Backsliding Without Broadband

We are losing out on so much of our potential because of regulatory constraints.

[But of course, that is only a part of the story.  The rest of it is lack of organization, and of discipline, which is a long, long story.]

Shyam Ponappa      |    April 1, 2021

Not being permitted to use available spectrum in line with technological developments and global applications is like being deprived of access to the air around one. That our way-below-par broadband is not systematically addressed as a critically important way to provide requisite infrastructure to improve people’s lives is troubling. We lose out on the facilitation of education, healthcare, productivity, commerce, industry, government services, and entertainment. Is the government unaware of our deprivation? Surely the authorities are capable of devising ways to use spectrum for the common  good. 

Whatever other matters they are busy with, this is an area that should have priority.

The difficulty is in satisfying competing demands arising from what can best be described as our collective gnarled psyche. One preoccupation is with making corporations alone pay for public resources without allowing for profits. This apparently pervades not only the government’s thinking, but extends to many people at large, in the press and media, polity, civil administration, and judiciary. Compounded with the anxiety of decision-makers to protect themselves from overzealous future witch-hunts, this ensures there are no innovative attempts at resolving our communications infrastructure needs. One also sometimes encounters sentiments questioning whether we need 5G, or faster internet, or notions that we already have adequate broadband, and so on. We are inured to dysfunctional infrastructure support, and have become habituated to accepting deficiencies in our daily lives. Whether it is dropped calls, slow internet, or sporadic failures in electricity, water supply, or logistics, we treat this shoddy state as acceptable, despite its immense drag on effectiveness and productivity.

Meanwhile, we have just embarked on yet another 4G spectrum auction, while 5G, where we are way behind global developments, seems a lifetime away. If only our policymakers and administrators actively sought ways to improve our communications, including rural broadband, for instance, we might learn from practices elsewhere in the world of adaptations that could be implemented here. One interesting instance is that of the Federal Communications Commission (FCC) in the US. Seeking to improve broadband in underserved markets, in 2019, the FCC began the Rural Digital Opportunity Fund (RDOF) initiative, to channel universal service obligation funds collected from telecom operators to get high-speed networks built and services provided in rural areas. This replaced the prior Connect America Fund programme with its lowest-bid awards that had not worked. In 2020, the FCC conducted a reverse auction for broadband services to rural users, allowing for slower delivery in more remote locations. The tentative award for Phase I is $9.2 billion (Rs 67,000 crore) over the next 10 years in monthly instalments, with time-bound completion requirements. (India has about Rs 55,000 crore in a comparable Universal Service Obligation Fund.)

Over 400 entities, many of them consortiums including electricity distribution companies, have won RDOF contracts to build networks and provide services. Most plan fibre-optic networks, but the biggest winner for $1.3 billion, LTM Broadband, plans to also use high-speed fixed wireless. Another winner, SpaceX, plans Low Earth Orbit satellites to deliver 100 Mbps. There has been criticism from some analysts and contenders who question the feasibility of gigabit wireless networks in place of fibre. This may be uninformed, but it remains to be proven that delivery is on time and profitable.

Despite the difference in our environments, the FCC’s example has useful pointers for India. One is a practicable way to channel USO funds to develop rural broadband, with performance monitoring every six months. Second, a model and time frame to design and conduct a reverse auction, and award the 10-year contracts, with minimal hype. Third, allowing for choice of technologies, including high-speed fixed wireless, satellite, and so on. Finally, a solid foundation is provided by FCC’s supportive approach to making spectrum and infrastructure sharing a reality, including 6 GHz Wi-Fi. This is the sort of action we need in place of more rhetoric.

A complementary approach is that of Sweden and other Nordic countries. Telecom operators there have been sharing infrastructure and spectrum from 2G through 4G, which is now being extended to 5G. Note that all levels of technology (2G, 3G, 4G and 5G) coexist in their networks (1).

For India, policy-makers have to develop approaches, policies, laws, adaptations, and so on that are specific to our context, including culture, institutions, practices, and geographic and social circumstances. One element likely to be necessary for ubiquitous broadband is shared networks in rural areas as well as in dense urban environments. Mandatory provision of shared infrastructure was being considered in Sweden over a decade ago. Given that government’s initiatives and Sweden’s experience with sharing thereafter, network sharing is likely to be extended for internal use without mandatory requirements. In India, too, there is need for government initiatives and incentives. This is because extensive changes in policies, laws, and regulations must be effected, requiring inter-agency coordination and convergence in government departments, legislative agencies, institutions, and among stakeholders. The latter will include service providers, manufacturers, and user groups. Sweden’s experience shows there are compelling cost and energy saving reasons for sharing, apart from environmental impact mitigation, but that without government initiatives and facilitation, the common-good outcomes are not likely to evolve naturally in India, where passive sharing has been permitted and practised for years.

