review of policy changes in the indian telecom sector

7/30/2019 Review of Policy Changes in the Indian Telecom Sector

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Review of Policy Changes in the Indian Telecom Sector

Rekha Jain

Indian Institute of Management, Ahmedabad

[email protected]

INTRODUCTION

Technological changes in the telecom and computers have radically changed the business scenario. In

turn, the new demands of business have spurred many telecom based technological innovations. In

order to exploit these innovations for competing in global markets, business community the world over

has been putting pressure on governments to revise the policy, regulation, and structure of the telecom

sector. Several countries across the world have responded by restructuring the state controlled telecom

service provider, increasing private participation, and deregulating service provision. The emergent

organizations have attempted to be more responsive to the business needs and have evolved

mechanisms to remain competitive even under tremendous pressures [Uehara, 1990; King, 1990;

Glynn, 1992; Kim, Kim, and Yoon, 1992; Laidlaw, 1994; Mutoh, 1994].

Over the past several years, developing countries have also recognized the important role a responsive,

business oriented, and technologically advanced telecom sector plays in the growth of the economy.

Many developing countries now accept the limitations of a monolith state monopoly in responding to the

twin challenges of spurring internal growth and competing in an increasingly global economy

[Donaldson, 1994; Jussawala, 1992; Melody, 1986; Jain, 1995; Pisciotta, 1994; Tyler andBednarizyk, 1993; Scherer, 1994; Wellenius, 1990; Wellenius, 1994]. The process of introduction of

new organizational forms and structures and policy is complex. In a developing country, resource

shortages, lack of technology and trained personnel, and political expediency make it an even more

difficult task.

Past experience of reform across many countries suggests that the fundamental underlying issue that

must be addressed in telecom reform is effective separation of the basic function of policy making,

operational management and regulation [ITU Report, 1989]. The second level consideration is that of

access to capital and human resources. The third level concern is introduction of competition for

efficiency in the telecom sector. Competition is considered to be a more important factor thanownership in introducing efficiency. Further, the order in which structural adjustments take place

determine their effectiveness [Melody, 1990].

The Indian telecom sector was wholly under government ownership until 1984 and was characterized

by under-investment, outdated equipment, and unfocused growth. The imperatives for reforms were the

overall trend of economic liberalization and the technological advances in this sector. The Indian

experience of implementing policy changes brings forth issues and alternatives which have implications


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for decision makers in India as well as in other developing countries where telecom sectors have similar

characteristics.

This paper provides an overview of the various organizations in the Indian telecom sector and assesses

the policy initiatives of government on whether they address the issues listed above: separation ofpolicy, regulations and operations, access to capital and human resources, introduction of competition,

and appropriate sequencing of these reforms. It also attempts to provide answers to some relevant

issues such as: In view of the organizational changes initiated by government, what have been the

consequences with regard to policy implementation? Have the new organizations been able to respond

better to the policy initiatives? Do the roles and relationships of these organizations amongst themselves

facilitate/hinder policy implementation? How successful have these attempts been?

INDIAN TELECOM SECTOR : PAST AND PRESENT

Organizational Structure

Telecom sector was a state monopoly until the mid eighties when the liberalization process started. The

Department of Telecommunications (DoT), under the Ministry of Communications, administered

telecom services. The Planning Commission, an apex level body, allocated funds for telecom

development from government resources. The telecom sector, therefore, competed with other

developmental priorities of the government for a share in resource allocation.

Planning, engineering, installation, maintenance, management, and operations of telecom services for the

whole of India was managed by the DoT, which also laid down and monitored adherence to technicalstandards and managed frequency usage. The DoT was the second largest employer in the public

sector, employing nearly 0.45 million people.

In one of the earliest steps towards reforms and boosting the indigenization efforts, the government set

up the Center for Development of Telematics (C-DOT) in 1984 with the objective of initiating and

managing research in the switching and transmission segments. Subsequently, the government separated

the Department of Post and Telegraph in 1985 by setting up the Department of Posts and the

Department of Telecommunications.

However, the DoT was a monolithic entity, with a huge work force managing the telecom operations ofthe entire country. The bureaucratic approach and the slow acceptance and induction of new

technologies with very little customer orientation were perceived as barriers to growth. Consequently, in

1986, two new public sector corporations -- Mahanagar Telephone Nigam Limited (MTNL) and

Videsh Sanchar Nigam Limited (VSNL) -- were set up under the DoT. MTNL was carved out of the

DoT and took over the operation, maintenance, and development of telecom services in Bombay and

New Delhi. VSNL was set up to plan, operate, develop, and accelerate international telecom services

in India. The government created the corporate organizations in order to allow decision-making

autonomy and flexibility and facilitate public borrowings which would not have been possible under a


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government framework. However, policy formulation, regulation, and several key decision areas

remained with the DoT. A new organization, the Telecom Commission, was created in 1989 with a

wide range of executive, administrative and financial powers to formulate and regulate policy and

prepare the budget for the DoT. The Telecom Commission had four full time members managing

technology, production, services, and finance and four part time members representing the PlanningCommission, Department of Finance, Department of Industry, and Department of Electronics.

Telecom Consultants India Ltd. was a project organization, under the DoT and provided consultancy

and turnkey project management services in India and other developing countries. A number of regional

and national level training centers provided telecom related training to employees in this sector. Several

private manufacturers and state level enterprises manufactured a wide variety of telecom equipment.

The largest manufacturer of telecom equipment was Indian Telephone Industries (ITI), a wholly owned

government enterprise. A brief description of the various organizations in this sector is given in Exhibit 1.

The sector was predominantly governed by the Indian Telegraph Act, 1885 and the Wireless TelegraphAct, 1933 which had been modified several times. In 1997, legislation was enacted to set up a

regulatory body, the Telecom Regulatory Authority of India.

