The distressed telecom sector in India, hit by regulatory uncertainties, had pinned its hope on the much-awaited policy on spectrum auctions. However, the recently proposed recommendations by the Telecom Regulatory Authority of India (TRAI) have left the industry staggering.
The reserve price for pan-India spectrum is proposed to be between $0.16 billion/MHz and a whopping $3.22 billion/MHz for various spectrum bands. The reserve price for 1800MHz band is pegged at $0.80 billion/MHz, which is 1.1 times the price discovered in the 3G auction in May 2010.
The recommended reserve price for spectrum in the 800MHz/ 900MHz frequencies is $1.61 billion/MHz (2.2 times 3G auction price) for a pan-India slot and a staggering $3.22 billion/MHz for 700 MHz band which is 4.3 times the auction price for 3G and 23 times the auction price of BWA. The extraordinarily high reserve price could result in a muted response from the intended participants.
The auction may not be able to attract global companies for greenfield operations. The objective of auctions is to aid in discovering the market price of the scarce resource. However, with the towering entry barrier and limited participation, the Government's aim would remain unfulfilled.
3G, a painful experience
Underpinning 3G clearing price as the basis for computation of reserve price for all future spectrum auction is unreasonable. Telecom companies in India acquired 3G spectrum for $0.74 billion/MHz for a pan-India slot, which exceeded the estimates of industry analysts and experts. 3G mobile technology worldwide has been a victim of excessive hype in the early part of the century, and India proved to be no exception, with emotions running high to acquire the limited 3G spectrum.
3G, characterised by expensive licence fees, especially in European countries during the early 2000s, has been a painful experience for many operators. Price paid per habitant for 3G licences due to overbidding in the UK and Germany was excessive at $595 and $559 respectively, with total 3G licence outgo at $35.4 billion and $45.85 billion. The strict mandatory roll-out obligations as part of the licensing conditions made matters even worse.
Some European operators wrote off their 3G licence investments while others surrendered their licenses altogether to the regulators when the prospect of recovering the cost of the outlay in the foreseeable future seemed extremely bleak. Operators that decided to stay the course have struggled to generate the kind of revenue streams on the 3G networks to recoup investment costs.
The failure is largely attributed to the prices paid by the operators in winning the auctions which was replicated on the average cost that was charged to the end consumer for the services, in turn leading to low subscriber growth.
Furthermore, the proposed reserve price in India is exorbitant when compared with the spectrum clearing price per MHz of other countries where the auctions were conducted in recent years for IMT services. Factoring the monthly ARPUs (average revenue per user) of selected countries, this contrast would be even starker.
Dent on cash flows
According to global studies, the reserve prices for future auction can be estimated at 0.5 times the final prices of the preceding auction. Though, in the context of Indian telecom sector, where the demand for spectrum is considerably higher, the authority decided to use a factor of 0.8 to determine the reserve price. The sagacity of this can be endlessly debated.
If spectrum is acquired at such phenomenal rates, the service provider is likely to pass on the higher costs to mobile phone users, leading to an increase in the wireless tariffs, which will impact the uptake of services. The revised spectrum pricing indicated by the regulator would be a big dent on cash flows and would also be reflected in the long-term valuations of the industry. The industry may witness huge outflow of funds and FDI. Any additional burden on the operators would ultimately lead to the natural death of telecom companies in India and de-growth of the industry.
The advantages for the service provider in the new spectrum policy are as follows. First, with liberalisation of spectrum, operators will have the option to use their entire spectrum for any technology by paying the auction-discovered price (adjusted pro-rata for the remaining licence term), which would rebase the licence period for all holdings to the next 20 years. Also, holders of spectrum at auction prices would be allowed to trade spectrum only to the limited purpose of frequency configuration.
The second advantage is modification in payment modes, i.e. an initial payment of 25–33 per cent of the total amount has to be made, depending on the spectrum band. After a two-year moratorium, the rest would have to be paid over a 10-year period. Third, the regulator has also reduced the spectrum usage charge to 1 per cent from adjusted gross revenue (AGR) from 3-8 per cent of AGR, which operators are currently paying depending upon the spectrum that they utilise. However, in net present value terms, this will be not be much of a respite for the sector.
The draft National Telecom Policy, 2012, lays emphasis on providing affordable and quality telecommunication services, especially in rural and remote areas. The thrust of the policy is to empower common man by using ICT in education, health, employment generation and financial inclusion making India a truly information society. However, the recommendations by TRAI are proving to be paradoxical. The clouds of recession are hovering over the industry and such recommendation would make the industry ‘out-of-reach'.