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But even allowing a very wide margin for errors, there must be some limit to the mistakes one can make. In the case of telecom services, far too many things seem to have gone wrong, and still seem to be going wrong. Of course, all related events have been reported by the media, often in a speculative mode. An authentic story is now told by the Comptroller and Auditor-General of India (CAG), in an audit report presented to Parliament in May, 2000. The Department of Telecommunications (DoT) entrusted telecom services to private entrepreneurs progressively as follows: --Radio paging services in 27 cities (1992) and 19 telecom circles (1994) --Cellular telephone services in the metropolises (1994), and 18 telecom circles (1995 to 1998) --Basic telephone services (1997) ln all these cases the licence fees were charged in the form of fixed annual amounts based on competitive bids and formal agreements were entered into with all the operators. But the system did not work out well, and the government changed the basis for fixing the licence fees in 1999, adopting the principle of revenue-sharing. It also allowed the existing operators to switch over to the new system without having to bid again. The report's highlights: The Conditions: The government failed to enforce the basic financial conditions stipulated in the tender papers and incorporated in the formal agreements with the operators. Licence fees: All the agreements had clearly specified that in the event of serious defaults in the payment of dues, the government could take severe penal action, and could even cancel the licences. But there were massive and widespread defaults in this regard, for which no penalties were imposed. The audit report notes that the ''laxity shown by the Department in taking action against the defaulting licensees at the initial stages encouraged others to follow suit....". The magnitude of the accumulation of arrears in payments was mind-boggling, and the progressive figure of outstanding dues, including interest in mid-l999, exceeded Rs 4,000 crore. (See Table--Overdue Telephone Fee, also Overdue Wireless Charges.) Bank guarantees: All the agreements had categorically provided that the operators should furnish bank guarantees to the government for amounts equal to the fixed licence fee for one year. There were heavy defaults, thus, reducing the scope for making recoveries of unpaid dues. The shortfalls in mid-l999 exceeded Rs 2,000 crore. (See Table--Telephones: Bank Guarantees, and Radio pagers: Overdue Fees & Guarantees.) Escrow accounts: The agreements had also provided that all operators should open compulsory escrow accounts immediately with scheduled banks in India, and that all revenues accruing from these operations should be paid into such accounts. It was specified that the DoT would have a lien on 30 per cent of the amounts credited to these accounts, which it could use--if necessary--for effecting direct recoveries of outstanding dues. It was observed by the auditors in late-1999, that such escrow accounts had not been opened by any of the operators anywhere. The licence agreements had not specified the format of the separate agreements which had to be signed in this regard. And the process had taken an astonishingly long time. The matter has not yet been resolved, and no escrow accounts have been opened even today. This omission obviously reduced the scope for effecting direct recoveries on outstanding dues still further. Moreover, in the revised set-up--namely, the revenue-sharing regime--it takes away an effective built-in mechanism for identifying the actual revenues which accrue. The Concessions: In mid-l999, the government allowed the existing operators in the fixed licence fee system to come over automatically to the revised system of revenue-sharing. In that context, it also made the following concession which had very substantial money value and lacked adequate justification: Effective date: The effective date of the existing licences in the case of all cellular and basic telephone services in the circles was extended across the board by six months. This amounted to writing-off outstanding licence fees to the extent of more than Rs 1,100 crore. According to the government, this was necessary because of delays in the grant of clearance by government agencies. But the CAG points out that actual instances of such delays should have been reviewed and sorted out on a case-to-case basis, and that such across-the-board decision resulted in undue windfalls in many cases. Licence period: The existing licences were valid for l0 years in the case cellular phones in the metropolises, and 15 years in the case of cellular phones in the circles, and all basic telephone services. The government extended the licence period to 20 years in all cases. The reason cited for this sweeping decision was that telecom projects were highly capital-intensive and not viable in the short-term. This argument was untenable, since the operators were well aware of the specified licence period at the time of submitting their bids. Moreover, the existing agreements themselves contained a clause giving the government an option to extend the licence period, which was naturally meant to be exercised only in the light of the operators' actual performance during the term mutually agreed upon. By offering a premature and arbitrary extension across the board at such an early stage of the operations, the government undermined its own ability to enforce important contractual conditions and deal effectively with serious