1. Here’s why beleaguered telecom does not need a bail-out

Here’s why beleaguered telecom does not need a bail-out

Declining profits, mounting debt and highly priced spectrum acquisitions have put tremendous pressure on the operators, even as they are required to increase investments, to meet the massive uptake of data consumption

By: | Published: June 13, 2017 5:36 AM
telecom. telecom news, telecom rationalisation policy The DoT has introduced a huge reform in allocation of spectrum from the administrative price mechanism to auction route, but has failed to bring in a similar reform in spectrum charging.

Declining profits, mounting debt and highly priced spectrum acquisitions have put tremendous pressure on the operators, even as they are required to increase investments, to meet the massive uptake of data consumption. It is not only the operators who are expressing these concerns, but scheduled banks as well as by the central bank are wary of the sector. The government realising the need for review has constituted an inter ministerial committee. Some political opponents have termed this strategic exercise as a precursor to granting bail-out package for the telecom industry. It would be wrong to call it a bail-out, but should rather be looked as a rationalisation exercise, which was long overdue.

Expressing concern about the ailing health of telecom companies, finance minister Arun Jaitley on Monday said. “We don’t need a situation where the balance sheet turns into the red and then have an adverse impact on the banking system itself. I am sure both the ministry and the regulator are aware of the situation. I am certainly concerned about the sector, but I am sure both institutions will take care of it.”

Now is the time to look at some serious actions in certain areas of current taxes and levies:

Remove the burden of USO contribution: Telecom operators are contributing 5% of their adjusted gross revenues (AGR) to department of telecom on account of Universal Service Obligation(USO) to the fund. As telecom density has now reached a reasonable level, the levy on operators seems to be unreasonable. These operators have spent huge money in rolling out their mobile networks in rural areas entirely at their cost and at the same time continued burden to contribute to USO levy is nothing but a double whammy. This burden must be removed from the operators. Removal at this stage does not mean removal for ever. In future, if ever there is a need to collect this amount for a specific project, the levy can be restored.

Reduce spectrum charge:

The DoT has introduced a huge reform in allocation of spectrum from the administrative price mechanism to auction route, but has failed to bring in a similar reform in spectrum charging. The government was charging a higher spectrum usage charge earlier in the form of spectrum fee. While it is now earning huge amounts by way of spectrum entry fee, through auction, it has not removed the burden of spectrum usage charge. The higher spectrum cost has forced the operators to borrow large sums. On the other hand, industry’s revenue and ebitda declined. The combined revenues of the industry went down to an estimated Rs 2,10,000 crore in FYI7. Further, in FYI8, revenue is estimated to decline further by Rs 25,000 crore. Analysts believe this is compounded by the fact that the total debt for the industry is pegged at nearly Rs 7 lakh crore, including Rs 2.95 lakh crore of deferred spectrum payments to the centre.

Watch:

International practices suggest that when the spectrum is allocated through auction, the usage charge should be nominal, ie, not more than 1%—enough to recover the cost of administration.

Remove burden of licence fee from fixed line:

Fixed line business over a period has seen huge decline. The maximum share of this business is controlled by the government operator. It seems illogical that on one hand the government wants the operators to contribute to the USO fund to provide support to un-remunerative fixed lines in the rural areas, on the other the revenues earned from these lines are subjected to a license fee.

Remove anomalies in the definition of AGR:

Another area of huge uncertainty has been the clarity on the definition of AGR on which the license fee is to be paid. The government, at present, levies license fee on the entire revenue of the licensed entity, irrespective of whether the revenue is earned form providing telecom services or not. There have been instances when a textile mill has acquired an ISP license and the entire revenues of the textile mill are subjected to payment of a licence fee. The government needs to be guided by the fact that the authority to collect license fee emanates from Section 4 of the Indian Telegraph Act. Unfortunately this provision has been extended to totally unrelated streams of revenue. A huge amount of litigation relating to this issue is outstanding right from the time of migration in 1999. It should try to bring an end to this dispute by one-time settlement and define the term AGR in the license agreement.

Telecom sector has been one of the shinning examples of privatisation in our country. But unfortunately has been loosing its sheen of late. It was the previous NDA government, which brought out the most important and bold reform in the telecom sector by allowing the telecom operators to move from fixed license fee to revenue share regime. This single step allowed the sector to grow exponentially.

It appears that the telecom sector has come full circle. The government must realise that helping the sector means helping itself. If telecom companies remain financially viable, only then the government can accrue money from auctions. On the other hand, if operators become non viable, it will not only reduce their capacity to participate in future auctions, but will force defaults even in the current outstanding spectrum payments.

Thus it’s not a bail-out package the sector wants, but rationalisation that it needs for long term sustainability. Similar attention is required from Trai to put a robust tariff regulation in place to curb the anti-competitive practices.

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