The Sunday Leader (Sri Lanka) had the story excerpted below tucked away in the business pages. It contains several lessons for public policy that will be discussed below. They include the importance of interrogating data to make sure that your conclusions make sense and of course the ever present problem of incentives.

Some 1.2 million cellular phones were imported illegally into the country last year, causing a loss in government revenue, the B.o.I. claimed.

In a presentation made to I.M.F. officers in Colombo last Thursday, the B.o.I. said that the number of new cellular mobile phone subscribers reported in 2008 were 3.1 million, of which number, the figure of new cellular phones imported amounted to 1.9 million. “Hence the difference of 1.2 million is imputed to be articles that have been imported through illegal channels,” the B.o.I. said.

“This figure can be more as a number of existing subscribers replace their old phones with new phones which are not reflected in the above equation,” the B.o.I. in a report made at this occasion said..

“If the seven million phones currently in use are replaced by a new phone within a period of five years, that would be equivalent to the inclusion of an additional 1.4 million phones annually. With an effective duty rate of 10% of C.I.F., the loss of tax revenue estimated for 2.6 million (1.2 million + 1.4 million) illegal phones imported is estimated at Rs. 631 million,” the B.o.I. further said.

The first problem is that the BOI is comparing apples and oranges. What the TRC or the mobile operators are reporting is the number of new SIMs issued in 2008, not the number of new mobile subscribers. It is wrong to assume that a mobile handset is required for each new SIM. The LIRNEasia teleuse@BOP3 representative sample survey of SEC groups D & E that was conducted before Airtel went on a free SIM distribution spree showed that 16 percent of SEC D&E users had multiple SIMs. Obviously this number is higher now. We cannot extrapolate from SEC D&E to the whole population accurately, but we can safely conclude that at least 10-15% of mobile users carry multiple SIMs. This number could be as high as 25%. Therefore, the conclusion drawn by the BOI by equating SIMs with handsets is wrong.

Leaving aside the numbers, yes, there is a problem of smuggling handsets. There are two responses to smuggling: first, plead for better enforcement, which seems to be what the BoI is doing; alternatively, one can try to align the incentives so that smuggling ceases to be attractive. The former may make people feel better (I can think of no other explanation) but it yields little result. Why not simply eliminate the duties and taxes on handsets altogether? Then smuggling will cease. How to make up the lost revenues? Why not devise a system for charging for telephone numbers, which is a “scarce” resource within the framework of the 10-digit numbering scheme currently operational? Numbers are used by fixed as well as mobile operators, and under the current regime they are wasted. Charging for numbers (and perhaps even auctioning “golden” numbers) can yield considerable revenues. This will make a lot more sense than commanding the waves to cease, like King Canute.