Post the 2G spectrum controversy of 2008, the government is determined to make amends by extracting a hefty wad of cash from the upcoming reauction. Industry players are largely unhappy with the resulting policies and lawsuits by some of the affected incumbents have ensued. By Pupul Dutta
2010 saw the Government of India auction the 3G telecom spectrum for Rs 67,719 crores—a huge amount of money by any standards. This, however, sparked queries as to why 2G spectrum hadn’t earned the exchequer a corresponding amount. The fallout of the 2008 2G spectrum scam, that has haunted the UPA- II, has been that the Union government has decided to auction these precious radio airwaves at a reserve price of Rs 14,000 crores for a 5 MHz pan India license in the 1800 MHz band. What’s more, the cabinet also approved the recommendation of the EGoM (Empowered Group of ministers) for a reserve price for the 800 MHz band at 1.3 times that of the 1800 MHz band.
With policies and pricing such as this, the government as well as regulator TRAI, have been at the receiving end of the telcos’ and analysts wrath.
To add to the misery of the telcos, the DoT along with TRAI has suggested that spectrum in the 800 and 900 MHZ bands (CDMA and GSM respectively) that’s currently being held by telecom operators be replaced with spectrum in the 1,800 and 1,900 MHZ bands respectively. The former are technically superior bands and are currently being used to provide GSM services in the country.
It is believed that, after the cabinet’s decision on the reserve price for 2G spectrum auctions, particularly the dicing of spectrum into slots of 1.25 MHz that comes with a price tag of Rs. 3,500 crore, it is widely expected that most incumbents who hold a higher amount of spectrum will bid in multiples of 1.25 MHz in select circles—those where they have the maximum subscribers or business.
As far as the new entrants like Uninor and MTS are concerned, they will be required to bid for at least 5 MHz of spectrum to carry on with their telecom business in India entailing a minimum outlay of Rs. 14,000 crore.
Impact on pricing
According to experts, in any auction, the base price has a greater impact on determining the number of participants, less so the final price. Therefore, it is quite possible that the number of bidders taking part in the auction may be impacted by this price (Rs 14,000 crore for a pan India license). Alternatively, bidders may restrict themselves to fewer circles.
“Interestingly, if we go into the circle-wise breakup of this figure, it appears that some of the category ‘C’ circles (tier II and III cities) have a relatively lower cost. It is possible that some bidders may restrict themselves to such circles. In fact, while base price has been reduced, the annual spectrum cost has been raised in a graded manner to be between 3-8%,” said Dr. Devendra PS Seth, Former Chairman and MD, BSNL , who was also former member of Telecom Commission and TRAI.
He explained that, depending on how the government counts the total spectrum holding, which ideally should be clarified before bidding, the actual cost of spectrum may go down for smaller spectrum holders (such as new operators) and it may rise for existing operators who already hold spectrum. “If the total spectrum holding is counted, the new operators will be in an advantageous position. A clarification from the government on this aspect will also impact bidding,” said Seth.
So far as the value of the base price is concerned—the calculations on which these are based viz. investments involved, ROI, etc—it appears that there has been an under estimation on the investment that’s necessary and, therefore, if the operators set about compensating for the costs, the potential tariff rise will be more than what has been projected by TRAI.
Rajan S Mathews, Director General, COAI, the GSM body of telecom operators, said, “Changing the payment model to high upfront charges coupled with even higher Spectrum Usage Charges (SUC) only aggravates the problem. Internationally, where the spectrum has been allocated through the auction process, SUC is fixed at a nominal rate not exceeding 1%. It is imposed only to recover the administrative costs that are associated with managing spectrum. As expressed by COAI, on various occasions, high payment for spectrum, one way or the other, will adversely impact affordability, as the tariffs are bound to go up. The situation is going to adversely impact rural penetration as well, as rural rollouts will become increasingly unviable and unsustainable.”
Impact on FDI
Foreign Direct Investment (FDI) in the Indian telecom sector was $1.7 billion in FY 2011, which was down by almost 35% as compared to the $6 billion in FY 2010. According to reports from COAI, investments in the sector by leading operators are down 50%. Moreover, banks and FIIs, including domestic ones, have stopped lending to telecom players owing to the policy uncertainties.
“Two aspects of an industry are important for FDI. The investor must get a good return on his investment and the market should have a stable and fair regulatory regime. The happenings of the past three to four years have sent shock waves coursing through the industry with the final nail in the coffin being the cancellation of licenses, which was an inevitable outcome considering the direction in which this sector had moved during recent years. If we are able to provide a stable, growth friendly and fair policy and regulatory regime, there is no reason why FDI will be held back only because of spectrum price,” said Seth.
Sistema lost $700 million, Telenor forfeited $680 million and Etisalat wrote off $820 million of its investment following the cancellation of 2G licenses by the Supreme Court in February this year. Uninor and Sistema, better known as MTS, have threatened to exit India in case policies become unfavorable.
Commenting on the situation, a top official of a telecom firm offering both CDMA and GSM, on the condition of anonymity, said, “MTS and Uninor will be affected in a big way if the policies are not tweaked in the telcos’ favor (all telcos in general). For them, these auctions are as much a necessity as it is an opportunity for the existing players.”
Fate of new players
According to experts, it is believed that India never had the market dynamics to support this many players. Hence, the exit of a few would not make a huge difference.
