Rajan Mathews, Director General, COAI, laments that the recent slew of policy decisions is extremely debilitating for an already struggling industry.
B&E: It is being put forward that the incumbents already have enough spectrum and may not bid at all. Won’t this encourage monopoly in the hands of a single operator?
Rajan Matthews (RM): It is not true. In fact, the scarcity of spectrum is affecting roll-out obligations and the Quality of Service of the operators. Being the 2nd largest telecom market in the world, it is actually ironic that average spectrum availability with Indian operators is significantly lower than in other leading markets in the world. Most operators who have been in the market for some time now have a fairly large subscriber base, which needs to be catered to with appropriate Quality of Service and outreach. Lack of spectrum leads to dearth in capacity for serving subscribers and further roll-outs into rural, semi-urban and urban areas; and leads to a substantial rise on the OPEX. In fact, if the operators did not require more spectrum, there would not have been so many representations made by them to the government regarding the high reserve price being set for the auction. The only reason for operators to shy away from the auction would be the exorbitantly high reserve prices that threaten sustainability.
B&E: What are your thoughts on refarming of spectrum against the high prices that have been set?
RM: The entire restructuring of an efficient network, by ripping off the existing infrastructure, disconnecting the connected and then deploying an infrastructure, which is more demanding both in terms of capital as well as space and construction, does not bring any sense of benefit to our minds, whether to the industry, or the consumers.
As per an independent study conducted by Analysis Mason, operators with 900 MHz band will need to replace 286,590 base stations and install an additional 171,954 base stations to provide equivalent coverage on 1800 MHz; which will lead to an incremental capex of Rs.54,739 crores, and incremental annual opex of Rs.11,762 crores. Also, operators will have to write-off existing 900MHz assets at an estimated cost of Rs.22,310 crores. At an industry level, additional capex of about INR 26,653 crores will be needed to deploy new towers to support incremental base stations.
In the scenario that operators with 900MHz spectrum are unable to provide equivalent coverage due to business case and operational feasibility, there is a risk of reduction in geographic coverage by as much as 40%. This is estimated to directly affect connectivity to about 70 million subscribers, and consumers trying to reach them. Also, the business case for a new operator acquiring 900MHz spectrum at the proposed prices will not allow for expansion to rural markets. If incremental investment in refarming and the costs of spectrum are passed on to consumers in the form of higher retail voice tariffs, overall tariffs will go up by as much as 64 paise/minute, with much higher impact in non-metro circles.
B&E: What’s the expected impact on the already high D/E ratio?
RM: It is extremely unfortunate that a slew of policy decisions such as auction of spectrum, one-time fee, refarming etc. are being imposed on the industry when it was already grappling with business viability and sustainability. Such decisions have further increased the financial burden on operators, leaving no scope to absorb the increased costs. It has been brought to the notice of the Government and the ministry that India has one of the lowest EBITDA margins of 29% among emerging Asian economies (36% on an average). Several operators report negative PATs and will not be able to cash break-even in next 5-7 years. Similarly, most operators report a negative or low return on capital employed. Hence, these increased costs will eventually be borne by consumers in the form of higher tariffs for the services.
B&E: It is being put forward that the incumbents already have enough spectrum and may not bid at all. Won’t this encourage monopoly in the hands of a single operator?
Rajan Matthews (RM): It is not true. In fact, the scarcity of spectrum is affecting roll-out obligations and the Quality of Service of the operators. Being the 2nd largest telecom market in the world, it is actually ironic that average spectrum availability with Indian operators is significantly lower than in other leading markets in the world. Most operators who have been in the market for some time now have a fairly large subscriber base, which needs to be catered to with appropriate Quality of Service and outreach. Lack of spectrum leads to dearth in capacity for serving subscribers and further roll-outs into rural, semi-urban and urban areas; and leads to a substantial rise on the OPEX. In fact, if the operators did not require more spectrum, there would not have been so many representations made by them to the government regarding the high reserve price being set for the auction. The only reason for operators to shy away from the auction would be the exorbitantly high reserve prices that threaten sustainability.
B&E: What are your thoughts on refarming of spectrum against the high prices that have been set?
RM: The entire restructuring of an efficient network, by ripping off the existing infrastructure, disconnecting the connected and then deploying an infrastructure, which is more demanding both in terms of capital as well as space and construction, does not bring any sense of benefit to our minds, whether to the industry, or the consumers.
As per an independent study conducted by Analysis Mason, operators with 900 MHz band will need to replace 286,590 base stations and install an additional 171,954 base stations to provide equivalent coverage on 1800 MHz; which will lead to an incremental capex of Rs.54,739 crores, and incremental annual opex of Rs.11,762 crores. Also, operators will have to write-off existing 900MHz assets at an estimated cost of Rs.22,310 crores. At an industry level, additional capex of about INR 26,653 crores will be needed to deploy new towers to support incremental base stations.
In the scenario that operators with 900MHz spectrum are unable to provide equivalent coverage due to business case and operational feasibility, there is a risk of reduction in geographic coverage by as much as 40%. This is estimated to directly affect connectivity to about 70 million subscribers, and consumers trying to reach them. Also, the business case for a new operator acquiring 900MHz spectrum at the proposed prices will not allow for expansion to rural markets. If incremental investment in refarming and the costs of spectrum are passed on to consumers in the form of higher retail voice tariffs, overall tariffs will go up by as much as 64 paise/minute, with much higher impact in non-metro circles.
B&E: What’s the expected impact on the already high D/E ratio?
RM: It is extremely unfortunate that a slew of policy decisions such as auction of spectrum, one-time fee, refarming etc. are being imposed on the industry when it was already grappling with business viability and sustainability. Such decisions have further increased the financial burden on operators, leaving no scope to absorb the increased costs. It has been brought to the notice of the Government and the ministry that India has one of the lowest EBITDA margins of 29% among emerging Asian economies (36% on an average). Several operators report negative PATs and will not be able to cash break-even in next 5-7 years. Similarly, most operators report a negative or low return on capital employed. Hence, these increased costs will eventually be borne by consumers in the form of higher tariffs for the services.
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