In a report by committee chairman Mark J Riedy, circulated among US telecom industry leaders exploring investment in India, the USIB said, "In this regard, the government of India decided originally to `earn' huge amounts of revenue from the privatisation process."

It noted that the licence fees forced telecom companies to `quote excessive licence fees' in a short time of four months. According to the report, what the government should have done instead was to request companies `to quote tariffs at which they would provide a basket of services.'

The report said the initial competitive bids had resulted in excessive (40 per cent to 50 per cent of total project costs) licence feespayable to the department of telecommunications (DoT). It said these "excessive licence fees have resulted in defaults in installment payments causing banks to attempt to encash bank guarantees resulting in project delays, partner selldowns and litigation."

Riedy's report said that "these significant fees have also caused significant reductions in operators' internal rate of return on investment discouraging continued investment by the foreign investment community."

Where the operator defaults on the payment of a licence fee, he must pay a penalty equal to 5 per cent above the prime lending rate of the State Bank of India. The DoT can enforce the default payment and penalty interest obligations by encashing the project bank guarantee. The USIB report said that although Indian financial institutions had stated recently that they would fund yearly licence fees for telecom operators through the investment breakeven year for new projects, "to date, we have not seen any evidence of this funding."

It alsocomplained that even though the various telecom associations have requested a two-year moratorium on the payment of these onerous licence fees, the government was yet to rule on this request. New Delhi apparently fears that such a moratorium would impact severely on its current fiscal year receipts and create legal complications in view of the original licence conditions.

At least five consortia -- JT Mobiles, Aircel Digilink, Koshika Telecom, Reliance Telecom and Modicum Network -- have filed suits against the DoT on issues surrounding licence fees.

With regard to future and retroactive revenue sharing, the report said that the government of India "should reopen all circles awarded bids in previous rounds for cellular and basic services to a new round of competitive bidding." It said that in this new round, the government "should not disturb any of the previous two-per-circle licence awards to the respective telecom providers."

However, the USIB suggested that the government should permit newbidders to compete for one additional licence award per circle, respectively, for each of the cellular and basic service systems on a revenue sharing, and not on a licence fee basis.

The report also said that the government should not permit Mahanagar Telephone Nigam Ltd (MTNL) which manages telephone services in Delhi and Mumbai "to enter any of the cellular circles as a third licensee, after the original bidding and without the payment of any licence fees". Doing so, it warned, would provide MTNL "a superior competitive position vis-a-vis the remaining two licences in any circle. As such, it would create an uneven playing field."

The report recommended instead that the government conduct a new bidding process on a revenue sharing basis and make awards. "Then, the government should replace licence fees with revenue sharing for all prior licence awardees," it said.