Creation of MTNL, its subsequent operations, and the relationship of the personnel employed in

MTNL to their counterparts in the DoT, raised questions about the organizational structure most suited

for this sector. Therefore, in 1991, at government initiative, three high powered Athreya Committee

submitted a report on the appropriate organizational structures for this sector. The report

recommended a) both policy and regulatory mechanism to be placed under Telecom Commission, b)

breaking up of the DoT into zonal corporations under the government, c) setting up a corporation,

initially in the public sector, to handle the long distance network d) value added services be provided bythe private sector, and e) general liberalization in production of equipment, autonomy for R&D and

training institutions. Subsequently, other reports for reforms had been commissioned, but in the absence

of public debate and employee and union concerns regarding the consequences of implementation, the

government had not formally adopted any report. Exhibit 2 gives an overview of the reform process.

Since 1997, there had been several statements in the media by key decision makers and the

Communications Minister calling for corporatization of the DoT. However, there had been very little

public information or debate regarding the sequence of decisions leading to corporatization or the form

of corporate structure.

Since 1995, there had been an increasing pressure from international organizations such as WTO toreview the monopoly status of VSNL and the DOTs monopoly in long distance communication.

VSNL continued to have monopoly over international telecom and broadcast transmission. It had

planned to enter long distance market, but the DoT had hampered its plans.

The Telecom Network1

1 Data for this section are largely taken from the Annual Reports of the Department of

Telecommunications, Government of India, 1986-95 and the Rakesh Mohan Committe report, 1996 on

Indias Infrastructure.


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Unlike the meager investments until 1990, in the eighth five year plan (1992-97), the government

substantially increased the outlay for this sector [Exhibit 3]. These included an investment of nearly US

$ 6000 million (1 US$ = Rs.30 approximately2), doubling of telephone lines from 5.2 million to 10.7

million, and extending the area of operations in terms of route-kilometers from 59,000 to 1,05,000.Telecom was included by the government as a part of technology missions -- a set of dedicated,

welfare oriented, and well-focused programs being implemented at the national level [Dhir, 1992]. As

of early 1995, the transmission network covered more than 1,27,094 km of different types of

transmission media. Exhibit 4 presents an overview of coverage of this sector. Exhibit 5 which provides

year-wise number of direct exchange lines provided by the DoT, the number of wait-listed of telephone

subscribers and also gives demand estimates from the DoT and ICICI until 2002.

Though the Indian network was 15th largest in size and had exhibited an average growth rate of eight

per cent since independence, it had not been able to provide commensurate level of benefits. This was

due to the diversity types in of switching technology and transmission media [Ravi, 1992]. Moreover,meager government investments had been spread across areas ranging from developing basic

infrastructure for rural areas to provision of integrated digital services network, albeit at a limited pace.

As of 1995, 65 per cent of the switching and 45 per cent of the transmission media had been digitized.

Future investments focused on further digitalization of the network, satellite communication, fibre optics,

and wireless in the local loop. Indias satellite program had been fairly successful, with the

development and launch of indigenous multi-purpose satellite systems. The satellites were being used

by both the Communications and the Information and Broadcasting Ministries.

Telecom Services

Basic Services

Telephone or basic voice service constituted more than 80 per cent of the telecom network by

investment and revenue [Ravi, 1992]. The telephone density in March, 1997 was roughly 1.6 per 100

population, compared with 14.7 for Malaysia, 8.1 for Brazil and 2.3 for China as of 1994. More than

eighty per cent of the telephones were in urban areas serving nearly 26 per cent of the population.

About 30 per cent of these were concentrated in the four metros of Bombay, Calcutta, Chennai and

New Delhi. Exhibit 6 provides information on the distribution of rural and urban population and the

corresponding teledensities. Although the DoT had set a target of at least one phone in each village by1997, by March 1996, nearly 60 per cent of the villages still remained uncovered. The massive

investments required to achieve this connectivity ( of the order of nearly one billion US dollars, at 1995

prices), had led the government to seek private participation.

2Exchange rate prevalent at that time.


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Despite the increase in number of villages connected by phone, rural connectivity was a subject of

concern. Even among the villages where telephones had been provided, it was found that a large

number of them did not function at all. Many were not accessible to the public, or did not have a long

distance connection. Rural public call offices were few, although various surveys had indicated that

these were good sources of income and provided a reasonable level of service [Jain and Sastry, 1997;Report of ICICI Working group on Telecom, The India Infrastructure Report: Policy Imperatives for

Growth and Welfare,1996 ]. Public payphones and telecom bureaus provided enhanced access.

However, by western standards and even by standards in many newly industrialized countries such as

Malaysia and Brazil, access was very restricted. The ratio of payphones per person was 1:3600.

During the eighth five year plan (1992 - 1997), the government decided that its objective of

development would be accessibility rather than provision of individual phone. It was, therefore,

decided to provide at least one pay phone per 100 households in urban areas and one pay phone per

village. This policy gave a boost to setting up of a large number of telecom booths across the country,

providing local, long distance and international connectivity, and often fax and other communication

facilities. Several people in urban areas did not opt for long distance connectivity due to fear of wrongor unfair billing by the DoT and preferred to use pay phone booths, where such problems did not arise.

The proliferation of these booths in urban, rural, high density and low density areas had alleviated, to

some extent, the need for individual phones.

Opening up the sector

The key drivers for change in the sector was the National Telecom Policy announced in May 1994. It

boldly specified its major objectives as telephone on demand, achievement of universal service

obligation and ensuring world class service to subscribers. This policy also paved the way for privatesector participation in telecom services. Exhibit 7 provides the objectives and resource requirements

for implementing the National Telecom Policy.

