Recapturing the Commons

Regulations that facilitate infrastructure with appropriate public resource use will enhance productivity.

Shyam Ponappa   |   March 7, 2019

Growth in the third quarter was disappointing, but there are signs of a cyclical recovery, with a Purchasing Managers Index for manufacturing at a 14-month high. For a significant upward shift of our growth curve, however, apart from lower interest rates, policy-makers have to be constructive. What might we wish for? Here are some suggestions.

Accept the reality that investible funds in India are insufficient for our needs. These include our stock and net inflow of capital, and profits available for investment. We can try to increase our productive capacity or choose business-as-usual, thereby staying below our potential. Why? Because our activities aren’t profitable enough to induce and sustain investment. We need investment —in hard infrastructure, such as transportation and logistics, electricity, water and sewerage, and communications, and in second-order infrastructure, such as security and law and order, health care, education and training, banking, finance and insurance. There’s also the need for reorganisation of markets and practices, e.g., in agriculture, infrastructure, and government procurement.

There’s little doubt that digital connectivity is invaluable for all these. While the imperative is clear, the question is how to orchestrate achieving the desired results.

The telecom operators, alas, have low profitability, inadequate network coverage, and too much debt. Continuing as before means subpar access and productivity for all. We are all hamstrung, and even more so in rural areas. Because of the expanse an7d scattered users there, connectivity entails much higher costs with lower revenue potential.

Self-Organising Infrastructure – A Conceptual Flaw Without Regulatory Support

Meanwhile, there are conceptual flaws in our approach. The National Optical Fibre Network (Bharat Broadband Network Limited or BharatNet) was conceived as a countrywide fibre backbone. The plan was for optical fibre links to 250,000 gram panchayat villages covering India’s approximately 600,000 inhabited villages. A major assumption, however, was that private operators would build access networks to villages and to users. This was unrealistic for a number of reasons. First, there’s the cost of covering sparse users over large expanses with low revenue potential. Second, the supportive regulations for wireless technologies to build the access networks were/are not in place. For example, even for the established 5 GHz WiFi range used globally for WiFi hotspots, restrictive policies meant that 5 GHz equipment could not be used effectively in India in urban or rural installations. This changed with new regulations for 5 GHz, but only four months ago in October 2018 (for details see https://organizing-india.blogspot.com/2018/11/a-great-start-on-wi-fi-reforms.html).

Other wireless technologies for intermediate- and last-mile links are still blocked, and need enabling regulations.

• The 700 MHz band: No operators bid for this given its high price, although it is very useful for covering distances of 5-10 km, and can penetrate walls and foliage. This band together with the 500 and 600 MHz bands could be used to connect gram panchayats to nearby villages. A study of inter-site distances in 14 states shows that most villages would be covered with this range (see Chart below).
  
  
  Study of Inter Site Distances - Gram Panchayats and Villages

• Source: https://tsdsi.in/wp-content/uploads/2019/02/Krishna-Ganti-Day-1-5th-Session-1.pdf

• The 500 and 600 MHz bands are allocated for TV, and therefore are part of the “tragedy of the unused commons”. Only a small fraction is used for broadcasting in India because of limited free-to-air TV and better alternatives. As they are earmarked for broadcasting, they are not used for telephony either.

• The 70-80 GHz band (E-band) is effective for short-range links covering more users at 3-4 km, but not permitted in India, although it is light-licensed in many countries with nominal fees, e.g., the USA, UK, Russia, and Australia. While ideally our regulations should align with global norms, there are exorbitant charges on operators (reportedly 37 per cent, plus corporate taxes), a debt overhang from spectrum auctions, huge investment needs, and relatively low revenue potential. Compelling arguments to let operators use the E-band with unlicensed access, with registry on a geo-location database to manage interference, to be reviewed after some years. The additional traffic will generate revenues from which government collections will increase.

• The 60 GHz (V-band for distances up to 1.6 km): the Cellular Operators Association of India (COAI) opposes making it licence-free as in most countries, and wants it assigned to operators for access and backhaul. For the same reasons as for E-band, operators could be allowed unlicensed access, with a review after some years.

Market Structure and Organisation

A larger problem is that legacy structural and organisational issues need concerted efforts to take requisite policy initiatives. This is perhaps a greater, more urgent need for ubiquitous connectivity.

