Subhasish M Chowdhury University of East Anglia

Debabrata Datta Institute of Management Technology, Ghaziabad

Indian Telecom: Regulation, Spectrum Allocation and Dispute Management

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Abstract Legal disputes have stymied the progress of the Indian telecom industry. This paper uses a contest theory model, where legal battles are a form of contest, to show that there can be equilibrium without legal battle. But this needs the policy makers to have dispute management as a prime area of focus. In that context the paper suggests suitable policy design against the backdrop of major telecom disputes. IIMB Management Review, December 2009

he privatisation of the telecom industry, the advent of cellular telephony and the concomitant scarcity of spectrum have burdened governments worldwide with the task of allocating the scarce spectrum among incumbent firms and potential entrants. These developments also throw open a challenge to economic researchers—that of modelling a market where firms compete, subject to availability of a scarce natural resource allocated by the government. Given that spectrum is in short supply and acquiring a larger share of the spectrum means more profit, it can be concluded that there will be conflict over spectrum acquisition and firms will engage in rent seeking activities. Unless the government (or the appointed regulating body) manages this task of spectrum distribution and regulation efficiently, disputes will surface and firms are likely to take recourse to legal redressal procedures. What the nature of equilibrium will be in this kind of market is an open question. In this paper we address this issue, using the Indian telecom industry as a case study. Before 1984, the telecom sector in India was operated exclusively by the government. In 1985 the Department of Telecommunications (DoT) was created as a separate department to serve as the primary policymaker and regulator for the telecom industry. The telecom sector was opened to private firms in 1991 to bring in value added teleservices other than fixed telephony. The Government of India released the National 287

Telecom Policy in 1994, and established the Telecom Regulatory Authority of India (TRAI) in 1997. This period of market driven reforms culminated in the incorporation of Bharat Sanchar Nigam Limited (BSNL) in 2001 as a public limited company. Controlled entirely by the government, BSNL and Mahanagar Telephone Nigam Limited (MTNL) remain at present the representatives of public sector presence in the telecom industry in India.

Early Licensing Procedure Initially in India, private entry was viewed as necessary only for premium services (mobile telephony, paging etc) as a supplement to public provision of basic telephony. Therefore in 1992, the government invited competitive sealed bids for two non-exclusive digital mobile licences for a 10-year period, extendible by five years, for the four metropolitan cities of Mumbai, Delhi, Kolkata and Chennai. The licence specified the use of Global System for Mobile Communications (GSM) standards for offering cellular services. Once interim licences were awarded to the private players, the unsuccessful bidders sought legal intervention and after clearance from the Supreme Court of India, eight licences were issued in 1994. DoT invited tenders for two non-exclusive licences for each of the 20 circles (usually coterminous with states); selection from among the technically qualified bidders was on the basis of highest levy (later converted to licence fee) which was measured over a 10-year licence period. The issuing of cellular licences called for an initial allocation of spectrum. In the metros each licensee was allocated 4.5 MHz in the 900 MHz spectrum, and in the circles the allocation was 4.4 MHz each. The licence fee based cellular service however could not take off as smoothly as had been anticipated because operators reported huge losses. The new telecom policy 1999 (NTP 99) provided for a new policy framework for cellular mobile service providers, and replaced licence fees with an arrangement for revenue sharing. The initial licence period was increased to 20 years, further extendible by ten years thereafter. NTP 99 for the first time explicitly recognised that the number of cellular operators in a given geographical area would necessarily be limited due to the scarcity of spectrum. It announced that apart from the two private operators already licensed, DoT/MTNL would be licensed as the third operator in each service area. In order to ensure a level playing field for the different service 288

providers in similar situations, the licence fee would be payable by DoT also. However, as DoT was the national service provider and had immense rural and social obligations, the government would reimburse the full licence fee to DoT. NTP 99 also proposed that the spectrum utilisation should be reviewed from time to time, keeping in view the possibility of increased spectrum availability, the requirements of the market, and other interests of the general public. The entry of additional operators in a service area was to be based on the recommendation of TRAI. Cellular service providers would be required to pay a one-time entry fee and also a licence fee on revenue sharing basis, to be determined as per the recommendations of TRAI. The growth of the Indian cellular industry picked up in this new revenue sharing regime. But this phase also witnessed the dispute between GSM and Wireless Local Loop (WLL) operators (which will be discussed later). This controversy was subsequently resolved, but all along spectrum allocation remained a bone of contention. Even TRAI in making its recommendations on the entry of the fourth cellular operator in June 2000 pointed out that it was constrained in its ability to make recommendations because of the lack of information about the availability of spectrum, although it emphasised the critical role of spectrum planning in sustaining competition and ensuring service quality. In short, the policy makers and the regulating body in India as in any other country found it very difficult to set up the regulatory mechanism and to choose the right mode of spectrum allocation. As a result many loose ends remained, paving the way for legal disputes.

