The Hindu Business Line : Clear signal on spectrum

On May 13, a committee under the Department of Telecom submitted a 56-page report on how spectrum allocation should be done henceforth for mobile services. This is probably the third attempt by the Government in the past five years to deal with this vexed yet crucial issue that will shape the way India’s telecom industry grows. The past two attempts did not change anything much. Spectrum continued to be given on subscriber-based criteria to operators without any mec hanism to ensure that the radio waves are utilised efficiently.

But the new report by the committee headed by Additional Secretary Subodh Kumar has proposed sweeping changes in the spectrum allocation policy. Unlike the previous committees, which only hinted at the broad direction for spectrum policy, the new panel has caught the bull by the horns in suggesting a market-based mechanism for allocating a scarce and valuable resource.

“At the current stage of development of the mobile wireless market in India, the Committee felt that the market mechanism should be explored as an alternative approach, since such a mechanism may be more appropriate in our present context. This may give flexibility in rolling out services with different technologies in a band, subject only to ITU restrictions; allow allocation of spectrum by auction; permit trading. The objective is to ensure that, over time, spectrum will be held and used for the highest value applications, thereby maximising the benefit to society from this resource,” the committee said.

Subscriber-linked allocation

To put it in context, spectrum is the most valuable resource for communication services. Until 1995, this spectrum was being used by Government agencies such as the defence forces, space department, railways and the national broadcaster.

Since there were only a few users, the Government did not plan the allocation and simply gave out huge chunks of radio frequencies to these agencies. But then came the mobile services. Until 2000, there were only three mobile operators with just 31 million subscribers. In 2001-02, the Government decided to allow more operators into the sector. As the subscriber base grew, the operators started demanding more and more spectrum. Therefore, in 2002, the Government decided to allocate spectrum linked to milestones based on the number of subscribers in a circle without charging any additional fee.

Since there is an inverse relationship between the quantum of spectrum and the investments required, operators started going after more subscribers to get additional spectrum. This worked well initially for the operators because the quantum of spectrum and the subscriber base also determined the valuations that they were getting. But things started getting out of control once the Government realised that it did not have enough spectrum to give to all the operators.

By 2006-07, there were six-seven operators adding nearly 8 million subscribers every month. The situation got worse in 2008 when the Government, despite the crunch in spectrum, chose to allow five more new operators. “The task of creating appropriate subscriber-linked criteria has become increasingly intractable. Fortunately the need to have a subscriber-linked criteria to assign spectrum has dwindled,” the committee says. Going by subscriber-based criteria Government would have to find new spectrum almost every month to satisfy the demand from both new and old players. Obviously the DoT does not have radio waves to meet the demands of 10 operators. “If the given block of spectrum is divided among three or more operators, the total capacity of the network decreases. From the regulatory point of view it is important to create a market situation wherein most operators have sufficient spectrum to be operating at or above the saturation point of efficiency while at the same time allowing enough competition in the market,” says the DoT committee.

other shortcomings

The panel has pointed out other loopholes in the current subscriber-linked spectrum allocation. “There are vast rural and suburban areas in most circles where spectrum assigned is already more than sufficient. At the same time the service provider needs additional spectrum in the dense urban areas. This disconnect between rural subscriber growth and need for spectrum in urban areas makes periodic revision of the subscriber-linked criteria,” the committee report says. The committee has also argued that the current allocation criteria do not take into account the increased use of mobile data services. “Spectrum needed for data services to a given subscriber base could otherwise be used to provide voice services to a larger subscriber base making the licence eligible for more spectrum.”

That apart, with the advent of new technologies and services such as Mobile TV, broadband access services and third generation services, it will be mind boggling to segregate the subscriber base of each type of service to apply the subscriber-linked criteria. “It is, therefore, time for the policy makers to shift attention from bringing in more competition to creating market conditions where efficiency of spectrum and economies of scale can be brought to bear to reduce network costs and improve quality of service. It is open to question whether the projected market of 1,100 million subscribers by 2015 can even be served when there are such a large number of operators with fragmented spectrum,” says the committee report.

In order to address these issues the committee has given a set of 19 recommendations (see box).

Almost everyone in the industry agrees with the direction being suggested by the committee as the long-term solution to India’s spectrum problems. Even the existing GSM players, who may have to cough out as much as Rs 2,000-3,000 crore as a result of implementing the recommendations, are willing to go with the suggested change.

New players not too happy

However the new players are not too happy. For one, the panel has suggested that henceforth spectrum should be auctioned in the open market instead of giving it on subscriber-based criteria. This means that new operators such as Sistema, Telenor and Reliance Communications will only get 4.4 Mhz assured spectrum along with the licence. In comparison, some of the existing players such as Bharti Airtel have been given up to 10 Mhz in some circles based on their subscriber numbers. “It is not fair that there is a push to change the policy after some of the operators have already taken advantage of the existing spectrum allocation criteria and have made huge profits. Why should we be asked to participate in an auction now in a market where the larger players will obviously have an upper hand,” asks one of the new players.

