Should the government go easy on the telecom sector?

The imbroglio over adjusted gross revenues has shaken the once-booming sector’s foundations

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Following years of breathtaking subscriber growth, tele-density is showing signs of strain. Some telecom players are facing an existential crisis due to brutal competition and the government demanding unpaid dues. At the same time, investors of different hues are lining up to invest in the space, signalling a belief that the industry still holds prospects of juicy returns. In a conversation moderated by K. Bharat Kumar , former VSNL Chairman B.K. Syngal and V. Sridhar, a Professor at the International Institute of Information Technology-Bangalore, discuss what lies in store for the industry. Edited excerpts:

Consumer demand has recently been impacted. Is that affecting the subscriber base as well, as we see tele-density slipping?

B.K. Syngal: Tele-density has been increasing since the early 2000s. The trigger point was in 1999 when we moved away from upfront licence fee payments to a pay-as-you-go regime. Over time, we have seen subscribers with multiple SIM cards who want a feel of which service provider is better. In the lower rung of consumers, movement is higher as well as temperamental. The Telecom Regulatory Authority of India (TRAI) itself admitted at one point that the actual numbers are 30% lower than the numbers being bandied about. So, I am not unduly worried. This could be a COVID-19 effect where mass movement of migrant labour and joblessness could have resulted in surrendered SIM cards.

V. Sridhar: What worries me is not so much the urban tele-density, but the mobile broadband reach. Recent statistics show we have 656 million mobile broadband subscribers and too few — about 19 million — fixed broadband subscribers. The good news in mobile broadband is that over one year, it has risen by about 200 million to reach here. But we still have a lot of ground to cover. The second worrying aspect is fixed broadband. We have about 35 million fixed line subscribers, and only 19 million broadband subscribers. Especially when we are moving towards work from home, long-distance education, tele-medicine and the like being dependent on connectivity, we need a reliable fixed line broadband network, which is pathetic in India. Even in wireless broadband, BSNL, a public sector operator with pan-India presence, has only about 21 million subscribers — that is only 3% of the total. That is worrying.

Will the imbroglio over adjusted gross revenues shake the industry’s foundations?

B.K. Syngal: The government is demanding penal interest from telecom operators which, in a way, defines them as wilful defaulters. They are not wilful defaulters. That is one big flaw in the AGR [adjusted gross revenue] imbroglio. The second big flaw is that the case has been going on for the last 15-16 years. And the government has merrily calculated interest on the basis of the number of years, at some LIBOR plus 2% or something like that. Now, how on earth is the industry to be blamed for the delay? The delay has been from both sides. The industry went to court and had a favourable judgment from TDSAT, which was very clear that you cannot have AGR included for non-telecom services. The government decided to go against that judgment to the Supreme Court. That dragged on and on. Finally, last year, this judgment came out of the Supreme Court. Of course, the entire saga is predicated on the faulty definition of AGR accepted by industry while migrating from a fixed licence fee to the variable license fee regime. Little did the industry realise the consequences of that hasty acceptance.

Here’s another interesting angle: Justice Bobde, in the Devas case, asked Devas, ‘Why don’t you waive off the interest because our liability is increasing every day?’ Now, why can’t the same principle be applied to this case too? To get out of this stalemate, a bold executive decision on the lines of 1999 is needed.

V. Sridhar: AGR comprises the regulatory fees that are broadly categorised into two areas. One is the licence fee which is 5% universal service obligation fee (USOF) plus 3% as licence fee. So that is 8%. Second comes the spectrum usage charges that range from 1% for 2,300 MHz up to 7-8%, depending upon whether the telcos are holding liberalised spectrum or unliberalised spectrum. This is huge. We are talking probably about 15% of the AGR as regulatory fees for the government. This is a flawed policy. In any country, the licence fee is not more than 3%, including the USOF. There is no reason why the government should levy a spectrum usage when the spectrum is auctioned. In the last auction in 2016, telcos coughed up ₹60,000 crore on buying spectrum. Spectrum is not something that will deteriorate. It doesn’t have depreciation or management costs associated with it. Now, the Supreme Court has just gone by the executive order, which says that this is the adjusted gross revenue due from these companies, and therefore, they have to pay that. The only thing that can be done is for the Department of Telecommunication to take a decision on cancelling or revising the AGR due, excluding the penalty.

