Fair value for spectrum: Can it help easing Indian telecom sector’s debt?

Spectrum is the most important resource for any telecom operator and one of the most important enablers for digitalisation of a country

Published: 26, Dec 2018

Varun Gupta is the Managing Director and India Leader at Duff & Phelps.

Image: Shutterstock
Image: Shutterstock

The Telecom Regulatory Authority of India (TRAI) recently submitted its recommendations to the Department of Telecommunications (DoT) on the base price for the auction of spectrum, including spectrum meant for the rollout of 5G.

Spectrum is the most important resource for any telecom operator and one of the most important enablers for digitalisation of a country. In terms of spectrum availability per million people, operators in India have half the amount of radio waves compared with operators in China.

Once a crown jewel, telecom is currently one of the largest debt-ridden sectors within the Indian banking industry, with debt of approximately Rs 7.5 trillion. Using Murphy’s Law to explain this, all that could possibly go wrong with the sector has gone wrong in the past few years -- whether it is decreasing revenues thanks to hypercompetition or increasing expenditure on spectrum, the largest component of debt in any telecom operator’s balance sheet.

Spectrum policy in India
From 1994 to 2010, the government followed the “administrative allocation” approach, allocating spectrum by integrating spectrum and licenses. During 2000–2004, the government granted licenses on a first come, first served basis. Prices for these bundled licenses and the quantity of additional spectrum to be allocated were calculated using an unclear method, and the Supreme Court of India criticised the process. In late 2006, TRAI suggested “auction” as a process for allocating 3G and Broadband Wireless Access (BWA) spectrum. Subsequently, the first spectrum auctions for 3G and BWA spectrum were held in 2010.

While spectrum allocation through auction was a noteworthy step, the high reserve prices somewhat negated the purpose of the new process. The exuberance exhibited by telecom operators during the first auction led the government to consistently increase the reserve price in subsequent auctions to economically unfeasible levels. While there was a healthy growth in the number of subscribers during the same period, industry profitability dropped due to intense competition and low average revenue per user (ARPU). As a result, a significant amount of spectrum remained unsold in the subsequent auctions. Thus, it became evident that it was imperative to price the spectrum at levels where bidders could actively participate and together discover the fair value-based on the spectrum’s economic utility.

Fair value of spectrum – Key considerations
Determination of fair value of spectrum is key to investors, corporations, lenders and borrowers, whether it is for cases admitted under the National Company Law Tribunal (NCLT) or for auctions of the 3,300–3,600 band. The fair value of spectrum depends on the following factors:

Spectrum fragmentation
Spectrum fragmentation results in reduction in spectral efficiency leading additional capital expenditure requirements for telecom operators. In the absence of a contiguous block, telecom operators need to install additional towers to enable spectrum reuse. Thus, due to inefficiencies and extra costs, fragmentation has a destructive effect on the value of spectrum.

Size of holding
The spectrum requirements of a telecom operator increase with growth in subscribers and data consumption per subscriber. Thus, large spectrum holdings are key to rolling out better services at high speed and positively affect value as a result.

Technology
Telecom operators need low frequency bands to cover vast areas and high frequency bands to transmit data faster. Bands such as 1,800 MHz occupy the sweet spot between coverage and capacity for 4G deployment and are thus in high demand. Such technological advantages should be accounted for when determining fair value, whether for liquidation or transaction purposes.

Spectrum generation
Telecom operators can now deploy any technology in any band (subject to additional costs) as spectrum has become technology neutral. To the extent the benefit outweighs the cost, the fair value of operators’ current spectrum holdings gets an incremental uplift.

Life of spectrum
Spectrum is typically valid for a period of 20 years. For obvious reasons, a longer period of remaining life positively affects the value of spectrum, especially from a liquidation value standpoint.

Demographics
Demographic differences are an important consideration in determining fair value of spectrum across telecom circles. In general, the higher the population density, more valuable the circle. For this reason, circles such as New Delhi and Mumbai were auctioned for higher prices than others.

Way forward
DoT’s draft for National Telecom Policy-2018 focuses on transition from physical to digital infrastructure. 5G is expected to transform a wide range of industries from education to retail, entertainment to transportation and everything in between. It can enhance Internet of Things (IoT) and Industry 4.0, thereby creating new revenue streams for market participants, especially those who have aggressive plans for 5G and IoT.

While sector consolidation is underway, reviving the sector won’t be easy. The cost of bandwidth in India is almost the same as that for global operators, while data and voice tariffs are much lower. As revenues from voice and data continue to decline in the coming years, telecom operators will need to rely on alternative revenue streams such as IoT for sustained profitability.

The author is Managing Director and India Leader at Duff & Phelps.

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