Telecomservices were categorized into domestic basic (which included basic telephony, telex and fax),

domestic value-added services (VAS) which covered all other services such as paging, cellular, data

services, VSAT and international basic and VAS. Telecom service liberalization started in 1984, with

private sector being allowed to manufacture customer premise equipment. In 1992, service provision

was opened for private sector. At this stage government also unbundled basic and VAS. Private

operators were allowed to participate in provision of VAS such as cellular and paging services.

Subsequently, basic services in the local loop were opened for private operators. Basic serviceprovision had been planned as a duopoly between the DoT and a selected service provider. Several

service providers, one for each of the twenty circles into which the entire country had been divided

would compete with the DoT for basic services. The bidders were evaluated both on financial and

technical parameters. Permissible network technologies were specified and basic service providers

were required to base their services on fibre-optic cable and wireless in the local loop as far as

possible. Licenses had been granted for an initial period of 15 years and could be extended by another

10 years. Private service operators were allowed to provide intra-circle long distance service which

contributed to almost 60% of the total calls.


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The government had mandated that all private basic service operators had to provide 10% of all new

lines in rural areas. A weightage of 15% for service provision in rural areas was given at the time of bid

selection. A penalty on a per day basis for each telephone not installed sought to prevent companies

from delaying meeting rural targets. At the same time, the government encouraged new emergingtechnologies including local loop wireless, cellular telephony and satellite based communication systems

that could help develop rural telecom in a cost effective manner.

Inter-circle communication remained under the DoT. VSNL maintained an exclusive license for

international services for at least until 2004. Advanced communication services like cellular, paging,

email, fax, data transmission over telephone and leased circuits were increasingly being made available

by private operators. However, Electronic Data Interchange standards and its adoption had not made

much progress largely due to the problems in long distance communication, lack of coordination for

adopting standards, and unclear policies in the various departments involved in national implementation.

Data Communication Services

Indias first public data communication network, INDONET was started in 1985 by CMC Ltd., a

public sector computer organization. However, due to poor service quality, and lack of revenues for

expansion, it was not very successful.. Though a large number of studies had shown that networks

enabled organizations to become more competitive [Parson, 1987], Indian organizations had little or no

imperative to use networking as they had operated in protected market conditions. Therefore, there

had been no pressure to hone up the organizational competitiveness.

Since 1992, the DoT owned and operated data communication network I-NET, had also becomeoperational. It initially linked up eight metropolitan cities in India through 9.6 kbps and 64 kbps data

links. However, there were delays in service provision and often the quality of service was poor,

resulting in poor growth of network. National Informatics Center (NIC), a government agency, had set

up a nation wide network, NICNET, using VSATs for use by various ministries and government

agencies. It linked nearly 450 districts of India. NIC provided system design and implementation

support. In most cases, the system was basically used for generating fixed format reports. There was

little flexibility in querying or report generation. Since mid nineties, NIC had attempted to get into

telecom service provision, but its efforts had been thwarted by the DoT. An educational network,

ERNET, set up by Department of Electronics with funding support from UNDP, linked up several

universities, research and educational institutes and had been successful in providing email, internationalconnectivity and other network services. However, its services were not generally available to

commercial organizations.

Setting up privately owned data communication networks was expensive for Indian organizations since

rentals of leased lines were high. The tariff policy also seemed to discourage networking. For example,

if the leased line was connected to more than one terminal, the tariff was doubled. In addition, the DoT

provided very little choice in the transmission media it leased out.


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Although the DoT allowed private VSAT provision, tariffs were regulated by it. The DoT did not allow

leased private networks or VSAT based networks to be connected to the public switched network.

There was a 64 kbps data rate limit for private VSAT provision. High cost of imported equipment, due

to the duty structure, high license fee, and non-recognition of VSAT as infrastructure excluded VAST

service providers from tax reliefs available to other infrastructure providers, and made it expensive forIndian organizations to use VSATs for data communications.

Cellular and Paging Systems

In May 1991, government announced its intention to award licenses to private operators for providing

cellular phones in the four metro cities of New Delhi, Calcutta, Bombay, and Chennai, and paging

services in 27 cities across India. Cellular services were viewed as a lucrative segment by the industry

and there was an enthusiastic response for bids. Cellular service was planned as a duopoly between

two selected service providers, with the DoT keeping the option of being the third service provider

open. For paging services, a maximum of four players in each circle were proposed. For both cellularand paging, separate licenses were issued for the four metropolitan cities, Bombay, Calcutta, Chennai

and Delhi. Licenses were awarded on the basis of competitive bidding with the highest bidders getting

the bid. The bidding guidelines mandated foreign collaboration and evaluation was based on financial

consideration such as net worth of partners, license fee quoted, and technical aspects such as the

subscriber base experience of the foreign collaborator and network roll-out plan . Despite the initial

legal hurdles, by 1997, cellular and paging services were well established in metropolitan cities and

several other cities in different service areas.

Software Exports

To facilitate software exports -- a thrust area identified by the government -- exporters were allowed

to set up satellite communication at 64 kbps from Software Technology Parks set up in selected

locations in Bangalore, Pune, Bombay, Hyderabad, New Delhi, Calcutta, Chennai, and several other

cities. In these parks, other infrastructure facilities such as buildings, and electricity were easily made

available. Previously, such high speed data links were not available. Procedures for establishing high

speed data links for software export were simplified by dovetailing and coordinating the activities of

various telecom organizations.

RECENT POLICY CHANGES AND THEIR IMPACT

The government had initiated policy changes largely in the following areas:

i) restructuring the sector

ii) increased investments

iii) technology development and transfer

iv) service provision


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The objective was to provide accelerated growth in infrastructure and services, improve customer

service, provide autonomy and flexibility within the sector to expedite growth, raise finances from the

public, and provide an effective regulatory and policy environment. In the following we attempt to

review the policy changes, assess the impact, and suggest directions for improvement.