Successive governments have struggled with revival plans for BSNL and MTNL, somewhat analogous to Air India and Indian Airlines in aviation. Governments have not provided sustained support for ambitious connectivity objectives. There is sometimes inadequate understanding of fast-changing, technically complex enterprises, and episodic attention is given to large enterprises that need timely capital- and skill-intensive decisions (and decision-makers in place), and the upgrading of skills and operating practices. BSNL and MTNL are declining, with bailouts, market disruption through price-cutting, and inability to deliver profits. This is a huge opportunity cost on citizens. However, it is conceivable that with appropriate leadership, and organisational and capital backing, these enterprises could contribute effectively to ubiquitous connectivity, rather than being a drag and/or a disruptive factor. This could happen, for instance, if an alliance were possible with private sector operators providing leadership, organisation and capital, while state ownership concentrates on safeguarding the public interest.

Bharti Enterprises’ Chairman Sunil Mittal has suggested an alliance with Vodafone for an optical fibre network. Bharti and Vodafone already have a joint venture, Indus Towers, providing passive infrastructure services to operators. If regulations enabled active infrastructure from a consortium including BSNL and MTNL, it would leverage the infrastructure while reducing the capital requirements, and increase delivery capability. The entire thrust of regulations could be oriented to facilitating service delivery, leveraging capital, equipment and human resources.

The regulatory approach should aim to facilitate access equitably to public resources that belong to citizens, and not to create obstacles.

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Shyam (no space) Ponappa at gmail dot com

A Great Start on Wi-Fi Reforms

The 5 GHz regulations are exactly what we needed for a start. But we need a lot more, and not only from the DoT.

Shyam Ponappa    |   November 1, 2018

This item of detail is almost like magic. The MoC has done something splendid regarding Wi-Fi. Its 5 GHz spectrum regulations have everything we could wish for. But it’s a first step — only the first. Much more is needed to reap the benefits.

To put it in context, we now have a policy that enables effective broadband Wi-Fi hotspots, and profound changes in connectivity are feasible for the last mile in India, as in other countries. A high proportion of smartphone traffic abroad is over Wi-Fi. In the recent past, in the US it was around 70-75 per cent, while Japan was around 83 per cent, and Germany about 87 per cent.1 Traffic is offloaded from licensed spectrum, freeing it up for re-use. We have 605 MHz added in the 5 GHz band to the existing 380 MHz for Wi-Fi, and a removal of restrictions on external usage as in the US, so Wi-Fi will have much greater capacity.

The ramifications, however, are ironic. These regulations could lead to a surge in economic activity, and consequent benefits from connectivity. But this will increase imports, which are already overboard on account of oil prices and technology imports, an aspect discussed later in this article.

The increased activities in network installation and ensuing benefits will vary depending on supporting ecosystems of policies and practices. This applies within the communications sector as also at points of interface with other sectors, such as electricity and finance. To illustrate, in communications, consider an unlicensed band in most markets including the US, the UK, and Europe, namely the 60 GHz V-band. Whereas the Federal Communications Commission (FCC) in the US delicensed 14 GHz in this band for “wireless fibre” called WiGig, India hasn’t done so. Instead, another WPC2 notification in October delicensed only 500 MHz (61-61.5 GHz) at very low power. Devices abroad that use this band for 400-metre and 700-metre connections have channels of 2,000-2,500 MHz acting as wireless fibre links over short distances. These can’t be used here. Short-distance connections to Wi-Fi and wired networks in offices and residential, commercial and industrial complexes will need fibre or cable.

This policy link is missing, perhaps because operators oppose it. The user network traffic bypasses operators to the extent that Wireless Internet Service Providers (ISPs) and other entrepreneurs set them up and collect charges, whereas operators have paid huge premiums for the spectrum required earlier. A solution that enables commercial deployment by licensed operators would solve this problem, although ISPs would have to go through operators as before. Another alternative could be to have unlicensed access to public wireless networks owned and operated by BSNL/BharatNet/CSC, or by operator consortiums, on payment of service charges by operators and users.

Equally essential are aspects of ecosystems that are adjuncts from sectors such as power supplies, finances, and local manufacturing, for substantial and stable growth. So for convergence resulting in significant benefits, these are the kinds of problems that will have to be resolved:

• The power situation, with a conscious shift towards more distributed, renewable (solar and, in some areas, wind) energy, with changes comparable to Wi-Fi/5 GHz in policies and practices. 
• The financial system and non-performing assets (NPAs), including the steady revival of infrastructure projects. While dealing resolutely with malfeasance and fraud, nursing and reviving good infrastructure underlying the NPAs is crucial. A sorry plight, but if revivable infrastructure projects are allowed to fail, they end up as unproductive, wasted assets (a repeat of Dabhol), with negative multiplier effects. 
• The imperative for the domestic manufacture of equipment to reduce imports. This is going to be an escalating compulsion because of our market size, unless we develop solutions that help balance imports, such as a compelling tourism strategy (but just think of the complexity of the ecosystem elements that need improvement) or communications equipment exports (equally complex).

