The government has proposed a reduction in the entry fee and licence fee for the long distance sector. While the existing players are crying foul and have demanded compensation for the hefty fees paid by them earlier, the policy has been welcomed by other industry players. Sector specialists share their views on the likely impact of the move on existing players, the end-users and indeed, on the playing field…
What impact will the proposed reduction in entry and licence fees have on the long distance sector in terms of volumes, tariffs, competition, etc.?
Arun Gupta: The existing long distance operators could not have any early-mover advantage because in this business, recovery of investments takes many years, especially in view of the rollout obligations in the NLD licence. The existing NLDOs have paid licence fees of Rs 1 billion and performance bank guarantees of Rs 4 billion (now reduced to Rs 2 billion) towards phased rollout obligations. Large investments have been made by them for creating NLD infrastructure, keeping in view the rollout obligations in the existing licences. They have together rolled out over 125,000 route km of a pan-India optic fibre network and have invested more than Rs 80 billion.
Vishal Malhotra: The new policy proposes a reduction in the entry fee to Rs 250 million (from the existing Rs 1 billion) and in the annual revenue share to 6 per cent (from 15 per cent). It also proposes waiving the rollout obligations for NLD operators. Similarly, for ILD operators, the new policy proposes a reduction in the entry fee to Rs 25 million (from the current Rs 250 million) and in the annual revenue share to 6 per cent (from 15 per cent) as well as waiving the rollout obligations.
Archana Sassan: The proposed reduction in entry fee and revenue share will lead to a reduction in cost points for long distance operators, which will, in turn, enable them to charge lower tariffs. This will be welcomed by subscribers. However, the government should ensure that only serious players enter the market so that there is no degradation in quality of service. The new policy, which is awaiting approval by the Telecom Commission, proposes a reduction in the licence fee and entry fee. From the end-user’s point of view, more players would increase competition, resulting in an increase in the volume of calls, lower tariffs and hopefully better services. However, it would be pertinent to note that notwithstanding the increase in the number of operators providing NLD/ILD services, non-implementation of the carrier access code (CAC), which gives the end-customer the right to choose the NLD/ILD operator while making a long distance call, would not increase the choice for subscribers. It would be the access providers who would have more choice in terms of choosing a particular NLD/ILD operator. Any benefits accruing to the access providers as a result of the aforesaid may be passed on to the consumer.
Rajat Sharma: The NLD/ILD space has been dominated by three players ?? Bharti, Reliance Infocomm and VSNL ?? since early days. While other domains in telecom have witnessed competition, real competition has not been witnessed in the carriage business. This proposal to reduce the entry and licence fees for NLD and ILD operators will give an impetus to growth in the carriage business by attracting more competition. The entry of new players can take prices southward and increase traffic volumes by optimally utilising the current high capacity networks.
Mahesh Uppal: I would expect there to be a major fall in the prices of long distance calls, especially international. Volumes should rise too, but by how much, only time will tell since the elasticity of demand data is still not conclusive.
Will the playing field be impacted for existing players who have paid huge fees earlier?
Arun Gupta: The business case built on the entry conditions for the existing operators as determined by TRAI and DoT were subjected to many policy changes in the last three years, which has eroded their licence value. Some of these are: allowing direct connectivity between ILDOs and access providers, bypassing NLDOs; permission to ISPs to offer VPN services; and direct inter-circle connectivity between Mumbai and Maharashtra, Kolkata and West Bengal, Uttar Pradesh (East) and Uttar Pradesh (West), and Chennai and Tamil Nadu.
Policy objectives like CAC and carrier pre-selection have not been implemented even after three years.
We may recall that while allowing migration of basic service operators (BSOs) to a unified access licence regime, differential licence fee was collected from BSOs who opted for migration to the unified licence. Further, cellular operators were granted a reduction of 2 per cent in their revenue share vis-a-vis new entrants for a period of four years from April 1, 2004. These measures were taken to ensure a level playing field while increasing the competition.
