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India’s telecom success story turns sour

by Prasad Krishna last modified Jun 04, 2012 05:14 AM
Over the past decade, the number of cellphones in India shot up from 6.5 million to 900 million, a prime example of how an industry could exploit the vast consumer market here to achieve breathtaking rates of growth and, in the process, help transform the country.

The article by Simon Denyer was published in the Washington Post on June 1, 2012. Shyam Ponappa is quoted in the article.

But that success story is starting to turn sour as a combination of greed, corruption and incompetence threatens to arrest that growth. Instead of being an advertisement for India’s economic potential, the telecom story has become an example for foreign investors of the perils of doing business here.

It also serves as a parable for the nation as a whole, of how India’s dysfunctional systems of governance threaten to undermine the private-sector success story of the past decade.

"There is a danger of snatching defeat from the jaws of victory," said Mohammad Chowdhury, an executive director and telecommunication specialist at consultants PwC India.

The first signs of trouble emerged in late 2008, when the boom was still at its height. In what became known as the "2G scam," an Indian journalist uncovered corruption and favoritism in the way that spectrum bandwidth — the radio frequency bands that companies use to transmit data — was being allotted to individual companies.

Accused of defrauding the Indian exchequer of billions of dollars and of accepting bribes worth hundreds of millions in return for spectrum allocation, the communications minister, A. Raja, and two senior bureaucrats were arrested in February 2011. More than a dozen business leaders also were jailed or charged.

But the slow response to the scandal has threatened the sector’s continued growth. 

Last year, the Supreme Court canceled all 122 licenses that Raja had granted in 2008, even in cases in which there was no suggestion of corruption. Companies that had invested huge sums of money in India, many of them not even implicated in the scandal, suddenly found their investments under threat.

Norway’s Telenor, which is party owned by the state, stood to lose about $3 billion, probably the biggest foreign investment loss by a Norwegian company, Trade Minister Trond Giske said last month. "If it is forced to move out of the country, it would have further political implications," he warned.

Up for auction

But the biggest blow to companies came when the Supreme Court, in an attempt to foster transparency and fairness, ordered that all spectrum be put up for auction to the highest bidder.

The auction system had failed in many countries, including the United States and Britain, with companies often overreaching to bid for spectrum and ending up bankrupt.

Instead, India had decided — wisely, in the view of many experts — to sell the spectrum cheaply in return for a share in eventual revenue. That gave companies the financial headroom to invest in towers across the country and helped make calls affordable for hundreds of millions of poor people. 

"There are very strong economic reasons for not auctioning spectrum in developing countries," said Shyam Ponappa of the Centre for Internet and Society

To add insult to injury, the Telecom Regulatory Authority of India recently recommended that the spectrum from the canceled licenses be auctioned for a minimum price many times as high as in comparable auctions all over the world.

It also recommended that spectrum now held by other companies be re-auctioned when existing licenses come up for renewal between 2014 and 2025, estimating that that could earn the cash-strapped government $50 billion in extra revenue.

A cabinet committee will meet this month to consider the regulator’s recommendations. But the industry is up in arms.

The Cellular Operators Association of India called the regulator’s recommendations "arbitrary, regressive and inconsistent" and said they would prevent the industry from delivering "on the government’s vision of affordable communications, rural penetration and rollout of data services."

Telecom entrepreneur Sunil Mittal called the recommendations "catastrophic." Mittal is the chairman and chief executive of Bharti Enterprises, which owns Airtel, one of India’s largest cellphone-service providers.

PwC India estimates that the recommendations will push up average consumer tariffs by about a third, meaning price-sensitive consumers will use their phones less. The biggest losers will be the rural poor, he said.

Indeed, investment in new telecom towers has stalled, and any attempt to squeeze more money from the industry will probably delay what could have been the next chapter in India’s telecom revolution — the rollout of mobile broadband services across a country where 85 percent of the population lacks Internet access.

"It is a huge opportunity missed," said A.S. Panneerselvan of Panos South Asia.

Vodaphone tax case

As the ripples of the 2G scam widened, a separate tax dispute with British telecom giant Vodafone also has cast a shadow over India’s image as an investment destination

In 2007, Vodafone bought a two-thirds stake in the Indian arm of Hong Kong’s Hutchison Whampoa for $11.2 billion, without paying tax. Vodafone says that the deal was conducted abroad and is not covered under Indian tax law — and that if anyone should be liable, it would be the Chinese seller rather than the buyer.

The Indian tax man disagreed. When India’s Supreme Court sided with Vodafone, the New Delhi government retroactively changed its tax laws and served Vodafone with a bill for $3.75 billion in tax, penalties and interest.

Governments around the world, including the Obama administration, complained that India’s tax laws were deterring foreign investment.

The telecom debacle stems from the government’s failure to set up an independent, autonomous and credible regulatory authority, such as the Federal Communications Commission, said former regulator Satya N. Gupta.

Instead, India’s Communications Ministry makes policies and implements them, its bureaucrats and ministers unwilling to surrender power — power that Raja is accused of abusing by changing the rules to favor his cronies.

Some experts say the industry has to take much of the blame, because companies constantly lobby for rules to be changed or decisions to be made in their favor.

Others accuse the Supreme Court of overstepping its mandate and entering the realm of policymaking. But Gupta says that was an inevitable product of the way the system was set up, that the court stepped in only because the institutions of government had failed.

"If the regulator was an independent and empowered body with executive responsibility, this would not have happened."

Rajeev Chandrasekhar, a former information-technology and telecom entrepreneur who is now a member of Parliament, said India’s governance has simply not kept pace with the economy’s transformation.

"The government as an institution is still in the 1800s, while the private sector is in the 2100s," he said. "There is nothing in India you can do without going to the government for some kind of clearance. There is always government in your life. These two worlds keep knocking at each other."

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