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Regulatory Challenges: Key concerns and initiatives

March 01, 2012

Despite the initiatives taken by the Telecom Regulatory Authority of India (TRAI) to remove hurdles for the telecom infrastructure segment, the segment continues to face regulatory and policy obstacles, thereby impacting the growth and deployment of tower networks across the country. For instance, tower companies have been subjected to multiple clearances and levies by local civic authorities and state governments. There have been several instances of unnecessary delays by local authorities while granting permission for erecting towers and developing infrastructure. Further, policy guidelines vary across the country, with each state having its own set of regulations. This leads to inconsistency in procedures as well as imposition of varied charges for the installation of towers.

Other key challenges faced by infrastructure providers include inadequate power supply, high costs of backup power, theft of diesel, and low availability and accessibility of alternative power solutions. The lack of grid power availability in remote regions continues to compel tower companies to rely on diesel, increasing their operational expenditure.

To ease the situation, in 2011, TRAI released two sets of recommendations – on telecom infrastructure policy and on the approach towards green telecommunications. According to the recommendations on telecom infrastructure policy, all Category 1 infrastructure provider (IP-1) companies will be brought under a unified licence regime. Thereafter, these companies would be allowed to install and share their active networks. Other clauses of the policy broadly include granting infrastructure status to the telecom tower segment, offering tax benefits for IP-1 companies under Section 80 IA, strengthening the scope of mobile virtual network operators, and dealing with the heavy charges imposed by local authorities for the installation of telecom towers.

The recommendation regarding grant of infrastructure status for the telecom tower segment was a long-awaited one. The segment is capital intensive and most tower companies face difficulty in raising funds due to high borrowing costs and volatility in the equity market. Infrastructure status would entitle these companies to tax incentives. Currently, the government provides tax holidays and other provisions under Section 80 IA of the Income Tax Act, 1961 to infrastructure companies in sectors like power, natural gas and ports. While telecommunications is an essential infrastructure, companies involved in building telecom infrastructure are deprived of such tax benefits. Infrastructure status would, moreover, address the ambiguities in the property tax terminologies related to the sector, wherein, in some cases, towers are taxed as an infrastructure property and in others as buildings. The status would also promote investments in rural areas and incentivise private sector companies to participate in telecom infrastructure projects.

Currently, there are no mandatory design specifications for telecom tower construction. This leads to companies adopting customised designs based on their own preferences and requirements. The TRAI recommendations call for standardisation in the design of towers, which would be developed by the Telecommunications Engineering Centre (TEC). Besides, the regulator recommends that the Department of Telecommunications (DoT) should address the issues pertaining to electricity connections for tower sites, in-building solutions, setting up cable landing stations and active infrastructure sharing, among others.

While most of these recommendations have been accepted by the industry, there is major apprehension with regard to bringing infrastructure providers under the unified licensing regime. Currently, IP-1 companies are not issued licences under Section 4 of the Indian Telegraph Act, 1885. As a result, these companies cannot seek right-of-way. In late 2011, the Telecom Commission accepted TRAI’s recommendation that tower companies, along with infrastructure providers and internet service providers, be brought under the revenue sharing regime. This would mean that these companies would have to contribute about 8 per cent of their adjusted gross revenue as licence fee. Currently, tower companies are not subject to any revenue sharing.

The decision has met with strong opposition from industry lobbies and infrastructure providers. Tower companies claim to have helped the Indian telecom sector achieve unprecedented growth. To make this possible, they have made huge investments, which will generate returns over a long term. With the prevailing tenancy ratio of 1.5-1.6 tenants per tower, companies claim that they are yet to reach break even. Thus, these companies do not see the levy of any fee as justified.

In addition, the Tower and Infrastructure Providers Association (TAIPA) has pointed out that imposing a licence fee on infrastructure providers would increase the segment’s annual payments by several billion. As it is, TAIPA notes, the tower business is under severe pressure with an estimated outstanding debt of around Rs 1,000 billion.

However, TRAI believes that in the light of ongoing and future technological developments, operators should have the flexibility to provide any or all kinds of services under a single umbrella or converged licence.

Discussions are still ongoing between the regulator, the telecom ministry and operators to resolve these issues. At a recent meeting, Minister of Communications and Information Technology Kapil Sibal asked the telecom industry to provide suggestions on several key issues so as to push a second round of reforms in the  sector. The key issues include granting “essential services” status to telecom infrastructure, tax holidays (under Section 80 IA) for infrastructure providers, uniform guidelines for state governments on telecom infrastructure creation and maintenance, effective utilisation of telecom infrastructure with innovative technologies; adoption of standards for all types of towers used in telecom, and sharing of active and passive infrastructure.

To encourage green telecommunications, in April 2011, TRAI made recommendations to promote the deployment of energy efficient technologies in order to reduce carbon emissions by the sector. As per the new rules (approved by DoT), it is mandatory for telecom companies to use renewable sources of energy for powering their towers. Telecom operators are required to ensure that at least 50 per cent of all telecom towers in rural areas and 20 per cent in urban areas run on hybrid power (a combination of renewable energy and grid power) by 2015. The move aims at reducing carbon emissions that are a result of the increased dependence on diesel. Currently, over 65 per cent of a tower’s electricity requirement is met by diesel generator sets. Further, the mandate requires that by 2020, 75 per cent of rural towers and 33 per cent of urban towers should utilise hybrid power.

However, the government’s plans for powering telecom towers through renewable energy sources have hit a roadblock with industry bodies and operators opposing the idea. The key issue under consideration is the lack of renewable energy sources and tower companies have no intention of setting up a generation system. It is observed that tower companies prefer to use an operational expenditure-based model rather than a capital expenditure-based one. They do not want to undertake high investments and generation costs or take the risks that come with generating green energy. Instead, these companies want the government to ask renewable energy service companies to supply electricity while they pay for the usage.

Other recommendations include certifying all telecom products, equipment and services within the telecom network by 2015. The certification would be done by TEC. Service providers are required to adopt a voluntary code of practice, which would encompass energy efficient network planning, infrastructure sharing, deployment of energy efficient technologies and adoption of renewable energy technology to reduce the carbon footprint. Further, service providers are required to declare the carbon footprint of their network operations twice a year to TRAI. They also need to evolve a carbon credit policy with the objective of achieving a maximum of 50 per cent over the carbon footprint levels of the base year (2011) in rural areas.

Going forward

A telecom infrastructure provider contributes about 70 per cent of the total capex required to set up a site by the operator. This contribution makes the infrastructure segment an important part of the telecom business. Addressing the issues and challenges faced by infrastructure providers will enable continued investment in this sector.

 
 

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