Our desperate need is for revamped spectrum regulations, making the relatively straightforward changes aligned with the FCC model to the extent feasible, after due consultation with industry and other stakeholders. Extending Wi-Fi on the lines of what has already been done for 5 GHz is the first step. The target bands are 6 GHz for Wi-Fi, 60 GHz for indoor Wi-Fi and outdoor authorised shared access by licensed operators like Wi-Fi, and similar outdoor regulations for 70-80 GHz. After that [the end-to-end connectivity is enabled -- which is infeasible now], a systematic initiative is required for network sharing through consortium ownership, with similar holdings in verticals with infrastructure providers, and government participation through BSNL. All concerned government agencies will need to be involved, as must all stakeholders.

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Shyam (no space) Ponappa at gmail dot com

1: https://www.nokia.com/blog/the-well-kept-secret-of-2g-3g-4g-5g-dynamic-spectrum-sharing/

Unlock = Open, not Choked!

Don't let a virus stall initiatives and weaken the economy.

Shyam Ponappa  |  June 4, 2020

A recent column in this newspaper juxtaposed the way smart, experienced people have high expectations, only to be disappointed by our weak state’s predictable failures (Strong expectations from a weak state, May 25). Is there justification for any optimism, or at least hope? Here is an exploration of reasons for persisting in the face of continued odds, and pushing for economic recovery. Why should one persist with constructive efforts? Because a rising tide lifts all boats, and one’s contribution can affect outcomes. And because attempts at partial opening will not suffice.

There could be new economic opportunities by way of capacity, logistics or markets, or a wider array of sustainable consumer choices, whether for manufactured goods, services, or activities. Think back, and surely you have witnessed government action extend beyond the grind of just keeping everything going.

One instance of major change that affected the economy was in 1990, when the secretary of the Department of Electronics N Vittal worked in close consultation with industry. This resulted in path-breaking reforms, such as the setting up of “high-speed” links (of a mere 64 kilobits per second at the time) between Information Technology (IT) companies in Indian software technology parks and their international clients, and various tax incentives that followed much later. The offshore services industry gathered strength, and later expanded to cover IT-enabled services with call centres and business processing, extending to knowledge processing.

Likewise, telecommunications reforms began in 1990, when prime minister Chandra Shekhar led a shaky government for a brief period. The telecommunications ministry was looking for a private sector consultant. Through an invisible network, an investment banker who had been a management consultant in San Francisco was asked to look into telecommunications reforms. This led to the setting up of the Athreya Committee and its recommendations: On separating policy-making from operations, corporatising the Mahanagar Telephone Nigam as an operating company for Delhi and Mumbai, and Bharat Sanchar Nigam for the rest, while recommending access to private sector operators. All this was not smooth and painless, and took years, but did happen eventually, although the separation remains untidy.

By 1998, telecommunications operators were in a situation similar to the predicament some months ago, of weak revenues and a debt overhang, with some differences. There were many operators with heavy debt because of government charges and limited revenue generation capacity, because of smaller networks and less clients. This is the “winners’ curse” of auctions, when exorbitant amounts are paid to government for auctions, with nothing left for building and running networks and enterprises to generate the revenues to justify those payments. There are exceptions, as in the social democrat Nordic states, or state-controlled allocations as in China, or in Japan for a number of years.

Key people in government grasped this. The Prime Minister’s Office consulted with industry and external consultants, and took action. This resulted in the New Telecom Policy 1999 (NTP-99), whereby the major change was converting up-front licence fees to revenue sharing, although the policy was uneven because of cherry-picked recommendations. Initially, the government set the percentage share too high. It took years to reduce and trigger rapid growth. This came about through reduced government charges, calling party pays (which cut call costs), and a price war, brought on by the stealth entry of a new technology (CDMA) network, which the authorities allowed despite incumbent protests. Mobile services then grew exponentially from 2004, until the 2G spectrum scam surfaced in 2011.

A stream of articles advocated extending revenue-sharing to spectrum fees as for licence fees, and for shared infrastructure including spectrum. In 2011, a senior official in the DoT was sufficiently impressed to explore the possibility of evaluating alternatives using simulation models. But the 2G scam broke after the first few meetings of DoT officials, and this process was aborted. Instead of major changes based on simulations, a mere statement of intent about spectrum pooling and sharing made it into NTP-2012.

