The Nation: New Telecom Policy: Close Call

Controversy and telecommunications have not parted company ever since the country's first National Telecom Policy was announced in May 1994. Every attempt to untangle the sector has only entangled it further. The raging controversy over the provisions and timing of the New Telecom Policy-1999 (NTP-99) only exemplifies this trend.

Prime Minister A B Vajpayee

THE MOVER: Vajpayee declared a priority area and promised a new policy. When his three ministers failed, he took matters into his hands. Now he must explain the haste.

The current debate is centered almost entirely on the July 6 cabinet decision which allowed private telecom operators to opt out of the existing fixed licence-fee system and enter a new system under which they would have to pay an entry fee and share revenues with the government. The roots of the cabinet decision lie in the NTP-99 which came into effect on April 1, 1999, just 16 days before the Atal Bihari Vajpayee government lost its majority in the Lok Sabha. Based on a report prepared by a special group on telecom constituted on November 20, 1998, the ntp-99 did away with the system of fixed licence fees. It also ended the duopoly (two operator ceiling) in all basic and cellular circles and proposed many other far reaching changes in the telecom sector. In the applause that the policy justifiably received from every corner, one critical shortcoming was overlooked: the ntp-99 was almost entirely addressed to the telecom companies that would enter the sector in future. The problems of existing operators -- 21 in cellular services and six in basic -- were largely ignored.

A note issued by the Department of Telecommunication (DOT) on March 26 announcing the ntp-99 had an oblique reference to the status of existing operators. "As and when the circles presently occupied by existing licensees are vacated either by expiry of the existing period, surrender, through mutual consent or otherwise, new licensees will be appointed under the new policy ... A reference will however be made to the Attorney General on the subject," the note said. Laden with losses -- Rs 6,000 crore accumulated loss on a total investment of Rs 11,500 crore -- existing operators interpreted these words as a signal that they would be able to get out of the fixed licensing-fee system sooner or later.

Meanwhile, Jagmohan, who was communications minister till the first week of June, was insistent that companies must pay up every penny they owed the government as licence fee. The industry cried foul, holding the government partially responsible for the losses it was incurring. Its list of woes included the absence of a truly independent telecom regulator (TRAI) they were promised at the time of bidding, the failure to make DOT a corporation and ridding it of its policy-making role, and delays in granting critical clearances without which companies could not start services even though they were paying the licence fee.

The situation reached a flashpoint in May when DOT terminated three cellular licences because the operators had failed to pay on schedule. The CPI(M)'s Somnath Chatterjee and Congress' Pranab Mukherjee wrote to Vajpayee drawing his attention to the plight of operators whose services had come to a standstill because of the termination of licences. Vajpayee had just then taken charge of the Communications Ministry amid expectations that he would stem the rot. But did the July 6 package do that? India Today attempts to answer that through five specific questions:

Was it really necessary to rush through the policy just two months before polls?
It's a clash between economics and politics. Cellular services companies alone have reportedly been incurring monthly losses of Rs 200 crore under the fixed licensing regime. Claims Anil Kumar, chairman of the Telecom Commission, the apex policy making body for the telecom sector: "Even a caretaker government has to carry on with the business of government. In any case, where is the haste or urgency? Tomorrow you will ask why there was so much of delay."

In fact, much of the problems of telecom companies are due to the delay in implementing the past policies. Even three years after the issuance of licences, some basic operators have not been able to achieve financial closure (being able to arrange for full funding for a project). According to a report of the Bureau of Industrial Cost and Prices (BICP), delays of up to 700 days had taken place in granting critical clearances to telecom projects. Already Swisscom, Switzerland's national telecom company, has quit India. The situation worsened last year after the government announced its decision to formulate a new telecom policy. The prospects of a change in policy froze all fund flows into the sector, making life more difficult for the operators.

Operators also contend that if the policy was not cleared in July, things would have got worse. Clearing the telecom policy wouldn't have been the first item on the agenda of the next government. Going by experience, it could have taken up to six months from October for the next government to formulate the policy.

