The moratorium on spectrum usage charges will improve industry finances. But spectrum auctions need a rejig
Recent announcements by the government in providing relief to the telecom sector, the major one being a four-year moratorium on the payment of spectrum usage charges (SUCs) as percentage of the adjusted gross revenue (AGR), are welcome.
The government also has redefined the calculation of AGR to exclude non-telecom revenue, which should substantially reduce the regulatory burden for the telcos. Apart from the financial relief, there are a couple of other notable points in the Cabinet decision.
First, the regulatory levy on the sector, which is one of the highest in the world. Licence fees, annual SUCs, and other fees including Right of Way charges for installing telecom infrastructure have burdened the sector. While there have been many discussions on reducing the regulatory fee, the mobile operators continue to pay tens of thousands of crores in annual spectrum charges apart from the upfront payment for auctioned spectrum.
The telcos have been paying annual spectrum charges in the range of 3-5 per cent of their AGR. In a welcome move, the recent Cabinet decision on withdrawal of the annual SUC for auctioned spectrum will reduce the regulatory burden on the sector.
Second, the extension of spectrum licence period from the current 20 years to 30 years is a welcome step as longer duration will provide the telcos visibility into the future and plan, accordingly, the active usage of scarce spectrum. The average spectrum licence duration internationally (including the US) is 15 years.
In our analysis of spectrum prices across countries, we find that licence duration affects positively spectrum prices. However, the price per year may come down due to the longer duration of the licence, thereby benefiting the telcos.
Third, abolition of 0.5 per cent additional annual SUC on shared spectrum is likely to pave the way for more sharing of spectrum between operators. This move, along with allowing telcos to surrender spectrum after 10 years, will promote efficient use of spectrum.
Fourth, spectrum audit needs to be conducted by TRAI on spectrum holdings by government agencies including defence, space, railways and public utilities so that the scarce spectrum can be put to efficient use. The re-farming of spectrum in the 1800 MHz held by defence for commercial mobile services in recent years has helped improve spectrum utilisation in this band.
Similar exercise is needed in other bands as well, especially in 26 GHz held by the Department of Space that is critical for rollout of 5G network services.
Though the above steps are in the right direction in providing stability to the beleaguered sector, the government has to initiate the following major reform in the forthcoming spectrum auctions. The Simultaneous Multiple Round Ascending (SMRA) auction pioneered by the Economics Nobel Laureates Milgrom and Wilson way back in 1994 is being used as a methodology for allocating scarce radio spectrum to mobile operators since 2010 in India.
Though the mechanism has been perfected over the years, recent auctions in India have not been successful with a large amount of spectrum in the precious sub-GHz band of 700 MHz remaining unsold in the previous two auctions.
The reserve price is the opening minimum bid price in the SMRA auctions and setting it appropriately determines whether the auction will be successful or not. Setting too high a reserve price will dissuade the bidders from bidding as it might exceed their valuation of the spectrum; too low a reserve price might be seen as the auctioneer giving away the scarce spectrum at a minimal price. High reserve prices that are determined based on the winning bid prices of previous auctions have proven to be the death knell for the industry.
We analysed the SMRA auctions held worldwide for the 700 MHz spectrum using the spectrum database of DotEcon.
The mean reserve price per MHz per population is about $0.05 (in International Dollars adjusted for Purchasing Power Parity). On the other hand, the average reserve price fixed by the government of India for 700 MHz during the auction in February 2021 was about $1.89 per MHz per pop (adjusted for PPP), which is several times higher than that set internationally.
A closer analysis indicates that the reserve price in metros is about $8.72, several times higher than mean winning bid prices in other countries. Only the category C circles had the reserve price set at $0.53, a bit closer to winning prices in other countries. The case is the same with other spectrum bands, resulting in telcos handing out huge payouts in the form of spectrum fee in the auctions, at least to get the minimum required spectrum to continue their services. It is time the government and TRAI took a bold decision to reduce the reserve price of the various spectrum bands, consistent with international bench mark prices.
The telcos, on their part, should invest in access and backhaul network infrastructure and adopt technologies such as voice over wi-fi to provide enhanced and superior connectivity to their deserving customers.
The writer are Professors at IIIT Bangalore and MDI respectively