Spectrum Planning and Dispute: A Theoretical Overview Mobile service operators are provided with the use of radio spectrum. This spectrum is limited in supply in view of its large number of uses—radio broadcasting, mobile telephony, mobile satellite services, meteorological uses, disaster management services, defence etc. The available spectrum of frequencies ranges from 300 Hz (cycles per second) to 300 GHz. However, given the present technological standards, much of it is not available for deployment. As such, radio spectrum is rationed out internationally. Although the radio spectrum allotted to a nation is national property and does not belong to the

Indian Telecom: Regulation, Spectrum Allocation and Dispute Management

government, it becomes the responsibility of the national government to ensure that the scarce spectrum is optimally used.

Economides 6 gives an introduction to the telecommunication regulation. Klemperer7, and Krishna8 are comprehensive discussions on strategic auction theory.

The issue of spectrum allocation has occupied the centre stage of policy debate in every country with the advent and rapid expansion of mobile telephony. As the number of subscribers keeps increasing, the demand for additional spectrum is also rising. Further, the advent of new technology like 3G also increases the need for additional spectrum allocation. After the dust generated by the first phase of spectrum allocation settled in Europe and North America, there is now another controversy over the optimum mode of spectrum allocation with regard to 3G technology1. India is also facing the same problem now, and is finding it difficult to come up with a quick solution.

Many economists favour auctions over the ‘beauty contest’ because it is efficient in theory—only an efficient firm can be the highest bidder and eventual claimant of the scarce resource9. Secondly, auctions generate revenue for the government. Thirdly, they are transparent and therefore subject to less controversy. However, experience has shown that auctions can lead to problems especially the winner’s curse10, where the winner bids an exorbitant amount but the deal finally fails to pay off11. Another problem is post contract opportunism where after winning the spectrum, the winner may refuse to pay the committed amount. No method is foolproof and coming up with a good solution The issue of spectrum allocation to the problem of spectrum The allocation of any scarce has occupied the centre stage allocation is no easy task for the resource is always a problem. government. of policy debate in every Theoretically, there are five solutions The main problem of allocating to this problem— muscle power, country with the advent and spectrum on a discretionary ‘beauty luck, time, political power, and rapid expansion of mobile contest’ basis is in determining the market power. Of these methods, telephony. As the number of optimal spectrum requirement. the first one will never receive the There is no empirical formula approval of a civilised society. The subscribers keeps increasing, which can calculate the exact figure second one involves the allocation the demand for additional in this regard. Additional spectrum of the resource based on luck—by flipping a coin, in a manner of spectrum is also rising. Further, requirements depend on various the advent of new technology parameters like the number of speaking. Its randomness makes it undesirable. The third is based on like 3G also increases the need subscribers, the density of subscribers, and their geographic the principle of first come, first for additional spectrum morphology. Other determinants serve, which in the context of allocation. are the types of applications (voice, spectrum allocation gives undue data, multimedia applications such advantage to the first players in the as video/audio, mobile TV etc) and the technology itself— market or the existing players, and fosters monopoly, and 2G Code Division Multiple Access (CDMA IS95A, GSM), is therefore not an optimal solution. The fourth method 3G Wide Band Code Division Multiple Access (WCDMA/ relies on the government to decide who best deserves the CDMA2000), WiFi, WiMax etc. In a multi-operator scarce resource. In spectrum allocation literature this is scenario it is difficult to assess the value of these known as a ‘beauty contest’. The main argument against parameters. Even when past data is available, a few a ‘beauty contest’ (in this context) is that it encourages parameters such as current subscriber base, current rent seeking and corruption. Moreover it is often arbitrary growth rate, etc might be known, while there would be and lacks transparency, and is prone to controversies. several indeterminate factors which could substantially This method can lead to litigation and eventual delay. alter the spectrum requirement estimates. When major Market power is another much applied method of spectrum technologies like GSM and CDMA are involved, the pattern allocation, and the instrument here is auction. The literature of spectrum use is distinctly different. Hence it becomes on spectrum auction in the telecom industry is quite vast. doubly difficult to determine the efficient distribution of Vickrey2, and Wilson3 pioneered the attempts to develop 4 5 spectrum between the two. The market makes a choice auction theory. Milgrom and Weber , and McMillan have between the two technologies on the basis of the cost of elaborated on many ideas of spectrum auctions.

