Budget should look into telecom crisis

V Sridhar/Rohit Prasad | Updated on February 01, 2020 Published on January 28, 2020

New territory While adopting 5G technology , India must remember that it comes with huge amounts of uncertainty   -  istock/sarayut

Along with relief in revenue payouts, reforms that aid in infrastructure development and enable competition are needed

Recent episodes, including the dismissal of petitions by the telecom companies on the payment of regulatory fees to the government based on Adjusted Gross Revenue (AGR), has put tremendous financial stress on the firms. The payout by the two major telecom operators, Bharti Airtel and Vodafone Idea, alone amount to ₹35,500 crore and ₹53,000 crore respectively.

One can keep debating about the definition of AGR — whether it should include core telecom services revenues or just gross revenues of the firm, and subsequently, the implications of the license fee and annual spectrum charges to be paid to the government. However, the moot questions are: Can the industry can withstand the vicissitudes of regulation any longer, and, what will be the type of market structure that may evolve on the other side?

Let us recapitulate the different hues taken by the industry since the 1990s due to varied regulatory objectives.

Intense competition

It all started in 1999, when the then incumbent telcos were crumbling under a huge commitment on spectrum fees. The then government provided a lifeline to the telcos in the form of revenue sharing arrangements as part of the New Telecom Policy. Simultaneously, a third private operator was introduced along withgovernment operator, creating a four-firm oligopoly structure.

Prior to 1999, we had a duopolistic market structure in mobile services with the Herfindahl-Hirschman index (HHI) indicative of competition at around 0.70 (near 1-monopoly; near 0-perfectly competitive). However, after the controversial issue of licenses in 2008, the average number of operators in each service area increased to 10 with a HHI of 0.18 by 2009, making this the most competitive market in the world.

The prices and corresponding revenue of the operators plummeted, bringing into question the viability of such hyper competition. In an article published in Telecommunications Policy, we argued that the telecom market at that time was allocative inefficient and indicated that a market with 5-6 players is more sustainable. As predicted, the average number of operators gradually reduced from 10 to six post mergers and acquisitions in 2016-2017. The market further consolidated due to intense price competition and bankruptcy filing by certain telcos.

At present, the number of operators in most service areas has come down to four, including the state-owned BSNL/ MTNL. The norm of having 3-4 telecom players has been in existence in many markets, including the US, and hence India is not worse off in terms of competition. However, any further reduction in the number of operators is going to reduce competition to unacceptably low levels from the point of view of consumer and social welfare, thus giving huge advantage to some firms. It is time that the government intervenes to resurrect the ailing sector in the public interest.

Regulatory intervention

One option would be to follow the path of 1999 by providing relief to the telcos through a reduction in regulatory levies along with a counterbalancing policy measure to increase competition in the provision of services.

The intervention we have in mind calls for new forms of telecom regulation. We believe the need of the hour is to move towards facility-based (i.e. infrastructure) and service-based licensing. This is followed by most of the developed countries, including Korea and Singapore, with a focus on “open access”. The National Digital Communications Policy (NDCP) 2018 also mentions development of open access next generation networks.

With the separation of infrastructure and service provisioning, the government will be able to incentivise infrastructure development through reduced regulatory levies on infrastructure providers. This includes reduced reserve prices on spectrum.

As the country attempts to leapfrog to 5G technologies, it is important to remember that these are accompanied by tremendous amounts of uncertainty. New market players such as facilities owners are likely to play an important role in the last mile. New technological possibilities such as greater use of non-exclusive spectrum are likely to transform the dynamics of competition, and the willingness to pay for licensed spectrum.

Easy access

Industry verticals such as the auto and white goods industry will have much greater stakes and will want to participate in value creation and capture when 5G networks are deployed.

Given these uncertainties and the distress already being experienced, operators need to be allowed to use 5G spectrum at close to zero cost for an abridged period of 10 years. At that point, given suitable market developments, a spectrum auction can be carried out.

While the carrot of free spectrum can be handed over to the infrastructure providers, open-access policies need to be introduced to enable non-discriminatory access to this infrastructure, thereby enabling competition in service provisioning. Simultaneously, an inter-ministerial committee on 5G needs to be set up to coordinate the creation of value across industry verticals using the telecom backbone set up by the infrastructure providers. Therefore, the immediate steps that are required are:

Provide relief to ailing telcos on revenue sharing payouts

Enact dual licensing — infrastructure and services

Reduce infrastructure development costs by fixing lower reserves prices and appropriate methods of allocation of radio spectrum, especially the 5G spectrum in 700, 3,400 and 26,000 MHz

Enable competition in service provisioning through open access regulation.

Set up an inter-ministerial committee on 5G.

Without adequate investment in the telecom infrastructure, forget about 5G; even OTPs cannot reach users in time to complete online transactions.

We must hope for some bold initiatives in the forthcoming Budget towards resurrecting the telecom sector.

Sridhar and Prasad are professors at IIIT-Bangalore and MDI-Gurgaon, respectively

Published on January 28, 2020
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