Tuesday, April 24, 2012

The important issue deciding the future of BSNL and telecom sector Impact of the TRAI recommendations on auction of spectrum, on BSNL/MTNL and Private Operators

In its judgment dated 2-2-2012 the Supreme Court has cancelled the 122 licenses for 2G spectrum issued in 2008. It directed the TRAI to submit recommendations for the auction of the spectrum that would be freed due to the cancellation of these licenses. The TRAI initiated the consultation process and released a consultation paper on the issue of the auction of the spectrum. Various stake holders including  the private operators and their  Associations, some individuals have submitted their views to the TRAI on its consultation paper. The BSNL Employees Union also submitted its views to the TRAI. After going through all these responses and after organizing an open house session to know the views of the stake holders directly, the TRAI finally released its recommendations on the auction of spectrum, on 23-4-2012.

Present status of spectrum allocated to various telecom operators

These  recommendations of the TRAI were submitted to DoT and consist of 176 pages. It is a very difficult to understand these recommendations unless we know the present status of the spectrum allocated to the telecom service providers.

a)      The spectrum allocated so far is in the following bands:

i)                    800 MHz band- for 2G services only by using CDMA technology

ii)                   900 MHz band-for 2G services only, by using GSM technology

iii)                 1800 MHz band-for 2G services only, by using GSM technology

iv)                 2100 MHz band—for 3G services

v)                  2300 MHz band—for BWA services

b)      Allotment and licence period

i)                    Initially 2 operators were allowed in each circle 1994 and thereafter to provide mobile services.

ii)                   Subsequently MTNL and BSNL were allowed as 3rd operator in each circle to provide mobile services.

iii)                 These 3 operators i.e the first two operators allowed in each circle and the MTNL(in Delhi and Mumbai) and BSNL (in all circles except Delhi and Mumbai) were allotted 2G spectrum in 900 MHz band initially and when the spectrum in 900 MHz band was no more available, they were allocated further spectrum in 1800 MHz band.The entry fee collected from the first and second operators who were private operators was nominal. The entry fee collected from MTNL and BSNL who were the 3rd operator was nil sice they were PSUs.

iv)                 Licenses were issued to the 4th mobile operator in each circle in 2001 and mostly they were allotted 2G spectrum in 1800 MHz band. The entry fee decided by bidding for pan India license(license for all the 22 circles) was Rs 1600 Crore plus.
v)                  Subsequently some more operators were allowed with the same fee of Rs 1600 Crore plus for pan India license. Licenses were issued along with the contractual spectrum. The contractual spectrum was 6.2 MHz in 900/1800 MHz band(GSM) and 5 MHz in 800 MHz band (CDMA). Further spectrum was allowed until 10 MHz depending upon the number of subscribers.

vi)                 In 2008, when A.Raja was the Communications Minister, 122 licensees were issued on first-come-first served basis and even this principle itself was distorted by pre-poning the last date for receipt of applications subsequently. The entry fee collected for all licenses including for those issued in 2008 was only Rs 1600 crore for all the 22 circles, which was the fee decided in 2001.This collection of the 2001 rate in 2008 without auction was the basic reason for the 2G spectrum scam. If auction was held, Government would have got about Rs 1,76,000 crore.

vii)               Due to the non-availability of adcequate spectrum, these new entrants of 2008  were allocated 4.4 MHz spectrum in 1800 MHz band.

viii)              The Supreme Court cancelled these 122 licenses and spectrum allotments terming the allotment of license on first-come-first-served basis as illegal and directed for auction of the spectrum freed due to cancellation of these licenses.

ix)                 It is to be noted that the licences are given on circle basis, at the rate of one license for each circle. If a private operator wants to take license for all circles in India, it ahs to take 22 licenses at the rate of one license per each circle. But MTNL is restricted to 2 circles only (Delhi and Mumbai) and BSNL is restricted to 20 circles( All opther circles except Delhi and Mumbai). Therefore MTNL has 2 license and BSNL has 20 licenses. The privatee operators present in all circles will have 22 licenses.

x)                  The licenses were allocated for a period of 20 years. Airtel, Vodafone who were given licenses in 1994/1995/1996 in many circles are completing 20 years and hence their licence period will be over by 2014/15/16 etc. MTNL was allotted mobile license in 1997 and hence its license period would be over by 2017. BSNL was allotted licenses for all circles in 2000 and hence its license period will be over by 2020. The Companies have to renew their license again after completing the 20 year licensee period by paying the required enty fee.

xi)                 The auction for 3G spectrum (in 2100 MHz band) and for BWA spectrum ( in 2300 MHz band) took place in 2010 and the 3G spectrum price obtained by the Government in the Auction was Rs 16570 crore for all the 22 circles. This means any company acquiring licenses for 3G services in all 22 circles ahs to pay this amount of Rs 16570 crore. The price discovered in total for all the 22 circles for BWA spectrum was Rs 12846 crores. In the 3G and BWA spectrum auction the Government got a total amount of Rs Rs 1,06,000 crores.

xii)               The Companies that got 3G and BWA spectrum in 2010 are entitled for that spectrum for 20 years until 2030.

