(Handwritten note

)
1.

Handed over a copy of the note to FM
2.

Retained 1 copy Sd/-

Finance Secretary 29.4.2008 Dir (Infra)

Issues relating to 2G

1.

Finance Minister forwarded a “non-paper” indicating the

views of the Ministry of Finance on spectrum related matters to Minister for Communication and IT on April 21, 2008. As instructed by FM, Finance Secretary also met with Secretary, DoT on April 24, 2008 to carry forward the discussion. The following is an update on the outstanding issues.

Can we charge for spectrum while also collecting usage charges?

2.

DEA is of the view that it is legally and administratively

tenable to impose a two part tariff for spectrum: a fixed, onetime “upfront” spectrum price for allowing the allottees to use a public resource for private profit; and, a recurring usage charges whereby Government shares the profits accruing to the operator. The upfront spectrum pricing also protects the Government against inefficient utilization of spectrum by an operator.

Pricing of Spectrum

3.

We may recommend the following principles for pricing of

spectrum:
i.

The startup spectrum of 4.4 MHz for GSM (2.5 MHz for

CDMA may be exempted from upfront pricing both for new and existing operators.

ii.

Under the UASL Licensing regime, there appears to be an implicit, indirect contractual obligation to allow further allotment of spectrum, beyond 4.4 MHz for GSM (2.5 MHz for CDMA), and upto 6.2 MHz for GSM (5 MHz for CDMA) after payment of 1% additional spectrum usage charges and ensuring that already allocated spectrum has been optimally and efficiently utilized. This may effectively protect operators who have existing allocations upto 6.2 MHz for GSM (5 MHz for CDMA) from payment of any other charges, including the "up front" spectrum price. Since it may not be possible to charge operators already having allocations upto this range, the principle of equity and “level playing field” would require that the operators, who get fresh allotment of spectrum upto 6.2 MHz for GSM (5 MHz for CDMA) too should not be charged for spectrum upto 6.2 MHz for GSM (5 MHz for CDMA).

iii.

Spectrum beyond 6.2 MHz incase of GSM (5 MHz in case of CDMA) should be priced. This is defensible on the following grounds. First, as per the terms of the UAS license, there is no contractual obligation on the part of the Government to necessarily allot spectrum beyond 6.2 MHz (beyond 5 MHz incase of CDMA); and, secondly, Government retains the sovereign right to modify the terms of license as also the procedure for allocation of spectrum, including quantum of spectrum, at any point of the time without assigning any reason.

4.

The relevant extracts of the licensing provisions are

extracted as under:
a.

Clause 43.5(ii) of License Agreement for provision of Unified Access Service states, “…. additional spectrum beyond (4.4 MHz/ 2.5 MHz ) may also be considered for allocation after ensuring optimal and efficient utilization of the already allocated spectrum however, spectrum not more than 6.2/

5.0 (GSM/CDMA) shall be allocated to the licensee…” ( emphasis added)

b.

Clause 18.3.1 of the License for provision of Unified Access Services after Migration for CMTS states “… any additional bandwidth, if allotted subject to availability and justification shall attract additional license fee as revenue share (typically 1% additional revenue share ) if bandwidth allocated is upto 6.2/5 MHz in place of 4.4/2.5 MHz….” (emphasis added)

c.

Clause 43.5 (iv) of both the Licenses (DoT have been using this Clause to allow allotments of spectrum beyond 6.2 MHz (for GSM) /5 MHz (for CDMA) with enhanced spectrum usage charges) as above states, “…. The Licensor has the right to modify and/or amend the procedure of allocation of spectrum including quantum of spectrum at any point of time without assigning any reason….”

d.

Clause 5.1 of the both the Licenses as above states, “… the Licensor reserves the right to modify at any time the terms and conditions of the License, if expedient in public interest or in the interest of security of the State or for the proper conduct of the telegraphs….”

5.

Hence, spectrum allocations beyond 6.2 MHz (GSM) /5 MHz

(CDMA) may be charged an upfront price, both in respect of new and existing allotments. It will of course be open to existing operators to relinquish their allocations if the new pricing regime is not acceptable to them.

How to Price - Auction or Fixed Charge?

6.

The principles that should govern pricing have been

discussed at length between DEA and DoT. Auctioning of spectrum was not found to be feasible on account of (i) legacy issue; and (ii) only a limited amount of identifiable free spectrum being available (auction is realistically possible if a large amount of spectrum is available). It was therefore, agreed between DEA and DoT that best and most practical way, under the

circumstances of determining a price for 2G spectrum would be to draw from the entry fee of Rs. 1650 crore (for 4.4 MHz) fixed in 2003/04. This translates to Rs.375 crore per MHz at 2003-04. This is to be multiplied a factor of 3.5 reflecting the growth in aggregate AGR per MHz between 2003-04 and 2007-08. This works out to Rs 1,312 core per MHz.

Spectrum Usage Charges

7.

