In a letter addressed to the department of telecommunication (DoT), the telecom operators including the three major players viz. Airtel, Vodafone Idea or Vi and Reliance Jio have submitted a charter of demands. These include:-
(i) reduce the license fee from 3% of adjusted gross revenue (AGR) to 1%, USOF (Universal Service Obligation Fund) contribution from 5% of AGR to 1%, spectrum usage charge (SUC) from 3-6% (depending on when the operator acquired spectrum in respective bands) to a uniform 3% for all operators; (ii) extend the tenure of leased spectrum to operators from 20 years to 40 years; (iii) moratorium of 7-10 years for payments (in addition to 2 years already given);
(iv) reduce interest rate on all outstanding deferred payment liabilities (for acquiring spectrum) and outstanding AGR dues from 9% -10% to 4% or less; (v) only telecom revenue be considered for levying license fee and SUC; (vi) early completion of the TRAI (Telecom Regulatory Authority of India) consultation paper on ‘floor price for tariffs; (vii) waiver of financial and performance bank guarantees (BGs).
Reportedly, the Government has agreed to (a) reduce SUC by 2% ‘prospectively’; (b) allow additional moratorium of 2 years for payments; (c) consider telecom revenue only for AGR calculation ‘prospectively’ and (d) reducing BG on AGR dues and deferred spectrum payments (DSP). Additionally, it has kept an option open for “converting a portion of Vi dues to equity after 4 years”.
The above relaxations will ease cash flow of the operators, though there is scope as well as strong justification for doing more particularly with regard to levies. Under the current environment wherein, the operators are buying spectrum – unlike in the past when it came bundled with the license – there is no logic in collecting license fee and SUC also. There is also no valid case for continuing with USOF levy (meant to fund building rural infrastructure) all the more when there is un-used money in the Fund (50%).
Even so, a drastic reduction in the levies won’t help in extricating a major operator (read: Vi) from the financial disaster it is currently facing. The real culprits are the policies and regulatory environment that have favored one player even while targeting others.
On the policy front, even as other operators paid gargantuan sums for obtaining license and spectrum, RJio got these at a throwaway price. It acquired an internet service provider (ISP) license from an unknown entity, Infotel Broadband Services Pvt Ltd (IBSPL) in 2010, and got with it pan-India broadband wireless spectrum (BWA) by paying Rs 12,837 crore. In 2013, this was converted into a unified license (UL) to provide voice services also by paying an additional fee of a mere Rs 1,658 crore – a price that telcos paid in 2001.
On the regulatory front too, the TRAI went out of its way to favor RJio. In September 2016, in a bizarre move rarely seen before, RJio entered the market with ‘free’ and ‘unlimited’ voice calls and low-cost data—a brazen case of ‘predatory’ pricing. The incumbent operators were forced to reduce tariff drastically to match RJio. Post – revision, the tariff in India at less than US$ 1 per GB was a fraction of what customers in other countries pay (US$30 in Japan, US$18 Korea, US$15 UK and US$10 in USA)
In February 2018, TRAI amended the Telecom Tariff Order (TTO) to define a firm to be predator, if in a relevant market (circle), (i) it offers services at less than its average variable cost (AVC) and (ii) controls 30% market share or above’. During 2017-18, even as all firms were selling below AVC, incumbent operators had a market share > 30% whereas, RJio had a share of < 30%. In the eyes of the regulator, the former were predators even as the latter was not!
The amended order being ‘one-sided’ and ‘discriminatory’ was set aside by the Telecom Disputes Settlement Appellate Tribunal (TDSAT). But, by the time TDSAT gave its verdict (December 13, 2018), the damage was already done.
As a result, incumbent operators, who were making profits prior to RJio’s entry, started incurring losses. Several operators downed shutters while others were bought over. Today, there are only three private operators viz. Vi, Airtel besides RJio – down from over a dozen prior to 2016. The hike in tariff – by all three operators in December 2019 – by up to 50% may have given some breathing space but, at < US$2 per GB, the rate continues to be woefully low.
The other major factor that pushed Vi to the brink (besides Airtel) was the October 2019 order of the Supreme Court (SC) requiring them to pay “unpaid” dues towards licence fee and SUC. The “unpaid” dues resulted from a stance taken by DoT (upheld by the SC) that for determining these levies, apart from telecom services revenue, AGR should also include revenue from non-telecom services viz. rent, profit on sale of fixed assets, dividend, interest etc.
(In case of unpaid dues from public sector undertakings (PSUs) such as Gas Authority of India (GAIL), etc the SC objected to the DoT raising demand on the basis of the above formula. In other words, it was fine with exclusion of non-telecom revenue for PSUs. For it to treat private operators differently was anomalous.)
The demand pertained to a period of over a decade being the ‘difference between (a) the levies amount calculated by using both telecom and non-telecom revenue and (b) actual payments made by operators (based on telecom revenue only)’. Together with interest on differential amount, plus penalty and interest on penalty, this works out to Rs 58,000 crore for Vi (Rs 36,000 crore for Airtel).
This has seriously undermined the finances of Vi and Airtel even as the impact on RJio was negligible at Rs 13 crore. While, Airtel has somehow managed to come out of the morass (helped to some extent by December 2019 tariff hike), Vi continues to be in doldrums due to the sheer magnitude of AGR and DSP liabilities totaling Rs 160,000 crore. The concessions granted by the Government do little to address the huge handicap faced by Vi.
Left to fend for itself, the company will go into liquidation leaving only two operators which does not augur well for a population of 1.35 billion. The global experience shows that in markets with fewer operators, tariffs tend to be high. Under a duopoly, the risk of a steep increase will remain. The way forward is to give a special package to Vi say by converting a portion its dues to equity but this should be done ‘now’ instead of waiting for 4 years (as proposed by DoT).
Given its huge customer base of around 255 million, massive network and quality of assets, potential for growth in telecom services, Union Government should go for majority ownership and control over Vi in lieu of its dues from the latter. However, this should be treated as one-off event; for efficient and profitable running, the firm must be ring-fenced from the bureaucracy.
Meanwhile, the Government should nudge TRAI to finalize its recommendations on ‘floor price’ for tariffs promptly and take steps to strictly enforce it. It should make sure that in the name of fostering competition, there is no repeat of blood bath.