Telcos chafe at EGoM refarming ‘breather’

In an apparent relief to incumbent GSM operators, the empowered group of ministers (EGoM) led by finance minister P Chidambaram on Thursday decided to allow partial spectrum reframing.

This means the operators can keep half of their existing spectrum up to 2.5 MHz and buy more if they need at the upcoming auctions.

The companies would have to pay a price either way, at a rate to be determined after the auctions, which get over only mid-next year. The 1800 MHz spectrum auction commences on November 12, while the process for the 900 MHz auction starts in March and gets over in June next year.

The move gives the operators some assurance of supply, though GSM operators currently holding 5 MHz have also been given the option of 100% spectrum refarming – or surrendering the entire 5 MHz spectrum they currently hold – as per Trai’s earlier recommendation, in case they do not wish to pay the auction-determined price for keeping half their spectrum.

Predictably, new GSM players and CDMA operators have been left miffed. CDMA industry body AUSPI believes new players will now compete for less spectrum.

But curiously, even incumbent GSM operators are not happy.

“While we had said that the total outgo for 100% refarming would amount to a whopping Rs60,000 crore, the amount for partial refarming hasn’t even been considered, as we believe very few players, if at all would go in for this. 2.5 MHz of spectrum is even less than the 5 MHz that operators already find difficult to work with, and hence it doesn’t make sense to pay a premium for a less efficient network,” said Rajan Matthews, director-general, COAI.

Experts estimate that partial refarming would rake in around Rs100,000 crore over a period of 10 years, depending on the auction proceeds.

“We have written to the Telecom Commission to reconsider the move as it is unclear whether operators will be able to win the required spectrum needed to continue operations in the upcoming 2G auctions. We feel that in this scenario, it would be better to go in for 100% refarming instead, where at least more spectrum from a more efficient band is assured,” said Matthews.

“This decision has provided some relief on risk, but no relief on price. However, the decision is patchwork and reflects the competing pressures on the government. Besides, the competition for new players will be heightened, as spectrum available will now be reduced,” said Mahesh Uppal, director, Com First (India), a firm dealing in regulatory affairs.

Mohammad Chowdhury, leader - telecom, PwC India, said, “The partial spectrum refarming as approved by the EGoM could result in a detrimental impact on consumers through higher prices as well as poorer quality of service. It will also not provide the financing relief the industry desperately needs to be able to reduce industry debt-to-Ebitda margin ratios, which, at around 5, are currently too high.”

The EGoM also said that in the case of M&As, companies will have to pay the market price if they acquire spectrum from another company which was allocated spectrum at old price of Rs1,658 crore.

“This will be a deterrent to M&As, as any hopes of acquiring cheaper spectrum, as per the old price has also shrivelled up,” said Matthews.

Hemant Joshi, partner, Deloitte Haskins and Sells concluded, “The ruling on M&A seems to be a contradiction to the decision on spectrum refarming. Policy should reflect the economic reality of the sector. Given this, refarming should have been postponed at least for another 2-3 years, until the sector turned profitable again.”

Incumbent operators like Bharti Airtel, Vodafone and Idea Cellular have their licenses coming up for renewal in 2014.