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Telecom Policy | The moral hazard in waiving dues for incumbents

Relief to Bharti and Vodafone will also open up the government to charges of favouritism. In the Darwinian world of telecom services in India, many companies have fallen by the wayside, including biggies such as Telenor and Etisalat. They faced the same problems and failed, but the government didn’t step up to bail them out at that time

October 31, 2019 / 06:15 PM IST
Representative Image

Representative Image

“If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem,” said American businessman J. Paul Getty. This principle, if it can be called that, has been used by many errant companies to hold banks (and in India, this inevitably means the taxpayer at the end) to ransom.

Bharti Airtel and Vodafone Idea seems to have borrowed a leaf from this playbook in crying foul about having to pay their legitimate dues to the Department of Telecommunications (DoT). Industry lobby, the Cellular Operators Association of India (COAI) has written to the government saying that Bharti and Vodafone will face an “unprecedented crisis” if DoT refuses to relax its demand for dues, Reuters reported on Wednesday.

"Investments could be curtailed, services could deteriorate, jobs could be lost and investor confidence will most definitely be shattered," COAI Director General Rajan S Mathews said in the letter seen by news agency Reuters.

That is effect trying to make a private company problem look like some widespread economic catastrophe. The government, on its part, has now set up a committee of secretaries to look into whether relief should be granted on these dues. Any such relief set a wrong precedent and constitute a moral hazard.

It will raise the questions as to why should the government intervene in one particular sector? Different industries have different problems, but the rule of the law should remain the same. The issue here is simply one of enforcing a contract. The telecom companies had agreed to pay this money when they signed on with DoT to provide telecom services.

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At a time, when the government is focused on improving the ease of doing business, it should not detract from its efforts by giving one-off exemptions. Remember, that enforcement of contracts is one of the weakest areas for doing business in India. If it is the turn of some telecom companies today, then tomorrow what’s to stop other industries like say power producers or carpet manufacturers to stand in a queue and demand sops?

Relief to Bharti and Vodafone will also open up the government to charges of favouritism. In the Darwinian world of telecom services in India, many companies have fallen by the wayside including biggies such as Telenor and Etisalat. They faced the same problems and failed, but the government didn’t step up to bail them out at that time.

A bailout is akin to socialising losses and privatising profits. The money, which should have been given to the government all these years, has in effect been used for other purposes. In any case, it is worth asking why the incumbents let matters come to such a pass?

The Supreme Court had ruled on this issue as far back as 2011. Even if the matter was being appealed, prudent accounting would have meant that money would have been set aside pending the final verdict. If that had been followed, any dues to be paid now would not have come as a big whammy. Mounting losses or shrinking profits is no excuse because the incumbents have the option of raising telecom tariffs.

In any case, we have the insolvency and bankruptcy code (IBC) now to ensure that companies which are struggling to pay their dues find some form of resolution. If Essar Steel and Amtek Auto can be taken to bankruptcy courts, why not telecom players? The law allows the corporate entity itself to file for bankruptcy. Also, while telecom is an investment-intensive sector, there are no entry barriers for serious players.

Ultimately, the incumbents should realise that you cannot have your cake and eat it too. If one wants the free market to prevail and competition to flourish, then one cannot go running to the government every time there is trouble.

Disclaimer: Reliance Industries Ltd is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Moneycontrol
Moneycontrol Opinion
first published: Oct 31, 2019 12:30 pm

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