Telecom Sector 222

8/6/2019 Telecom Sector 222

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Developments in the telecom sector,

award of 2G licenses in 2007-08 andsubsequent observations of audit

Policy Perspectives

Status ReportStatus Report

January 07, 2011


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Scheme of Presentation


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Initial developments and NationalTelecom Policy (NTP), 1999

q ( , )NTP 1994 approved on May 13 1994 opened the telecom sector for

:private participation ( )2 cellular mobile telecom service CMTS licenses each granted. (in the 4 metros in 1994 Fixed license fee prescribed over

) .10 years with spectrum usage charges payable separately 34 CMTS licenses issued in 18 telecom circles in 1995 based on

( )bidding for license fee over 10 years with spectrum usage

.charges payable separately ( ) -6 basic wireline licenses issued in 1997 98 based on bidding.for licence fee over 15 year license period

q Inadequate revenue generation and inability of telecom operators to:honor revenue commitments

[ ]Constitution of Group on Telecom GoT under Shri Jaswant Singh

(then Minister of External Affairs and Minister of).Electronics , NTP 1999 formulated to take a fresh look at the policy

, framework for the sector and to resolve the problems of the.existing operators

q , ,NTP 1999 approved by Union Cabinet on March 26 1999 and made

, .effective from April 01 1999


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Initial developments and NationalTelecom Policy (NTP), 1999..

q , :Salient features of NTP 1999

:Objectives

( )revenue maximization not an objective

o To introduce greater competition in the.telecommunications sector

o To provide equal opportunities and level playingfield for all players.

o To make available affordable and effective

.communications for the citizens

Importance assigned to Telecom Regulatory Authority of( ).India TRAI

,NTP 1999 continues to be the policy matrix guiding telecom.sector to date

q ( , ):Migration package offered to existing licensees 42 CMTS 6 Basic

( %Revenue sharing arrangement 15 of Adjusted gross revenue[ ]) ,AGR instead of fixed license fee with effect from August, .01 1999

Pro rata ,license fee payable upto July 31 1999 to be.treated as entry fee

: ,3 levies from this point entry fee annual license fee and

.annual spectrum usage charges

.Significant Financial implication of the transition


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Development policies followed in theperiod 1999 to 2004

q ( ) ,First come first serve FCFS principle used for the first time in

,2001 in allotting spectrum for basic services with wireless in( ).local loop WLLq Licenses for the 4th cellular operator were issued on the basis of a

, ,bidding process for entry fee in 2001 in 4 metros and 13 telecom.circles

The pan India entry fee aggregated to ` , .1 658 crore

This was half of what had been charged to the 1st

and 2nd

CMTS, operators in 1999 while offering them the migration.package

q :The annual license fee was progressively reduced % / / % [ , ]From 15 to 12 10 8 Category A B and C circles in

, , .January 2001 with significant financial implication

% / / % ( / / %By additional 2 to 10 8 6 8 6 5 for 1st and 2nd CMTS, ) , ,operators for 4 years except in Metros in April 2004 with.significant financial implication

q .Spectrum entitlements were progressively enhanced . ,Additional spectrum beyond 6 2 MHz upto 15 MHz on additional

- % ( , , ).revenue share of 1 3 of AGR February 2002 and April 2004


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Development policies followed in theperiod 1999 to 2004..

qPolicy underpinnings of telecom sector outlined in detail in the X

:Plan document The telecom sector needs to be treated as an infrastructure.sector for the next decade

Government s broad policy of taxes and regulation for the.telecom sector has to be promotional in nature

Revenue generation should not be a major determinant of

.macro policy governing the sector License fee needs to be aligned to the cost of regulation( ).and administration of Universal Service Obligation USO

Specific planning would be required to prepare the grounds-for a multi operator system to develop and the subscriber

.base to expand without impediments

;Spectrum policy needs to be promotional in nature with.revenue considerations playing a secondary roleq ,The X Plan document was formally released on December 21 2002