The state of the industry apart, it was also in the government's interest to rush through the policy. The operators were expected to pay 20 per cent (about Rs 740 crore) of their entire outstanding licence fee by February and an additional 15 per cent (about Rs 560 crore) by August 15 this year. Operators would not have coughed up this sum if they were to stay under the licensing fee system. Companies had already moved court, asking for exemption or extension of payment because of delays in government clearances. But having been allowed to shift to a revenue sharing system, operators have agreed to pay the entire 35 per cent of the outstanding fee and withdraw the cases against the government. Consequently, against the budget estimate of Rs 1,700 crore revenue from the telecom sector, the government is likely to get Rs 2,000 crore this year.

The compelling economic logic notwithstanding, the timing of the decision does make it a political potboiler. In fact, even the Delhi High Court is not convinced of the reason to rush through the policy. That could be the reason why at the August 3 hearing of the petition, the court ruled that even though the policy can be implemented forthwith it must stand the scrutiny of the next Parliament.

Has the government defied Parliament by letting operator opt for revenue sharing?
No, if you go strictly by the statute book. Implementing a policy decision is an executive function and the government may or may not opt to debate it in Parliament. But in a democracy, government is bound by convention to discuss every major policy issue in parliament before it acts upon them. The 1994 National Telecom Policy was discussed and debated in Parliament. "What is the point of having a democracy otherwise?" demands Congress spokesman Kapil Sibal.

The government contends that several provisions of the July 6 package had been discussed and debated freely -- though not in Parliament -- for at least six months. The report of the Group on Telecom (GOT), which formed the basis for the ntp-99, was made available for public debate on January 23 and even placed on the Internet for perusal. Over 17,000 responses were received which were taken into account while finalising the ntp-99. When the Cabinet finally cleared the policy on March 26, Parliament was not in session. Nonetheless, on April 1 -- when the policy came into force -- the government placed a copy of the policy document in the Parliament library.

Obviously, placing copies of the policy on the Net or in the library is not the same as tabling it in Parliament. Moreover, the ntp-99 did not mention the possibility and modalities of allowing existing telecom operators to shift to the new system of revenue sharing. By the time the Cabinet approved such a shift, the government had lost the confidence vote in Lok Sabha. Apparently, the preferable course would have been to wait for the House to be reconstituted after the polls and let the policy be implemented by the next government. So more than the provisions of the policy, it's the process of implementation that has come under attack from the opposition. Says Indira Jaising, counsel for Delhi Science Forum which filed a petition against the policy in Delhi High Court: "There was absolutely no transparency in the process."

Is the new policy a sell out that could cost the exchequer Rs 50,000 crore?
All projections of losses due to the shift to a revenue-sharing system are notional because it is impossible to calculate the revenues to be received by the government in the remaining 15-16 years of the licence term from each operator. Even more dubious are the claims of potential revenues that could have accrued if the existing operators were not allowed to opt out of the licence-fee regime. On the face of it, Rs 26,000 crore was scheduled to come in from the basic services operators and Rs 23,800 crore from the cellular services operators in the remaining period of licence-fee regime. But if the payment record is any indication, the actual revenue realisation would have been much less.

Till July 31 this year, cellular services operators together should have paid Rs 6,043 crore to the government. Their arrears (excluding interest) were Rs 2,581 crore (43 per cent). The basic service providers owed Rs 892 crore, but had arrears as high as Rs 528 crore (59 per cent). Even the little money coughed up by the companies was largely because of the tough stance taken by Jagmohan earlier this year. Three operators -- JT Mobile, Koshika Telecom and Aircell -- had some licences terminated because of non-payment of licence fee. Given the huge losses across the industry, there was little chance that future payment schedules would have been adhered to by the operators. By switching to revenue sharing, the government has not only ensured an immediate payment commitment of 35 per cent of the licence fee due up to July 31, 1999, but has also partaken a share in their future revenue stream.

If operators were suffering losses, why didn't they surrender the licenses?
The hope of being able to recoup their losses in the long run kept the companies going. Says Virat Bhatia, managing director (public affairs) of AT&T: "The companies threw good money after bad money anticipating a turnaround in revenues eventually." Except Bharti Telecom, which reported Rs 2 crore net profit in 1998-99 from its cellular operations, every operator has reported losses ever since they began operations. Aiding the companies' optimism for a turnaround were periodic announcements of policy amendments. In 1998, then communications minister Sushma Swaraj had hinted at the prospects of granting a two-year moratorium on licence fee payments and extending the period of licensing from 10 to 15 years. Then came the promise of revenue sharing and extension of licence period to 20 years, which made companies stay in the race.

