The government initiatives of 1994 and 1999 were well-intentioned telecom policy documents at the heart of which were two core concerns—the good of the Indian consumer and to attract, as much as possible, private investment to fuel growth in the sector. The government also intended to effectively separate policy, regulatory and operational roles, set up a regulator and introduced competition in all services except the international long distance, slated to open next year.

So why is that in all these years, we have had an awful track record of protracted legal battles between the private investors and the government, not so encouraging foreign investments record and above all, still one of the lowest tele-density in the region?

For investors of all hues, for a long time, the post-liberalization Indian telecom policy and regulatory regime resembled the Delhi roads. Road travel in many parts of the national capital of Delhi is a nightmare. Roads are either full of potholes or just that the metallic layer on them has withered away. But these very roads are full of solidly intact speed breakers!

The government came up with a well-intentioned policy and even as that policy was not effectively implemented, investors began to encounter speed breakers. Today, while many of those speed breakers are gone, there remain some key concerns which need to be addressed before investors can call the Indian telecom the best place to be in.

Stability of the Policy

It is close to three years now, since the National Telecom Policy of 1999. And notwithstanding accusations of frequent tinkering with the policy (primarily, with regard to the issue of WLL-based limited mobility service), the fact remains that the government has done nothing to undo the basic intent of the 1999 policy.

Quite to the contrary, the government has made a number of progressive moves. Some facts in support of the view that the NTP 99 had said the government would open up international long distance, leading to an end of VSNL’s monopoly, by 2004. Its monopoly over international data service has almost gone. The monopoly over voice ends six months from now. Again the document set a target date of 2001 for the corporatization of DoT’s telecom services. Bharat Sanchar Nigam Limited came into existence last year. The government was unequivocal in not allowing Internet telephony. Now if the current minister of communications, Pramod Mahajan, was to be believed, it would be allowed in April 2002.

There could be a number of issues arising out of the NTP 99 that an investor could find not-really conducive to its business goals, but by and large, the government has ensured a fair degree of stability in its telecom policy. That is not a big issue. "Today, investors have far lower concern on the legislative and policy uncertainty, and the government appears more flexible in trying to change with the technology trends", points out Deepak Kapoor of Pricewaterhouse Coopers.

The bigger issues of concern for investors are those that follow from the operation of that policy.

Concern : 1 Independent, Responsible and Effective Regulator

The NTP 99 reaffirmed the government’s commitment to a "strong and independent regulator with comprehensive powers and clear authority to effectively perform its functions". The importance of involving the Telecom Regulatory Authority of India (TRAI) in the key decisions related to markets, license fee and interconnection, were also underlined.

However, the past incidents have shown that TRAI is anything but strong and independent. For instance, despite the fact that the regulator was entrusted with determining the need for and introducing new service providers, the Delhi High Court had reasoned that the DoT was not obliged to seek TRAI’s recommendation on the entry of new service providers, and that any such recommendation would not be a binding on the DoT. The said case had come up before the court when the DoT had granted MTNL a license to operate cellular services in Delhi and Mumbai. In another instance, the same court questioned TRAI’s authority in coming up with an interconnection regime on its own. The court had held that under its act, TRAI could not propose an interconnection regime that differed from the one specified in the license.

No doubt, these court rulings and many other TRAI orders that were not accepted by the DoT, leads to a conclusion that the regulator here, is anything but independent and effective. These instances show that TRAI has been limited in its power by both the legislation under which it operates and its frequent narrow interpretation by the government.

So how does an investor rate the independence and effectiveness of the regulatory institution, in this context? How does he understand the government’s attitude towards the regulator, especially when the latter is confronted with decisions of the regulator?

