Vodafone-Idea Merger Is Signal To Government That It Can No Longer Play Shylock To Telcos

The Vodafone-Idea Cellular “merger” should be seen by the government as a wake-up call. The merger, which may well come unstuck at some point of time over the next 18 months if things don’t pan out, is more a cry of distress than a celebration of future success. It is the clearest pointer yet that the government’s policies towards the industry are weakening it rather than nurturing it.

The telecom industry is flying without fuel, and the only reason it has still not crashed is its in-built momentum. A paper plane can fly as long as there is some air current holding it up, but once that stops, it comes down. The force that keeps telecom still flying is the growing customer base; the forces dragging it down are debt (government-induced debt resulting from high spectrum prices) and regulatory overload. The government’s policies are simply not conducive to consolidation or long-term industry health. It is not even in its own best interests as it is about to kill the golden goose.

If the 2G scam showed the rapacity of crooked individuals to make private bounties from underpriced spectrum, the shift to transparent auctions has now involved a lurch in the opposite direction, where the government is the greedy pig. Far from seeing spectrum as a long-term annuity for revenues, the government is seeing it as a source of annual windfalls that can be blown up on populist projects. Nothing illustrated this better than the first windfall of 2010-11. In the first transparent sale of spectrum based on competitive bidding, former finance minister Pranab Mukherjee collected more than Rs 106,000 crore from 3G and BWA airwaves. But, without a thought, he blew up the entire money in oil subsidies in one year.

Spectrum windfalls are taking the wind out of the industry’s sails, and ultimately will deplete government revenues too.

Consider how this “windfall” is generated. According to the latest figures, the telecom industry has accumulated debts of over Rs 4.5 lakh crore, most of it due to the prices paid for spectrum. The government sees this as revenue, but most of the money came from borrowings, mostly from public sector banks, which are 70 per cent of the banking system. Put another way, government has essentially lent the industry money to pay for spectrum.

If it is government-owned banks’ loans that constitute spectrum “revenues” (and the same applies to coal auctions, or airport privatisation), this rigmarole is unsustainable unless industry profits are adequate to service the loans while leaving some spare cash to invest in customer acquisition and improving services. If it can’t, it is government banks which will be left holding the sack of bad loans. The spectrum windfalls will vanish into bank recapitalisation needs.

But government policies do not recognise this essential conflict between the need for short-term revenues and ensuring their longer-term sustainability. It wants to collect money from the industry at every opportunity.

For example, even after paying for spectrum, there is a spectrum usage charge of 6 per cent of adjusted gross revenue. Then there are payments under the universal service obligation, which is essentially a subsidy to BSNL to offer services in rural areas. Then the government wants to collect revenues even when operators want to share spectrum they already own. The liberalised spectrum sharing norms are liberal only in the government’s own imagination. Little wonder the industry prefers roaming pacts over spectrum sharing at high costs. And in case of mergers, the norms suggest that if any of the merged entities happened to receive spectrum allotted in the past at below market prices, the difference between the actual prices paid and the current market price has to handed over to the government.

While there is no getting away from auctions, surely this payment can be spaced out over the life of the spectrum allocation (20 years) instead of collecting it substantially upfront over 10 years?

The industry has called for the creation of a spectrum holding company where various companies can pool their owned spectrum and the bulk capacity leased according to individual operators’ needs. Spectrum can be shared just like towers, most of which are now owned by tower companies and not network operators.

The logical pathway away from high debt and towards higher viability is to allow more telecom companies to operate as virtual network operators (VNOs, for which the Telecom Regulatory Authority of India already has norms), leaving spectrum, towers, and exchanges to be operated by other specialist players. Not all telecom companies may choose to become VNOs, but some of them surely will. It will mean telecom operators will own the customers, but little of the network, spectrum and hardware that makes it all possible.

In this scenario, government will be able to auction spectrum in smaller doses in line with rising data demand and expected revenues, but it can’t collect regular windfalls.

Vodafone-Idea ‘merger’ is a pointer that the government needs to change policies from being a rent-seeker to a gardener who sows to reap over a lifetime. What it will lose in terms of short-term revenues it will gain from annuities and income taxes on healthy profits.

The government’s essential dilemma is the same as Shylock’s in Shakeapeare’s Merchant of Venice: it can’t get its pound of flesh without spilling lots of blood. Moral: do it gently and carefully.