Bleeding telcos: Cutting extortionate levies is not a bailout

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Updated: August 1, 2019 7:34:57 AM

It is a pity the apex telecom panel chose to ask trai to lower its penalties citing the poor health of telcos; these firms had questioned trai’s order on its merits.

India risks missing the 5G boat, like it did for 2G, 3G and 4G. Except, this time, it would be because we were too greedy

A recent article opposes government intervention in the telecom sector reeling under a debt of over Rs 7 trillion. It argues that the root cause of the debt is incompetently run private companies and their greedy promoters, and, therefore, there is no case for the government to review the penalties of over Rs 100 billion facing them. Nor is there any reason to lower the reserve price of Rs 4.92 billion per MHz for the forthcoming auction of the 5G spectrum.

Unfortunately, such an approach is short-sighted. It will prevent vital reform, hurt most stakeholders and won’t fix rogue behaviour either.

The Digital Communications Commission (DCC) is the top policy body of the telecom sector, with secretary level representation from the Department of Telecommunications (DoT), Ministry of Electronics and Information Technology (MeitY) and the NITI Aayog. It had asked Trai to review its decisions on the two different matters of penalties and the 5G reserve price. It wanted lower penalties in view of the sector’s poor finances and lower reserve price for 5G spectrum since otherwise, it would impede wider access to 5G services. Trai has declined both appeals. Though a final decision is still pending, the incumbent companies have clearly failed, thus far, in their efforts to have the penalty waived or the reserve price of 5G lowered.

It is misleading to suggest that either of these demands amount to seeking a bailout. Unlike DCC, incumbents have not cited poor finance as the reason to quash or reduce penalties. They have contested Trai’s decision on merits. There was also a dispute about the jurisdiction of sector regulator Trai and the competition body, CCI, in matters related to competition in the telecom sector, which reached the Supreme Court, where the issue was ruled on ruled last year. Based on this order, Telecom Dispute Settlement and Appellate Tribunal (TDSAT) set aside Trai’s orders, e.g., predatory pricing. The matters of jurisdiction and penalties are still in courts and have little to do with a bailout.

The appeal for a lower reserve price is even further from a demand for a bailout. Experts have raised several questions about the methodology adopted by Trai to arrive at the reserve price and pointed out professional errors in the computation. The reserve price is sharply out of line with similar estimates in other countries. Trai has provided little beyond cursory responses to the serious questions raised.

The approach to reserve prices is worrying considering why we need—and the Supreme Court ordered—the auctions in the first place. The idea is to let the markets discover the correct price given the complexities of computing it. While a very low reserve price could, admittedly, attract speculative bidders and should be avoided, a high reserve price seeks to pre-empt the results of the auction making it almost redundant.

India’s experience confirms that final bids can be several times the reserve price, as happened in the auction of 3G spectrum in 2010. Equally, high reserve prices have been no guarantee of success. For example, thanks to the high reserve price of 700 MHz spectrum in 2016, it found no bidders. Several auctions have failed, with over 50% spectrum unsold or witnessing little to no bidding beyond the reserve price. In 2016, barely 21% of spectrum was sold above the reserve price.

The government’s many pronouncements, including the National Digital Communications Policy (NDCP), speak eloquently about leveraging 5G technologies for India. It is said that with one of the world’s largest telecom networks and abundant expertise, India is well placed to drive its national agenda in 5G. This includes influencing technology, standards, hardware, adoption, etc. However, this is impossible without substantial private sector investments in the network, and in devices and services. The sector is now primarily driven by private players, with government companies playing a minor (and sadly, dwindling) role. The only tangible way, therefore, for the government to speed up deployment of 5G is to ensure that its rules, spectrum design and allocation do not deter investors in any part of the 5G ecosystem. Arguably, nowhere is the much-touted Ease of Business more relevant than in creation of capital-intensive infrastructure.

The existing spectrum design is a significant risk to investment and competition. This must worry Trai and the government alike. More so, since unsold or unused spectrum is not a protection against future shortages; unlike finite natural resources like coal, water, gas, etc, spectrum is inexhaustible. Not using it today does not leave more for future generations!!

There are reports that some incumbents plan to skip the 5G auction. It would be a small consolation if some old or new players do bid, despite the high reserve price. At that price, they will have a greater incentive to prioritise lucrative customers or regions over expanding coverage or developing India’s nascent data markets. This is particularly relevant in the case of 5G where the business case is unclear even in mature telecom markets. A well-designed auction that attracts wider participation could provide a much-needed fillip to India’s aspirations in 5G technologies. Otherwise, India risks missing the 5G boat, like it did for 2G, 3G and 4G. Except, this time, it would be because we were too greedy in our auction design.

The industry’s poor financial health is hardly a claim of vested commercial interests alone. The sector’s revenues are down by roughly 40%, as are the company valuations. The DoT and DCC both acknowledge it, as do a wide range of financial analysts and think tanks. Indeed, the Minister for Communications and Information Technology highlighted this very aspect in his maiden briefing after taking over the portfolio.

Indebtedness is not just a risk for players alone. It affects lenders—especially public banks—and the government, which receives roughly 30% of the sector’s revenues in levies of various kinds. It affects consumers and the economy at large, given the countless ways in which telecommunication affects virtually every aspect of our lives. We ignore, at our own peril, the poor health of a sector that reportedly contributes over 6% of India’s GDP.

There is good reason to reform the design of India’s spectrum auctions. It is a travesty to suggest that a lower reserve price is a demand for subsidy. It is counterproductive to suggest that reform should be delayed simply because one believes companies are run incompetently or that their promoters are greedy. Indeed, coherent regulation is our best defence against rogue players and unearned profits.

(The author is Director, Com First (India) and specialises in telecom regulation and policy. Views are personal)

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