The Way To Responsible Regulation

By Dr Vinayshil Gautam

Founder director, IIMK, & Professor, management department, Indian Institute of Technology, Delhi

Sanjay Sinha

Account marketing manager, Nokia Networks, South Asia

The telecom market in India is undergoing an unprecedented transition. Technology has created a new economy, making networks expand on an unprecedented scale. This was made feasible by punching more and more power, and adding new services at ever falling per-unit costs. But the telecom economy is riding on the back of a regulatory regime which clearly has to guide this powerful horse. Regulation, or the lack of it, is undoubtedly a key factor shaping the telecom markets globally; whether to regulate and how much to regulate is the eternal dilemma.

Telecommunications in India has traditionally been government controlled as have other infrastructure industries. In the not-too-distant past, telecom has probably been one of the most regulated industries the world over. However, today there is a clear global understanding that emerging telecom services should not be regulated "" at least not tightly. This view is partly due to the belief that new, value-added services will not flower if they are loaded with regulatory obligations during early stages of development. There is also a growing realisation that fixed telecom networks have been excessively regulated, resulting in limited innovation and growth. This fact has been fairly well accepted in the last few years and most countries have lately been taking a liberal stand on controlling value-added services like mobile telephony and the internet.

An ITU research study has shown that most countries consider the regulation of value-added telecom services unwarranted. The actual regulatory model adopted has, however, varied significantly from country to country and also from time to time. Full privatisation has been quite rare and most governments, especially in south east Asia, have chosen to move gradually towards market liberalisation. It is accepted that some amount of regulation is certainly needed, at least to ensure operation without frequency interference, but how and how much to regulate is the burning question.

HOW BEST TO REGULATE?

Regulation is actually about fair market play and the ability of the state to provide operators with a playing field where they can compete on equal terms. It determines market growth, benefits to the consumer and the extent to which consumers are able to reach out and exercise their choice with a range of telecom services. This basic issue of regulation is as pertinent in the most developed telecom markets as it is in the developing economies.

While it may be difficult to achieve "perfection" in regulation, any attempt towards "responsible" regulation requires a clear understanding of market forces and a vision of the industry's future. Many, if not most regulators, have lacked both the experience and vision to regulate the telecom industry towards growth.

It may be noted here that the World Trade Organisation (WTO) has provided defined regulatory benchmarks and the WTO's Basic Telecommunications Agreement (BTA) provides an essential framework for regulation with key regulatory tasks, including the implementation of cost-based pricing, rights of interconnection, the establishment of independent regulators, and technology-neutral scheduling and so on. However, despite WTO-BTA guidelines, many countries, including India, have decided to adopt their own strategy and have been pretty out of sync with the market expectations of international players and investors.

For instance, the WTO-BTA calls for a separation of the regulatory body from the operating body, with the intention of making the regulator impartial vis-a-vis private operators. However, most Asia-Pacific members of WTO, including India, have paid little attention to this basic condition "" in spirit. The Department of Telecommunications (DoT) has been playing the dual role of operator and regulator till quite recently. The creation of the Telecom Regulatory Authority of India (TRAI) has been ridden with controversy and disputes, with most issues ending up directly in the laps of law courts.

Even if the operator (DTS) and regulator (DoT) have now been theoretically separated with the new National Telecommunications Policy of November 1999, the complexity and responsibility of DoT's role and its influence in policy matters still remain at least as important as before in the new regime.

In fact, DTS was split into two as of June 2000 into the Department of Telecom Services (DTS) and the Department of Telecom Operations (DTO). The latter has subsequently been corporatised into Bharat Sanchar Nigam Ltd (BSNL). Despite this, creating and managing regulatory authorities has been particularly difficult, and the Indian telecom market has realised the same the hard way. In fact, Singapore, Hong Kong and Australia are probably the only countries which have had well-functioning separate regulatory bodies in the Asia-Pacific.

It is good that the government has now begun to think clearly about laying down and refining the regulatory framework. Better late than never. Ideally, most of these reforms should have actually preceded the telecom liberalisation in 1995. Though most countries in the Asia-Pacific have adopted a similar strategy of major restructuring at later stages of liberalisation (except probably New Zealand), such fundamental changes always affect the nature of multi-operator competition and investment sentiment.

QUESTIONS OF CONTESTABILITY

The burning regulatory question is of contestability, the ability of alternative carriers to compete on equal terms with incumbents, and the extent to which consumers are able to exercise choice and shop around for the whole range of telecom services. Asian telecom has already witnessed a decline in the industry two years back as the market slowed due to poor economic and fiscal conditions. Though the market has picked up since then, the regulatory framework and reforms, of course, play a crucial role in orchestrating the development of this emerging industry.

The government has recently initiated a series of "corrective measures" to push the growth process after a difficult phase of controversies, disputes and turmoil. The industry went through some tough times for two years, especially the last quarter of 1999 and early 2000 with the regulator insisting that companies which had defaulted on heavy licence fees should auction their assets. Licences of operators like Koshika Telecom, Aircel Digilink and JT Mobile, Punjab, were terminated for non-payment, till they paid up the licence dues. TRAI later proposed, only at the suggestion of the PMO, a migration package from the licence fee structure to a revenue-sharing regime, whose terms and conditions were again unacceptable to many operators. The issue was resolved with most operators migrating to the revenue-sharing package.