Restructuring the Sector

The Athreya committee's report, as well as the subsequent reports on restructuring may be viewed as

an initiation of a process of examining organizational options. The reports, however, had not focused

on provision of autonomy in financial and operational decision-making. Management incentives which

would allow these organizations to increase profitability and the structural mechanisms which would

allow them to raise capital from markets had been very sketchily outlined [Jain and Chhokar, 1993].

Thus, access to capital would still remain a problem. Availability of manpower trained to be responsive

to fast changing needs of the global market place would be a constraint. Besides the limitations, thesuggested changes were superficial since most "restructured" organizations showed too much of a

control orientation and would continue to work with the old work force without adequate retraining.

Inability of top management and political executives to address the need to make the DoT more

competitive, could be cited as failures. Given the large base of employees who had been entrenched in

a typical bureaucratic mode of functioning, providing customer orientation and business perspective

appeared to be the most difficult task. The DoT had no specific training policy in this regard. Though

there were several training centers, these were not equipped to handle managerial issues. The focus of

restructuring had been on the organizational form and not so much on identifying the mechanisms for

acquisition of new core capabilities, the appropriate incentives, and nurturing a climate in which

change could take place. The governments inaction on any restructuring reports showed a lack ofpolitical will. The major issues were the management of unions and the retraining of the staff to orient

itself to a more competitive environment. The opening of basic and value added services without

attempting to streamline the DoT operations, review of organizational strategy and absence of top

management vision, would eventually lead to a situation where the DoT would lose revenues and

market share, and see the flight of its well educated and professional staff to private companies.

The setting up of the TRAI in 1997, separated the regulatory function. However, policy making and

operations continued to be with the DoT. In an environment where the DoT had been a monopoly

service provider, policy maker and regulator, the setting up of the TRAI was not adequate to allow it to

accept a regulatory regime. This was because the DoT operations had never been regulated before.In a competitive scenario, the DoT saw potential threat to its position, and evaded regulations not

favoring it. This had been clearly brought out when some private cellular operators approached the

TRAI for contesting the DOTs unilateral revision of tariff. The DOTs initial stand was that the TRAI

had no jurisdiction over it, although the TRAI Act clearly specified otherwise. A part of this problem

could possibly have been addressed by appropriate changes in the Indian Telegraph Act. To date the

DoT and TRAI continue to have turf wars. Absence of a clear response from the government

regarding TRAIs role vis--vis the DoT had led to litigations and delayed decisions regarding Internet

service provisions.


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The governments approach to organizational reform had been ad hoc, as exemplified by the setting up

of the TRAI which was driven by increasing pressures from the private operators and not as a step in

an overall plan of reform. Although the establishment of TRAI had been a positive step in terms of

separating of regulations from policy making and operations, inadequate legislative reform could makethe TRAIs task harder. There had been several concerns from the industry and users at the outdated

legislation, but the government had not responded and there had been no formal review of the various

Acts that may need to be reviewed or implemented de novo.

Experience of other countries has stressed the need to separate policy, regulation, and operation.

Separation of policy, regulation, and operations usually requires changes in legislation. For example, the

restructuring of the Japanese Nippon Telegraph and Telephone Public Corporation and Kokusai

Denshin Denwa was preceded by appropriate changes in the legal framework [Mutoh, 1990].

Similarly, in Malaysia, restructuring was preceded by legislative changes. As a part of the Malaysian

governments action plan of implementing its liberalization policy, legislation was enacted in 1987 toseparate the monopoly service provider Jabatan Telekom Malaysia (JTM) , into two parts - the

regulatory unit called JTM and an operating company called Syarikat Telekom Malaysia (STM), a

government owned company. STM was issued a license by Minister of Telecommunications to operate

the basic telecom network as a monopoly for a period of 20 years. Suitable amendments were also

made to the Employees Provident Fund Act and Pension Act to protect employees interests and enable

them to continue with provident fund facility in the new organizations. Subsequently, STM was

privatized by selling 25 per cent of its share to the public and foreign investors and renamed Telekom

Malaysia. Many countries, recognized that the changing technologies, and business requirements of

this sector required rapid responses in terms of enabling legislation and had amended their telecom

Acts in the fast 5-6 years. Examples of countries where such initiatives had been implemented were theUSA, UK, Germany and Mexico.

In India, the government had not addressed this basic requirement necessary for reform and there was

no pre-planned sequence of structural changes which are the basic determinants of effectiveness of

reform [Melody, 1990]. Therefore, the government, investors and subscribers could expect only

marginal benefits from the reform process.

Increased Investments

Though government investment in this sector had steadily increased, telecom's share of investment inthe economy remained more or less steady at an average of 2.81 per cent until 1985. Although, the

budgeted share of investment for 1990-95 showed a sharp increase to 6.25 per cent, it was far less

than what many other developing countries were investing in the infrastructure at that time. In

comparison, Kenya, which has had almost the same level of gross domestic investment (as a percentage

of GDP) from 1981-1989, as India, [World Development Report, 1991, pp 119], raised the telecom

investment as a share of GDP from 3.28 per cent in 1978 to 8.61 in 1987 [Akwule, 1992]. The effect

of under-investments in this sector was compounded by the diffusion of these scarce resources over a

number of areas resulting in a situation where no specific area in telecom was well-developed.


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In the past, international bodies had supplemented limited government resources and had funded some

expansion and technology upgradation programs [MTNL Report, 1991]. However, that could not be

a not a long-term and stable solution. Until 1984, there were a number of restrictions for raising

finances. Subsequently, the government removed some of these constraints and allowed state ownedtelecom factories, MTNL, and VSNL to raise funds by issuing low interest tax free bonds. In May

1997, VSNL became the first public sector undertaking to offload its equity in the international market.

The government, however, remained a majority shareholder with a holding of 65 per cent. Against a

Global Depository Receipt (GDR) issue of US $ 448 million, its receipts were US $ 526.5 million.

