Business Standard tracks progress in infrastructure projects this week. In a five-part series on telecom, surface transport, power, railways and urban infrastructure, correspondents study financial closure of projects in the sector as a measure of efficacy of infrastructure reforms. The series starts with the telecom sector:
Last week, senior executives of BPL-US West Communications _ the cellular operator in Maharashtra, Tamil Nadu and Kerala _ said the Rs 2,270-crore project had gone into financial closure, the stage when equity and debt commitments to a project are finalised. Cause for cheer?
Hardly. Despite the BPL-US West debt syndication of Rs 1,300 crore among the largest in recent times, it is just the fourth cellular telecom project _ in the states _ to achieve financial closure.
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All of the metro cellular ventures have gone into closure, but there too, in their second foray into debt markets for funding expansion, the operators have received a not-too-enthusiastic response from lenders.
The three other projects which have achieved financial closure are: Escotel Mobile, Birla-AT&T and Tata Communicatio
s. Four deals in three years. What really then is wrong in telecom _ a sector tom-tommed with internal rates of return predicted at 30-40 per cent or more? The plot of Indian telecom story is centred around the massive over-estimation of the domestic market by promoters of the cellular companies and resultant licence fee bids completely out of sync with the market. Linked to this wrong approximation of the market is the drop in the Indian consumer markets in the last 12 to 18 months suddenly turning consumer buying distinctly bearish.
A good example of the overestimation of the market demand and the consequent overbidding of licence fees is seen in the case of Karnataka. The licence fee _ spread over ten years _ for the state is Rs 1,393 crore which translates into nearly Rs 140 crore a year. At the current usage levels, the two companies licensed to offer services in the state would need more than a lakh subscribers each just to fund the yearly licence fee payout.
That's not all: companies which had predicted usage levels of 250-300 minutes usage a month are in reality recording barely 100 minutes. And, since realisation per minute of a call is down to Rs 6-7 from an earlier projection of Rs 10 or so, the average revenue per user hovers around Rs 1,000; and, in some cases, is as low as Rs 700. However, demand overestimation is not the only factor responsible for the troubles of the cellular industry. Lenders without access to long-term funds and with little experience in appraising telecom projects contribute significantly.
Without a mature credit derivatives market and long-term rupee-dollar swap instruments to hedge against forex risk in the long term, financiers have been wary of exposing themselves to telecom projects. Some $4.5 billion (Rs 18,000 crore) is required by telecom projects in overseas debt alone.
The scenario for basic telecom projects is worse when _ and if _ they come on. The quantum of licence fees are significantly more in the case of these projects: in Maharashtra, the cellular bid was a little over Rs 1,650 crore while the 15-year basic telecom licence was won with a quote of nearly Rs 14,000 crore. The projected cash flows, on the other hand, are not significantly at variance with the cellular projects.
The only silver lining in the sector, then, is the performance of the Rs 17,000-crore department of telecommunications. It has been growing at a compound 16-17 per cent annually in the last four-five years. Admittedly, this growth is sustained by monopoly profits, but addition of 3.5-4 million phones a year is at least something to go by.
Tomorrow this series will focus on the projects in the surface transport sector _ roads, ports and inland waterways.