CHAPTER-5

PRIVATISATION OF TELECOM SECTOR IN INDIA

5.1 Introduction

The Industrial Policy Statement of July, 1991 mentioned that the government did not
want to continue with all the sundry enterprises it owned. It promised that: "Portfolio
of public sector investment will be reviewed with a view to focus the public sector on
strategic, high-tech and essential infrastructure." Six categories mentioned for
disinvestment were: (i) PEs based on low technology, (ii) small scale PEs, (iii) non-
strategic PEs, (iv) inefficient and unproductive PEs, (v) PEs having low or nil social
consideration or public purpose, and (vi) areas where the private sector has developed
sufficient expertise and resources. A large number of PEs producing consumer goods
and most of those which were sick met these criteria. But no mechanism was put in
place by the government for initiating action on its policy, except referring a large
number of sick PEs to the B1FR as required by the Sick Industrial Companies Act.
And once the reference was made, the government became unconcerned about the
purpose meant to be served by going to BIFR.

5.2 Reforms in Telecom Sector

The infrastructure sector, poses serious problems in developing countries, both in

meeting development goals and making available improved services. This is also seen
as the most important hindrance, in attracting international investments and in the
process of globalisation. Therefore, the maladies of the infrastructure sector, make it
expedient For policy planners, to think of comprehensive reform measures. Each

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sector has its own peculiar characteristics, problems and possibilities and therefore
need separate policy initiative for reforms. However, a detailed analysis of Telecom
sector is present in this chapter. For developing appropriate policy Frameworks for
Telecommunication sector reforms, it is imperative to study the characteristics of the
sector, its constraints and the goals for development.
In most developing countries (including India), economics of scale, and political and
military sensitivities have made telecommunications a typical public service and a
natural monopoly. Manufacturing, installation, operations and control functions are
generally exercised by government departments or semi-autonomous boards or public
enterprises, funded entirely out of public coffer. Often the same authority is also
responsible for policy and regulatory function.

53 High Return on Investment

Investment in telecommunication sector, yields high returns to the economy as a

whole. A study of the World Mark in Africa, Asia and Latin America reveals that, on
a Conservative basis, investment in telecommunication services is expected to yield
an average internal rate of return of 18- 20 per cent. About 90% of the telephone lines
are connected to communication - intensive sectors of the economy such as trade,
finance, transport, utilities, communication, government administration, professional
service providers etc. In fact about 90% of telephone calls and revenues emanate
mainly from productive and distributive activities of the economy. All these figures
suggest that rational investment and pricing policies can make telecommunications as
profitable enterprises, The sector can also be an important source of revenue for the
government by way of licence fees, value added tax, general revenue, import duty,
income tax etc.

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5.4 Underinvestment leading to Inadequate Services

Despite high potential for social and private returns, telecom sector is characterised
by gross underinvestment, with rapid technological advancement, the sector requires
high capital intensive Investment, which cannot often be met adequately by the
meager budgetary resources of the government. This results in an ever-increasing
demand -supply gap, New applications for basic telecom services, have to wait
several years (3 million waiting list of applicants in India) before securing
connections. This prompts many users to pay premium for acquiring telephone
connection:- in secondary market or paying high rentals for proprieties with telephone
facilities. During peak hours there is severe call-traffic congestion, due to limitations
of line capacity, resulting in irritatingly high call failure rate. Lack of funds also
imposes severe limitation, on making available value added advanced services,
increasing!) required by the modem sectors of economy. This has debilitating
repercussions on the competitiveness of organisations and industries it a globally
integrated market place. Foreign investment in economic enterprise becomes
inhibited and quality of life is owned in terms of personal access to emergency
services and communication with kith and kin.

5.5 Unequal Territorial Coverage

Availability of telecom services are skewed with major concentration being continued
to the metros and big cities where most of the economic transactions originate.
Similarly, long distance networks get a better service priority because of their higher
revenue earning potential. Lack of spread and poor quality of service in rural and
backward areas, deprive the vast multitude of rural population of access to telecom
services. This has far reaching social and economic connotation in accentuating rural
urban disparity.