Both the government and industry have said they would not come back with a recalculation. Are we setting ourselves up for a 2- or 3-player market?

V. Sridhar: We are looking possibly at a two-three player market. If this pulls on, Vodafone UK may not continue to infuse capital into the Indian company. That means we are looking at three operators now. The world over, even in the U.S., in specific areas, there are only three or four operators. That is not really bad as long as the three are equipped to compete. Right now, we are looking at a monopoly emerging in Indian telecom. That will not be good for the consumer.

Shouldn’t the telcos have started making provisions against AGR in their financials from the beginning?

B.K. Syngal: It wouldn’t have really solved the problem, because once you start making provisions, generally the mindset is to accept that ‘we are likely to be in default.’ Provisions are made where it is imminent adverse judgment. In this case, the pendulum has swung either way. Provisions also do not ensure payments would be coming until the entire judicial process gets completed. When Vodafone purchased Essar, they made a provision of something like $3 billion to be paid to the Indian government, which the government has been demanding. It made the provisions, but it has still not paid those amounts, and they are still fighting in the courts.There are other issues here: we are taxing the industry’s success in perpetuity at 33%; we are not leaving the money they make out of the growth for any investibles, like let’s say, broadband, fixed line etc. The government needs to take a hard look at this ‘33% in perpetuity’. The industry also has not been very smart, deliberately I think, to present to the government some spreadsheets to say, okay, you reduce this from 33% gradually, but we will ensure minimum revenue to you from the telecom sector. There can be revenue neutralisation, linked to inflation plus say 200 basis points. There are cases worldwide; for example, Ofcom, the U.K.’s communications regulator, told the government that industry just couldn’t be in a mode of paying windfall profits all the time. So, the industry paid more tax, and if they were not doing well, they got dispensations. Hence, the industry remained in the pink of health. The industry here should ask the government for revenue neutralisation. Why can’t the government suo motu take a decision and look at all the wrinkles dispassionately; like taxation in perpetuity, penal interest while legal battles are going on, etc?

The average revenue per user (ARPU) will have to go up if the industry’s health has to improve. But can it?

V. Sridhar: According to the ITU’s ICT price basket study, India is ranked 49th in the mobile broadband data plans. So, for about 1.5 GB per month on our average data plan, ARPU is at about $4.75 per month, adjusted for purchasing power parity. The world average, according to the GSM database, is about $8.45. We are very low compared to the international average. The ARPU has to go up. Here’s how it could: ARPU can go up based on the content generated or by creating a larger ecosystem, with operators playing the role of not just connectivity and bandwidth providers, but also as solution providers. Telcos can actually tie up with businesses especially in 5G and IoT in order to have other avenues for revenue than the retail sector.

Also, in a market such as India, the retail consumer may not go to the high end so ARPU will have to be compensated for by additional value-added services for business consumers.

B.K. Syngal: Data usage per subscriber per month has grown 43 times in the last three years. In September 2016, it was 0.235 GB per subscriber per month; now it is close to 10 GB. There is what I call tariff rebalancing, that is, how to tariff the data vis-a-vis voice — that needs to be looked into. Tariffing of data is still not being properly carried out. There should be reasonable numbers for data charging. Today, about 60% or so of the long distance calls, whether internal or external, are running on Internet or broadband connectivity. People are hardly making any switch calls. Let there be studies as to how much of revenue has migrated away from the conventional switched business into the packetised or the Internet business. The regulator should then look into the tariffs for both data and voice. There are still a large number of customers who use basic voice service. So, there has to be a tariff for voice as well. So, look at the tariff and stop this obnoxious, ‘free this, free that’ trend. When Jio came into play and gave some one year of some free services, etc., TRAI should have intervened at that stage saying that the operator ‘was not doing anyone a favour’. The cellular industry got seriously bruised as a result of that laxity by authorities.