There were other incredible developments, although with no apparent results (yet). For instance, in 2013, a non-governmental organisation, the Centre for Internet and Society in Bengaluru, arranged for the former chief technology officer of the US Federal Communications Commission, Jon Peha, who had pioneered changes in America, to meet with top officials of the DoT, the Telecom Regulatory Authority of India, and some IIT professors. The latter conducted successful trials using TV White Space spectrum for the Ministry of Electronics and Information Technology. The details are many, but the point is that constructive advocacy can have an impact.

Reviving the Economy Now

We are in a difficult situation, with our economy and society battered by the lockdown and much else. We will need to do everything possible to recover, and it will take years. Attempts at partial opening will not suffice. Systemic revival calls for unrestricted flows of money, people, activity, and goods and services.

While reactivating the economy, we will need to be cautious through the pandemic (through “social distancing”, using masks to reduce infection, avoiding close contact with outsiders, and so on). But survivors have to live with this virus, as with other strains of viruses and bacteria, and other threats.

Consider traffic accidents, which average over 145,000 deaths annually (data 2013-2017: https://ncrb.gov.in/sites/default/files/chapter-1A-traffic-accidents-2017_0.pdf).  Extrapolating, this means a million fatalities in seven years, yet we don’t shut down all traffic. By comparison, Covid-19 had about 6,000 fatalities since January.

A proportion of the medical fraternity opines that (a) there is community spread of Covid-19, and (b) with many cases milder than the expected severity, that most patients need home care rather than hospitalisation. If these continue, our health systems will not be overwhelmed with severe cases. Also, so far, India has had a relatively low fatality rate of 2.8 per cent (see chart).

Source: Data - https://ourworldindata.org/coronavirus

As long as these factors hold, our priority has to be unfettered economic activity. Countries with higher fatality rates, including Sweden, China, Japan and Germany in the chart, have open economic activity (with tremendous productivity). We will weaken and our problems will escalate if we are held back.

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Shyam (no space) Ponappa at gmail dot com

Fix Problems Before Complete Failure

We need some real solutions on the ground.  Examples - Jet Airways post mortem findings applied as the way forward for difficult NPAs; and a radical change of course as strategic participants in consortiums led by the private sector for BSNL and MTNL.

Shyam Ponappa  | July 4, 2019 

There is much talk about improving the big picture in India. What we really need, though, is some successes on the ground — some actual resolution of problems as building blocks for further success. Two instances are discussed below.

The first is a puzzling business failure: Jet Airways running aground in slow motion. It is already bankrupt, but unravelling the sequence could make such financial predicaments, of which there are many, more tractable. India’s once dominant airline slipped up and, inexplicably, was allowed to collapse. Over 16,000 employees are affected, and India’s airline services are in turmoil. One estimate of liabilities was Rs 26,000 crore.

Why didn’t lenders and government agencies use a combination of executive action, judicial process and bridge financing to keep the airline afloat? Did legal obstacles genuinely prevent resolution? Or was it irresolute collective action, including lenders being gun-shy because of the Non-Performing Assets (NPAs) and witch-hunts, or manipulation, complicity, or vindictiveness? Answers and corrective action could help fix other high-profile NPAs.

The second is a macro-level example from telecom: The mishandling of BSNL and MTNL. Since the 1990s, successive governments have repeatedly attempted to give a fresh impetus to these hapless telecom entities, while depriving them of what could actually have made them successful, namely, strong, informed leadership, with independence/non-interference. Consequently, BSNL’s accumulated losses amount to nearly Rs 1 trillion. This is nearly five times Jet Airways’, and double Air India’s accumulated losses until March 2018, the latter being roughly the size of India’s annual health budget.

Sorting out these infrastructure service problems is crucial because of their effect on everything from security, education and healthcare, to work and entertainment.  If BSNL and MTNL can change course constructively, we may be able to get them off their collapsing trajectory. Resolving this situation would remove severe impediments to our effectiveness and convenience, and an enormous drag on productivity. Connectivity and communications are so critical to social and economic capabilities, and our approach for decades has been so flawed and on a disastrous trajectory, that it is incomprehensible that we should be resolutely following this failing path without changing it. Now, the government is reportedly considering infusing thousands of crores into the same business, together with monetising land and assets.

What Is In The Public Interest?

The first step is setting appropriate objectives for BSNL and MTNL. What public-interest needs do they serve? The communications minister mentioned strategic areas like home and defence, and services for crisis management during times of disaster such as cyclones and floods. Two others that he mentioned appear unjustifiable: That they are national assets, and leading providers of free services. The first is just an assertion, while the second is inappropriate for commercial undertakings. It’s time to drop wishful thinking and take honest stock. For instance, after policy statements supporting spectrum sharing, regulations were framed to be so restrictive as to make it not worthwhile. Instead, policy-makers should set objectives that actually serve the public interest.

