Regulations: Why does positive intent often leads to negative outcomes?

Have you ever wondered why while trying to regulate a sector, positive intent do not always translate into positive outcomes? In fact, most regulatory actions emanating out of bureaucratic directives often lead to negative results, i.e they are bad for the interests of the very stakeholders for which they are intended to benefit. The reason is simple. Bureaucratic action (if not properly thought through) cannot allocate "scarce resources" efficiently. Also, such directives, often end up triggering the "wrong incentives" - promoting inefficient use of "scarce resources". In order to substantiate the above conclusion, I will like to point to some examples. You will see that in each of these cases the regulatory directives didn't serve the intended purpose to benefit the stakeholders.

Holding Auctions Where Bidders Pay in Installments

Intent : a) To encourage a large number of players to participate. b) To enhance "demand", to maximize revenues. b) To mitigate financial burden of the winners.

Incentive : More players are encouraged to participate in the bidding process.

Outcome : Over valued resources as a result of irresponsible bidding, thereby preventing roll out of services in most areas, due to excessive outflows on spectrum (destroying the viability of business in areas where the revenue potential is lower).

Migrating From Fixed License Fees to Revenue Share

Intent : To enable the operators to roll out services by bailing them from the burden of paying disproportionate amounts (committed in the past auctions).

Incentive : a) Players are motivated to focus in the urban areas - enabling them to pay license fees without eroding their profits significantly. b) Players are motivated to use spectrum inefficiently - enabling a market laggard to pay less license fees even when it holds the same amount of spectrum compared to the market leader.

Outcome : Rural customers suffered, as the operators lacked incentives to expand networks in these areas.

Allocating Spectrum Using Subscribers Based Criteria

Intent : To promote efficient use of spectrum by assigning more to the players who enrolls more subscribers.

Incentive : a) Players are motivated to operate in the urban areas - enabling them to get more free spectrum by enrolling more subscribers. b) Players are motivated to take more voice subscribes (subscribers based criteria was voice based) - enabling them to become eligible for more spectrum. c) Players are motivated to take more spectrum - enabling them to save capex/opex cost (access to more spectrum obviate the need to invest in equipment to to support growth in traffic).

Outcome: a) Rural subscribers suffered, as operators didn't have the required incentives to expand in these areas. b) Broadband/Internet suffered, as operators didn't have the required incentives to develop the data market. c) Laid the foundation of 2G scam, as free/undervalued spectrum promoted a mad rush to seek telecom license.

AGR (Used for Calculating LF) Includes All Cost (Barring Few)

Intent : a) To prevent arbitrage, b) To encourage the operators to make independent investments and not roll out networks by sharing resources with others - the justification used by government at the time when it recommended this approach.

Incentive : Players are motivated to dissect key related business out of their licensed entity - enabling them to save license fees, for example handset business is not part of the licensing business.

Outcome : a) Disturbed the playing field between the operators and the OTT players who end up offering similar services without paying any license fees. b) Discouraged sharing or resources between operators. c) Prevented VNO to take off. c) Resulted in a large number of court cases between the operators and the government. d) Prevents the government in enabling PDOAs (without the obligation to pay licensee fees), as they are nothing but a glorified ISP operator.

Linking Reserve Price to the Last Auction Value

Intent : a) To promote level playing with other players, b) To prevent loss to the exchequer.

Incentive : a) Players are forced to bid - enabling them to stay in business when they are conscious about the fact that the spectrum is highly over valued. b) Players are encouraged to bid - enabling them with the opportunity to consolidate the market by knocking the weaker player out.

Outcome : a) Rural subscribers suffer, as at these prices do not justify the operators to expand networks into the rural areas. b) Consumers suffers due to decrease in competition.

Conclusion

I had just quoted few examples (there are many) where the positive intent did not translate into benefits that was originally envisaged by the directives. On the contrary it triggered incentives which resulted in sub-optimal results. Hence, it is important that all bureaucratic decision are well thought through, and weighs in all the incentives which are likely to get triggered by the proposed directive. Also, the public should be conscious about the fact the narrative of "maximizing revenues of the exchequer" may not always be in their interest. Why? As explained above that incremental action cannot allocate "scarce resources" efficiently. Therefore, it might be in public interest to ensure that the resources are optimally priced so that the business are healthy and have all the right incentives to use resources efficiently. Unless it is done consciously all good intentions anchored around these policies may not translate into equivalent outcomes, thereby forcing the stakeholders and the consumers to suffer.

(Views expressed are of my own and do not reflect that of the employer)

PS: Find the list of other relevant articles in the embedded link.