In fact it took months to even formalise and issue letters to operators approving the migration. Operators could not be blamed for believing that the regulator didn't want them to grow. While, on one hand, it said that the cellular industry should grow and was taking steps towards it, on the other it was adding up internet connection charges and spectrum charges, and erecting obstacles. TRAI was also fighting for 17 per cent revenue-sharing till recently. This too caused a good amount of heartburn among the operators as moving to 17 per cent meant changing the complete business model and network valuations of all circles. The revenue sharing has now been fixed in the 8-12 per cent range.

DELAY IN CPP REGIME

The issue of fixing tariffs and the CPP (calling party pays) regime was another nightmare which affected the uptake of subscribers considerably. The DTS, MTNL and the Cellular Operators Association of India have been contesting the right of the old TRAI to fix the revenue-shares between basic and cellular operators in the CPP regime.

The industry was of the clear opinion that the share should be fixed by mutual discussions and negotiations between the operators and TRAI should intervene only if there is a dispute. The delay in implementing the CPP regime has clearly set back the growth of the industry by about a year if not more.

The whole of 1999 saw one issue after another surfacing, ranging from the rights of TRAI, licence terminations, revenue-sharing mode disputes, differences over dispute settlement modes of TRAI, powers of TRAI, right to fix tariffs, the role of DoT, CAG and government in fixing tariffs, worries over the effect of the domestic long distance policy on intra-circle traffic, corporatisation of DoT and so on. More recently, concerns have been expressed about the WLL limited mobility issue, which the cellular telephony industry has been opposing tooth-and-nail.

SOME RAYS OF HOPE

The formation of the new TRAI with clear powers did bring in a breath of fresh air to the industry. The second important initiative has been the formation of the Group on Convergence to evolve the regime of a convergent communications sector.

The Information, Communication and Entertainment Act of 2000 envisages vesting the proposed common regulator "" the Information, Communication and Entertainment Authority of India (ICEAI) "" with many significant powers, which are currently with the DoT. It will empower the regulator to set licence fees for various ICE services, ensure compliance with terms and conditions and recommend revocation of licences for non-compliance with the licensing conditions and to manage the spectrum of electromagnetic frequency, which will also make the new regulator a more powerful body than the TRAI.

The convergence regulator will make recommendations for granting licences for broadcast services, set tariffs for basic services in the broadcast sector, establish the need and conditions for a new service provider and also regulate the revenue-sharing arrangements between providers of different ICE services. Such a single provision will allow operators to offer seamless communication services to the market.

However, the draft bill which details the creation of the convergent regime and the vested responsibilities of issuing licences and settling regulatory matters does not talk about the nature of the licence regime. The already apprehensive industry may witness a tug-of-war between the lobby of bureaucrats to try to dilute the provisions of the composite licence in favour of separate licences. The market is actually expecting a "licence-less" regime for all operations, except probably in cases where scarce spectrum resources are involved. One hopes the government understands the convergence phenomenon.

CONCLUSION

The mobile industry has actually doubled its size in the year 2000. It took about five years for the Indian cellular industry to grow to 1.5 million subscribers and just one year (year 2000) to add up the next 1.5 million. Today, the net subscriber count stands at around three million, which is less than one per cent of the population that can afford it.

Most operators have had growth figures of over 100 per cent in 2000, despite a severely restrained year in 1999. With a positive regulatory regime India could become one of the largest telecom markets in the world. The industry has witnessed considerable consolidation over the last year and the interest of international players and investors has been rising considerably. However, they may yet be tempted to freeze their investment plans for some more time till the clouds of uncertainty clear.

In the year 1999 the Global Fortune 500 list had 22 telecom companies, and 44 IT companies. The aggregate net revenue of the telecom group ($264.1 billion) was about two-thirds that of the IT group ($362.5 billion); yet, the aggregate net profit of the telecom group ($50.5 million) was almost two-and-a-half times that of the IT group ($21 billion).

Telecom is one of the fastest-growing industries and mobile communication is in fashion. However, it also seems fashionable to intervene and regulate the mobile business simply because of potential revenues and profits and also the high market capitalisation "" till recently "" of their international business partners in the stockmarket.

The very purpose of regulation should not be forgotten. As the impact of the industry on the national economy (deregulation has been on top of many manifestoes at the last national election) grows, it will be even more important to be wary of the effect of regulatory actions and delays. The International Telecommunication Union (ITU) says that the world's telecommunication power balance is shifting towards the Asia-Pacific region, which is expected to take up nearly half the global market by 2010 and India and China are the forerunners.

Responsible regulation should be carefully constructed to give maximum economic benefit with minimum regulatory effort. Every effort should seek to build up competition in one part of the market in order to stimulate further competition in other parts of the market. It may be possible to achieve similar goals through more direct regulatory intervention, but every act of market intervention, however, carries the risk of producing a market distortion. So it is wise to avoid intervention wherever possible.

The industry is still seeking "a friend" in the regulator to help harness its full potential for a better economy and to stimulate growth.

(This article appeared in the June 2002 issue of Indian Management magazine)