, , .covering the period April 01 2002 to March 31 2007


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Development policies followed in theperiod 1999 to 2004..

q , , ,Decision of the Union Cabinet dated October 31 2003 on

( )introduction of unified access service UAS licensing regime( ,based on TRAI recommendations of October 27 2003 and, )recommendations of a GoM dated October 30 2003 :

The recommendations of TRAI with regard to implementationof the UAS Licensing Regime for basic and cellular

.services was accepted

&Minister of Communications IT was authorised to finalisethe details of implementation including the calculationof the entry fee based on the principle given by TRAI in

.its recommendationsq - -Decisions taken by the then Minister in charge of

:Telecommunications (in regard to migration to UAS licensing

)regime

Entry fee of 4th ( )CMTS licensee discovered in 2001 adoptedas the entry fee for new operators into the UAS licensing

.regime New licenses to be issued on FCFS basis and spectrum

allocated subject to availability on a first come first

( ) .serve basis FCFS basis

, , .26 UAS licenses issued between January 2004 and May 2004


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Award of 2G licenses in 2007-08 andsubsequent developments

q , ,25 new UAS licenses were awarded between June 2004 and March 2007

.on FCFS basis and as per the existing license conditionsq ,Reference was made to TRAI in April 2007 to furnishrecommendations on limiting the number of access providers in

.each service area and other license conditions Salient, :recommendations of TRAI dated August 28 2007 are

No cap be placed on the number of access service providers

.in any area ( , )Spectrum in 2G bands 800 900 and 1800 MHz should continue.to be priced as before for new entrants

, ,In future all spectrum excluding the spectrum in the 2G.bands should be auctioned

Dual spectrum may be allocated to existing licensees on

/ .same entry fee charged from existing new licensesqTRAI recommendations accepted in the Internal Telecom Commission( ) , .ITC meeting held on October 10 2007

q - - , .Approved by the then Minister in charge on October 17 2007


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Award of 2G licenses in 2007-08 andsubsequent developments .

q :Process followed for award of 2G licenses , (Press release issued by DoTon September 24 2007 appeared in

, ) ,news papers on September 25 2007 specifying October 01 2007 .as the cut off date for accepting new applications 343 new

.applications were received in this period ( & )Reference made to Ministry of Law and Justice ML J on the

.options to deal with the large number of applications Advice& ( )of ML J to refer the matter to a Empowered GoM EGoM not

.accepted ,Applications received upto September 25 2007 taken up for

processing under an FCFS methodology notified via a press, , ,release issued on January 10 2008 wherein fulfillment of the

( )Letter of Intent LoI conditions was stipulated for.earmarking seniority for allotment of UAS license

Applicants were asked to collect DoT s response on the, :applications on January 10 2008 at 3 30 PM and submit

.compliance of LoI within 15 days , ;121 LoIswere issued on January 10 2008 78 complied with on the

; . ,same day 42 complied on the next day In all 16 applicants, .were issued 120 UAS licenses between February and March 2008

2 more licenses were issued in July 2008 to anotherapplicant company who made application prior to September 25


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Award of 2G licenses in 2007-08 andsubsequent developments .

q , :Salient recommendations of TRAI report dated May 11 2010

Auction should not be resorted to for spectrum in 2G bands( , , ).800 900 and 1 800 MHz bands

q


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Presumptive loss on award oflicenses

Ca te g o ry Crit e ria fo r w o rkin g o u t p o t e nt ia l lo s s to e xc he q u e r

S Te l ra te Ra te s o n t h e

b a s is o f 3 G

a u c t i o n

S a le o f e q u it y b y t h e n e w

l i c e n s e e sUn it e c h S w a n

New licenses 38,950 1,02,498* 40,442 33,230Dual technologylicenses

14,573 37,154** 15,132 12,433

Beyond contractedquantity of 6.2 MHz

13,841 36,993# 14,052 12,003

Total 67,364 1,76,645 69,626 57,666

Crore

* . ( . )Presumptive loss to be estimated against 4 4 MHz instead of 6 2 MHz* . ( . )Presumptive loss to be estimated against 4 4 MHz instead of 6 2 MHz.allotted to new licensees.allotted to new licensees