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production and the quality of services provided. But in this case both cost and quality are dependent on the quantum of spectrum allocated, and therefore no independent basis for cost comparison is available. This scenario quite often leads to disputes, and the problem is exacerbated by some additional factors. The telecommunication sector is one of the fastest growing sectors in the world—over 9 million users are added every month—involving large sums of money and big players12. The industry is in a state of flux, having witnessed the transition from a state of natural monopoly to open competition among the incumbent firms as well as the new entrants. Liberalisation and privatisation have also led to disputes, and both the government and the service providers are finding it difficult to adjust to the regulatory regime. In countries like India, where public sector firms and private service providers coexist, the latter often allege that the government’s decisions favour the former. Additionally, the rapid changes in technology and business practices render the process of decision making a harrowing task for all those involved. In such a scenario disputes can crop up frequently, leading to constant and prolonged litigation, an atmosphere of uncertainty, and a delay in decision making. Given the short life of telecom technology, timely technological upgradation gets affected. Thus litigation tends to become a hindrance to the growth of this industry. The model in the next section illustrates the scenario of a firm resorting to legal action, which can result in a ‘bad’ equilibrium. The legal battles among firms and their implications on market equilibrium have received attention in the literature. Robledo has discussed asymmetric litigation costs as entry deterrence instruments 13 . Bruce and Macmillan 14 summarise dispute resolution in the telecom sector. Our paper attempts to introduce legal battles as a form of contest, which is new to the literature.

Rent Seeking Contest Model We consider a rent seeking contest model where two risk neutral firms—say firm 1 and firm 2—are involved in a Cournot type oligopoly game in the telecom industry. They may engage in fighting between themselves over spectrum allocation, and spend resources (xi) to seek redressal if they feel aggrieved. So xi ≥ 0. If firm 1 wins the fight, its costs may or may not fall, but firm 2’s costs will definitely go up. Thus the prize of the fight is some expected relative cost advantage over the rival firm. 290

We posit a two-stage game between two players. In the first stage the firms involved decide whether to engage in a legal battle or not. In the second stage the firms produce goods for the market, and play a quantity setting game. The marginal cost of production of a firm depends on the outcome of the legal battle, if it does happen. For simplicity, we assume a linear demand function of the form P(qi + qj) = a - b(qi + qj), where a (vertical intercept of the demand curve), b (slope of the demand curve) >0, and the effort spent on litigation by firm i is xi. P is the price in the market that depends on quantity (q) produced by firms i and j. The marginal cost of the winning firm weakly decreases by θ∆ where θ ∈[0, 1] and the cost of the rival firm rises by ∆.15 We use the revised Tullock contest success function16 and represent the probability of success in the litigation as pi = xi / (xi + xj + T), where i, j = 1, 2 and T is the effort of the regulator to reduce the possibility of litigation, and the chance of success in it. Specifically, T / (xi + xj + T) is the probability that nobody wins in the legal combat. T can be transparent policy, negotiation skills, general acceptability of the regulator etc. c is the constant part of marginal cost. Hence

Superscript s represents success, and superscript f represents failure. The Pay off function is:

Where β is the fixed price of the resource x. We apply backward induction and first find out the solution of the second stage Cournot game. Solving for first order condition and assuming global concavity of the pay-off function

Hence we get

Indian Telecom: Regulation, Spectrum Allocation and Dispute Management

The firms decide whether to engage in litigation or not after taking the above profits into consideration.

the global concavity condition, we get the slope and curvature of implicit best response function of firm i:

Proposition: There are two equilibria in this litigation game. In one, the equilibrium is xi** = xj** = 0 provided _ k i / β , where k is defined below. In the other T > 1 equilibrium we get xi* = xj* > 0. Proof: (i) Solving for equilibria Calculating the profit from the Cournot game we get So the reaction curve of firm 1 is convex from below when it rises upwards, and concave from below when it slopes downwards. The reaction curve of firm 1 will turn backward below the 450 line. Similarly the reaction curve of firm 2 will turn backward above the 450 line. One of the equilibria takes place at the intersection point and the other one takes place at the origin. The two equilibria are given in Exhibit 1.