VSNL had plans to invest these receipts in other areas such as opening of more international gateways

in metropolitan areas to reduce its dependence on the DoT and increase its quality of service. The

government had also given permission to MTNL to float GDRs, but the volatile market conditions had

prevented it from doing so until October 1997.

While VSNL sought to increase its revenues, it was under immense pressure to lower the totalaccounting rate. VSNL had to agree to a 11 percent reduction in rates as compared to the 20 per cent

reduction proposed by the Federal Communications Commission - the US regulatory agency.

Considering that the US accounted for around 30 per cent of incoming calls and the incoming to

outgoing ratio with US was 6:1 as compared to VSNLs average of 2.5:1, the pressure to reduce

accounting rates could have significant impact on VSNLs performance. Further, this could lead to a

downward revision of international tariff and a consequent erosion of revenues.

The government had recognized the role of increased investments and its limited availability

indigenously. This had been reflected in its bidding guidelines both for basic and VAS, where it

mandated foreign financial support. The government also recognized the importance of Indianownership of companies and had therefore, limited foreign partnerships to 49 per cent. However, many

foreign companies had got around the problem by forming holding companies, thus allowing them to

increase their stakes in the Indian company. Recognizing the potential for growth in the Indian telecom

sector, many suppliers had provided easy terms of credit and deferred payments to private operators.

Technology Transfer and Development

India had attempted to follow a policy of self-reliance in manufacture of products through indigenization.

Until 1986, most telecom equipment used outdated technology. However, in the wake of liberalization,

the DoT attempted to introduce some advanced technology both by indigenization and by seekingforeign collaborators. Until July 1991, the DoT shortlisted the technology that could be imported and

the licensed capacity for manufacture. Import of technology was also linked to the requirement of

phased indigenization. Though this limited the technology choices, it ensured that Indian manufacturers

developed expertise in selected areas.

The introduction of the new industrial policy in July 1991 removed the constraint on choice of

technology, capacity, and phased indigenization program for imported technology. By 1992, when the


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basic services were opened for competition, the weightage given to indigenization in evaluation of bids

was only three percent, limited to the first three years plan of operations.

Due to lack of access to technical and financial resources, especially foreign exchange, the DoT

generally, lagged behind in its level of technology. India's indigenization program in the switchingsegment carried out by C-DOT was successful in introduction of rural exchanges designed specifically

for Indian conditions characterized by dust, heat, and humidity. It was also able to license this

technology to private vendors, for incorporating in the DoT network. C-DOTs efforts at developing

medium and large sized exchanges had been slow [Business Today, January 1992]. C-DOT, which

began with of government support for it's program, based on the championing of these ideas at the

highest political levels by it's mentor, Sam Pitroda, lost focus after he left the organization. C-DOTs

initial success demonstrated the capability of Indians in a highly sophisticated technological field and

resulted in the government being able to negotiate far cheaper prices for other imported exchanges.

Subsequent developments in technology, deregulation in the sector, and the absence of a visionary at

the top had left C-DOT without focus. In addition, the high profile nature and the political connectionsof its mentor, put C-DOT under a lot of controversy, resulting in further slowing of its plans. Increasing

deregulation had also resulted in ITI in dire financial straits.

Service Provision

Despite heavy investments by the government, basic service provision in most areas was poor. The

problem was compounded by the apathy and absence of customer orientation in the DoT. Billing

continued to be a major source of complaints. Although government had involved private operators to

have faster service roll out, but due to the constraining service provision conditions in the basic service

license, legal battles and an uncertain political climate, only two of the nine basic service providers hadsigned the license agreements as of October, 1997. By June 1998, private basic service was available

in a single city in Madhya Pradesh.

Cellular and paging services had taken off in several cities and there was intense competition in this

segment. Innovative paging and cellular services had become available However, service providers

could only specify tariffs mandated by the DoT, leading to dissatisfaction at the lack of freedom..

Although private email service provision had begun in some cities, heavy license fee charged by the

DoT had led to several providers closing down their operations. Service providers were prohibited

from setting up their own networks for email and had to use leased lines from the DoT.

In order to respond to the changing environment, VSNL had invested in new ventures, especially in

satellite communications which was an emerging area. Some of these initiatives were investments in ICO

Global Systems which planned to offer a global hand held satellite system, gateway for the Iridium

satellite project, and joint venture with Telstra of Australia for provision of domestic VSAT services.

VSNL has emphasized investment in the emerging areas of satellite communication which is likely to be

the major provider of international connectivity over large areas. Its Internet service provision had

provided Indian users with access to the Internet, although demands for better quality transmission and

an increasing user base were putting pressure on VSNLs infrastructure. Private provision of Internet


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had been announced, but had been put on hold by the courts due to the legal battles between the DoT

and the TRAI. Private Internet service providers were constrained to use VSNLs international

gateway facilities.

Besides the regulatory constraints, service providers were concerned with the business processes forservice provision, inadequate understanding of their need, and bringing in accountability in the DoT. The

TRAI planned to facilitate service provision by ensuring equitable and fair interconnect agreements were

worked out and implemented and also planned to define and monitor quality of service parameters.


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DIRECTIONS FOR IMPROVEMENT

Restructuring the Sector

A variety of features and options in the Indian restructuring initiative could have been drawn from the

experience of many other countries such as Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka,

Thailand, and Korea where at least some degree of organizational restructuring has been introduced

[Jussawala, 1992; Melody, 1986; Jain, 1995; Pisciotta, 1994; Tyler and Bednarizyk, 1993; Scherer,

1994; Wellenius, 1990; Wellenius, 1994].