Thus far, we have had confused and absurdly contradictory objectives in practice: High government collections from auction fees and charges, while expecting ubiquitous, reasonably-priced, good-quality services. It seems self-evident that such contradictory objectives cannot possibly be achieved. The fact that high government charges deprive networks of funds and increase user costs are documented in the following reports:

“A Study of the Financial Health of the Telecom Sector”1 and 

“The Impact of High Spectrum Costs on Mobile Network Investment and Consumer Prices”2

Suggested Objectives

A genuine reset could be attempted on the following lines:

• Connectivity is the most essential objective. The ideal must be balanced with the practical, through trade-offs and phasing. The top cities and clusters have a major share of economic and social activity and are therefore a priority, of which 35-50 may be the fastest growing, with the next 50 requiring attention because of sheer size. For instance, Sweden’s phasing for 2025 is for 98 per cent of the population to have a minimum of 1 Gbps at home/work, 1.9 per cent at least 100 Mbps, and 0.1 per cent at 30 Mbps. But to the extent communications are available in our hinterland together with roads, water and sanitation, activity and prosperity will spread, with less pressure to migrate to urban centres. The longer term objective therefore needs to be good connectivity everywhere (within reason).
• An equally important objective is to safeguard the public interest, while ensuring good, reliable services at reasonable prices. The question is not whether to shut down BSNL and MTNL, but how to provide the right structuring and support including reskilling and continuing education, so that they participate effectively in consortiums and provide safety, security, and oversight in the public interest.
• A third is to avoid disrupting markets with unsustainable prices, including free services. Governments have done this repeatedly in telecom, airline and electricity services. It needs to stop. People need high-quality infrastructure for productivity, not shoddy services that undermine productivity and waste their time, pre-empting better services because of low pricing.
• A fourth is to actively ensure adequate capacity and quality in services to not constrain or waste public resources and potential. This is to avoid the shoddy services referred to above, that are bottlenecks that subvert alternatives as low-priced barriers to competition, through constraining revenues while draining public resources.
• Finally, we must embrace infrastructure- and spectrum-sharing. Sweden provides a model not only for the European Union, but also for India. Singapore had a model public-private partnership until some years ago, when SingTel, a passive anchor partner, took over OpenNet. We need mandatory active network sharing (including spectrum) through consortiums run by the private sector, with BSNL and MTNL as guardian anchor participants. A report by Stokab in March 2017,³ the City of Stockholm’s IT infrastructure company, provides details of an operator-neutral fibre and mobile infrastructure. 

Resolving connectivity problems that affect many people may be more easily doable than, for example, clearing the NPAs, or reconfiguring agriculture.

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Shyam dot Ponappa at gmail dot com 

1: http://icrier.org/pdf/Working_Paper_380.pdf

2: https://www.nera.com/content/dam/nera/publications/2017/PUB_High_Spectrum_Costs_0517.pdf

3. https://www.stokab.se/Documents/Nyheter%20bilagor/Provins%20rapport%20mars%202017_en.pdf

NPAs & Bad Banks

Correcting misinformed impressions about NPAs, and
the Swedish model for setting up a Bad Bank.

Two features about non-performing assets (NPAs) deserve exploration. First, prevailing impressions about banks and NPAs, such as:

• Large borrowers are primarily responsible for non-performing loans;
• Small borrowers rarely default;
• Privatisation will prevent NPAs and frauds; and
• A bad bank for problem loans will help or it won’t.

Second, solutions for NPAs have been limited to providing some government funding, with hopes of muddling through.First, take the contention that large borrowers account for most bad loans. Of total NPAs of Rs 10,149.16 billion, the published Big 12 comprise 25 per cent (Rs 2,537.29 billion).1 Another 100 wilful defaulters of over Rs 2.5 million against whom suits were filed constitute 7.3 per cent (Rs 740.2 billion).2 While these constitute a third of NPAs, smaller accounts make up the other two-thirds.Among housing loans, NPAs are highest among small loans not exceeding Rs 200,000 (10.4 per cent, or Rs 1,361.26 billion of Rs 13,089 billion), more than double the rate for larger loans over the last five years.3 The lowest NPAs are in the over-Rs 2.5-million category at 0.9 per cent, decreasing with loan size.Housing loans contribute 13.4 per cent to total NPAs, i.e.:

• About half the top 12 defaulters (25 per cent), and
• Double the 100 wilful defaulters (7.3 per cent).