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5.6 Poor Level of User Satisfaction

In a monopolistic situation, government often tends to undervalue customer

satisfaction. Inadequacy, poor quality and unreliability of service especially delay in
restoration of line after breakdown, leads to high degree of customer dissatisfaction.
The rise in pricing of telecom services have also been outstripping the wholesale
price index ffor all commodities) resulting in discontent among users.

5.7 Major Reforms

The rational for sector reform in telecom sector, starts from the basic premise that, if
the country's economy has to succeed in an increasingly globalised, competitive and
information based world economy, then telecom facilities must grow, become
inexpensive, keep pace with total technological development Conversely, reform of
telecommunications, would be used as a catalyst for growth in other sectors, thus
enhancing our overall economic performance. While the exact direction of reforms
would depend on a country's political philosophy, institutional characteristics, sector
constraints and overall economic policy, certain basic lessons can be drawn, from the
experiences of countries who have already embarked on the reform path. There are
broad policy areas that any government has to content with. These involve
determining appropriate:
• Sector Structure
• Degree of Competition
• Regulatory Framework
• Distributive Equity
Each area of policy reform is discussed in the following pages.

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5.8 Reform of Sector Structure

Governments in developing countries have been increasingly veering round, to the

view that alternatives to the traditional state telecommunication monopoly, must be
considered in order to introduce private participation, competition, a degree of
management autonomy and commercial orientation in the enterprise. It is expected
that such changes will introduce both risk sharing, greater ability to raise investment
capital needed for expansion and modernisation, and enhance responsiveness to
customer expectations. In the new context the ambits of policy, regulation and
operational functions must be separated, with government's role limited only to policy
making. There are two specific modalities for achieving reforms in sector structure.
De-Govemmentalisation/Corporatisation Shifting responsibility of providing telecom
services from the government is likely to result in greater operational flexibility,
autonomy of decision-making and freedom from unnecessary political intervention.

This can be achieved in various ways:

1) Transformation of government Telecom Department into an autonomous state-

owned enterprise, operating under a specific status, (example Pakistan).
2) Reorganisation of a public enterprise into a corporation, under normal company
law, with principal state participation in the equity structure.
(examples: Fiji. Nigeria, Malaysia, India)
3) Divestment of government equity in a public enterprise, in favour of private
investors general public (with provision of golden share in favour of government)
making the government a minofity owner, (examples Mexico, Chile, Turkey,
Panama).
4) Full scale privatisation with no government participation in stock.

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The process of de-govemmentalisation can be strengthened by introducing innovative
financing and investment strategies. Since, the general Investor perception is that
corporatization brings in its wake greater degree of commercialization, transparency
of operation and accountability to the enterprise, it would be easy to raise financial
resources from capital markets by issues (public / private placement) of appropriate
financial instruments (shares, debentures, bonds etc.). A corporate entity can also
enter into financial and technical collaboration agreements, with foreign enterprises
or explore possibilities of B.O.T ventures.

It is important however to keep in mind, that change of ownership structure by itself

does not necessarily guarantee or ensure better functioning of the infrastructure
sector. What is required instead is a political will to support a change towards
efficiency, commercialisation in functioning, a change of altitude among the (op
management and supportive national policy by the government.

5.9 Reducing the Role of Monopoly

Existing monopolistic telecommunication enterprise, which are now unable to bear

the brunt of their nationwide responsibilities, can be relieved of some of the
responsibilities which can be handled by others. For example, handing over of value
added services to private operators would permit the monopoly enterprise to
concentrate on the priority task of developing countrywide infrastructure for basic
services.

