Irrational spectrum prices to pinch consumers

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The Economic Times

by

Prashant Singhal
Partner in member firm of EY Global

The entire business model and survival of telecom operators is based on the licence and spectrum issued by the government. Spectrum is a scarce natural resource. Its price should not only be attributed to the benefits it brings to telecom operators, but even future gains such as socioeconomic growth of the country, impact on tele-density, better coverage and inclusive growth. However, the government's decision to price spectrum extraordinarily high is not in tandem with these goals.

The Indian government has set the reserve price for auction of 5 MHz pan-India 2G airwaves at 140 billion. Furthermore, the reserve price for 800 MHz CDMA band has been set at 1.3 times the GSM spectrum price. Although the price of 2G airwaves is nearly 29% lower than the price recommended by the Telecom Regulatory Authority of India ( Trai), it is set to increase the burden on telecom operators and be detrimental to the sector. Besides, spectrum usage charges have been fixed at 3-8% against Trai's recommendation of 1%.

A comparison of the recommended spectrum price in India with the spectrum price for select countries where auctions were conducted in the last 2-3 years clearly underlines the exorbitant spectrum reserve price in India (see accompanying graphic).

At times, the limited availability of spectrum makes governments drive high spectrum prices under the pretext of maximising public good. For example, the Indian 3G and broadband wireless access ( BWA) licence auctions helped the government garner over $15 billion and reduce its large fiscal deficit. However, using the price discovered through 3G auctions as the benchmark to set the reserve price of 2G spectrum has several downsides. 3G auctions in India witnessed aggressive bidding and exceeded the estimates of the government. Hence, the price discovered through 3G auctions may not serve as the best way for all stakeholders in the future.

It is important to note that this price differential would be steeper when we compare clearing price to clearing price, as the current comparison considers the clearing price of a country to the reserve price recommended in India.

With the government fixing an exorbitant price, it is likely to decelerate growth of the sector. Assuming the spectrum acquisition for telecom operators involves upfront payment and are primarily debt-funded (70% debt), the debt/EBITDA ratio for the sector is estimated to swell to 8-9x by 2015-16. This does not take into account funding for network rollout. Also, as per the Reserve Bank of India ( RBI), the overall exposure of Indian banks to the telecom sector (2G, 3G and others) was $18 billion ( 910 billion) till November 2011, making future funding challenging.

Irrational spectrum prices will ultimately be passed on to subscribers that restrains mobile uptake and diminishes the impact and value derived from spectrum. It limits the capacity of telecom operators to invest in networks, leading them to prioritise urban areas and results in digital divide.

Additionally, the auction may be unable to attract global companies to set up greenfield operations. With the Indian telecom sector already reeling under a staggering debt of over 2 trillion and reducing margins due to excessive competition, such high spectrum price is a blow to the sector. The high reserve price is anticipated to result in muted response from the intended industry participants.

As the country continues to face inflationary headwinds, this steep rise in spectrum price is likely to push mobile tariffs upwards and add to inflation-related woes. Perhaps the decision to arrive at this price may have a much deeper impact than rising fuel prices on the common man. In this age of ubiquitous connectivity and high-speed wireless networks, it is essential to have appropriate spectrum pricing in order to maximise socioeconomic benefits of wireless services.

With the thrust of the National Telecom Policy (NTP), 2012, being on broadband-on-demand and empowering the common man through ICT, setting such high spectrum price averts the vision laid down by policy. NTP 2012 envisages revenue maximisation as a secondary objective. However, the decision by the government to set such high reserve price is totally contrary to the policy objective.

Over the years, India has transformed into one of the fastest-growing mobile markets in the world and has attracted unprecedented investor interest.

Today, the sector is at an inflection point and is eyeing a spectrum revolution that ushers it into the next wave of growth in the coming decade. The policies around spectrum pricing need to take account allthe nuances of the industry to ensure inclusive growth. In particular, spectrum pricing needs to ensure that rural areas have access to wireless services at an affordable price.

And, as urban India continues to use mobile phone to communicate, it is not about economy alone; it is about the life of an average Indian - that is transformed by getting connected due to the mobile revolution. One wrong step and we would go back by at least 3-5 years owing to high tariffs, resulting in either 'inflation' or 'civil war'. Whatever be it, it will surely not be progressive for the people of India eventually impacting the economy.

(The author’s views are personal)