Dialling the wrong number again

Prime Minister Manmohan Singh, while inaugurating the India Telecom Summit 2013 last week, expressed concern that the rural tele-density was just over 40 per cent with millions of people in villages still remaining untouched by the telecom revolution. He further said that the Government was alive to the need for expansion of telecom services in the rural areas and has set a target for increasing rural tele-density to 70 per cent by 2017 and 100 per cent by 2020.

If the Government’s vision is to be executed, this will roughly translate into demand for an additional 400,000 base stations and 50,000 towers with average tenancy of 2.3 at an investment of Rs 50,000 crore. In effect, the Government is visualising doubling the current telecom capacity and increasing its reach to every corner of India while providing broadband services.

It is in this context that the Government’s proposal to collect licence fees, in the form of annual revenue share, from telecom tower companies, goes against the stated goal of encouraging the telecom infrastructure industry to serve as an effective channel to serve the “common man”.

The tower infrastructure industry has been one of the key drivers of the Indian telecom growth story. The growth has been aided by a liberal licensing regime which permitted tower companies to do business with minimal Government levies. Under the existing policy, tower companies are required to pay only a registration amount of Rs 5,000 while applying for infrastructure provider-1 category licence. There are no additional fees.

Once registered, the company can provide assets such as dark fibre, right of way, duct space and tower. It can also provide network infrastructures limited to antenna, feeder cable, Node B, Radio Access Network and transmission system.

Presently, there are over 200 tower companies which have registered with the Department of Telecommunications for infrastructure provision. As per the information available with TRAI, there are over three lakh towers in the country.

Majority of these telecom towers are owned by 12 companies. Out of the three lakh towers, about 50 per cent are shared by more than one operator. The total annual revenue of the tower companies is estimated to be around Rs 23,500 crore. The total investment made by these companies is estimated at over Rs 100,000 crore in the last 15 years.

But now the tower companies are faced with a paradoxical situation. On one hand, the tower industry has been granted infrastructure status in recognition of the key role it plays in increasing telecom coverage.

On the other hand, the Government has proposed that tower companies that lease infrastructure to mobile companies be forced to operate under the same unified licence that mobile operators, long-distance operators, and internet providers need to serve their subscribers. Under the proposed unified licensing regime, additional licence fees of 8 per cent will be imposed. For an industry which is still struggling to meet its cost of capital, this additional levy may cripple the industry, which could make it difficult for the tower companies to make further investments in rolling out the 50,000 new towers needed to meet Government targets.

The TRAI, which first recommended bringing the tower companies under the licence fee regime in 2010, feels otherwise. The regulator reckons that that major telecom companies are forming IP-I companies and hiving off their existing telecom tower assets to such IP-I companies, with the prime motive of reducing the attendant incidence of licence fee on revenues earned from sharing their telecom infrastructure. In other words, TRAI suspects telecom entrepreneurs could be adopting accounting methods to minimise the incidence of licence fee on their telecom ventures by showing higher revenue on the books of the tower companies.

The TRAI has also justified its position by saying that tower providers are facing restrictions from different local bodies and are being subjected to local regulations which are not uniform. Bringing them under the licensing regime would facilitate a more orderly development.

According to the regulator, by licensing them, they can also be permitted to provide both passive and active infrastructure, independent of the service providers. This will facilitate faster roll out and reduction in the capital expenditure on the part of the service providers.

Another reason given by TRAI for bringing the tower companies under licensing regime is that it will bring in additional revenues to the Government.

The tower industry revenues are estimated to grow at around 11 per cent annually and a 8 per cent revenue share on current revenues would lead to an income of Rs 1,900 crore per year for the national exchequer.

Unfortunately, the Government has bought the TRAI argument, especially since the additional revenue could help it bridge the fiscal deficit. But the proposal is based on flawed principles. The TRAI is incorrect in stating the licensing will bring additional benefits to the tower companies. Restriction from local bodies and taking right of way permissions is a problem even with existing licenced operators. They enjoy no advantage in obtaining approvals or funding as claimed by the TRAI. In any case, no company should be forced to move to a licensing regime. If there are advantages, as the TRAI claims, then tower companies would logically take a unified licence on their own.

The concern over telecom companies using the arbitrage in licence fee is also misplaced. Majority of the tower companies in the country are independent players.

Even those entities where telecom companies have a significant stake are either listed on the stock exchanges or are managed by a different board of directors. If the Government still has concerns, there are audit and tax tools available to check misuse of arbitrage instead of bringing every company under a licence regime.

It all then boils down to the fact that the Government will get additional revenues by imposing the fee. Licence fees are imposed on companies which have been allocated natural resources such as spectrum. In the case of tower companies, there is no such natural resource given to them.

If licence fee is imposed on tower companies simply because they are offering a service to telecom service providers, then anything which is used by the telecom companies can be subjected to licence fee. By this logic, the telecom equipment supplier, IT companies, and even consultants who provide services to telecom companies can be brought under licence regime. Clearly, such a move would be irrational and legally untenable.

The Prime Minister while speaking at the telecom summit rightly acknowledged the transformative power of the Internet in the lives of people.

Tower companies are an important cog in achieving that transformation. Revenue maximisation, particularly at a time when the telecom sector is going through a challenging phase, goes against this objective.

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