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Troubled Waves

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Less than a month before retiring, chairman of Telecom Regulatory Authority of India (Trai), J.S. Sarma, has ensured that the telecom industry remembers him, but for all the wrong reasons. Almost every telecom operator has something to hate in the 176-page Recommendations on Auction of Spectrum, which Sarma released last week. In the short run, it threatens to create more disruption before things settle down. Of course, the Department of Telecommunications (DoT) may not accept all the recommendations, but chances are that many of them will go through.

The biggest shocker is the reserve price for all future spectrum auctions. Based on the 2010 3G auction prices, the reserve price for 1 MHz of spectrum of the 1800 band across India has been fixed at Rs 3,622 crore. The reserve price for 4.4 MHz of start-up spectrum across India will be Rs 15,937 crore — almost 10 times the Rs 1,659 crore charged in 2008 for similar spectrum under former telecom minister A. Raja.

There's more. Trai wants the base price for  the 900 band (that will be auctioned in 2013-14) to be fixed at Rs 7,244 crore per MHz — almost double the base price for 5 MHz (not 1 MHz) of 3G spectrum in 2010. It has also fixed the price for the 700 band (to be auctioned in 2014) at Rs 14,488 crore per MHz, four times the base price for 20 MHz of the 2300 band in 2010.

The high reserve prices have shaken the industry. In a first ever, two rival industry bodies — the Cellular Operators Association of India (COAI) and the Association of Unified Service Providers of India (Auspi) — have come out with a joint note on the topic. Says the head of a large telecom operator: "Have they seen the results of telecom companies? They simply want to kill the sector." A former senior bureaucrat in the communications ministry says "this is the last nail in the coffin" for the industry.

















WHAT TRAI HAS RECOMMENDED


  • 5 MHz of the 1800-band spectrum beauctioned this fiscal year at a reserve
    price of Rs 3,622 crore/MHz

  • Any operator can bid so long as they do not violate the cap of 10 MHz (Delhi & Mumbai) and 8 MHz (rest of India)

  • The 900 band to be refarmed at a base price of Rs 7,244 crore/MHz

  • The 700 band, which can be used for
    4G, to be auctioned in 2014-15 at a base price of Rs 14,488 crore/MHz

  • Spectrum usage be liberalised

  • Spectrum usage charges be lowered to 1 per cent

  • A staggered payment schedule for
    the licence fee, including a two-year
    moratorium


WHAT IT MEANS FOR THE INDUSTRY


  • Bids will start at a base price of Rs 18,111 crore for 5 MHz of the 1800-band spectrum. Only one
    operator can get spectrum in a circle

  • Since incumbents can also bid, operators whose licences were cancelled may not get spectrum

  • Incumbent operators (Bharti Airtel, Vodafone, BSNL and Idea Cellular) could lose spectrum in the 900 band. They may be offered equivalent
    spectrum in the 1800 band at market price

  • Spectrum becomes expensive. Reliance Industries gets time to roll out services before other operators can aspire for 4G spectrum

  • Operators can use any technology to provide any service on any band

  • Operators will gain after the bid as earlier charges were between 3 per cent and 8 per cent



Trai also wants to re-farm spectrum in the 800-900 band. Re-farming means changing how a particular band of spectrum is used. In lieu of the lost spectrum in the 800-900 band, operators will get spectrum in the 1800 band at the discovered price. Operators can bid for spectrum in the 800-900 band. But the good part is that spectrum use will be liberalised. So any operator who acquires spectrum in the auction can provide any telecom service using any technology on the band. Trai also says re-farming will be implemented from 2014, when the 20-year licences will begin to expire.

No One Is Spared
Almost every operator has reason to complain. For incumbents the cost of doing business will go up sharply. First, they will need to buy spectrum in the 1800 band at the discovered price. Second, they will want to retain the 900 band in key circles. Third, they will need to re-configure existing networks to match the 1800 band. That would be a neat 50 per cent increase in capital expenditure, by some estimates.

Among incumbents, the hardest hit could be the two state-owned telecom companies — BSNL (Bharat Sanchar Nigam) and MTNL (Mahanagar Telephone Nigam). Trai has mandated that 2.4 MHz of MTNL's spectrum should be withdrawn immediately. Says Anita Soni, CFO at MTNL: "Yes, it will increase our costs since spectrum has been capped at 10 MHz in Delhi and Mumbai." MTNL would need to shell out a minimum of Rs 8,800 crore to get 6.2 MHz of the 1800 band in the two metros alone. This will add to its burdens — it recorded a loss of Rs 2,644 crore during April to December 2011.

But BSNL could lose more as it has 6.2 MHz in the 900 band across India, barring Delhi and Mumbai. For something similar in the 1800 band, it would have to pay at least Rs 22,500 crore. And this when it suffered losses of Rs 5,997 crore in 2010-11.

The private sector incumbents, too, will need deep pockets. Analysts estimate that Bharti Airtel will have to pay over Rs 32,000 crore, and Idea Cellular Rs 21,000 crore. But once that is done, they can offer 2G, 3G or 4G in that band. This will, of course, depend on how many devices are currently available in each band. A Vodafone executive says, "We believe that several of these recommendations are retrograde and if accepted, will do irreparable harm to the industry." Bharti and Idea Cellular refused to comment on Trai's recommendations.