Therefore, the need is for a systemic fix across all levels, not only big defaults.Second, the context for NPAs is the economy. As last year’s Economic Survey (2016-17) pointed out:- A number of NPAs resulted from overleveraging after a high-growth period. Corporates used debt to invest heavily in long-gestation projects in infrastructure, such as power, mines and metals, and spectrum and coal auctions, encouraged by the government. From 2004-05 to 2007-08, the investment-gross domestic product (GDP) ratio rose from 27 per cent to 38 per cent, while bank credit doubled. Then, costs rose along with difficulties in acquiring land and environmental clearances, and oil prices. Import prices rose 2.4 times between 2010 and 2014. The rupee dropped sharply against the dollar, increasing foreign borrowing costs. Domestic borrowing costs also increased with interest rates (Chart 1) as growth fell.

Chart 1: Real Interest Rate: Lending Rate Minus GDP Deflator

https://tradingeconomics.com/india/real-interest-rate-percent-wb-data.html

- By 2013, nearly a third of Indian companies had interest cover less than 1 (EC1), i.e., annual earnings before interest and tax (Ebit) less than interest. By 2015, nearly 40 per cent were at this level. From 2012 through mid-2015, EC1 companies’ earnings were around Rs 250 billion per quarter. By end-2015, earnings had dropped to Rs 20,000 per quarter, and by September 2016, to Rs 15,000 per quarter. Cash flow was insufficient to service debt from 2014. The result was a sharp increase in NPAs (Chart 2), which could increase to 11.1 per cent by September 2018.

Chart 2: NPAs

https://tradingeconomics.com/india/bank-nonperfoming-loans-to-total-gross-loans-percent-wb-data.html

What’s difficult to understand is why and how systemic controls against inappropriate evergreening and fraud, such as integrating SWIFT, or Society for Worldwide Interbank Financial Telecommunication, with in-house systems, and avoiding underreporting of NPAs, have not been enforced until now. Systems have to be properly designed and implemented.However, while we dither over a bank for bad loans, NPAs need resolution. The most salutary model of banking reform, privatisation and recovery is from Sweden.

Sweden’s transformation after its banking crisis of 1991-1992 is remarkable. Their prior experience parallels ours in some ways, although our attributes are very different, i.e., small versus large, advanced/developing, highly skilled small population/underskilled large population, and so on. For years, Sweden was an underperforming economy with low real wage growth, high inflation and public debt. Then a period of rapid growth and credit expansion led to a real estate bubble and collapse, like ours.

Housing prices fell by 25 per cent and commercial real estate by 42 per cent between 1990 and 1995. NPAs went from 5 per cent to nearly 50 per cent among banks (all private), and bankruptcies soared. In this crisis, the entire political leadership decided to unite to resolve their problems. Then, despite fighting behind the scenes, they worked together to take quick action.4 The Swedish centre-right government and the Social Democratic opposition decided on (a) state ownership of troubled banks (b) while guaranteeing all depositors and creditors except bank shareholders. This united approach restored confidence. A ‘bad bank’ was set up and NPAs evaluated and assigned to ‘good’ or ‘bad’ banks by an independent body disposing of bad assets. Sweden’s banking system recovered to support a sound economy with growth.

In our case, undertakings untainted by greed or moral turpitude with cash flow problems deserve efforts at rehabilitation. Examples are where there’s a likelihood of improving cash flows, as in some of the power projects that have run aground for reasons such as lower demand, or exceptional input cost increases. An objective evaluation process by an expert group to triage the NPAs is needed, categorising the untainted and impaired, and where there is scope for revival. Also, rehabilitation measures need to be formulated. The rub is that India is ill-equipped by culture and customary practices to do this. Yet, we would benefit greatly if we could draw on Sweden’s experience in taking corrective action. Private asset reconstruction companies have not been effective. It is unlikely that partial measures will fare better.The primary requirement is political unity across all parties. Without this, none of the rest can follow. Then, setting up an independent professional entity unencumbered with political considerations to do what is needed. This becomes evident in comparing the US crisis of 2008 (all private banks) with the Swedish experience. After Lehman Brothers collapsed, the Democrats agreed to the Treasury Secretary’s ad hoc $700-billion bailout package, then denounced it just before a vote. The Republicans rejected their own plan, leading to turmoil in the markets. The bill finally passed a week later, and although successful in cleaning impaired assets at a much lower than expected cost, led to a slow recovery and was hugely unpopular. Similarly, the Japanese approach has been slow and not a clear success. Can India’s political parties replicate Sweden’s example? Will they?