...........................(1) where and

It is observed that if then

.

Implications of the Model If

we get one Pure Strategy Nash

The redeeming feature of this model is that the fight-fight equilibrium is not the only equilibrium. There is also a ‘good’ equilibrium where there is no legal battle. Thus, at

Equilibrium (PSNE) at Again solving for first stage first order condition for xi > 0, we get similarly

.

Solving both Best response Functions, we get the PSNE with the following positive litigation effort.

Exhibit 1 Two Equilibria in a Rent Seeking Contest Model Resources of firm 2 x2 k1 R1(x2)

.

(ii) Sufficient conditions for global concavity of profit functions

ie ie As we look at the first order condition of the firms, under IIMB Management Review, December 2009

x2*

O

E

x1*

R2(x1)

k2

x1

Resources of firm 1

In case of symmetric costs we get

Where R1(x2) represents reaction curve of firm 1 as a best response to x2 and R2(x1) represents reaction curve of firm 2 as a best response to x1; O and E are two equilibrium points.

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least theoretically, attempts can be made to reach the good equilibrium. The implications of the model are clear. If in a country like India, the government cannot manage the dispute in the telecom industry—i e, it cannot maintain a high T (regulatory effort)—the country may end up with the bad equilibrium xi** = xj** > 0 where firms waste resources in fighting. The good equilibrium is xi** = xj** = 0 where there are no legal battles, but the government and the regulator have to play an effective role to ensure this equilibrium is maintained.

Spectrum Allocation in India: Case Studies of Various Legal Disputes We can examine spectrum allocation in India in the light of the results of the above model. As was mentioned earlier, the Indian telecom industry has been beset with legal disputes and wrangling since the introduction of market-driven reforms. We will discuss two major disputes.

Case 1: Transition from Fixed Fee to Revenue Sharing Model The original auction process for spectrum allocation divided the country into 21 circles. DoT stipulated that there could be only two operators per circle for cellular services, and only one additional operator for fixed phone services. The use of auctions appears to have been motivated by the desire to raise revenues, and to ensure transparency in the allotment of licences. As part of the auction process, the bidders would first be evaluated on the basis of their experience, and other criteria, and only qualified bidders would be allowed to bid. The design of the auction process was faulty as it not only retained the licensing fee—determined by bids, and fixed for the first three years—but also fixed call charges at higher levels than fixed telephony rates (provided by DoT), leaving the monthly rental element as the only adjustable instrument for a bidding firm to attract customers and compete with others 17. This was brought about by DoT playing a prominent role in this auction system both as a player and as the referee. In the role of a player, DoT and MTNL got cellular licences sans licensing fee in all circles. As the referee, DoT set per-minute cellular charges at extra-high levels in relation to its own fixed line charges. Moreover, it required all interconnections to go through its fixed lines 292

and charged a high fee for this service. Private cellular operators were also denied the right to provide the services of international calls18. Despite these restrictions, the first licensing attempt through auctioning in 1995 evoked a good response. But the bid pattern was lopsided. One firm with a turnover of US$ 0.06 billion quoted the highest bid in nine circles, incurring a payment liability of $15 billion. This suggests that this firm and some other bidders were unduly enthusiastic and susceptible to the winners’ curse, leading to the ‘hold-up’ problem or a spot of post contract opportunism. Just after the completion of licensing, the firms started pleading with the government that with this kind of bid, call charges would be too high for the industry to break even. There were also some lawsuits involving DoT. Ultimately in 1999, several powerful private firms pressurised the government to change the system and introduce revenue sharing, absolving the firms of their auction commitment. This debacle can be attributed to several factors. A fundamental flaw in this auction was that the government played the role of a player as well as the referee. This made the entire scenario murky and led to squabbling. There were too many institutions governing the situation, who sometimes worked at cross purposes. For the formulation of the telecom policy, in addition to DoT, the Department of Space, and TRAI, the government had set up ad hoc bodies, such as the Information Technology Task Force and the Group on Telecommunications. The growth scenario of cellular business was not properly projected. The mobile service was assumed to be a luxury whereas it turned out to be widely used by people. There was a failure to project future demand, and gauge the extent of future decline in the prices of handsets and telephony services. Moreover, the possibility of post contract opportunism was not taken care of. TRAI had both regulatory responsibilities as well as the task of adjudication, and its role was not unambiguously specified. One of TRAI’s rulings against the granting of a licence to MTNL by DoT was quashed by the Delhi High Court on the grounds that the government’s (i e, DoT’s) decision should get precedence over the regulator’s decision.

