An inter-ministerial group (IMG) is currently reviewing the financial health of India’s telecom sector. This follows a steady fall in sector revenues since Reliance Jio launched its 4G services last year.
An inter-ministerial group (IMG) is currently reviewing the financial health of India’s telecom sector. This follows a steady fall in sector revenues since Reliance Jio launched its 4G services last year. Jio’s competitors reportedly lost roughly Rs 80 billion (Rs 8,000 crore) in the first six months. Analysts and lenders have warned of telecom companies defaulting on loans or becoming unviable. However, Jio’s entry brought important benefits and its cut-throat pricing provided a much-needed boost to broadband usage. The IMG’s challenge is to recommend how India can boost investor confidence, without slowing broadband growth. For this, it must treat the arguments of Jio and its competitors with sympathy and yet, healthy scepticism. The pressure on revenues is real. Incumbent companies, mainly Airtel, Vodafone and Idea, are badly hit. Jio’s free 4G services forced them to drop their prices to protect their market-share. The sector lost 9% in revenues in the immediate quarter after formal launch. The telecom operators also face Rs 4.8 trillion in debt.
The government too has suffered as it collects roughly 30% in levies such as licence fees, spectrum usage charges, services tax, etc. Department of Telecommunications (DoT) has reportedly lowered current year’s revenue targets by 40%. Fearing a poor response, it has postponed the next auction of spectrum. However, internet access in India is the cheapest ever, with tariffs down over 50%, and thanks partly to Jio, smartphones are cheaper. The cost of being online has fallen steeply and monthly broadband usage — barely 500 MB less than a year ago — is now 1,200 MB.
More people are using Facebook, Twitter, WhatsApp, shopping online, paying digitally and using hundreds of apps for work and pleasure. This is a substantial achievement, showing what affordable data can achieve. Yet, there are large gaps in access and capacity. While globally, India is №2 in terms of internet users, it is №1 in those unconnected. According to a recent report by OpenSignal, broadband speeds in India are among the lowest and trail even neighbours, Pakistan and Sri Lanka. Telecom Regulatory Authority of India (TRAI) estimates India needs millions more Wi-Fi hotspots.
According to sector specialist body, GSMA, of the India’s one billion mobile connections in March 2016, only 61.6% were unique users. So, mobile connectivity is not universal. Filling the gaps will take an estimated Rs 2.5 trillion and therefore. well-financed operators. However, imposing price floors is wrong way to improve operator finances. Doing so will deny critical commercial flexibility to new entrants, force higher prices on customers and hurt data growth. Any late entrant, e.g. Jio, can rarely succeed without being price competitive. Incumbents were naïve to ignore that Jio could be willing to pay a steep price to dislodge competitors.
However, Jio’s proposal to abolish interconnection usage charge (IUC) and to move to a “bill-and-keep” regime is flawed. Currently, when a telephone subscriber makes a phone call to someone on a different network, the destination network receives an IUC at the rate of `0.14 per minute. Removing the IUC, as Jio advocates, could simplify settlements, if equal number of calls travelled in either direction. However, they do not. Being new, Jio has fewer subscribers than its main competitors. It has more outgoing calls than incoming and it pays more in IUC than it receives. Most operators recover IUC costs from call tariffs. Jio can’t since its customers enjoy free voice calls. So, the ‘bill-and-keep” regime subsidises Jio at the expense of its competitors.
The IUC is a legitimate payment for costs incurred in terminating a call on the destination network. Admittedly, incumbent players can abuse this. They can thwart competition by making interconnection difficult or expensive. To prevent this, TRAI and other leave almost all other tariffs to markets; but rarely, IUC. TRAI fixed the current IUC in 2015. Regulators typically compute IUC by modelling costs incurred in interconnection including a fair return on investment. There is good to reason to review IUC periodically, since the underlying costs are not static.
However, abolishing IUC is short-sighted and could hurt rural areas the most. Deploying and maintaining rural networks is expensive. For instance, poor access to electricity forces dependence on diesel which is expensive and difficult to store or secure. Low demand for services and poor revenues are the norm as incomes are low and businesses, weak. Rural users usually receive more calls than they make. This makes IUC an important source of revenue for investors in rural networks. Indeed, regulators have sometimes used IUC to encourage investments in rural networks. Abolishing IUC would further weaken the business case for rural broadband.
The government can do much to attract the large investments needed in the telecom sector without distorting competition or hurting data growth: It can remove the irrational regulation that discourages investments, especially large ones. For instance, most countries now auction spectrum to deal with its increasing demand. However, few countries that auction spectrum also impose high licence fees and spectrum usage charges like India. Further, the government designs spectrum auctions to maximise revenue. These forced costs are worsening operator debts, and threatening their viability.
Government levies distort India’s telecom and broadband markets in other ways. The large fees form the basis of a demand from telecom operators for a similar burden on Over-the-Top (OTT) services that compete with their services in any way. The so-called “same service same rule” advocated by them, would require licences and fees for internet-based telephony and messaging services like Skype, WhatsApp, etc. This could be counterproductive since these services are key drivers of data usage and of future revenues of the sector.
Removing the burden on the telecom operators would end the parity argument besides enhancing data usage and the finances of incumbent operators. Abolishing irrational fees would admittedly, hit government revenues in the short run. When the revenue sharing regime was introduced in 1999, many saw it as a bailout for telecom companies. It had replaced the licence fees that operators had committed to the government in auction, but were unable to pay. In subsequent years though, it raised much more revenues for the government than it had sacrificed then.
Taking a cut in revenues could turn out similarly if it leads to a sound and viable telecom infrastructure that virtually all sectors of the economy can exploit. The increasing demand for digital infrastructure and services is a massive commercial opportunity. Communications markets usually thrive with rational and predictable rules. The IMG could make an opportunity out of the current crisis, if it can help remove current distortions and align incentives of all stakeholders.
This article was originally published in Financial Express on July 1st, 2017.