In Korea, the restructuring initiative was defined by the telecom policy : provision of one telephone per

family and switching automation [Kim, Kim, and Yoon, 1992]. As a first step towards this, the telecom

operations were removed from the Ministry of Communication and several incorporated public

common carriers (PCC) were made responsible for it. In 1982, the PCCs were placed under aKorean Telecommunications Authority which had financial and operational autonomy. Subsequently the

telecom authority offered specialized services such as data communication, port communication, and

cellular mobile communication with active private participation. The Ministry of Communication

coordinated policy formation, design, and implementation issues. At this stage the various organizations

that provided these services were still monopolies and public entities. In the late 80s, PCCs were

privatized, telecom services were further deregulated, and competition existed both in the basic and

VAS. Both domestic and foreign companies could offer data and VAS, while the VAS providers had

been allowed to offer services across a number of other service categories. International competition

was allowed in manufacturing and some services. The government felt that domestic manufacturers

could withstand competition from foreign firms whereas it adopted a more cautious approach for theservice providers. There was a stage-wise well defined framework for opening up the market : a tariff

rate reduction of 7.5 per cent, greater role of foreign firms in public procurement, and simplification of

technical standards. To ensure smooth transition, the government introduced these changes gradually.

In contrast to India, the Korean telecom policy was very focused. It was responsive to the changing

environment and the government took measures such as privatization, restructuring, and deregulation at

various points in time to ensure that the sector remained competitive. The key elements of successful

implementation of this policy had been the strong government support and political will for implementing

reforms as exemplified by the governments decision to open up the domestic market to foreign

companies for equipment procurement and provision of services. In contrast, the Indian attempts atrestructuring had been halfhearted as exemplified by the high degree of operational and financial control

within MTNL and VSNL. Further, very little groundwork within the DoT had been undertaken prior to

any changes in the organizational structure that may be inevitable. Further, there had been little public

debate on these issues.

Increasing Investments


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The experience of other developing countries which had successfully raised finances needed to be

explored by Indian decision makers. For example, in Korea the government consciously decided not

to raise money for the telecom sector through tax and bonds as these mechanisms required consent

from the Ministry of Finance and the National Assembly. The government bonds would face increasing

pressure for high interest rates [Kim, Kim, and Yoon, 1992] and consequently, the customer wouldhave to pay higher tariffs. The government then decided to incorporate the telecom entity as a public

corporation, in order to allow it to raise capital and provide management incentives to improve the

overall functioning of the organization. Profits from telecom service operations could then be invested

back into the sector. This strategy removed financial constraints on investments. In Mexico, the shares

of the public telecom companies were sold to private bidders not on the basis of offered price alone but

also on the technical expertise of the bidders [The Economist, 5 October, 1991, p 34]. This ensured

not only access to capital but also technical and managerial expertise of the successful bidder.

In India, although the government has attempted to address the problem of access to capital by allowing

foreign companies to participate in service provision and provided an institutional framework fordisinvestment, the overall regulatory and legal framework and infrastructure availability may be

impediments to attracting foreign companies. Privatization in the end-user segment would ease the

government burden only to a small extent. Until the DoT can be corporatized and allowed to raise

finances from the public, it may be difficult to fund the massive investments required for the network and

switching segment. However, there are risks in this approach, as often until the corporatized entity is

restructured, provided tools for enhancing its competitiveness and has financial liabilities written off, it

may not appear as an attractive option to the investors.

Technology Transfer and Development

Lessons from Korea's experience of successfully developing indigenous switching technology are worth

noting. The key components of this strategy were the alliance between the telecom authorities,

equipment manufacturers, and telecom research institutions. Continued and stable financial support

from government and its role in effectively coordinating the interlinkages between business and research

institutes were important instruments in this program. Further, the government closely monitored the

progress and removed bottlenecks during the development phase.

Many developing countries have been able to successfully coordinate the efforts of internal R & D units

with those of foreign collaborators. For example, Korea's experience of not only adoption and

diffusion of imported technology in the digital electronic switching but also in diverse fields such aspetrochemicals, synthetic fibers, machinery, and iron and steel is an example of how a government can

facilitate technology development [Enos and Park, 1988]. In all cases the Korean government could

negotiate precise terms with foreign suppliers in its favor. The Korean government not only negotiated

for technology transfer but also for a range of auxiliary services such as financing, training and

channelizing for excess output. Monitoring the absorption of technology was incorporated as a part of

the negotiation with the foreign supplier. In addition, the government was successfully able to

coordinate the efforts of various ministries and was actively involved in the implementation at various

stages.


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In contrast, the Indian attempt at indigenization suffered from lack of resources, few if any linkages with

the business and research institutions, delays in absorption, diffusion and indeginization [Mani, 1992]

and support which was based on a single individual's relationship with politicians [India Today, January

11, 1991, pp 115-119]. C-DOTs initial success and its ability to recruit high quality manpower,indicated the availability of professional and technical expertise in the country. The critical issue was

the harnessing this expertise within an institutional framework and establishing sustainable, responsive

high tech organizations.

Service Provision

The government must ensure that private operators conditions for service provision are based on

sound commercial principles. Putting constraining conditions such as high license fees or unfair

interconnect agreements will delay service provision (as has happened until now). In order to ensure

that the private operators share the benefits of their operations, the government and TRAI could workout revenue sharing mechanisms. For interconnect agreements to be fairly worked out, the DoT would

need to accept the role of the TRAI in arbitration of disputes. Whereas the private operators had

generally supported the role of the TRAI, the DoT had not done so.

The government needs to ensure that the Indian users have access to the latest technology, as often

such technology is cheaper and better than the existing one. For example, the Personal Communication

Services (PCS) available in the USA and many other European countries has brought down the cost of

wireless telephony substantially.

POLICY IMPLICATIONS

The government needs to evolve a blueprint of reform for the entire sector. It needs to separate the role

of policy making from operations. The setting up of the TRAI as an autonomous body has separated

regulations from policy and operations. The problems of political expediency could, thus, be minimized.

