A number of analysts believe that the telecom regulator's decision to cut interconnection charges for mobile operators from 14 paise to 6 paise is flawed on many counts.
Analysts at IIFL said in a report TRAI changed the model for calculating new IUC without giving any explanation as to what has changed since 2015.
"TRAI has not mentioned explicitly, but it has moved from LRIC+ in 2015 to LRIC model now, and this has made a major difference. LRIC+ allows for the coverage part of network also to be included in avoidable cost, whereas LRIC does not. TRAI now seems to argue that if the incoming off-net minutes are removed, coverage would still have to be preserved and this results in lower avoidable cost," IIFL said in a report.
"TRAI has also not considered spectrum price – the avoidable cost is entirely taken in the form of network element counts, whereas the reality is that operators use equipment as well as spectrum, and spectrum prices have gone up sharply," it added.
The quantum of spectrum assumed for the equivalent telco also makes a significant difference – the larger the quantum, the lower the equipment cost and hence the lower the avoidable cost. TRAI has again not mentioned this -- and this alone makes the calculations incomplete. Finally, all BTS' are assumed to cost the same, whereas BTS' with higher equipage cost more in reality.
Deutsche Bank said TRAI has used LRIC methodology, which disregards spectrum costs to calculate the new termination rate. "We note that the previous rate of ₹0.14, prescribed from March 2015 was based on LRIC+ methodology, which included the impact of spectrum costs. Further, the regulator has used subscriber data for December 2016, traffic data for 4QCY16 and busy hour data for February 1-7, 2017, as a basis for calculation of mobile termination rates (MTR) . We note that this period covers the ‘free launch offer’ from Jio, which would have distorted these metrics, " the bank said in a report sent to its clients.
Kotak Institutional Equities Research said “the ratio of IUC for mobile termination relative to retail price in India is approximately 45 per cent as compared to 13 per cent in Germany and Japan, 11 per cent in France, less than 10 per cent in the UK and 1 per cent in China”.
“…after the reduction in the termination charge from ₹0.14 per minute to ₹0.06 per minute, the termination charge as a per cent of retail tariff would become 20 per cent, which would be in line with international trends..”
Kotak said the logical flaw that it sees in the above argument made by the TRAI is that it has ignored the possibility of the role of the denominator (i.e. retail tariff) in the MTR/retail tariff (M/R) ratio being higher in India versus the select set of countries chosen for comparison. "Any ratio is always influenced by both the numerator as well as the denominator. Could it be possible that the M/R ratio in India is high because the retail tariffs are low? They perhaps are if one were to consider that industry-level RoCE is in the negative zone. Any interpretation of a ratio that focuses solely on either the numerator or the denominator without considering the other fails to look at the complete picture in our view," it added.