** . ( )Presumptive loss to be estimated against 4 4 MHz instead of 5 MHz** . ( )Presumptive loss to be estimated against 4 4 MHz instead of 5 MHz.allotted to dual technology licensees.allotted to dual technology licensees

# .Presumptive loss against Spectrum beyond 6 2 MHz not to be considered# .Presumptive loss against Spectrum beyond 6 2 MHz not to be considered( , )as the allotment of additional spectrum post January 17 2008 is( , )as the allotment of additional spectrum post January 17 2008 is

. .subject to pricing as determined in future for spectrum beyond 6 2 MHz. .subject to pricing as determined in future for spectrum beyond 6 2 MHzDecision to be taken after TRAI s recommendations which are presentlyDecision to be taken after TRAI s recommendations which are presently

, .awaited after TRAI s letter of May 18 2010 , .awaited after TRAI s letter of May 18 2010


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Presumptive loss on award oflicenses .

:Observations on Presumptive loss based on 3G prices

q ,UAS licenses issued in January 2008 and 3G payments made in May., ,2010 therefore 3G prices have to be discounted to reflect time.value of money

q .Economic value of spectrum a function of subscriber base and ARPU, %. While subscriber base increased 3 times ARPU reduced by 66

q . ,2G spectrum was subject to availability On average allottees of

( )2008 and even earlier have received spectrum after a gap of a,year therefore 2G spectrum is available on an average for 19..years instead of 20 years

q :There is difference in spectral efficiency of 2G and 3G spectrum .5 MHz of 2G and 3G spectrum have spectral efficiencies of 40 61

. , . .,Erlangs and 149 1 Erlangs respectively i e in the ratio of: / .1 3 4

q - . - - . While computing the pro rata value for 4 4 MHz spectrum vis vis 6 2, - .MHz the non linear advantage due to consolidation of holding 6 2

. .MHz over 4 4 MHz needs considerationqq

qq


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-----< >:Observations on Presumptive loss based on 3G prices II

qTelecom sector policy has evolved continuously since 1999 and is:predicated on the following pillars increase in teledensity and;affordability to the consumer creation of a competitive

,environment with level playing field between existing and new; ,incumbents and revenue accrual to Government both through one

.time fee and annual recurring charges

, ;The policy evolved through NTP 1999 1999 migration;package for existing operators development policies; ,followed between 1999 and 2004 and the overarching

.vision articulated through the X FYP ,The policy created a historical legacy once it was decided

to allow induction of new operators in the UAS regime on

.the basis of 2001 entry fee

, ,TRAI the sector regulator has recommended for induction of,more players at low entry charges in its successive

/ , ; / ,recommendations of October November 2003 January May; , ; , , .2005 August 2007 and May 2010

q


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-----< >:Observations on Presumptive loss based on 3G prices III

,The policy has met with spectacular success in terms of;increase in teledensityand subscriber base reduction in; , .call rates and boosting economic growth

Development policies pursued between 1999 and 2004 had.significanyfinancial implications

o However duopoly regime was ended and additional

.operators were introducedo This resulted in direct benefit to the consumers over `

, , ,1 00 000 croreper annum as a result of ARPU drop, , ).between September 2007 and May 2010

q .3G auction has a different context There were no historical

, .legacy issues hence no issues of level playing field arose,Moreover auction of 3G spectrum was a consistent recommendation, , ; ,of TRAI in its successive reports of September 2006 August

; , .2007 and May 2010q , (If the TRAI recommendation of May 2010 on the basis of which the, (If the TRAI recommendation of May 2010 on the basis of which the

)presumptive loss has been estimated is seen in totality and )presumptive loss has been estimated is seen in totality and

. ,spectrum upto 6 2 MHz is kept out of the ambit of pricing the. ,spectrum upto 6 2 MHz is kept out of the ambit of pricing the value of presumptive loss reduces to NIL value of presumptive loss reduces to NIL.


