Rational Expectations: Another pyrrhic telecom victory

The dispute over what comprises AGR is decades old, so instead of letting it bounce from one court to another, the government needed to sit down with industry and settle the definition once and for all.

Given Aircel owes the government Rs 12,389 crore by way of AGR dues, the NCLAT ruling that its spectrum cannot be transferred—without that, the insolvency process will grind to a halt—is a big victory for the government. Indeed, the same principle will also apply to RCom that is also in the insolvency courts and owes the government more than double at Rs 25,199 crore of AGR dues.

But this victory, assuming the Supreme Court upholds the NCLAT ruling—the NCLAT ruling itself reversed the NCLT ruling on the issue—is at best a pyrrhic one. Both Aircel and RCom, keep in mind, owe PSU banks a lot of money, so if there is no resolution, the government is losing money, even though indirectly. Aircel owes banks and other lenders Rs 58,670 crore while RCom owes Rs 40,000 crore.

And while it is true that the NCLAT ruling ensures the government can continue to show Rs 12,389 crore of dues from Aircel on its books, this is not even worth the paper it is written on since, till there is some resolution at the insolvency courts, the government is not going to get one paisa of the dues. It is like the tax dues of over Rs 12 lakh crore that the government shows every year in the budget documents; most of it, the taxman admits, is pretty much uncollectable.

And, to the extent the banks can’t recoup their loans—or some portion of them through the insolvency process—they are going to be that less keen to lend to telecom companies on the strength of their spectrum holdings. Indeed, it was because banks required some surety while lending that, in the past, the government had come up with tripartite agreements between it, the banks and the telcos on the spectrum.

While that tripartite agreement still remains and the banks can use it as a lien, it is of little use if, once there is a default, the banks are not free to just auction off the spectrum to another bidder. Indeed, the government would also benefit if this was allowed to happen because, if the spectrum was used by another telco, the government would at least earn licence fee and spectrum charges on this based on the revenue the buyer-telco earned from the spectrum every year. Indeed, to the extent banks are reluctant to fund telcos, the government loses again because its revenues from the industry—both from spectrum sales as well as annual licence fee/spectrum charges—are dependent upon the industry being able to invest more to grow.

While the Supreme Court will, eventually, take a call on whether the NCLAT view on the sale of spectrum is a valid one, what is amazing is that the government’s position continues to be what it is. As long as the position is that the banks don’t have the right to sell the spectrum, it reduces their desire to lend against it. And every day that the spectrum lies unused is a dead loss for the government and the economy. Also, if the telcos don’t own the spectrum after the auction, why are they paying so much money for it?

Sadly, the government refusing to do the right thing in telecom is, well, old policy! The dispute over what comprises AGR is decades old, so instead of letting it bounce from one court to another, the government needed to sit down with industry and settle the definition once and for all. Instead, it was allowed to fester. How much damage not taking a decision is causing can be gauged from the fact that, of the Rs 168,000 crore of AGR dues, interest and penalties add up to Rs 126,000 crore.

Similarly, despite the government likely to lose a large part of the Rs 37,588 crore that Aircel and RCom owe it on account of AGR and also the Rs 58,254 crore that Vodafone Idea owes it were the latter to shut—not entirely impossible given its precarious financial position—it still hasn’t taken a decision on deferred spectrum fees; and the amounts there are even larger. In the past, to ensure that telcos were able to bid for the ridiculously expensive spectrum, the government came out with a bit of a fudge; it allowed the spectrum to be paid for in 10 annual instalments after a fixed upfront amount, thereby making the spectrum seem more affordable.

While that allowed the government to get more buyers, what it also did was tie the government’s fortunes with those of the industry. So, when Vodafone Idea owes the government Rs 61,671 crore on account of deferred spectrum costs—in NPV terms, not the total added over the years in which payments are due—it shutting down exposes the government to huge losses as well. Ideally, deferred fees should be discontinued, but they won’t; so, the deferred dues will keep rising till, one day, like the AGR dues, they too will become uncollectable.

Postscript: The flipside of the government’s fortunes getting tied to those of the industry is that decisions like scrapping both licence fee and spectrum charges should have been taken a long time ago as that would help the industry that remains in precarious shape since it owes the government Rs 260,000 crore. That this hasn’t happened underscores how government policy continues to remain paralysed and unresponsive.