Regulatory overreach?
There is no country in the world where the regulator has used the mobile termination charges regime to compel a change of technology
The Telecom Regulatory Authority of India’s (Trai) regulation on the mobile termination charges (MTC) has invited critical commentary in this paper and elsewhere (September 24 editorial, Business Line; September 23, The Financial Express; September 28, Mint). My article in this paper questioned the rationale for the decision. Some amplification is necessary. More importantly, the long-term future of the industry merits serious discussion.
Trai’s justification for its decision was: Full IP networks have close to zero MTC; IP networks are the future and telcos must be coaxed to invest and move to such technology; and, calculating MTC on the LRIC pure methodology.
First, is it the business of the regulator to choose what is the best technology for the telcos? No. The government licenses telcos to operate. And, the government’s (licensor’s) policy is technology-neutral. An operator is free to deploy a technology of its choice. Market competition decides which choice is right. If an operator chooses a “bad” technology, customers will flee to a rival competitor. If the government chooses to reverse its policy and insist on a technology, it can impose a licence condition. The regulator cannot modify licence conditions under which telcos operate. And, it certainly cannot change government policy.
Second, assume that actual costs in an IP network are one paisa and costs on any other non-IP network are higher. Assume that Jio has an all-IP network. Then why a six-paise termination charge for calls terminating on its network? Is the five paise just jam for Jio?
Third, using the LRIC pure method has been called into question on numerous grounds. Now, consider this. If an inappropriate method is used, however transparent the math it will still yield a wrong answer. Spreadsheets are no substitute for logic. And some have even questioned the spreadsheet (See Mint)! If spectrum costs were counted till 2015, why the sudden change? If a new method was adopted by Trai in 2015, why abandon it?
There is not one country in the world where the regulator has used the MTC regime to compel a change of technology. No regulator has set MTC as 0, even in countries with IP networks. A first for India?
These and many other issues prompt the inference that the decision is unjustified. Transparent disclosure of the calculations won’t make this criticism go away.
Even more important is the question: Since VoLTE networks will cater to a small percentage of the consumers, what happens to the rest? What happens to low-priced tariff plans for poorer consumers? Are we designing a Digital Divide or exacerbation thereof? Where will the investment come from? Public investment is unlikely. So, unless the private sector steps up, network infrastructure investment will fall far short of what is needed.
This leads to the really serious issue, namely the precarious state of the industry’s finances. In articles written two years ago (September 22 and 23, 2015, The Financial Express), I had pointed to how man-made blunders nearly destroyed the industry. Earlier, in 2013 and 2014, Trai had told the government about the distinct risk that some borrowings would become non-performing assets (NPAs) and a telecom industry problem would spill over and become a banking sector problem. Trai’s silence (in the MTC decision) on this is puzzling.
That the sector is in trouble is now widely accepted. Even the State Bank of India has said that this will be the next to go to NPA hospital. Mr. Jaitley has said there are ~98,000 crore worth of stressed assets in public sector banks. One company is close to default; its debts have been temporarily rolled back. Some others are bleeding so profusely that “you plug one hole today and another one opens up tomorrow”.
Revenues of the sector have fallen over the last year; as a consequence even government revenues. So much so that the Telecom Commission had to write to Trai to seriously address the matter. Make no mistake, predatory competition was the cause; how many firms do you know give their products away for free? Trai’s inaction on the tariff plans of the entrant allowed this to happen.
The critical variable is the EBITDA margin. Its size determines whether the telco can meet its interest, amortization and tax obligations and allow internal resource accrual. Roughly, a 40 per cent margin is the minimum required. The EBITDA margin for the three main players (apart from Jio) ranged between 30 and 37 per cent during 2016. It has since plummeted, in some cases below 20 per cent. The sector’s outstanding debt is about ~5 lakh crore. Also add another ~3 lakh crore in future obligatory payments. And then there is the investment required for network expansion and upgrade. Where will the money come from? Not from equity or debt (given present exposure levels). That leaves internal resource accrual.
The government set up a group to look at how to relieve telecom distress. No decisions so far. Here is a suggestion. Telcos pay licence fees (LF) and spectrum usage charges (SUC). This is the revenue sharing arrangement in place for 15 years. The justification was that since spectrum was allocated, telcos could pay more in revenue share. However, once spectrum started being auctioned (2010), the government got revenues from both auctions and the revenue sharing arrangement. Clearly, there was a case to reduce the LF and SUC rates. The National Telecom Policy 2012 stated that the rates would be rationalised (bureaucratese for reduced). But gluttonous governments (UPA and BJP) have looked the other way. The LF and SUC preempt 13 per cent of telco revenues. The sector also yields government tax revenues, i.e. corporate tax and GST. The total draft is about 30 per cent. There is a compelling case to reduce LF and SUC to five per cent and one per cent respectively. This should release roughly ~15,000-20,000 crore. And that money is better in private hands (for investment) than to fund the fiscal deficit.
There are many other things that could be done. But reducing LF and SUC will be a start. Is the ministry of finance listening?