Walking the tight rope, in today's times with telecom

During the early 1990s when liberalisation started altering the economic dynamics of the country, many sectors opened up to global influences and knowledge exchange, be it the banking, financial services and insurance or the information and communications technology (ICT) sector.

It is at this time, that the telecom services sector witnessed an uptick in proliferation, led by privatisation, on the back of increasing demand and dismal performance by then existing state-owned telecom service providers.
Buoyed by the new developments and recognizing the need for a well-entrenched telecom infrastructure, the government unveiled the National Telecom Policy 1994 (NTP 94), which invited private players to participate and chart the future growth path of the sector.

During this time, only four metros were initially awarded licenses for providing cellular mobile services. The fees prescribed then were small fixed ascending fee for the first three years and a variable annual fee, from the fourth year onward. This annual fee was very high, which put into question the viability of the approach.

However, in the next phase of licensing in January 1995, tenders were summoned for cellular and fixed telecom services in 20 circles or states of India. The selection of the company in this instance was to be through a single-stage bidding process.

Few upheavals
At this juncture, a few upheavals took place. The hope of a favourable post-liberalisation period, overall attractiveness of the Indian market due to its low tele-density, and high latent demand for telephones and a growing middle class, shaped an environment where many Indian companies with no prior experience started bidding excessive amounts for the circle licenses.

Overall, 34 licenses in 18 circles attracted Rs 200 billion for a 10-year license. By 1999, many bidders could not cough up such high fixed fees and stumbled on the edge to insolvency. This was the time, when the government introduced NTP 99 to address the problems of the industry.

National Telecom Policy 1999 (NTP 99)
When NTP-99 was introduced, it not only replaced the high cost fixed licensing regime with a lower cost licensing structure through an entry fee and revenue sharing mechanism, but it also provided for greater degree of competition and more flexibility in the choice of technologies.

Migration was one of the most ground-breaking and landmark decisions of the government with no close parallel either in India or for that matter, anywhere else in the world. The timely and responsive intervention of the government demonstrated its vision and foresight and clearly stated the commitment towards the reforms process.

The decision to allow migration was not an easy one, but the government did not hesitate to take this bold step. In fact, it can safely be stated that migration was one of the key factors that was responsible for the complete transformation of the Indian telecom sector, which is now widely looked up to as the flag bearer of the Indian liberalization process.

The beneficial impact of the new regime could be seen almost immediately in terms of lower tariffs, increased coverage and growing subscriber base. NTP-99 and enabling policy measures provided the much needed boost to the Indian telecom sector.

NTP 99 was followed by enabling policy measures so as to strengthen the telecom sector. The original TRAI Act and subsequent amendment of the TRAI Act on 25 January 2000 resulted in considerable strengthening of the regulator and greater clarity on its role and powers. The amendment also put in place a separate dispute settlement mechanism in the form of the Telecom Dispute Settlement and Appellate Tribunal (TDSAT) to expeditiously deal with and resolve issues relating to the telecom sector.

Era of growing competition
As a part of the migration package which was offered to the service providers, the GSM service providers surrendered their Duopoly rights and the same was replaced by increased competition. The 3rd and 4th GSM operators in every state/telecom circle were introduced in 2001-02. The Government owned fixed line service providers, BSNL and MTNL, were deemed to be the third cellular mobile operator in every service area.

Looking at the growth in mobile telecom and its market potential, other non-mobile telecom service providers, primarily fixed line service providers, who did not have the license to provide fully mobile services, started providing CDMA based services.

Both, the fixed service tender as well as the license, carried explicit provisions prohibiting fixed operators from offering mobile services. The reason for the express prohibition on mobility in the fixed licenses was that, in addition to being allowed to lay cable and wires, the fixed operators were also allowed under their license to use wireless in the last mile (WLL-wireless in local loop) to offer fixed services.

In spite of the prohibition, the fixed service providers started providing fully mobile service. What followed was a prolonged process of Litigation in the Telecom Tribunal and the Apex Court of India. Eventually, the GSM industry was persuaded by the Government to withdraw the case from the Supreme Court.

So as to resolve the issue, the GSM service providers were offered a reduction in the Licence Fee burden. A 2% reduction in the revenue share (from 12%, 10% & 8% depending on the service area) was offered to GSM service providers. A further 2% reduction in revenue share for the 1st & 2nd GSM operators in Circles was also allowed, subject to the caveat that the revenue share percentage will not fall below 5% (the USO contribution).

CPP regime introduced
Further, with the coming in of Calling Party Pays (CPP) in 2003, the number of telecom subscribers witnessed a massive surge. Earlier, both the caller and the receiver were charged per call basis. The introduction of CPP changed all that. As a result, incoming calls became free, and thus, the affordability of cellular mobile services was further enhanced.

