Why bill for India's 5G infrastructure is looking steep for telecoms companies

Operators that survived an intense price war have amassed huge debts and may lack the financial muscle to invest further

intense price war in India has forced telecom operators to merge and take on huge debts to survive. Reuters
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India is gradually advancing its plans for rolling out the fifth generation wireless network, an essential step in the evolution of the country's telecommunications market to bring it up to standard with other major global economies.

Communications Minister Ravi Prasad said earlier this month that the government plans to auction 5G spectrum in a matter of months, most likely by the end of this year or the beginning of next year. This means that the market will not have to wait too long to find out how eager telecom companies are for new investments and about the state of their financial health.

The hefty price tag attached to 5G is raising a few eyebrows in India. Analysts question whether debt-laden telecom operators in Asia's third-biggest economy will be able to foot the bill. Despite the government's push to shift the nation on to the next generation of communications systems, which would help boost the sluggish Indian economy, financial constraints faced by companies could delay the launch of 5G.

"The telcos with huge debts, declining average revenue per user and an abysmal return on capital are not in a position to make huge investments in [the new] spectrum, licence fees, infrastructure and equipment," says Rajan Mathews, the director general of the Cellular Operators Association of India, a telecom industry body in New Delhi.

Sanjay Bakaya, India and South Asia vice president for US telecom software company Mavenir, describes the spectrum auction as "the main driving factor" for 5G development in India.

It is eagerly awaited. Fifth-generation data speeds are many times faster than the current 4G technology and would allow people to download a high-definition movie in seconds.

According to a 2018 report prepared for the Indian government by a telecoms committee, the economic benefit of 5G in India could reach $1 trillion (Dh3.67tn) by 2035, as it creates business opportunities and helps facilitate social development.

Sectors including agriculture and manufacturing, for example, could benefit from 5G as the Internet of Things, allowing machines to communicate and operate efficiently with limited human involvement, becomes cheaper and more efficient.

However, the investment required to develop 5G infrastructure in India is enormous, according to the report. The committee forecast $100 billion would be needed over the next five to seven years.

Globally, countries such as the US, UAE and South Korea are already in the early stages of rolling out 5G commercially.

India wants to follow the lead of these economies but its telecoms sector is not perched on a stable base.  

Companies in India have been battered over the past few years by stiff competition, which has forced them to cut prices and many have high levels of debt.

The troubles for the sector started with the September 2016 launch of telecom operator Reliance Jio, a part of the oil-focused conglomerate Reliance Industries, which is controlled by India's richest man, Mukesh Ambani. Jio has disrupted the telecom landscape with cut-price data packages and promises of "free calls for life".

Jio's aggressive strategy started a price war that led to a decline in profitability and margins. Some operators merged to survive while others were forced out of business. The total gross debt for India's three surviving major telecom operators – Vodafone-Idea, Bharti Airtel India and Jio – at the end of March stood at 3.9 trillion rupees (Dh202.7bn), according to India Ratings and Research, which is part of Fitch Group.

"The credit profiles of telecom operators will remain under pressure in the medium term due to intense competition and elevated debt levels," says Prashant Tarwadi a director and telecom analyst at India Ratings.

He says Jio's data tariffs are 25 per cent to 30 per cent lower than those of Bharti Airtel and Vodafone-Idea, which makes it a very tough operating environment. Jio is the only profitable company in India, but it is still heavily in debt.

With 5G licence auctions looming, operators are facing yet another challenge. The price set by the Telecom Regulatory Authority of India for 3,300 to 3,600 megahertz bands for 5G spectrum at 4.92bn rupees per MHz is about four times what South Korea charged in its auction last year.

Gopal Vittal, the India and South Asia managing director and chief executive of Bharti Airtel, says the spectrum prices are "exorbitant", particularly "given that the state of 5G ­ecosystem is still nascent".

"We would hope that the ­government brings down prices of spectrum and reserve prices of spectrum, and that is the stage [at which] we would look seriously at 5G," he says.

“At the proposed reserve prices, any incremental investment in 5G technology may yield return on capital employed of only about 5 per cent,” says Mr Tarwadi. “Any incremental capital expenditure towards spectrum or 5G technology will derail the fragile recovery and be negative for ratings.”

The ratings agency already has a negative outlook on India’s telecoms sector for the remainder of this financial year, which runs until the end of next March.

There have been several delays to India's plans to adopt the new technology. Mr Prasad said in June that the government planned to start 5G trials within 100 days.

That deadline has passed without any progress.

Despite all the headwinds faced by the sector, the potential for 5G use in the country is huge, and the growth prospects are enormous. The country has 1.17 billion mobile phone subscribers, according to data from the country's regulator, making it the world's second-largest telecom market after China.

More and more people are buying smartphones in the country and the number of users is expected to double to 829 million by 2022, according to technology conglomerate Cisco.

While the opportunity may be there to tap a huge market, for now the main concern is the expenditure these companies will have to undertake without the prospect of any near-term profit.

“The auction prices will play a key role in establishing the competitiveness among operators,” says Mr Bakaya.

One of the core requirements of 5G technology is extensive optical fibre connectivity, he says.

Reducing costs and addressing delays in accessing cell sites or fibre ducts will be critical in how successful India is in rolling out 5G, he added.

There are other obstacles in the way of 5G success.

China’s telecom giant Huawei, which is considered a leader in 5G technology, is eager to participate in India’s 5G trials and play a significant role in the sector.

However, the company is mired in allegations of espionage and has been labelled a security thereat by the US, a charge which it denies. The Indian government has yet to decide on whether it will allow Huawei to participate in its 5G trials.

Experts suggest New Delhi should have regulatory and security protocols in place before it opens the country for trials.

"5G opens up a lot of opportunities around Internet of Things, video, edge computing," says Varoon Rajani, the co-founder and chief executive of Blazeclan Technologies, in the city of Pune in western India. "But opportunities also bring threats."

These could include cyber attacks and unauthorised access to devices,” he says.

“Indian authorities are already taking major steps towards data protection and security.

“With the emergence of 5G technology, IT teams will need to focus further on potential data security implications,” says Mr Rajani.