Liberalise E and V spectrum, replace telco levies

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November 5, 2020 7:15 AM

The liberalisation of E and V band spectrum offers a unique opportunity to expand broadband usage. Let it signal the reform of India’s telecom licensing regime

The unique feature of the Unified Licence (UL), which telcos hold, is that its holders must share a substantial part of their revenues with the government, as levies.The unique feature of the Unified Licence (UL), which telcos hold, is that its holders must share a substantial part of their revenues with the government, as levies.

There is a fresh controversy around spectrum in India’s telecom sector. The sector’s key players are divided on access to unused spectrum in E and V bands—we offer more details later—that can expand broadband capacity. The Telecom Regulatory Authority of India (Trai) has recommended to the government that this spectrum be regulated lightly or “liberalised” to promote wider use. Major technology companies and standalone internet service providers (ISPs) support Trai’s proposal. However, telecom operators (telcos), the main users of spectrum in India, vehemently oppose this idea. Cellular Operators’ Association of India (COAI), in a letter to the government, claimed that the proposal is “technically not feasible, legally untenable, causes huge revenue loss to the government and disturbs level playing field”. It advocates auction of the spectrum for the exclusive use of its members. A final decision is pending.

I argue below that Trai’s proposals are sound and timely and in line with the reform undertaken by regulators in a growing number of countries. The telco response reflects more the shortcomings in India’s telecom licensing regime, that is delaying urgent reform, and less the weakness of the proposals.
We start with a brief introduction to the proposals.

The spectrum recommended for liberalisation relates to frequencies between 71-76 GHz and 81-86 GHz (E Band), and to 57-64 GHz (V band). It supports high-speed data transfer at short distances but is currently idle. The range of E band frequencies is about a kilometre while that of V band is 200-300 metres since the lower frequencies, which normally imply longer reach, are in the range where oxygen molecules absorb them.

In view of this, regulators increasingly recommend liberalisation of E band spectrum and delicensing of V band spectrum. This would untap the potential of a valuable and scarce economic resource. Liberalisation would also open the market to innovative players, technologies and business models, and enhance services available to users and the economy at large. India’s own National Digital Communications Policy (NDCP) of 2018, spoke of “promoting the effective utilisation of high capacity backhaul E-band… and V-band …spectrum in line with international best practices”.

However, India’s licensing rules complicate this reform.

The unique feature of the Unified Licence (UL), which telcos hold, is that its holders must share a substantial part of their revenues with the government, as levies. These levies are over and above the international norm, which is: a market price for spectrum, nominal regulatory fees, and applicable taxes. Indian telcos paid a massive `4,028 crore ($540 million) in levies to the government in the last reported quarter.

The new users of liberalised E and V band spectrum would avoid the levies, if the spectrum is available for use with say, a registration, instead of a UL. It will be cheaper for them to offer a niche service like highspeed data transfer at short distances. However, the savings would be tiny compared to costs and revenues of the services that telcos provide across the country through their exclusive 2G, 3G and 4G spectrum.

However, this “cost advantage” of niche players presents a problem that is unique to India: It feeds the claim that liberalising E and V bands, “disturbs the level playing field”. It serves to block other potential users of the spectrum on the grounds of “same service, same rules”. This is critical since the rules do not limit the number of players in the market or offer them exclusive rights to any unused spectrum. Such “level playing field” considerations do not apply in other jurisdictions, even if telcos may and do advocate exclusive use of the spectrum.

Niche service providers are unregulated in most jurisdictions. However, in India, due to the burdensome levies on telcos, niche players can be nipped in the bud by invoking the “same service, same rule” mantra. Markets that thrive elsewhere have made little headway in India. Examples include Wi-Fi hotspots, virtual network operators, use of cable TV infrastructure for broadband and other services that “non-telco” entrepreneurs can provide.

The direct link between UL levies and government revenues has the unintended effect of aligning the interests of incumbents and the government. It also serves to entrench incumbents and deprives consumers of the proven benefits of competition.

Other complaints against liberalisation are easier to address.

It is incorrect to suggest that liberalisation is technically unfeasible. Eighty-six countries already regulate E band spectrum lightly, and 22 have completely delicensed V band.

It is an exaggeration to claim that the reform is legally untenable in view of the Supreme Court judgement in the 2G case in 2012. The Court had ordered that in future all spectrum be allocated through auctions. It came down strongly against spectrum allocation using administrative or “first-come-first-served” methods, which deprived the exchequer of legitimate revenues and led to private profit. However, the Court offered important clarifications of its position in its response to the presidential reference on the matter. It accepted that the allocation of natural resources is a matter of economic policy, not a constitutional principle. It acknowledged the limitations of auctions as the sole method of allocating scarce resources.

The government too, has made exceptions. In 2018, the government issued a notification to delicense the use of spectrum—5,150-5,250 MHz, 5,250-5,350 MHz, 5,470-5,725 MHz, and 5,725-5,875 MHz—for low power applications. In 2015, it reportedly allocated microwave spectrum to TSPs without any auction though subject to clarification of rules. Also, it is difficult to equate sharing of spectrum with its allocation for the exclusive use of a private player.

It is trite to link liberalisation of E and V bands to a loss of revenues of the exchequer. The government has repeatedly claimed—most recently in the NDCP—that revenue maximisation is not its sole policy objective. Indeed, COAI has a long-running and justifiable demand for lowering of levies and auction reserve prices, and opposition to the auction of the microwave spectrum. Surely its proposals, if accepted, will hurt revenues of the exchequer.

India’s flawed licensing regime has delayed important reforms. Robust competition from players, technologies, and business models is the way to address the needs of India’s diverse users, from the marginal to the extremely sophisticated.

Large levies are a burden on telcos and distort market competition. They must be replaced by less distortionary instruments such as the general tax regime. This author proposed another approach in this newspaper (bit.ly/2TTHyeI). There could be others too.

The liberalisation of E and V band spectrum offers a unique opportunity to expand broadband usage. Let it signal the reform of India’s telecom licensing regime.

Author advises diverse clients on telecommunications regulation and policy. Views are personal

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