Dilution of monopoly status, would also encourage sector efficiency, encourage

responsiveness to user demands, encourage technological innovativeness, prompt
competitive service provision and improve overall capability for mobilising
investment resources. There are six main approaches for achieving the goal of
shedding monopoly status. They are:

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1) Sub-contracting. Routing tasks such as civii works, cable laying, equipment
installations, phone directory publications, operation of public telephone booths,
telephone billing etc., can be sub-contracted.
2) Private Provision of Subscriber Equipments (e.g. telephones, teleprinters, private
automatic branch exchanges) on a competitive basis. This would allow users a
greater degree of choice of equipments at a competitive price.
3) Competitive Provision of Services Value added services e.g. cellular mobile
telephone, radio pagers, video conferencing, e-mail services etc., could be
entrusted to private bidders. This could bring in competitive discipline to
potentially fast growing and technology intensive segments of the telecom sector
without placing additional investment and operational burden on the main telecom
enterprise. Similarly, telephone cooperatives and small independent companies
can be established and encouraged to provide basic telecom services in rural
areas, not covered by the main telecom enterprise. Even in the existing monopoly
service areas, competition with the main service providers can be introduced by
allowing entry (on competitive basis) as a duopoly or as a multi-front
competition.
4) Business Networks. Large business entities with specific telecom service needs
can be allowed to establish and maintain their own telecom networks. This could
help overcome communication constraints, in vital productive sectors and meet
specific needs of high end foreign companies.
5) Capacity Trade. Trading of telecommunication capacities, among various private
and public telecommunication providers, can promote economy of scale and
technological innovation.
6) Splitting In large developing countries (like India), the national monopoly
enterprise, can be divided into separate regional entities, which could function
more efficiently (examples - MTNL. VSNL in India).

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5,10 Developing Competition

International experiences suggest that typically the benefits of corporatisation, are

significantly improved, when a sector is exposed to competition. Competition
promotes efficiency, innovation, price reduction and responsiveness to customer's
demands. To understand the nature of competition and decide upon the degree of
competition, it is necessary to first clarify the technical process of providing a
telecom service.
The three basic components in telecommunication infrastructure are -
i) Network facilities
ii) Telecom services (basic and value added)
iii) Customer premises equipments.

Telecommunication networks comprise of transmission and switching facilities,

which perform the basic telecommunication function, of transmuting and switching
information. The basic telephone services and telex network's are designed and
operated for only these services. Therefore any competing service provider without
having independent transmission and switching facilities could only act as a
broker/reseller of the underlying carrier services. However, a service provider having
his own switching facilities, can lease transmission facilities from the main network
operator (carrier), incorporate certain service features and add value to his switching
facilities before service to the users.

Although, more or less restricted network competition, has been allowed in the USA,
UK and Japan, most other countries want to continue with one national network
infrastructure (as a monopoly). This attitude is buttressed by the fact that, competition
in this area, is both economically difficult - being enormously capital intensive and
duplicative in nature, as well as politically non-acceptable from a national security
point of view. Hence, the major policy debate, in telecom deregulation, now centers

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around allowing competition in service—basic and value added and in customer
premises equipment.

5.11 National Telecom Policy, 1994

The New Economic Policy, announced by the government, aims at improving India's
competitiveness in the global market and rapid growth of exports. Another element of
the New Economic Policy is attracting foreign direct investment and stimulating
domestic investment. Telecommunication services of world class quality are
necessary for the success of this policy.
The objectives of the New Telecom Policy are as follows:

1) The focus of the telecom policy shall be telecommunication for all and
telecommunication within the reach of all. This means ensuring the availability of
telephone on demand, as early as possible.
2) Another objective will be to achieve universal service, covering all villages as
early as possible.
3) The quality of telecom services should be of world standard. The objective will
also be to provide widest permissible range of services, to meet the customer's
demand at reasonable prices.
4) Taking into account India's size and development, it is necessary to ensure that
India emerges as a major manufacturing base and major exporter of telecom
equipment.
5) The defence and security interest of the country will be protected.

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5.12 Department of Telecommunications

A number of committees were set up by the government, to recommend on key

aspects ranging from restructuring of the DOT to implementation of the National
Telecom Policy.

5.12.1 The Arthreya Committee

A high level committee on Reorganisation of Telecom Department headed by Dr. MB

Arthreya was constituted in December 1990. The committee was set up to
recommend the most appropriate organisational structure for the management of
telecom services. The committee submitted its report in March 1991. The committee
could not arrive at a consensus on key issues like reorganisation. But, the committee
had unanimous opinion on the following:

1) The present duality of structure, i.e. part-DOT and part-MTNL should be ended.
2) Value added services be thrown open to competition by public or private
enterprises, co-operatives etc.
3) Small entrepreneurs may be encouraged in installation, cabling, closed user
networks etc. for greater efficiency.
4) The "Policy and Regulation" tier, should be separated from the "operations" tier in
any future structure.
5) These should be greater, real decentralisation, delegation, autonomy and
flexibility for the field units.
6) Need for professional management in technical and other areas.
7) Need for massive effort to upgrade staff knowledge, skills and attitudes for
absorbing new technology and providing better customer services.

