New Delhi: India’s department of telecommunications (DoT) is examining a model used in several countries such as the UK, Australia, Canada and Denmark for pricing radio spectrum. It is based on additional investment required for setting up telecom towers and radio gear in order to serve more phone subscribers.
The model, called administrative incentive pricing, or AIP, looks at the amount of investment required to be made by a telecom operator for serving more subscribers if additional spectrum, or the airwaves used to carry voice signals, is not allocated. Mobile phone service firms can technically operate with limited amounts of spectrum, but have to spend more on setting up more so-called base stations—radios mounted on towers to cover a given area—and maintenance of networks.
Not only does this model help arrive at the price of allocating fresh spectrum, but also sets the benchmark for cost of spectrum not fully used by the phone firms.
The AIP model is one of the options DoT is now examining to determine the economic value of spectrum so that operators could be charged accordingly for any additional spectrum allocated to them.
As first reported in Mint on 5 December, DoT had formed a committee headed by Manju Madhavan, member (finance) of the Telecom Commission, an apex body at the department, to look at spectrum pricing. Calls to the office of Madhavan, who has applied for voluntary retirement from government services this week, were not returned.
“We are giving inputs on spectrum pricing, but nothing final has been submitted so far. We have looked at administrative incentive pricing mechanism as well,” confirm-ed a senior department official, who is a member of the committee, but did not wish to be identified.
Other options could include a full-fledged auction of spectrum or a fixed per-MHz fee for spectrum or a combination of options.
Meanwhile, a second departmental committee, set up to look at spectrum allocation issues, recommended allotting minimum frequency of 4.4MHz along with new service licences and favoured the auction route for distributing incremental airwaves. According to PTI, the panel, headed by additional secretary R. Bandopadhyay, said in its 22-page report that a technical committee can be set up to specify the methods, including auction for allotment of incremental spectrum.
Varadharajan Sridhar, a telecom specialist at Gurgaon-based Management Development Institute (MDI), said the AIP method could be a good solution. “With operators offering such high bids for radio spectrum, we could witness a ‘winner’s curse’ similar to Europe auctions few years ago if auctions are actually held in India,” he said. “API-based approach can help us avoid that.” Sridhar was referring to large bids put in for spectrum rights by bidders who overestimated the potential for that service.
The UK and Australia use different variants of the AIP method for determining the price of spectrum. In the UK, regulator Ofcom, or the Office of Communications, looks at the opportunity cost of an asset or resource, such as additional telecom towers, that is the next best alternative to spectrum. Ofcom introduced AIP-based spectrum pricing in 1998 under Wireless Telegraphy Act, and said it would review it every three years.
In the UK, the incentive pricing method resulted in return of around 28MHz of spectrum in wireless communication bands below the 3GHz band, and almost 160MHz in the 3-10GHz band from operators since 2003.
“The aim of AIP is to ensure that the holders of spectrum fully recognize the costs that their use imposes on society by holding spectrum,” Chris Doyle at the Centre for Management under Regulation at the UK’s Warwick Business School wrote in a paper publ-ished in January. The UK raised £296 million (Rs2,330 crore then) during 2004-06 through AIP recoveries.
However, experts also point out possible drawbacks of an AIP-based approach. “The opportunity cost of spectrum for Bharti Airtel would be quite different from somebody like Aircel, which is yet to install a single telecom tower, or infrastructure in a place like Delhi,” said MDI’s Sridhar, arguing that the AIP-derived costs could be lower for Bharti Airtel Ltd, India’s biggest mobile phone services firm by number of subscribers and number of telecom towers. A better approach, he said, could be “to have different assumptions for new operators and the incumbents”.