Saturday, February 04, 2012

“Forward to the Past” – Imminent Tele “Con” Policy


What if I gave you a cricket bat and say, Rohit Sharma, a cricket bat? Who's likely to do more with it?...let's assume you're not a hoodlum enforcer who uses the bat for other things..and its about scoring runs for your team.
The value of spectrum (or any operating asset) ownership is pretty similar...a different owner will do different things.
·        
  •      Value of spectrum in govt's hands = zero.
  •  ·         Value in the hands of Someone who knows how to run a business? = x;
  • ·         Value In the hands of Someone Else who knows more than someone? =  Something Else times x

Someone and Someone Else pays taxes on profits, purchases of equipment, creates salaried jobs that are taxed etc. Letting the value develop implies taxes on earned revenue (sales has happened) and lower costs of doing business as you don't pay these taxes before the sales. This translates into lower prices in a competitive market, what has happened in India. Compare this to excise duty, a tax levied on manufacture…this forms part of a minimum price that the product must sell at or its not worth producing it. The higher the price, the lower is likely volume of sales.  Telecom Policy is about enabling higher volumes of sales, i.e, more users of telecom services at lower prices.

Licence fees upfront through a mechanism such as an auction, attempts to collect all those taxes right now through forecasts of sales. (In underworld lingo this is called "hafta". Hafta, though is dynamically set, and good dons link it to revenues being realized as breaking property is not the objective of the exercise, collecting regular extortion money is). Auctioning spectrum is just like license fees, even if called something else. The higher the auction price, the higher the minimum prices on offer by the service providers.  We experienced this through the initial round of telecom "auction" licences in the 90s. The prices of telephone calls were astronomical and the user base remained quite limited to the affluent, contrary to what the policy intended.

Lets take the following scenarios:

Scenario I – govt auctions licences, awards highest bidders, restricts number of operators and collects huge licence fees.
Market Outcome : Higher prices of services, fewer subscribers, companies default on fees (so govt doesn’t actually realize the fees) and the services don’t expand.

Scenario II – govt. awards non-exclusive rights to offer services for an entry fee commensurate with the potential market size plus a share of the sales of operators
Market Outcome:  More competition, lower prices and a wider user base. 
These above scenarios represent what actually happened in 1996 (Scenario I) and over the last decade (Scenario II).


The Telecom Policy has come under fire for alleged wrong-doing of the Minister in violation of his own guidelines of approval. The slant being given to it all now, courtesy the Supreme Court verdict, is that the policy is wrong as its cost the govt licence fees. 

Government restrictions on economic activities on individuals cost the economy about 3-4% of GDP growth. These restrictions are on account of plain needless and suffocating policies and laws – ie – the strangulation of economic activity within the existing laws and rules. Nobody is being a crook by enforcing these laws. Vested interests want these laws and rules to continue. This translates into Rs 750,000 crores or more per annum of “income loss” to the citizens of India.  Should we charge the political parties this much for the right to contest elections and form the government? It’s the law and rules that they make that have resulted in the loss to the nation.
The purpose of good policy is to ensure maximum access to citizens – physical access and costs (lower prices) – of a service or a right or a product. The Telecom Policy has worked towards that end to the extent the operators are being killed on profits. But listen to the politicos instead – lets collect a promise of higher license fees and kill the industry altogether – up front (Scenario I above). A clear case of moving “Forward to the Past”  - I vote we go “Back to the Future”. 

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