Given that India is slowly moving from a closed economy to a competitive one, intensive monitoring,

detailed implementation plan, and guidelines to ensure fair access to the network also need to be

designed in the restructuring plans [Melody, 1991; Jain 1997].

Politically, public consensus and addressing employee concerns for providing financial and operational

autonomy of various organizations in this sector could possibly accelerate the introduction of reforms.In the absence of a well defined strategy, reforms are likely to get implemented in an adhoc manner. A

long term policy for training and educating the large work-force in the immediate future in technical and

managerial aspects, software design and maintenance, and service development has to be an integral

part of any future telecom policy. The approach to corporatization has to be carefully worked out as

the consequences are likely to impact reform programs in other sectors of the economy. The role of

organizational culture and management of various interest groups is critical to a successful privatization

program. These need to be incorporated in the future reform processes. Decision making committees


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must consist of professionals from a wide range of fields to strengthen the analytical component of any

policy design and implementation.

Access to capital, skilled manpower and foreign exchange are major determinants of the speed of

reform. Therefore, capital market funds either through partial or full privatization would have to beobtained. MTNLs experience of attempting to issue GDRs, in an uncertain market shows how other

economic sectors can influence the telecom entities performance, as well as the role of global economy

in influencing domestic policy.

Competition which is considered essential for ensuring efficiency, profitability, introduction of new

products and service innovation should be enhanced in the basic and value added services and

manufacturing. In the context of the changing business scenario, policy regarding marketing, usage, and

ownership of datacom channels and other telecom services needs to be amended.

The Indian government must evolve a coherent technology transfer policy. It can play a positivecoordinating role between foreign collaborators and internal R&D units in technical development.

Given the large size of the market, it could negotiate from a position of strength and ensure availability of

latest technology at reasonable prices. The Telecom Commission must view itself as an enabler and

catalyst in the change process.

CONCLUSIONS

India has begun a process of telecom reform without any coherent long term plan. For the benefits to be

available to the economy a number of actions would have to be taken, viz., separation of policy andoperation, corporatization of at least some divisions of telecom service, and implementation of a long

term training policy and monitoring systems to ensure fair access to the network. Ad-hoc nature of the

reform process would lead to minimal benefits and at times may be dysfunctional. The speed of

implementation of reforms needs to be accelerated. Implementation of many of these suggested

measures may require strong political will and a concerted effort.

This paper highlights the role of political will and employees concerns in implementing reforms and the

need for top management in addressing them. A well laid out plan for reform is likely to bring greater

success and remove uncertainty from investors and employees and bring in support for the reform

process.


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Global Issues of Information Technology Management , ed. Palvia, Palvia and Ziegler, Idea

Group Publishing, Harrisburg, USA.

Donaldson, H. (1994): Telecommunication Liberalization and Privatization: The New Zealand

Experience in Implementing Reforms in the Telecom Sector. Ed. by B.Wellenius and P.A. Stern, WorldBank, 1994. pp 253-260.

Enos, J.L. and W.H. Park. (1988): The Adoption and Diffusion of Imported Technology: The Case of

Korea, Croom Helm, USA.

Glynn, S. (1992): "Japan's Success in Telecommunication Regulation: A Unique Regulatory Mix,"

Telecommunications Policy, pp 5-12.

"Gunning for Sam," India Today, January 11, 1991, pp 115-119.

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Jain, R. (1997): Operationalizing a Regulatory Framework in India Vikalpa : The Journal of

Decision Maker, July 1997.

Jain, R and Sastry T (1997) : Rural Telecom Services in India, paper presented at the Telecom

Policy Research Workshop, Feb. 28 -March 1, 1997, Indian Institute of Management, Ahmedabad,

India.


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Jussawala, M. (1992) Is the Communications Link Still Missing?, Telecommunications Policy,

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and Cautionary Lesson," World Development, Vol. 26, No.12, pp 1829-41.

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Reforms in the Telecom Sector. Ed. by B.Wellenius and P.A. Stern, World Bank, 1994. pp 285-292.

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"Telecommunications," Economist, October 5, 1991, p 34.

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Exhibit 1: Organizations in the Telecom Sector

The Wireless Planning and Coordination Wing assigns, regulates, and monitors the frequency

usage and setting up of radio receiving and transmitting equipment. It is also the nodal agency forcoordination of frequency allocation with ITU, Geneva.

The government owned telecom factories manufacture a large variety of telecom products. Until

1984, these were the sole manufacturers of telecom equipment in the country. Subsequently, private

sector and multi-national corporations had set up manufacturing units, for a variety of equipment. With

successive liberalization in imports, equipment such as cellular phones, master stations for cellular

telephony, etc. were being imported.

The Center for Development of Telematics (C-DOT) was set up to indigenously develop telecom

technology, especially switching and transmission components. C-DOT had successfully designed andproduced rural automatic exchanges which constituted nearly 87 per cent of the total lines being

manufactured using C-DOT technology [Business Today, January 1992]. EPABX and medium size

exchange (10,000 lines - 50,000 lines) were other products using C-DOT technology.

The Mahanagar Telephone Nigam Ltd. (MTNL) was a public sector organization wholly owned

by the government. Since its inception, it had raised finances from the market by floating telephone

bonds. Its revenue and profit have steadily increased over the years. MTNL had introduced a number

of telecom services in its area of operations such as payphones on franchise basis, limited radio paging

services, voice mail, and access to a national data network [MTNL Completes Five Years, 1991].

Videsh Sanchar Nigam Ltd. (VSNL) provided international telecom services to Indian users. It

evolved from the Overseas Carrier Department in the Ministry of Communication. It operated

principally through four main gateway centers, Bombay, New Delhi, Chennai and Calcutta. All the

VSNL gateways were mesh connected through direct national telecom links. VSNL, too, had

successfully raised finances from the market. Until 1997, it had been the sole internet service provider

when the government allowed private internet service providers. However they were still required to

use VSNLs international gateways.