Case 2: GSM-WLL Dispute The single most important legal controversy occurred in 2000 when TRAI proposed that mobile calling using the

Indian Telecom: Regulation, Spectrum Allocation and Dispute Management

The problem was finally resolved when the government WLL licences should be restricted to relevant short distance introduced unified licensing, making cellular services calling areas19. But the basic service operators of WLL technology-neutral, and allowing WLL players to provide exploited a loophole in the licence and offered the full the full range of mobile phone services after payment of range of mobile telephony services by using call forwarding an entry fee equal to what the GSM operators had paid. and multiple number registrations. The GSM based But by that time, the two major Indian WLL operators operators who had paid a significant licence fee contested had already established their base. There are several lessons this decision, and this legal battle continued for three years. to be learnt from these cases. The regulatory body ought In January 2003, the cellular operators, based on GSM not to make differential treatment on the basis of system, threatened not to interconnect with WLL operators technology; it is better to provide technology-neutral and block all the calls unless the issue of access charge licensing. It is up to the licensee to choose which was solved. As blocking of calls violated the cellular service technology and equipment will be used to provide the license, TRAI immediately issued an order on 9 January, licensed service. This provides a fair and predictable 2003 against such blocking of calls originating from WLL regulatory regime flexible enough to embrace the right networks. Cellular operators moved the Telecom Disputes technology and market developments. Settlement and Appellate Tribunal (TDSAT) and the Supreme Court, The merger of political interests and seeking redressal against the TRAI the interests of particular firms is a In 2000, TRAI proposed that order. Finally, to create a level playing critical issue, and a very difficult mobile calling using WLL field between WLL and cellular one to tackle. One means of operators, TRAI decided to impose licences should be restricted to protection against such a nexus is an access charge of 30 paise per transparency, which interestingly is minute on all the calls in metro cities. short distance calling areas. But often ensured by political With this, the interconnect charges the operators exploited a competition. The appointment of a paid by cellular operators in metro dispute settlement body consisting loophole and offered the full circles came down from Rs 1.20 of government and private range of mobile telephony for 3 minutes to 30 paise per representatives—as in Japan—or minute20. services. The GSM based the use of the services of private The problem was caused by the arbitrators—as in Hungary—are operators who had paid a failure of the regulatory body to some remedies. properly implement the initial significant licence fee contested decision to restrict WLL services to this decision, and this legal Situation since 2003 calls within the local circle only. TRAI had announced that mobile battle continued for three years. An analysis of the second phase of licensing reveals an improvement switching centres (MSC) could not in the Indian government’s ability be used in the handsets for WLL based services. Because to orchestrate an effective bidding and licensing process. of this restriction, the licence fee for WLL service This phase was characterised by much less legal dispute. providers (Rs 495 crores) was much less than the fee for 21 There are several reasons for such an improvement. The GSM cellular service providers (Rs 1633 crores) . But introduction of the unified licensing system in 2003 WLL firms started providing long distance phone services ensured a technology-neutral policy, and eliminated the (out of the local circle) by innovative use of technology. distinction between basic and cellular services. The TRAI did not take immediate action to prevent this, and regulatory and dispute settlement roles of the original TRAI the dispute started snowballing. Meanwhile the major WLL were bisected, and the TDSAT was constituted to address service providers in India at that time had built up a dispute settlement in 2000 22 . The scope for court substantial subscriber base. TRAI took an ambivalent intervention was curtailed by making the Supreme Court stand, and failed to initiate action against the operators. of India the sole judicial authority with the powers to review Allegations surfaced (unsubstantiated) that undue political the decisions of TDSAT. DoT’s telephone services were intervention prevented TRAI from taking appropriate transferred to a new corporate entity, BSNL. This made action, resulting in favouritism and differential treatment BSNL at par with private firms in the eyes of the law. among the firms. IIMB Management Review, December 2009

