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“TRAI’s Revised Tariff Analysis Continues To Be Flawed"
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Friday, July 13, 2012:
The Cellular Operators Association of India (COAI) refutes TRAI’s revised report on “Analysis of effects on costs, tariffs and financial Returns”, which continues to suffer from many of the flaws previously pointed out by COAI and independent analysts. The analysis provided by TRAI is flawed, non-transparent and inconsistent with the market realities. TRAI’s analysis of the impact on tariff which has now increased from 4.4 paise to 15 paise is an acknowledgement of COAI’s earlier assessment that the impact on tariffs could be much higher.
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The TRAI’s objective behind the exercise appears to be a pre-determined answer to an already arrived-at conclusion and an attempt to defend its earlier position on the matter. TRAI has apparently not studied the impact of the recommendations on the various stakeholders of the sector; but rather made some estimates of their assumed rise in cost/minute based on certain scenarios. Our observations based on a preliminary review of the TRAI analysis highlights the following:
· TRAI has changed its assumptions on the growth of total minutes in its bid to achieve a pre-defined conclusion. It increased the growth rates to 15%, 14% and 11%, in the first three years as against its assumptions in the past paper, dated 23rd April 2012 where it was assumed to be 10% for the first three years. This change in assumption has led to a substantial decrease in rate per minute in the new analysis.
· The elasticity of demand has not been taken into account. The increases in tariff, as a result of higher cost, could result in lower usage by subscriber, this will further lower the total minutes of use. Also, since subscribers are expected to grow at 6-7% as per TRAI, total minutes cannot grow at 14-15%.
· In some scenarios, the rate of increase in non-voice revenue (up to 50% of the total revenues by year 2017) is unrealistic and is not borne out by international experience. Further, the costs associated with the increased projected non-voice revenue (such as additional spectrum) has not been factored in the analysis. Thus, the cost of additional spectrum and capital needs to be considered. This proposed adjustment would have an upward impact on the calculated tariffs.
· Given the present high debt burden on operators (INR 185720 crores), no explanation has been provided as to how operators would raise further funds even if spectrum mortgage is permitted. Further, TRAI has not considered the fact that banking system will not be able to extend and sustain the funding for the spectrum to be acquired.
· By TRAI’s own computations, the return on capital employed under some scenarios is lower than the risk-free return on capital. Therefore, the financial incentive to continue to remain in business has not been considered.
· TRAI calculation of EBITDA and PBIT are erroneous. The impact due to CAPEX, OPEX, cost of spectrum and interest charges needs to be assessed and taken into account. TRAI assumes the cost increase is marginal while revenue growth is substantial. The assumption on cost increase is completely understated as against the current industry scenario. These assumptions/calculations seem to be goal seeking, as against trying to analyse the true impact on the industry and the common man.
· The other issues that need to be considered are:
o Cost of financing the initial years of losses also required to considered
o Cost of subscriber addition has been on the rise, this has not been considered.
o Capex for increased capacity is not being considered
o Capex for refarming in TRAI’s analysis is quite marginal and unsubstantiated versus the impact computed by Analysys Mason in their June 2012 report
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