Telecommunication Consultants India Ltd. was a consulting organization involved in implementation

of turnkey projects in India and other developing countries.

Training centers provided mainly telecom related training to The DoT personnel. There were a large

number of regional telecom training centers including a national Advanced Level Telecom Training

Center.


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Exhibit 2 : Milestones in Telecom Reforms

1984 Manufacturing of subscriber terminal equipment to private sector.

1985 Telecom was constituted into a separate department with a separate board.

1986 MTNL and VSNL created as corporations.

1988 Government introduces in-dialing scheme. PABX services only within a

building, or in adjoining buildings.

1989 Telecom Commission formed.

1991 Telecom equipment manufacturing opened to private sector. Major international

players like Alcatel, AT&T, Ericsson, Fujitsu and Siemens entered equipment

manufacturing market.

1992 Value-added services sector opened for private competition.

1993 Private networks allowed in industrial areas.

1994 Licenses for radio paging (27 cities) issued.

May 1994 New Telecom Policy announced.

Sep. 1994 Broad guidelines for private operator entry into basic services announced.

Nov. 1994 Licenses for cellular mobiles for 4 metros issued.

Dec. 1994 Tenders floated for bids in cellular mobile services in 19 circles, excluding the

four metros, on a duopoly basis.

January 1995 Tenders floated for 2nd operator in basic services on a circle basis.

July 1995 Cellular tender bid opened.

August 1995 Basic service tender bid opened; the bids caused lot of controversy. A majority

of bids were considered low.December 1995 LOIs issued to some operators for cellular mobile operations in circles.

January 1996 Rebidding takes place for basic services in 13 circles. Poor response.

The Telecom Regulatory Authority of India (TRAI) formed by ordinance.

October 1996 LOIs being issued for basic services.

March 1997 The TRAI Act passed in Parliament.

June 1998 Several VAS available through private operators. The first private basic service

becomes operational.


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Exhibit 3 : Share of Telecom Sector in National Plan Outlays

Period Total Outlay Telecom Outlay

Rs. Billions* Value Rs.

Billions

Percent

Total

First 1951-56 20 0.47 2.40

Second 1956-61 47 0.66 1.41

Third 1961-66 86 1.64 1.91

Annual 1966-69 66 1.59 2.40

Fourth 1969-74 158 4.15 2.63

Fifth 1974-78 287 7.81 2.73

Annual 1978-80 230 5.19 2.26

Sixth 1980-85 1097 27.22 2.48

Seventh 1985-90 2250 81.47 3.65

Annual Plan 1990-92 823 61 7.4

Eighth 1992-97 3420 406 11.9

* One US dollar was equal to Rs.18 until July 1991 when the rupee was devalued and was Rs.30

until 1992. It was approximately Rs 37 by November 1997 and had reached nearly Rs.42.50 by

June 1998.

Source:N. Ravi, "Telecommunications in India-Past, Present and Future," in IEEE Communication

Magazine, March 1992.


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Exhibit 4 : Overview of Telecom Coverage

1995-96

Accessibility

Direct Telephone Exchange Lines Working (Lakhs) 97.95

Trunk Automatic Exchange 188.00

Computerised Directory Enquiry (Station) 264.00

Computer Fault Repair Service (Station) 281.00

Telephone Facility in Villages 185136

International Subscriber Trunk Dialling Facility to Other Countries 242.00

Stations Provided with Approved NSD Facility 4704.00

District Headquarters Provided with STD Facility 500.00

Quality of Service Call Success Rate (%)

Local 95.60

STD 88.60Telephone Fault Rate per 100 Stations per month 17.60

Percentage Delivery of Telegrams within 12 Hour Daylight 92.70

Effective Percentage of Trunk Calls 78.90

Net Surplus 3665.89

Plan Expenditure (Rs Crores) 5882.98

Internal Resources 4656.98

Market Borrowings 951.00

Others 275.00Budgetary Support 0.00

Average Monthly Revenue During the Year (including MTNL per Revenue per

DEL)

Rs. 928.84

Total Number of DELs (Lakhs) 97.95

Total Number of Underground Cables (Lakh Pair KMs) 587.90

Source: Annual Report of The DoT, 1996-97


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Exhibit 5 : Direct Exchange Lines (DEL) , Waiting List for Telephones (1985-1990) and

Demand Estimates until 2002

Year DEL

(in '000)

Telephone Wait List (in '000)

1985 3166 956

1986 3486 1125

1987 3801 1287

1988 4167 1420

1989 4560 1714

1990 5074 1961

Estimated Demand (in millions)

Year DoT Estimates ICICI Estimates

1996 12.8 14.6

1997 17.4 17.7

1999 20.5 36

2002 30.7 64.3

Source: Annual Report 1991, DoT and The India Infrastructure Report: Policy Imperatives for Growth

and Welfare,1996 pg 121

Exhibit 6 : Percentage Distribution of Telecom Services in Rural and Urban Areas (1995)

Item Rural Urban

Population 74 26

Teledensity 0.2 3.4Number of Exchanges 84.7 % 15.3%

DELs 17.8% 83.2%

Source : The India Infrastructure Report: Policy Imperatives for Growth and Welfare,1996 page 103


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Exhibit 7 : Objectives and Resource Requirement of NTP (1994)

Objectives:

1. Telecom for all and telephone within reach of all.

2. Provision of certain basic telecom service at affordable and reasonable prices.

3. World class quality of telecom service.

4. India to emerge as a major manufacturing base and exporter of telecom equipment.

Resource Requirements:

Expected demand by 1997 (conservative) 15.8 million

No. of lines required for providing telephone on demand 10 millionResources required for rural connectivity Rs. 4,000 crores

Resources required to meet eighth plan objectives Rs. 56,750 crores

Total requirements Rs. 75,000 crores

review of policy changes in the indian telecom sector

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