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Shyam (no space) Ponappa at gmail dot com


1: http://www.business-standard.com/article/finance/steel-firms-dominate-list-of-rbi-s-12-defaulters-117061601393_1.html 

2: https://suit.cibil.com/

3:https://rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=17314

4:http://www.slate.com/articles/news_and_politics/the_pivot/2012/10/sweden_when_its_banks_failed_the_scandinavian_country_made_a_miraculous.html 

and 

https://www.reuters.com/article/us-sweden-banks-analysis/swedish-banks-safe-bet-or-risky-business-idUSKBN1500ZX

Extractive Charges on Spectrum & Petroleum

Are government levies on these critical inputs beneficial or detrimental?

Shyam Ponappa  |  

March 6, 2014

A spectrum auction last month ended with over Rs 61,000 crore (about $10 billion) bid for the 900 MHz and 1800 MHz bands. Everyone seems upbeat: the government at high bids, and operators at staking out spectrum so that they can continue offering their services. The public at large seems enthused. Is there reason for good cheer? Consider some of the outcomes and the likely consequences.

Outcomes

• Dominant operators, namely, Bharti Airtel, Vodafone and Idea, have won enough spectrum to continue building their businesses. So has a new potential contender, Reliance Jio.
   
• Winners must pay the amounts they've bid, in addition to making further investments in networks. Their financial compulsion will be to increase prices to amortise a payment of nearly Rs 18,300 crore, followed by the remainder to be paid in 10 annual instalments after a two-year moratorium. Competition will provide a countervailing effect against price hikes. The annual payment by all operators after two years will amount to about Rs 4,400 crore. To put this in perspective, Bharti's profits for FY 2013 were around Rs 5,000 crore and Idea's around Rs 800 crore.

• This perpetuates the approach of operators paying first for the right to use spectrum, then dividing available spectrum for their mutually exclusive use. The corollary is that unless operators choose to share some of their infrastructure, as some do for mobile towers, each operator must invest in its own infrastructure. In the absence of voluntary infrastructure sharing to the extent permissible, multiple investments are needed to build parallel networks. This is comparable to railways or transportation companies setting up multiple countrywide railroad and road networks, each for their own exclusive use. The result is a very capital-intensive approach requiring much more investment, while not being sufficiently remunerative.

Consequences

• To the extent that there are front-loaded government charges, operators have less capital for network investments.
   
• Resource constraints result in service deprivation in low-potential areas, as is prevalent now. In other words, urban areas may be well served, but not less densely populated rural areas where the majority reside. It is for the same reason that metro cities are better served by airlines or transportation services: the profit potential is higher.
   
• The lack of amenities in rural areas means there is continuing demographic pressure to migrate to cities. The overwhelming societal need for the provision-of-urban-amenities-in-rural-areas ("PURA") is entirely sidelined. Yet, these are the amenities people need most for economic empowerment, productivity and better living conditions.

Contrast this with Sweden's approach to broadband, for instance. Sweden is a pioneer in the use of 700 MHz for broadband. A loosely translated quote from Sweden's information technology minister reads: "A hundred years ago, it was the ability to build good railways, good roads and good physical infrastructure that laid the foundation for jobs and growth. Today it is also about fast enough build-out of good mobile telephony."1

Another instance of constructive intervention, and that too in a developed metropolis, is the London Enterprise Panel's approach, because London's broadband is considered insufficiently competitive. Funds "will be invested where the market is failing (particularly where this is proving a barrier to business growth)".2

In India, the efficient 700 MHz and 800 MHz bands have not yet been assigned except for limited 800 MHz spectrum for CDMA. These bands are most effective for broadband in rural and semi-urban areas. However, auctions and high reserve prices militate against their effective deployment at low cost, thwarting an apparent remedy for our deficient coverage. Also, GSM operators have just bid aggressively in the recent auction to survive, and are loaded with debt. Only the financially strong Reliance Jio, which has not bid as much, can offer high bids. Vodafone may also be able to do so. So, one problem is reduced bidding capacity, but a bigger problem is reduced investment capacity: the higher they bid, the less likely they are to provide countrywide broadband quickly at reasonable prices.

Petroleum Levies


Petroleum levies comprise another range of high government charges on critical inputs. In 2006, the taxes on petrol amounted to 52 per cent of the retail price, and on diesel, 30.4 per cent with Rs 45 to the dollar, (Delhi price: Rs 45/litre when Brent crude was $65/barrel). Tax collections now amount to around 30 per cent for petrol and 18 per cent for diesel, with Brent crude at around $110/barrel, and petrol in Delhi at Rs 74/litre. While the percentages collected are lower, the amounts collected are about 70 per cent higher than in 2006 because of the increase in the price of crude oil at a time when the economy is slumping.


