Spectrum Issues

1.

The issues contained in the attached note dated 4 July 2008

were discussed with PM by FM and Minister (Telecom) on July 4, 2008. Secretary (DoT) and I were present.

2.

All the issues have been agreed to as in the note. In

particular, it was also decided that the proposal to extend licences for the spectrum overhang period (to make the licence coterminous with the last tranche of spectrum allotted) as discussed in para 12 of the note will not be pursued because it is administratively and conceptually clumsy and potentially

problematic from the legal angle.

3.

Please reconfirm that the SBI-PLR method will yield revenue

of Rs.3000 crore plus even without the proposed licence extension. The SBI-PLR method was agreed to on this express understanding.

Sd/(D. Subbarao) Finance Secretary 6 July 2008

AS (EA)

Ministry of Finance Department of Economic Affairs

July 04, 2008

Spectrum Issues - Update

(Update on Papers dated February 11, April 17 & 29, and June 11, 10, 27 & 30, 2008)

1. Meetings took place between Finance Minister and Minister of Telecommunications on May 29, 2008 and June 12, 2008 to resolve outstanding issues relating to allocation and pricing of 2G and 3G spectrum bands. The DEA paper, in following paragraphs, attempts to consolidate the position on the outstanding issues.

2.

The issues that are taken up for discussion in this paper are

summarized as under:
i. ii. iii.

Raising spectrum usage charges for 2G spectrum Pricing of spectrum for 2G allocations Method of allocation of 3G spectrum

I.

Spectrum Usage Charge for 2G Spectrum

3.

Spectrum usage charge is pegged to the bandwidth and is

calibrated as a percentage of the Adjusted Gross Revenue (AGR). In view of historical legacy reasons and the administrative issues involved in changing an established practice, it was decided to continue with the current practice of levying spectrum usage charges on the basis of varying percentages of AGR for different bandwidths of spectrum.

4.

It has been agreed to raise the rates as indicated in Table 1

below. This will yield revenue of Rs 4,149 crore in 2008-09, an

increase of Rs 1,270 crore over the revenue yield on the current rate structure.

Table 1: Spectrum usage charges and Revenue Implications thereof for 2008-09

Bandwidth Range (MHz) usage

Spectrum charges

as a % of AGR Existing Price Upto 4.4 4.4 6.2 6.2 8.0 8.0 10.0 10.0 12.5 12.5 15.0 Revenue Implication for 2% 3% 4% 4% 5% 6% 2,879 Proposed Price 3% 4% 5% 6% 7% 8% 4,149

2008-09 (in Rs. Cr.) Source: DoT Finance

II.

Pricing of Spectrum for 2G Allocations

5.

It is legally and administratively tenable to impose a two part

tariff for Spectrum: a fixed, one-time "upfront" spectrum price for allowing the allottees to use a public resource for private profit; and, a recurring spectrum usage charge, whereby Government shares the profits accruing to the operator. However, due to historical legacy reasons, spectrum allocations upto 6.2 MHz for GSM (5 MHz for CDMA) shall not be charged both from new and existing operators.

6.

It has been agreed that the "base price" shall be determined

by taking the entry fee of Rs.1,650 crore (determined in 2003-04) for pan-India operation of UASL licensees as the price of spectrum for 6.2 MHz of bandwidth for GSM operators (a similar exercise is possible for CDMA operators also). This translates to an embedded price of Rs.266 crore/MHz (for pan India operation).

7.

Since the unit price determined as above relates to 2003-04,

it needs to be indexed to reflect the increase in the price level. Two options have been worked out.

8.

In the first options the embedded price of spectrum is

updated using SBI PLR, compounded on a monthly basis, from the date of allotment of additional spectrum beyond 6.2 MHz, upto March 31, 2008, for the purpose of determining the amount payable by existing operators as on March 31, 2008. The indexing factor works out it to 1.52 and represents the time value of the price of spectrum for the duration over which it remained unrecovered from the operators. For new operators, who are allotted spectrum beyond 6.2 MHz after March 31, 2008, the putative spectrum price as on March 31, 2008 would be updated to the date of allotment using the same methodology of compounding the SBI PLR on a monthly basis.

9.

In the second option, the indexation is made using the

number of times by which GDP (at current market prices) has gone up between 2003-04 and 2007-08, in order to determine the amount payable by existing operators, for spectrum beyond 6.2 MHz, as on March 31, 2008. This is premised on the assumption that the growth in GDP reflects, in a rough and simple manner, the "scarcity" value of spectrum, i.e., the GDP growth rate can be used as a proxy parameter for updating the embedded price of spectrum, as derived from the 2003-04 Entry Fee. This indexation works out to 1.7. For operators who will be allotted spectrum beyond 6.2 MHz after March 31, 2008, the updating factor will be

indexed to the GDP (at current market prices) for the year in which the spectrum allocation beyond 6.2 MHz takes place, with the base year remaining the same, i.e, 2003-04.

10.

Broad Estimates indicate that while the methodology using

PLR would yield Rs 3,028 crore the revenue yields in the option using GDP would be Rs 3,400 crore, by way of upfront charge for spectrum beyond 6.2 MHz allotted upto March 31, 2008.

11. The lacuna in the first option is that over the last five years, SBI PLR rates have had an inverse relationship with nominal GDP as well as GDP at factor cost. This implies that in a growing economy, when the demand for spectrum will rise, the first option will, in fact, undervalue its price. (Annex may be seen).

12. These rates shall be applicable for the entire duration of the initial license period of 20 years for all operators, Extension in license period and the conditions for extension shall be as per the extant policy at the time of expiry of the license.

IlI.

Method of Allocation of 3G spectrum

13.

DEA and DoT have agreed that allotment of 3G spectrum

will be made on the basis of the Interactional Competitive Bidding (ICB), with reiteration of the existing mandatory "roll out" clause. The present criteria for pre-qualification will be followed for 3G auction, viz all interested parties eligible for the UASL license will participate. A non-licensee who succeeds in obtaining 3G spectrum in the ICB process, for a particular circle, would be granted a license to operate 3G services in that circle.