Column: The telecom blunders

By: | Published: September 21, 2015 12:18 AM

Spectrum availability is woefully short in India, barely 40% of what is available in comparable geographies

In its short history of 20 years, the modern telecom industry has gone through boom and bust. Till 10 years ago, it was the toast of the economy. However, man-made blunders nearly made it toast. Since so much rides on the sector, it is crucial to identify key problem areas and draw up an agenda for action.

First is infrastructure. Spectrum availability is woefully short in India, barely 40% of what is available in comparable geographies. An independent study by the Brookings Institution confirms this. Over 2000-2015, spectrum availability has increased by about 60-70% in all; in that time, subscribers have grown 80-fold and advances in technology have created new pressures on demand, e.g. data services. Delhi’s load per unit of spectrum is reported to be 10-12 times that of Shanghai! These are facts. Instead of fixing the problem, the department of telecommunications (DoT) is in denial that the problem even exists. The public policy implications are crystal-clear.

The first is that ways must be found to augment spectrum availability to serve larger socio-economic goals. Secondly, can existing spectrum be more effectively used? And this applies to all spectrum, including that held by the government and its agencies. Other infrastructure requirements: India needs at least 200,000 more towers. This is not a serious problem in rural areas; in urban areas, it is. Urban populations agitate the most about towers. And, ironically, the voices (complaints) about quality of service (QoS) are loudest in urban areas! If the urban networks capacity is to increase (and transition to FTTX), ways must be found to deal with Right of Way (RoW) issues. At present, RoW charges are as high as 20-40 times the cost of the fibre. Without this capacity expansion effective delivery of broadband in urban areas will be crippled.

Second is the regulatory regime. The finance minister recently said that many ministries have to snap out of their “control-freak” culture. Nothing epitomises this better than DoT. A few examples will suffice to illustrate this problem. All telecom licenses currently contain an all-embracing provision that the licensor can change the terms of the licence at any time of its choosing. And, this is not questionable because it is a contractual condition of the licence! The allocation of spectrum and assignment of frequencies, an exclusive DoT preserve, has witnessed long delays. Spectrum auctioned in early 2014 was not allocated as late as October, 2014 when licences were running out in November, 2014. Since this risked jeopardising service delivery in areas such as Delhi, and a Parliament Session was around the corner, a last minute, ad-hoc solution had to be devised. Another telling example: The licensor has the power to levy a penalty of R50 crore per Licence Service Area (LSA) for infringements. Without any regard whatsoever to the nature of the infringement (minor or major), DoT mechanically levies Rs 1,100 crore as a penalty (R50 crore x 22 LSAs). The previous telecom minister repeatedly chided his officials on this count, to little avail. Despite numerous suggestions on a graded penalty system, DoT tenaciously persevered with its plainly absurd approach. Lastly, a litigious culture is all pervasive; rather than take an executive decision, matters are routinely referred to courts for decisions. This has the attendant problem of ceding executive and policy space to the judiciary.

The third set of issues concern industrial structure and charges levied by the government. In virtually all countries, there are no more than 2-3 operators. To economise on capital, an option is to develop a single open-access network backbone and then license operators. This saves on capital and is the model used in Australia and, now, in Mexico. For a capital-scarce country, it makes perfect sense to limit the number of operators. Not for us this common sense; hence, the absurd situation of 8-12 operators in some LSAs. The promoting competition card was overplayed; it was a flimsy excuse for rent-seeking behaviour. Now, we have to pick up the pieces. Clearly, not all the operators are financially viable. Industrial consolidation is urgently necessary to staunch the bleeding. For the banking sector, it will require extensive provisioning, as enterprises exit. The flawed decisions of the past could have been corrected through timely action on Mergers and Acquisitions (M&A) and spectrum trading. Neither is in place, though they were accepted ‘in principle’ 3-4 years ago! Meanwhile, operating losses have cumulated, adding to the size of the NPAs. There are further problems with the 25/50 rule on spectrum holdings. Even if industry size was confined to 4 operators (more than sufficient for competitive pressure), a 40/60 rule is workable. Such changes are not even being contemplated.

The huge investment requirements prompt a closer look at the finances of the industry. The race to the bottom on tariffs seriously eroded ebitda margins. Debt levels are already at prudential limits. Equity financing is ruled out; investors (foreign and domestic) do not have any appetite when there has been no return on the large amounts already invested. The only alternative is internal resources. The finances of the telcos are fully stretched, by any international comparison. NTP 2012 recognised this while avowing that a major objective would be restructuring of charges payable by telcos. Three years later, that promise remains on paper. India levies 8% of Adjusted Gross Revenue (AGR) as licence fee (LP), the highest in the world. There is also a Spectrum Usage Charge (SUC) between 4% and 6% of AGR; in most parts of the world the counterpart fee is either fixed or about 0.1% of AGR. When spectrum was administratively allotted one could justify the SUC. But, in an age of auctioned spectrum it is clearly anachronistic. Moreover, since the auctions have started yielding huge revenues, surely it should imply a cut back in the LF/SUC. Today, telcos pay up to 30% of their GR in fees, charges and taxes. This draft on their revenues significantly reduces ebitda margins and their ability to invest.

Lastly, there are many serious institutional challenges. The Telecom Commission (TC) was set up more than 25 years ago as a single decision window. It is now simply a glorified committee of secretaries which neither has the authority nor the willingness to take a decision. Like all government committees, it is a means of diffusing responsibility, a euphemism for no one’s responsibility. Second, it is an open secret that the DoT works in silos. Effectively, there is no coordination even at the senior management level of the silos. The result is that all matters float to the very top for coordination and management decision. Third, the Universal Service Obligation Fund (USOF) functions as an appendage of the DoT. It has been bureaucratised beyond belief and has no authority to take decisions even after government policy is settled. It processes proposals just as if it was another branch of government. The outcome: more than 60% of the amount collected from the sector as contribution has simply gone to finance the budget deficit.

It has not been used for the purpose for which it was intended, namely, investment to supplement private investment to enhance coverage. Astonishingly, since inception, USOF has not once given a project for execution to the private sector. Fourth, the Wireless Planning and Coordination Wing remains an entirely opaque institution whose decision-making processes cannot be fathomed. While one can understand reluctance to disclose sensitive information on spectrum held by defence, surely, information on availability of and allocation of spectrum open for commercial use, should be in the public domain.

The author is former chairman, Trai. This is the first of a two-part series

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