Financial Daily from THE HINDU group of publications
Monday, Oct 25, 2004
Industry & Economy - Foreign Direct Investment
Info-Tech - Insight
Telecom: Why 74% cap will not ring in FDI
Paranjoy Guha Thakurta
In his 14-page note to representatives of Left parties on October 12 (a copy of the Note is in the possession of the author) to rebut their criticism of his proposal to hike the FDI cap for telecom firms, the Finance Minister has put forth a host of arguments supporting his position. However, many of his contentions appear inconsistent.
To start towards the end of Mr Chidambaram's note, where he questions the suggestion made by the Left that India could emulate the Chinese strategy of first investing in domestic manufacturing facilities by forcing international telecom majors to collaborate with government-owned Chinese companies and thereafter leveraging the price advantage to capture foreign markets.
According to the Finance Minister, "this is a kind of `infant industry' argument" pleading for protection that would result in "substantial costs to the economy". He added that such a 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 (information technology enabled services) sector".
The Finance Minister argues that the Chinese model would slow the growth of India's telecom sector "until hardware manufacturing is mature enough to support it".
He is of the view that as India's strategy relies heavily on the service model and the BPO (business process outsourcing) model, the country would "fritter away its advantage in the service sector" by following China. Then, Mr Chidambaram puts forth selective information about the telecom scene in China.
This is what he has stated: "Further, information is available that China threw open (its) 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) AT&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."
But this is not the full picture. What has the Finance Minister not stated? Despite its accession to the World Trade Organisation (WTO), China's telecom market still has many restrictions for foreign investors.
Foreign telecom firms mention the existence of several non-tariff barriers such as "archaic" service definitions, stringent network security, limitations on geographical roll-out, absence of effective laws and an independent regulator and, wait, restrictions on foreign ownership!
China opened "value added" (excluding mobile phone services) services to foreign investors in January 2002 allowing them to hold up to 30 per cent shares in operations in three cities Beijing, Shanghai and Guangzhou. This policy was extended to cover 14 more cities in January 2003. A year later, the FDI cap was increased to 50 per cent and geographical restrictions lifted altogether. Moving now to "basic" services (including mobile and fixed line telephony), China will allow FDI up to 25 per cent only from January 2005 onwards and that too in its main three cities mentioned above.
The FDI cap will go up to 35 per cent in January 2006; by then, foreign investors would be allowed to operate in 14 cities. Importantly, the FDI cap will be increased to 49 per cent only in January 2007 by which time all geographical restrictions would be lifted.
What should also be noted is that all international data and Internet protocol services are considered "basic services" in China and, hence, not open to foreign participation.
Moreover, when basic services are opened in 2005, the minimum capitalisation required for a JV would be $250 million this condition was written by Chinese policy-makers after that country became a part of the WTO effectively introducing a major barrier to inflows of foreign investment. It must be emphasised that China consciously broke its government-owned telecom monopoly into two and created a duopoly.
The world's largest mobile phone company, China Mobile Communications, is ranked 242nd in the latest Fortune 500 listing with revenues of $20.76 billion, assets worth $49.73 billion and over 1,16,000 employees. In terms of profits, China Mobile is ranked 67th with profits of $3.58 billion. This enterprise is larger than China Telecom that has revenues of $ 19.46 billion. China Mobile is the most valuable Chinese company in the world at present. Three years ago, when it offloaded 3 per cent of its shares to Vodafone, it earned in excess of $ 2.5 billion.
Consider now the situation in India. Since 1995, the government has allowed 100 per cent FDI in specific telecom services such as Internet, radio paging and voice mail as well as in the manufacture of telecom equipment. In the services specified, not a single foreign investor has come in so far.
As for manufacturing telecom equipment, at least four multinational corporations (Alcatel, Lucent, Ericsson and Siemens) currently operate JVs in India that have a combined inflow of FDI worth less than Rs 1,000 crore.
Contrary to what the Finance Minister's note would imply, AT&T (China) is not an investor in telecom services but a representative office that deals with bilateral long-distance phone traffic between China and the United States. A similar representative office is run by AT&T in New Delhi. Incidentally, Alcatel Shanghai Bell is a manufacturer of equipment and is not engaged in providing telecom services.
Comparing the telecom scene in India and China, the contrast is striking. China started mobile telephone operations in 1992, two years before India did, although India had invited bids for cellular licences in four metropolitan cities in 1992 itself. China has two government-owned mobile phone operators; India has eight, including two public sector companies. China still does not allow foreign investment in telecom services whereas in India, the "official" FDI cap is 49 per cent. Now the clincher: Against more than 42 million mobile phone subscribers in India, China currently has over 300 million mobile phone subscribers (with no FDI)!
Mr Chidamabaram concluded his note stating that the "recent growth in the number of telephone connections has been exceptional, but sustaining this and to achieve a network coverage of 70 per cent... against the present 20 per cent will require investments on an unprecedented scale, which is possible only with FDI."
There is an important consideration in this context. True, India needs investment in telecom on a huge scale, including foreign investment. However, whether foreign investment would help improve network coverage and make phones available to those in villages and remote areas is extremely doubtful.
On October 23, the number of mobile phones exceeded the number of fixed line phones in India. The country currently has a teledensity close to nine; in other words, there are nearly nine phones for every hundred individuals. This figure, however, conceals a lot.
The all-India rural teledensity figure is a pathetically low 1.6. In the city of New Delhi, there are more than 40 phones for every 100 people whereas this proportion is less than two in Assam, Bihar, Chhattisgarh and Jharkhand. There are at least 70,000 out of the nearly six lakh villages in India without a phone. Importantly, close to half the phones installed in the rural areas do not work at any point of time.
There is another important reason why the teledensity figure is misleading. It includes individuals, households, corporate bodies and commercial establishments such as hotels, each of which have many phone connections. Perhaps less than 6 per cent of the Indian population actually owns a phone.
The relevant term should be "access" not teledensity. To expect private telecom firms with higher foreign equity to resolve the tremendous problems involved in spreading the telecom revolution across all sections of the Indian population would be like asking for the moon.
(To be continued)
(The author, a senior journalist, is Director, School of Convergence. He can be contacted at firstname.lastname@example.org.)
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