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Agenda for Change: Industry identifies top priorities for the new government

July 03, 2014

telecom sector witnessed subdued growth in the past two years due to policy and regulatory uncertainty, and cancellation of 2G licences of several operators. Although, in 2013, the government issued guidelines on several regulatory matters, implementation remains limited. With the formation of the new government, industry stakeholders are expecting a revival in sector growth. Industry experts share their views on their expectations from the new government regarding policy and regulatory issues in the telecom sector…

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Kunal Bajaj

Currently, the basic problem in the telecom sector is the lack of confidence because of the drastic changes in policy and regulations from time to time and particularly in policies that are set to be implemented retrospectively. The case of Vodafone, for instance, shook up a lot of people. Also, we have a situation where the courts have stated that the Comptroller and Auditor General of India will be allowed to audit the balance sheets of telecom companies, when there is already an official auditor assigned by the Telecom Regulatory Authority of India (TRAI) for the task.

While the government made substantial progress with regard to clarity on spectrum auctions over the past couple of years, we still do not have a proper road map on spectrum availability. For instance, the government has not given any timeline for auctioning of spectrum in the 800 MHz and 900 MHz bands. It is also unclear whether more spectrum in the 2100 MHz and 2300 MHz bands will be made available. Therefore, companies are making decisions based on the concluded auctions, where  the price of spectrum in the 900 MHz and 1800 MHz bands rose quite high. Moreover, there is an element of uncertainty with regard to the licence fee, because different auctions with varying amounts of spectrum have had different revenue sharing rules. This is an issue that needs to be addressed.

Spectrum trading and sharing need to be allowed in order to optimise resources and costs. On the merger and acquisition (M&A) front, the requirement that the acquiring company has to pay the market price for the spectrum which was allocated through administrative methods, basically means that the acquisitions are going to happen in a specific scenario. The acquirer is likely to look for spectrum in specific circles, rather than the target company. So it is good that there is some clarity but the policy is not structured to trigger a lot of M&As.

There are a lot of issues for the new government to address, and we cannot expect everything to be resolved quickly. We will have to wait and see what happens.

Mohammad Chowdhury

After being the darling of foreign investors and the poster child of economic growth, the Indian telecom sector fell from grace over the past few years due to corruption, scandals, cancelled licences, tax disputes, debt crises and tariff hikes. Now, there is a chance to inject fresh momentum into the sector.

Here are three areas for consideration:

•Provide voice services to the masses: With rural telecom penetration below 50 per cent, the new government should encourage the industry to invest more money in rural network expansion and use the unutilised Universal Service Obligation (USO) Fund.

•Regain the faith of investors: Much has been achieved in the past year to demystify telecom regulations. Clarifying the M&A norms will remove the final hurdles and facilitate more deals, which will fuel investment in the sector.

•Mobile-enabled services, local application development and innovation: The Indian telecom sector has led in analytics and pricing but lacks ingenuity and achievement when it comes to innovations that could serve a nation in need of better communication. A science and education policy to encourage innovation in telecom, technology and IT is a long-term project. More initiatives should be taken to drive m-health and mobile money to scale faster.

Umang Das

Recognising the importance of the tower industry, the former government had in 2012 brought the telecom infrastructure sector under the harmonised list of infrastructure subsectors. The Department of Telecommunications has already sought clearance for concessional loans with a longer tenor of 12-15 years. The telecom sector is reeling under a massive debt of over Rs 2,500 billion and the provision of viability gap funding (VGF) is the key. This facility will reduce the capital cost of projects by credit enhancement and make it viable and attractive for private investments through supplementary grant funding. In addition, VGF will be necessary to meet the green energy targets mandated by the government.

Given the substantial capital investment required, it is imperative to encourage private sector participation, and tax incentives play a significant role in attracting these investments. The government provides a tax holiday under Section 80IA of the Income Tax Act, 1961 to infrastructure companies in the power, ports and other sectors. A similar tax holiday should be extended to the telecom sector.

Assured grid power should be made available to telecom operators on a priority basis at industrial/favourable rates. This is crucial as telecom licensees are required to maintain network uptime of 99.95 per cent. Hence, in the absence of reliable grid power, the sector suffers and its costs increase, especially in the rural areas.

The government needs to remove impediments at mobile tower locations through enforceable rules under the Indian Telegraph Act, 1885. (Clause 7[e] empowers the government to make rules to lay down the conditions and restrictions subject to which any telegraph line, appliance or apparatus for telegraphic communication shall be established, maintained, operated, repaired, transferred, shifted, withdrawn or disconnected.)