Vishal Malhotra: No doubt the existing NLD and ILD operators had the advantage to enter the market first, but their opposition to lower entry barriers for new players is not surprising. These operators have paid huge licence fees and specific rollout obligations have further required them to invest in expensive infrastructure. These concerns should be addressed realistically and rationally.
Archana Sassan: From the point of view of the existing players, the proposed policy change is not good news. After paying an entry fee of Rs 1 billion, financial bank guarantee of Rs 4 billion and revenue share licence fee of 15 per cent coupled with rollout obligations, the policy incentives for the new players would be a sore point for the existing players. Without doubt, there would be nonparity in the level playing field.
If implemented, the new policy is likely to create a situation similar to the WLL-cellular dispute which cost the industry heavily. It is therefore imperative that the government tread this path carefully. Competition and a level playing field should be implemented in a manner that leaves no player in a worse-off situation.
It is pertinent to note that the policy change may not ensure competition in the true sense, as the consumer’s choice is limited in the absence of CAC. Most subscribers are ignorant about who carries their STD/ISD calls and are at the mercy of their respective operators. Further, “equal access” of exchanges of basic and mobile operators to all long distance carriers is also non-existent. This results in NLD operators like Bharti being unable to connect their NLD network to the basic services of BSNL, thus denying 40 million BSNL customers their choice of an NLD carrier.
In this situation, adding more operators is not really necessary as healthy competition amongst the current four operators is possible. Implementation of CAC would ensure healthy competition, by giving a choice to the customer instead of to the access provider. The government should reduce the licence fees of the incumbents so that NLD/ILD charges come down; implement CAC so that subscribers have a choice of operators; and enforce equal access so that NLD/ILD operators can be interconnected.
Rajat Sharma: If new players come in, the revenues of existing players will surely be impacted.
However, the field will not be impacted to a great degree since the incumbents’ presence for the past four years has already yielded some return on capital to recover the costs incurred by them. Also, their network penetration is far superior to what a new player can implement and hence, benefits can be leveraged from this. So, there truly is no disadvantage the existing players will suffer from.
Mahesh Uppal: The impact may be marginal. But, there is an issue of principle here. Any unilateral change in the terms of a licence during its tenure should be done after a competent agency does a calculation of the financial impact. This should take into account not just fees paid but also investments made and revenues obtained as well as the current value of the licence in the new technology environment.
Are the incumbents justified in asking for compensation?
Arun Gupta: Long distance operators are requesting that the existing players should not be “worse-off” as per the government’s policy. The government has always followed a policy of enabling a level playing field for the existing players while introducing new players.
Services that are technologically possible should be allowed while at the same time ensuring a level playing field to all service providers. In light of this, the compensation is seen as fair and just.
Vishal Malhotra: It is true that the existing long distance operators had the first-mover advantage. At the same time, it is also true that they incurred huge “losses” due to the high entry fees and stringent rollout obligations. Keeping this in mind, the government should work out a compensation mechanism, wherein the said “losses” can be offset against future licence fees. This will obviate payment of cash compensation.
Archana Sassan: The existing operators have approached DoT for a compensation of around Rs 28 billion in view of the proposed cut in the licence fees for new players. Whether or not asking for compensation is justified would depend on how much the four incumbents have gained by entering the market and getting the first-mover advantage, which would not be available to the new players. This is an issue that needs to be carefully examined keeping in mind the investment made by the existing players and their earnings in the last few years.
However, it is getting clearer that the government will not grant any compensation to the incumbents, although other incentives like proposed revenue share licence fee reduction and rollout relaxations may be applied across the board to the existing players also. The government will do well to remember that not doing so would definitely encourage litigation and adversely impact telecom growth.
Rajat Sharma: Even during the earlier case of reduction in the annual licence fee for the first and second cellular mobile operators, one did not witness any disbursement of money by the government. Even in this scenario, the existing players can expect an adjustment for extra costs incurred by them in their future licence fee payments.
