How not to kill the golden goose?

The Supreme Court’s order that the government must auction all future 2G spectrum has raised the spectre that players will bid so high for spectrum that they will have little to spend on rolling out urgently-needed networks. Cash-strapped players, it is being argued, will have no choice but to punish customers with high tariffs.

While simple economics suggests that though a sharp rise in prices is unlikely, there is little doubt that a significantly higher charge for spectrum, companies will have fewer resources to expand networks, especially to rural or remote areas, where costs are high and profits distant. However, this is hardly the reason to retain the old system that enabled many politicians, bureaucrats and private companies to cheat the exchequer. Fortunately, when one considers government levies on the telecom sector as a whole, there appear many more rational and defensible options. Indeed, the new options arguably reconcile the obligations of corporates and policymakers more constructively.

In India’s licence fee regime, there is no upfront payment for spectrum. But the licence fee was large and, until 2001, reflected the market price. As many have pointed out, the upfront licence fee is de facto the price of spectrum. We are, of course, leaving aside the basis for actual amounts charged as licence fees.

Companies pay close to 6-10% of their revenues for annual licence fees; depending on the state or circle in which they provide services, around

2-3% of their revenues go towards spectrum usage charges. In 1999, the government allowed ‘revenue sharing’, in lieu of licence fees, on request of companies who found themselves unable to pay the high fees that they had bid in the auctions of licences in 1995. Unexpectedly, the move towards revenue sharing, far from being a write-off, has brought more in fees to the government than companies committed to paying through their early bids.

Last year, the government received around R10,000crore and R3,000 crore in licence fees and spectrum charges, respectively. The Cellular Operator Association of India says telecom companies pay roughly 29% of their revenues to the government in the form of various fees,giving India’s telecom sector the dubious distinction of being the most ‘taxed’ in the world.

In most mature regulatory regimes, for example in all member countries of the European Union, there isno charge for licence fees but companies pay for the use of any finite resource such as spectrum, phone numbers, ducts and rights of way. The regulatory agencies managing them are obliged to allocate such resources transparently through open competitive processes such as auctions. Provision of services requires authorisation, but no other fees. Companies do pay small fees to reflect administrative costs of regulating them.

Internet services and other value added services attract no fees. Companies providing them do not require any prior permission even if they must meet specified conditions. This helps create a flexible and competitive regime for such services and protects, from excessive government regulation, small or medium size businesses who typically provide such services.

The new Supreme Court directive to auction spectrum could easily double the revenues to the exchequer. The corresponding doubling of financial burden on the sector will be the proverbial killing of the golden goose. While the auctions are necessary to ensure demonstrable transparency, the higher burden can be reduced equally transparently by bringing licence fees to a minimum.

It made perfect sense for the Telecom Regulatory Authority of India (Trai) to club recommendations on spectrum allocation and pricing along with those for a unified licence. The issues are highly inter-related.

The Telecom Commission, the chief clearing house for policy of the Department of Telecommunications, has considered Trai’s proposals recently and, according to newspaper reports, accepted them after earlier demanding a review of some of them. One of the commission’s main considerations in evaluating proposals on licence fees was that the new licence regime be ‘revenue neutral’ i.e. not result in a net loss of revenue to the exchequer.

The Supreme Court judgment offers a unique opportunity for India to bring its licensing regime in line with the more considered regulatory regimes of the world. The judgment strikes at the very basis of assumptions used in Trai’s recommendations on licensing. To attempt a patch-up in the recommendations would be unwise, since it would carry at least some of the legacy problems that cause frequent controversies in a critical sector like telecom.

A simple way forward would be for the Telecom Commission, where the ministry of finance is represented, to have an annual revenue target from government levies in the telecom sector. Fees for spectrum could be set off against that target and licensed operators could then be expected to pay a flat revenue share to make up for the rest. This has the advantage that those in charge of sector policy could set the revenue target, based not just on exchequer goals but also on policy goals to keep services affordable and the sector attractive to investors. This will ensure crucial separation between obligations of businesses and government agencies. This will also enable the government to tweak macro objectives but is simple and transparent enough to be enforceable and to deter mischief.

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