Developments in the telecom sector, award
of 2G licenses in 2007-08 and subsequent
observations of audit
Policy Perspectives
Status Report
January 07, 2011
1
Scheme of Presentation
1.
Initial developments; New
(NTP),1999 and its impact
Telecom
Policy
2. Development policies followed in the period 1999
2004
3. Award of UAS/ 2G licenses in 2007-08 and
subsequent developments
4. “Presumptive loss” in award of licenses
5. Conclusions
2
Scheme of Presentation
1.
Initial developments; New
(NTP),1999 and its impact
Telecom
Policy
2. Development policies followed in the period 1999
2004
3. Award of UAS/ 2G licenses in 2007-08 and
subsequent developments
4. “Presumptive loss” in award of licenses
5. Conclusions
3
Initial developments and National
Telecom Policy (NTP), 1999
 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.
 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’.
 NTP, 1999 approved by Union Cabinet on March 26, 1999 and made effective
4 from April 01, 1999.
Initial developments and National
Telecom Policy (NTP), 1999…..<II>
 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 playing field 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.
 ‘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.
5
Scheme of Presentation
1.
Initial developments; New
(NTP),1999 and its impact
Telecom
Policy
2. Development policies followed in the period 1999
2004
3. Award of UAS/ 2G licenses in 2007-08 and
subsequent developments
4. “Presumptive loss” in award of licenses
5. Conclusions
6
Development policies followed in the
period 1999 to 2004
 First come first serve (FCFS) principle used for the first time, in 2001, in allotting
spectrum for basic services with wireless in local loop (WLL).
 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’.
 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.
 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).
7
Development policies followed in the
period 1999 to 2004…..<II>
 Policy 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 multioperator 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 role.
 The X Plan document was formally released on December 21, 2002 covering the
period April 01, 2002 to March 31, 2007.
8
Development policies followed in the
period 1999 to 2004…..<III>
 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 implementation of the UAS
Licensing Regime for basic and cellular services was accepted.
 Minister of Communications & IT was authorised to finalise the details of
implementation including the calculation of the entry fee based on the
principle given by TRAI in its recommendations.
 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) adopted as 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.
9
Scheme of Presentation
1.
Initial developments; New
(NTP),1999 and its impact
Telecom
Policy
2. Development policies followed in the period 1999
2004
3. Award of UAS/ 2G licenses in 2007-08 and
subsequent developments
4. “Presumptive loss” in award of licenses
5. Conclusions
10
Award of 2G licenses in 2007-08 and
subsequent developments
 25 new UAS licenses were awarded between June, 2004 and March, 2007 on
FCFS basis and as per the existing license conditions.
 Reference was made to TRAI in April, 2007 to furnish recommendations 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 licenses.
 TRAI recommendations accepted in the Internal Telecom Commission (ITC)
meeting held on October 10, 2007.
 Approved by the then Minister-in-charge on October 17, 2007.
11
Award of 2G licenses in 2007-08 and
subsequent developments ….<II>
 Process followed for award of 2G licenses:
 Press release issued by DoT on 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 LoIs were 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
another applicant company, who made application prior to September 25, 2007.
12
Award of 2G licenses in 2007-08 and
subsequent developments ….<III>
 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).
13
Scheme of Presentation
1.
Initial developments; New
(NTP),1999 and its impact
Telecom
Policy
2. Development policies followed in the period 1999
2004
3. Award of UAS/ 2G licenses in 2007-08 and
subsequent developments
4. “Presumptive loss” in award of licenses
5. Conclusions
14
“Presumptive
licenses
loss”
on
award
of
` Crore
Criteria for working out potential loss to exchequer
Category
New licenses
Dual technology
licenses
Beyond contracted
quantity of 6.2
MHz
Total
S Tel rate
Rates on the
basis of 3G
auction
Sale of equity by the new licensees
Unitech
Swan
38,950
1,02,498*
40,442
33,230
14,573
37,154**
15,132
12,433
13,841
36,993#
14,052
12,003
67,364
1,76,645
69,626
57,666
* ‘Presumptive loss’ to be estimated against 4.4 MHz (instead of 6.2 MHz) allotted to
new licensees.
** ‘Presumptive loss’ to be estimated against 4.4 MHz (instead of 5 MHz) allotted to dual
technology licensees.
# ‘Presumptive loss’ against Spectrum beyond 6.2 MHz not to be considered as the
allotment of additional spectrum (post January 17, 2008) is subject to pricing as
determined in future for spectrum beyond 6.2 MHz. Decision to be taken after TRAI’s
15
recommendations
which are presently awaited after TRAI’s letter of May 18, 2010.
“Presumptive loss”
licenses ….<II>
on
award
of
Observations on “Presumptive loss” based on 3G prices:
 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.
 Economic value of spectrum a function of subscriber base and ARPU. While
subscriber base increased 3 times,ARPU reduced by 66%.
 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..
 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.
 While computing the pro-rata value for 4.4 MHz spectrum vis-à-vis 6.2 MHz, the
non-linear advantage due to consolidation of holding 6.2 MHz over 4.4 MHz
needs consideration.
16
“Presumptive loss”
licenses ….<III>
on
award
of
Observations on “Presumptive loss” based on 3G prices -----<II>:
 Telecom 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.
17
“Presumptive loss”
licenses ….<IV>
on
award
of
Observations on “Presumptive loss” based on 3G prices -----<III>:
 The policy has met with spectacular success, in terms of increase in teledensity
and subscriber base; reduction in call rates; and, boosting economic growth.
 Development policies pursued between 1999 and 2004 had significany financial
implications.
o However duopoly regime was ended and additional operators were
introduced.
o This resulted in direct benefit to the consumers over ` 1,00,000 crore per
annum, as a result of ARPU drop between September, 2007 and May, 2010).
 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, 2010.
 If the TRAI recommendation of May, 2010 (on the basis of which the ‘presumptive
loss’ has been estimated) is seen in totality and spectrum upto 6.2 MHz is kept
18 out of the ambit of pricing, the value of ‘presumptive loss’ reduces to NIL.
“Presumptive loss”
licenses ….<V>
on
award
of
Observations on “Presumptive loss” based on Offer of S Tel Ltd.:
 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.
 The company also asked for permission for active infrastructure sharing
whereas sharing of spectrum is not permitted under the current UAS
regime.
 The offer was subsequently withdrawn by the company and this was stated
in its affidavit before the Supreme Court of India.
 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 price.
 There is no provision in the licensing regime to offer spectrum on the basis
of conditional offers.
19
“Presumptive loss” on award of licenses
….<VI>
Observations on “Presumptive loss” due to ‘Sale of Equity’ by Swan and Unitech:
 Valuation of company is a function of many factors, and not just the quantum
of spectrum held.
 The cases are of dilution, not sale of equity.
 Government has been encouraging induction of Foreign Direct Investment
in all sectors, including telecom.
20
Scheme of Presentation
1.
Initial developments; New
(NTP),1999 and its impact
Telecom
Policy
2. Development policies followed in the period 1999
2004
3. Award of UAS/ 2G licenses in 2007-08 and
subsequent developments
4. “Presumptive loss” in award of licenses
5. Conclusions
21
Conclusion…..
 The 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 Ministers for grant of UAS
licenses; and, successive TRAI recommendations of 2003, 2005 and 2007.
 The policy has met with unqualified success and has propelled India into the
fastest growth telecom market worldwide.
 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
findings.
22
OVERALL IMPACT…NATION TO DECIDE..
SUMMARY OF TRADEOFFS
1.
a)
b)
c)
d)
2.
REVENUE IMPLICATIONS
Revenue losses/ Amount foregone over years,
due to conscious policy changes, like:
‘Migration Package’ under NTP 1999 from
fixed License fee to revenue sharing
Progressive reduction in License fee
charges, as % of AGR
‘Low Entry Fee’ maintained (Assumptions
regarding ‘Presumptive Losses’ are open to
question)
Progressive enhancement of Spectrum
entitlement (Amount foregone does not arise
at this stage, since it is yet to be charged)
Consistent Policies since 1999 aimed at
maximizing growth and competition rather
than revenue, and minimizing tariffs.
BENEFITS REALISED
1.


