Why telcos are look­ing for a bailout yet again

Telcos are said to seek a deal that will pare var­i­ous statu­tory pay­ments such as spec­trum user charge and in­ter­con­nect charge

Mint Asia ST - - News - B Y TA DIT KU NDU

The jour­ney of the Indian econ­omy since the big-bang re­forms of 1991 has been noth­ing short of a roller-coaster ride, and no other sec­tor en­cap­su­lates it better than In­dia’s tele­com sec­tor. Some of the promised fruits of lib­er­al­iza­tion—high com­pe­ti­tion and low prod­uct prices— in­deed ma­te­ri­al­ized in this sec­tor, lead­ing to a phe­nom­e­nal rise in tele-den­sity in the coun­try. Yet, some of the darker as­pects of the lib­er­al­iza­tion process—crony­ism, re­source-grab and cor­rup­tion—also man­i­fested them­selves quite starkly in the sec­tor.

In 2012, the Supreme Court struck down the li­cences of sev­eral telecom­mu­ni­ca­tion com­pa­nies (telcos) cit­ing cor­rup­tion and ar­bi­trari­ness in the al­lo­ca­tion of spec­trum, rul­ing that the process had en­riched telcos at the ex­pense of the ex­che­quer.

Five years af­ter that verdict, the tele­com sec­tor is at the cross-roads once again. Faced with a new ri­val with deep pock­ets—re­liance Jio—heav­ily in­debted tele­com in­cum­bents have rushed to the gov­ern­ment for a bailout package, which the gov­ern­ment is con­sid­er­ing.

The telcos are re­port­edly seek­ing a bailout deal that would re­duce var­i­ous statu­tory pay­ments such as the spec­trum user charge and the in­ter­con­nect charge, be­sides ex­tend­ing the time­frame for mak­ing spec­trum-re­lated pay­ments to gov­ern­ment ( bit.ly/2sg0fxv). In­cum­bent telcos such as Bharti Air­tel Ltd have of­ten com­plained that fre­quent changes in tele­com poli­cies have of­ten hurt them while favour­ing some ri­vals.

For ex­am­ple, the gov­ern­ment in 2002-03 al­lowed com­pa­nies with fixed tele­phony li­cences to of­fer mo­bile tele­phony ser­vices, which favoured Re­liance In­fo­comm (later Re­liance Com­mu­ni­ca­tions) and Tata TeleSer­vices Ltd. Sim­i­larly, when the gov­ern­ment changed rules in 2007-08 to al­low com­pa­nies of­fer­ing mo­bile ser­vices on the CDMA plat­form to also do so on the dom­i­nant GSM plat­form, the ma­jor ben­e­fi­cia­ries were again Re­liance Com­mu­ni­ca­tions and Tata Teleser­vices. Chart 1 Tele­com in­dus­try's debt lev­els have again risen since gov­ern­ment re­sumed spec­trum auc­tions post-2010 Sub­se­quently, in 2012, the gov­ern­ment al­lowed com­pa­nies with a broad­band wire­less li­cence to of­fer voice ser­vices, which ben­e­fit­ted Re­liance In­dus­tries Ltd. Gov­ern­ments and reg­u­la­tors on their part have of­ten cited changes in tech­nol­ogy and con­sumers’ in­ter­ests while chang­ing rules and reg­u­la­tions.

This is not the first time telcos have lob­bied for a bailout package, though. The first such package was in 1999.

Eigh­teen years later, the sec­tor is in cri­sis once again. To un­der­stand how this has hap­pened, it is help­ful to rewind to the mid-1990s when the first coun­try-wide tele­com spec­trum auc­tions took place. The auc­tions were badly de­signed, and com­plaints re­gard­ing lack of trans­parency in the auc­tion process and fre­quent change of rules were com­mon.

The net result of those auc­tions was slow roll-out of ser­vices be­cause of the fi­nan­cial stress borne by auc­tion-win­ners, slow clear­ances for fre­quency al­lo­ca­tions, and the lack of a suit­able frame­work for man­ag­ing the in­ter­con­nect ar­range­ments. Even­tu­ally, the prob­lems snow­balled and the tele­com sec­tor suc­cess­fully lob­bied to ob­tain a bailout in 1999.

