145;Telecom leap-frog is impossible without FDI146;

GOVT

The Left note states, 8216;8216;It is because of this strategic importance that foreign capital in the telecom sector is strictly regulated in most advanced and developing countries8217;8217;. This is not the correct position. The note gives an incomplete and in that sense an incorrect picture of the situation8230; The note clearly shows that there are a large number of countries that do not impose any restriction on FDI in telecom. This is particularly so for most advanced countries including the UK and Germany and for some large developing countries, including Argentina and Brazil. Further, in Japan, the FDI limit relates only to the incumbent state-owned service provider. It is possible to have a different FDI policy for such incumbents together with a more liberal FDI policy for other service providers. For instance, Japan has a permissive policy for non-incumbent service providers.

It is true that some important countries still place restrictions on FDI in the telecom sector. However, in a number of countries, the rapid technological advances in the last decade or so and the growing realisation that liberalising the telecom sector is key to overall industry growth are resulting in relaxation of these constraints worldwide. Most governments have made specific commitments to open up their market in the WTO8217;s General Agreement on Trade in Services GATS. Even in basic telecommunication, a large number of governments have made liberal commitments on some or all services.

At present, out of 29 OECD countries, FDI restrictions in the telecom sector are present only in a few countries Canada, Korea, Mexico, Poland and Turkey with restrictions only for mobile services in France and the United States. Other OECD countries, including the UK, Germany and Japan, do not have any restrictions. In case of the US, there is restriction only on grant of radio licences to foreign companies; however, it appears that these restrictions do not operate in case of indirect foreign ownership from third parties and possibly also to lease of the radio licence. Even in the USA, fixed, trunk and international services have no restrictions and even companies not incorporated in the USA can provide such services. Finally, the European Commission and other countries have asked the US to lift these restrictions as part of the GATS negotiations.

Across the world, the restrictions on mobile services are more due to spectrum availability rather than any ideological or security considerations.

The increasing liberalisation is on account of recognition that FDI leads to better incentives for technology transfer, improved management, etc, and thus results in lower prices and better services. Therefore, instead of looking only at the history of controls in this sector, it may be better to look at the emerging trends. Hence, FDI regime has to be chosen by the country concerned taking into account all the relevant considerations, which in the Indian context relate to security concerns and the need to finance rapid growth. This is particularly important as India still has a lot of catching up to do and needs policies that will permit the necessary leap-frogging.

LEFT

2.The telecom sector is a strategic sector with significant security issues. Telecom traffic has been monitored by the US and other security agencies to tap into vital security, and even commercial information. This is why the Intelligence Bureau and the Directorate of Revenue Intelligence both favoured the 49 per cent limit on FDI. Almost all countries in the region with security concerns have similar FDI caps.

GOVT

All countries, including those with high FDI limits, would have security concerns and would have to take adequate precautions to address the security concerns. Ownership appears to have little correlation with vulnerability to illegal access to information by hostile countries. This is clear from the fact cited in the note that Echelon, a Global Electronic Surveillance Network designed and coordinated by the National Security Agency of the USA in collaboration with the UK, Australia, Canada and New Zealand, 8216;8216;has been monitoring Indian Telecommunications for decades8217;8217;. Moreover, the point made, that it is the hardware which will make the country vulnerable to foreign interests is not a valid issue, since imports of telecom equipment are already completely free under OGL. The more appropriate response to legitimate concerns about national security would be to require security clearance of foreign partners and also require that critical management and technical positions should be held by Resident Indians. It would also be of interest to note that countries in the South Asian region such as Pakistan, Bangladesh and Sri Lanka do not place any restrictions on FDI in the telecom sector.

LEFT

3. The argument that FDI should be permitted because India requires very large amounts of capital to rapidly expand its telecom infrastructure is specious because Indian telecom companies have healthy balance-sheets and are in a position to raise adequate funds from the domestic market. The constraint to growth is not lack of capital but the cost of services, and this can be adequately addressed through an appropriate regulatory environment.

GOVT

It is unlikely that the requisite growth in the telecom infrastructure can take place through domestic savings alone. The growth achieved last year was exceptional and of a qualitatively and quantitatively different genre compared to previous years. This growth has to be sustained to provide affordable telephony to all parts of the country. Most of the subscriber growth has come from private sector investments and this trend is likely to be maintained. In future, the contribution of the private sector, along with the public sector, would have to be maintained at a high level. The sustainability of such growth to achieve 200 million subscribers by 2007 and a much larger base beyond 2007 is desirable and will require huge resources. FDI becomes a key resource in this context. Slowing the growth momentum at this stage would lead to losing several direct and indirect benefits of telecom growth. According to the Working Group on the telecom sector, an investment of Rs 1,60,000 crore is required to be made in this sector during the Tenth Plan period. Even if domestic capital of this magnitude were to become available, which is doubtful, it would certainly be at the expense of investment in other sectors where foreign investment may not enter as readily. Clearly, then, foreign investment should be welcomed as a means of adding to the overall capital formation in the country. The argument that telecom growth can be ensured through bringing down the cost of services may be taken as valid, but the fact remains that unless there are abnormal profits in the system, regulation alone cannot bring down the cost of services. In the long run, prices will come down only if the cost of delivering these services also comes down, and this requires upgradation in technology and capital infusion, as well as cheap capital8212;all arguments in favour of FDI.