Meanwhile, we are on a path committed to curbing demand to contain the deficit: Battening the hatches, tightening belts, and waiting for oil prices to fall /exports to rise, keeping a wary eye on the current account deficit (CAD) because of imports, and inflation. This pressure may persist for months, possibly even years, restricting growth. Aren’t there feasible, growth-oriented initiatives, tempered by not exceeding reasonable bounds, including the CAD?

The data on the CAD, capital formation, FPI inflows, and FDI are in the chart below.

CA: https://rbi.org.in/scripts/PublicationsView.aspx?id=18603 

GFCF: https://data.gov.in/sites/default/files/datafile/Table3.10.xls

FPI Inflows: https://rbi.org.in/scripts/PublicationsView.aspx?id=13729

https://rbi.org.in/scripts/PublicationsView.aspx?id=18599

FDI Equity Inflows: http://dipp.nic.in/sites/default/files/FDI_FactSheet_29June2018.pdf

A study of data from 2001 to 2016 of how the capital account and its components, the current account, and gross fixed capital formation affect each other concluded that sustained capital formation requires more foreign direct investment (FDI) relative to other flows.3 FDI was found to have an indirect effect on capital formation, which was found to affect the current account. Debt portfolio flows and nonresident deposits financed the current account, but did not contribute directly to capital formation.

In Indonesia, a study of how the CAD affects exchange rates found that when it exceeds about 2 per cent of the GDP, the exchange rate depreciates over 12 per cent after a four-month lag.4 Tracking such relationships in India would be useful for policy making.

Meanwhile, India’s large growth sectors are plagued by unsustainable economics. For sustained growth, they have to be organised more rationally, to generate profits for productive enterprises. Promising domestic sectors include electricity, communications, and aviation. Bypass strategies as in software and IT-enabled services won’t work, because these services are for domestic markets. They must generate profits without labour arbitrage, while balancing imports and exports, unless growth continues to attract foreign capital. Genuine reform as for Wi-Fi and 5 GHz spectrum with collaboration involving the private sector and governments modelled on the automotive sector are a possible way forward.

Shyam (no space) Ponappa at gmail dot com

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1: Claus Hetting, October 2018: https://wifinowevents.com/news-and-blog/japan-83-of-smartphone-traffic-runs-on-wi-fi/; https://wifinowevents.com/news-and-blog/germany-wi-fi-carries-87-of-smartphone-traffic/

2. WPC: Wireless Planning and Coordination Wing, Department of Telecommunications

https://dot.gov.in/sites/default/files/License%20Exemption%20in%205%20GHz%20G_S_R_1048%28E%29%20dated%2022nd%20October%2C%202018_0.pdf?download=1

3. Ashima Goyal & Vaishnavi Sharma, September 2017: http://www.igidr.ac.in/pdf/publication/WP-2017-016.pdf

4. Nugroho et al, January 2014: http://bmeb-bi.org/index.php/BEMP/article/download/445/420/

The Problems That Should Occupy Our Electioneers

The prize in the elections next year could be a winner's curse.

Shyam Ponappa    |   July 5, 2018

The preoccupation with state and Parliamentary elections that is now manifest may take away attention from the economy. Despite some encouraging developments, major structural problems such as the non-performing assets (NPAs) in banks and stalled projects await resolution. They need urgent attention beyond the din of politics.

