Sale and leaseback of spectrum may save the telecom sector

The government is reportedly mulling over various measures to provide relief to the telecom sector, ranging from extending the payment period for outstanding dues to 20 years, to lowering the licence fees and spectrum usage charges as shares of revenue. These are all welcome thoughts but if telcos follow the ‘sale and lease’ policy common in the aviation industry, they would avoid locking up capital on a spectrum hoard.

Vodafone-Idea (Vi) has bought spectrum worth ₹1,82,000 crore. This amount is payable till 2036. Interest is payable on the deferred instalments, to make the net present value of the payment stream over these many years equivalent to what it would have paid, if it had paid the money upfront. So, the spectrum payments are a huge drag on the company’s finances. Now, add to these payments the company’s so-called AGR dues of a little under ₹60,000 crore (collectively, ₹1.6 lakh crore for all telcos).

Even if the government defers the payment period to 20 years, instead of the 10 years the Supreme Court has mandated with the additional interest charged, these payments will add to the financial burden on the company.

A swift recap of AGR dues might be warranted for the sake of those who are not in the telecom industry or in the news business and thus obliged to understand what it means. In the 1990s, when mobile telephony licences were issued to private operators, it was on the basis of how much would-be operators bid to pay the government as licence fees, for the benefit of being allowed to offer mobile telephony to customers, save the initial batch of eight licences, two each in the four Metros, which were awarded on a nomination basis. Indian companies, including present-day champions, bid huge amounts and displaced competitors, including several foreign companies, who had bid realistic amounts based on their projections of likely revenue.

Having obtained the licence on the basis of unrealistically high licence fee bids, the operators fell into financial stress and sought relief from the government. In 1999, the Vajpayee government migrated the telcos to a new telecom policy regime, in which licence fees were fixed as a share of the revenue. The spectrum usage charge was also to be paid as a share of the revenue.

The sharable revenue became a crucial definition for the industry. The government promised the telcos that it would be guided by the recommendations of the sector regulator, Telecom Regulatory Authority of India (TRAI). The industry agreed, while migrating to the new regime, and signed off on contracts that obliged them to pay the government fixed shares of their gross revenue. TRAI made recommendations as to what components of revenue would have to be shared with the government as licence fees and spectrum usage charge (SUC).

The Telecom Dispute Settlement and Appellate Tribunal (TDSAT) refined these recommendations and, from the sector regulator, a concept of adjusted gross revenue (AGR) emerged, which included all revenue arising from exercise of the telecom licence and excluded non-telecom revenues such as treasury profits, income from commercial property, etc.

Also read: Retrospective tax: Keep Vodafone pragmatism pragmatic

However, the government refused to accept the regulator’s definition of sharable revenue and demanded a share of the total revenues of a telco. The companies disputed this and the case progressed, from 2003 when it started, all the way up to the Supreme Court.

In October 2019, a bench led by Justice Arun Mishra ruled in the government’s favour, entertaining no argument other than the bald fact that the telcos had, while migrating from fixed annual licence fees to a share of the revenue as licence fees in 1999, agreed to share their total revenue, ignoring the government’s promise to take into account TRAI’s recommendation on what would constitute sharable revenue. This imposed collective dues of ₹1.6 lakh crore, including penalty and interest on delayed payments.

The government was willing to grant the telcos 20 years to pay off their dues, but Justice Mishra ruled, just before demitting office in October 2020, that the telcos had to pay up in 10 years.

The added injustice was that the government dropped the demand the Department of Telecom had raised, on assorted public enterprises such as GAIL that had obtained a telecom licence but had scarcely any telecom operations, for ₹4 lakh crore as AGR dues. If GAIL and PowerGrid could be exempt from sharing their non-telecom revenues as licence fees, how could the government fail to apply the same principle vis-à-vis the telcos? The court did not entertain this question at all.

The telcos were saddled with dues worth ₹1.6 lakh crore as AGR dues at a time when Jio’s disruptive entry into the 4G market had already weakened their financial position. Vi is on the verge of failure, and if it fails, that would cause the government considerable reputational damage. The government would like every telecom circle (mostly the same as a state, except for a few exceptions) to have at least three private telecom players, along with a state-owned operator.

So it is thinking of measures to ease the financial burden on telcos. One is to reduce the licence fees and spectrum usage charges, levied as steep shares of AGR (10 percent, eight percent and six percent of AGR, depending on the nature of the circle where you operated).

When telcos got their spectrum for a relatively small sign-up fee and no upfront payment for spectrum, that arrangement made sense. But after the government started auctioning spectrum in 2010, and companies obtained their spectrum paying substantial charges for it, there is no rationale for continuing with steep licence fees or any spectrum usage charge whatsoever. Telcos should just pay taxes on their profits, just as other enterprises do, after having paid separately for spectrum.

However, these prospective changes will not bring relief to the telcos in the present. For that, they need an arrangement similar to the ‘sale and leaseback’ arrangement commonplace in the aviation industry.

Also read: Your mobile bill to go up soon as telcos feel the pinch after spectrum auction

Suppose an airline requires 50 planes. Suppose it opts for A321s from Airbus, it would have to pay somewhere around $120 million apiece, or $6 billion. Instead of locking up this much of capital, the airline would buy these planes and sell them to an aircraft leasing company, and lease these aircraft back for its operations. The capital cost lies on the books of the leasing company, while the airline just has an annual lease expense, and the obligation to renew the lease for the contracted period. The aircraft lessor is essentially a large pool of capital, whose expertise is in raising capital cheap and finding reliable airlines that would lease their planes at rates that offer the lessor a decent return on its capital.

Suppose a large pool of capital could be put together to buy out the spectrum from the telcos, who would then get cash in hand, if the spectrum they sell to the lessor has been fully paid for, or, at least, be released from the obligations of deferred payment and interest to the government, in case they have opted for staggered payment of the amount they bid to acquire the spectrum.

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