“There never was a market for 12 to 14 players. Of the operators whose licenses have been canceled, only two or three are likely to be interested in continuing their services (particularly those who have invested a lot in infrastructure).They will likely bid for spectrum unless the actual auction process takes so long that they move on to other markets or sectors,” opined Seth.
Mathews of COAI, on the other hand, felt that not many companies would continue their operations due to which the financial implications for the entire sector would be grave if the present recommendations were implemented.
“As far as spectrum is concerned, we are also concerned as to how many operators would be able to buy back an adequate amount of spectrum in order to renew their services in the affected license areas owing to the scarce quantity of spectrum being made available for auction coupled with the exorbitant prices being recommended,” he said.
MTS, which is a joint venture between Sistema Joint Stock Financial Corporation of Russia and the Shyam Group of India have been the most affected by the entire 2G scam and policies, so much so that the Russian government had to intervene.
Vsevolod Rozanov, President and CEO, Sistema Shyam TeleServices Ltd (SSTL), said, “Given the realistic sectoral environment and market dynamics, the reserve price for spectrum as approved by the cabinet is excessively high. There is no rationale to support why the 800 MHz CDMA spectrum should be priced 1.3 times higher than the GSM 1800 MHz spectrum. It is significant to note that the GSM spectrum being put up for auction is liberalized whereas the 800 MHz CDMA spectrum continues to be non liberalized.”
Rozanov added that the true market price of spectrum had to be determined through auctions as the Supreme Court in its February 2 order had directed. “Hence, the reserve price for spectrum should be Rs 1,658 crores and any change in this pricing contradicts the spirit of the same order,” he said.
SSTL has filed a curative petition before the Supreme Court post the government’s announcement on pricing of spectrum. “I am hopeful that the highest court of the land will look into the merits of SSTL’s case and give us justice,” Rozanov added.
Spectrum refarming or redistribution?
Spectrum refarming means allotting the already used frequencies for some other purpose or migration of operators from the band that they currently use to some other band and reusing the current band for other radio services. It is a global phenomena, which ensures better value and usage of available spectrum.
Most telcos have been against the practice, alleging that TRAI’s re-distributing rather than re-farming. Mathews of COAI commented, “The directive for re-farming, as the process suggested by the government is not that of re-farming but of redistribution and it is based on weak grounds. The entire restructuring of an efficient network, by ripping out the existing infrastructure, disconnecting the connected, and then deploying an infrastructure, which is more demanding in terms of both capital as well as space and construction, does not bring any benefit, whether to the industry or the consumers.”
According to a study by Analysis Mason, operators with the 900 MHz band would need to replace 286,590 base stations and install an additional 171,954 base stations in order to provide equivalent coverage on 1800 MHz; which would result in an incremental CAPEX of Rs 54,739 crores and incremental annual OPEX of Rs 11,762 crores. Also, operators would have to write-off their existing 900 MHz assets at an estimated cost of Rs 22,310 crores. At an industry level, an additional CAPEX of about Rs 26,653 crores would be required to deploy new towers and support the incremental base stations.
In the scenario that operators with 900 MHz spectrum are unable to provide equivalent coverage due to business case and operational feasibility, there is the risk of reduction in geographic coverage by as much as 40%. Such a reduction of coverage is estimated to directly impact the connectivity for about 70 million subscribers and other consumers who would be trying to reach them.
Sweetening the deal
Given the tough policies and high pricing of the radio waves, the government has sweetened the entire deal by offering a few candies such as staggered payments wherein a telco can pay some pre-determined amount at the time of winning spectrum and the rest can be paid over a period of some ten years or as decided. Also, the cabinet has approved the mortgage of spectrum, which would help telcos get a bank loan for their auction bids.
However, telcos and analysts call this move as sheer sugar coating over the bitter tablet that lies within. Mahesh Uppal, Director Com First, a Delhi-based consulting company that specializes in policy, regulation and strategy, said, “It is simply sugarcoating the deal. It might improve the taste a bit but there is nothing substantive that has been done to provide relief to operators.”
Seth on the other hand believes that any amount of sweetening at this level would be of no help whatsoever to telcos. “Calculations are available to show that staggered payments do not offer benefits except perhaps on the cash flow situation. Other actions such as permitting mortgaging of spectrum and easier M&A are good steps for the sector. However, the real benefit of mortgaging of spectrum can only be realized with spectrum trading which is currently disallowed,” he said.
What’s next
Given the price at which the spectrum is to be auctioned, it is unlikely that many players would participate in the process. Also, with the high acquisition prices, tariffs too are expected to go up by almost 25-30%.
Opined Jaideep Ghosh, Partner KPMG Advisory Services, “The tariffs in India have been low. In the past 18 months, we have seen 15-20% firming up of the basic voice tariff. Because of the competitive scenario and the fact that the tariff is low, the established operators’ EBITDA margins have been hit. With 2G auctions, it is expected that tariffs would go up considerably. It may not go three times higher but it would firm up.”
Going ahead, the government had fixed August 31 as the deadline for the 2G spectrum auctions. However, no preparatory work has begun that would confirm the government’s or industry’s seriousness in conducting the same. Given the fact, the auctions are conducted online, the appointment of the e-auctioneer has not even started. Several pieces in the run-up to the auctions remain incomplete, which makes it virtually impossible to meet the stated deadline.
