Column: Dialling the right numbers

Written by Prashant Singhal | Updated: Jan 20 2014, 09:19am hrs
Nothing ... will ever be attempted, if all possible objections must be first overcome, said the inimitable and oft-quoted literary titan of the 18th century, Samuel Johnson. The adage is not farther from the truth for the Indian telecom sector.

Clarity on impeding regulatory issues towards the closing months of 2013 instilled traces of optimism and hope for the revival of the sector in 2014. Reduction in the spectrum base price, clarity on M&A norms and relaxation of FDI limits to 100% were the key policy moves which induced that cautious confidence. The year 2014 was touted as the year for renewal, restoration and recovery. With the spectrum auction on the anvil and expectation of positive reforms, viz. the formation of a new government at the centre, the sector had just gathered that initial momentum.

In this sentiment of tangential hope, the emergence of the lurking issue of spectrum usage charge (SUC) has jerked the buoyancy and built yet another impasse. As a result there is a further withering away of the already atrophied market sentiment. At a juncture, where operators and the government were expected to be preparing for the crucial spectrum auctions, the focus has shifted towards deliberations on an appropriate SUCa charge whose raison d etre in itself is debatable and needs a careful rethink and a possible overhaul.

SUC forms a significant net outgo for the operators and the industry is fretting over the final regulatory outcome on the issue. Take a notespectrum fees paid by operators in India amounted to a whopping R51.9 billion in FY12 and is expected to add up to R73 billion for FY13. This is over and above the high pay-outs in form of license fees charged from operators which, at 8% of the Adjusted Gross Revenue (AGR), is one of the highest in the world (amounting to R113.3 billion estimated for FY13 alone).

Unfortunately, the India telecom sector faces one of the worlds highest net outlays in form of regulatory costs includingbut not limited toservice tax, state level VAT, spectrum charges and license fees (other charges include additional duty of customs (ADC), central sales tax, municipal charges, right of way, etc). Basically, in FY12, spectrum fees and license fees (the two of the largest regulatory pay-outs) together accounted for a massive 73.1% of the sectors ebitda (R232.2 billion) while in FY11, the figure stood high at 59.7% of the ebitda (R232.6 billion). Undoubtedly these charges burden the Indian telcos that are already struggling with weakened financial viability, and are weighed down by huge debt obligations in an overall recessionary economic climate (the total service sector debt in 2012 stood at $29.3billion, above net revenue of $28billion).

In addition to the expense outlay, the staggered nature of SUC levies has its own demerits. Under the current cascading SUC, a merger or a spectrum-sharing agreement between two operators, even with the start-up spectrum (4.4 MHz/2.5 MHz), would attract a high levy as a percentage of their AGR. This regulatory expense is likely to act as a deterrent for operators contemplating M&A and also inhibit the much-awaited spectrum-sharing in the sector.

The quantum and scope of regulatory levies has for long remained a contentious issue for the Indian telecom market in comparison to its international peers. Multiple levies account for 30% of the revenues earned by telecom companies in India as compared to about 5% in other Asia-Pacific countries.

Specifically on the SUC front, most countries recover spectrum charges through an up-front payment in auctions and there is no need for a supplementary charge. Even when a fee is being levied, it is only to cover the administrative cost of managing the spectrum.

In most of the countries, the spectrum fee is charged as a fixed annual payment or as a percentage of the turnover related to the revenues attributable to the use of relevant frequency bands. A review of the benchmark fee for 900 MHz, 1800 MHz and 2100 MHz spectrum in European countries shows that most nations have either low annual spectrum fee charges, or no charges at all. In the UK, the administrative incentive pricing is applied only to the spectrum that has not been auctioned, or to licenses that have been re-assigned through auction after the expiry of the earlier license term.

Even in the case of licence fee, Indian levies outweigh global counterparts by a fair clip. For instance, China has no license fee, while in Singapore, it varies between 0.8-1% of the annual turnover. Similarly, the licence fee charges are negligible for Nigeria (2.5% turnover, less interconnection charges) and Thailand (up to a of maximum 1.5% of the annual revenue).

In summary, the need for rationalisation is imminent Within this scenario, there is an urgent need for the Indian regulator to rationalise taxes and levies as well as streamline the convoluted regimes for regulatory charges. At present, several permutations are being evaluated by the Telecom Commission for SUC regime. Such regulatory overhang throws the sector off-balance and puts it in a state of flux. Moreover, it acts as a constraint for the sectors financial sustainability. It is imperative to seek a balance between the maximisation of revenues for the national exchequer and paving the way for healthy and sustainable growth of the industry.

For 2014 to shape up as the year of renewal, recovery and restoration of the Indian telecom sector there is an urgent need for pseudo-barriers, in the form of strenuous and extended regulatory gridlocks, to clear the way for calibrated and quick dispute-resolution. The government needs to take progressive steps to uphold and seize the optimism which has made a much-needed comeback and rethink the policy caveats and regulatory pay-outs with a view to maximising the overall sector growth and viability.

The author is partner in a member firm of Ernst & Young Global.

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