Telecom woes and half-baked measures

Why the proposed policy initiatives in telecom may have limited success

pratap

Pratap Vikram Singh | September 5, 2017 | NEW DELHI


#digital governance   #telecom service providers   #telecom policy  
GN Photo
GN Photo

As the telecom sector is mired in financial, regulatory and competition hurdles, and consumers are grappling with poor quality of services and connectivity, the government and the regulator are drafting a slew of policy initiatives to provide redress. The department of telecommunications (DoT) plans to unveil a new telecom policy (NTP) by the end of this year. The telecom regulatory authority of India (TRAI), having done a few rounds of consultations, will soon come out with its order on interconnection usage charges (IUC), a point of contention between the incumbent operators and Reliance Jio – the new entrant.

An inter-ministerial group (IMG) formed by the government to ease the financial stress of the sector, which is reeling under a nearly Rs 5 lakh crore debt, is also expected to submit its report in a month.

Scepticism abounds to what extent these measures would be able to address the core challenges. Whether these would help in putting in place a reliable network across urban and rural India, ensure greater usage, reduce financial distress or encourage investment? Let us take a look at the IUC, first.
 
In simple words, IUC is the fee which an operator, from where a call originates, pays to another operator, where the call terminates. At present, the regulator has pegged the IUC at 14 paise. This means whenever a call from one operator terminates at another, the former pays the latter 14 paise per call.
 
 The rates are revised in two-three years, and historically, have always been reduced. It was in 2015 when the IUC was brought down from 20 paise to 14 paise. This time when TRAI brought a consultation paper on revising the IUC, Reliance Jio demanded that it should be phased out completely, and proposed a bill-and-keep (BAK) model, wherein the telcos don’t charge each other for the call ending on their network. But the incumbents feel that the IUC at 14 paise is already below the cost and hence it should be increased. The incumbents even disagree with the regulator’s way of calculating the IUC. In fact, Airtel chief Sunil Mittal has suggested that TRAI should set a fair and transparent mechanism for calculating the cost.
 
The reason cited by Jio, and those who want to do away with the IUC, is that the telecom network, which has traditionally been a public switched telephone network (PSTN), is now moving towards internet protocol (IP) network. The IUC applies only in the case of PSTN and not IP. Jio’s entire LTE network works on IP.
 
Rajat Kathuria, director and chief executive, Indian Council for Research on International Economic Relations (ICRIER), says that eventually all networks will move to IP. So sooner or later, the IUC is going to get redundant. The TRAI may have to bring in an ‘interim regulation’ wherein it may reduce the IUC, although the definite figure will only be clear after it comes out with its recommendation, he says.
 
Mahesh Uppal, director, ComFirst, a telecom consultancy firm, disagrees. The bill-and-keep model, says Uppal, would be fair, if there was broad parity in the number of calls between the incumbents and the new entrant. At present, most calls terminate on incumbent networks. 
 
“They [incumbent telcos] have invested large sums on infrastructure and customer acquisition. They have legitimate expectation of returns,” says Uppal.
An official at TRAI says that both sides have logic. “The decision usually in such cases is taken at the top,” the official says.
 
Financial sustainability
 
One of the oldest pain points of the industry is the major outgo. The telecom service providers pay about 28 percent of their adjusted gross revenue (AGR) to the government – highest in any industry.
 
The telcos pay during the auction of spectrum. Then they have to pay spectrum usage charges. They also mandatorily contribute to the universal service obligation fund (USOF). Most importantly, the auctions are designed in such a way that prices go up. The conditions attached to the spectrum auction are not sufficient enough to bring down the auction prices. “For example, if the government says whoever bags the spectrum will not only have to ensure that there is increase in net access but also usage in terms of traffic, it will help consumers and grow the market. It makes perfect policy sense.   If you design the auction this way the bids will surely come down,” says Uppal.   
 
The decision, however, has to be taken by the ministry of finance. It will need to decide between upfront revenues from auctions or a healthy and sustainable sector that could have much larger and longer-term impact on the economy, he says.
 
Moreover, the image of the telecom sector in the government as a cash cow must change.
 
Kathuria, who has worked with the TRAI between 1998 and 2006, says that the government should reduce the financial burden on the sector. “Give them [telecom service providers] all that they want. But deal with them firmly when it comes to quality of service and access,” says ICRIER chief.  
 
The IMG, as reported in the media, is likely to propose extension of deferred payment schedule from 10 to 16 years, excluding the two initial years of moratorium. At present, telcos have to pay a part of spectrum auction amount upfront to the DoT and the balance has to be submitted in 10 annual instalments after initial two years of moratorium.
 
The IMG is also expected to propose marginal cost of funds-based lending rate (MCLR) regime over prime lending rate (PLR) regime for interest payments.
 
Uppal says that the mandate of the IMG seems limited; So,it is unlikely to deal with design of auctions.
 
Competition
 
In their presentation, the incumbent telecom service providers accused Reliance Jio of predatory pricing aimed at acquiring greater market share by offering services below the cost. Reliance Jio, on the other hand, has accused Airtel, the largest telco, of providing a customised retention plan to hold back customers, terming its method as “unfair and deceptive”.
 
Moreover, it is unclear whether matters related to competition fall under the domain of sectoral regulator TRAI or the Competition Commission of India (CCI).
 
There are two kinds of issues related to competition, explains Uppal. One is market structure and the other is behaviour of market players. So whether there should be a monopoly or multiple players is about structure. If players in the market indulge in anti competitive price-cutting, it is about market behaviour.
 
Broadly, issues  related to structure should be looked by the TRAI as it is the sectoral regulator. The behaviour part – involving anti-competitive practices – should be looked after by the CCI, he suggests.
 
As of now there is a turf war between the two regulators. CCI chief DK Sikri wrote a strong letter to TRAI chairman RS Sharma, reminding him that the issues for consultation relating to delineation of the relevant market, assessment of dominance and predatory pricing are “issues of determination for the commission”. 
 
 
pratap@governancenow.com
(The article appears in the September 1-15, 2017 issue of Governance Now)
 
 

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