Jim <<They E-maled me and told me they had several tenders but as you know no orders to date. Much is wrong with their economy.>> The Indian economy is only one aspect holding back the Indian wireless market; more problematic, however, are the current costly regulations the Indian Govt. has enacted. Follows is a mobilecomms article. I'm told that these costly regulations are about to come down. The Indian Govt. isn't about to stand idely by and let the cellular market be completely destroyed due to it's unheard-of extensive and costly fixxed user fees. Once those fees come down (to rival their neighbors - expected now the first part of this year), India's wireless market may boom like it's neighbors. It's obviously VERY difficult for current Indian operators to impliment new systems when they're struggling to pay for the systems currently in place (due primarily to licensing fees which account for 40% of operational costs):
(The following is a CLEAR case of government bungling. It's just sad to see this thing still go on in today's world market economy. Note Swisscom's CEO's opinion: <<Jeffrey Hedburg, director of Swisscom International. Yet, should government policies change, Hedberg is bullish about India and has placed two Swisscom executives as CEO and CFO in the joint venture.>> The bullish is there; costly govt. regs MUST come down.)
Uncertain future for Indian cellular
Mobile Communications International Issue 57, January 1999
By Nitin K. Shankar
Three years after the first cellular call was made, the original spirit of optimism amongst Indian cellular operators has given way to gloom and uncertainty.
The Indian cellular industry has run
up losses of over Rs25 billion ($600 million) to date with the figure growing by almost Rs2.5 billion every month.
This situation has occurred because the licence fees payable to the Indian government are way out of proportion to revenues. During the bidding stage, most operators had projected an annual revenue of Rs20,000 ($470) per subscriber based on a monthly usage of 250 minutes. Due to a far lower usage than predicted as well as lower airtime rates, revenues cover just 25 per cent of licence fees. Thus, most cellular companies are in arrears in the payment of their licence fees.
Licence burden
While the operators erred in committing to high licence fees during the bidding stage, the fact is that licence fees in India account for about 40 per cent of an operator's costs—as against six per cent in Singapore. Unfortunately, the government is moving very slowly to correct this situation.
A typical example is the situation of the eight metro operators in the cities of Calcutta, Delhi, Bombay and Madras who are now obliged to pay an enhanced licence fee of Rs6,023 ($143) per subscriber from the fourth year of operation. Unlike the first three years during which licence fees were a fixed cost, it is now the single largest variable cost in a cellular operator's cost-sheet.
Modi Telstra, the country's first cellular operator based in Calcutta, missed the August 1998 deadline for paying its fee. None of the other operators have paid up. “Actual revenues are around Rs12,000 per subscriber,” says C. Karunakaran, vice-president of BPL Mobile. “This means that we cannot sustain this licence fee burden.”
Metro operators have requested that licence fees be readjusted to link to their revenues. D. R. Mehta, CEO of RPG Cellular, one of the Madras operators, believes that “15 per cent of an operator's revenue is a more pragmatic levy than a flat rate”. The Ministry of Communications has yet to take a decision on the issue.
The operators in the regions (called circles) are in even greater trouble, as their revenues are also way below projections. They had urgently asked the government for two concessions: an extension of licence period from 10 to 15 years and a two-year moratorium on the payment of licence fees.
While the government has agreed to the extension of the licence period, it has rejected the other, more crucial, demand for a moratorium on licence payments. This decision came as a blow to those cellular operators who are facing a severe financial crisis and were looking for temporary relief measures.
Like the metro operators, the circle operators have been demanding a shift from licence fees to a revenue-sharing mechanism. The Department of Telecommunications (DoT) will be placing its recommendations before the Telecom Regulatory Authority of India (TRAI) whose decision would be binding on all operators. With the entire process moving at a snail's pace, many operators risk going out of business.
Actually shrinking
The licence fee uncertainty is such that the industry is actually shrinking instead of growing. When growth peaked in December 1997, it was expected that the industry would have one million subscribers by March 1998. A month later, the industry was still nearly 85,000 short of the mark.