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GSM vs CDMA In the matter of spectrum allocation, the Indian Spectrum Management Committee (created in May 1999) has failed to significantly improve the effectiveness of the auction itself, resulting in a situation today in which services that require the same spectrum in neighbouring bands are still treated differently by the government. Hence the government has been resorting more frequently to ad hoc allocation. The failure of the initial auction mechanism and the government’s inability to stick to its position created trouble in the allocation of spectrum. The problem became more complicated when CDMA technology came into being along with GSM. Although this has encouraged faster telecom development, and has led to an increase in the number of players in each service area, the GSMCDMA row still continues. In 2001 the government decided to bundle entry level spectrum (of 4.4 Mhz) for $413 million. Subsequently the government allocated extra spectrum on the basis of number of subscribers—a practice not usually followed elsewhere. This was done on the basis of the report of the Technical Evaluation Committee (TEC) in October 2007. TEC recommended enhanced subscriber linked criteria which was even higher than what was recommended by the Authority23. Since the government prefers to follow a discretionary policy, there is constant lobbying by the GSM and CDMA players, and appeals to court are made off and on. The discretionary policy has proved to be particularly prone to bargaining and squabbling on account of the technological differences between GSM and CDMA with regard to the pattern of spectrum use. The GSM lobby argued that CDMA needs less spectrum since the latter technology is five times more efficient than GSM in the use of spectrum, provided CDMA operators invest in proper infrastructure. GSM operators had invested in setting up cell sites24, and they alleged that CDMA operators were demanding more spectrum without making similar investments in order to save investment costs and to make more profit. The CDMA lobby argued that if GSM were to evolve to WCDMA, GSM operators would be able to achieve similar spectral efficiency and revenue generating services as CDMA operators. So they demanded a revision of the policy that allots more spectrum to GSM operators compared to CDMA operators. They also alleged that 294

GSM service providers hoarded spectrum and deprived the nation of the use of precious resources. The GSM association appealed to TDSAT and then to the Delhi High Court to grant a stay order against the government’s decision to allow CDMA operators to provide GSM services. While this issue is still pending in TDSAT, the Delhi High Court rejected this petition in August 2008 citing technology neutrality25. So it is now up to TDSAT to decide whether CDMA operators should get an additional allocation of spectrum for GSM based services. The Department of Telecommunications (DoT), in July 2009 has sought TRAI’s recommendations on the comments of the Committee on ‘Allocation of Access (GSM/CDMA) Spectrum and Pricing’. In addition, TRAI has also been requested to furnish its recommendations on the terms and conditions of existing licence for extending validity of these licences perpetually or otherwise vis-à-vis 2G spectrum (GSM and/or CDMA) allocated and/or 3G spectrum owned by existing licensees. DoT has also sought the Authority’s clarification on auctioning of all spectrum. On 16 th June 2008, the government constituted another committee consisting of representatives of DoT, Technical Evaluation Committee (TEC), defence and educational institutes like IIT, IIM etc. The second committee submitted its recommendations on 13 th May 2009. Now TRAI has come out with a consultation paper to settle the policy for spectrum allocation26. But unfortunately the situation has been vitiated by allegations against DoT of corruption in spectrum allocation. What transpires from the above analysis is that although the regulatory system in India has been relatively streamlined, an effective policy of spectrum allocation is yet to be devised. Hence in terms of our model, the scenario tends towards the bad equilibrium. The weaknesses of the present policy are many. After initial allocation through auctions, subsequent allocations remain arbitrary and discretionary. The methods of these allocations do not match with either auction nor ‘beauty contest’, and keep the milieu perpetually conducive to litigation. Commenting on the situation, the Delhi High Court said, ‘prima facie we find that spectrum has been allocated in the worst manner and public exchequers have lost thousands of crores [rupees]’27. On the basis of the technological differences between GSM and CDMA in the pattern of use of spectrum, a 2:1 ratio in spectrum allocation has been introduced. The

Indian Telecom: Regulation, Spectrum Allocation and Dispute Management

arbitrariness of this allocation pattern has made the situation prone to disputes. The licence fee is charged at differential rates for different services. There is no charge for pure internet services, but there is a 6–10% charge for mobile telephony, leaving scope for one company to allege that the other is misclassifying its revenue sources.