Issues arising now

i)                    Since the Supreme Court ordered that the spectrum should be allotted only through auction, hereafterwards any company has to acquire spectrum through auction only.

ii)                   For the Companies like Airtel, Vodafone etc whose licenses in many circles are expiring by 2014/2015/2016, they have to obtain spectrum through auction.

iii)                 For the Companies like Uninor, Systema, Etisalat whose licenses were cancelled by the Supreme Court, if they want to continue, they have to obtain the spectrum through auction.

iv)                 MTNL/BSNL licenses would expire in 2017/2020 respectively and at that time they have to obtain spectrum through auction.

v)                  The spectrum allotted in 800/900/1800 MHz bands previously was for providing 2G services only by using CDMA/GSM technology. Now the spectrum in these bands can be utilized to provide mobile broadband and other advanced services by using HSPA and LTE technologies etc. But this cannot be done unless the license condition is liberalized. Thus the issue of spectrum liberalization has come forward.

vi)                 The spectrum bands below 1000 MHz i.e spectrum in the bands of 700/800 and 900 MHz is more valuable than the spectrum in the above 1000 MHz band i.e than the 1800/2100/2300 MHz band. This is because  the spectrum in the bands  below 1000 MHz band enables the spectrum holder to provide advanced wireless broadband services with less capital expenditure than the spectrum in the above 1000 MHz bands. But the below 1000 MHz band spectrum in 800/900 MHz band was available with a few operators only where as others are having spectrum in 1800 MHz band only. If they are allowed to provide advanced mobile broadband and other advanced services by liberalizing spectrum, it will put them in advantageous position and all other companies would be at a disadvantaged position. Therefore before liberalizing this below 1000 MHz band spectrum, it has to be taken back from its hoders and then auctioned. This taking back of the valuable spectrum in 800/900 MHz band spectrum from the operators having it so that it can be auctioned and made available to all interested in purchasing through auction, is called as “spectrum refarming”.

vii)               BSNL is having 900 MHz band spectrum in 6.2 MHz quantity in almost all circles. Airtel and Vodafone are also having this 900 MHz band spectrum in several circles. Through the process of refarming, this valuable spectrum has to be taken back from them. But how it can be taken back unless their license period will be over? This is a question to be decided.

viii)              If 900/800 MHz band spectrum is to be taken back from the operators having it, in its place the 1800 MHz band spectrum has to be provided to them in equal quantity. How this is to be done? How much quantity of spectrum can be made available in 1800 MHz band for this purpose?

ix)                 Since 700 MHz band spectrum which is the highest quality spectrum, is not allotted so far, how and when it can be allotted?

x)                  Since the spectrum in any band has to be allocated by auction only, what should be the reserve price per MHz quantity of spectrum in each band while putting it for auction?

xi)                 How much spectrum can be allotted to the bidder in each band?

xii)               When the auction in each band has to be conducted?

These are some of the issues which have to be answered by the TRAI while making its recommendations on the auction of spectrum.

TRAI’s recommendations

The TRAI, after consulting all the concerned and studying the issues based on such consultation, submitted its recommendations to the DoT yesterday, on 23-4-2012. The following are the important points in these recommendations:

1.       All spectrum to be assigned through auction in future shall be liberalized. That is, spectrum in any band can be used for deploying any service in any technology.

The implication is any body who acquires the spectrum in any band, can utilize it for providing not only 2G services, but also all advanced services using suitable technology. Thus the Companies who will acquire the spectrum in 1800 MHz band now in the auction can provide advanced mobile broadband services etc using suitable technologies.

2.       The Authority recommends that the Service providers may be allowed to convert their existing 1800 MHz spectrum into liberalized spectrum on payment of the auction determined amount in which case they will be granted spectrum for a period of 20 years. They will be allowed to adjust the price paid by them for the existing spectrum on pro-rata basis for the period of the existing license.