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.:Observations on Presumptive loss based on Offer of S Tel Ltd

q ,The offer was conditional and untenable since it. ,pertained to 6 2 MHz spectrum in the 900 MHz band in all.22 service areas which was not available

q The company also asked for permission for activeinfrastructure sharing whereas sharing of spectrum is not

.permitted under the current UAS regime

q The offer was subsequently withdrawn by the company andthis was stated in its affidavit before the Supreme Court.of India

q (The amount offered ` , )13 752 crore was spread over 10,years with the first year offer being only ` .250 crore

The company could have reneged on its commitment after

/being allotted spectrum at 1 5th

.of its extant priceq There is no provision in the licensing regime to offer.spectrum on the basis of conditional offers


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Presumptive loss on award of licenses.

Observations on Presumptive loss due to Sale of Equity by Swan

:and Unitech

q ,Valuation of company is a function of many factors and not.just the quantum of spectrum held

qq , .The cases are of dilution not sale of equity

qq Government has been encouraging induction of Foreign Direct

, .Investment in all sectors including telecomq


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Conclusion..q

q

qThe policy matrix which led to the issue of UAS licenses in 2008, , ;evolved over a period of time through NTP 1999 decision of the

, , ;Union Cabinet dated October 31 2003 practice adopted by; ,successive Ministersfor grant of UAS licenses and successive

, .TRAI recommendations of 2003 2005 and 2007q The policy has met with unqualified success and has propelled India

.into the fastest growth telecom market worldwideq , ,The issue of deficiencies if any in translating policy into

,procedure and procedure into actions are being looked in to by.the One Man Committee set up by DoT and Investigating Agencies

.Appropriate action will be taken based on the findingsqq


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OVERALL IMPACTNATION TO DECIDE..SUMMARY OF TRADEOFFS

REVENUE IMPLICATIONS

1. Revenue losses/ Amount foregone overyears, due to conscious policychanges, like:

b) Migration Package under NTP 1999from fixed License fee to revenuesharing

c) Progressive reduction in Licensefee charges, as % of AGR

d) Low Entry Fee maintained(Assumptions regardingPresumptive Losses are open toquestion)

e) Progressive enhancement of Spectrumentitlement (Amount foregonedoes not arise at this stage, since

it is yet to be charged)

2. Consistent Policies since 1999aimed at maximizing growth andcompetition rather than revenue,and minimizing tariffs.

BENEFITS REALISED

1. DIRECT CONSUMER BENEFITS Indian customers have benefitted by Worlds

lowest tariffs (Fallen from Rs 32 /min to Rs0.30 /Min) due intense competition (Benefit to

Aam Aadmi: Over1,00,000 Cr/year)

Citizen connectivity and empowerment, whichcannot be estimated in value terms.

2. RAPID GROWTH IN INDIAN TELECOMMARKET Due to the Policies, favoring promotion of

Telecom Sector over revenue generation, IndianTelecom Market has become Worlds fastestgrowing market, with subscriber addition of 16-18 million/month, ahead of Chinas 8Million/month)and Worlds second largestTelecom Market, afterChina. Since 2005, Indian subscribers have thusgrown from 9.83Cr to 74.21Cr (Oct 2010) andsimilarly, Tele-density has grown from 8.95% to

62.51%), empowering masses.

1.3. SPIN OFF BENEFITS TO ECONOMY:

Huge indirect gain from impact on GDP GrowthRate

High Service Tax accruals (30% of total Servicecollections coming from Telecom sector alone)

Huge investments by Telecom Service providers andManufacturers.

Indian Telecom has turned out to be third biggest


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Thank You


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Growth of the Telecom Sector since 2000

:Source TRAI

Telecom Sector 222

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