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Telecom: BICP did not moot revenue sharing

Telecoms and Elasticity


Online edition of India's National Newspaper on indiaserver.com
Monday, August 02, 1999


NEW DELHI, AUG. 1. The sole authoritative assessment of private cellular projects had neither proposed
shifting to a new income sharing regime nor had it suggested a six-month- waiver on licence fees payment to
compensate for delays by Government agencies while clearing the projects.

The report of the Bureau of Industrial Costs and Prices (BICP) had proposed higher rentals, better project
management and reduction of various charges levied on subscribers in order to stimulate demand. While the
TRAI and the Government implemented all the concessions proposed for private companies, there was no
action on other proposals considered unpalatable to private companies. On the other hand, the Government
appeared to have gone out of its way by offering concessions such as a change-over to income sharing
formula and freeze on licence fees payment for six months.

The PMO was aware of the contents of the report because a copy was given to the Secretary of the Prime
Minister on November 9, 1998. Mr. Vajpayee was holding the Communications portfolio at that time as the
then incumbent, Ms. Sushma Swaraj, was made the Delhi Chief Minister.

The BICP report is considered the only legitimate and in-depth study into problems faced by cellular
companies after a similar report by a Financial Institution (FI) was disputed as it had also lent funds to private
phone companies.

The BICP felt the companies had suffered losses partly due to delays by the DoT in clearing projects from the
technical angle. On the whole, the BICP was confident that the losses could be made up later.

``The actual demand for cellular phones exceeded the estimated demand in the metros, while in circles, the
actual demand was only one seventh to half of the estimated demand. However, the Bureau is of the view that
this is only a temporary phenomenon and the demand for cellular services will pick up as the prices of
handsets, activation fees and security deposits taken from subscribers by private companies decline.''

``The price elasticity of demand shows that a 10 per cent fall in the price of a handset results in a 19 per cent
increase in demand thus indicating that the demand for cellular services is essentially robust.

Companies were pulled up for wide variations in their project planning and asked to cut down costs. The
BICP report pointed out ``substantial differences'' in capital expenditure even between companies in the same
metro/circle. It asked them to make economies and offer reductions on amounts charged for handsets and as
activation charges. ``The operators should strive to improve their performances by reducing their overheads
and increasing the subscriber base and air time usage,'' said the BICP.The operators had anticipated losses
during the initial years even at the time of bidding. Moreover, companies had projected a very high level of
capital expenditure without considering the downward trend in the existing capital equipment cost in the global
market.

While conceding that non-metro companies had suffered losses, it recommended hiking of monthly rental to
Rs. 600 per subscriber. This was done by the TRAI on April 1. ``With the exercise of this option, it is seen
that a majority of companies will become viable with the internal revenue rate exceeding 16 per cent,'' said the
BICP. In addition, the companies were advised to review their investment plans and reduce the cost of
operations to that achieved by the efficient operators in their respective metros and circles.

There is no doubt some private companies suffered from delays in Government clearances. ``Cellular
operators were required to start commercial services in at least 10 per cent of district headquarters in the first
year. This proved to be an optimistic projection for a majority of circles as there were delays varying from 87
days to 375 days in the commencement of circles to 10 per cent of district HQs,'' it noted.

The Government was also asked to allow companies to use enhanced frequency spectrum as this would
reduce the number of costs, leading to savings in capital costs.