From around 559,000 subscribers in April 1998, the base of metro cellular subscribers has now dropped to 447,000. “This is on account of deliberate pruning of defaulters, as we can ill-afford to pay licence fees for subscribers who default on their bills,” says Sandip Dang, head of marketing at RPG Cellular.
The real problem is that DoT, the licenser, regards private cellular operators as competitors rather than partners.
A powerful anti-privatisation lobby within DoT has been initiating moves to make life difficult for cellular operators. Recently DoT barred cellular operators from public call office (PCO) services, which are booths offering mobile communication services to the public. Such cellular PCOs provided operators with an additional source of revenue, and Koshika Telecom, which operates more than 800 PCOs in Uttar Pradesh (West) and Uttar Pradesh (East), has been asked to close them down or lose its licence. Koshika is appealing this decision, and the outcome is still not known.
Cellular operators also pay DoT retail access charges for mobile-to-fixed line calls, and for some operators this amounts to half the amount invoiced to mobile subscribers for local calls. In addition, DoT does not share long distance income with operators on calls made by mobile subscribers. “Unless the DoT is willing to subsidise long distance and international calls, our average revenue will not grow substantially,” says Fergus Wilmer, CEO of Spice Telecom, the operator in the Karnatak and Punjab circles.
DoT has also encouraged MTNL, the public sector operator in Delhi and Bombay, to enter as the third cellular operator in these two cities. The TRAI, however, disallowed MTNL's entry, contending that this violates the terms of the licence agreement. Delivering the order, TRAI chairman S. S. Sodhi said that it is mandatory for the government to consult it over the “need and timing of entry” of a new service provider.
MTNL, along with DoT, appealed against the TRAI order in the Delhi High Court, which set aside TRAI's order to allow MTNL to enter the cellular services market. In the meantime, three metro operators Bharti Cellular, Sterling Cellular and BPL Mobile Communications have filed separate petitions challenging the legality of MTNL's entry into cellular services. This is one case where DoT has succeeded in sidelining the TRAI and moved its battle to the courts.
To be successful, liberalisation needs an institutional structure that permits quick settlement of rival claims between the incumbent and new entrant operators. The real problem lies in the failure of the government to convert DoT's operating arm into a corporation and transfer its policy-making functions to the Communications Ministry as well as the TRAI.
Foreign investors
A strong TRAI is essential for maintaining investors' confidence, particularly when DoT has combined in itself the roles of licenser, policy maker and service provider.
In the present situation, many foreign multinationals want out. Birla AT&T, a joint venture with 49 per cent participation by AT&T, bid highly for its licences for the Gujarat and Maharashtra circles. It was one of the largest equity funded ventures in the country, but its base of Rs525 crores ($125 million) has been wiped out by cumulative losses. The promoters are anxious to sell part of their holdings and have asked investment bank Deutsche Morgan Grenfell to find a buyer.
Telia of Sweden is also looking for a buyer for its 26 per cent stake in JTM Mobile, the cellular service provider for the circles of AP, Karnataka, and Punjab. “Even domestic financial institutions are not in a position to disburse the loans which have been committed to various operators due to the uncertainty in the industry,” says P. Raja Mohan Rao, JTM's CEO.
Swisscom had earlier committed an additional 100 million Swiss Franc investment in its joint venture with Delhi operator, Essar. It has now mapped out various options ranging from a build-up to an eventual dilution of its investment in its joint venture. “We are not willing to stay under just any conditions,” says Jeffrey Hedburg, director of Swisscom International. Yet, should government policies change, Hedberg is bullish about India and has placed two Swisscom executives as CEO and CFO in the joint venture.
Australia's Telstra International has also assumed a more active role at Modi Telstra, the Calcutta operator where it holds a 49 per cent stake. In the wake of mounting losses, it has placed its nominees in the CEO and CFO positions. Telstra officials, however, point out that “the company's success will largely depend on the concessions given to the cellular industry by DoT”.