Meanwhile, operators realised that they could haul up the government for delays and recover some of their investments. The threat of court cases has already yielded results -- a six month waiver of licence under the ntp-99 that will cost the national exchequer Rs 1,443 crore. In fact, even before this uniform exemption was announced, four companies -- Srinivas Cellcom, Modicom, Koshika and Hexacom -- had been individually granted licence fee waiver for periods ranging from four months to almost nine months. The BICP report had clearly established the rationale for granting such waivers in lieu of delays in government clearances. The attorney general too recommended an across the board six month waiver. Eventually though, the waiver amounts to less than six months' licence fee since operators are required to pay penal interest on their licence fee arrears.

Given these factors, it is no wonder that even in the face of a stern deadline for payment of licence fee arrears set by Jagmohan in February this year, not a single company opted to surrender the licence.

Couldn't the operators be asked to give up licences and fresh bids invited?
There is a body of opinion that the government should have simply cancelled the licences and gone in for fresh bids. By starting on a clean slate it wouldn't have had to grapple with the problem of marrying the old system of fixed licence fee with the new system of revenue sharing. But for that to be done the government would have to first ask all existing operators to surrender their licences at a mutually agreed price. Determining that price would have meant calculating the notional present value of future revenues that the surrendered licence could have generated. The computation would have been subjected to numerous claims and counterclaims leading to litigations. The operators would have also had to be compensated for their losses. After all, as Sunil Mittal, CEO of Bharti Telecom, points out, "The new policy is a bail-out to survive, not to thrive."

Besides, wholesale cancellations of licences would have had a negative impact on the sentiments of investors, both domestic and foreign. Experts claim that up to 10 years could have been lost in just fighting compensation cases. And only when the process of surrendering the licences would have gotten over could the government have invited fresh bids. In the interim period, either all private telecom operations would have had to cease or be nationalised. Both equally unlikely options.

So, at best the July 6 package is only an attempt to correct the grossly misplaced telecom policies of the past five years. At worst it is fodder for opposition parties scrambling for a substantive issue for the next Lok Sabha elections. Its ultimate price will depend on how many votes it costs (or fetches) to the parties in government and those in the opposition in the forthcoming Lok Sabha elections. "The lessons for the government is clear," sums up a telecom expert, "In a democracy no economic decision is without a political baggage. And in a coalition democracy, that baggage is excessively heavy." The coming weeks will show just how heavy it is.

BACKTRACKER-I
PRE-CONTROVERSY: "The government must wait for the AG's opinion on movement of existing operators from fixed licence fee to revenue sharing ... Operators whose licences have been terminated may be restored," wrote Pranab Mukherjee to the PM on June 5.

POST-CONTROVERSY: Alleges the government did not fulfil the necessary conditions under which telecom operators should have been allowed to opt for the revenue sharing system, even though the government acted after AG's opinion.

BACKTRACKER-II
PRE-CONTROVERSY: "The integration of the existing cellular operators into the new telecom policy framework seems worth considering," wrote Somnath Chatterjee to the PM on May 12.

POST-CONTROVERSY: Alleges that the final policy (which allows telecom operators to opt for revenue sharing) is against the national interest and demands a special Rajya Sabha session to discuss the matter.

THE BENEFICIARIES
The entire private telecom sector stands to gain from the shift to a revenue-sharing system. Following are some of the big beneficiaries:
Reliance Telecom: Has seven cellular and one basic circle. Biggest gains in cellular circles of Bihar, Orissa and Himachal Pradesh where license fee was ten times the revenue earned.
BPL-US West: Four cellular circles. Should gain most in Maharashtra and Kerala where licence fees were double the revenue.
Bharti Telecom: One cellular, one basic circle. Should gain most in Delhi where the licence fee commitment is high due to large subscriber base.
Hughes Ispat: Highest bidder of Rs 13,990 crore for basic services in Maharashtra. Has no other circle. Biggest gainer from the shift to revenue sharing.
Essar Communication: One cellular and one basic circle. Its Punjab basic circle had the second highest licence fee payment of Rs 4,593 crore.

THE NTP-1999
� Revenue sharing replaces fixed licence fee system.
� Duopoly system done away with.
� TRAI to be given more teeth.
� STD services to be opened to private sector from 2000.
� DOT to be corporatised by 2001.