The telecommunications bailout is not a silver bullet

Recent government measures to depress Indian telecommunications have brought much hope to the besieged industry. Reforms ranging from the moratorium to increasing foreign direct investment could greatly help telecommunications operators. But a thorough reality check shows that the challenge of pulling the industry out of the doldrums could be much greater.

On the one hand, the high costs associated with spectrum could further depress revenues. Indian telecommunications companies spend a third of their income on acquiring and holding waves, according to a study by the GSM Association. Even excluding spectrum fees, which the government has now abolished, spectrum should remain prohibitive.

Example: the reserve price for waves in the frequency band that makes 5G possible is ??492 crore per MHz, much higher than the prices determined by the auctions in the countries. A statement by Bharti Airtel to a parliamentary panel last year put these 5G prices at ??7 crore per MHz in Austria, ??35 crore per MHz in Australia and ??70 crore per MHz in UK.

Mobile tariffs can hardly compensate for these costs: India has some of the lowest tariffs in the world. While voice services are indeed free, data has bottomed out since Reliance Jio entered in 2016. A GB of mobile data costs an average of $ 0.68 in India, compared to $ 4.72 in South Korea. $ 3.33 in the US and $ 1.42 in the UK.

Recent reforms offer a temporary pause, but long-term sustainability will depend on the government biting the bullet on its own high statutory levies and on operators able to raise tariffs to economically viable levels.

Liquidity relief

Four-Year Moratorium on Adjusted Gross Revenues and Spectrum Fees Gives Heavily Indebted Industry Valuable Cash-Flow Respite ??41,000 crore a year, shows Nomura’s research. The liquidity support gives companies, in particular Vodafone Idea (VI), the leeway to invest in network upgrades and whet the appetite at the next spectrum auction.

The government has also given companies the option to convert interest due at the end of the moratorium into equity, signaling willingness to take a stake in VI if it fails to tidy up its house by then. . The moratorium also improves prospects for Bharti Airtel, whose tower arm Indus Towers has VI as a key customer.

However, companies that take advantage of the moratorium will accumulate higher interest (8-10%) on deferred payments, which will further increase the debt burden afterwards. This means that if the industry gets a break from reforms, the moratorium could, in fact, push the liquidity crunch in the sector for four years.

Upward revision

Debt reduction requires operators to boost their revenues through tariffs. But the industry average revenue per user (ARPU), excluding interconnection usage charges and roaming settlement, has fallen to ??74.88 per month in 2019, from ??123 in 2015, the last year before Jio. Tariffs were only increased last year, bringing the ARPU to ??94.87. Data revenue fell much more sharply, with average revenue per subscriber per GB dropping from a high of ??226.30 in 2015 to a meager ??10.93 in 2020.

A ??1 increase in ARPU can add approximately ??1,000 crore in the industry’s operating profits, according to a Crisil report last year. The growth of the industry can only be sustained if the short-term monthly ARPU reaches around ??200 per month, and possibly at ??300, say experts.

The government has so far been reluctant to set a floor for telecommunications tariffs. Given the current structure of the industry, a tariff increase is only possible if the industry collectively takes the plunge.

Vodafone recovery

The crisis in the telecommunications sector has often centered on the plight of Vodafone Idea in recent years. The moratorium gives the company a cash cushion of $ 4.3 billion, according to Investec Capital Services. While improving liquidity will help the operator stay afloat for now, its future depends on its ability to reduce debt while making new investments in 4G expansion and 5G deployment.

According to Credit Suisse, Vodafone Idea needs to more than double its current monthly ARPU to reach around ??240 by 2025-2026 to reimburse contributions to the government, assuming it is able to retain 260 million subscribers.

The government has shown its intention to maintain the current structure of the industry consisting of three private operators and one public operator. Vodafone Idea must now convince investors and its subscribers of the possibility of a revival.

Puneet Kumar Arora is Assistant Professor of Economics at Delhi University of Technology.

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