Spectrum Usage Charge is currently linked to bandwidth,

and the rate of charge is a function of the quantum of spectrum allocated to an operator. DEA has argued that a rate of charge linked to bandwidth is not rational and that the rate of charge must reflect the scarcity value of spectrum. This can be accomplished by making spectrum usage charge circle or category specific. It is estimated that this changeover would double the current yield from spectrum usage charges from Rs. 2,800 crore (Assuming a consolidated AGR of telecom sector of Rs 60,000 cr in 2007-08; @ 3.5% of AGR, assuming a growth rate of 20% pa) to Rs 5,200 crore3 (estimates, for 2008-09) (Assuming a weighted average rate of 7% of AGR, total AGR Rs 60,000 cr in 2007-08 and a 20% growth rate).

8.

There have been several alternative proposals / models for

enhancing spectrum usage charges.

9.

TRAI in their August, 2007 recommendations, proposed an

increase in spectrum charge by 1% of AGR for spectrum allocation beyond 8 MHz and a one-off fixed charges beyond 10 MHz. The estimated yield under this formulation will be Rs. 3,250 crore (2008-09) (Rs 200 crore would be the realization from operators having more than 8 MHz currently; Rs 250 crore is expected from operators having more than 10 MHz – it is assumed that only 2 operators per circle would go in this category

in 5 Category-A circles and 3 Metro Circles). The TRAI model also postulates a single part tariff, which is in the form of spectrum usage charge till 10 MHz cutoff and in the form of a specific spectrum price beyond. This model is not acceptable because of: (i) low additional yield; (ii) there being no sanctity for the thresholds of 8 MHz and 10 MHz and 10 MHz.

10.

DoT, in their recommendations contained in the non-paper

handed over to Finance Minister, proposed an increase in 1% of AGR over existing rates upto 7.2 MHz; and a step increase of 0.5% for every 1 MHz increase thereafter. The estimated yield of the DoT model is in the range of Rs 3,800- 4,000 crore (2008-09). This is also not acceptable because: (i) a low additional yield; and (ii) the model persists with the current flawed System of linking rate of charge to allotted bandwidth.

11.

Reliance Communication Limited (RCL) have proposed

increasing spectrum charges by 2% beyond 6.2 MHz and, applying fixed charges for allocations beyond 6.2 MHz with value of the charge being derived from the price discovery under 3G auctions. However, since price discovery through 3G auction is yet to take place, the financial implication of the proposal – estimated by Reliance Communications at Rs. 7,800 crore is hypothetical and cannot be validated.

12.

The proposals of DoT, TRAI and RCL suffer from the

additional limitation that they all contemplates single part tariff.

13.

It is evident that the maximum realization in terms of'

revenue comes from the DEA formulation. The additional advantage of using this formulation - besides its linkage to scarcity value - is that it represents a break from the current structure. This is important for the following reasons. Currently, the spectrum usage charge is linked to bandwidth; a rate of 4% from 6.2 MHz

upto 10 MHz; and 1% higher for 12.5 MHz; and so on. It is possible under the present dispensation for operators to argue, for example, that the additional 1% that they pay for going from 10 MHz to 12.5 MHz is, in fact, the price for the additional spectrum, and that levy of a spectrum, usage charge on top of that is not tenable.

14.

We may, therefore, continue to canvas the DEA formulation,

which is as follows:

Circle Category

Spectrum Usage Charge as % of AGR

Metro I (Delhi, Mumbai) Metro II (Kolkata) Category – A Category – B Category – C

8% 8% 8% 6% 4%

Issues relating to 3G/WiMax Spectrum

Allocation of 3G/WiMax spectrum 15. DoT had recommended two options in this regard: auction

among existing UAS (including ISP licenses, for WiMax) license holders; or, and open global auction (ICB). DEA expressed an explicit preference for the ICB model with re-iteration of the mandatory roll out clause and pre-conditions relating to prior experience in the sector net worth criteria etc., being specified for pre-qualification of bidders. Since these recommendations of DEA are not in line with those or TRAI (contained in the September; 2006 Report on "Allocation and Pricing of 3G and BWA Spectrum"), DoT, wrote to TRAI on April 10, 2008 asking for reconsideration of their earlier recommendations on restricting auction for 3G/WiMax spectrum to existing operators and to widen

the ambit to include new applicants, both Indian and foreign, who have appropriate experience in the telecom sector (copy-of DO letter of Secretary, DoT to Finance Secretary enclosed).

Issues relating to Mergers and Acquisitions 16. DoT have issued a notification on April 22, 2007

on "Guidelines for intra service merger of Cellular Mobile Telephone Service (CMTS)/ Unified Access Services (UAS) Licenses" (copy attached).

17.

The

guidelines

derive

substantially

from

the

recommendations made by TRAI on this subject vide Report of August, 2007. The guidelines mandate a "spectrum transfer charges” to be payable as specified by Government.

18.

DoT may be advised that fixation of "spectrum transfer

charges" shall be in consultation with DEA.

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