The Centre could yet ride to the telecom sector’s rescue

In 1998, Indian private telecom companies faced bankruptcy due to a crippling fixed-fee license model. The government’s 1999 policy shift to a revenue-sharing model saved the sector. Now, with a Supreme Court ruling on unpaid license fees, the sector faces crisis again, requiring government intervention.

This article was first published in The Mint. You can read the original at this link.

In 1998, the Indian telecom sector was on its last legs. The experiment of allowing private companies into the telecom sector, which had previously been the exclusive preserve of the government, had come at a cost that was proving too great for them to bear. Though they had made tremendous investments in rolling out brand new mobile telecom networks in the country, they were finding it hard to recover their costs. On top of that, they were each required—under the terms of their agreement with the government—to pay a crippling [[licence fee]], which, given their constrained means, was proving to be unsustainable. They were staring down the barrel of bankruptcy.

The root cause of all this was the model that the government had chosen to calculate the mobile telecom access provider licence fee. When prospective licensees bid for telecom circles, they were required to do so by proposing a fixed licence fee per subscriber that they would pay to the department of telecommunications (DoT). Though they put in bids on a per-licensee basis, the actual licence fee that they had to pay the government was calculated as a fixed lump sum based on the government’s projected estimates of the number of subscribers these licensees would have every year.

In fact, the number of subscribers was far lower than had been projected, and year-on-year customer acquisition grew at a much slower pace than the government predicted it would. This meant that the capital investments that these new private telecom companies had made in anticipation of having to support a large number of subscribers ended up being grossly underutilized, and the average revenue per user (ARPU), which was the revenue basis for the government’s licence fee projections, was far lower than anyone anticipated. According to a study at the time, close to 17% of subscribers had not used their cell phone at all and 37% had bills lower than Rs. 500 a month. By July 1999, private telecom companies owed DoT huge sums in licence fees, bringing them to the brink of bankruptcy.

Recognizing that the fixed-fee approach to licence fee determination was not working, the government took the unprecedented step of admitting its mistake. It recognized that to allow the telecom sector to grow, it would need to come out with a new policy to set this right. The National Telecommunications Policy of 1999 replaced the [[fixed-fee licence]] model with a new [[revenue-sharing model]]. With that, rather than paying a fixed-fee based on revenue projections, telecom licensees had to pay a percentage of actual revenue as licence fee. This method of calculation had a more direct bearing on the business of the telecom licensees than the earlier model.

That the telecom sector benefited from these policy changes is evident for all to see. Today the Indian telecom industry is one of the fastest growing in the world, adding new customers at a rate that other countries find hard to match, all the while offering some of the lowest tariffs and the most innovative products and services available anywhere.

Today, the telecom sector again finds itself on the verge of bankruptcy. The revenue-sharing model required telecom companies to pay licence fees calculated on the total gross revenues of the company, including non-telecom revenue streams. Though this was better than the previous fixed-fee model, telecom licensees disputed the need to pay licence fees on non-telecom revenues, and have, for about two decades, only paid licence fees on their direct telecom revenues.

This dispute was recently argued before the Supreme Court. Unfortunately for telecom companies, the apex court interpreted the licence agreement strictly, and ruled in favour of the government. As a result, the three remaining telecom companies were required to pay a cumulative Rs. 92,000 crore to the government by way of unpaid licence fees, penalty and interest. Last week, the Supreme Court castigated the government for failing to collect the amount due, prompting DoT to call for all dues to be paid up by midnight on Friday.

While the telecom companies have only themselves to blame for assuming that the court would look past the plain language of the licence and rule in their favour, the result of all this is that the telecom sector is once again on the ropes.

The government has no option but to step in and take steps to revive the sector, just like it did in 1999. All it would take this time is a simple amendment of the licence agreement to ensure that licence fees should only be calculated based on revenues directly earned from the telecom businesses of the licensee, and not on the total business revenues of these companies. This interpretation is better aligned with the purpose of licensing and will allow the government to fully realize the value of the spectrum that it has licenced. It is probably the only measure that will revive one of the few indisputable success stories of the Indian economy’s liberalization era.

That said, while these measures would address concerns of the telecom industry, it will not deal with the fact that existing telcos would still owe the government Rs. 92,000 crore of unpaid licence fees of the past, together with penalties and interest on amounts owed before the licence agreements were amended, unless the government decides to make such an amendment retrospective in effect. It’s not as if the Centre has never done that before.