Opinion

High levies set to strangle telecom sector

V Sridhar | Updated on November 02, 2019 Published on October 29, 2019

Effective growth: Broadband services must be improved in terms of both price and quality for digital progress   -  istock photo

The stiff licence fees and spectrum usage charges will impair the capacity of telecom majors to invest in infrastructure

The recent Supreme Court judgment on upholding the definition of Adjusted Gross Revenue (AGR) to include all revenues earned by the licensed Telecom Service Providers (TSPs), and just those of core services, appears to be the death knell for TSPs. While the dispute over the definition of AGR has been on since 1999, the important aspects are the Annual License Fee (LF) of 8 per cent and Annual Spectrum Usage Charges (SUC) of about 1-6 per cent of AGR payout to be made by the TSP (along with interest and penalties), which are likely to throw the TSPs into a debt trap that we as a nation can ill-afford.

Telecom has been one of the brightest spots in India’s liberalisation journey, with the country being the second-largest in mobile subscribers and even mobile broadband subscriber base, next only to China and beating the US. Telecom and broadband Internet have string multiplier effects on the economy, leading to large-scale digitisation of consumer-facing services — including digital finance and commerce platforms — thus augmenting transparency, reducing information asymmetry, and most importantly, allowing for nurturing of the digital start-ups and innovation ecosystems in the country.

 

Telecom and broadband form a very important infrastructure backbone in the country, which — unlike the others such as water, electricity, and sewage — is primarily driven by private firms. Hence losses, debt and unsustainability in this industry are likely to manifest in various forms, including government provisioning of digital services. What is the way out?

Regulatory fee

High regulatory fees have been the curse of this industry. The annual LF of 8 per cent — which includes a 5 per cent Universal Service Levy (USL) — is high compared to the international average. The USL since its implementation in 1999 has contributed more than ₹1,00,000 crore to the exchequer, of which there remains an unspent balance of about ₹50,000 crore in the book of accounts. Our rural penetration has improved, thanks partially due to the state-owned BSNL as well as efforts of the private operators. It is time the government looks at reducing the USL, thereby providing some relief to the TSPs.

Next is the annual SUC, that remains in effect despite radio spectrum being allotted through auction, as mandated by the Supreme Court in 2012. When there is a fixed upfront payment for the spectrum, there is very little justification for levying additional SUC. Spectrum need not be maintained by the government, unlike other natural resources, and hence levying SUC is unjustifiable.

As per the DoT notification in 2016, the SUC will be 3 per cent of AGR for all spectrum auctioned henceforth; nevertheless, the incumbents face a complex calculation of SUC due to their legacy spectrum; as a result, the SUC ranges from 1-6 per cent. The government will do well to completely eliminate the SUC, as it puts an onerous burden on the TSP, which is already struggling to pay the upfront fee committed towards spectrum auction proceeds.

These regulatory interventions are likely to provide some relief to the ailing telcos and provide the much needed fillip to the industry.

Operator services

The third issue is the on-going price war between new entrants and the incumbents, which is also a cause of worry for the industry. While telecom regulator TRAI has not intervened in tariff until now, the DoT seems to be mulling over fixing a floor price for telecom services. This shifts the burden to the weary consumers. In a sector with about four operators, the TSPs should be wise enough to adjust their pricing and revenue-earning strategies, so that they don’t incur loss.

The government should not make their job easy by fixing floor prices. It is retrograde step in the face of effective competition in the sector.

Fourth in the list of burning issues is the Interconnect Usage Charge, especially the Mobile Termination Charge (MTC) which is to be paid by the originating carrier to the terminating carrier for voice calls. While TRAI has re-initiated the consultation process on its plan to reduce the MTC from the current level of 6 paise per minute, the ecosystem in the country will not permit MTC reduction to zero any time soon.

Unless the penetration of mobile broadband nears 100 per cent (from the current level of about 30 per cent), reduction of costs for mobile termination cannot be brought down. Even if it is a pure packet-switched call, the marginal cost of terminating it cannot be ignored due to the associated spectrum and infrastructure cost.

Even now, the MTC in India is one of the lowest in the world. Hence, a very small reduction, as opposed to a steep fall, could induce the incumbents to improve their broadband infrastructure, reducing call termination costs.

Planned merger

Fifth, the decision taken to merge BSNL and MTNL has been a right one, considering the loss incurred due to MTNL’s diseconomies of scale. With the merger and the financial support given by the government, the new BSNL-MTNL entity should be mandated to compete effectively against the private operators, fulfilling their national goal of connecting rural and semi-urban areas of the country.

Procurement policies of the entity should be made less stringent, so that it can deploy infrastructure — especially 4G mobile broadband network — quickly to overcome the lost time. Effective utilisation of the large assets of the combined entity across the country should commence so that it can become EBITDA-positive soon.

While the judgment of the Supreme Court on AGR has been reverberating all around, the culprit really is not the mere definition of AGR, but rather the regulatory levies on the AGR. If the government is serious in its efforts to revive the sector, it is time that the DoT thinks about rationalisation of the regulatory levies.

With the merged BSNL-MTNL entity providing effective competition to private operators, the telecom market will soon become vibrant. But unless the underlying telecom and broadband services improve both in price and quality, a Digital India is a pipe dream.

The writer is Professor, IIIT-Bangalore

Published on October 29, 2019
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