Review of Policy Changes in the Indian Telecom Sector Rekha Jain Indian Institute of Management, Ahmedabad rekha@iimahd.ernet.

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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 and Bednarizyk, 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 than ownership 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

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 of policy, 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 technical standards 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 of the 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

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 Planning Commission, 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 Telegraph Act, 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 by the 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 to review 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 Network 1
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.

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 by 1997, 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.

Exchange rate prevalent at that time.

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 wrong or 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 private sector participation in telecom services. Exhibit 7 provides the objectives and resource requirements for implementing the National Telecom Policy. Telecom services 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 service provision 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.

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 emerging technologies 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 become operational. 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, international connectivity 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.

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 for Indian 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 cellular and 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) ii) iii) iv) restructuring the sector increased investments technology development and transfer service provision

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, the suggested 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 of political 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.

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 make the 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 to separate 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 the USA, 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 in the 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.

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 owned telecom 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 total accounting 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 Indian ownership 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 seeking foreign 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

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 switching segment 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 connections of 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 had signed 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

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 for service 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.

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 a Korean 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 the service 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 at restructuring 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

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 would have 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 for disinvestment, 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 as petrochemicals, 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.

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 work out 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

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 be obtained. 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 positive coordinating 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 and operation, 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.

REFERENCES

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Jussawala, M. (1992) Is the Communications Link Still Missing?, Telecommunications Policy, Vol.16, No.6, August 1992, pp 485-503. Kim, C., Kim, Y.K. and Yoon, C.(1992): "Korean Telecommunications Development: Achievement and Cautionary Lesson," World Development, Vol. 26, No.12, pp 1829-41. Laidlaw, B. (1994) : Evolution of Telecommunication Policy in the United Kingdom in Implementing Reforms in the Telecom Sector. Ed. by B.Wellenius and P.A. Stern, World Bank, 1994. pp 285-292. Mani, S. (1992), Foreign Technology in Public Enterprise (New Delhi: Oxford & IBH). Miller, N.P. (1994) Regulation: Reconciling Policy Objectives in Implementing Reforms in the Telecom Sector. Ed. by B.Wellenius and P.A. Stern, World Bank, 1994. pp 485-504. Melody, W.H. (1986): "Efficiency and Social Policy in Telecommunication: Lesson from the US Experience," Journal of Economic Issues, September 1986. Melody, W.H. (1991) Telecommunication Reform: Which Sectors to Privatize, ITU Conference, October 13-15, Geneva. "MTNL Completes Five Years", MTNL, 1991. Mutoh, N. "Deregulation of Japan's Telecommunication Business and the Role of Kokusai Denshin Denwa," Restructuring and Managing the Telecommunication Sector, op.cit., pp 61-69. Parson, G.L. (1987): "Strategic Information Technology" in Towards Strategic Information Systems , ed. by E.K. Somogyi and R.D. Galliers, Abacus Press, Cambridge. Pisciotta, A. A. (1994): Privatization of Telecommunication: The Case of Venezuela, in Implementing Reforms in the Telecom Sector. Ed. by B.Wellenius and P.A. Stern, World Bank, 1994. pp 185-194. Ravi, N. (1992), Telecommunications in India: Past, Present and Future, IEEE Communication Magazine , March 1992. Report of the High Level Committee on Reorganization of Telecom Department, March 1991.

Scherer, PR. (1994): Telecommunication Reform in Developing Countries in Implementing Reforms in the Telecom Sector. Ed. by B.Wellenius and P.A. Stern, World Bank, 1994. pp 67-82. Tyler, M and Bednarizyk, S. (1993): "Regulatory Institutions and Processes in s Telecommunications: An International Study of Alternatives", Telecom Policy, December, 1993, pp. 650-676

"Telecommunications," Economist, October 5, 1991, p 34. "The C-DOT Baby Matures", Telematics India, September 1992, pp 24-26. The India Infrastructure Report: Policy Imperatives for Growth and Welfare (Vol III); Expert Group on the Commercialisation of Infrastructure Projects, Published by Ministry of Finance, Government of India, by Dr Rakesh Mohan, Director General, National Council of Applied Economic Research, Parisila Bhavan

Uehara, T.(1990): "Privatization and Reorganization of Nippon Telegraph and Telephone", Restructuring and Managing the Telecommunication Sector, op.cit., pp 67-69. Wellenius, B. (1990): "Beginning of Sector Reform in the Developing World" Restructuring and Managing the Telecommunication Sector, op.cit., pp 89-98. Wellenius, B. (1994) : Implementing Reforms in the Telecom Sector. Ed. by B.Wellenius and P.A. Stern, World Bank, 1994.

