Financing Handicap

The National Telecom Policy (NTP) 1999 recognizes that provision of
world-class telecommunications infrastructure is the key to rapid economic and
social development of the country. It is critical not only for the development
of telecom equipment manufacturing and information technology, but also has
widespread ramifications on the GDP of the country.

India has one of the fastest growing telecommunication systems in the world
with system size growing at an average of more than 20 percent over the last
four years. With over 169,154 route km of microwave/UHF and over 171,297 route
km of optical
fiber transmission capacity connected to over 27,909 telephone exchanges with
international connectivity to over 236 countries, the existing infrastructure
has still a large scope to grow.

NTP ’99 envisages a tele-density of 7 by 2005 and 15 by 2010. For achieving
the above, approximately 75 million lines (15 million lines per year) would be
required by 2005 and an additional 175 million lines (35 million per year) would
be needed by 2010. At current prices, this translates into an additional
investment of Rs 160,000 crore by the year 2005, which translates into an
average of Rs 32,000 crore per year for the period 2000—05, as against the
existing annual investment of about Rs 18,000 crore.

Setting up a telecom project requires huge investments. While the cost of
infrastructure for providing services in India is among the highest in the
world, the paying capacity is among the lowest. In the overseas market, finance
is available at very low rates.

On the other hand, limited finance is locally available at very high rates.
Further, not many agencies are willing to extend finance either to telecom
operators or equipment vendors.

The government must consider setting up of a telecom finance corporation, for
lending funds at reasonable rates for short, medium and long-term requirements
both to the telecom operators as well as equipment suppliers.

Some of the key reasons for establishing a telecom finance corporation would

Capital-intensive projects: Almost all telecom projects are capital-intensive
and involve medium-or long-term gestation period, resulting in critical projects
not getting a head start due to lack of timely finance.

Commercial viability: As the service prices are regulated and
not market-controlled, they cannot be increased beyond certain limits.
Therefore, a prospective financier considers the investment non-credit worthy.

Plethora of rules: Too many approvals and a plethora of rules
delay project implementation. Sometimes, as many as 100 clearances are required.

Telecom Equipment Manufacturers Association (TEMA),
therefore, in its pre-budget recommendations to the government of India, year
after year, has recommended setting up of a telecom finance corporation for
financing the telecom manufacturing and services sector. TEMA had also
recommended setting up of a telecom finance corporation to the Planning
Commission’s working group on telecom sector for the 10th Five-year Plan, and
to the Telecom Development Council.

Today, most of the private telecom operators are purchasing
equipment from multinational companies that are providing vendor financing on a
long-term basis. Private telecom operators are reluctant to purchase the same
equipment from a local manufacturer, primarily for want of vendor financing. As
a result, the domestic manufacturing sector is suffering as none of the
manufacturing companies are in a position to provide financial package to ease
repayment by the operators. Even BSNL plans to seek equipment against deferred
payments by one year. Although it may be possible, in a few cases (like
liquidation of inventory) to accept a deferred payment proposition, the Indian
telecom manufacturing sector is otherwise not in a position to do that.

The telecom sector is expected to continue its growth
performance of over 20 percent for the next 5—7 years as well. It is an irony
that despite the demand for telecom equipment, the domestic manufacturing sector
may not grow proportionately, as the major portion of equipment supplies would
go to the MNCs offering vendor finances. For strategic reasons alone, domestic
telecom manufacturing industry must grow to provide defense-related equipment
and for rural communication.

In a large number of sectors of the Indian industry, several
government finance corporations are already active. These include NABARD for
agriculture, Power Finance Corporation for power generation and distribution,
Railway Finance Corporation for Railways, Small Industries Development Bank for
the small-scale sector, and Banking Institute Technology Development Board for
DST financing technology projects.

TEMA also recommends that a committee of experts be formed to
identify the sources of funding, including government funding, multilateral and
bilateral assistance, institutional financing, market borrowings, internal
resources and private investment. The government can contribute the seed money
while other banks and financial institutions can contribute to the corpus.

Arun Khanna, President, TEMA

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