Charged up

It's a precursor to the big 4G fight that's going to take place in the telecom sector. Reliance Jio (RJio), the telecom arm of Reliance Industries, is at loggerheads with the GSM industry body Cellular Operators Association of India (COAI) over spectrum usage charges (SUC). Even though Reliance Jio is a member of COAI, it seems to be losing out to the rest of the members who are in favour of fixed SUC charges of 4.5 per cent of adjusted gross revenues (AGR), as proposed by the Department of Telecommunications (DoT).

The bone of contention is the additional monetary burden of some Rs 60,000 crore that will fall on Rjio over a period of 20 years if the fixed SUC rates come into force. RJio says that other COAI members are paying higher SUC charges, which they want to pass on.

A series of policy changes related to SUC rates has made the matter complex. Nevertheless, the government is close to finding a solution to the problem that seems to be hurting Rjio as compared with competition including Airtel, Vodafone and Idea.

Currently, Airtel and Vodafone, on average, pay SUC of around 6.5 per cent, 2 percentage points higher than DoT's proposed figure. RJio, on the other hand, pays different rates, including 1 per cent for the BWA spectrum (used for 4G services) it had acquired in 2010.

The Background

In 2010, the DoT went for auctions and SUC was fixed at 3 per cent for 3G spectrum and 1 per cent for BWA (the spectrum used for 4G services). It was argued that SUC rates for 3G and 4G spectrum were different for a reason -3G was tightly intertwined with 2G spectrum and it was difficult to segregate the revenues and, thus, chances of manipulation were high.

In the 2012 auctions, the government went back to a slab-based system before settling for a weighted average method based on the SUC rates of the auctioned and allocated spectrum.

Meanwhile, RJio has said that the weighted average method should be continued. Under this method, each player pays a different SUC rate. If this system remains, RJio is expected to gain while other players will be at a huge disadvantage.

The problem has arisen from the government's approach towards SUC over the years. A few years ago, the telecom airwaves were allotted to operators based on their subscriber base. Higher the number of subscribers, the more spectrum was allotted. The spectrum sale was not linked to market rates at that time so the government introduced SUC, a slab-based system under which telcos pay charges on the quantum of the spectrum they hold. It ensured that telcos make efficient use of spectrum, and they are not just hoarding spectrum by inflating the subscriber numbers. The SUC ranged between 3 per cent and 8 per cent of AGR.

But since the spectrum allotted in the pre-auction era will be expiring in the next few years, the government has to go for uniform SUC rates (ideally on the lower side) in order to reduce the burden on telcos who are already paying market-linked prices for spectrum.

COAI says that charging different SUC rates for different bands is impractical. It would be difficult because segregating revenues could be challenging. Also, all bands are interchangeable, so telcos will play the arbitrage game by directing most of their traffic on bands with low SUC charges. RJio, however, disagrees and says that revenue segregation is possible.

"In most of the world, there's no such thing as SUC. When telcos buy spectrum, they are charged a nominal amount of administrative fee, which is less than 1 per cent," says Rajan S. Mathews, Director General, COAI. The high SUC burden on operators can adversely impact investment in infrastructure, says COAI in its April letter to TRAI. "Numerous rates are presently applicable for spectrum assigned at different points of time?[which] lead to ambiguities while entering into transactions such as M&A, spectrum trading and sharing and liberalization?A uniform rate will simplify the calculations and remove all arbitrages and ambiguities," the letter said.

The SUC generates significant revenues for the government (about Rs 33,365 crore since 2010). Tweak-ing the rates by a few percentage points can impact these revenues. Apparently, the SUC rate of 4.5 per cent doesn't result in loss of revenues. "The matter has gone to the Telecom Commission, which has said that there could be legal issues," says Mathews.

An analyst argues any change can affect RJio's initial cost estimations and change the business economics.

"Before every auction, rules of the auctions, including SUC rates, are defined by DoT and all bidders bid for the spectrum accordingly. If higher annual spectrum charges are kept, the auction bids are likely to be lower and vice-versa," says an analyst.

The ball is now in the government's court. SUC seems like an old concept that is creating fresh ruckus in the industry.