BIF Recommendations on Pricing of Allocated Resources

BIF Recommendations on Pricing of Allocated Resources

( Pt. of Capsule II )

Recommendations

1.Formula for calculating reserve price must be declared in advance, which can help in:

Avoiding/minimizing bidding distortions
promoting responsible bidding
ensuring optimal prices

The inputs recommended to be used for calculating reserve price for future auctions are:

Auction Prices of all past years.
Propagation weights of all spectrum bands.
Cost Inflation Index for past years.

2.Revise spectrum usage charges to cover actual cost of administering/regulating spectrum.
3.Revise license fee to reflect actual cost of administering/regulating the sector.
4.Revise Universal Service Obligation Fund Levy to 1-2% of AGR
5.Cost of Right of Way as per New rules, the Indian Telegraph Right of Way Rules, 2016, effective November 15, 2016 plus actual restoration charges

Pricing of Allocated Resources

Pricing of allocated resources include the spectrum price, license fee and cost of right of way. The spectrum price comprise of the spectrum auction price and spectrum usage charge.
High reserve prices and/or unrealistic predetermination of spectrum value would likely result in poor appetite from potential bidders and could lead to valuable spectrum left unsold and unused. It was observed in Australia that an unrealistically high reserve price resulted in one operator quitting before the auction and led to valuable portion of the 700MHz spectrum left unsold and unused. Unused or under-utilised spectrum does not benefit society or consumers. The opportunity cost of unused spectrum is enormous and far outweighs any short term gains in auction revenue. We believe that high reserve price is one of the major reasons for spectrum remaining unsold in the previous auction and the prices discovered in the Indian spectrum auctions are not a true reflection of its value.
Every failed auction results in missed opportunity for the economy, lower investor interest in the industry, revenue loss to the exchequer and inefficient allocation of spectrum and therefore sensible reserve prices are important. It all started with an overenthusiastic bidding by the operators in the year 2010 (3G and BWA auction) and became worse at the time of the renewal auctions of 900 MHz band in 2014 & 2015. The 2010 auctions were held at the backdrop of the license cancellation when spectrum was earlier given to new operators at a subsidized rate (without auctions). This increased the number of bidders, thereby raising the price of spectrum disproportionately high. In 2014, and 2015, the operators whose licenses were expiring had no choice but to bid enormous amount to stay in business. Apart from these few instant, the spectrum auctions in India remained largely subdued resulting in a large quantum of unsold spectrum. But the reserve price always stayed high and was never curated to correct these abbreviations, resulting in huge chunks of unsold spectrum and whatever got sold was taken only at the reserve price. This high and distorted reserve price, coupled with forced bidding (to protect existing business), totally destroyed the value of spectrum acquired in the auctions.
The issues with spectrum pricing can be summarized as:

Low proportion of spectrum sold
Few circles with premium over reserve price indicate no real market discovery
No correlation between prices and revenue
No correlation between prices across bands
Prices increasing exponentially
Anomaly in calculation (700 MHz price)
Indian price among the highest although tariffs are lowest in India
High outflow in buying more spectrum - Total debt of the Industry – INR 4.5 lakh crores; total spent on spectrum in auctions since 2010 – INR 3.6 lakh crores

The issues listed above have been covered in detail under Spectrum Management – Allocation and Pricing.

The price discovered in the last auctions should not be treated as the market price. Rather BIF is of the view that spectrum should be treated/viewed as the ‘raw material’ for socio-economic benefit for the nation rather than be seen as a measure to fill /augment the exchequer revenues.
Spectrum usage charge: The spectrum usage charges (SUC), which are more than 5% of revenues is not reasonable. This represents a highly anachronistic situation. Once the spectrum has been won in an auction, enlightened regimes merely cover the cost of administering and regulating the spectrum, which would only be a small fraction of 1%. The table below gives a comparison of regulatory charges in India with other countries.
License fee:The decision to charge a license fee as a share of revenue was offered by the DoT as a "migration package" on 22nd July 1999 to bailout the then licensee from the risk of bankruptcy due to excessive bidding in the auction held after NTP (National Telecom Policy) 1994. Thereafter, the issue has been marred by constant litigation between the DoT and the licensees centered around the "definition" of AGR "Adjusted Gross Revenue". DoT’s definition of AGR encompassed all revenues (except a few like termination and roaming charges which are collected on behalf of the other operator) including some which do not even qualify as revenues if mapped with the conventional accounting standards. Licensees, on the other hand, wanted inclusion of only those revenues in the AGR which emanates from the activities that required a license. They want the revenues from activities which are fundamentally non-telecom in nature to be excluded from the AGR.

The current regime of charging License fees as % of AGR prevents the licensee to share infrastructure, as payments made between licensee will not qualify as pass-through and therefore will increase the overall cost. Benefits of sharing of infrastructure can be clearly seen in the case of IP-1 (tower companies) who do not pay license fees. New reforms like introductions of VNO are aimed at elevating this "sharing of infrastructure" to the next level. But, many such reforms (aimed at increasing operational efficiency) may not deliver proportionate benefits if the current license regime is not overhauled to prevent charging of license and spectrum fees multiple times on the same revenues of operators sharing infrastructure.

