A practical solution is to move towards a single licence fee and link it to services revenues and spectrum
The telecom sector today faces crippling impasse about spectrum and licensing. The two recent auctions for spectrum failed to attract sufficient bidders. Telecom companies are resisting high reserve prices and one-time fees for spectrum. The government cannot give in since it has a deficit to plug and cannot afford fresh allegations of collusion. Is there a practical solution?
Fortunately, there is and it could allow the government to lower reserve prices without allowing the companies to run away with largesse. A simple way is to reduce upfront payments by companies, but keep variable the proportion of revenues they currently pay to the government in the form of licence fees and spectrum charges. A practical way to achieve this is to move towards a single licence fee and link it to two variables, viz the total telecom services revenues and the spectrum held by each company. The idea is that the government specify its target licence fee as a unique proportion of sector revenues each year, akin to a tax in the budget. Individual companies would then pay licence fees, according to the following formula:
Annual licence fee for any telecom company = PxSxR, where R represents total yearly revenues from telecom services, P the fraction of these revenues that the government would retain every year, and S the fraction of total spectrum allocated that is held by the company.
The licence fee implies that companies without spectrum will pay no annual fees. This reflects the practice in most mature regulatory regimes where players pay for the use of spectrum and other scarce resources but are largely free to provide any or all services. Indeed, this will usher a unified licence that is more coherent than the one recommended by the Telecom Regulatory Authority of India (Trai), and still in line with the National Telecom Policy announced last year.
Allowing government to fix P above gives it a handle to protect its revenues. Passing the entire burden of licence fees on spectrum users will not shock the system either. Mobile services already contribute roughly 75% of total revenues and this rises to 97% if you include their revenues from long distance. (Each mobile player provides national and international services that are predominantly consumed on mobile devices.) Also, the unified licence, when implemented, will remove service distinctions.
Limiting fees to spectrum users justifies merging the old licence fees and spectrum charges, making the system simpler and easier to implement. Basing all licence fees on aggregated and not individual revenues of companies promotes efficiencies since more productive players will pay less. This also reduces incentive to under-report revenues to escape liabilities.
It would make sense to implement these changes for all players in 2014, when the first set of telecom licences are due to expire. Tenures of all existing licences too could then be brought at par. The Trai Act allows the government to issue directives on policy matters and these changes should certainly qualify.
Linking fees with yearly revenues will reduce dependence on high reserve prices. This will help design better spectrum auctions. This is critical in today?s climate of mistrust. Today, maximising government revenues upfront seems the only defensible objective even if it scares away investors and delays rollout of networks. The new approach will reduce the risk of companies using low reserve prices to grab spectrum cheaply, since the government can fix, each year, the share of revenues to be paid as licence fees and prevent unintended windfalls.
This approach will similarly allow a more transparent allocation of spectrum for special needs or less developed markets. This seems difficult to accommodate in today?s environment with high upfront payments. We could seed new markets, aid innovation and efficiency by designing special auctions?or have no auctions at all?to allocate spectrum to promote specific technologies or solutions. For example, European countries like the UK and the Netherlands have auctioned separate spectrum for communications within buildings, since wireless traffic increasingly originates and terminates there.
These proposals need fine-tuning. For example, Trai would need to compute fees for companies that use different types of spectrum, for example 2G, 3G, 4G spectrum or even VSAT, and propose an equivalence. The proposals could benefit standalone international long-distance players substantially. They hold no spectrum and the roughly R200 crore they will save in annual fees might be seen as ?unearned profits? to be prevented. Similarly, the differential impact on mobile players too might need to be reconciled, at least once, to facilitate moving to the new system. Trai is competent to review options and possibly recommend a one-off adjustment in fees. The government too might want to fix a token fee to administrative costs of licensing, as some countries do.
Disputes are endemic to the sector, but courts can resolve them, as they have done till now. The new proposals are a defensible policy shift in line with overall government objectives. If Trai can respond to a government reference as efficient as it does, the government can lower reserve prices without needless controversy. This will end the current logjam in the telecom sector and offer a workable framework for the future.
The author is a telecom consultant