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However, the committee could not reach a consensus on the issue regarding the
organisation structure.

5.12.2 The D. K. Gupta Committee

In December 1994, the DOT constituted a committee to study and make

recommendations regarding restructuring of the headquarters of DOT, under the
chairmanship of D.K. Gupta. The terms of reference of the committee inter alia were:

a) Operations of VSNL. The Videsh Sanchar Nigam was established under the
DCT, in April 1986, after conversion of the erstwhile department of overseas
communications services, under the Ministry of Communications. VSNL
provides, operates and maintains all types of international telecommunication
services for the country. The INTERNET - services was added to the VSNL's
basket, during August 1995.

b) Private Sector Basic Service Operators. Amidst large discontent among the
four lakh telecom employees, on 16th January 1995, the government invited
tenders from private sector, for providing basic telecom services in 21 circles.
The guidelines issued by the government stated that, the DOT would maintain
its presence in all telecom circles and only one private sector operator per
telecom circle would be allowed to provide the basic telecom services.

The tenders floated in January 1995, inviting bids for basic telecom services,
envisaged the private sector to operate 17.75 lakhs telephone lines and provide
2.17 lakh villages with public telephones, total investment involved is about
Rs. 8,250 crore.

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c) Terms and Conditions for Basic Service
Eligibility Conditions
1) The bidders must be a private Indian company, registered under
Companies Act 1956.
2) In case of joint venture with a foreign company, foreign equity should
not exceed 49% of total equity.
3) The bidder company must have experience of operating 5,00,000
telephone lines as on 1.1.1995. Experience of the foreign partner could
be considered but should have minimum stake of 10% in the total equity.
4) The net worth of the bidder company, should not be less than Rs. 3,000
crore, Rs 200 crore and Rs. 50 crore for category A,B and C circle
respectively.
5) No company in a joint venture can be part of more than one bidder.

d) Financial Conditions
1) Tariff for the service provided by licencee shall not be more than DOT’s
tariff. Tariff is subject to regulation, by the to-be set up Telecom
Regulatory Authority of India.
2) The licencee has to pay licence fee in yearly installments, for the periods of
license as quoted by him.
3) Financial bank guarantee and performance bank guarantee to specified
counts will be given by the licence to the government agents including due
patent and licence conditions.

e) Bids by Private Operators for Basic Telecom Services The basic telecom
services bid were bid were invited on telecom circle basis. The bids which
were submitted till 23rd, June, 1995 indicated that 16 consortia had evinced
interest. For 2 telecom circles, 81 bids were received. Delhi and northern stare

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 of Punjab proved to be the most sought after circles with both attracting nine
bids each.

5.13 Current Scenario

The Indian Telecom Sector has come a long way since the days of long waiting for
getting telephone connections in pre-1990 era. Today, India's telecom network, with
about 344 million telephones, is one of the largest in the world and the second-largest
among the emerging economies of Asia.

The sector has witnessed dramatic transformations on almost all fronts. While
monopoly has given way to competitive regime with multiple players, tariffs have
been reduced drastically. The share of private sector has increased to more than 74%,
and the contribution of mobile telephony has gone up to 80%. The performance of
telecom sector has been widely acclaimed. However, we have to travel many more
miles to catch up with the developed countries. The government has set an ambitious
target of 500 million telephones by the end of 2010, and broadband connectivity to 20
million subscribers by end-2010.