Coming shake-out
The shake-out in the industry will take place even faster should the government delay its decisions. As no bank or financial institution is willing to touch cellular projects, most operators cannot even achieve financial closure, i.e. obtain loans to cover the entire project cost. Only three cellular operators (Escotel, Birla AT&T and Hexacom) have succeeded so far. Others will have to postpone their network expansion projects.
In addition, there is the question of licence fee arrears. The 23 existing operators have an annual licence liability of Rs21 billion ($508 million), and only Escotel has been prompt in paying its licence fee dues.
Escotel, which has the licence for cellular services in Uttar Pradesh (West), Kerala and Haryana, has run up losses of Rs1.15 billion ($27 million). Yet, this is not discouraging them from eyeing weaker operators. “We've been getting offers from cellular operators who want to quit the business. We're willing to buy them out, but it all hinges on the viability of the circle,” declares Escotel Mobile Communications chief executive officer K. Vijay Rao.
Bharti Telecom, which owns Airtel, one of the Delhi operators, is the only operator to have made a profit in 1997-98. Although Sunil Mittal, chairman of parent Bharti Enterprises, disclaims all desire for takeovers, he has powerful partners in Stet (Italy) and British Telecom. Reliance Telecom and BPL Mobile are two other operators who may go on the acquisition trail.
There are many candidates for take-over, but the three prime targets are: JT Mobiles, Koshika Telecom and Fascel. Together, these three companies account for 65 per cent of the Rs12.6 billion ($300 million) outstanding as licence fee dues from the industry in June. While JT Mobiles needs to fork out Rs4.7 billion ($111 million) in licence fees alone, it had also run up losses of Rs2.5 billion ($59 million) in 1997-98.
Koshika's Rs300 million ($7 million) loss may be small in comparison. Yet, its annual licence fee dues of Rs766 million ($18 million) are twice as high as its estimated 1998 income of Rs300 million ($7 million). While Koshika's performance does not inspire much confidence, the company has, nonetheless, innovated on the marketing side. It has franchised more than 800 PCOs in its circles, thus creating opportunities for entrepreneurs.
However, it owes its supplier, Alcatel, around Rs2.3 billion ($55 million) and does not have the funds to complete its project. “We believe in the project in the long term but cannot wait indefinitely.” says Didier Verhulst, chief executive of Alcatel's mobile communications division in India. “Therefore, we would be supportive of any reconfiguration that would put Koshika on a stronger financial footing.”
For the present, Koshika's future is uncertain, but there may be hope. The Indian prime minister, Atal Behari Vajpayee, recently set up an information technology task force, which has also been mandated to resolve all outstanding issues between DoT and TRAI. “We have the political will to untie all the knots, and government would not like the two executive wings to move to the courts on any issue,” said Vajpayee.
The task force should remember, however, that the cellular industry is a visible symbol of the liberalisation process, and private operators have invested millions of dollars in infrastructure alone. Should telecommunications be considered as a core sector then a new set of rules will have to be developed to ensure the economic viability of such projects.
Cash cow
The Finance Ministry has to stop looking at the cellular industry as a cash cow to be milked through licence fees.
Licence fee payments are remitted into a central revenue pool instead of being reinvested in the communications infrastructure. In the process, growth is being stifled as cellular services are priced beyond the reach of the growing middle class. While China has already hit the 30 million cellular subscriber mark, India has yet to reach its first million.
Still, in today's global economy, telecommunications is the engine for growth. The promise of cellular telephony is great when one thinks of the potential of personal communications systems that will permit interactive voice and data transmissions. This could open up new opportunities for Indian cellular companies, who are already offering intelligent network features as well as national and international roaming facilities.
All it now requires is the political courage to unshackle the industry from its licence fee burdens so that cellular can take its rightful place as an economy driver.
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