Going by newspaper reports, the inter-ministerial group (IMG) set up to resolve the telecom sector mess is likely to suggest two changes only—first, to raise the number of years over which telcos are to pay the installments for the auctions they have participated in and second, to lower the interest on these payments from a fixed one right now to a floating one. If this is true, it will be unfortunate since neither addresses the problem though they will provide immediate cash-flow relief. Indeed, with the discipline of an immediate payout lifted, it is possible telcos will once again go back to irrational bidding—ideally, there should be no deferred payment for future auctions. If telcos pay their dues over, say, five years more, this will have to be discounted by the interest rate and, in NPV terms, there will be no difference in the payout. As for moving to a floating rate, this is something that should be done anyway since, at a time when interest rates are falling, not doing so will mean the government will end up getting more money from the telcos than they had bid in the first place.
The crux of the matter is that the government has mixed two very different forms of payment for spectrum. In the past, when spectrum was given out free—after the initial chunk given with the licence—the government got paid for this by way of high licence fees and spectrum charges. So, when it moved to upfront auction bids, the government needed to scrap the licence/spectrum fee; instead, it chose to combine them. Not surprisingly, the industry is in the mess it is in, and this is even before RJio disrupted the market.
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After having spent Rs 9 lakh crore on capex, industry needs an ebitda of Rs 140,000 crore just to meet interest costs—industry ebitda, however, is a mere Rs 50,000 crore. The high licence fee regime was compounded by auction design that was aimed at ensuring industry paid out much more than was desirable—since telcos were losing their licences prior to some auctions, they had no option but to bid astronomically to renew them. In the case of the 3G auction for 2100MHz spectrum in 2010, a peculiar auction structure and the fact that eight telcos were chasing three pan-India slots meant the price for Delhi and Mumbai rose to 10 times the reserve price—while the two circles accounted for 13.7% of industry revenue, the spectrum price was 40% of that year’s auction. As a result of this, the share of telcom revenues going to the government by way of recurring licence/spectrum charges and auction-bids rose from 11% in FY07 to 32.4% in FY17—if service taxes are included, the number rose from 23.2% to 47.4%. If the issue of high licence fees is not addressed, it will only be because the optics of slashing these are poor and will be seen as doing a favour to fat-cat industrialists.
While this is something the government needs to deal with, if it does not take the right decision, industry will continue to bleed. And while that may not matter to the government, it must keep in mind the fact that the industry’s capex was funded by Rs 4.6 lakh crore of bank and non-bank debt. All of this will get compromised if the industry’s health does not improve.