1. Reliance Jio effect can facilitate telecom propulsion to greater heights

Reliance Jio effect can facilitate telecom propulsion to greater heights

With the sector already having a debt of over Rs 4.5 lakh crore, there is also great concern, for banks, about high NPAs.

By: | Updated: June 14, 2017 4:05 AM
Reliance Jio effect, Reliance Jio, telecom, telecom industry, NPAs, National Telecom Goals To remain competitive, the incumbents have been compelled to reduce their tariffs sharply causing deep erosions in their revenues and viability.

Curiouser and curiouser. Nothing could describe better the current state of the Indian mobile telecom sector—replete with freebies, penalties, accusations and denials, growth & predictions of doom. All this after the dramatic entry of a powerful new player & the so-called Jio Effect. To remain competitive, the incumbents have been compelled to reduce their tariffs sharply causing deep erosions in their revenues and viability. With the sector already having a debt of over Rs 4.5 lakh crore, there is also great concern, for banks, about high NPAs. Telcos have been clamouring for urgent relief measures from the government. Even banks have joined this chorus and the government has, understandably, set up an inter-ministerial group to provide recommendations. Seeing all this, one is overwhelmed by tremendous deja vu. Many aspects are a powerful replay of happenings in 1998 & 1999, when the fledgling sector was about to collapse completely due to high licence fees, unviable business cases, delayed governmental clearances, defaults in licence fee payments and a threat of NPAs to banks.

Despite the similarity, there are important differences. The current situation is largely the result of aggressive competition from a new entrant which has also admittedly produced remarkable results in terms of data usage, mobile internet and broadband adoption that are greatly in sync with the National Telecom Goals. India has, thus, become one of the largest mobile data consuming countries in the world, and its internet user base has now become the second largest in the world. All these would provide, as well established by World Bank, a significant boost in GDP growth and personal productivity as well as security and enhancement of quality of living. Of course, economists and policymakers might well ask whether such tariffs are sustainable, but the market would decide that.

Truth is, even before the Jio Effect, the sector was in financial distress due to flaws in the spectrum and licensing regime. The Jio Effect only precipitated the crisis. Although it is inarguable that telcos need major policy relief to survive, given the current scenario of massive consumer/economy benefits, it may be neither appropriate nor sustainable to hand out one-sided relief packages to the incumbents to compensate the Jio Effect. A bailout would be a significant cost to the national exchequer and might invite PILs since the spectrum-related reliefs would be an ex-post revision of spectrum auction conditions. The government might even face criticism since the statutory regulator has upheld the promotional tariffs of the new entrant and highlighted interconnection issues.

Cut to 1999, when the government offered relief measures, not as a bailout package, but as a fair settlement. The government might now also obtain from the incumbents certain undertakings that will help achieve national telecom objectives (eg rural broadband, Digital India) and serve public interest (QoS).

In 1999, the telcos had to forego their extremely precious duopoly right enshrined in their licences/contracts and also withdraw all their licence-related legal challenges in the various courts. Last but not the least, this writer, on behalf of the operators, had to give an affidavit in court as regards a remarkable reduction of the prevailing high tariffs to a very low and affordable level.

Assuming that a settlement is the basis, the first relief required for telcos is with regards to spectrum usage charges (SUC), which are more than 5% of revenues. This represents a highly anachronistic situation. Once the spectrum has been won in an auction, enlightened regimes merely cover the cost of administering and regulating the spectrum, which would only be a small fraction of 1%. Hence, it is recommended that, for auction-allocated spectrum, the SUC level should be brought down to max 1%. The second relief concerns extension of spectrum EMI payments from 10-years till end of the concerned licences.

Licence fees also need to be reduced from current level of 8% to 3% maximum, which would be in line with international norms and also be far higher than the cost of administration & regulation, which is what most enlightened regimes follow. (It may be recalled that the Trai study, in 1998, determined that about 0.2% of AGR is adequate for covering cost of regulation). There are two additional justifications for this measure. One is that the GST on telecom services will be 18%—a big hike of 3% from the current level of 15%. The other justification is that the USO levy of 5% included in the licence fee could be drastically reduced to say, 1% ,since, as part of the settlement, the government could take undertaking from the TSPs for rural rollout. The government should concurrently put in a fair definition of AGR.

Most important, the government needs to review the auction rules for reserve prices, which are out-of-line with international norms and result in non-discovery of market prices. In fact, most of our auctions could be deemed failures since major spectrum quantities have remained unsold and whatever was sold was at the RP or marginally above it. Unless remedial actions are taken, the situation is bound to worsen in the years ahead. The RPs are continuously rising in a ‘killer’ spiral and it is estimated that, at this rate, sector would need several lakh crore for spectrum over the next few years. Industry would soon be back in a critical state and seeking relief yet again.

Last, different licences ending at different times create continuing complexities as regards spectrum demand and availability, and level-playing field. The government could take this opportunity to declare a common sunset date and align all licences to make pro-rata payments or credits on LF and spectrum one-time fees as also create licences in perpetuity. All will retain and continue with their existing spectrum and be entitled to acquire additional spectrum only through auctions.

What Indian telecom needs now is a robust and visionary settlement that provides opportunity to clean the system of legacy issues and propel the sector to the global numero uno position.

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