Friday, December 14, 2001

Telecom Policy For High Growth

Indian Telecom is an example of one of the interesting paradoxes of the nineties. Despite Telecom policy & Telecom regulation being roundly criticised, GDP from communications has been one of the fastest growing sector of the Indian economy. There is still an opportunity to reform and simplify the regulatory framework further and maintain or even increase during the next decade the growth rates seen in the last. This article focuses on selected aspects of policy that need to be reformed, namely licensing, spectrum permits, revenue share and Universal service obligations (USO).
Over the last few decades there has been enormous technological change in telecommunications. This has reduced costs, made possible the complete unbundling of different segments of the industry, led to a convergence of Computers (digital) communication (analogue) and Media (video) and is close to eliminating the “natural monopoly” traditionally held by the local wire line network or ‘Basic service.’ Our policy framework does not fully reflect the revolution that has taken place and will be completed over the next decade or so.
A series of papers since 1998 has outlined the principles on which an efficient Telecom policy should be based (see for instance “A Communication Policy for the 21st century, Economic and Political Weekly, June 3-9, 1999). These principles are, (a) A Market based approach to investment and production (i.e. supply), which is the hall mark of economic reforms, (b) A forward looking approach which anticipates, rather than follows, rapid technological changes in Telecom and communication, and (c) The unbundling of licensing (spectrum permit, service provision and regulatory/technical/prudential).
Two decades ago industry required a license to invest and produce. The amount of investment and the types & quantities of goods that could be produced were specified on the license. The time has come to abandon this practice in the telecom sector, by de-licensing investment in telecom and decontrolling the provision of all telecom services. In other words the spectrum (bandwidth) permit would be unbundled from the (infrastructure) investment and service provisioning/production license and the last two must be freed from control. Telecom companies will then be free to invest in telecom infrastructure, buy sell or lease it to each other and provide any combination of services that they find efficient & economical to provide. The latter could include Internet telephony, NLD or ILD service.
Even when there is no investment licensing or control on production or provision of services, registration may be required for prudential & regulatory purpose. TRAI should have the power to issue such regulatory/prudential/technical licenses to Telecom service providers and to adjudicate on connected matters. Such a prudential license is needed only for the ‘last mile’ (retail) fixed line network, what was historically defined as a “natural monopoly.” A registration procedure will suffice for all other Telecom service providers and various types of service provision.
The government exercises ownership rights over the electro-magnetic radio frequency spectrum or ‘bandwidth’ (Cellular, WLL etc.). An agency such as the spectrum advisor is designated to issue spectrum permits or spectrum use licenses. A spectrum permit should specify the geographical area and bandwidth that can be used and the period for which the user-permit applies. It must not specify or limit the types of telecom services that can be produced or provided (e.g. mobile/basic) on this spectrum. These permits must be fully tradable. The successful bidders must have the right (defined before the auction) to sub-lease part or whole of the spectrum or to sell the spectrum permit to any company that fulfils the eligibility criteria for bidding for the spectrum permit. The eligibility clause would include anti-monopoly provisions. The TRAI should have the authority to enforce the eligibility clause.
The only purpose of the spectrum fee is to effectively ration a scarce resource (not to raise revenues). There should, therefore, be no spectrum fee or charge in geographical areas in which the demand for spectrum is less than the available bandwidth. Revenue shares, which have replaced license fees, can be viewed as a form of spectrum fee. This implies that revenue sharing should be eliminated from all geographical areas (e.g. rural areas & towns) in which there are less than four cellular operators. Bandwidth availability also probably exceeds demand for it in all but the (6-12) largest cities.
These two policy suggestions also imply that there should be no revenue share on any other Telecom service. The infrastructure character of Telecom services cannot on the one hand be used to justify excise, customs and income tax concessions and then be totally contradicted by additional taxation in the form of revenue share (e.g. on basic services, NLD etc.). Both the extra taxation (through revenue share) and the special exemptions should be eliminated.
The USO & the need to connect remote areas like the North East have been used to hide a number of inefficiencies & distortions. The regulator (TRAI) must ensure that the system moves to cost based pricing coupled with an explicit cross tax-subsidy scheme to implement the USO obligation. This should be based on an explicit USO charge in the form of revenue share of variable (call) charges coupled with an explicit subsidy on fixed (connectivity) charge. As the cost of connectivity is much higher in the rural & remote areas the explicit subsidy would be higher for these areas.
The policy should allow the emergence of specialist providers of telecom services to the high cost rural & remote areas, instead of forcing every license holder to set up a rural network. This can be ensured through an appropriate cross-subsidy, determined through a “subsidy auction.’

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