settlement mechanism can be a means of reducing political influence. Such mechanisms include arbitration and mediation by a team of specialised arbitrators. Many countries like the USA, Australia, Jordan, Hungary etc have a system of arbitration in place. When foreign firms are involved, international arbitration can also be practised. Indonesia has a system of involving the International In view of the shortcomings of the discretionary allocation Chamber of Commerce for international mediation. These of spectrum, and its vulnerability to legal disputes, the mechanisms complement regulatory adjudication, while auction method should be adopted to allocate further maintaining the regulator's role as the prime decisionspectrum. A properly designed auction mechanism is more maker. It is however important that there should be transparent and less prone to legal issues. It augurs well official endorsement for the non-official dispute that DoT has decided to go for auctions for the allotment resolution alternatives. Australia and Canada have a of spectrum for 3G and WiMax in the country, and has system of industry-based consensus building announced the guidelines. It is however also necessary organisations, comprising industry for the government to be aware of representatives. In some countries the associated ‘hold up’ problem, and In view of the shortcomings of dispute settlement is considered a to insist on some commitment separate area of regulation. The US device, so that the eventual winner the discretionary allocation of Supreme Court opined that the task of the auction cannot deny payments spectrum, and its vulnerability of adjudicating regulatory disputes later. It should also ensure that and anti-trust disputes should be to legal disputes, the auction proper infrastructure is rolled out. A bifurcated. Japan set up a special part of the auction revenue can be method should be adopted. A Dispute Resolution Commission used to subsidise infrastructural properly designed auction 28 with the powers of mediation and investment . mechanism is more transparent arbitration.

Conclusion

and less prone to legal issues. It augurs well that DoT has decided to go for auctions for the allotment of spectrum for 3G and WiMax in the country, and has announced the guidelines.

As our model suggests, dispute settlement should become an important area of focus for the seamless growth of an industry like telecommunications. Regulatory adjudication is currently the standard practice of dispute resolution in this sector. In order to improve this mechanism, policy makers should particularly focus on the partitioning of judicial functioning for the area of regulation, antitrust measures and consumers’ disputes; the technological neutrality of policy; transparency; promptitude in decision making; and dispute resolution with the involvement of private bodies in arbitration and negotiation. The regulatory mechanism in India is often alleged to have a politically-driven bias. Political influence cannot be fully avoided, since the regulating body is appointed by the government. So it would be helpful to know how different countries in the world are trying to grapple with this knotty but commonplace problem. The participation of non-official bodies in the dispute IIMB Management Review, December 2009

Telecommunication in India is often referred to as a success story. The mobile set has become an essential possession for many people. It is heartening to note that the Indian telecom sector has been attracting huge investments, and the news of the 3G auction has evoked keen interest among big foreign firms. The industry however needs a well-designed dispute settlement machinery so that the growth of the Indian telecom industry is not derailed in legal conflicts.

References and Notes 1 McKnight, L, R Linsenmayer, and W Lehr; ‘Best Effort versus Spectrum Markets: Wideband and Wi-Fi versus 3G MVNOs?’ Working paper, 28.10.2001, MIT, DSpace@MIT. 2 Vickrey, W, 1961, ‘Counter Speculation, Auctions, and Competitive Sealed Tenders’, Journal of Finance, Vol 16, No 3, pp 8–37. 3 Wilson, R B, 1967, ‘Competitive Bidding with Asymmetric Information’, Management Science, Vol 13, July, pp 816820;Wilson, R B, 1992, ‘Strategic Analysis of Auctions’, in R J Aumann and S Hart, (Eds), Handbook of Game Theory with

