Telecomm industry – in ‘self-massacre’ mode

Arundhati Bhattacharya chairperson, State Bank of India [SBI] – India’s largest bank – has sounded alarm bells over troubles facing the telecommunication industry due to “highly unsustainable levels” of debt of mobile companies. The industry’s debt to the banking sector is estimated at Rs 400,000 crores.

In a letter to telecom secretary, Aruna Sundararajan, Bhattacharya stated “the stress in the sector has reached highly unsustainable levels after the entry of new players and launch of free services, which led to erosion of EBITDA [earnings before interest, taxes, depreciation and amortization] of telecom service providers.” The gravity can be gauged by looking at following numbers.

The total annual cash outflow of industry is Rs 178,000 crores which includes interest payments: Rs 43,000 crores; loan payment: Rs 50,000 crores; spectrum related deferred payment: Rs 20,000 crores and annual capital expenditure: Rs 65,000 crores. As against this, the total EBITDA of the sector on an annualized basis is Rs 65,000 crore. This leaves a deficit of Rs 113,000 crores.

Bhattacharya has sought immediate intervention to stem the slide. She has sought “deferred payment” for spectrum purchases to be aligned to the life of spectrum holding which is 20 years. Against the current payback plan where they need to pay for spectrum in 10 years after a two-year moratorium, this may be changed to repayment in 15 years with moratorium of five years.

She has also sought rationalization of “regulatory charges”. This includes abolition of 5% license fee taken towards Universal Service Obligation (USO) Fund. Further, GST should be levied @5% as against 18% approved by GST Council [this demand has been rejected by the Council].

Even if the government were to accept both the demands, this will reduce their annual burden by about Rs 23,000 crores [license fee: Rs 13,000 crores; spectrum charge: Rs 10,000 crores]. It won’t be of much help as even after this, the industry would be in deficit of Rs 90,000 crores. The crux of the problem lies elsewhere.

This is due to entry of a Greenfield 4G operator with aggressive tariff plans viz. ‘free’ and ‘unlimited’ voice calls and low-cost data. Reliance Jio [RJ] launched its introductory offer in September, 2016 for free – both data and voice for 90 days which was extended by 3 months. From April, 2017, even as voice calls continue to be free ad infinitum, the data is charged at throwaway price Rs 50 per GB.

This was a very tempting offer not only for new customers but also impossible to resist even by existing customers registered with incumbent players. Fearing migration, those players reduced their tariff drastically to match RJ. Post-revision, in India, tariff has plummeted to less than US$ 1 [compare this with US$30 in Japan; US$18 in Korea; US$15 in UK, China and Germany; US$10 in USA; US$7.5 in Spain; US$6 in South Africa].

At such rock bottom tariff, it was inevitable that almost all companies would bleed. RJ sees nothing wrong in its pricing strategy which it argues is in sync with Modi’s grandiose plans for pan-India broadband connectivity. Low tariff helps increase in coverage especially majority of the poor. It sounds appealing and the stance has been endorsed by telecomm minister. The argument is fallacious.

The public interest is not served merely by keeping price low. It is equally important that companies should be able to provide services on a ‘sustainable’ basis and maintain ‘quality’. If, their financial health is not in good shape, how will they be able to ensure this? Already, call drop is a major issue and this is because they are not spending enough on building required infrastructure.

Imagine, if, banks were to insist on timely payment of all their dues [they have every right to] and so does government with regard to license fee, spectrum charges etc, service providers will collapse. With this, access of mobile services to public will be denied. The free voice call [albeit for life time] and less than a dollar data plan will become a pipe-dream!

But, companies know that the political establishment won’t let this happen. So, they have petitioned for relief and even banks have lined up in support due to fear of their loans turning NPAs [non-performing assets]. The government has promptly set up an inter-ministerial panel. It is currently having deliberations with various stakeholders and is expected to submit recommendations soon.

Considering the far reaching ramifications, Modi – dispensation will be tempted to grant relief and also force banks to take a hair-cut. But, this will be patently unfair to the tax payer who ultimately foots the bill.

The problem is solely the creation of service providers. Among them, the lead is taken by the new player. There could not be a more brazen example of ‘predatory’ pricing with sole aim of snatching away customers from incumbent players. When, a service is priced much below cost, what else is it?

Ideally, the regulator Telecomm Regulatory Authority [TRAI] should have nipped it in the bud. But, it saw nothing wrong in this highly objectionable practice. Still worse, the Competition Commission of India [CCI] – on a petition filed by incumbent operators – has held that this is not a case of predatory pricing. It sees nothing wrong in Reliance group using resources from other segments to cross-subsidize operations in telecomm. It opines that incumbent players are well established and capable of standing up to the new player.

If, everything is so hunky-dory and service providers could have slugged it out – without any negative consequences on their financial health – then, why are they bleeding? Why are they seeking help from government? Why banks are worried about their loans?

If, a wrong has been done, the only sustainable way to move forward is to undo it. A correction process can be initiated only when companies recognize that ‘there are no free lunches’. Their services cannot be likened to government supplying food at Rs 1 per kg [under Food Security Act] wherein, the entire excess of cost over this is met as subsidy from the budget [though, this too is not desirable in view of huge fiscal ramifications]. The telecomm companies should avoid becoming a captive of this mindset. They should recognize that theirs are private businesses and need to sustain on their own. And, the government must not abet them by endorsing their actions.

Team Modi should say ‘no’ to requested concessions [those will only bleed the exchequer and banks]; instead, it should goad them to revise data tariff to reasonable level and shun the practice of free voice call.