The proposed NTP 2011 and its implications

Eleven years have passed since NTP 1999 came into being and since then many changes have taken place in the telecom sector in terms of demand, competition and technological changes. In view of this and as a clean-up effort, in the wake of the 2G scam, telecom minister Kapil Sibal, in January 2011, announced the formulation of NTP 2011.

In order to formulate NTP 2011, a panel has been constituted comprising the additional secretary (telecom) and adviser (technology) as co-chairmen and DoTs deputy director generals as members. Two rounds of meetings have already taken place and eight teams have been constituted to work on specific areas. Many new proposals are likely to form part of NTP 2011 that is expected to replace NTP 1999. NTP 2011 is likely to be announced by the end of this year.

Based on recent announcements by the telecom minister and various news reports, the broad contours of the proposed NTP 2011 and the likely implications on the telecom sector can be broadly categorised under six different heads.

De-linking the spectrum from the licence: A very important step that the telecom minister has taken (to meet with the current controversy), is to de-link spectrum from licences. This is likely to make spectrum expensive. Licence to be issued to telecom operators shall be in the nature of ?unified licence? and the licence holder shall be free to offer any of the multifarious telecom services. In the event the licence holder would like to offer wireless services, it will have to obtain spectrum through a market-driven process and if the auction process adopted for finding the market price of the spectrum is finally adopted for granting/renewing further spectrum, then it is likely to result in high valuations, given the competitive nature of the bids for a very basic raw material in a sector that is booming month-on-month.

Shorter licence period: The current policy allows operators to hold on to their licences for a 20-year period. Going forward, the telecom licences are proposed to be granted for a period of 10 years which means more capital outgo for telecom companies as they will have to renew their licences every 10 years. This also means that operators would have to shell out a lower capital sum towards obtaining licences. Operators wanting to renew their licences will have to apply 30 months before the expiry date. Thus, old operators, whose licences are valid, till 2013-14, may have to apply for renewals right away.

Uniform licence fee: Another big proposal, however, is the decision to move to a uniform licence fee. Operators currently pay between 6% and 10% of their revenues, depending on the circle of operation. A uniform fee would lower the financial burden on operators, given the already high cost of spectrum and the declining ARPUs.

Liberalised merger and acquisition (M&A) guidelines: Typically, taking from the developed markets, every telecom circle should ideally have maximum 4 – 6 operators so as to make it economical and competitive enough for everyone to be profitable. The current strengths of each circle in India is in the range of 9-14. We have one of the lowest ARPUs in the world and declining year-on-year. Operators are also not profitable given that there is no level playing field, as each operator has about 4 MHz to about 10 MHz of spectrum, while globally it would be in the range of 22 MHz to 25 MHz of spectrum. In the light of the above, a strong need is felt to liberalise the M&A guidelines. The liberalisation of M&A guidelines is expected to drive consolidation in the industry, which is facing intense pressure on margins due to tough competition and low tariffs.

However, much depends on how ultimately the M&A guidelines are framed. For instance, the current announcements suggest a minimum of six operators in each circle, which as noted above, would not serve the purpose. Further, at present, an operator cannot hold more than a 10% stake in another operator in the same circle where it operates. There is also a lock-in period of three years for companies that were granted licences in 2008. This means that they cannot exit the venture before the end of this period.

As a part of NTP 2011, the guidelines for M&As are likely to be relaxed to encourage consolidation and help operators with an exit option.

Encouraging domestic telecom equipment manufacturing: NTP 2011 is likely to include measures appropriate to encourage domestic telecom equipment manufacturing. In order to boost manufacturing of indigenous equipment, the department of telecommunications (DoT) may extend preferential status to ?Made in India? products in NTP 2011. The draft policy is already released in the form of a discussion paper, going by which dependence on foreign technology would reduce and give a fantastic boost to domestic manufacturing, so much so that by 2020, as per the paper, imported equipment would constitute about 20% of the total demand.

Spectrum refarming: The significant value that a natural resource can fetch was exposed very well during the exhaustion of the 3G spectrum in 2010. It is imperative that governments across the globe use this not only discreetly but also with great amount of responsibility. Inefficient usage can result in a very large loss to the national exchequer and higher revenue deficits.

With this in perspective and knowing well that different technologies require and operate well in different bandwidths of spectrum, it becomes critical for governments to refarm the already and to be allotted spectrum in different bands to the various players viz. broadcasters, radio, telecom operators, defence etc. If the government does take concrete measures towards this end, the benefit will be three- fold: a) to the government because it would set maximum recourse for the best available spectrum and also free up spectrum for further auctioning; b) for the operators, since that may result in lower capital investment on infrastructure, lower drop in calls and hence better services; and c) the customers, who would naturally benefit from better value-added services for a reasonable cost.

One would need to wait and watch with bated breath how NTP 2011 is formulated and implemented. However, this will undoubtedly be a far-reaching development in the telecom space and hence the Indian infrastructure space, which would revamp the face of the sector, hopefully, providing a much-needed fillip to an industry that is currently struggling with controversies.

The writer is executive director, telecom and entertainment & media tax practice, PwC