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Lesson from India's Telecom Liberalization

[Carried by PANOS Feature Service, London, 12 Feb 1997]

India's telecommunications liberalization - involving the largest auction of tenders anywhere - is floundering. But after three years of ad-hocism and fence sitting amid charges of corruption, the government appears to have settled down to do its homework.

This may be the best chance yet for the Indian government to see some of the huge license fees promised by prospective operators of basic telecommunications services.

The liberalization began with a bang - bids received in September 1995 in response to the government's first tenders were close to a staggering $30 billion. They covered all the 21 Circles into which the country's telecommunications operations are geographically divided. The Circles are graded A, B and C, with A being the most profitable.

The first signs of a telecommunications revolution in India are there to see. The bustling bazaars in small towns and big cities are crammed with shops selling services like long- distance telephone and fax calls.

The government set the ball rolling in 1994, when it announced a far-reaching, clear and ambitious telecommunications policy. It not only opened the field to private investment but also declared that every one of India's 570,000 villages would have a telephone line by 1997. So far, some 250,000 villages - just under 40 percent - have been connected with public telephones.

The government also promised to set up an independent regulatory authority soon.

The policy's main aims are to reduce waiting lists for telephones, improve the dismal state of rural telecommunications and provide a world-class service at home and in the workplace. The money is to come from both the private and public sources.

But things began to look murky soon after 1995's first round of auctions.

There were huge differences between the bids for the A Circles and the less lucrative C Circles. An unknown company - an Indian-Israeli-Thai consortium called HFCL - accounted for almost a third of all the license fees offered. It was no surprise when newspapers alleged the company was close to the then Minister of Telecommunications.

The government then declared that all the bids - save five - were unacceptably low. Of the five bids - for a total of about $11.2 billion - four were from HFCL. Only one was for a C type Circle.

New bids have been sought twice in 1996. Except in a couple of cases, the response has been cool - the amounts offered are only marginally higher than the minimum price. Half the circles - mostly the poorer ones - have not attracted a single bid.

The policy implementation - some say the policy itself - is in a shambles.

One of the main reasons for the mess is the way the policy has been presented to the country. Perhaps fearing controversy, the government has tabled the policy document in Parliament with little notice, and few debates have been held.

Since its adoption, several major international players have voiced their concern - about the lack of a transparent regulatory regime; the limit on the licenses a company can retain; the one-sided terms offered to the new service providers (close to 70-80 percent of the revenue from each call was to go to the government's Department of Telecommunications); and the lack of price flexibility.

The government response has been sympathy - and a series of baffling and frustrating moves. It has backtracked on some decisions and changed others, dithered long over the regulatory body and suddenly transferred the bureaucrat who fashioned the policy, fuelling rumors about differences at the top. To cap it, large sums of money from alleged kickbacks have been discovered at the home of the former Minister of Telecommunications.

"There are two dimensions to the entire problem," Pramod Mahajan, a senior Member of Parliament from the opposition Bharatiya Janata Party, told journalists recently. "The first is the total lack of a clear policy on telecom - the rules are constantly being changed along the way. The other dimension is corruption. The present crisis is a clear outcome of corruption in the ministry."

Stung by domestic and international criticism, the government has recently taken several initiatives to speed up the entry of private players into the telecommunications sector.

Some long-standing demands of would-be investors have now been met, including tax concessions and lower tariffs for connecting new networks to the existing one. And

An ordinance to set up the Telecom Regulatory Authority of India was signed by the President in January.

The process has been a learning exercise for all concerned - but most of all for India's policy makers, still new to liberalization but aware of the potential the country offers to investors.

The main lesson from India is that the strategic nature of telecommunications requires it to be handled with political savvy as well as commercial sense. Inviting new players to compete with a government monopoly of over 100 years requires a bureaucracy that is well-versed in the intricacies of business, banking law and technology management - traditionally in short supply in governments anywhere.

The state of telecommunications in India reflects decision-making processes in many countries. Where there is political patronage, there is also a reluctance to set up credible regulatory bodies that can reduce the scope for arbitrary action.

Dr Mahesh Uppal is a communications and information technology specialist.