Given the financial state of some players, is the industry even ready for 5G auctions?

V. Sridhar: We have moved from 1G to 2G, for both of which the operators were in full control and realising revenue. With 3G and 4G, we have seen Internet companies providing over-the-top services, and they have appropriated much value and relegated telcos to normal bandwidth providers. 5G is going to be very different. 5G is not about connectivity and high speed only; it is about creating an ecosystem. For example, in the case of healthcare, it is an ecosystem that would comprise telecom operators, healthcare providers, hospitals, governments, system integrators that provide Internet of Things and machine-to-machine communication. We need to have spectrum so that high bandwidth-intensive applications can be provided to end users. India is poor in allocating spectrum. There are specific spectrum bands which have been pending auction for a while now due to various reasons. We don’t have enough spectrum for operators despite the consolidation that has taken place. Operators need adequate spectrum to provide low latency, high coverage, highly reliable communication services.

As to affordability, the auction methodology we use is appropriate. But what is wrong is the setting up of the reserve price. They have always set the reserve price based upon the winning bid price of the previous auction, which is never done in any other country. A very high price puts off operators. The 700 MHz spectrum, which went unsold in 2016, has remained vacant for the last four years. What have we got? With a lower reserve price, at least that could have been used.

I advocate actually starting with a zero reserve price. Because, the simultaneous multiple-round ascending auction will extract true value from the bidders; it is an excellent mechanism. Why artificially increase the reserve price so that either the spectrum goes unsold, or the operators pay huge amounts, resulting in the winners’ curse?

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B.K. Syngal: The latest count on 5G consumers is something like 100 million worldwide, and 80% of those are in China. Then, there are three technologies today: Huawei-ZTE’s, Nokia’s and Ericsson’s. They are in the process of being standardised. It is the Europeans versus the Chinese. Now with the sanctions, industry is also waiting and watching, as to which technology to choose. They have limited choice, but want technology that is interoperable. Interoperability between networks is a priority. So, operators are asking, ‘why should we be the guinea pigs’? Further, 5G is a bandwidth that has to be used by consumers and consumers must have devices to use that bandwidth. There is also this debate using E and V bands for dense urban areas.

Has anyone discussed health concerns, obstructions and complications? For example, Israel has not adopted the E and V bands yet, because they say there are health hazards. We have to get out of this euphoria and look at practical issues. There is also a debate about the mix of fibre and Wi-Fi hotspots. There were consultations to use satellites to create points of presence, and distribution tributaries to users or connectivity to consumers directly like the new OneWeb satellite system. I believe in applying technology to reach out to the masses.

Let’s not be hung up on 5G technology to provide bandwidths upwards of 100 Mbps. Have no doubt that higher bandwidths are needed, but how to deliver those most effectively and timely, is the question. I have an upgradeable FTTH delivering me 100 Mbps plus; is not that 5G? I think we should wait on 5G auctions, not rush into it. We should educate the government.

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What gives global tech majors the confidence to invest in India, albeit so far in one player, Reliance Jio?

V. Sridhar: Previously, the likes of AT&T or Telstra or Etisalat, would pick up stakes in telecom companies as FDI. Today, it is Facebook, Google and other Internet firms that are putting in money. Why? Because the value proposition is more on the content, and applications are abundant. India’s 650 million mobile broadband subscriber base is a huge potential base for any Internet firm to tap into. So I won’t be surprised if for example, Amazon is interested in picking up a stake in Airtel. Because it will include the synergic operation of e-commerce along with this digital cloud offering as well as connectivity.

B.K. Syngal: In my mind, the game has just begun. As a matter of fact, Google wanted to go with Airtel, it was looking at them to buy stake.

Vodafone has a very close relationship with Google in the rest of the world. So it is a little intriguing that it went with Jio.

B.K. Syngal is former Chairman and Managing Director of VSNL; V. Sridhar is a Professor at International Institute of Information Technology-Bangalore