The existing operators are having 1800 MHz band spectrum and it is available for them till the end of their license period, whether it is upto 2014/15/16 (in case of Airtel, Vodafone etc), 2017( MTNL) or 2020(BSNL). But as per the existing license condition it can be used for providing 2G services only and cannot be used for providing advanced wireless broadband services etc. On the other hand the Company which acquires this band of spectrum now in the auction can utilize it for providing advanced services. To allow the existing operators also to provide the advanced services using the spectrum in this band, the TRAI laid down the condition that the existing operators have to pay the price determined in the auction for the spectrum held by them and they will be allowed to hold it for another 20 years and the amount already paid earlier by them for acquiring the spectrum would be adjusted on prorate basis against the amount to be paid by them on the basis of the price decided in the auction.

3.       The Authority recommends that the Reserve Price for the 1800 MHz spectrum shall be circle wise with pan India spectrum reserve price of Rs 3622.18 crore per MHz.

(For BSNL, if it wants its spectrum in 1800 MHz band to be liberalized, each MHz reserve price will be Rs 2202.78 crore per MHz, excluding Delhi and Mumbai. What ever is the price derived in the auction on this basis, it has to pay for liberalization.Other wise it cannot provide advanced services using the spectrum it has in 1800 MHz band and it has to be satisfied with providing 2G services only on this band until 2020, whereas other operators will be providing advanced services also. BSNL is having 4.4 MHz quantity of spectrum in 1800 MHz band spectrum in all circles. The TRAI fizxed the reserve price of 1800 MHz band spectrum at a higher level than 3G spectrum because advances services can now be provided on this 1800 MHz band spectrum more economically compared to the 3G spectrum in the 2100 MHz band.)

4.       Refarming of spectrum in 800 MHz and 900 MHz bands should be carried out progressively at an early date but not later than the due date of renewal of the licenses. The spectrum available with the service providers in the 900 MHz band should be replaced by spectrum in 1800 MHz band,  which should be charged at the price prevalent at the time of refarming.

5.       The Authority also recommends that the Government must actively explore the possibility of refarming of the spectrum in 900 MHz band immediately, by invoking the authority to change the license conditions.

BSNL  and MTNL are  having spectrum in a quantity of 6.2 MHz in each circle in 900 MHz band. Airtel and Vodafone are also having spectrum in this 900 MHz band in many circles. Almost all other operators are not having spectrum in this band. Since this is a highest quality spectrum, it has to be refarmed(taken away) from them so that it can be auctioned. But it can be done only at the time of renewal of their licenses which will be in 2014/15/16 for Airtel and Vodafone, in 2017 for MTNL and 2020 for BSNL. This is one option. Whether such a valuable spectrum should be restricted to provision of 2G services only until their license period is over? Therefore the TRAI is recommending the Government to actively explore the possibility of refarming of the spectrum in 900 MHz band immediately, by invoking its authority to change the license conditions. Assuming that the Government does this, then what will be the scenario for BSNL and MTNL? They are to be provided spectrum in 1800 MHz band in the place of the 900 MHz band spectrum that will be taken away from them and they have to pay the price for the 1800 MHz spectrum decided by the auction. What is the compensation that would be given for taking away the 900 MHz band spectrum from them, is not known. Airtel and Vodafone who have this spectrum until 2014/15/16 have to surrender it by that time for its refarming. The problem is not so big for Airtel and Vodafone since their license period will be over by 2014 etc. But in case of BSNL it would be nothing but wasting of the 900 MHz band quality spectrum if it is confined until 2020 only for 2G services. At the same time if it is to be refarmed immediately, it will be expensive for BSNL.

6.       The Authority recommends that the DoT should immediately arrange to allocate spectrum in the 1900 MHz band for refarming the spectrum in 800 MHz band. The Authority recommends that the DoT should immediately carry out the interference study. The spectrum in the 800 MHz band should progressively be refarmed at the time of renewal of licences of such operators. 

     The spectrum in 800 MHz band is at present used for providing 2G services only by using CDMA technology although it is a high quality spectrum band on which the advanced services can be provided by utilizing suitable technologies. Just like 900 MHz band spectrum, the TRAI recommends for its refarming. To do this, the TRAI recommends to give 1900 MHz band spectrum to the Companies from whom the 8900 MHz band spectrum would be taken back in the refarming. At the time of their renewal of licenses.Only a few of the licenses in 800 MHz are expiring between 2015 and 2018. Most of these licenses are expiring in the year 2020(PSU) and 2021.

7.       The Authority recommends that the auction of spectrum in 700 MHz band may be carried out at a later date, preferably in 2014 as and when the ecosystem for LTE in the 700 MHz is reasonably developed, so as to be able to realize the full value of the spectrum.

