To start with, in areas like paging and cellular services, entrants are limited by the need to allocate frequencies from a limited frequency spectrum. This gives them an oligopolistic position which can yield rents. Second, since provision of basic services requires provision of the "right of way" to build the network crossing public property and using public assets (like telephone poles, say), excessive entry can lead to "congestion" with adverse social consequences. Here again those private operators permitted to enter become eligible for rents. Third, even though in liberalising mode, the government cannot allow unfettered entry into an area which inevitably involves large sunk costs in infrastructure. In the rush for occupying the market, the industry could get saddled with huge excess capacities leading to waste. Thus, though private entry was to be allowed, originally only two operators were to be permitted entry in each circle. Finally, since the idea of opening up the sector is not just to encourage the entry of private operators but also to expand the network, private sector entrants would have to be allowed to interconnect with the existing public utility network. Given the "externality" associated with a telecom network, which makes the utility of a network a function of its size, the private operator derives substantial "unpriced" benefits from interconnectivity.
 
It is the existence of rents in all these forms that justifies the levy of a licence fee on private entrants. The question remains, however, as to how this levy should be computed. The problem is that all the benefits derived by private operators are not from "goods" that have markets. Hence the market itself cannot compute these gains on the basis of prices it generates. It is essential that the government or any of its regulatory arms should, on the basis of a detailed investigation, normatively impute a cost to the benefits being handed over to private operators. Rather than resort to such a procedure, and in keeping with its belief in liberalisation and the benefits of the market mechanism, the government decided to let private operators themselves 'price' these gains by bidding for the licences on offer in the different telecom circles.
 
The result of that auctioning procedure is now history. Private operators, driven by the liberalisation fever into speculation, based on over-optimistic projections of market potential and counting on unusually low costs of operation, made bids that were irrational both in terms of the number of circles which were sought by individual operators and the size of the bid in monetary terms. Once the bids were opened and licences offered to the highest bidder, three consequences followed. Some potential operators (like Himmachal Futuristic) withdrew their offers in many of the less promising circles, delaying the process of identifying the potential operators. Yet others bidders were soon convinced of their folly by their inability to obtain support from financiers for their proposals. And finally, of those who went ahead with their projects, quite a few found themselves unable to meet the commitments they had made themselves. Tables 1 and 2 provide the licence fee commitments made by those operators who remained in the fray after the initial withdrawals and Tables 3 and 4 provide the amounts which remained due as on 31 March 1999.
Table 1 >> Table 2 >> Table 3 >> Table 4 >>
 
In such a situation, there are two approaches which can be adopted. Within the logic of the liberalisation ethos, it could be argued that the state should maintain its distance and make the investor pay the price for foolhardiness. Bankruptcy and closure would follow. The bidding process can operate again, and the new winners may be the same groups or others who may buy up the infrastructure created by the original players. The second approach would be one which recognises that the premise on which much of liberalisation works - that markets are efficient - was and is wrong. This would require a transition out of the current licence fee regime to one which allows operators to remain viable. This was what the government had decided to do, through a scheme involving a revenue sharing agreement between DoT and the private operators, rather than a fixed licence fee.
 
There were still two problems here, however. First, there was no reason why those cellular operators whose irrational bidding generated the mess, should be the natural beneficiaries of this transition. Especially because their irrational bidding may have kept out of the industry players who had greater capabilities in the telecom area and a more sober assessment of market conditions. Second, writing off past dues would amount to subsidising the speculative bidders rather than penalising them.
 
Mr. Jagmohan, in his brief tenure as Communications Minister, was clear on both these counts. He backed a scheme involving a one time entry fee and a revenue sharing agreement, to implement which there would be a new round of bidding in which existing operators could participate. The idea was that, if the existing operator lost out in that bidding process, he would be bought out by the winner at a price arrived at by an independent valuer. But the transition to that scheme was to be prospective. Meanwhile, companies had to pay up a minimum of 20 per cent of their outstanding dues and securitise the remaining part. Some operators agreed and obliged. Others like Koshika amd JT Mobile held out, leading to a cancellation of their licences and a termination of the connection to the DoT network. When the action was challenged in court, the judges backed the Communications Minister.
 
Yet, when the government finally decided to make the transition, it chose to sacrifice its Communications Minister, who was moved out of his job, and let the operators get away without paying for their folly. They were required to pay a sum equal to their dues on fees on existing licences as on 31 July 1999 as an entry fee into the revenue sharing regime. They were also expected to subsequently pay a revenue share (tentatively fixed at 15 per cent) to the government. The actual estimation of a reasonable licence fee was left to be computed by the TRAI at a later date. This surrender to the private operators was the first blow to the credibility of the government's regulatory framework.