There is a rationale for collecting reasonable charges to cover construction and maintenance, environmental impact mitigation and waste disposal (clean-up), and to provide incentives. But it's time our governments stopped being extractive, and rationalised charges based on objectives and policies in the public interest. Governments and politicians should be addressing these, instead of doles and giveaways. The aim should be to maximise life-cycle benefits, which can be optimised by reducing short-term capture in favour of longer-term accruals from growth, and from policies designed to deploy productive infrastructure including applying the principle of common carrier access.

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shyam nospace ponappa at gmail dot com


1: "Digital TV [700 MHz band] will now provide frequencies for cell phones", writes IT Minister Anna-Karin Hatt - Dagens Nyheter, February 27, 2014: http://www.dn.se/debatt/digital-tv-far-nu-lamna-frekvenser-till-mobilerna/

2: London Enterprise Panel - 2014-2020 European Structural & Investment Funds Strategy for London, January 2014: https://www.london.gov.uk/sites/default/files/London LEP ESIF Strategy 2014-20 (1).pdf


Questions and Answers

What should the government do?  How should spectrum be handled?

What the centre/states should do:

a) Mandatory common carrier access, i.e., open access to shared networks, with payment depending on extent of use.  Active infrastructure sharing.

b) This means that (i) networks are shared in their entirety, and (ii) spectrum, which is part of a network, is also shared.

It will immediately consolidate the networks, reduce redundant investments, and optimize carrying capacity/throughput.  This also implies reduced carbon footprint, and more capital available for extending coverage and services (instead of being sunk in right-to-use purposes).

In the case of electricity, the logic is:

‘Because a single high-capacity line minimizes both capital costs and losses to electrical resistance per unit of power carried, transmission and distribution are natural monopolies.’

http://www.econlib.org/library/Enc1/ElectricUtilityRegulation.html

A similar rationale applies to communications networks and services, allowing for multiple players for competition.

c) How should spectrum be handled?  Given over to the national network of networks administration on a pay-for-use basis.  Is this a ‘gift’ to telecom companies?  Only in the same way that government-acquired land given to highway authorities, ports, airports, industrial areas, and so on, are gifts to them.  There needs to be clarity on what constitutes infrastructure, and I’m of the firm opinion, I think without bias, that telecom/broadband networks are part of essential infrastructure. 

d) Then the question arises: what about windfall profits, or excessive profits. 

i. There should be no windfall profits because there are no arbitrage profits available, as any legitimate user can access the network on payment.

ii. In the event there are unforeseen windfalls, they can be recovered through the mechanism of windfall profits taxes [which should be allowed for], and the level of profits can and need to be regulated, whether by appointed regulators or elected public utility commissions.

e) All spectrum – including 600 Hz, 700 MHz, 800 MHz – should be rationalized and used in the public interest, including Defence.

f) Where states come in: right-of–way charges need to be rationalized.  Public services need incentives designed into their functioning and delivery, including schools, colleges, not just government services.

Spectrum Auctions: 'Jhatka' or 'Halal'?

The choice is between sudden death and a slow one

Shyam Ponappa / February 3, 2011

Why do people advocate spectrum and licence auctions? Is it because they think auctions work? Is it the appeal of an ideology, like capitalism or socialism? Or is it because governments often collect large sums, and auctions seem fair (in a market-driven sense) and transparent? Theorists apparently cannot find better ways to allocate spectrum or licences, despite the alternative of technical and financial short-listing followed by a lottery. Yet, while desiring high government collections, people really want reasonably-priced good infrastructure, and continue to rail against government waste. Let’s review some so-called “successful” auctions and what followed.

1994: The US spectrum auction

Prior to 1994, the US used to allocate spectrum on demonstrated capacity and merit (“beauty contests”). The spectrum auction in 1994 netted record bids. The Federal Communications Commission chairman reportedly said: “Auctions have proven once again to be a success not only by awarding licences to those that value them most, but also by decreasing the national debt.” Then disaster struck, with a number of “successful” bidders declaring bankruptcy. As BusinessWeek put it in 2010 with the benefit of hindsight, “... over time, beauty contests have delivered fewer problems and higher value to society than have airwave auctions.”¹

1994: India telecom licences

In 1994, India auctioned telecom licences. Chaos followed owing to overbidding and default. Thereafter, the sector struggled from one contention to the next, with the government and operators deadlocked by 1998. The New Telecom Policy of 1999 provided a breakthrough, tossing aside the auction bids in favour of shared revenues. After the percentage share was reduced to reasonable levels, and “Calling Party Pays” halved tariffs in 2003, mobile services grew exponentially to over 725 million subscribers by 2010. Interestingly, the Telecom Regulatory Authority of India estimated that auction fee foregone till March 2007 was over Rs 19,000 crore, whereas actual revenue collections were double, at Rs 40,000 crore; by March 2010, the collections were 80,000 crore.