Rohan Dhamija and Ashwinder Sethi

The telecom industry has witnessed a lot of challenges in the last five years, including licence cancellations, high spectrum prices and tax uncertainties. This, coupled with the hypercompetitive nature of the market, has led to the exit of new entrants, Etisalat and STel, while the incumbents are finding it difficult to maintain profit margins and invest in new technologies like 3G and 4G at the same time. Given the investor- and business-friendly outlook of the new government, the telecom industry has a lot of expectations from it. Policy and regulatory reforms such as a clearer and rationalised tax regime, timely auctions, favourable M&A rules and allowing spectrum sharing and trading will help get the industry on an upward trajectory.

Indian telecom companies are heavily taxed with 25 per cent-30 per cent of an operator’s revenues from a circle going to the government as service tax, licence fee, and graded spectrum usage charge. There have also been issues of unfair taxation policies, which have led to faith in India’s investment climate dwindling. The former government’s amendment of the tax laws with retrospective effect, which brought the Vodafone-Hutch deal of 2007 under the tax ambit, is an example of this. The new government should thus look to implement clear and transparent taxation policies, and rationalise taxes to be in line with what operators pay in other countries around the word, in order to restore confidence in the sector. This will also help operators increase the investment that they can make in improving their current network and adopting new technologies.

Another major issue adversely affecting the telecom sector is spectrum uncertainty. Spectrum across multiple bands (700 MHz, 800 MHz and 2100 MHz) is expected to be auctioned within the next five years. However, operators cannot formulate their strategies since there is no clear and certain road map for spectrum release. This has resulted in an artificial scarcity of spectrum, thus inflating the prices during auctions. Laying out a clear spectrum road map and setting judicious reserve prices will go a long way in helping operators formulate their long-term spectrum strategies and plan their capex expenditure accordingly. The new government should also look to formulate better M&A policies, as this will help the industry become more efficient.

Himanshu Gupta

The telecom sector has witnessed a slight slump in the last few years mainly due to the rigid regulatory policies. We welcome the new government and are hopeful that the telecom scenario will witness an overhaul, with major changes in the regulatory and policy scenario. The former government laid down tough security regulations, especially for foreign telecom companies. This was a setback for the ecosystem, as most of the infrastructure was built by these foreign companies. Telecom is a very capital-intensive industry with the ever-reducing price of services. The opex burden for new operators is very high with the huge cost of spectrum paid upfront. We are hopeful that the new government will rationalise these policies and support telecom players.

We expect that the new government will streamline the spectrum sharing and trading guidelines, which will help boost the overall telecom ecosystem. We also want the new government to introduce improved norms that will facilitate broadband penetration in the country and ensure these services reach the masses, thus contributing to the goal of achieving digital inclusion. While we appreciate the government’s focus on boosting the country’s infrastructure, the telecom sector needs to receive special attention for infrastructure development to ensure greater rural penetration. Policies to promote rural network expansion should be put into place; this will not only help achieve rural telecom penetration but also help implement the National Optical Fibre Network (NOFN) project, which aims to connect 250,000 gram panchayats. From the equipment manufacturing standpoint, we appreciate measures adopted by the government to boost local manufacturing like preferential market access; however, we hope the government will be considerate to foreign equipment vendors as well.

M&A guidelines have been the most discussed and sought-after policy initiative. The policies related to M&As should be more liberal to synergise the industry through consolidation and operation optimisation.

Rajan Mathews

The year 2014 is a crucial one for the telecom industry as it looks forward to the new government and its policy initiatives for development of the sector. We are hopeful that the new government will help us maintain a long-term, stable, predictable, development-oriented and investor-friendly policy regime. This will recognise the long-term nature of the investments and long maturity requirements of the sector. The key areas of long-term policy focus are: stable licence terms and conditions, effective M&As, security, green telecom targets, taxation, technology roadmap, etc.

The key areas of focus for us would be:

•Spectrum: The government should make spectrum in the 2100 MHz, 1800 MHz, 800 MHz and 700 MHz bands available to the industry in conformity with globally harmonised bands. Most of the spectrum in these bands is currently lying unutilised with various government agencies. In India, contiguous spectrum is not available with the operators because spectrum has been allocated to them in small quantums at various time intervals and hence the current allocation is non-contiguous. Rearrangement of frequency spots should be carried out between the DoT/Wireless Planning and Coordination and the operators to ensure contiguity of spectrum. Without this, roll out of 3G and 4G/long term evolution networks will be impaired.

