TRAI has tried to spin the 57% cut in the Interconnection Usage Charges (IUC)—and the recommendation that this be cut to zero by 2020—by arguing this is pro-consumer. If telcos have to pay 14 paise for every minute their subscribers call another network, Trai argues, this acts as a floor tariff; reduce this to 6 paise, and tariffs will fall again.That this is patently incorrect is obvious if you just match the fall in IUC over the years with tariffs— and Rjio was offering virtually free calls even when the IUC was 14 paise, wasn’t it? More important, if Trai believes tariffs are directly related to costs, surely it should have been asking RJio for its costs and comparing these with its tariffs? Why the Competition Commission of India (CCI) hasn’t investigated RJio tariffs thoroughly remains another surprise.
Trai’s IUC order has details on how to calculate IUC—a fully allocated cost (FAC) model, a partial long-run-incremental-cost (LRIC) and a full-LRIC model. It is obviously right when it says the FAC model doesn’t encourage telcos to lower costs while an LRIC does, but India has been using partial LRIC models since 2015 anyway. The problem with the pure-LRIC used this time is that capital/spectrum costs don’t get counted — these are to be recovered from subscribers, but more on that later. Trai is right when it says that termination costs on IP networks—like RJio’s VoLTE—are less than on conventional 2G/3G networks. But this misses the point since just a fourth of users are on 4G networks. The rest are on 2G/3G networks. So, Trai justifying a 57% cut in IUC rates largely on the basis of lower IP network costs is akin to telling telcos to ignore those who can’t afford VoLTE phones, and to just focus on the better off, not those using legacy 2G/3G networks in Bharat. That is why this column (goo.gl/WZWKGk) recommended the government defray costs for Bharat to move to VoLTE phones at the earliest.
For any network to survive, whether 2G, 3G or 10G, it must recover costs. And that can be done by getting more revenues from data or voice, and the latter is broken up into incoming and outgoing calls—IUC is the payment for incoming calls. So, if Trai slashes IUC, telcos have to get more from either data or outgoing calls. As Trai rightly says, telcos can raise tariffs to compensate for a fall in IUC, but if an RJio’s tariffs are below-cost, how can any telco raise tariffs? And if pure-LRIC models don’t allow telcos to recover capex/spectrum costs from IUC, where are these to be recovered from in such a situation? In these circumstances, if telcos were to lower investment, especially in Bharat, can anyone blame them?
But why blame Trai when GoI is doing the same? As this column has argued before, combining high-cost spectrum bids with large revenue-share-based licence fees crippled the industry long before RJio came in. Yet, GoI has done little to fix this. Eventually, however, GoI may be the biggest loser—it has already had to put off an auction this year and may have to do so again. A simple exercise makes this clear. Assume telecom revenues rise 6% per year for the next 15-16 years, just as they did in 2010-17 (though they fell 15% in the last 12 months) and assume spectrum costs go up just 2% per year and telcos routinely renew their spectrum as their licences expire — spectrum costs rose 8% annually since 2010, but telcos can’t possibly afford that anymore. A back of the envelope calculation shows regulatory costs (spectrum costs plus licence fees) will eat up 26% of telecom revenues over the next 10-15 years, down a bit from 28% in 2010-2017—in other words, industry will continue to be broke and unable to service its huge debts of Rs 4.9 lakh crore and its deferred payment obligations of Rs 3.1 lakh crore. This calculation, by the way, assumes the pricey 700MHz or 3500MHz are not sold since telcos clearly cannot fund another costly auction— the government’s proverbial golden goose (4% of total buget revenues came from telecom in FY17) has just been killed. This has larger implications for telecom subscribers and the country’s investment climate, but you would think that a government would at least look out for its own short-term interests.