The table See the table gives the estimated requirements of investment in the telecom sector for the period from 2002-07. Based on current growth rate, investment required will be 11 billion. Even after taking into account the so-called healthy balance-sheets of Indian companies, the requirement of FDI is estimated to be 2.5 billion per annum.

The current equity structure of Hutchison Max Private Limited, both through the direct and indirect routes, reveals that foreign investment in the said company is approximately 69 per cent. Similarly, the equity structure of Bharti Televenture Limited, through the direct and indirect route, is approximately 67.5 per cent. Information is now available regarding IDEA which is a joint venture of Tata, Birla and AT038;T. The current foreign investment in the company is approximately 35 per cent and the company intends to make a public issue to induct more foreign equity to take the total foreign equity to 49 per cent that is within the current ceiling. According to information available, Reliance Infocomm has foreign investment from three entities amounting to a total of 10 per cent.

The further and most important point is that the debt equity ratio of the Indian industry is 1:6:1 and in rare cases, it goes up to 2:1. This implies that huge amount of equity would have to be invested before it is leveraged to raise debt.

LEFT

4. There is already adequate competition in fixed line as well as mobile segments in India and so the argument for lifting FDI cap in order to promote competition is not valid. This argument is being put forward by the cellular lobby as they want to exit the market after making windfall profits.

GOVT

This argument may be considered in the light of the point made earlier that the key driver for telecom growth is the cost of services. The cost of services is clearly related to the level of competition. It may be noted, however, that competition does not necessarily arise from the presence of multiple players in the market, as instances of such players forming cartels is not unknown. The real benefit of competition comes from the threat of new entrants, and it is for this reason that FDI has been advocated as a means of keeping the threat of fresh entrants alive. The argument that competition results in unnecessary and wasteful duplication of infrastructure is no longer valid as technological advances have brought down costs significantly and it has been established that benefits of competition in terms of price and service quality for the consumer greatly outweigh the cost of apprehended duplication of infrastructure. If it is indeed correct that many existing cellular players are looking to exit the market, then it becomes imperative to allow FDI, to prevent the market from being captured by one or two large players.

LEFT

5. The relaxation should not become a means of legitimising the exploitation of the existing loophole, by which foreign equity can actually breach the cap, by means of the holding company.

GOVT

The argument is for increasing the availability of foreign investment in an open and transparent manner. There are enough arguments to justify a higher cap on FDI. Such a higher cap will also make existing investments transparent as it has already been suggested to the Ministry of Telecom that 26 per cent of the equity should be held by Resident Indian citizens of corporates wholly owned by Indians.

LEFT

6. We should emulate the Chinese strategy, of first investing in domestic manufacturing by forcing telecom majors to enter into collaborations with Chinese state-owned companies, and thereafter leveraging the price advantage to capture foreign markets.

GOVT

This is a kind of 8216;infant industry8217; argument, but as our experience has shown, there are substantial costs to the economy of such protection. The adoption of this strategy is unlikely to result in the kind of growth that India needs, particularly as it is to become a pre-eminent player in the ITES sector. The Chinese model, as enumerated, would necessarily slow down the growth of the Telecom sector until hardware manufacturing is mature enough to support it. Unlike China, India8217;s growth strategy relies heavily on the service sector and in particular the BPO model. The need to expand telecom in such a scenario is self-evident. India would be frittering away its advantage in the service sector by slowing down growth in telecom.

Further, information is available that China threw open the doors to foreign capital and technology, while welcoming network and handset suppliers such as Nokia, Motorola and Siemens. As regards operating companies, it was a monopoly of China Telecom. That monopoly was broken, and China Telecom was allotted 21 provinces and Netcom was allotted 10 provinces.

As regards companies which carry overseas traffic from China, information shows that there are two such companies. These are:

i AT038;T China Co Ltd, which is a 100 per cent foreign-owned enterprise in Beijing set up more than 20 years ago and serving as a link between China and the US.

ii Alcatel Shanghai Bell Co Ltd, a joint venture, with Alcatel holding 50 per cent plus one share. This was set up in December 2000 and operates a JV for the Pudong area outside Shanghai.

In conclusion, it needs to be stated that most countries have permissive FDI regimes as opposed to restrictive ones. The choice of the FDI regime is to be based on the country8217;s own requirements, which in India8217;s case are our security concerns and the need to attract greater investment. The most recent growth in the number of telephone connections has been exceptional, but sustaining this and to achieve a network coverage of 70 per cent as against the present 20 per cent will require investments on an unprecedented scale, which is possible only with FDI.