Published: Business Line, 18 November, 2004

By Prabhat Dayal, Manish Agarwal and Bipin Batra

THE Telecom Regulatory Authority of India (TRAI) is to finalise its recommendations on unified licensing regime (ULR) shortly.

The key objective of the ULR seems to be that of unhindered growth of new applications and services, leveraging on technological developments in the information and communication technology (ICT) sector.

However, a closer look at TRAI’s recommendations reveals that the main objective is to ensure a level field and a no-worse-off (in fact, better-off) situation for existing NLD (national long distance) and ILD (international long distance) operators.

All other objectives, such as encouraging efficient small operators to cover less-developed areas in term of telecommunication facilities, easy entry for new operators and encouragement of new technology, have taken a back seat in the process.

While the recommendations outline several initiatives, there are certain concerns that need to be addressed.

First, the proposed entry fee of over Rs 107 crore for unified licence would be a huge entry barrier for new operators and also for those intending to upgrade to NLD-ILD services; it would only serve to protect existing NLD-ILD players. Integrated operators, such as Reliance and Bharti, are not required to pay any entry fee for unified licence.

In this context, it is worth noting that while access services (basic and cellular) have witnessed intense competition, the NLD-ILD segments have not; this despite the opening up of the sector.

This is primarily because of the high entry fee and prohibitive bank guarantees, limiting the number of NLD/ILD operators. Going by the recommendations, competition is again going to be limited because of the unfavourable and irrational entry barriers.

Though TRAI has proposed a gradual reduction in the entry fee from the recommended Rs 107-plus crore to Rs 30 lakh after five years, much of the reduction would happen only in the sixth year, when the entry fee would be reduced from the proposed Rs 32 crore to Rs 30 lakh.

The reduction would be asymmetrical, as much of it would happen only in the later years. Existing operators will thus be shielded from competition for five years and consumers denied the benefit of competition. This is unwarranted.

Besides, TRAI has recommended the following concessions for NLD-ILD operators:

Reduction in licence fee from 15 per cent to 6 per cent of revenue share;
Relaxation in rollout obligations; and
Reduction in performance bank guarantee (PBG) from Rs 100 crore to Rs 50 crore for NLD operators. This has already been effected.
The total benefit for NLD and ILD operators from these concessions is estimated at more than Rs 4,400 crore over a five-year period.

Estimated benefit for NLD and ILD operators
Combined market size of NLD & ILD operations
(FY 2003-04)
Rs.9487 crore
Accrued benefits by way of reduction in license fees
(9% of Rs.9487 crore)
Rs.854 crore per annum /
Rs.4269 crore for five years
Relaxation of performance bank guarantee of Rs.50 crore per operator Rs.150 crore for private operators alone
Total estimated benefit (excluding relaxation given in rollout obligations) Rs.4419 crore

The recommendations are clearly loaded in favour of NLD-ILD operators. Compared to the Rs 4,400-crore relief package, the proposed reduction in entry fee to ease entry is a minuscule Rs 15 crore and Rs 3 crore, respectively, for NLD and ILD operators.

In India, there are only four NLD and five ILD operators compared to 621 and 360 respectively in the US, more than 20 in each segment in Australia and more than 10 in France and Chile. And with these recommendations, the NLD-ILD segment in India will continue to remain concentrated.

Given the likely trade-off between the objectives of easy entry and level playing-field, TRAI has focussed on the latter. Instead, suitable concessions to existing operators with lower entry fees would have served the purpose better.

Under no circumstance should concessions be accompanied by entry barriers to protect existing operators. Unfortunately, this is precisely what the regulator has done.

The entry fee should be brought down to Rs 30 lakh in the first year itself, rather than after five years. Delaying competition will not be in the interest of consumers.

While the proposal to allow niche operators to cover less-developed areas in terms of telecommunication facilities is a welcome step, the incentives given to them are wanting; the only worthwhile one being free entry.

They are subject to restrictions on use of technology but are expected to contribute revenues equal to those of other operators who function from lucrative areas and who are free to use any technology. This goes against the objective of encouraging small operators and would make their operations unviable.

There should be no licence fee for niche operators for an initial period of say, five years, after which there can be a review. Moreover, there should be no restriction on use of technology, else the areas from where they operate would continue to remain technologically backward.

Under licensing through authorisation, Internet service providers (ISPs) are allowed to provide restricted Internet telephony. However, the gross cost variation in simple authorisation ISP licence and unified licence may prompt many ISPs to terminate illegal traffic.

Already, there are complaints of a grey market in incoming ILD calls. ISPs may be encouraged to provide Internet telephony subject to payment of Rs 30 lakh as entry fees.

This is an opportunity to address all anomalies in the system and encourage growth of new technologies. However, the regulator has chosen to protect NLD/ILD operators and postpone the use of new technology for another five years. Last November, TRAI had initiated the first step, where access service licences were unified.

And, as a final step towards convergence, it has now come up with these recommendations. However, unless these concerns are taken into account, the proposed regime would not achieve its objectives.