The Association of Unified Telecom Service Providers of India has, in fact, shot off a letter to the Department of Telecom charging that the committee’s report is biased in favour of the existing GSM players. AUSPI, representing the interests of RCoM, Tata Teleservices and Shyam Sistema, has told DoT that while the committee has suggested only a one-time fee on existing players with more than 6.2 Mhz, it has proposed to cap spectrum for new players at 4.4 Mhz.

“This would mean that there will be subscriber-linked criteria linking the eligibility and justifying the utilisation of existing spectrum for incumbent operators but having an auction for another set of operators just because they are new and hence weaker operators. These two concepts are completely contradictory. Thus, any recommendation that allocates spectrum beyond 4.4 Mhz through auctions will just not be legally tenable in addition to being against previous policies of the DoT and recommendations of the Telecom Regulatory Authority of India (TRAI),” AUSPI has said in its letter to DoT.

In defence of variable pricing

While the committee has acknowledged the consequences on new players as a result of moving to an auction-based allocation, it has taken the view that the Government need not always ensure absolute level playing field amongst operators who have entered the market at different points of time.

“Variable pricing of resources for entrants at different times happens with other natural resources (e.g. land for industrial development) as well. Early or late entry, each comes with a set of advantages and disadvantages and is part of the business proposition. The government needs to consider only whether the objectives of fair competition, increasing tele-density and efficient spectrum use are met,” the report says. To keep the cost of acquiring spectrum balanced between new and old players, the committee has proposed that even existing operators should be asked to pay a one-time fee for spectrum beyond 6.2 Mhz. The one-time fee will be derived from the price received by the Government during the auction of 3G spectrum to be held later this year. For example, if the Government gets Rs 5,000 crore for 5 Mhz of spectrum during the 3G auctions, existing players will have to cough up Rs 1,000 crore for every Mhz of spectrum beyond 6.2 Mhz. Incumbent GSM players say that they are willing to pay the amount with the long-term objective of having a transparent, market-based spectrum policy.

‘In the right direction’

But the new players are also peeved at the committee’s proposal to impose an annual uniform spectrum charge of 3 per cent on all operators, irrespective of technology or the quantum of spectrum. At present, operators pay between 2 and 6 per cent of their annual revenues depending on the amount of spectrum they hold. If the committee’s report is implemented then it will benefit existing players who are paying as much as 6 per cent of the revenues as spectrum charges. On the other hand, new players will end up paying more as they are giving only 2 per cent of their revenues at present. According to the committee, the weighted average spectrum charge being paid by operators comes to around 3.35 per cent. The committee has argued that moving to a uniform spectrum charge will remove any arbitrage between dual technology players and operators with both 2G and 3G spectrum.

Notwithstanding the concerns raised by the new operators, market watchers say the committee’s proposals are in the right direction. “Spectrum management is a complex issue and there cannot be a solution that makes everyone happy. But any policy can be considered good if it manages to address the concerns of 80 per cent or more of the stakeholders. The report addresses all the issues related to spectrum allocation and has given a good direction. Now the ball is in the court of the new Government to see the recommendations through and make it into a policy,” says B.K. Syngal, former Chairman of Videsh Sanchar Nigam Ltd, and currently Senior Principal at Dua Consulting.

Whether the recommendations of the committee are converted into a policy or whether they will be used as a negotiating tool by the Ministry of Communications is a question that will be answered over the next few months.

Key recommendations

Start-up spectrum capped at 4.4 Mhz for GSM and 2.5 Mhz for CDMA operators.

New licences issued henceforth will not get any start-up spectrum.

All future allocation of spectrum should be through auction. Allocations based on subscriber-based criteria till January 17, 2008, will be taken as final. Auction limited to existing licence holders.

No operator can have more than 25 per cent of total spectrum available in a circle.

Operators who have received spectrum beyond 6.2 Mhz after January 17 will have to pay an upfront fee. This fee will equal the 3G auction price prorated per Mhz.

Merger, transfer and sharing of spectrum to be permitted among operators.

Operators will have to pay spectrum transfer charges if radio wave is acquired from another operator. Spectrum assigned through auction or spectrum for which market price has been paid will not attract any transfer charge.

Spectrum to be assigned for a period of 20 years after which the operator holding it should be given the first right to buy it again at a price determined by DoT annually.

Uniform spectrum charges of 3 per cent for all operators, irrespective of the quantum of spectrum or technology.

Operators who got spectrum before January 17, 2008, will be given an option to pay an upfront fee and move to the uniform charge regime or continue at the current slab-based charges.

Government should set up a committee to develop a roadmap for exploiting the digital dividend whereby broadcasting services shift from analog to more spectrally efficient digital bands. This will free up spectrum for mobile services, especially in rural areas.

tkt@thehindu.co.in

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