The problem with revenue sharing

A company desirous of providing telecommuni­cations services in India must acquire a licence and pay prescribed fees. For instance, telecommunications Service Providers (TSPs), typically, obtained a Unified Licence on payment of a one-time entry fee. They share about 8 percent of their revenue as licence fees and another 3 percent as spectrum usage charges. However, these seemingly innocuous rules are increasingly problematic.

Fixing telecom levies as a proportion of revenues would seem like a rational approach. Indeed, in 1999, when it was adopted, it served to stabilise the telecom sector where many private players were on the verge of default. The companies had bid exorbitant amounts to obtain the licences, and were unable to pay up. They had overestimated market demand and the likely revenues.

The new revenue-sharing approach rescued struggling companies by lowering their immediate liability and future risk. Equally, it salvaged India’s ambitious privatization programme that eventually took telephone and data connectivity across the country.

However, the revenue sharing approach has several side effects. An obvious one is that an inefficient company that generates lower revenues pays less, while a successful efficient company ends up paying more. Like traditional taxation, it is not a sufficient barrier to growth. However, the approach has led to numerous disputes and litigation about computing revenues. The Supreme Court recently settled much of the debate but also caused an unprecedented fiscal crisis for the sector.

Another flaw is that the system encourages inefficient use of spectrum. Take a licensed company that offers free use of spectrum to attract more users to its network. Its actions would not just hurt its revenues but also those of the government. This happened recently when one company offered free telephone and data services over a prolonged period.

The current approach also discourages any reform that appears to hurt government revenues. This is the case with the liberalization of E and V spectrum bands. Over 60 countries have done so, but India’s decision is pending 6 years after the Telecom Regulatory Authority of India made its recommendations to the government. The valuable spectrum-that supports Gigabit data speeds-is idle. Sadly, the government has little incentive to change current rules despite the obvious benefits. Liberalization would attract more players and, in the short-term, hurt the revenues of TSPs as well as the government. The revenue-sharing approach, therefore, creates a unique conflict of interest for India’s decision-makers.

Current rules have also forced other anomalies. Consider the case of Mobile Virtual Network Operators (MVNOs) who resell mobile services using the spectrum of licensed TSPs. MVNOs have largely failed to take off in India. A key reason is the high regulatory burden and restrictions on MVNOs in choosing their parent TSP. The rules stem, arguably, from the perceived risk to government revenues. This contrasts with most mature regulatory regimes where MVNOs and related services face minimal regulation and levies, if any.

Revenue sharing is also the root of the TSP’s demand for same service, same rules. Licensed TSPs, who share substantial revenues with the government want it to impose it on Over-the-Top (OTT) players like Skype, WhatsApp, who use TSP networks to provide calling and messaging services. A more rational approach, in line with most mature regulatory regimes, would be to abandon revenue sharing altogether.

Revenue sharing is counterproductive and must go. The government would inevitably lose revenues in the short term. It should recover the losses, if any, from the broader tax regime. Relying solely on revenues of licensed players is hurting urgent reform.