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Economic Applications, Vol 1, North Holland, pp 228–279. 4 Milgrom, P, and R J Weber, 1982, ‘A Theory of Auctions and Competitive Bidding’, Econometrica, Vol 50, No 5, pp 1089– 1122. 5 McMillan, J, 1994, ‘Selling Spectrum Rights’, Journal of Economic Perspectives, Vol 8, No 3, pp 145–162. 6 Economides, N, 2004, ‘Telecommunications Regulation: An Introduction’, Working Paper 04-20, NET Institute. 7 Klemperer, P D, 1999, ‘Auction Theory: A Guide to Literature’, Economic Surveys, Vol 13, No 3, pp 227–286. 8 Krishna, V, 2002, Auction Theory, San Diego: Academic Press. 9 Cave, M, and T Valetti, 2000, ‘Are Spectrum Auctions Ruining our Grandchildren’s Future?’, Info, Journal of Policy Regulation and Strategy for Telecommunication Information, Vol 2, No 4, pp 347–350; Haan, M A, and L A Toolsema, 2003, ‘License Auctions when Winning Bids are Financed through Debt’, Working Paper No 200310, University of Groningen, CCSO Centre for Economic Research; Virmani, A, 2000, ‘A Communication Policy for the 21st Century’, Economic and Political Weekly, Vol 35, No 23, pp 1907–1910; Virmani, A, 2004, ‘Competitive Access to Telecom: Spectrum Policy and M & A’, Economic & Political Weekly, Vol 39, No 7, pp 620–622. 10 Capen, E C, R V Clapp, and W M Campbell , 1971, ‘Competitive Bidding in High Risk Situations’, Journal of Petroleum Technology, Vol 23, June, pp 641–653. 11 Zheng, C B, 2001, ‘High Bid, Broke Winners’, Journal of Economic Theory, Vol 100, No 1, pp 129–171. 12 TRAI Annual Reports 2007–08. 13 Robledo, Julio R, 2005, ‘Strategic Patents and Asymmetric Litigation Costs as Entry Deterrence Instruments’, Economics Bulletin, Vol 15, No 2, pp 1–9. 14 Bruce R R, and R Macmillan, 2004, ‘Dispute Resolution in the Telecommunications Sector: Current Practices and Future Directions’, Discussion Paper, A study commissioned by International Telecommunication Union and The World Bank. 15 d’Aspremont, C, and A Jacquemin, 1988, ‘Cooperative and Non Cooperative R&D in Duopoly with Spillovers’, American Economic Review, Vol 78, No 5, pp 1133–1137. 16 Tullock, G, 1980, ‘Efficient Rent Seeking’, in J M Buchanan, R D Tollison and G Tullock, (Eds), Towards a Theory of Rent Seeking Society, Texas A& M University Press, pp 97–112; Nti, K O, 1997, ‘Comparative Statics of Contests and Rent Seeking Games’, International Economic Review, Vol 38, No 1, pp 43–59.

17 Malik, P, 2004, ‘Indian Telecommunications Policy and Regulation: Impact on Investment and Market Structure’, Discussion Paper, WDR 0304. 18 Panagaria, A, 2008, India: The Emerging Giant, Oxford University Press; Jain, R S, 2001, ‘Spectrum Auctions in India: Lessons from Experience’, Telecommunications Policy, Vol 25, No 10, pp 671–688. 19 http://www.financialexpress.com/news/wll-services-to-berestricted-to-local-call-area/58189/0 20 www.financialexpress.com/printer/news/67372 21 www.capitalmarket.com/CMEdit/SFPrintStory.asp?SFSNO 22 www.tdsat.nic.in 23 Consulation Paper TRAI, 2009. www.trai.gov.in 24 Cell sites (towers) allow the spectrum to be re-used in order to carry more traffic. 25 Jain, S, ‘2G spectrum: What’s $10-15 bn between Friends?’, September 29, 2008. http://in.rediff.com/money/2008/sep/ 29guest.htm 26 Consultation paper No 6/2009, Oct 2009, Telecom Regulatory Authority of India. www.trai.gov.in 27 http://timesofindia.indiatimes.com/Business/India-Business/HCslams-spectrum-allocation-policy/articleshow/4595581.cms 28 Datta, D, 2006, ‘Spectrum Auction and Investment in Telecom Industry – A Suggested Policy’, Paper Presented at the Seminar on Contemporary Issues in Development Economics, Jadavpur University, Kolkata. 29 For a review of international situation of dispute management in telecom, see Bruce and Macmillan, ‘Dispute Resolution in the Telecommunications Sector: Current Practices and Future Directions’. 30 http://www.cn-c114.net/575/a421091.html

Subhasish M Chowdhury is Lecturer, School of Economics, University of East Anglia, Norwich, UK. [email protected] Debabrata Datta is Professor of Economics, Institute of Management Technology, Ghaziabad. [email protected]

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Indian Telecom: Regulation, Spectrum Allocation and Dispute Management

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