The Hindu Business Line : Telecom: Higher FDI cap, no guarantee to better service

Large investments are indeed required in the telecom sector. However, the contention that such investments would materialise only by increasing the FDI cap from 49 per cent to 74 per cent is suspect.

IN ITS October 12 reply to the Left parties' objections on raising the foreign direct investment (FDI) limit in telecommunications companies from 49 per cent to 74 per cent, the infrastructure section of the Department of Economic Affairs in the Ministry of Finance argued that across the world "restrictions on mobile services are more due to spectrum availability rather than any ideological or security considerations."

This assumption raises certain questions. Security concerns on use of mobile telephones are serious, especially in a country like India. On December 13, 2001, those who infiltrated the high security Parliament area were wielding not just guns but cellular phones as well. But the more important question is whether the Department of Telecommunications (DoT) is in a position to allocate greater spectrum for new mobile licences. Much of the private investment in telecom (especially FDI) has come into mobile telephony. India has seven mobile phone operators (four using the GSM technology and three the CDMA platform).

If Bharat Sanchar Nigam Ltd (BSNL) were to offer CDMA services, this number would rise to eight. This is by far the maximum number of mobile operators any country has. The international average is no more than four mobile telephony operators in a country.

Given that existing operators have been complaining about the limited in spectrum availability — 6-10 MHz allocated thus far — and the DoT and the Telecom Regulatory Authority of India (TRAI) repeatedly expressing their inability to allocate even existing operators new spectrum, where and how does the government expect to get more spectrum for new mobile licences? At an average of 20 MHz per operator, which would be the requirement over the next 10-20 years, the existing operators could use up nearly 150 MHz.

Moreover, TRAI's recommendations on the unified licensing regime do not even indicate that the regulatory body is willing and/or ready to introduce more mobile operators. Does the Government then expect that any new FDI flows to be used to gobble up Indian companies or move their promoters to positions of minority shareholders?

If this happens, it would merely enrich a few Indian industrialists and put massive pressures of raising new capital on BSNL, but would not result in any greenfield projects. Fresh FDI can go to new telecom projects only if new licences in mobile telephony are ready for allocation.

The Finance Ministry has made the following claims: "The increasing liberalisation is on account of recognition that FDI leads to better incentives for technology transfer, improved management, etc., and thus results in lower prices and better services. Therefore, instead of looking only at the history of controls in this sector, it may be better to look at the emerging trends. Hence, FDI regime has to be chosen by the country concerned taking into account all the relevant considerations, which in the Indian context relate to security concerns and the need to finance rapid growth. This is particularly important as India still has a lot of catching up to do and needs policies that will permit the necessary leap-frogging."

What this ignores is the important consideration that technology transfer and improved management are unrelated to FDI in the telecom sector. Specific technology transfer occurs when equipment is manufactured. The DoT successfully brought in GSM and CDMA technologies by incorporating the appropriate conditions within the licence agreement of 1994 and then changing over to technology neutrality in September 1999. The National Telecom Policy (NTP) 1999 certified technology neutrality as a policy decision. As for services management, much depends of the induction of managers capable of efficiently running world-class operations. Indian managers are today being invited to run some of the world's biggest telecom operations; for example, Mr Arun Sarin is CEO, Vodafone.

However, linking FDI to parameters of technology transfer and managerial expertise is at best tenuous. What gives the Government confidence that a higher FDI cap will reduce tariffs further? How would infusion of new capital lower tariffs? Would a higher FDI cap automatically bring telecom services in areas not being served (given the fact that the current track record of foreign investors outside urban India is extremely suspect)? The country's ability to attract high-quality foreign capital would depend on an improvement in the regulatory and policy framework. No foreign investor in telecom has ever cited the so-called "low" FDI cap as a reason for not coming to (or not choosing to remain in) India.

