Spectrum Auctions

ECONOMY/ GOVERNANCE

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
• Infrastructure: Energy, Ports, Roads, Airports, Railways, Telecommunications etc

Spectrum Auctions

Context: The Department of Telecommunications (DoT) said on Wednesday (January 6) that auctions for 4G spectrum in the 700, 800, 900, 1,800, 2,100, 2,300, and 2,500 MHz bands will begin from March 1.

What are spectrum auctions?

• Role in Communications: Devices such as cellphones and wireline telephones require signals to connect from one end to another. These signals are carried on airwaves, which must be sent at designated frequencies to avoid any kind of interference.
• Ownership of Spectrum: The Union government owns all the publicly available assets within the geographical boundaries of the country, which also include airwaves. 
• Need for Auction: With the expansion in the number of cellphone, wireline telephone and internet users, the need to provide more space for the signals arises from time to time. To sell these assets to companies willing to set up the required infrastructure to transport these waves from one end to another, the central government through the DoT auctions these airwaves from time to time.
• Validity of Spectrum: These airwaves are called spectrum, which is subdivided into bands which have varying frequencies. All these airwaves are sold for a certain period of time, after which their validity lapses, which is generally set at 20 years.

Why is spectrum being auctioned now?

• Previous Auction: The last spectrum auctions were held in 2016, when the government offered 2,354.55 MHz at a reserve price of Rs 5.60 lakh crore. Although the government managed to sell only 965 MHz – or about 40 % of the spectrum that was put up for sale – and the total value of bids received was just Rs 65,789 crore.
• Licences expire in 2021: The need for a new spectrum auction has arisen because the validity of the airwaves bought by companies is set to expire in 2021. In the spectrum auctions scheduled to begin on March 1, the government plans to sell spectrum for 4G in the 700, 800, 900, 1,800, 2,100, 2,300, and 2,500 MHz frequency bands. 
• Importance of Reserve Price: The reserve price of all these bands together has been fixed at Rs 3.92 lakh crore. Depending on the demand from various companies, the price of the airwaves may go higher, but cannot go below the reserve price.

Who are likely to bid for the spectrum?

• Existing Players: All three private telecom players, Reliance Jio Infocomm, Bharti Airtel, and Vi are eligible contenders to buy additional spectrum to support the number of users on their network.
• Foreign Players: Apart from these three, new companies, including foreign companies, are also eligible to bid for the airwaves. Foreign companies, however, will have to either set up a branch in India and register as an Indian company, or tie up with an Indian company to be able to retain the airwaves after winning them.

What will the bidding cost the three existing companies?

• Both Bharti Airtel and Vi have repeatedly expressed their inability to shell out a lot of money – either to buy new spectrum or to renew the old spectrum licences that they already hold.
• Most analysts expect Bharti Airtel to renew some of its old spectrum, but to not bid for new spectrum at all.
• On Vi, all analysts expect that the company may not participate at all in this auction, given the cash flow constraints it is facing.
• Reliance Jio is likely to not only renew the 44 MHz spectrum that it had bought from Reliance Communication, but to also bid for additional spectrum in the 55 MHz band owned by the latter in the upcoming auctions.
• To this end, Reliance Jio will incur a total capital expenditure of Rs 240 billion at reserve prices, and would require to make an upfront payment of nearly Rs 60 billion, if it were to opt for the long term deferred payment plan.

What is the Impact of lukewarm response by existing private players?

• Below par revenue collection: Government may not be able to get the expected revenue from its spectrum auction, like it happened in 2016. 
• Impacts Budget Estimation: Below par performance in auctions may impact the budget estimation which takes into account the revenues from this source. 

• Fiscal Situation of Telecoms: The unenthusiastic participation by existing players also reflects the tight fiscal position of telecom companies which they are in, that may further impact the roll out of 5G in India

How will the deferred payment plan work?

• As part of the deferred payment plan, bidders for the sub-1 GHz bands of 700, 800 and 900 MHz can opt to pay 25 per cent of the bid amount now, and the rest later.
• In the above-1 GHz bands of 1,800, 2,100, 2,300, and 2,500 MHz frequency bands, bidders will have to pay 50 per cent upfront, and can then opt to pay the rest in equated annual instalments.
• The successful bidders will, however, have to pay 3 per cent of Adjusted Gross Revenue (AGR) as spectrum usage charges, excluding wireline services.

Conclusion

Spectrum auction in India has turned into a buyer’s market. There is expectation of minimal competition, with operators picking up spectrum that provides best value for money instead of focusing on renewing all their expiring spectrum