New telecom era in the country started in mid-90s with the launch of first mobile
services in August 1995 "Modi Telstra". However, the telecom sector since then has
undergone a sea change. When the first mobile services were introduced in the
country, it was considered as an item of luxury and a status symbol. The call structure
was too expensive, with an outgoing call rate of Rs 16 a minute and incoming call
rate of Rs 8 a minute. Over and above this, the cost of instrument was prohibitive
with cheapest instrument costing Rs 15,000 a piece. As a result of this, wireless
communication service was affordable only to a small section of people. Operators
were not entirely responsible for high call rates during the initial phase as the license
fee charged by the government for obtaining the telecom license was astronomically

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high. Also, at the onset of the telecom revolution, the wireless communication service
was present only in selected urban areas, which has since then spread to all cities and
is now percolating to rural India, where two-thirds of the population resides.
The passage of new telecom policy in 1999, which introduced several consumer-
friendly initiatives, has changed the face of the Indian telecom sector.

5.13.1 Telecom Target for the 11th Plan

• A telecom subscriber base of 575 million with one phone for two rural
households by 2010 i.e., to reach a rural tele-density of 10% from the present
1 9%.
• On demand telephone connection across the country at an affordable price
• 20 million broadband connection and 40 million internet connections by 2010
and broadband connection on demand across the country by 2012.
• 3G services in all cities/towns with more than 1 lakh population.
• Broadband connectivity to every school, heath centre and Gram Panchayat
• To make India hub of telecom manufacturing lay accelerating the
establishment of telecom-specific SEZs.

Entry of private operators like Bharti Airtel, Hutch, Reliance, Tata, BPL and Idea has
created a competitive market resulting in reduced operational costs and upward trend
in the number of mobile subscribers. One of the highest telecom tariffs in the world,
India has moved to one of the lowest telecom tariffs without compromising on the
quality of services that has in fact generated substantial customer satisfaction. With
the introduction of One-India call at Rs 1/- per minute, telecommunication has now
become well within the reach of every citizen.

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5.13.2 Spectrum Issue

Currently, there are seven wireline and 12 wireless telecom operators in the Indian
telecom sector. One of the interesting statistics to be noted is that the GSM operators
in India served 3.36mn subscribers per MHz (125mn GSM mobile subscribers with
37.2MHz of spectrum), whilst China's GSM operators are serving only 0.85mn
subscribers per MHz (38mn GSM mobile subscribers with 45 MHz of spectrum).
Although the number of wireless operators is not so large, nor is the penetration level,
the telcos have been experiencing severe shortage in spectrum, which has lead to
deterioration of operational standards. In order to find a solution to this problem, the
Department of Telecommunication (DoT) has asked the Defence Ministry to vacate
about 25MHz of spectrum.

5.13.3 Regulatory Framework

Historically, this sector was primarily run by the Government under the umbrella of
the Ministry of Telecommunications and Information Technology, Department of
Telecommunications (DoT). The government started opening up the
telecommunication sector to the private sector in the early 3990s. Earlier, the
Department of Telecom was the whole and sole of the sector, and used to act as a
service provider, regulator, policy maker and also the arbitrator in case of disputes.
The year 1997 was the watershed year in the history of the Indian telecom sector. In
this year, the Telecom Regulatory Authority of India (TRAI) came into being with a
view to providing an effective regulatory framework, and adequate safeguards to
ensure fair competition in the provisions of telecom services and protection of
consumer interests. TRAI was vested with powers to issue directions to service
providers, make regulations, notify tariffs by giving orders and adjudicate in cases of
disputes.

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With a view to separate the role of service provider and policy formulator, the
government created the Department of Telecom Services (DTS) from DoT in 1999.
In October 2000, the DTS was corporatised, which is now known as Bharat Sanchar
Nigam Ltd (BSNL). In January 2000, the TRAI Act-1997 was amended by an
ordinance. The amendment separated the adjudicatory function of TRAI and assigned
it to a new entity called the Telecom Dispute Settlement and Appellate Tribunal
(TDSAT). Appeals against TDS AT judgments can only be filed in the Supreme
Court.

The government introduced the National Telecom Policy (NTP) in 1994. However,
the policy did not have the desired effect as indicated by the growth of subscribers.
The government introduced the New Telecom Policy in 1999, which tried to rectify
the loopholes of earlier policy. The NTP, 1999, changed the fixed license fee system,
envisaged in NTP, 1994, to a revenue-sharing regime.

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