2000: The UK 3G auctions

The 3G auction in the UK was hailed as a spectacular success, reaping bids of about $35 billion.

2000: The France and Germany 3G auctions

Germany followed, netting $67 billion, and the finance minister quipped that the auction was for unexpected revenue to pay the national debt. France demanded a flat fee of $4.5 billion per licence.

The dotcom bubble burst in March 2000, followed by communications and technology companies a year later, and the bidders went into a tailspin. The collapse nearly bankrupted not only British Telecom owing to the enormous debt it incurred for the bids, but the entire industry worldwide. The economic slump that followed made it impossible for firms to pay off high debts, as their interest payments increased while their ratings fell.

A contrarian move in France is noteworthy for its prescience and insight. CEO Martin Bouygues (pronounced “Bweeg”) of the third mobile operator, Bouygues Telecom, refused the government’s demand of $4.5 billion as the fee for a 3G licence, making it the only mobile communications company in Europe with no investment in 3G. Mr Bouygues’ letter in May 2000 appeared on the front page of Le Monde, asking: “What should I tell my employees? … That we have a choice between a sudden death and a slow one?” While his opposition was ignored, by 2002, the French government dropped its asking price by more than 85 per cent to induce Bouygues to accept a 3G licence.

In terms of results, the auction “failures” – the Netherlands, Switzerland, Sweden, and “non-auction” countries like South Korea, Japan and Finland (until 2009) – have the best broadband services.²

Kapil Sibal’s appointment as India’s telecom minister has brought hope, with prospects of radical improvements in infrastructure, especially broadband, with a clean hand. Mr Sibal’s recent pronouncements on a new telecom policy, however, raise the spectre of another deadlock. Here are two examples: (a) “Adequate spectrum will be provided to all service providers.”

This is feasible not through slivers of spectrum for many operators, but only if there is a common carrier access, that is, all operators can access spectrum for a reasonable fee. There is no indication of what “adequate” means, nor of pooling or sharing spectrum.

Let’s hope the domain experts have been heard and not shouted down on “adequacy”. For instance, the Telecom Equipment Manufacturers’ Association had recommended that two blocks of 50 MHz each in the 698-806 MHz band be allocated to facilitate the development of wireless equipment and services. Large blocks of contiguous spectrum offer far more efficient capacity than many narrow bands. For local innovation, to get low costs, we have to think of adequacy in these terms, and not slivers of 4.4 MHz or 6.2 MHz.

(b) “Spectrum henceforth will be awarded only on a market-based mechanism.”

If the criterion for success is high bids and not delivered services, in effect, this means auctions, and the result is likely to be dismal. Those enamoured with auctions focus on the success of bids, ignoring the purpose of spectrum/licence allocation, which is service delivery resulting in consumer surplus (societal benefits).

If the operators choose to roll over and accept authoritarian decrees, a deadlock may develop again as it did in 1998 between the government and the public interest.

The government’s choices include:

• a genuine effort at developing comprehensive and integrated policies for reasonably priced services, while carrying along stakeholders;
• a cosmetic effort, letting stakeholders vent, and then issuing arbitrary decrees that leave a mess. For example, too many operators with fragmented spectrum; or
• attempting a political or populist fix, seeking to make the United Progressive Alliance look good, the Opposition look bad, bleeding all operators to avoid accusations of a sell-out, and still leave a mess.

The first alternative is in the public interest; the second and third are not. The issues that need comprehensive transformation are spectrum and network sharing for service delivery at least cost. The government and Mr Sibal have the opportunity to choose an approach resulting in excellent delivery including broadband at reasonable prices.

1 'Spectrum Auctions Hurt Mobile Consumers', Bengt Nordstrom, Businessweek, August 17, 2010: http://www.businessweek.com/globalbiz/content/aug2010/gb20100817_915227.htm

2 'Broadband quality ranking - by economic development', Pierre Verdi, October 27, 2010:

http://www.sbs.ox.ac.uk/newsandevents/releases/PublishingImages/3%20-%20Broadband%20quality%20ranking%20-%20by%20economic%20development.jpg