Home India 1998 Liberalisation of the Telecommunications Sector in India: Some Policy Issues

Liberalisation of the Telecommunications Sector in India: Some Policy Issues

by david.nunes
Subhash BhatnagarIssue:India 1998
Article no.:2
Topic:Liberalisation of the Telecommunications Sector in India: Some Policy Issues
Author:Subhash Bhatnagar
Organisation:Indian Institute of Management, Ahmedabad, India
PDF size:28KB

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Article abstract

India had initiated reforms in the telecommunications sector in 1994. The broad policy structure was aimed at attracting private investments to meet the growing backlog in basic telephone services. After a three-year process of trial and error the implementation is being put back on rails. This article discusses the key policy issues that still need to be resolved to fully achieve the objectives set out. These issues will form the research agenda of a telecommunications policy studies centre being established at the Indian Institute of Management, Ahmedabad.

Full Article

With economic liberalisation and the likelihood of large investment flowing into India, the importance of key infrastructure facilities for promoting industrialisation is being recognised. Telecommunications infrastructure is an absolute necessity to build an efficient industrial economy. It is vital for providing connectivity between producers and markets, clients and service providers, exporters and importers, government functionaries and individuals, public and private organisations. Today many of the sophisticated applications of information technology ride on the telecom infrastructure. In that sense the growth of IT usage and its impact on the competitiveness of Indian industry and service organisations depends on the quality of access to telecommunications services. It is believed that the role of telecommunications infrastructure vis-à-vis development of backward areas in the 21st century will be as important as the contribution of the road network in opening up backward areas. The penetration of telephones in India at 1.6 per 100 is very low in comparison with the world average of 10. There are more than 2.1 million consumers waiting for a telephone connection. Although in recent years the Indian network has grown at the rate of 20%, to continue this growth rate over the next five years, nearly 19 million lines will have to be added to the existing 12 million. Long term projections place the total demand in year 2006 at 63 million lines. In order to facilitate this growth, one must invest something in the region of US$56 billion.. Internal accruals of the Department of Telecommunication (DoT) and Mahanagar Telephone Nigam Ltd. (MTNL) would finance this growth partially but the remains must come from the private sector. . The Government introduced several policy changes in 1994, realising the importance of creating a modern telecommunications infrastructure. These were aimed at bringing private capital into the sector including foreign investments and introducing competition into areas such as basic services and long distance services. India was divided into telecommunication circles within which the DoT would compete with one private operator for local and Subscriber Trunk Dialling (STD) calls. For inter circle calls and international calls there would be no competition to DoT and Videsh Sanchar Nigam Ltd. (VSNL). A three member Telecom Regulatory Authority of India (TRAI) with quasi judicial powers has been set up to adjudicate on matters arising out of the implementation of the new policy. There has been a mixed response to the new policy. Whereas cellular and paging services are being run by private companies in many metropolitan areas, there has been little progress in private basic services. The basic circles were licensed through a bidding process with a floor license fee. Something went wrong and only four out of the twenty-one circles had possible service providers after the first round. Others are in courts and in a number of circles there are no bidders at all. For the last two years, there has been fierce debate within and outside the government on whether these changes are sufficient, and on issues arising out of the implementation of the policy changes. Given the complex and often conflicting objectives, there is a feeling that policy making should be adequately supported by research and analysis to evaluate various options. The almost innumerable combinations of ways in which telecom services can be built and maintained, the uncertainties regarding tariff structure and demand projection make the whole issue of policy implementation very complex. Key Telecom Policy Issues The following aspects of telecommunications policy need some further resolution; defining and clarifying of policy objectives, restructuring, regulation, privatisation, industry development, investment and financing. These are discussed below. Need Assessment Appropriate models need to be developed for forecasting the demand for telecom services under a variety of assumptions governing delivery of such services. Developing robust models for forecasting the demand for a variety of telecom services under a variety of scenarios of competition, pricing and network expansion is necessary for subsequent planning of how these services can be delivered. However, unless this analysis is done in depth and there is clarity on the types of telecommunications infrastructure required and their relative importance, it would be very difficult to estimate delivery mechanisms and the resources required. Whereas urban teledensities may reach international averages if constraints on availability are overcome and prices are kept low through investment and competition, the rural densities need to be projected after careful analysis of existing demand patterns. Most of the public call office users have currently to travel to other villages to use such Public Call Offices (PCO). This is indicative of the potential for expanding access in rural areas. Interestingly people were also using PCOs for receiving calls and were willing to pay a service charge for this facility. In general, the perception of quality in terms of congestion, disruption mid-way through calls, and clarity of voice was low. Most rural respondents felt that the current one-time charges as well as usage charge were quite acceptable. In rural areas creating more public call offices under private ownership seems to be the way to expand access to telephony. It is evident that a large amount of research will need to be done to identify the criterion for segmenting the market. The current projection of 19 million lines over the next 5 years has to be scaled down considerably. Technology Choices With rapid research and development in telecom technology, fundamentally new products and ways of providing telecom services are emerging. Without developing a reasonably accurate model of the network, important parameters such as investments, operating costs, quality and reach of access cannot be evaluated. India expects to spend nearly US$50 billion on telecommunications infrastructure. Given the size of the market, efforts need to be made to concentrate on technology development in areas where it is possible to develop appropriate skills as well as to provide adequate resources given the potential manufacturing base that can be developed. The logic of economy of scale and scope demands that, as in many other countries, there should be some integration amongst providers of basic telephony, mobile telephony, value added service providers, suppliers and manufacturers of equipment. Delivery Mechanisms and Regulation The third important dimension of telecom policy would relate to the nature of institutional infrastructure, which can implement projects to augment telecom services and subsequently deliver these services. A variety of issues concerning the delivery mechanisms need to be resolved. Several issues relating to interconnection