India - higher spectrum evaluations

Finmin writes to DoT on spectrum pricing

The finance ministry has prepared a memorandum for the telecom ministry, placing a 3.5 times higher commercial value for spectrum. The note points out several procedural lapses linked to the spectrum issue.

The development follows two consecutive letters by the Central Vigilance Commission (CVC) to DoT (department of telecom), questioning the latter's refusal to allow spectrum allocation through open auctions. Recommending significant amendments to the spectrum pricing policy, the finance ministry's note has linked the commercial value of spectrum to telecom revenue growth since 2003.

It has concluded that for a pan-India operator, the circle fee fixed at Rs 357 crore per MHz should be inflated by a multiple of 3.5 times reflecting the growth in AGR (average gross revenue) per MHz between 2003 and 2008.

Referring to Cabinet meeting of October 31, 2003, the finance ministry has said it was decided that spectrum pricing would need to be fixed mutually between DoT and ministry of finance, so as to provide incentive for efficient use of spectrum as well as disincentive for suboptimal usage.

The telecom ministry recently allocated 120 universal access service licences (UASL), which comes with 4.4 MHz of startup spectrum. The cumulative price of these licences, based on 2001 fees amounted to Rs 8,986.49 crore. The finance ministry's new valuation places the real value closer to Rs 31, 452.72 crore, which implies a Rs 22,466.23 crore loss to the exchequer in the first quarter of 2008 itself.

TOI was the first to highlight that the market value of spectrum is at least three to four times the price at which it is being awarded. The finance ministry's latest note to the DoT shows a growing consensus among several key ministries including the PMO and commerce ministries that the recent signing of licences, which will lead to allocation of fresh spectrum was done at a loss to the exchequer.

TOI had further reported that the absence of any M&A restrictions in the new licences further allows these nine private companies to sell the spectrum at a huge premium in the open market. The CVC has strongly expressed its concern over DoT's dilution of M&A norms.

Rollouts for a pan-India GSM network involve a capex of at least Rs 15,000 crore. This is clearly beyond the funding capability of a majority of the new entrants who neither have the size nor the competence to compete with players like Bharti, Vodafone, BSNL and others. Absence of M&A restrictions sets the stage for license/spectrum resale to the benefit of new entrants.

DoT's reluctance to restrict spectrum sale by new entrants belies telecom ministry's assurance to PMO and CVC that scarce spectrum is being given at throwaway prices to keep telecom tariffs low. In the end, the consumer will be forced to bear the market value of spectrum, though depriving the exchequer in the process. The memorandum also documents observations about spectrum usage charge and need to enforce Trai's recommendations stiffening spectrum allocation norms based on a stricter subscriber-linked criterion.