The Left parties had argued that the view that a higher FDI cap should be permitted "because India requires very large amounts of capital to rapidly expand its telecom infrastructure is specious because Indian telecom companies have healthy balance-sheets and are in a position to raise adequate funds from the domestic market." It had been further argued that the "constraint to growth is not lack of capital but the cost of services, and this can be adequately addressed through an appropriate regulatory environment".

The Finance Ministry's reply stated: "It is unlikely that the requisite growth in the telecom infrastructure can take place through domestic savings alone. The growth achieved last year was exceptional and of a qualitatively and quantitatively different genre compared to previous years. This growth has to be sustained to provide affordable telephony to all parts of the country. Most of the subscriber growth has come from private sector investments and this trend is likely to be maintained.

"In future, the contribution of the private sector, along with the public sector, would have to be maintained at a high level. The sustainability of such growth to achieve 200 million subscribers by 2007 and a much larger base beyond 2007 is desirable and will require huge resources. FDI becomes a key resource in this context. Slowing the growth momentum at this stage would lead to losing several direct and indirect benefits of telecom growth.

"According to the Working Group on the telecom sector, an investment of Rs 1,60,000 crore is required to be made in this sector during the Tenth Plan period. Even if domestic capital of this magnitude were to become available, which is doubtful, it would certainly be at the expense of investment in other sectors where foreign investment may not enter as readily. Clearly, then, foreign investment should be welcomed as a means of adding to the overall capital formation in the country.

"The argument that telecom growth can be ensured through bringing down the cost of services may be taken as valid, but the fact remains that unless there are abnormal profits in the system, regulation alone cannot bring down the cost of services. In the long run, prices will come down only if the cost of delivering these services also comes down, and this requires upgradation in technology and capital infusion, as well as cheap capital — all arguments in favour of FDI."

What cannot be denied is that large investments are indeed required in the telecom sector. However, the contention that such investments would materialise only by increasing the FDI cap from 49 per cent to 74 per cent is suspect. An important reason why Indian telecom companies have failed to raise large amounts from the capital market (through initial public offerings) is the sense of uncertainty that had plagued this sector during the previous government.

Private telecom companies and the government, including the regulator, TRAI, were almost always at loggerheads with one another and frequently embroiled in litigation.

The growth potential of the Indian telecom market is more apparent now than a decade ago. Some of the regulatory hurdles too are out of the way.

The market is reportedly growing by as much as 1.5 million connections a month. Will new foreign investors be interested in entering the Indian market at this juncture? The chances do not appear bright unless new opportunities — in the form of, say, new mobile licences — emerge. This seems most unlikely.

The telecom companies and the TRAI both claim that Indian tariffs are among the lowest in the world. With the latest technology available to service providers, it is not at all clear how new FDI will help lower tariffs further or why such investments would be considered "cheap" capital or capital that is more easily accessible.

The 49 per cent cap on FDI, contrary to what the Government's note implies, does not prevent upgradation of technology in any manner. It is also not true that better regulation cannot bring down the cost of service. In fact, empirical evidence suggests that more effective regulation has brought about some of the sharpest cuts in telecom tariffs.

The migration package for cellular operators enabling them to move from a licence fee system to a revenue sharing regime helped reduce the per minute tariff of mobile calls from an average of Rs 8 to Rs 3. The move from a system of "called party pays" to one where the "calling party pays" in May 2003 did, according to the TRAI, result in a massive jump in the mobile phone subscriber base and a reduction in tariffs.

Then, the introduction of competition in International Long Distance services by providing a licence at Rs 25 crore against Rs 500 crore for a licence for National Long Distance services helped reduce ILD tariffs far more significantly than NLD tariffs since these were related to the cost of entry.

These three examples clearly indicate that forward-looking, enlightened and creative regulation would result in reduction in tariffs rather than mere introduction of competition. By contrast, the introduction of a fourth mobile operator in telecom circles resulted in mobile tariffs coming down by a very small fraction.

(To be concluded)

(The author, a senior journalist, is Director, School of Convergence, New Delhi. He can be contacted at paranjoy@yahoo.com.)

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