The CPP also helped remove one of the greatest barriers in the uptake of cellular mobile services as it encouraged increased subscription amongst the low-end and marginal consumers. Introduction of CPP was an inflexion point which led to a sharp growth in the number of mobile subscribers in India.

In 2004, for the first time the country started thinking about broadband and a policy on broadband was formulated. The government also started identifying spectrum beyond 2G so as to achieve the broadband targets of the country.

Further, the 3G and BWA (Broadband Wireless) auction happened in 2010, wherein, TSPs bid very high amounts, which raised concerns around the eventual financial health of the telecom sector. While on one hand, the RBI was tackling inflation by containing liquidity in the system, telcos started facing problems in generating finances. Apart from paying the license fee, telcos were also supposed to invest in rolling out infrastructure. However, with global markets in bad shape, operators’ access to financing narrowed.

Licence cancellation
The crisis in the sector deepened when in February 2012, the Supreme Court of India ruled on a public interest litigation (PIL) related to the 2G spectrum case. The court declared the allotment of spectrum unconstitutional and arbitrary, cancelling the 122 licenses issued in 2008.

Those folks whose licences were cancelled had to bid for spectrum through an open auction process stipulated by the Supreme Court.

The regulator, based on orders from the apex court, initiated open consultation on spectrum auction. Based on the recommendations, auctions were held in 2012 and 2013. However, both these auctions failed due to the high spectrum prices. The operators whose licenses were cancelled, as well as other licensees could not bid successfully due to exorbitantly high spectrum prices. The Government concurrently announced the NTP 2012, so as to enhance penetration and coverage of service and boost the adoption of broadband in India.

In 2014, once again the auctions were conducted. This time many existing mobile licenses were coming up for renewal and the operators were forced to bid as their initial spectrum was put up for auction under the garb of reframing of spectrum. To get back their original spectrum so as to cause least inconvenience to the subscribers, operators had to bid for their spectrum at high prices. This further intensified the already existing financial distress of the industry.

Disruption occurs
However, the biggest disruption occurred when Reliance Jio Infocomm entered the market fray in 2016. An already competitive industry became hyper-competitive, with plummeting data charges and rock-bottom tariffs. The untenable market scenario led to closures and consolidation.

Videocon, Sistema and other players sold their spectrum. Reliance Communications closed its 2G and 3G services, including voice, only offering 4G data services after its mounting debt and unsuccessful merger attempt with Aircel. On the other hand, the latter filed for bankruptcy because of high debt and negligible revenue.

Even hitherto healthy entities such as Vodafone and Idea Cellular were forced to merge operations, emerging as India’s largest TSP in subscriber base and revenue terms. Due to the consolidation, where once, more than 10 TSPs vied for market share we now have only four Pan-India players left in the market.

The market shakeup has led to Reliance Jio having 31% revenue market share while Vodafone-Idea is a close second at 30% share and Airtel following with 28%. BSNL and MTNL, the two public sector operators, come a distant fourth with around 11% share.

Debilitating hyper-competition leading to record low tariffs, falling revenues, rising debt, a high burden of levies and significantly squeezed margins have led to financial stress in the telecom sector. The sector is currently reeling under a cumulative debt of Rs 7.64 lakh crores, while the overall revenue is now less than Rs two lakh crores. The mounting losses and tough market conditions have meant that the number of players have shrunk from 10 to just three private operators plus one PSU.

Latest body blow
The latest body blow to the industry came via a Supreme Court ruling asking TSPs to pay Rs 92,000 crore to the Government on the AGR (adjusted gross revenue) issue. The industry believes its very viability is threatened due to this ruling, particularly when the TSPs are presently undergoing severe financial stress and have reported record losses.   Ailing, cash-strapped TSPs will hardly be in a position to support the ambitious plans of broadband and network expansion – not to mention the nation’s Digital India mission. All these objectives need robust cash flows, but in the present dire financial straits, TSPs do not have surplus funds to spare for such plans.

In turn, it should be recalled that the telecom sector supports a broad-based digital value chain, which will also be impacted by its cascading problems. When job creation and employment numbers are of critical concern in all sectors, the closure of any TSP would hardly bode well for the industry at large.

There is no doubt that the central government has been undertaking initiatives to help the industry. For supporting and reviving the industry, the Centre had introduced the new, National Digital Communications Policy 2018, which is aligned to its Digital India mission.

Recently, the Union Cabinet also announced Rs 42,000 crore payment deferment on spectrum dues for TSPs. This comes in the form of a two-year moratorium on these dues and the number of instalments being increased from 16 to 18.

On their part, after years of low and unrealistic tariffs, TSPs are now increasing tariff to shore up bottom-lines. This move is aimed at fostering a stable competitive ecosystem where additional investments and steady, sustainable long-term goals will help them work in support of the national mission of transforming India into a digitally-empowered, knowledge-based economy.

