Rational Expectations: Don’t tie govt fate to telco viability

By: |
February 8, 2021 5:45 AM

For future auctions, remove the deferred payment formula; vital to immediately allow spectrum hypothecation to banks

If this is done, the obvious question is whether telcos who bid will be able to raise the entire money upfront as opposed to just the 25-30% that they had to in the earlier dispensation.If this is done, the obvious question is whether telcos who bid will be able to raise the entire money upfront as opposed to just the 25-30% that they had to in the earlier dispensation.

With the imminent threat of Vodafone Idea shutting down now receding, the government is probably breathing a lot easier since, had this happened after the Supreme Court ordered the telco to pay Rs 58,254 crore of AGR dues, the government was in danger of losing not just this amount—Vodafone Idea has paid Rs 7,854 crore of this—but also around Rs 61,671 crore that the telco owes by way of the deferred spectrum payments; as per the auction rules, after an upfront amount is paid, telcos pay the rest in annual instalments.

In various places, including this column, Vodafone Idea’s deferred spectrum dues have been put at around Rs 150,000-160,000 crore in the past. That number is derived from an arithmetical addition of the annual instalments it needs to pay till 2034 whereas the Rs 61,671 crore number is the net present value (NPV) of the dues; as such, it is a more accurate number to use.

But while the immediate threat is over, it is not clear how soon Vodafone Idea will be able to fully compete with Bharti Airtel and RJio since, with it continuing to be cash-starved, it simply cannot spend as much on capex that is critical for it to keep upgrading its network. In the event, its closure cannot be ruled out either, especially if it keeps losing customers to Airtel and RJio. In which case, the government needs to find a way to delink its fortunes from those of individual telcos like Vodafone Idea or even Airtel or RJio.

The government tying itself to the fortunes of telcos is also a bad idea from the point of view of policy. Right now, for instance, while big tech firms like Google and Facebook are keen on the government delicensing the E&V bands, the existing telcos are keen that this be auctioned as, they argue, delicensing will mean the tech giants can come in with cheaper broadband internet solutions using the E&V bands. Even if, for the sake of argument, delicensing is a better solution for the country, the government will find it difficult to take a policy decision if its fortunes are tied to those of individual telcos.

So, when the next spectrum auction takes place, early next year in all probability, the government should change the rules from a part-upfront-rest-in-instalments model to a full-upfront payment model. This will, of course, lower the amount the government can hope to get in a bid since the EMI method encourages telecom players—just as it does consumers—to bid a bit more liberally than they would otherwise. For the government, though, this is a better solution since there is no risk of not being able to collect the money when a telco goes belly up.

It is not clear if this is what the Union Budget is referring to as ‘Communications’ in the annexure on arrears of non-tax revenue, but this has jumped from Rs 16,203 crore in FY15—in earlier budgets, the item was labelled ‘Communications (License Fee) Receipts’—to Rs 113,878 crore in FY20, making it clear the Centre has a lot at stake if a telco goes belly up.

If this is done, the obvious question is whether telcos who bid will be able to raise the entire money upfront as opposed to just the 25-30% that they had to in the earlier dispensation. There is, on the face of it, no reason for strong telcos not to be able to raise the funds, more so if the government finally amends the rules so that the spectrum bought can be hypothecated to banks and, should the firm default or go belly up, the banks can immediately sell this spectrum to some other telco.

This is something that has been talked of for several years—and many, including lenders, believed it had already happened!—but, as the RCom insolvency case at the NCLT makes clear, the matter is far from resolved. In the case of Aircel’s insolvency, the NCLT had approved the resolution plan which included the sale of the spectrum, but this ran into some other hurdle. Meanwhile, with the government saying, in the RCom case, that the spectrum cannot be sold as it belongs to it, the matter will go to the Supreme Court since, no matter how the NCLT/NCLAT decide, either the government or the telcos will oppose it.

Apart from trying not to perpetuate the link between the government’s dues and the fortunes of telcos, the government will—sooner rather than later—also need to take a decision on how to improve the fortunes of the industry by scrapping the licence fee/spectrum usage charge (LF/SUC) regime; in any case, with spectrum being auctioned, there is no longer any justification for charging telcos LF/SUC which were imposed when spectrum was given out free. While it is true that there has been some improvement in the fortunes of telcos over the past few months thanks to tariff hikes, the Rs 260,000 crore deferred spectrum plus AGR dues makes it near impossible for the industry to bounce back to health soon, more so since the capex needs are going to keep on increasing to cater to 5G and other demands.

For several years, the government has refused to take a decision on this and, instead, looked for band-aid solutions like a moratorium on spectrum/AGR payments; given the NPV of the burden remains unchanged, this is merely kicking the can down the road. With the government seemingly more able to take tougher decisions now—lower corporate tax rates, a new PLI scheme, fixed term contracts for labour and a new PSU policy—perhaps it will take another look at the telecom sector. Indeed, once decisions like scrapping of licence fees and spectrum usage charges are taken, it also becomes easier to take decisions like delicensing the E&V bands; both will, as it happens, improve India’s access to broadband mobile connectivity.

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