Let the telecom sector flourish

Quick-fix solutions during the last 25 years have caused a lot of damage. It is now time for a more principled approach by all stakeholders.

By Brijendra K. Syngal

There are two success stories led by India’s liberalization and globalization efforts initiated in 1991 – opening up of the telecom sector and the emergence of the knowledge-based service industry in the country. The result of the decision is there for all to see. Today, we have moved from kataar (queue) to betaar (wireless) explosion. The market cap of these two sectors alone could be in the region of USD 1.0 trillion.

So what propelled the growth of these two sectors? It was the right choice of cellular technology and digital connectivity and bringing in of the internet in August 1995. There are two celebrations, the silver jubilee of the birth of twins, cellular and internet. I will not dwell on the internet, but stay focussed on cellular, though I had a role to play in both of them. The first famous call between Jyoti Basu and Pt Sukh Ram was made using our VSNL tower in the then Calcutta on 31 July 1995. These two events are the bedrock of the digital revolution that we see today.

I remember BK Modi walking into my office in Bombay with his entourage. We settled over coconut water and he broached the topic of using our tower in Calcutta that was so strategically placed. Before I could say anything he offered to pay for the service. I asked for Rs five lakh and he agreed. That was the sharing of infrastructure without government interference or nod. I was recovering my cost of the tower in two years or so, a win-win situation. Ironically, the internet was also launched in Calcutta a fortnight later from Halishahar, and was touted as the second independence by the media.

The cellular was banded as elitist by some in the 1980s. Thank god it was scuttled then. Had it not been, we would have been investing in one of the outdated technologies: Advanced Mobile Phone Service (AMPS) and the then under development D-AMPS (US), CDMA (US), and Analogue (EU). The fourth, an upcoming Global System for Mobile Communications (GSM) Systeme Global Mobilite, was in a developed stage, deployed in 1991. The choice, in the 80s, would be restricted to two AMPS (US) and Analogue (EU/UK). CDMA had not been commercialized by then, mostly used by the defence. In 1991, too, there was pressure to use DAMPS, but it was successfully warded off by Pt Sukh Ram with a rustic worldly approach, something that one needs at times.

The fate was sealed in favour of GSM following a visit, early on, by a senior official of DoT, where I was an appendage. We called on Tony Booth, Board Director of BT, for cellular networks and Vodafone CEO, Ferozpore-born Gerald Arthur “Gerry” Whent in the UK. Without a blink, both informed that they were removing all analogue equipment and replacing them with GSM by the end of 1992. Why would anyone in their right mind invest in outdated dying technology, they asked? After his return, Pt Sukh Ram conveyed to the PMO that India should invest in a system of the future and not the past. That sealed the fate of the choice of technology.

The success story has been mired in controversy right from inception. The award of the first eight licenses was challenged, resulting in Tata moving out of the race. Ironically, of the original eight, only one Airtel has survived. The rest have either fallen by the wayside or assumed a new avatar. The initial licensing had its own flaws: for example, the aim being to fill government coffer, which continues to this date by taxing the success of the industry in perpetuity.

It was a start, but a false one. Naturally, the tariff for the service was high at Rs 16 per minute, because of a hefty license fee in addition to an equally obscenely entry fee. Perhaps, low-cost, high volume theory of the economy was considered risky. Both government and service providers were in their cost recovery mode, economies scale be damned, alas that was not to be.

The best use was to call a driver by a missed call, a pager modified. In addition, the called party too had to pay. The industry was teetering into extinction when NDA 1 came to power to take some bold decisions in the form of NTP 1999, to move away from the high fixed license fee to the revenue share model. It also introduced an additional private player, plus a government player. That was a booster dose, but the additional competition was contested. I had the task of convincing incumbents that before competition kills us, we would be long dead anyway.

An industry which continues to be taxed at 30% while generating EBIT of an average 20% annually cannot service its debts, thus making them, in effect, NPAs.

NTP 1999 left the definition of Adjusted Gross Revenue (AGR) a bit vague, though accepted by industry in the package; it is the root cause of the present AGR issue that is bleeding the industry white. In addition, there are cries of high debt, some because of bad business decisions like the wrong choice of technology – CDMA, African Safari, and obnoxiously high cost of surrogacy to mitigate FDI violations. The road to recovery did not begin until another controversial decision of limited to unlimited mobility (again a creation of another loophole in the definition of the local loop in NTP 1999) happened. Circa 2001 leashed yet another three-year war, resulting in the historic recommendation in 2003 for delinking of the spectrum, allocation by auction, and restricting the number of players to a total of six players – four in GSM and two in CDMA (through the backdoor).