Mahesh Uppal: If there is a loss caused, compensation is justified. However, the magnitude of the loss is not obvious. It must be determined through a reasonably rigorous calculation. This is neither difficult nor time-consuming if there can be an agreement on the methodology. The compensation need not be cash. It could be in the form of waiver of future licence fees.
How does the reduction fit into the communication minister’s “OneIndia” plan?
Arun Gupta: The plan needs to be designed suitably whereby no one is adversely affected.
Vishal Malhotra: The minister’s OneIndia tariff plan promises to do away with the distinction between local and long distance calls. This will lead to a reduction in long distance call prices. With the proposed relaxed norms for new operators, competition is set to increase, leading to a further dip in long distance call prices.
Archana Sassan: The OneIndia plan promises to erase the distinction between local and long distance calls. From that perspective, the proposed policy would be a realisation of the plan. Any decrease in the licence fee would be welcomed by subscribers as call costs are expected to decrease consequently.
Rajat Sharma: The reduction seems to fit into the minister’s OneIndia plan.
Mahesh Uppal: The minister’s proposal for cheaper NLD and ILD licences is, of course, linked to the OneIndia plan. However, OneIndia needs to be achieved more carefully than is being proposed. The top-down approach is never the best in a competitive market and can cause many distortions. The ideal way is to reconcile the current NLD and ILD licences with the new licence regime after computing the impact on the existing players. Long distance markets do not present complex policy or regulatory issues although the rather contradictory access deficit charge regime artificially raises long distance charges. Once it is merged with the Universal Service Obligation Fund, as many have advocated, the NLD/ILD licence fees could be removed altogether, as in most liberal markets. Then, as in other competitive markets, our market too will deliver a flat rate across the country.
If rollout obligations are waived, will there be any incentive to cover the rural areas?
Arun Gupta: Any change in the rollout obligations would not impact reach to the rural areas since even today, it is the access provider who serves the rural areas though they may use the infrastructure of the NLDO.
Vishal Malhotra: The proposed “waiver” of the rollout norms would cast no obligations on long distance operators to extend their network to non-profitable rural areas. To address this, the government could consider extending the deadline for fulfilling the rollout obligations instead of waiving them completely for new operators.
Archana Sassan: Rural teledensity continues to lag behind the urban areas by an embarrassingly huge margin even today. Rural teledensity is just about 2 per cent while urban teledensity is 31. In metros like Delhi and Mumbai, the teledensity is 40-50 per cent. Operators do not prefer to roll out their networks in low-income rural areas because they find it difficult to fund their expansion due to inadequate returns/profits. This has led to a huge “digital divide”, and a new class of technology haves and have-nots.
If India has to achieve the goal of bringing a quarter of its population under the telecom network by 2007, it has to achieve an overall teledensity of 22.98 per cent (rural teledensity of 15 per cent and urban teledensity of 31 per cent).
Under these circumstances, relaxation of rollout obligations would be a major setback and would enable non-serious players to enter the market.
Private players with solely commercial interests would not contemplate investing in the rural areas. Hence, to ensure some increase in rural teledensity, it is important that rollout obligations are not relaxed for any operator ?? existing or new. The government may also consider implementing universal service obligations more effectively.
Rajat Sharma: Current market forces and business cases will not tempt any telecom player to go to the rural areas and incur high costs in return for low revenues. The incentive has to be engineered by the government, for example, the USO Fund should be aggressively allocated and released to players to ensure investment in infrastructure for rural connectivity.
Mahesh Uppal: The rollout obligation in NLD/ILD licences has little to do with rural communications where the problem is the missing “last mile” to the end-user. If anything, a fully deregulated NLD/ILD market will especially help rural users. There are few phones in rural areas that anyone could possibly call. So, low local call rates help urban people much more. This is often missed. The calls made from villages are predominantly long distance, usually to get in touch with members of families who have left their villages to earn a livelihood far away within the country or overseas.
