The issue of spectrum pricing, which has wide implications for the future funding requirements of telecom service providers (TSPs) is still a crucial piece that is missing in the Indian telecom sector, says the latest ICRA Ratings report.
The issue would acquire added importance to the TSPs at the time of license renewal when they would also have to pay for the spectrum, ICRA stated in its impact assessment of DoT’s decisions on spectrum management and licensing framework.
“In the near term, spectrum pricing would have a critical bearing on the determination of a one-time spectrum fee, which the TSPs may have to pay for the excess spectrum held beyond the contractual limit,” the report states.
The Indian telecom regulator, in May 2010, had recommended that all future spectrum pricing be determined through a market-related process, a stand that was reaffirmed in the draft National Telecom Policy 2011 (NTP 2011) issued in October 2011. In February 2011, TRAI had proposed a spectrum pricing framework based on the last spectrum auction (3G auction in May-June 2010).
“However, given the change in the industry environment since then (cancellation of 122 2G licenses, slowdown in subscriber addition, and pressures on key operating metrics), what eventually evolves on the spectrum pricing front remains to be seen,” ICRA stated.
The report also stated that Department of Telecom’s (DoT) deferment of decision on license fees for telecom tower companies would protect their profitability, besides that of the incumbent TSPs like Airtel, Reliance Communications and Tata Teleservices, who own some of the large tower companies.
The report states that DoT’s decision of uniform license fee of 8% in two annual steps starting 2012-13 is likely to have a positive impact on the cost structures of most TSPs whose license fee expense as a percentage of their Adjusted Gross Revenue (AGR) is in the range of 8.4-9.2% (for the quarter ended September 2011).
“Typically, the circles in which the license fee as a percentage of Adjusted Gross Revenue is 6% are also the ones where the teledensity is low. Making the license fee uniform at 8% in all circles may discourage TSPs from expanding their presence in the low-teledensity circles, as expansion would mean paying a higher license fee,” ICRA stated in its impact assessment.
The report further stated that the guidelines on spectrum sharing are likely to benefit the established TSPs facing congestion in certain service areas, and enable them provide better quality service to subscribers. Further, by allowing more efficient use of spectrum, sharing could also impact spectrum auction pricing.
ICRA has also put forward some outstanding issues that are yet to be addressed by the DoT. They are:
- The framework governing the implementation of the unified license regime, including the migration path for all existing licenses to a unified license.
- TRAI had earlier recommended that at the time of license renewal, spectrum be awarded only in the 1800 MHz band (re-farming of spectrum). This could have a significant impact on the operations and finances of the TSPs currently holding spectrum in the 900 MHz band, as this band provides greater coverage4 as compared to 1800 MHz band due to its propagation characteristics. The current DoT guidelines accept the need for re-farming in principle, but further steps will be taken after the new TRAI recommendations are received.
- Decisions on all matters relating to the one-time excess spectrum charge, including pricing of spectrum in cases of mergers & acquisitions and spectrum sharing.