The draft discussion paper for new telecom policy has recommended free entry of operators in basic services, a structure similar as in the ISP policy.The paper has recommended that in order to create a level-playing field between the two, identical levels of revenue-sharing will need to be imposed on both ISP and basic services operators. This would require modifications to the existing ISP policy and could be compensated by allowing voice over internet protocol (VOIP) services to be provided by ISP operators.

This would allow network operators to make economic decisions on choice of technology without being restricted by regulation and ultimately provide more cost effective service to the consumers.

It may be recalled that the basic service operators had submitted that byallowing internet service providers (ISP) to set up the last mile linkage, the government had in effect broken the duopoly structure and hence they ought to be compensated. The GoT has recognised this important need.

However, at the same time the discussion paper has also ruled out that it will lead to a `free for all' or lead to the projects suffering from lack of finances due to presence of several players.

Two of the industry representative contacted by The Financial Express however pointed out that the exact modus operandi of preventing a `free for all' has not been spelt out and was far from clarity. The argument about ISPs too was not valid as the installed base of the PCs with a modem connection was very small as compared to the huge rolling out requirements of the basic service operators.

Since the ISP providers were envisaged to primarily use the access network of the department of telecom (DoT), private basic operators or the cable operators for providing internet service only, GoT hasrecommended to impose any licence fees on these operations. But to ensure a level-playing field, an explicit modification in the policy will need to be made whereby ISPs would not be permitted to set up their own access network. If they want to do so, they would need to acquire a separate basic services licence.

For ISPs, the current licensing regime has no restrictions on entry with only token Re 1 per year fee from year six as the licence fee.

The policy will have to recognise that building an access network is highly capital intensive. It is necessary to ensure that marginal players without financial strength or staying power do not enter and make the industry difficult to regulate. Accordingly, it is necessary to impose certain entry barriers in the form of a fixed one-time entry fee for basic service providers, according to the draft paper.

Justifying the limited multipoly structure, the paper has cited the difficulties faced by the basic services operators in achieving financial closure. Multipolywill, instead of making things more difficult for them to make their projects viable, will help them achieve the goal easily.

With multipoly, both investors and lenders would recognise and factor in their decision-making the fact that there are already multiple operators in the market as a result of the ISP policy, according to the paper.

``It is not necessary that the level of competition be limited to a duopoly in order to ensure a project's viability. It is, however, critical that the level of competition be determinate at any point in time. It is expected that the policy would not allow indiscriminate and random entry of operators at any point in time. Instead, there would be an orderly licensing system whereby the licensor, through a pre-defined process, would award licences at a particular point in time and thereafter review new entry only at a later stage, based on competitive position of the industry,'' says the paper.

Worldwide telecom projects are financed at the initial stages by acombination of sponsor equity and vendor finance and only seek non-recourse debt from the banks or capital markets after the project has progressed to an extent that lenders can assess its cash flow potential with some degree of certainty, it points out.

In India, the project costs so far have been excessively high on account of the licence fees and project sponsors have been unable to take up even a part of this without external fund commitments. As a result, these projects have been forced to seek bank finance at an early stage. It is expected that under the proposed licensing regime, a greater part of the initial investment would be by way of sponsor equity.

The fact that this is feasible can be demonstrated by the fact that for a typical project roughly 40 per cent of project cost is accounted for by licence fees and most projects are structured on a debt equity ratio of between 1:1 to 1.25:1. Therefore, if the licence fee component is removed, a major part of the project expenditure would be met bythe present levels of equity commitments made by sponsors. The projects would then have the flexibility of quickly rolling out their network, demonstrating their cash flow generating ability and then approach banks and capital markets for funding.

The GoT proposal for multipoly will also help a lot in achieving the new national telecom policy objective of a steep increase in teledensity from the present 2 per 1,000 to 15 per 1,000 by year 2010 which would require installation of 130 million lines, involving a capital expenditure of about Rs 400,000 crore.

Convergence is happening, and now

GoT has factored in the convergence and technological advancement in making the groundwork for a `technology proof' policy and said that there is no way India can afford to be aloof from these developments.

Citing a paradigm shift in the industry, the paper notes that technology now permits the provision of new services over existing infrastructure. Wireline and wireless services are also fast converging interms of its carrying capacity. This has made segmentation of the industry on the basis of delivery infrastructure irrelevant.

Similarly, definition of services based on nature of information content is also becoming difficult as for example voice, data, video are all coded and transmitted in the form of digital signals or `packets' which are not quite distinguishable.

Maintaining duopoly for voice and allowing multiple operators for data is extremely difficult, the paper notes. As far as data traffic is concerned, the ISP provider would have a clear competitive advantage on account of use of a superior technology as packet switching is more efficient for data transmission than circuit switching.

While data may constitute an insignificant part of DoT traffic today, trends in other countries as well as in India suggest that data traffic would far outstrip traditional voice traffic over the next few years. Experts estimate that worldwide the ratio of data to voice traffic will invert from the current20:80 to 80:20 within the next five years. It is inevitable that traffic in India would display a similar trend.