Rajeev Chandrasekhar's official website - Member of Parliament

Spectrum Reserve Price Won’t Impact Telecom sector

July 20, 2012

Any extreme question deserves an extreme answer, and in this case, the answer is a simple ‘no’. Having said that, no sane person can suggest that the reserve price which, in turn, affects the cost of acquiring spectrum, will not affect the viability of the telecom operators. This is a well-established link and it needs to be studied.

In the three sets of recommendations that TRAI has sent – the last being the Impact Analysis, this issue has been specifically covered. It is clear from the analysis that the TRAI has presented, after taking into consideration the data presented by the industry, that the viability of the telecom sector - even after a 5 paise per minute increase in tariffs - remains intact. The model deployed by TRAI estimates total incremental cost and incremental costs per unit of output. Each stimulation models a particular policy scenario. The additional costs associated with that particular policy option are plugged in to compute incremental costs per minute on a year-by-year basis.

The second part relates to computing the tariff increase necessary to neutralize the increase in cost. The third and other one relevant to this question presents a set of stimulations that examines as to what happens to the financial viability ratio when tariffs are increased by a fixed amount per minute. The analysis has been conducted for a range of tariff hikes between 5-30 paise.

The effects on the industry EBITDA, EBITDA margin, PBIT and RoCE have been analyzed in detail. With nearly 60-pages of annexures and data and detailed workings, including information provided by the industry, it is clear that with just 5 paise per minute increase in tariffs, the EBITDA and EBITDA margin post impact are higher than in the base case for every year under all policy options in a normal scenario. Further, for most years, the PBIT too is higher than the base case.

The real challenge for the industry is the ability to attract investment capital at one level, and the application of the auction price to a range of spectrum that has been allocated above the contracted amount. In the end, the market and the scarcity quotient will decide the cost at which the spectrum is acquired. Companies which are flushed with funds are expected to protest – as they usually do and then turn up for bidding immediately after. A closer look at spectrum and license auctions in 2001 and 2010 shows that the companies that were protesting the most also made the most aggressive bids and were by far most successful. In fact, the bids paid off, and till date, they remain healthy on their financial numbers with enviable EBITDA margins even by global standards.

By any conservative estimate, India only has about 700 million plus active mobile subscribers. This would mean that the unaddressed market is at least another 400-500 million – accounting for the last 100 million being either too poor or resourceless, aged and children who cannot afford a mobile phone. Even under such circumstances, the spectrum cost paid at the auctions would be spread across a 20-year license and serve an additional acquisition of 400 million odd subscribers. The protest by the industry needs to be seen in its right perspective.

The Government needs to, in a transparent manner, address the issue of how the auction price based on the reserve price will impact the spectrum that is already in possession of the companies. At stake is nearly Rs 3 lakh crores of revenue for the Government, and therefore, it must go by the detailed analysis on the industry viability that has been presented by the TRAI in discharge of its statutory function. In reality, 2G spectrum and linked mobile licenses were never auctioned after 2001. It is this period between 2001 and 2008 which needs to be corrected. Also at stake is the credibility of the Independent Regulator TRAI which needs to be rebuilt after years of political interference and manipulation.

In the final analysis, the licenses are sufficiently long-term, the unaddressed market substantially large and the Independent Regulator’s viability analysis appropriately suggests that the cost of acquiring spectrum at the existing reserve price benchmark will not materially impact the telecom industry.

This appeared as an article in Financial Express on July 20th,2012

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