Vodafone CEO Vittorio Colao wants poor Indian mobile users and tax payers to pay for the company’s bad business decisions and inefficiencies. He has sought high mobile termination charges (MTC) and financial sops from the government so that the company can serve the rural poor!
Vodafone had earlier warned the British telecom regulator Ofcom against reducing mobile termination charges (MTC), in 2010, in the name of poor mobile users. Ofcom ignored its warning and reduced MTC by more than 85% in the UK in last seven years and it helped customers.
Last week, Vodafone CEO wrote a letter to the telecom minister Manoj Sinha seeking financial sops from the government and assurance that MTC would not be reduced “at a time when the industry is facing such immense hardships.” He also warned that “any reduction in MTC risks large scale site shut-down of already unprofitable sites in rural India.”
Ofcom rejected Vodafone’s arguments
In 2010, when Ofcom was in the process of finalising the new mobile termination rates (MTR) in the UK, Vodafone warned that around four million users would be forced to disconnect their mobile phones if Ofcom went ahead with its proposal to cut MTR. It’s then chief of UK operations Guy Lawrence said: “Ofcom’s proposals to slash our incoming call revenues are likely to mean that low income families will start paying more to use their phones because the money we receive from incoming calls will disappear.”
He further added that “This revenue allowed us to support low spenders. We see these proposals as unnecessary intervention which tax low income families and should be reconsidered.” This argument is also part of Vodafone’s written response to Ofcom’s consultation document on MTR.
Ofcom ignored Vodafone’s warning and slashed MTRs. From 2011 to 2017, the British regulator has reduced MTR by more than 85% and it has been in the benefit of consumers.
Vodafone’s letter to the Indian telecom minister is on similar lines. “The existing rate of 14 paisa (MTC) is already below cost. This damages the economic case for connecting rural areas because traffic is largely from urban to rural, with little call origination revenue in rural areas. Even at the present MTC rates, 15-20% of our sites run at a loss. The letter warns: “Any reduction in MTC risks large scale site shut-down of already unprofitable sites in rural India and which would greatly diminish the population coverage of mobile telephony.”
This argument is similar to what Vodafone told Ofcom seven years ago. It has no basis at all. How could any operator plan its network on the basis of incoming calls only, especially when the regulator had informed the Supreme Court in 2011 that IUC would be phased out in next three years? Colao’s letter is just an excuse to delay reduction in MTRs. In any case, there is universal service obligation fund (USOF) to meet rural requirements.
Debt Conundrum: Huge price paid for acquiring Indian assets and circumventing FDI rules
Incumbent telecom operators say that the industry is in financial stress due to huge debt and its EBIDTA is very low. The three large incumbents are themselves to blame for it.
In the case of Vodafone, the accrual of debt has been partly due to acquisition of Indian assets and partly due to high price paid to circumvent FDI dispensation. While acquiring Hong Kong-based Hutchinson Essar, Vodafone made a highly leveraged deal of Rs. 4,95,00.0 Crore. Vodafone paid the ‘surrogacy cost’ of Rs. 30,000 Crore to Ruia brothers, Rs. 1,241 Crore to Analjit Singh, and Rs. 8,900 Crore to Piramal Enterprises for holding Vodafone assets until 100% FDI was allowed in the telecom sector.
Vodafone’s acquisition of Indian entity at high price and engaging entities to circumvent FDI rules was its business decision. It didn’t help customers as this went to the promoters of Hutchison, Essar and other entities.
Vodafone’s net debt stood at Rs. 47,807 Crore in FY15. The relative investment to debt ratio strongly suggests leveraged nature of Vodafone’s Indian business.
One of the reasons why Vodafone is lagging in competition is that it hasn’t made the kind of investments in 4G that is required in the network.
No case for high MTC and financial sops
It is clear that Vodafone is using old ploy to delay reduction in IUC regime. Moreover, there is no case for poor mobile user and tax payer to compensate incumbent operators for bad business decisions.
TRAI should simply follow ITU report that recommends bill and keep. If its immediate implementation is not possible, then it should move towards zero termination charge regime as fast as possible, as per the report ‘4th Generation Regulation: Driving Digital Communications Ahead’. It suggests pure long range incremental cost (LRIC) method for determining IUC during interim period.