First, the good news

• Gross fixed capital formation improved to an all-time high of Rs 111.85 billion in the last quarter of 2017-18 from Rs 102.40 billion in the previous quarter.
• There was some credit growth, with non-food credit increasing 11.1 per cent in May 2018, compared to 4.1 per cent a year ago. Credit to the services sector also increased by 21.9 per cent compared to 4.0 per cent in May 2017, and personal loans grew 18.6 per cent compared to 13.7 per cent in May 2017. However, areas such as infrastructure, basic metals and metal products, construction, gems and jewellery, and vehicles and transport actually declined.
• The Insolvency and Bankruptcy Code (IBC) is apparently being implemented more effectively than it might appear. A Brookings Institution report of a conference of financial experts, including a former Deputy Governor of the Reserve Bank of India, in Mumbai in February states: “50 per cent of all NPAs are currently being resolved through the Code, another 25 per cent will soon be. The judiciary has been following the (very tight) timelines prescribed by the Code.”¹
• This week, a public sector bankers’ committee recommended potential solutions for NPAs to the finance ministry. These include an asset management company for stressed assets run by the banks, an asset trading platform for loans, an inter-creditor agreement between banks with the lead bank authorised to implement time-bound resolution, and finally, the IBC and sell off. Sceptics may mistrust these as being too cosy. Realistically, however, we have to accept that functioning together for mutual benefit requires trust, built around good organisation with checks and balances, and validation (observed in the breach in the complicit NPAs). In Ronald Reagan’s phrase (actually a Russian proverb), “Trust, but verify”.

So, is the glass half-full or half-empty?

The bad news

Here are just two examples of the looming problems.

• Stalled projects: An RBI circular of February 12, 2018, was like a guillotine on a number of private power projects with inadequate cash flows because of circumstances beyond their control. The circular directed banks to begin the resolution (sell off) process for all delayed projects, including those where debt restructuring was under way. There’s a school of thought embodied in this directive that uniform criteria must be applied to all defaulters. Another approach advocated by the power ministry is that there can be problems outside the developers’ control for which they are not responsible, such as a shortage of fuel, denial of access to captive mines, financial weakness of distribution companies, or delays in government or regulatory clearances. Developers cannot control these, and therefore such projects should be excluded from the purview of the RBI Circular. A Parliamentary Committee also recommended this in March.² The Allahabad High Court, hearing a petition by the Independent Power Producers Association of India against insolvency proceedings, ordered that “no action be taken against the power sector under the revised framework, and directed the finance secretary to hold a meeting with his counterparts in the power and coal ministries, along with representatives of the RBI and the Insolvency and Bankruptcy Board of India in June to discuss ways to address the issues faced by stressed power plants.”³

While the RBI held firm at this meeting on June 21, 2018 (e.g., see: https://www.business-standard.com/article/opinion/why-ibc-must-be-sector-agnostic-118070100732_1.html), the finance secretary reportedly asked for written submissions by the stakeholders. A group of experts will review these to consider next steps. The Allahabad High Court may yet save us from the brink.

• Fettered policies: The Wi-Fi example

We have an odd juxtaposition, with the government eager to auction 5G spectrum for revenues, while making it available to operators. The industry wants the spectrum but is overburdened with debt, which it already has difficulty servicing because of hyper-competitive price cutting. In addition, there’s a vast, underserved rural and semi-urban market, which requires even more capital investment. Finally, there are the stressed banks, which have thus far been the major source of funding.

Meanwhile, our fettered approach to 5 GHz for Wi-Fi is an example of policies that need unleashing. India’s National Frequency Allocation Plan (NFAP) has delicensed 380 MHz in the 5 GHz band. This is 200 MHz less than required by the standard, so users have less spectrum. Second, India permits only 50 MHz for outdoor use, and the remaining 330 MHz for indoor use. This severely constrains the use of this band and available devices in India, making it ineffectual for Wi-Fi hotspots in both urban and rural areas. We need an amendment in India's 5G policy to conform to international standards. There need be no indoor/outdoor restrictions and less restrictive power limitations, as in the USA.

It could mean adopting policies in sync with global markets. For users, it means that any compatible device from any market can be used without customisation. This allows easier installation and maintenance because no customised set-up is required. For manufacturers, devices they make that conform to global or large-market standards can be used wherever these standards apply, which gives access to more markets. Both attributes facilitate higher volumes, which help result in lower prices, making devices more affordable. All users benefit from the full capacity of the device provided it is in a compatible system. Unfettering changes like this and for 60 GHz, as another example, will unleash Wi-Fi.

This is the kind of policy change that is required to unfetter ourselves. What’s needed is an attitude of thinking constructively, instead of meanly or restrictively. Without such constructive changes, the way ahead will be hard regardless of who wins the next elections.

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Shyam dot Ponappa at gmail dot com

1: https://www.brookings.edu/blog/up-front/2018/03/01/how-to-solve-issue-of-rising-non-performing-assets-in-indian-public-sector-banks/

2: 164.100.47.193/lsscommittee/Energy/16_Energy_37.pdf

3: https://powerline.net.in/2018/06/30/seeking-a-reprieve/