arrangements, sharing revenue, and the timing and nature of competition in the lucrative national and international STD remain to be resolved. There is a feeling that unless there is a strong and efficient national service provider, introduction of limited competition may not result in significant overall improvement of service to the customers. It is possible that private operators may choose to operate with marginal improvements in service since the standards against which the operators will measure their own service are reasonably lax. In that sense, the 1994 policy has been a useful trigger but many more conditions may have to be fulfilled to enable real change in service quality to take place. The issue of privatisation or corporatisation of the DoT is concerned with bringing in efficiency and an ability to raise financial resources from the market. Many countries have privatised or corporatised their Government monopoly service provider before bringing in competition. India has chosen to do it differently. Some urban parts of DoT have been corporatised (MTNL). It needs to be found out whether corporatisation leads to improved operational efficiency. It certainly provides flexibility to the corporations in terms of raising finances and also in terms of identifying areas of new investment. From the interactions in the workshop it was evident that the operational managers of DoT have still not reconciled to the entry of private operators in direct competition with them. It is natural that DoT officials will protect their own interest and therefore create as many difficulties for the private operators. The formation of TRAI has not come a day too soon. TRAI must create a level playing field for all the service providers and nudge the competitors to cooperate rather than confront. DoT has always operated as a monopoly in a situation where demand far exceeded the supply. A much greater marketing orientation will have to be provided through training to enable DoT officials to understand the fact that demand can be created though better service and newer services which add value. They will have to view their business from the perspective of the consumer. There are other areas of concern such as the number of employees per telephone line in India, which is 64 compared to the average of 2 in the developed countries. In evaluating different options for institutional arrangements to deliver telecommunications services, the issue of pricing of telecommunications services will be crucial. How should the whole sector be regulated? What is the role of legislation in settlement of disputes and complaints? Who would establish standards and enforce compliance of these standards? One of the early initiatives of the TRAI is in the area of defining parameters for measuring service levels and defining standards for service. What could be the legal frameworks for settling disputes between providers and consumers? India has already created the TRAI with quasi-judicial powers, but the debate on its scope of activity continues. Several countries have evolved a regulatory mechanism through experimentation over the last three decades with different models. While it is possible to learn from the experience of others, there is no single model which may be best suited for India. It is, however, clear that a regulation authority with a limited scope but adequate support in terms of staff and other resources may be more effective than an agency which is burdened with a wide scope but becomes ineffective because of its lack of ability to carry out appropriate analysis and research in a large number of areas. Issues in Financing One of the key issues in attracting private investment is to define a fair economic return for the investor. Policies on pricing, revenue sharing, extent of competition, financing arrangements, and tax regimen will influence the rate of return of a private operator. In telecommunications, it is clear that investors can hope to get returns only in the long run. However, if long run viability is not assured, many private operators may shy away from investing in basic infrastructure. Models need to be built which will factor in all the market uncertainties and policy implications to calculate returns on investments. To support investments of the order of US$56 billion in the telecommunications sector in a ten-year period would need the development of an ancillary sector. A large expansion in the telecom network has implications in terms of training of new personnel to do various tasks and retooling of existing personnel. Policy Issues in Data Communication Access to public data networks for data communication within the country, the ability of corporations to acquire adequate transmission band width to build proprietary networks, and the ability of organisations to access the internet will play an important role in building the competitiveness of the Indian Industry. Building of an information highway will enable organisations to exploit opportunities for getting a large piece of the services that are outsourced from large Multinational Companies (MNCs). The quality of the education system within the country can be enhanced many times through distance learning opportunities offered by a national information highway. The diffusion of internet service in India is rather slow, owing to the small base of PCs as well as a restrictive policy of access and inadequate bandwidth. Many of the existing policies on pricing and competition for Internet access and rentals for leased lines for data communication have been reviewed in the recent past. The monopoly of VSNL, a state corporation, as an Internet Service Provider (ISP) has been ended. Private ISPs are expected to stimulate internet growth but must continue to depend on VSNL for the international links. Suitable policies have to be put in place to attract investments to build a large capacity backbone for the national information highway system. Policies on pricing of leased lines, availability of leased lines and limitation on interconnection amongst different networks of service providers need to be reviewed. India has the skill base to garner a large share of the multi billion dollar outsourced software development and other allied service market, if the data communication infrastructure can be strengthened and made user friendly. Conclusion It is hoped that the proposed centre for telecommunications studies would be able to provide inputs on some of the above policy issues. It would essentially be involved in the following three types of research: . Focus on fundamental issues where basic understanding of some phenomena needs to be enhanced. Some examples would be to understand the social and economic impact of telecom in rural areas and the effect of privatisation/corporatisation of government departments on increase in operational efficiency. . Tracking the experience of the other countries which have deregulated their telecom sector through policy changes. Such changes have resulted both in intended and unintended consequences. . The bulk of the research would be undertaken in areas where issues arising out of implementation of the policy need further resolution. These studies could also be commissioned by the relevant implementing agencies. The policy makers would have to be open to external inputs. Policy formulation is not a one- time task. Policies need to be continuously refined in the light of feedback received from their implementation. The implementing agencies will have to share the feedback and make operational data available to the research centre. IIMA hopes to build long term relationships with policy makers and implementers to create an enabling environment for policy research to take place. The centre will engage in continuous interaction with policy makers, researchers and industry leaders in the next three years to find preferred alternatives for some of the policy options illustrated earlier.

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