EGoMs decision on spectrum levy leaves room for arbitrage

Written by fe Bureau | New Delhi | Updated: Jan 28 2014, 11:21am hrs
The empowered group of ministers (EGoM) on telecom on Monday approved a uniform spectrum usage charge (SUC) of 5% of an operators adjusted gross revenues on all new airwaves bought at an auction. Incumbent operators like Bharti Airtel and Vodafone will now have to pay a charge that is the weighted average of 6% on existing spectrum of 10 MHz and 5% on new spectrum.

The decision, which now needs to be ratified by the Union Cabinet, has resolved the uncertainty around the auctions, which begin on February 3. However, the efficacy of the new formula will be proved only once the department of telecommunications (DoT) puts in place a system that can segregate revenues from broadband wireless access (BWA) services spectrum and 2G airwaves.

The decision is broadly revenue-neutral for operators as well as the government. A Bharti Airtel or a Vodafone will pay a charge that is the weighted average of the current charge on existing spectrum and 5% on any new spectrum. Their levy would come down to 5.6% in a circle like Delhi where they hold 10 MHz spectrum from 6% currently.

While a new operator must pay an SUC of 5% against the current 3%, the charge will not go up as it buys more spectrum in future.

The government currently earns a pan-India average SUC of 4.8%. With the charge now at 5%, there will be no adverse impact on revenues.

The EGoM decided to continue with an SUC of 1% for BWA spectrum since it did not want to violate the governments contractual obligation as per the bid conditions of 2010. However, BWA operators like Reliance Jio and Bharti Airtel will have to pay an SUC of 5% for the new airwaves they acquire and will need to report separately the revenues earned from BWA airwaves and new spectrum.

According to sector analysts, segregation of revenues could be difficult, leaving those operators that own both spectrum bands with room for arbitrage. The problem arises because today there are smartphones that can work across both the bands. A similar issue had cropped up before the DoT in 2008 while deciding the SUC for 3G spectrum; an internal panel then had ruled that segregation of revenues between 2G and 3G services is not possible because of similar inter-working of phones and SIM cards across the two technologies. The only possible solution to check such inter-working is to lay down strict guidelines that isolate BWA handsets and other technological architecture from those utilised for 2G services. Something on these lines is done in the case of access services licences and those of internet services and also in the case of GSM and CDMA services.

Sources said that DoT officials have assured the EGoM they would devise a system that effectively segregates revenues between BWA and 2G services. Primarily, it is the operators prerogative to report separate revenues from different spectrum bands, like Bharti Airtel which currently holds radio waves in 2G, 3G and 4G bands does. In case there are any issues, the telecom department can conduct audits to check revenue reporting, MF Farooqui, secretary, DoT, said.

No big losers, no big winners, said telecom minister Kapil Sibal.

A successful auction means greater investment in the sector, he added, explaining the rationale for the new rate.

We expect revenue earned from SUC fees in fiscal 2014 to remain similar to that earned in the last fiscal, said Farooqui. In 2012-13, the government earned a total of Rs 5,689.88 crore from spectrum levy.

However, the GSM industry body, the Cellular Operators Association of India (COAI), which had sought a uniform and flat SUC for all spectrum, is not euphoric about the new system. The new rates provide only about 0.5% benefit to incumbent GSM operators. Moreover, issues raised by industry and sector regulator Trai on arbitrage, complexity of reporting revenues, etc, have not been addressed. While the new system does not benefit GSM players, it provides huge incentives for BWA spectrum holders. This may lead to a muted bidding since operators will have to incorporate the additional cost of higher SUC into any auction strategy, said Rajan Mathews, director general at COAI.

The EGoMs formula for rationalising SUC is different from the one prescribed by the Telecom Regulatory Authority of India, which mooted a flat SUC of 3% for spectrum bought in auction and 5% where there was a mix between auction and administered. This was opposed by Reliance Jio as it meant that BWA operators also pay 3% against 1% applicable on them as per the bidding guidelines of 2010.

Hemant Joshi, partner, Deloitte Haskins & Sells, said that lack of clarity on spectrum acquired through M&A will be a roadblock in any operators bidding strategy. He added that the government should try to move towards flat spectrum charge over a period of time considering technology neutrality.