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'TRAI creating artificial scarcity of spectrum'

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CIOL Bureau
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NEW DELHI, INDIA: Rising costs are making tariff hike inevitable. In a conversation with Muntazir Abbas of CyberMedia, Cellular Operators Association of India director general R.S. Mathews says spectrum refarming will have an adverse impact on the nation’s competitiveness.

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"On one hand we are trying to compete with the world in terms of both physical and virtual infrastructure, such policies will definitely pull us down and act as a growth deterrent for virtual infrastructure," he says.

Excerpts

CIOL: With tariff hike indication, are not the operators/industry creating pressure tactics on the government for leniency in 2G spectrum auction?

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Mathews: Firstly, independent financial analysts, other industry bodies like CII, banks, research firms like Analysys Mason, audit and consulting firms such as PwC, E&Y, etc. have all opined that the reserve prices are too high and will be ruinous for the industry. So, this is not an opinion held only by the operators.

The industry has explained in very simple terms that with the dwindling financial health and loss of investor confidence, it is already going through torrid times. The TRAI itself is well conversant of this fact. If on top of that, such atrociously high charges are levied for spectrum, the industry obviously will not have the financial strength to bear the burden. It will eventually be passed on to the subscribers as part of the tariff.

CIOL: TRAI in its recommendations said that spectrum available with the service providers in the 900 MHz band should be replaced by spectrum in the 1800 MHz band, which should be charged at the price prevalent at the time of refarming. What are the challenges, operators are likely to face in spectrum refarming at market-determined prices?

Mathews: First, it should be worth mentioning here that the Supreme Court’s order did not have any nexus with the recommendations on the so called “refarming” that TRAI is trying to unnecessarily impose on the operators.

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Let’s look at what is “refarming” going to bring to the table or let’s say to the nation, consumer and the industry:

1. There will be huge write-off of existing investments and infrastructure which will be a complete waste of national assets and also a big cost implication for the industry.

2. Additionally, it will cost around thousands of crores to each operator to replace its 900MHz with an 1800MHz network. TRAI has totally ignored the cost implications on service providers on refarming.

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3. Having exhausted their fund reserves buying spectrum at exorbitant prices, we are doubtful how many operators would have the requisite financial resources to undergo the refarming process.

4. The “refarming” recommendations will also result in huge disruption in network and a fall in the quality of service. At the same time, the cost to provide the existing services will itself increase very sharply.

5. There are serious public interest and public policy impacts that have not been acknowledged by TRAI e.g., such “refarming” will result in fall in teledensity.

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All of this will lead to an adverse impact on the nation’s competitiveness — where on one hand we are trying to compete with the world in terms of both physical and virtual infrastructure, such policies will definitely pull us down and act as a growth deterrent for virtual infrastructure. 

CIOL: The regulator said that it attempts to take liberal approach. What's your view?

Mathews: I believe you are referring to the “Liberalization of Spectrum” as is being postulated by TRAI which is totally inconsistent with the policy of technology neutrality and licence conditions. Unfortunately, TRAI has blatantly ignored the fact that the supporting eco-system (network equipment, handsets, etc.), of futuristic technology is non-existent.

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The development of a mature eco-system is at least five years away. Therefore, any higher spectrum fee just to change the tag of the spectrum to “Liberalized” while it continues to be used for 2G services is totally unjustified.

Any alternative use of spectrum in 1800MHz/900MHz band is not economically viable due to the fact that less than 5 pc of the present customers use 3G and the handsets for 4G are hardly available.

It is also pertinent to note that the latest price derived in BWA auction during 2010, in 2300 MHz band for the 4G technology (which TRAI now proposes to allow in existing spectrum allocation, under the guise of liberalization) was only Rs 1284.77 per MHz (FDD equivalent) on pan—India basis as against the TRAI’s proposed price of Rs 3,622 per MHz for 1800 MHz for pan-India. Thus it is even more puzzling that the purported benefit being now sought to be given in the name of liberalization, has itself been valued at much less price by the market forces in recent past.

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CIOL: TRAI argues that spectrum is relatively a smaller investment by telcos; therefore they are capable of absorbing it. Please comment.

Mathews:
For a long time industry has been making representations to the government regarding the significant increase in network operating expenses besides government fees, levies, charges and penalties adding to margin pressures for the operators.

India has a significantly high regulatory levy varying between 19 pc and 28 pc of the operator revenues. Rising interest rates have resulted in increase in debt servicing costs for operators. Consequently operators are under immense margin pressure (several reporting negative PATs). Similarly, most operators report a negative or low return on capital employed.

In the recent past we have also witnessed cancellation of 122 licences, exit of two telecom companies and displeasure exhibited by global giant Telenor on the overtly regulated telecom market in India.  The investor’s confidence is shaken and even the banks are not ready to lend any more capital required for network expansion.

The industry is reeling under the pressure of depleting margins and mounting debts. A minimum of Rs.18000 crore for pan-India spectrum in such a situation, cannot be considered as a small investment.

CIOL: Telecom regulator said that at least 5 MHz of spectrum shall be offered in all auctions. From an industry perspective, is it a good move?

Mathews:
TRAI in its recommendations has itself stated that 581 MHz of spectrum is available in the 1800 MHz band; however, it has suggested putting only 110 MHz for auction.

This creates an “artificial scarcity” and deliberately extorts a higher resulting auction price. Importantly, by limiting the auction to only one block of 5 MHz initially, the TRAI seems to be suggesting the end of operators whose licenses stand quashed — since only one of the quashed licensees would be able to continue services.

The TRAI while auctioning only one block of 5 MHz per circle, which is less than the 20 pc of the total available spectrum, has also ignored the real direct loss to the government, by keeping the productive national asset idle.

CIOL: It also suggests spectrum trading for the limited purpose. How do you see it?

Mathews: TRAI has used the term spectrum trading in a different sense, where ‘spectrum reconfiguration’ may be permitted as per prescribed procedure, within the same band. This is not real spectrum trading as seen in the international scenario.

CIOL: As the TRAI has sent clarification to DoT on 20 points that include auction price and eligibility criteria, what according to you are the key areas that need attention?

Mathews: There is an immediate need to relook and reconsider the TRAI recommendations as they are not in conformity with the Supreme Court judgment.

Only a small fraction of available spectrum is being put up for auction, thereby creating artificial scarcity of spectrum.

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