Telecom. Telecom reforms not sweeping enough

The telecom reform package the Cabinet approved on September 15 has merely ‘kicked the can down the road’. The package, however, does have positive features such as exclusion of non-telecom revenues from the levy on adjusted gross revenue (AGR), lengthening of tenure of spectrum to 30 years from 20 in future auctions, and abolition of spectrum usage charge (SUC) for spectrum acquired in future auctions.

Also, the reform package encourages spectrum sharing by abolishing the 0.5 per cent additional SUC, raises the ceiling for foreign direct investment in the telecom sector under the automatic route to 100 per cent from 40 per cent, and defers four years of AGR payments, albeit with a catch.

Relief not reform

The four-year AGR moratorium will provide temporary cash flow relief to telecom companies (telcos). However, the telcos are required to pay an interest of MCLR plus 2 per cent, which is currently 9 per cent, on their AGR dues during the moratorium, so that the government’s receipts are ‘NPV protected’. NPV, or net present value, is the current value of a future stream of payments discounted at the applicable interest rate.

ICRA estimates that the industry’s AGR payouts are likely to almost double from ₹14,000 crore in FY2021 to ₹27,000 crore from FY2026. When the interest rates on long term retail home loans range from 6.5 to 7 per cent, the 9 per cent interest for a four-year moratorium is excessive. More so when telecom levies in India are higher than in most developing Asian economies.

It is unfortunate that Bharti Airtel and Vodafone Idea (Vi), which have opted for the moratorium to secure some cash flow relief, have to pay a high interest rate at a time when their financials are weak. Jio, an arm of the cash rich Reliance Industries, has rightly decided not to avail itself of the moratorium. The government must roll back the interest on AGR.

A second tranche of reform announcement is likely. The government should consider reversing its decision to potentially convert AGR dues to equity at the end of the moratorium period and compensating telecoms for catering to rural customers and those belonging to economically weaker sections (EWS) as part of the second tranche of reforms.

In the September 2021 reforms announcement, the government has the option, not obligation, to convert AGR dues to equity at the end of the moratorium. This may demonstrate the government’s commitment to maintain the telecom industry’s competitive landscape and would not result in a cash outflow for the government.

However, the government is already saddled with two loss-making telcos — BSNL and MTNL. Acquiring equity stakes in more struggling telcos is imprudent. Instead, the government should reimburse the telcos for catering to rural and EWS subscribers.

In India, telcos have tended to compete on the basis of price, a practice that intensified with the entry of Reliance Jio in 2015-16. The average revenue per user (ARPU) realised by Indian telcos in 2020 was 39-58 per cent lower than those by telecoms domiciled in countries in a comparable stage of development — Indonesia and the Philippines.

Unviable ARPUs is not the sole factor responsible for the Bharti Airtel’s and Vi’s losses. High spectrum prices have resulted in Indian telcos accumulating excessive liabilities including debt and forking out a higher share of revenues as interest payments. The situation is exacerbated by India’s high corporate tax rate which, along with that of the Philippines, is the second highest among the BRICS and ASEAN countries.

Indonesia’s Telkom and XL Axiata and the Philippines’ Globe Telecom and Smart Communications remained profitable even amidst the ongoing Covid-19 pandemic and their liabilities as multiples of EBITDA are much lower.

Though low ARPUs and high levies have debilitated Bharti Airtel’s and Vi’s financial profiles, there has been a positive social externality. According to Telecom Regulatory Authority of India’s, ‘Yearly Performance Indicators – Indian Telecom Sector, 2020’, the country’s wireless tele-density in 2020 was high at 84.90 per cent, comprising urban and rural tele-densities of 134.34 and 58.75 per cent, respectively.

The market share of private sector telcos was 89.42 per cent; the combined market share of state-owned BSNL and MTNL was just 10.58 per cent. This implies that Reliance Jio, Bharti Airtel and Vi have led the charge in providing affordable telecom services to rural and EWS subscribers.

The government compensating telcos for catering to rural and EWS customers should not be an issue, notwithstanding it’s strained fiscal position, thanks to the ₹58,809.56 crore ($7.81 billion) available in the Universal Service Obligation Fund (USOF) as of August 31, 2021. The objective of USOF is to provide access to telecom services in a non-discriminatory manner to people in rural and remote areas at affordable and reasonable prices, thereby bridging the rural-urban digital divide. The USOF is financed through the collection of Universal Access Levy (UAL) at 5 per cent of AGR from telecoms.

USOF understated?

The USOF, which was set up in FY2003, has collected ₹1,19,735.16 crore up to August 31, 2021, of which it has disbursed close to 51 per cent or ₹60,925.59 crore on projects to build telecom infrastructure, provision of land lines and mobile phones and broad band in rural and remote areas. Back-of-the-envelop calculations indicate that the outstanding USOF balance may exceed ₹100,000 crore ($13.28 billion) had the Department of Telecommunications (DoT) invested the unutilised USOF funds in fixed deposits of public sector banks during the 18 years since inception.

The DoT, as a good governance practice, must periodically report the quantum and nature of USOF investments and the resultant income earned.

In the absence of competitive tariffs, a digital divide would have not only segregated urban and rural areas but also those above and below the poverty line. It makes imminent sense to expand the scope of USOF to include provision of telecom services to EWS and compensate telcos for catering to rural and EWS subscribers. It is only fair that the government compensates private telecoms for catering to rural and EWS subscribers, especially since they face the triple whammy of low ARPUs, high telecom levies and high corporate taxes.

The writer is the Singapore-based head of research at Korea Development Bank. Views are personal

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