Universal Service Obligation (USO) Levy: Universal Service Support Policy came into effect in 2002, providing statutory status to the USOF in December 2003. Fund was introduced to provide access to telegraph services to people in rural and remote areas at affordable prices. Universal service levy of 5% is levied on the adjusted gross revenue (AGR) earned by all telecom operators except on VAS such as internet service, voice mail and email, which is very high in comparison to USO levy in other comparable countries. The average range of USO levy in other comparable countriesis 1-2%.

Regulatory Charges in India vis-à-vis Other Countries

Cost of right of way: Implementation of ROW policy continues to be a barrier. Network providers spend significant percentage of the overall CapEx on RoW fees. States are required to view Right of way as an enabler for creation of a sustainable National Asset instead of a source of revenue generation. Tedious application processes made obtaining RoW difficult for telecom service providers while exorbitant administrative charges discouraged them from undertaking significant network roll-outs. Meanwhile, the absence of a standard administrative cost structure resulted in significantly high costs for obtaining RoW.

Recommendations

Setting reasonable reserve price of spectrum:Reserve prices play a pivotal role in the auction design. There is a need to review the auction rules for reserve prices, which are out-of-line with international norms and result in non-discovery of market prices. Reserve prices should be set at levels that are high enough to keep non-serious bidders at bay, but low enough to achieve vibrant price discovery.In past, the reserve prices were mostly linked to the most current auctions. This resulted in its exponential increase, as it was hardly ever corrected to curate market distortions.

Calculating reserve prices correctly is critical for ensuring a properly designed auction. It must be such that it is able to steer the auction "price discovery system" to reflect the optimal value of the "band" and the "circle" in question. Currently, the prices emanating out of past auction are highly erratic and arbitrary. If not then how can the price of the 800 MHz band (with better propagation characteristics) valuedat 50% of the 900/700 MHz band?

Hence, well-defined formulae based on sound assumptions will not only increase transparency in the system but also will empower the government officials with the ability to take the right decision. It also help prevent changing rules in the middle and will make the spectrum auctions more robust, thereby motivating the companies to buy more spectrum - leading to better network coverage and connectivity - enhancing consumer interests.

The formula for calculating reserve price must be declared in advance, which can help in:

Avoiding/minimizing bidding distortions
promoting responsible bidding
ensuring optimal prices.

The inputs needed for calculating reserve price for future auctions are:

Auction Prices of all past years.
Propagation weights of all spectrum bands
Cost Inflation Index for past years.

Using "Auction Prices" Adjusted to "Cost Inflation" And "800 MHz Band" (Rs Cr), the prices for all auctions adjusted to the year 2010, and mapped to the 800 MHz band can be calculated. The reserve price can be now determined by carrying out some simple steps over the information listed in the above table. These steps are listed as under.

Calculate the average price for all years and for all circles individually.
Add the numbers in step 1 to get a single "Pan - India" number.
Readjust the price above (step 2) using the "Inflation Index" to map it to the current year.
Multiple the number above with the average % revenue distribution across circles to arrive at the circle numbers.
The circle price calculated above (step 4) is mapped to the 800 MHz band.
Readjust the number above (step 4) with the "band weights" to arrive at the prices for the respective bands.
Discount this number by a factor (anything between 20% to 50%) uniformly to arrive the final reserve price across circles.

Please note that prices calculated above are not arbitrary but based on a clearly defined principle. One might choose to tweak these principles/assumptions, but once finalized these should not be changed regularly/randomly. Doing so not only curates distortions on account of irrational bidding but also corrects for value the band and the revenue potential of the respective circles - lower bands are valued more, and so are the circles with greater revenue potential.

Spectrum usage charge:When the spectrum has been won in an auction, the spectrum usage charge should merely cover the cost of administering and regulating the spectrum. The Annual Budget of WPC Wing & Wireless Monitoring Organization together is about Rs 75 Crore (including Machinery & Equipment, Buildings, etc.). If one adds the Pension expenditure to it, figure comes to about Rs 200 Crore. So, the total budget comes to about 0.1% of AGR. It is recommended that for auction-allocated spectrum, the SUC level should be brought down to 0.1% of AGR. This can be recovered in form of fixed cost to the spectrum winner or as 0.1% of AGR.

License fee:The total Staff and office expenses for DoT (excluding WPC & Monitoring Organization as well as Pension expenses) are Rs 483 Crore, which is less than 0.2% of AGR. Keeping this in view, the license fees in its current form (% of revenues) should be brought down to a maximum of 0.2% of AGR plus the USoF levy as decided under new policy.

Universal Service Obligation Fund Levy:As stated earlier, USO levy is in the range of 1-2% in other comparable countries. The USO levy should be brought down to 1-2%, with an ultimate objective of doing away with the levy in next 2-3 years in line with TRAI recommendations.

Cost of right of way:For several years, RoW has been the biggest hurdle in the expansion of telecom infrastructure across the country. As stated earlier, tedious application processes made obtaining RoW difficult for telecom service providers while exorbitant administrative charges discouraged them from undertaking significant network roll-outs. Meanwhile, the absence of a standard administrative cost structure resulted in significantly high costs for obtaining RoW.

As per the New rules, the Indian Telegraph Right of Way Rules, 2016, effective November 15, 2016, DoT has also imposed a one-time administrative fee of Rs 10,000 for the installation of a telecom tower and Rs 1,000 per km for optical fibre cable (OFC) networks. Only these one-time charges along with restoration charges should be imposed and no rental/other costs should be charged. There is a need to resolve Rights of Way issues by classifying the types of Cities and create a joint Centre-State council to resolve the issues along the lines of the GST Council.