inefficiency and major financial defaults. Entry fee: The Telecom Policy, 1999, provided that all operators licensed under the new system based on the concept of revenue-sharing should pay an one-time entry fee, which would be fixed by the Telecom Regulatory Authority of India (TRAI). But, in the case of the existing operators who were allowed to switch over to the new regime, the government decided that the outstanding licence fees--which were very substantial--should be treated as the entry fee. This hardly made sense as the outstanding dues were payable in any case under the existing agreements, whether the basis for fixing the licence fees in future was altered or not. The loss suffered by the government on this account can be assessed only when the TRAI fixes the entry fee for new operators, which is still to be done. The Contradictions: Some inherent intriguing contradictions in the above scenario: Competition by-passed: Automatic transplantation of all the existing licences from a specified system of fixed licence fee into a totally different system of revenue-sharing, as well as the 'ad hoc' extension of their validity period by five to ten years, contradicts the basic concept of competitive bids which the government had rightly adopted at the outset. Once the government had decided to switch over from the fixed-fee regime to the revenue-sharing regime, the proper thing to do was to terminate the licences of the defaulting operators and call for fresh bids under the new dispensation. Of course, a few operators who were not major offenders could have been given an option to come into the new scheme as exceptional cases. But even there, any arbitrary extension of the licence period would have gone against the basic principle of fair competition. Subscriber base: The justification given by the government for these decisions was that all the operators had grossly overestimated the likely number of subscribers over a 10-year period, and were suffering enormous losses. This impression was based on the claims made by the operators themselves, and not on any impartial study. The CAG report points out that such claims were not true at all. In the case of cellular telephones in the metropolises, from the beginning the number of subscribers were far more than what had been projected by the operators themselves in the original competitive bids. In some cases, even the projections for the tenth year had been surpassed in the third or fourth year. As regards cellular phones in the Circles, the CAG found that the apparent shortfalls in many cases were due to the fact that the operators had not fulfilled their own commitments in terms of geographical coverage (districts), which did not call for any compensation from the government. Of course, one can argue that the subscriber base depends not only on numbers, but also on the duration of usage. This aspect has not been taken into account by the CAG, but he has commented on the wide disparities and distortions in the information furnished by the operators to different authorities in different contexts, and the government's failure to verify the data independently. The overall impression which emerges is that the government's policy decisions in this context were indeed facile. Defaults rewarded: Whatever may be the arguments in favour of 'bailing out' the operators said to be in distress, the twin facts remain: they had made their high bids of fixed licence fees in full awareness of the environment, eliminating other competitors from the picture and had flagrantly violated the contractual conditions regarding payment of licence fees (and furnishing bank guarantees and opening escrow accounts), throwing these safeguards to the winds. The intrinsically contradictory result has been that reckless defaults have attracted handsome rewards and not severe penalties. The Confusion: These impressions are reinforced by the fact that the government introduced the revised system of determining licence fees (namely revenue-sharing) with effect from August, 1999, without clearly laying down the criteria which should govern such a system. The CAG's report highlights some surprising omissions, which are still to be set right. Moreover, no effective regulatory mechanism is still in place: Vague set-up: There is no clear definition of 'gross revenue', and no prescribed procedure for maintaining and verifying detailed records of the revenue earned. As noted earlier, even the escrow accounts have not yet been opened by any operators. Uncertain share: The quantum of the government's share of the revenue, which is to be charged as licence fee, has not yet been fixed. It is to be recommended by the TRAI, which had told the government that it would need some time. Meanwhile, the government has simply fixed 15 per cent of the gross revenue as 'provisional licence fee', to be adjusted one way or the other when a final decision is taken. There seems to be a lot of unhealthy speculation in the air about what precisely the TRAI is likely to suggest. TRAI's role:
In fact, a thick cloud of uncertainty obscures the precise role which
the regulatory authority is expected to play in the on-going telecom drama.
But that is an intricate topic which calls for a separate study.
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Many
decisions taken by the government in the 90s have been bold and unprecedented.
In many crucial contexts, a process of trial and error has been inevitable
because of the unfamiliar and complex problems encountered while entrusting
the hitherto-public vital services to private enterprise.
