Column : A spectrum blow to telecom

Written by Nripendra Misra | Updated: Nov 13 2012, 09:00am hrs
Telecom services have been loudly acclaimed as the success story of economic policy in India. The National Telecom Policy 2012 has proclaimed that the availability of affordable and effective communications for the common man is at the core of the agenda. In a knowledge-intensive global scenario, telecommunication is the key driver of economic and social development. Its contribution to GDP growth has been confirmed by the World Bank.

The recent developments and policy decisions by the government unfortunately give the impression that the prime consideration is contribution to the state exchequer and much less on revamping and consolidation. There are several key issues that have resulted in the standoff in the telecom sector. We need to recognise that the Indian telcos have underperformed in the last three years due to increased regulatory risks and a self-inflicting drive in tariff cuts. If newspaper reports are to be believed, there is no bidder of spectrum earmarked for CDMA services. Only 5-6 companies have deposited earnest money for the auction of GSM-related spectrum. Most of these companies have shown interest for select service areas. It is safe to conclude that the response is not very encouraging and the government may miss its budgetary expectation of R40,000 crore unless there are some surprise irrational bidding. It seems that even the serious players have been discouraged because of an unreasonably high reserve price, which is disproportionate to the current revenues and future growth prospects. The auction needs to be designed in a manner such that there is well-spread rent-seeking linked with the growth of the industry. The high reserve prices have in some ways pre-empted the market determination of the value of spectrum.

Another key issue is the governments surprise choice in favour of spectrum refarming. The argument in favour of refarming is enforcement of a level playing field, realisation of spectrum value at present market price and maximisation of the versatile usage of the spectrum band. The details of the policy are both contradictory and self-defeating. The argument for a level playing field is weakened if the existing owners are allowed to retain one half of their present allocated spectrum. Initially, 900 MHz band was allotted because of its availability to the first three operators. Later on, the number increased to seven operators in total including two PSUsBSNL and MTNL. These service providers have expanded their network and have a substantial presence across urban and rural areas. In the event that they are asked to move to the 1800 MHz band, they would be required to put up additional base stations and re-engineering the existing base stations available to them. One estimate provides a capex of R55,000 crore apart from incremental annual operation cost. All this exercise may invite re-writing of the balance sheet and will have implications on the tariff. In the developed countries, refarming has been tested in the background of business case, economic and financial outcome and competitive landscape. There are other issues of implementation, including the need for retaining both 900 MHz and 1800 MHz during the period of implementation, which could be 2-3 years. Lastly, it is difficult to identify the future ownership of this 900 MHZ band except the existing key incumbents who have both financial and entrepreneurial capabilities to maximise the utilisation of this versatile band. In case there is a rational determination of the auction price for 1800 MHz band, the solution in terms of retaining 900 MHz band, can be through a monetisation route rather than refarming.

The decision on spectrum renewal and payment against excess spectrum is equally critical to the growth of the telecom sector. Any regulatory uncertainty would adversely affect the government commitment in NTP 12 and attracting investment both domestic and foreign. The renewal of spectrum ownership and license of existing operators will fall due from 2014 onwards. It is learnt that the Telecom Commission favours the regulators recommendation of realising the market price of spectrum based on the 2G auction. Additionally, the regulator has also recommended that the operators holding more than 6.2% of MHz spectrum should be asked to pay a one time levy for excess spectrum held. The decision of the government on these two critical pending issues would have a long-term bearing on the health of the existing players. The decision for deferred payment as evolved in 1999-2000 while permitting migration to a new regime would appear financially viable and more acceptable to the operators. The DoT has also decided for a unified license. Therefore, the migration could be permitted at the time of renewal and also in realising the price of excess spectrum through a longer and flexible levy keeping in mind the outcomes of 2G spectrum auction. Thus, a part of market determined price could be realised upfront as a one-time payment and the balance could be spread as minimum annual levy.

Finally, DoT will have to tackle the structural deformity as there seems to be a poor financial case for retaining more than six players in a circle. This would become particularly critical after the one India one license policy is endorsed. The government will have to incentivise consolidation through clear-cut regulatory criteria. Even NTP 2012 has emphasised appropriate mechanisms to achieve a balance between competition and consolidation while dealing with the legacy issues in the sector. The interest of the consumer would also be safe once the above issues are constructively addressed.

The author is former chairman, Telecom Regulatory Authority of India