thus creating an uneven playing field when there are big and small players.

In the first phase of the Unified Licensing recommendation, TRAI applied the principle of consumer interest and argued that the regulator should not impede technology development. It recommended the Unified Licensing Regime (ULR) and full mobility for WLL (Wireless in Local Loop) mobile phones. Competition and consumer interests were held to be the only considerations in arriving at this decision. However, it effectively made Reliance the biggest beneficiary of ULR.

India's WTO commitments do not prevent BSNL from entering into public-private partnerships through franchisees. By adopting this model BSNL could franchise up to 30,000 rural telephone exchanges, which could create employment for a vast pool of technically skilled, retired employees of the company. An excellent example of such public-private partnerships are the franchised PCOs, which have created livelihoods for more than a million families and account for about 30 per cent of BSNL's revenue. (As on December 2004, there were 2.3 million PCOs in the country.)

Under state monopoly, security considerations prevented the extension of public-private partnerships beyond customer premises equipment for individual PCOs all over the country and EPABXs in urban areas. Franchising an entire rural exchange was unthinkable. This is no longer the case, with entire networks coming under the control of the private sector and with the government's decision to raise the FDI limit.

BSNL could enter into franchise agreements with rural industries, especially the sugar industry, which is more than willing to offer telephone services in its areas of operation. In 2002, the Indian Sugar Mill Association (ISMA) estimated that improved telecommunications would increase sugar production by two million tonnes, worth Rs.2,500 crores a year.

NTP-94 and NTP-99 too envisaged the promotion of local industry. However, the indigenous telecom manufacturing industry cannot grow under the present regulatory framework. Only if the regulatory principles are fair and supportive of fixed lines can the Centre for Development of Telematics' (C-DOT) manufacturers, the jelly-filled copper cable industry, and the push-button phone manufacturers be revived, resulting in the creation of employment opportunities.

BSNL has unfortunately worked in the interests of private cell phone lobbies by effecting simultaneously two changes in the facilities provided to its consumers. These have lowered the value of fixed lines and made them artificially costlier, resulting in cell phone lines cannibalising fixed lines.

BSNL withdrew the `91' dialing facility, which enabled a subscriber to call neighbouring SDCAs at local call rates. The `91' facility gave unprecedented value and network access to the consumer and was an example of a pro-poor regulatory principle. The withdrawal of the `91' facility simultaneously with an increase in the rural local calling rate from 0.60 paise to Re.1 a call resulted in a near sixfold increase in call charges.

BSNL tried to give the user the `95' facility as a substitute for the `91' facility. However, this was not made optional for the consumer. Moreover, unlike the STD facility, the `95' facility cannot be `dynamically' locked. This resulted in disconnections and the shifting to a pre-paid cell phone service, which forced the consumer to budget his telephone use.

THE cell phone lobbies have used various accounting subterfuges, such as excluding the cost of the handsets from the costing of the line, to create the myth that mobile telephony is cheaper than fixed phones under all circumstances. While the cheapest handset with a life of about three years may cost about Rs.2,000, the cheapest fixed-line phone costs only Rs.200. Further, while fixed-line phones are virtually maintenance free, the hidden recurring and maintenance costs of cell phones are not taken into account.

Statistics released by TRAI indicate that as of September 2004 there are over 4.3 crore cell phone users in the country. Their handsets would be worth at least Rs.8,000 crores. Based on consumer experience with the working of mobile handsets, batteries, maintenance and the need for upgradation, in four to five years the value of this investment will be zero.

By stating that mobile telephony is cheaper and more convenient to acquire than fixed-line connections, TRAI Chairman Pradip Baijal is helping to promote the myth that mobile telephony is cheaper than fixed-lines under all circumstances. It is well established the world over that wireless services are not a substitute for traditional fixed-line basic telecommunications services in terms of costs and the quality of transmission.

Despite the fall in costs of wireless services in the past few years, they are not expected to become cheap enough to replace fixed-line services entirely, even if the quality of transmission can be compared with that of fixed-line services.

Moreover, rapidly evolving mobile telephone technology is making products obsolete much faster compared with the fairly mature fixed-line technology. The implications of large-scale deployment of mobile technology under the new patent regime, without indigenous manufacturing capability, spells financial disaster in the long run. For instance, if the foreign manufacturer either changes the model or stops producing spares like batteries for older models, both the patent regime and technological barriers will prevent the servicing of old phones. While the purchase of mobile phones does not lead to any multiplier effect in the domestic economy, it compounds India's toxic waste disposal problems.

Further, a gender bias will emerge when low-income families replace fixed-lines or opt for mobile phones. This was not an issue in advanced countries where mobile technology appeared after 90 to 100 per cent households possessed telephones. Given the division of labour within the family in an underdeveloped country like India, it would be reasonable to conclude that mostly male members of the family, who are usually more mobile than female members engaged in household work, would have ownership of the mobile phone. It may not be mere speculation to suggest that India is being used as a vast laboratory to test the medical effects of cell phones.

The TRAI has not been able to collect and publish figures relating to the household penetration of fixed lines, which hides the sober truth that while the number of telephones are increasing, few new households have access to the fixed-line service. The absence of such statistics prompted the NDA government to include telecom in its `India Shining' campaign. If the UPA government fails to direct the TRAI to monitor household fixed-line penetration and leave mobility to the market, it will suffer from the same delusion as the NDA government.

The solution lies in strengthening and ensuring a truly independent TRAI, and making BSNL more competitive to bring the benefit of communications closer to the poorest of the poor. This will be in keeping with the original goals of NTP-94 and NTP-99 as well as the pro-poor shift evidenced in the 2004 elections.

E. Siddarth Rao is a freelance writer based in Bangalore.