Telecom Equipment Vendors Hit By Delays

The delay in financial closure - tying up sources of equity and debt funds of cellular telecom projects has put under squeeze the India business plans of equipment vendors like Ericsson, Siemens, Nokia and Motorola.

This is because the letters of credit (LC) opened for the equipment imports have lapsed and the Reserve Bank of India (RBI) is taking time clearing the extension of the LCs.

The central bank does not clear extension of LCs automatically, but adopts a case-by-case approach.

Apart from the additional costs caused by the delay in getting an extension, the situation has been worsened because most telecom equipment vendors have taken upon themselves the cost of the LC - between a quarter to half per cent of the transaction amount.

Typically, the cost of equipment for a single circle ranges between $30 million and $35 million (Rs 108 crore and Rs 126 crore).

The cost of an LC of this amount would vary between Rs 27 lakh to Rs 54 lakh.

The amounts get huge because in many cases one vendor has won contracts to build cellular telecom networks in several circles.

For instance, Ericsson of Sweden has won contracts to roll out networks in ten circles on its own, in addition to setting up mobile switching centres (the equivalent of exchanges in cellular networks) in eight circles along with Motorola.

Finnish major Nokia is building out networks in five circles on its own and two circles along with Motorola.

German engineering major Siemens has won contracts in three circles on its own and another three along with Motorola.

Alcatel has four circles to build networks in and Lucent Technologies (formerly of AT&T) three circles in its kitty.

According to norms prescribed by the Organisation of Economic Cooperation and Development (OECD), vendors are allowed to finance up to a maximum of 85 per cent of this amount through suppliers credit.

This is usually sourced from external credit agencies (ECAs) like Export-Import banks of their countries.

In India the equipment vendors have even arranged to finance the remaining 15 per cent through commercial banks.

The equipment suppliers cannot convert the LC amounts into short-term loans because ECAs will then not disburse the 85 per cent of equipment cost as contracted.

The ECA credit is for financing exports from the vendors country. If the cellular operator with the help of the vendor converts part of the LC amount into short-term loans, then the ECA will reduce the disbursement by that amount, a banker said here.