2.
RAPID GROWTH IN INDIAN TELECOM MARKET
Due to the Policies, favoring ‘promotion’ of Telecom Sector over
revenue generation, Indian Telecom Market has become
World’s fastest growing market, with subscriber addition
of 16-18 million/month, ahead of China’s 8Million/month) and
World’s second largest Telecom Market, after China. Since
2005, Indian subscribers have thus grown from 9.83Cr to
74.21Cr (Oct 2010) and similarly, Tele-density has grown from
8.95% to 62.51%), empowering masses.
3.
SPIN OFF BENEFITS TO ECONOMY:
Huge indirect gain from impact on GDP Growth Rate
High Service Tax accruals (30% of total Service collections
coming from Telecom sector alone)
Huge investments by Telecom Service providers and
Manufacturers.
Indian Telecom has turned out to be third biggest recipient
sector of FDI and has attracted more than US 10 Billion $ since
2000)
Network externalities like facilitation and productivity
enhancements in Trade, industry and commerce
Employment opportunities




23
DIRECT CONSUMER BENEFITS
Indian customers have benefitted by World’s lowest tariffs
(Fallen from Rs 32 /min to Rs 0.30 /Min) due intense
competition (Benefit to Aam Aadmi : Over1,00,000 Cr/year)
Citizen connectivity and empowerment, which cannot be
estimated in value terms.


Thank You
24
Growth of the Telecom Sector since 2000
1400
7.00
1319
6.70
6.00
1113
1000
5.00
4.99
800
884
4.00
4.06
634
584.32
600
2.82
340
1.55
272
1.15
0.79
200
0
391.76
394
3.58
6.54
13
Total Subscriber(Million)
3.00
469
400
1.9
635.5
Tariff
Subscriber / ARPU
1200
33.69
52.22
90.14
165.11
0.58
2.00
261.07
237
0.52
ARPU(Rs/Subscriber/Month)
177
0.39
121
114
0.31
0.30
1.00
0.00
Tariff (Rs/Min)
Source : TRAI
25