The new regulation on interconnection usage charges (IUCs), slashing termination rates by 57%, will have far-reaching consequences on the telecom sector. It will help in bringing down tariff, improving quality of services and in replacing inefficient 2G networks with the latest 4G technology that will help in taking the benefits of the digital economy to the masses.

A high IUC disincentivises operators from investing in new technologies, as they earn good revenue just by receiving calls on their depreciated 2G networks. A phasing out of IUCs by 2020 is also in keeping with the spirit of the original Telecom Regulatory Authority of India (TRAI) recommendation which argued in favour of a more gradual roadmap to remove termination charges totally.

IUC is the charge that a telecom service operator (from where a call originates) pays to the company where the call is terminated.

TRAI’s decision has, however, divided the industry and analysts, thanks to a corporate war between Airtel, Idea, Vodafone and Reliance Jio. The whole debate is concentrated around which company is gaining and which one is losing, and whether it will help improve the financial health of the sector. There is no place for customers or the society in these discussions. In any case, consumer is low on priority of corporate in India.

On September 19, the regulator announced that IUCs will be slashed from 14 paise per minute to 6 paise per minute. It will be further reduced to zero paise by January 2020.

Guiding principle for IUC regulation
The International Telecommunications Union (ITU) has clearly defined the guiding principle for regulators in deciding the IUC. “Where regulators are needed to mediate interconnection disputes, rates should be based on maximising economic welfare,” says a report of the UN body titled ‘4th Generation Regulation: Driving Digital Communications Ahead’.

In the Indian scenario, economic welfare of the masses is maximised when good quality services are available at affordable prices. Today, benefits of the digital economy are not available for all, due to the lack of availability and access as well as the high cost of broadband. Telecom networks can’t even carry voice without a few call drops. In places where internet connectivity is available, download speeds are a big challenge most of the time.

The ITU report recommends: “Keep interconnection regulation as simple as possible to avoid unintended consequences, following these guidelines – establish “Bill and Keep” or “free peering” wherever possible, if termination charges continue to be regulated, bring them down toward zero as fast as possible.”

It is clear that TRAI is justified in reducing the IUC by 57%. However, it should have brought down the IUC to zero by 2019 instead of 2020. A delay in the implementation of 4G by operators will delay the ‘Digital India’ programme by one year.

IUC and financial health of the sector

The telecom sector has a debt of Rs 4.42 lakh crore, while its revenue is only about Rs 2.11 lakh crore. The earnings before interest, tax, depreciation and amortisation of the industry is Rs 50,000 crore.

However, the IUC has no role to play in the poor financial health of the sector. The industry accumulated this debt when the IUC was 14 paise. There are various factors that have led to the poor financial health of India’s telecom industry, such as wrong business decisions, high taxes, huge investments on spectrum and infrastructure, hyper competition and so on.

The government has set up an inter-ministerial group (IMG) to recommend sops for the sector. The IMG has already said that it can’t make recommendations on IUC.

As per the TRAI Act, 1997, TRAI was established to “…. protect the interests of the service providers and consumer of the telecom sector, to promote and ensure orderly growth of the telecom sector.” However, a high IUC is against the interests of consumers and the orderly growth of the sector, as it discourages new, more efficient technologies.

IUC and rural coverage
Vodafone CEO Vittorio Colao had said that the low IUC will have impact on rural subscribers as the operators subsidise their rural operations from the high revenue earned through IUCs. This argument is now being used by other analysts as well – but there is no logic to it.

Vodafone had made similar argument in its home country, the UK, in 2010, when Ofcom was finalising the new mobile termination rates (MTRs). The company said then that around four million users would be forced to disconnect their mobile phones if Ofcom went ahead with its proposal to cut the 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.”

Ofcom ignored Vodafone’s warning and slashed MTRs. From 2011 to 2017, the British regulator has reduced MTR by more than 85%, benefitting consumers.

Now, the Vodafone CEO has written letter to the telecom minister saying, “Any reduction in mobile termination charge risks large scale site shut-down of already unprofitable sites in rural India and which would greatly diminish the population coverage of mobile telephony.”

The government has set up a universal service obligation fund (USOF) for providing connectivity to rural areas. The operators can always participate in USOF tenders for rural connectivity.

TRAI doing well

TRAI’s decision to reduce the IUC by 57% is in line with the recommendations of the ITU report. It will help in phasing out inefficient 2G networks. The regulator has used the pure long range incremental cost (LRIC) method in arriving at 6 paise per minute. This method was followed successfully in the EU as well. In a pure LRIC calculation, only those costs which would hypothetically be avoided if the termination service are withdrawn are included. This excludes all fixed costs and common-cost mark ups. It ensures that the economies of scale are fully incorporated into termination rates.

The regulator should have, however, advanced the date for zero termination charges to 2019. This would have encouraged operators to turn the new disruption in telecom into an opportunity to meet Digital India goals.