The Cellular Operators Association of India support the use of auctions to allocate spectrum. However, it is important to determine the elimination of licence fees and high spectrum usage charges given the fact that the market price for spectrum has already been paid.

•Improve the financial health of the industry: There is an urgent need to rationalise the taxes and levies in the sector, which aggregate to 30 per cent of the revenues earned by telecom companies, as compared to about 5 per cent in other Asia-Pacific countries. Licence fees and spectrum usage charges (SUC) account for about 12 per cent of the adjusted gross revenue. Indian mobile operators have the highest regulatory costs, including service tax, licence fee and graded SUC. These multiple levies discourage private investments that are required in the sector, especially to meet the broadband connectivity objectives of the government, thereby deterring any multiplier effect on the economy. The increase in the price of spectrum acquired through methods other than auctions, as required under the M&A guidelines, is a damper.

Introducing a flat SUC of 1 per cent over the next two to three years should provide some relief to operators. The USO Fund levy of 5 per cent must also be gradually reduced to 1 per cent as operators meet the revised contractual roll-out obligations which now cover rural areas.

•Broadband and new technologies: For enabling world-class data services in the country, the industry requires regulatory, tax and policy stability, development of infrastructure such as power and towers, availability of adequate spectrum, and customer centricity (affordable tariffs and gadgets, customised content, etc.). The industry also needs to work closely with the government, international standards bodies, over-the-top service providers and civil society to promote security while ensuring the legitimate rights of consumers. There is a need to have rational security policies that protect stakeholders and do not stifle innovation and progress.

The government should facilitate new and efficient technologies such as M2M and cloud computing which are more efficient, lower cost, important for the development of the small and medium enterprises sector, and help build better and more efficient governance.

•Infrastructure status: Though the segment has been awarded infrastructure status, there is a need to implement the benefits of the status for the industry in parity with the other infrastructure sectors. These benefits include tax holidays, reduced interest on debt and sourcing of funds from special funding agencies. The government should facilitate faster infrastructure roll-outs through uniform procedures/approvals and low-cost right-of-way (RoW) charges on telecom towers, fibre-optic cable networks, etc.

We hope to see much better times in the coming years with policy and regulatory initiatives by the government and TRAI that will have long-term benefits for the industry.

Romal Shetty and Sathish Gopalaiah

With the new government being viewed as a harbinger of hope, the entire value chain has high expectations for the sector’s revival. Spectrum management, policy uncertainty, stringent mergers, licensing and M&A norms, a complex RoW framework, along with the high direct and indirect taxes levied on the stakeholders, are some of the major issues that need government intervention. In addition, the government should bring in greater financial inclusion by promoting the mobile money mechanism within the country.

 

Key expectations

Spectrum management continues to top the priority list for operators. The government needs to draw up clear plans regarding the release of unused spectrum to meet the growing demands of operators. Further, optimal pricing, a well-defined national auction strategy and the relaxation of spectrum sharing and trading norms can improve the overall business scenario.

The much-awaited M&A norms did little for the sector, which is congested with over 10 operators. However, a re-evaluation of the spectrum acquisition fee clause can potentially trigger telecom sector consolidation.

Investment continues to be another pain-point of the sector. Even though the National Telecom Policy (NTP) outlines some capex-intensive programmes such as rural penetration, commissioning of the national broadband network and making India a hub for telecom equipment manufacturing, little has been achieved. Promoting public–private partnership programmes towards these objectives could help enable investment and growth.

However, a lot of infrastructure policy-related work remains to be done in order to facilitate investments. The multi-tiered governing model for the RoW, results in significant roll-out delays and increased ancillary costs. A sovereign framework can ease these issues and enhance the footprint in under-serviced areas. Further, India’s ailing government incumbents need to adopt sustainable business models. A helping hand from the government, through capital infusion and restructuring exercises can help them survive the cut-throat competition and meet the NTP objectives.

Another set of stakeholders suffering the turmoil in the sector, are the tower companies (towercos). The infrastructure status has failed to yield benefits for the towercos. Although they are on the 3G/4G roll-outs, various financial and non-financial incentives are also expected from the new government.

The way forward

The sector at large is in dire need of a stable and transparent business-friendly policy regime. Being the catalyst for socio-economic development in the country, the new government needs to address the issues in a phased manner. Once the clouds clear, the sector has a strong potential to emerge as the sunshine sector again.

 

 
 

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