The then-nda gov­ern­ment waived ex­ist­ing obli­ga­tions of telcos in lieu of a rev­enue-shar­ing agree­ment; the li­cence fees fixed ear­lier were waived. How­ever, this move was crit­i­cized among others by the Comptroller and Au­di­tor Gen­eral (CAG) at that time, as pro­vid­ing un­due favour to telcos. But the rapid ex­pan­sion of the tele­com sec­tor af­ter the 1999 bailout package quelled crit­i­cism about the move, which was hailed ret­ro­spec­tively. Chart 2 Ris­ing tele­den­sity has been off­set by fall­ing rev­enue per user for telcos

Af­ter the 1999 bailout, the gov­ern­ment con­ducted one more auc­tion in 2001, which was de­signed better than the pre­vi­ous one. But faced with shortage of spec­trum, the gov­ern­ment be­gan to al­lot ad­di­tional spec­trum on a first-come-first-served ba­sis and aban­doned the auc­tion route. This al­legedly led to cer­tain mal­prac­tices, with op­er­a­tors try­ing to in­flate their sub­scriber num­bers. Ac­cord­ing to an ex­plo­sive 2010 CAG re­port ( bit.ly/2gbhu4c), this pol­icy led to losses worth Rs1.76 tril­lion. The abuse of the first-come-first-served pol­icy led the gov­ern­ment to re­vert to the auc­tion route. A sub­se­quent court verdict can­celling li­cences granted un­der the ear­lier pol­icy in 2008 only put the fi­nal nail on the cof­fin of the first-come-first-served pol­icy.

Partly be­cause of the gov­ern­ment’s urge to max­i­mize rev­enues in or­der to be per­ceived as hon­est ad­min­is­tra­tors of public re­sources, and partly ow­ing to the ag­gres­sive bid­ding by telcos to ac­cess a scarce re­source, telcos are to­day among the most in­debted firms in the Indian econ­omy. The ex­ag­ger­ated claims of the CAG did not help mat­ters as it helped raise public ex­pec­ta­tions from the spec­trum auc­tions. The CAG’S max­i­mum es­ti­mate of loss—rs1.76 tril­lion—was based on rev­enues gen­er­ated by 3G auc­tions, which seem to have been in­flated by ag­gres­sive bid­ding.

The moral haz­ard cre­ated by the 1999 bailout might have played a part in the ag­gres­sive bid­ding by telcos since they might have an­tic­i­pated a bailout in the event of fi­nan­cial dis­tress. While there are some strik­ing par­al­lels be­tween the latest cri­sis and the one in the 1990s, the one big dif­fer­ence is the en­try of Re­liance Jio. Jio’s launch has been dis­rup­tive for the sec­tor and its ex­pan­sion plans may put fur­ther pres­sure on in­cum­bents, as an ear­lier Plain Facts col­umn pointed out.

Yet, it is the bur­den of re­pay­ing high spec­trum costs which lies at the root of the cri­sis as it did in the 1990s. Height­ened com­pet­i­tive pres­sures have only ag­gra­vated the cri­sis. The out­stand­ing debt of telcos is Rs4.85 tril­lion, be­sides another Rs3 tril­lion owed to the gov­ern­ment as de­ferred pay­ment obli­ga­tions for spec­trum.

The de­te­ri­o­ra­tion in debt met­rics of telcos be­gan right af­ter the gov­ern­ment re­verted to the auc­tion route in 2010, data from the Cen­tre for Mon­i­tor­ing Indian Econ­omy (CMIE) show. The debt-to-eq­uity ra­tio for the in­dus­try was largely sta­ble dur­ing the non-auc­tion years (2001 to 2010) while it has steadily de­te­ri­o­rated there­after. See Chart 1

Ag­gres­sive bid­ding by telcos has led to a debt pile-up, which threat­ens the health of both telcos and their lenders. And their ag­gres­sive ex­pan­sion has hurt margins. While telcos have been able to widen their reach over the last few years, it has been largely off­set by fall­ing av­er­age rev­enue per user (ARPU). The en­try of Re­liance Jio might drive ARPUS even lower. See Chart 2

In the fi­nal anal­y­sis, it seems that while the auc­tion route may have helped elim­i­nate ar­bi­trari­ness in the al­lo­ca­tion of scarce tele­com spec­trum, it may have cre­ated per­verse in­cen­tives for both the gov­ern­ment and the telcos , lead­ing to the cur­rent debt cri­sis. Given the prece­dent of 1999, telcos are once again ask­ing for some kind of re­lax­ation in their pay­ment obli­ga­tions to the gov­ern­ment.

In­dia’s tele­com saga shows why auc­tions may not al­ways be the best way to ap­por­tion a na­tional re­source, es­pe­cially when such auc­tions are guided by the sole ob­jec­tive of rev­enue max­i­miza­tion.

At this point, there are no easy choices for the gov­ern­ment. If the gov­ern­ment does not in­ter­vene to­day, it risks los­ing out on its fu­ture spec­trum rev­enue stream. Given the ex­po­sure of state-owned banks to tele­com debt, it also raises the risk of de­faults or hair­cuts on those loans, the even­tual costs of which would be borne by tax­pay­ers.

And if the gov­ern­ment gives in to the bailout de­mand, as re­ports in­di­cate, it will risk ex­ac­er­bat­ing the prob­lem of moral haz­ard, rais­ing the risks of more and big­ger bailouts in the fu­ture, the even­tual costs of which would be borne by fu­ture tax­pay­ers.

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