Going back to the licence raj?

Going back to the licence raj?

The government’s lax attitude to competition policy and the continuing ambiguous nature of our two competition regulators, viz. the Monopolies and Restrictive Trade Practices Commission and the Competition Commission of India (CCI) is leading to some interesting developments.

The Telecom Regulatory Authority of India (Trai) is mandated to “facilitate competition and promote efficiency in the operation of telecommunication services". It had previously nibbled at competition regulation, by specifying caps on spectrum holdings as a part of mergers and acquisition (M&A) guidelines. Now, it is proposing to ride boldly into the competition regulation vacuum. Responding promptly and perhaps hurriedly, within two months, to a request from the department of telecommunications (DoT) in April 2007, Trai, in its latest consultation paper on Review of Licence Terms and Conditions and Capping the Number of Access Providers, goes deep into questions of M&A, market power, et al. CCI be warned!

The full-fledged entry of Trai into competition issues, while understandable, is not welcome. Its tenor in the consultation paper is disturbing. It appears to be looking for arguments that limit the number of service providers, to say that the degree of competition in India is already very high. It wants to prevent India becoming a “high-growth low-quality market"; somewhat disingenuously attributing quality of service (QoS) issues to the “growth-oriented focus" of the service providers, ignoring Trai’s lack of pressure on QoS issues.

Trai misses the fact that competition is not related to the number of players in the system. It is related to the ease of entry. It is the ease of entry that permits newer firms to weed out inefficient incumbent service providers, and it is the threat of entry that keeps the incumbents on their toes. Take that away, and you almost always get a cosy cartel. With freer entry, a new service provider can position itself as a high-quality, higher-price service provider or a low-quality, low price provider, or whatever combination suits the market. It is this that drives innovation.

But free entry in telecom is dogged by the restrictions on spectrum availability. Trai ties itself into various knots by asking complicated questions on administrative allocation of spectrum and whether the same operator can own both CDMA (code division multiple access) and GSM (global system of mobile communications) spectrum, etc. The avoidance of the spectrum issue by Trai and DoT over the past many years has finally come home to roost.

Spectrum is not scarce throughout the country. If at all, it may be scarce in the metros, where the density of population is high and tower sites are difficult to obtain. But even here, the increasing tendency to reuse spectrum, to share infrastructure and the release of spectrum by our defence forces is mitigating the problem. Trai seems concerned that using spectrum more efficiently will need more capital, but this is required only in such areas where the market is also large. Ignoring this bespeaks an unsettling unawareness of core market principles. Surely, Trai cannot be arguing that the number of providers needs to be restricted so that incumbents save on spectrum management and earn higher margins for expansion?

The solution to the spectrum problem lies in de-linking it from the licence. Spectrum can then be allocated or sold in defined geography-frequency blocks. For example, Australia sub-divides a given band into three-dimensional blocks, defined geographically by parallels of latitude and meridians of longitude and by a standard bandwidth (1MHz) in frequency. Each such block is called a standard trading unit (STU) and the ownership of blocks is recorded electronically. These blocks are then tradable. So, a new operator has to convince the telecom regulator of its technical and financial capacity and go and buy the relevant number of STUs and use them to provide service. The Australian competition authority retains the right to block acquisition of spectrum if it would lead to a significant reduction of competition in a significant market.

If such a situation were to prevail in India, the same operator can own both CDMA and GSM spectrum and provide services only as long as it is willing to purchase the spectrum needed. Service providers will no longer have to face the allegation that subscriber numbers are being manipulated to secure spectrum. In rural areas, STUs will be in excess supply and have a low price, thus helping meet universal service obligation needs. By adopting this approach, Trai can cut the Gordian knot that it has created. Yes, a transitional scheme is needed, but that can, with some effort and regulatory will, be devised.

Telecommunication growth in the country, driven by the fuel of competition, is a major success story. As the role of old incumbents wane and new firms come into their own, it is but natural that the neo-incumbents will exert pressure to reduce the level of competition. Trai needs to be alert to these tendencies and refrain from going back to an old licence raj clothed in new language. Else, even this success story will evaporate.

Partha Mukhopadhyay is senior fellow, Centre for Policy Research, New Delhi. Comments are welcome at theirview@livemint.com