Even after this hike, the tariffs in India are still the lowest globally and the amount that consumers will be paying for utilising world class communication services will still be much less than what they were paying three years ago. In FY 2016 and FY2017, the ARPU was Rs 126 and Rs 118 while the ARPU now, post hike, will still be as low as Rs 112.  Thus, the telcos will be careful to ensure that the tariffs still remain affordable for all categories of customers, across the country.

The industry has noted the Honourable Prime Minister’s challenge of covering all “uncovered villages” within a year to ensure no part of the nation remains without communication services. With 565,000 mobile towers and more than 2.2 million BTSs (Base Transceiver Stations), the industry offers last-mile connectivity across most parts of India. Right of way policy (RoW)To further enhance connectivity speedy roll out of telecom towers and overall infrastructure is a must.

To hasten the deployment of underground (optical fibre) and over ground (mobile towers) infrastructure in India, the RoW policy was introduced by the DoT. As per its rules, RoW looked to standardise administrative expenses across the country to the maximum of Rs 1000 per km for fibre and a maximum of Rs 10,000 for overhead towers. This rate is much lower than the existing 1,000-1,500 per running meter (which amounts to Rs 10 lakh per kilometre) – charged by many states. Also, there is to be a negligible one time administrative fee that covers the cost of clearance/permit that are levied for allowing authorisations for the deployment of telecom infrastructure.

As a part of the renewed focus, 15 states and 2 Central Agencies have been aligned with the DoT RoW until now, including Rajasthan, Haryana, Odisha, Maharashtra, Assam, Arunachal Pradesh, Tripura (only fee part), Jharkhand, Meghalaya, Madhya Pradesh, Manipur, Karnataka, Tamil Nadu, Uttar Pradesh, Uttarakhand, Ministry of Defence (MoD) and Ministry of Environment, Forest and Climate Change (MOEFCC).

However, the pace of tower installations is facing major challenges in states such as Gujarat, Punjab, Himachal Pradesh, and West Bengal. It is a fact that a conducive RoW policy will massively bring down delays that arise from variable and complex permission procedures laid down by local authorities, mitigate non-uniformity in levies and collect necessary approvals from state departments.

Furthermore, the State policy needs to be disseminated to all the line ministries in the state for the implementation and adoption at all levels. More towers will translate to improved call quality and bring down incidences of call drops, which will in turn boost the Government’s flagship Digital India program, promote Smart cities and enable financial inclusion, in true sense of the term. A conducive RoW policy will also enable speedy roll-out of 5G.5G opportunitiesIn the past, the nation has made relatively smooth transitions from fixed landlines to 2G, 3G and then 4G.

Where the last one is concerned, adoption rates were comparatively fast. As 5G looms on the horizon, though, there are concerns about its spectrum availability and pricing, which need to be more rational. It may be noted that the current suggested reserve price of 5G spectrum is seven times above existing prices in overseas economies. Such high floor rates would only make 5G unviable for TSPs.

Realistic pricing in 5G
Realistic pricing in 5G would benefit all stakeholders since its potential is vast. To elaborate, by 2026, an estimated USD 619 billion in revenues is likely for operators catering to 10 select sectors via 5G. These comprise manufacturing, automotive, public transport, public safety, energy and utilities, healthcare, agriculture, financial services, retail and media and entertainment.

The scope from 5G is almost limitless. Once implemented commercially, 5G can bring about a slew of disruptive changes that could open new employment and entrepreneurial opportunities, some of which were once considered implausible. AI-linked technologies such as smart transport and traffic management, smart manufacturing, smart agriculture, smart healthcare, connected vehicles, drones and telemedicine or remote consultation between doctors and specialists, are already operational in India and abroad.

In all these spheres, 5G is the best option for seamless, speedy and robust connectivity. In addition, other emerging technologies such as AI, AR, VR, IoT and M2M, can only proliferate on a back of a robust 5G infrastructure. In the mission to make India a knowledge-based economy, 5G can be the prime mover, driving a fully-networked society where digital dominates personal as well as professional landscapes.

Clearly, the telecom sector is akin to a golden goose of economic activity. Irrational pricing will kill its will to survive and thrive, whereas rational rates would ensure faster pan-India adoption of 5G while also facilitating upstream and downstream benefits for all stakeholders.

Accordingly, what’s required is a conducive and enabling regulatory environment where TSPs can make the requisite investments through healthy bottom-lines, generating a high tide of prosperity benefiting the industry at large, the Exchequer and citizens across the country. But all these benefits can only accrue if the telecom industry is itself thriving.

-- Rajan S. Mathews

-- The author is Director General, COAI.