Urjit R Patel: Lessons in telecom turnaround

The process of infrastructure development in India is riddled with challenges; and successes are few and far between. Since stakeholders are perpetually under pressure to move from one task to the next, often little or no time is expended on deconstructing what worked and that which did not.

While failures still manage to attract some scrutiny by critics or commentators, successes are rarely analysed.

Until about a year ago, the telecom sector was suffering from several maladies, perceived to be intractable. To begin with, basic service licences were mired in a legal battle regarding the provision of unlimited mobility services using wireless in local loop (WLL).

Second, the number of operators providing almost similar services proliferated to 5""6 in certain areas and some of them reportedly were financially distressed.

Such difficulties are not uncommon, and to the extent that it is a manifestation of the need for industry consolidation, usually investors deal with it through either a merger with (or an acquisition by) a stronger counterpart.

This was not to be in our case because intra-circle mergers and acquisitions were not allowed. Third, the sector regulator proposed to compensate the dominant public sector fixed-line incumbent to the tune of Rs 13,000 crore, for the deficit that it purportedly incurs on account of the provision of "commercially unsustainable" access and calls, through inter alia an administered charge on long-distance calls that use fixed-line networks.

The proposed approach, widely known as access deficit charge (ADC) as part of the interconnection usage charge regime, threatened to skew the playing field against private operators and also distort the price signals for long-distance calls on fixed-line networks.

Fourth, the variable licence fee, at 8""12 per cent of adjusted gross revenue, was way above the general international practice. For instance, for GSM cellular services, while France, Mexico, Japan, Bangladesh, and Finland impose no variable fee, in the UK, Singapore, Malaysia, and Sri Lanka, the fee is less than 1 per cent of revenue.

As a consequence of the above, there was a perceptible decline in investors' interest in the sector. In 2002-03, disbursements by major financial intermediaries declined to Rs 2,788 crore from Rs 3,999 crore in 2001-02; and foreign direct investment declined from about Rs 4,000 crore in 2001 to Rs 300 crore in 2003.

The situation now is very different. In 2003-04, teledensity increased by about 2, which is more than thrice the average annual increase of 0.6 during 1997""2003. The wireless subscriber base, currently at 43 million, is expected to reach the 100-million mark by end-2005.

The revival of investors' interest can be gauged from the fact that players like Idea, Bharti, and Aircel have sought to expand their footprint through acquisitions of either complete or partial stakes of other operators.

The recent move of Singapore Technologies Telemedia and Telekom Malaysia to acquire AT&T's 33 per cent stake in Idea Cellular is yet another case in point.

The stock prices too have reflected the unlocking of value in the sector. The current market capitalisation of Bharti Tele-Ventures and Tata Teleservices (Maharashtra) are, respectively, 85 per cent and 35 per cent higher than a year ago.

How did this turnaround come about? A rather obvious answer is that the government and the Telecom Regulatory Authority of India (Trai) took some right decisions, which enhanced investor confidence by addressing the sector's problems.

For instance, the government resolved the unlimited mobility imbroglio by ushering in the unified access (basic and cellular) services licensing (UASL) regime and reducing the revenue share payable by 2""4 percentage points.

It also allowed intra-circle mergers and acquisitions. Trai, on the other hand, revised the ADC estimate from 30 per cent to 10""12 per cent of the sectoral revenues and also decided not to provide for the recovery of the entire amount through a regulatory diktat.

The answer that the government and Trai took right decisions, although true, is incomplete since it fails to throw light on a far more interesting aspect""that is, how they arrived at those decisions.

Admittedly, one may never get to know the precise set of motives and events that guided these decisions. Nevertheless, from information in the public domain and with the benefit of a ringside view of some of the key developments, one could discern three factors that helped policy makers in making beneficial choices.

First, willingness to seize the initiative. Both the government and Trai decided to tackle the situation head on rather than letting matters drift.

While the Union minister of communications and Trai had initiated extensive consultations with key stakeholders, the government complemented their efforts by constituting a group of ministers (GoM) on telecom matters to resolve the crisis.

The GoM, in turn, sought inputs from Trai and Infrastructure Development Finance Company and subsequently cleared the ground for comprehensively addressing most of the thorny issues.

Second, acceptance of reality. Once it became clear that the provision of unlimited mobility through WLL is technologically feasible, the government recognised that restrictions that were in place because the original policy did not foresee and provide for such an eventuality were not only unsustainable but would also deprive consumers the benefit of competition.

At the same time, the government was conscious that allowing WLL service providers to offer unlimited mobility is likely to adversely affect the financial health as well as morale of the cellular operators and, worse, allow scope for criticism that it is selectively violating licence conditions.

Third, adherence to time-tested values of maximising consumer welfare and equity. Policy makers realised that any resolution of the impasse, in order to be effective and acceptable, should be able to preserve the potential for competition and, at the same time, be fair and equitable to all concerned.

In line with this, basic service operators were allowed to offer unlimited mobility by migrating to the UASL regime after paying the difference, if any, between the entry fees paid by them and the fourth cellular operator for their service area.

After thus bringing basic service operators at par with the latest cellular licensee, private cellular players who had entered the fray earlier were accorded a specific, additional concession of a 2 percentage point reduction in revenue share payable.

This equitable balancing act, indeed, was pivotal in making the solution palatable to both cellular and basic licensees. Trai's decision to revise the ADC amount substantially downwards is yet another example of decision making with an eye on consumer welfare.

Also, merging the ADC system with the Universal Service Obligation regime in due course, as preferred by Trai, would help eliminate competitive distortions that are inherent in the present practice of loading ADC on minutes of usage.

The recipe for success has remained broadly unchanged over the ages. To quote Aristotle: "The only way to achieve true success is to express yourself completely in service to society. First, have a definite, clear, practical ideal""a goal, an objective. Second, have the necessary means to achieve your ends""wisdom, money, materials and methods. Third, adjust all your means to that end."

(The author is with IDFC; views expressed here are personal)

urjitpatel@idfc.com