Among the high quality spectrum bands of 900,800 and 700 MHz bands, this 700 MHz band spectrum is of the topmost quality. By using this spectrum band, high speed wireless broadband services can be provided in rural areas with lowest investment for equipment as well as terminals. But the spectrum in this band is yet to be allocated. Moreover, the equipment and terminals for deploying this technology are not yet available in large quantity for which some time is required. Hence the TRAI recommended for the auction of the spectrum in this band in 2014.

8.       The TRAI recommended  the reserve price for 1 MHz quantum of spectrum in the following bands at the following rates:

i)                    1 MHz spectrum in 2300 MHz band –for all circles together-- Rs 723.52   crore
ii)                   1 MHz spectrum in 2100 MHz band –for all circles together— Rs 3773.24  crore
iii)                 1 MHz spectrum in 1800 MHz band –for all circles together— Rs 3622.18 crore
iv)                 1 MHz spectrum in 800/900  MHz band –for all circles together— Rs  7244.36 crore
v)                  1 MHz spectrum in 700  MHz band –for all circles together— Rs  14488.52  crore

9.        In all auctions atleast 5 MHz shall be offered, except where the spectrum available is less than 5 MHz.

This means that in each circle, in any band, atleast 5 MHz quantity of spectrum has to be offered. As per the above mentioned reserve prices, the reserve price for the minimum 5 MHz quantity of spectrum in 1800 MHz band  for all circles together will be 5x3622.18=18110.90 crore and in auction it is likely to be increased further by the bidders. If BSNL has to liberalize its spectrum in 1800 MHz band, it has to pay any where above Rs 45000 crore, which will be a heavy burden on it.Same rule is applicable for the spectrum in other bands also.

10.   The Authority recommends the following schedule for deferred payment of the bid amount by the successful bidders

Initial Payment
Period for balance payment
Supra-1 GHz band (1800,2100 and 2300 MHz bands)
33% of the Bid amount
2 years
10 years(equal annual instalments)
Sub-1GHz bands (700,800,900 MHz bands)
25% of the bid amount
2 years
10 years (equal annual instalments)

While this deferred payment is available for the biders, what about the existing operators, say BSNL, which has the present license period upto 2020, if they want to liberalize their spectrum in 1800 MHz band? Whether they will be allowed deferred payment? It is not clear from the recommendations.

11.   The following is the sequence of the spectrum auction:

a)      5 MHz of 1800 MHz band—In 2012-13, as early as possible, to establish the market value of the spectrum.

b)      Allocation of additional 1.25 MHz of spectrum to the holders of 4.4 MHz in 1800 MHz band, subject to legal opinion.

c)       Auction of spectrum in 800 MHz band—should be done in the current financial year

d)      Auction of 900 MHz band spectrum—This should be conducted in the first half of 2013-14 preferably in the first quarter so that there is adequate time for deployment as and when 900 MHz spectrum is available by November 2014.

e)      Balance spectrum in 1800 MHz—in the first half of 2013-14

f)       Auction of spectrum in 2100 MHz band—should be carried out in the second half of 2013-14

g)      Auction of available spectrum in 700 MHz band—should be carried out in the first half of financial year 2014-15

h)      Auction of additional spectrum in 2300 MHz band—This should be carried out in the second half of the financial year 2014-15

(Does this mean that the BWA spectrum surrendered by BSNL would be auctioned then only and the amount would be returned there after only?)

12.   The authority recommends that the Department of Telecommunications should engage an auctioneer for aperiod of 3 years so as to conduct the auctions without delay.

13.   The authority recommends that mortgage of spectrum may be allowed by spectrum holders to a registered Indian financial institution against borrowings. The mortgager will be subject to the condition that in the event of default of the liability, the spectrum shall be auctioned by the financial institution under the supervision of the DoT and all proceeds in excess of the liability shall be remitted to the Government.

14.   The Authority recommends that DoT must take up with the Ministry of Finance and the Reserve Bank of India to remove all the road blocks in the frame work for borrowings by the telecom sector against the spectrum assigned to them.

15.   Rollout obligations as below:
Villages having population >10000
Villages having population 5000-10000
Villages having population 2000-5000
2 years from effective date
3 years from effective date
4 years from effective date

For the existing licensees, the authority recommends that they should be given one more eyar to complete the two years rollout obligations and two years to complete the third and fourth year roll out obligations from 1-4-1012.