All was well until 2007, when the mayhem of the 2G scandal, because of flawed recommendations by TRAI, broke out. Unheard arbitrary actions like bringing forward the cut-off dates for accommodating few cronies never applied first come, first served principle, for spectrum allocation despite 2003 recommendations. And then, there was a new nomenclature for spectrum allocation under a combination of technology to Reliance and Tata. That was the bloodbath industry continues to suffer from, in addition to the AGR issue, plus the level of levies. Licenses were traded at huge multiples by most recipients, resulting in no money into the industry, but unscrupulous promoters. The cancellation of 122 licenses was indeed a body blow. Those who ventured back to do business, had little or no money to invest, including less faith in regulation and policy. It did not end there but continued.

Bad policies, a silent regulator

Policy paralysis or irrationality in regulation has been the case since 2003. In 2007, the government did not auction the spectrum, resulting in the 2G scam. It gave a dual technology award to two favoured telecom players Tata and Reliance Com and in 2010 changed conditions of the spectrum usage from "data only" to both voice and data, and lower spectrum charges.

Recently, in 2016-17, and fourth time, lax interpretation of pre-commercial testing regulations in the country, which led to the current bloodbath, grabbing a market share in the garb of testing a new technology by releasing promotional offers, one after another. All this happened due to the lack of clear regulations for pre-commercial testing procedures in India.

Despite the clear breach of market norms, the regulator sat silently, while telecom companies went into the frenzied mode of M&A to sustain themselves. Thus, from almost 13 operators just a few years back, the telecom industry has come down to just four, including BSNL on life support. The basics of competition law tell us that such consolidation is a recipe for a disaster if handled with kid gloves.

The role of DoT

DoT has its own share of the blame. Besides the lack of clarity in regulations, the decision making at DoT leaves much to be desired. They sit on TRAI recommendations for years on, such as long overdue regulations on mergers and acquisitions, spectrum sharing, rationalizing spectrum usage charges across the industry (today it benefits an operator despite the recommendation of TRAI) and trading guidelines, two-decade-long debate on the definition of AGR and discussions on Unified License, no clarification on the definition, and limits of promotional offers are some of the many such policy issues that plague the telecom industry.

The way forward

One of the immediate benefits that the government can give to the sector is to allow them breathing space in taxes. An industry that continues to be taxed at 30% while generating EBIT of an average 20% annually cannot service its debts, thus making them, in effect, Non-Performing Assets (NPA). One might think that the government is probably waiting for it to happen so that it can bail out the big who-is-who of the industry. The government needs to be more prudent in its approach towards the sector and come out with a well thought out plan to resolve the Debt Crisis, instead of knee jerk reactions like moratoriums on loans or writing off debt, etc.

In the longer run, the government should start by introducing the concept of revenue neutrality in their tax regime, i.e. taxing companies relative to their growth. Thus, in the period of lower growth, lower taxation will provide a stimulus for growth. While doing the opposite, which the government is doing now, is making sure that the industry is decimated in the long run. It further needs to make sure that there are well-defined laws and regulations for market functioning. This may require consultations with all the stakeholders to minimize the policy loopholes. It is vital to ensure that one or other players do not exploit these loopholes to benefit themselves while decimating the market. To my mind, it is imprudent to tax the success of the industry in perpetuity at 33%. The industry must be left money to invest in creating an infrastructure for expansion as well as new offerings.

No single culprit

The industry can keep venting by being economical with the facts, because, you know, yeh dil maange more, but it is also imminently necessary for them to take charge of their bad business decisions. They must become less litigious, and stop internecine wars. I can see another one on the horizon on 2G-mukt Bharat.

The regulator, which is supposedly the conscience keeper, and DoT, the custodian of the sector, most of the time, did not act when it was necessary to intervene. The light-touch policy principle should not mean turning a blind eye to the flagrant violations of norms.

The cancellation of 122 licenses was a body blow. Those who ventured back to do business, had little or no money to invest, including less faith in regulation and policy.

Further, the government needs to take into account some key recommendations made, time and again, by various stakeholders to reform the policy issues related to the sector in a timely manner. It also needs to rationalize its exorbitant expectations of revenue from the sector by adopting revenue neutrality and shift the burden of maintaining its fiscal limit to other sectors.

It is critical to understand that piecemeal reduction or quick-fix solutions, here and there are not going to help. There is an urgent need for a principled approach by all stakeholders to ensure that this vital infrastructure can flourish without bleeding the industry and consumers are not left high and dry due to flawed policies and their implementation. At times consumer interest is used as emotional blackmail. However, such actions damage the viability of the industry as happened recently.

Therefore, balanced consumer interest, adequate healthy competition, commercial interest of industry, with sound predictable policies and regulation is the need of the hour. Let me be very clear: telecom is the future and the 25 years that have gone by would soon be a speck in the rearview mirror because I always see telecom as the tip of the iceberg.

The author Brijendra K. Syngal, former CMD of VSNL is presently Senior Principal with Dua Consulting

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