The answers to these questions, probably lie in the kind of political and social environment that the regulator operates in. Also important is the kind of relationship it enjoys with other interested players like the communications ministry, the Telecom Commission, and the DoT, etc. In other words, in seeking to understand the regulatory institution and its functioning here in India, investors could do well in trying to appreciate the political environment outside TRAI, the kind of relationships among different political parties and other interest groups, and that relationships’ effect on the telecommunication reform as also the relationship between the parliament, executives, etc, and policy direction. Remember TRAI’s first tariff order on 9 March 1999, managed a reduction in long distance and international calls, largely because of political factors outside the regulator’s purview.

Where does TRAI stands now? "TRAI is still an evolving body. The political system and bureaucracy are not willing to have an independent regulator. Precious time was lost in turf battles between TRAI and DoT. Now I would say TRAI promises to be a far more meaningful institution than it was, say, three years ago", observes Prof S Manikutty, business policy area, IIM, Ahmedabad.

Deepak Kapoor of Pricewaterhouse Coopers sees another problem with the regulator. "TRAI is largely funded by the government. So many people would perceive it to be heavily influenced by the latter", he says. As such, he adds, the regulator should not only be independent but also be perceived to be so.

There is another worrying aspect of the regulatory mechanism, sometimes it is perceived to be too keen in protecting incumbent’s revenue. "The regulator often starts worrying about how its decisions would impact the incumbent’s revenue", adds Taveesh Pandey, investment officer, International Finance Corporation, the World Bank’s private sector investment arm.

Concern : 2 Dominance of Players with Significant Market Power

The interests of the operators with significant market power, guide most of the time and in many ways the primary behavior of the government in putting down the investor-friendly regulatory steps. And operators with significant market power in this case are the state-owned BSNL, MTNL and VSNL. "There is not even an attempt to disguise partiality towards DoT and its sister concerns", remarks Prof Manikutty.

The issue of interconnection, perhaps, best explains how the dominance of the state-owned players affects the establishment of a fair and an impartial regulatory regime. Many countries rank interconnection related issues as the single-most important problem in development of the competitive market. However, the DoT has usually put down those TRAI recommendations on interconnection which did not find favor with BSNL or MTNL. Certainly not the best policy for establishing a competitive framework with level-playing field for all players, including the new entrants.

Kapoor says that establishing a competitive framework would mean helping the new entrants to overcome incumbent advantages and preventing anti-competitive behavior by incumbents. "Facilitating real competition also means ensuring that no operator has unfair advantage over others", says Kapoor.

Another area of concern for the new entrants is the issue of accounting separation for the incumbents. Accounting separation is used to determine and regulate extent of cross-subsidization, in vertically independent companies. TRAI had initiated a process on accounting separation in September 2000 but was suddenly scrapped mid-way. Pandey, however, stresses that the issue of cross-subsidization has to be seen in a certain perspective. "Cross subsidization should not be allowed when an incumbent is not fair in sharing interconnection revenue", says Pandey. Otherwise, he says, cross-subsidization is an element of business everywhere.

Some Minor but Important Speed Breakers

There are some other issues that need to be tackled from an investor’s perspective, primarily related to foreign exchange repatriation by the foreign investors. The existing regulations in this regard are not exactly to their liking. Moreover, the government should do something about the 49 percent investment cap for foreign investors, in the telecom services sector. Every body knows that this cap is not being adhered to by the foreign investors, so why not have a clear policy.

The Silver Lining

No doubt there are issues to be solved. And there will be issues to be solved. The silver lining here is that investors today, have a far better regulatory environment to operate in than it was a even a year ago. And who would testify to this better than an investor? "As an investor I am happy with the current environment", says Taveesh Pandey of IFC. IFC accounts for 80 million dollars (all private sector investments in the last two years) of the total 140 million dollars invested by the World Bank group, in the telecom sector here, in India. PricewaterhouseCooper’s Kapoor agrees. "Investors are much more confident now", he observes. Prof Manikutty, has another optimistic point: "We can hope that just as we have witnessed a degree of liberalization that could not have been even imagined in 1990, events may overtake the country, and things will happen by default".

Ravi Shekhar Pandey