16.   The Authority recommends that the validity period of the spectrum should be for 20 years.

The Impact on BSNL and MTNL and private operators

From the above, it is clear that for the liberalization of 1800 MHz band spectrum, enabling it to provide advanced services on that band, it has to pay to the Government any where above s 45000 crore which would be a heavy burden on it. If it does not want to have its spectrum liberalized, it has to continue the 2G services on the 1800 MHz band until 2020 without utilizing it for the advanced wireless broadband services where as others would be utilizing that band available with them for providing the advanced services and it will result in subscribers migrating from BSNL. MTNL also will face similar problem. The private operators Airtel, Vodafone as well as the Uninor etc, all are criticizing the reserve price fixed by the TRAI for the auction of spectrum in various bands, especially in 1800 MHz band as too high. The existing operators Airtel, Vodafone have to procure spectrum again in 2014/15/16 when their license period of 20 years would be over, at the rate based on the price that would be found out in the auction to be held, with a reserve price of Rs 18110 crore for 5 MHz spectrum in 1800 MHz band for all the circles. At this rate, they have to pay  huge sums for acquiring spectrum on expiry of their license period. It is estimated that Airtel has to pay a huge sum of Rs 30000 crore, Vodafone may have to pay Rs 45000 crore and Idea may have to pay Rs 21000 crore in 2013-15 when their licenses will expire, for procuring the spectrum they have, again.
While the licenses of Airtel and Vodafone will expire by 2014/15/16 and at that time the spectrum they have in 900 MHz would be taken away and put for auction by the DoT in the process of refarming so as to enable them to get it again on liberalized basis for providing advanced services with less cost, BSNL will be having 900 MHz band spectrum in large quantity until its present license period 2020 and it has to be utilized only for providing 2G services only since its liberalization is not allowed without refarming.  Inspite of having 900 MHz spectrum in abundance, it can not provide advanced services on it until 2020 and in case it wants the liberalized spectrum in 900 MHz band, it has to procure it additionally in the auction by incurring a huge amount.

The reserve price recommended by TRAI is justified

The TRAI in its recommendations has explained that compared to the prices obtained in the various bands of spectrum in other countries, the reserve prices recommended by it and the consequent price that would be decided in the auction will be less and the financial impact will not be so much, since the spectrum usage charge for the liberalized spectrum is reduced to 1% on revenue compared to the earlier 3-6% on revenue. Also, the payment of the spectrum price will be a deferred payment.

The case of BSNL and MTNL

Being the PSUs, the BSNL and MTNL are the State. Hence they, as the State, are the owners of the spectrum allotted to them, on behalf of the people. Hence they need not pay any thing for the spectrum. When they were allotted spectrum in 1997/2000 without collecting any price for that in 800/900/1800 bands, and when that license period will continue upto 2017/20, how can they be charged for liberalizing the spectrum in these bands? Their case is different from the private operators since the private operators paid entry fee for the spectrum they obtained. In view of the enormous social obligations like providing landline services in rural areas and broadband services in urban areas using its landline network by incurring enormous losses, providing to the security needs of the country, encouraging indigenous telecom equipment production by acquiring 30 per cent of its equipment from ITI, providing large employment with social justice etc, the BSNL and MTNL are entitled for the spectrum without any cost.

 In its response dated 20-03-2012 to the consultation paper of the TRAI on the questions related to the auction of spectrum , the BSNL Employees Union submitted as below:

In China, the PSU operators were allotted spectrum free of cost in the interest of providing cheaper services to the people. On similar grounds, the PSU operators in   India should be provided the spectrum in all bands free of cost, recognizing them as instrumentalities in the hands of the State for utilizing the natural resources efficiently in the interest of the people. For this purpose, the PSU operators must be allowed to procure the equipment without any delay and discrimination and keeping their present financial condition in view, they should be allowed to procure loans from banks with Government’s guarantee. Pending all the controversies, litigations, insurmountable difficulties in allotting spectrum in all bands equitably between the private operators, this preferential treatment to PSUs will help in the efficient utilization of the natural resource of spectrum for the best benefit of the people, in line with the judgment of the Supreme Court. Moreover, the fact that the DoT/BSNL and MTNL were prevented from providing the mobile services until 2002 and hence severely discriminated and were put at a disadvantage should be recognized and they should now be allowed to provide the advanced services on their existing spectrum bands without paying any amount to the Government for that purpose. No payment be collected from BSNL/MTNL for the spectrum allocated to them in any band and in any quantity.”

The important fact to be taken note is that the Supreme Court judgment ordered for the auction for allocation of spectrum in 2G band only and hence the question of liberalizing the spectrum now does not arise in case of the private operators. Since there is no bar for the liberalization of spectrum in case of the PSU operators (the equality issue is the issue pertaining between the private operators only), and since such liberalization is an immediate necessity for the benefit of the people, it is necessary at least to allow the PSU operators to provide advanced services on the existing spectrum bands”.

Therefore the PSUs should be allowed liberalization of spectrum without payment of any amount for that.


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