While the incumbents at least have an established network, new operators whose licences have been cancelled by the Supreme Court (SC) are worse off. While licences of eight were cancelled, Trai has put up only 5 MHz of the 1800 band for auction initially even though it says that 576.2 MHz is available. Just 5 MHz means that only one operator can get that spectrum.

By doing this, Trai has imposed a cap on the number of operators in a circle and created an artificial scarcity of spectrum. This goes against its own suggestion in 2007 when it did not want any cap on the number of operators in a circle.

break-page-break
Then, the new operators wanted the auction to be initially restricted to companies that have lost licences. Trai, however, has opened it to all. Says Sarma: "We cannot have an auction for cancelled licences alone. They don't exist as a class as far as spectrum auctions are concerned."

So, it is possible that a new operator will not get spectrum in circles where it is already operational in the 1800 band auctioned earlier. A statement by Uninor says: "It seems obvious that some of these recommendations will create severe negative impact on the entire industry. It is up to the political leadership of India to now ensure that the gains of the past few years of affordable phone calls for India's people are not undone."

Since the SC has ordered the government to hold the auctions by 31 August, there may be another auction of the 1800 band this fiscal year and whose base prices will be the closing price of the first round, making it even more expensive.

Some new operators contest the liberalisation ‘advantage' as well. They only want to be in the 2G space (the low-end market) and so did not bid for 3G spectrum in 2010. A liberalised spectrum will finish their business case. The regulator and the licensor (DoT), however, say the recommendations are progressive. Says R. Chandrashekhar, secretary, DoT: "Liberalised spectrum with complete freedom to use it for any technology for the next 20 years is an important factor."












RE-FARMING IMPACT
BHARTI AIRTEL Spectrum re-framing will increase costs. Renewal payments would be over Rs 32,000 crore. Lower spectrum usage charges will benefit in the longer term
VODAFONE Operations in key circles will be hit. Lower spectrum charges to its advantage
RELIANCE COMM. Its GSM operations in eight circles and CDMA in 22 circles will be affected
IDEA CELLULAR Renewal payments could cross Rs 21,000 crore. Lower spectrum usage charges will benefit in the long term AIRCEL Faces re-farming in its profitable circles BSNL/MTNL Already under stress.
MTNL will lose 2.4 MHz of spectrum in Delhi and Mumbai immediately. Re-farming could be very expensive for BSNL
TATA TELESERVICES Will face re-farming in the 800 MHz band
UNINOR Will need to review India operations; it has to see how many circles it can get spectrum in. Cost of staying in business has increased sharply
SISTEMA Will have to bid for the 800 band at base price of Rs 7,244 crore/MHz
RELIANCE IND. Can bid for spectrum in the 900 band

 

















"The charges are not so high as to affect either the operators' business case or the consumer tariffs"
J.S. SARMA, Chairman, Telecom Regulatory Authority of India
"When you say that it is going to be re-farmed and auctioned, that means your are actually going to change the usage of the spectrum"
R. CHANDRASHEKHAR, Secretary, Department of Telecom

Apart from the issues of reserve price and re-farming, says Andrew Beale, an analyst at London-based Arete Research, "the proposals are fairly logical, even progressive, with plenty of spectrum, provided operators can afford it."

Among the positive moves is allowing operators to stagger the licence fee payment. They need to pay 25 per cent (for the 800 and 900 bands) initially followed by a two-year moratorium, and then the rest in 10 instalments. Trai has also lowered the spectrum usage charge from 3-8 per cent to a flat 1 per cent. Says a telecom consultant: "These are huge gains and will ensure that there are enough bidders."

According to a UBS Investment Research report, the average spectrum usage charge for Bharti is 4.1 per cent of its gross revenue, and 3.7 per cent for Idea Cellular. This can go below 1 per cent once the operator's entire spectrum is on market-determined prices.

The only gainer seems to be Infotel Broadband Services, the broadband wireless access unit of Reliance Industries. With the  auction for the 700 band slated for 2014-15, Infotel gets a two-year headstart.

The Next Move
The final say on the recommendations, however, lies with DoT and the Empowered Group of Ministers. A former bureaucrat says DoT is unlikely to object to the base price since that can be censured by the Comptroller and Auditor General. But it can ask Trai to revisit the methodology used to arrive at the base prices.

Will the case end up in court? Not immediately, but that can happen once applications are invited for auctioning the 1800 band. Operators could argue that restricting bidding to 5 MHz is against the SC verdict.

If the government sticks to the recommended price, expect bidding by just a few. Already, three operators — Etisalat, S Tel and Loop Mobile — have decided to quit the industry. Such moves can affect investor interest in the Indian telecom sector. Says senior advocate Gopal Subramanium: "When we invite FDI, we need to provide the right assurances."

What the Trai recommendations have done is increase the uncertainty in the industry. But it could also result in consolidation. It all depends on how DoT handles it now.

anup(dot)jayaram(at)abp(dot)in

(This story was published in Businessworld Issue Dated 07-05-2012)


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