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 for coordination 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 and produced 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.

Exhibit 2 : Milestones in Telecom Reforms 1984 1985 1986 1988 1989 1991 Manufacturing of subscriber terminal equipment to private sector. Telecom was constituted into a separate department with a separate board. MTNL and VSNL created as corporations. Government introduces in-dialing scheme. PABX services only within a building, or in adjoining buildings. Telecom Commission formed. Telecom equipment manufacturing opened to private sector. Major international players like Alcatel, AT&T, Ericsson, Fujitsu and Siemens entered equipment manufacturing market. Value-added services sector opened for private competition. Private networks allowed in industrial areas. Licenses for radio paging (27 cities) issued. New Telecom Policy announced. Broad guidelines for private operator entry into basic services announced. Licenses for cellular mobiles for 4 metros issued. Tenders floated for bids in cellular mobile services in 19 circles, excluding the four metros, on a duopoly basis. Tenders floated for 2nd operator in basic services on a circle basis. Cellular tender bid opened. Basic service tender bid opened; the bids caused lot of controversy. A majority of bids were considered low. LOIs issued to some operators for cellular mobile operations in circles. Rebidding takes place for basic services in 13 circles. Poor response. The Telecom Regulatory Authority of India (TRAI) formed by ordinance. LOIs being issued for basic services. The TRAI Act passed in Parliament. Several VAS available through private operators. The first private basic service becomes operational.

1992 1993 1994 May 1994 Sep. 1994 Nov. 1994 Dec. 1994 January 1995 July 1995 August 1995 December 1995 January 1996 October 1996 March 1997 June 1998

Exhibit 3 : Share of Telecom Sector in National Plan Outlays

Period

Total Outlay Rs. Billions*

Telecom Outlay Value Rs. Billions 0.47 0.66 1.64 1.59 4.15 7.81 5.19 27.22 81.47 61 406 Percent Total 2.40 1.41 1.91 2.40 2.63 2.73 2.26 2.48 3.65 7.4 11.9

First Second Third Annual Fourth Fifth Annual Sixth Seventh Annual Plan Eighth

1951-56 1956-61 1961-66 1966-69 1969-74 1974-78 1978-80 1980-85 1985-90 1990-92 1992-97

20 47 86 66 158 287 230 1097 2250 823 3420

* 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.

Exhibit 4 : Overview of Telecom Coverage 1995-96 Accessibility Direct Telephone Exchange Lines Working (Lakhs) Trunk Automatic Exchange Computerised Directory Enquiry (Station) Computer Fault Repair Service (Station) Telephone Facility in Villages International Subscriber Trunk Dialling Facility to Other Countries Stations Provided with Approved NSD Facility District Headquarters Provided with STD Facility Quality of Service Call Success Rate (%) Local STD Telephone Fault Rate per 100 Stations per month Percentage Delivery of Telegrams within 12 Hour Daylight Effective Percentage of Trunk Calls Net Surplus Plan Expenditure (Rs Crores) Internal Resources Market Borrowings Others Budgetary Support Average Monthly Revenue During the Year (including MTNL per Revenue per DEL) Total Number of DELs (Lakhs) Total Number of Underground Cables (Lakh Pair KMs) Source: Annual Report of The DoT, 1996-97 97.95 188.00 264.00 281.00 185136 242.00 4704.00 500.00 95.60 88.60 17.60 92.70 78.90 3665.89 5882.98 4656.98 951.00 275.00 0.00 Rs. 928.84 97.95 587.90

Exhibit 5 : Direct Exchange Lines (DEL) , Waiting List for Telephones (1985-1990) and Demand Estimates until 2002

Year 1985 1986 1987 1988 1989 1990

DEL (in '000) 3166 3486 3801 4167 4560 5074

Telephone Wait List (in '000) 956 1125 1287 1420 1714 1961 ICICI Estimates 14.6 17.7 36 64.3

Estimated Demand (in millions) Year DoT Estimates 1996 12.8 1997 17.4 1999 20.5 2002 30.7

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 Population Teledensity Number of Exchanges DELs Rural 74 0.2 84.7 % 17.8% Urban 26 3.4 15.3% 83.2%

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

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

Objectives: 1. 2. 3. 4. Telecom for all and telephone within reach of all. Provision of certain basic telecom service at affordable and reasonable prices. World class quality of telecom service. India to emerge as a major manufacturing base and exporter of telecom equipment.

Resource Requirements: Expected demand by 1997 (conservative) No. of lines required for providing telephone on demand Resources required for rural connectivity Resources required to meet eighth plan objectives Total requirements 15.8 million 10 million Rs. 4,000 crores Rs. 56,750 crores Rs. 75,000 crores