Telcos Show Serious Concerns over 3G/4G IM

Telecom operators have shown serious concerns relating to various matters after thoroughly going through the Information Memorandum for next-gen license auction that is planned for April 7th, 2014.

Apparently they aren’t happy with variety of things, ranging from the price to payment terms and from number of licenses offered to spectrum types that up for sale.

Ricardo Tavares, CEO of TechPolis and consultant for all five mobile phone operators in Pakistan on policy matters related to spectrum auctions, has penned down his reservations in a write-up that is shared with ProPakistani.

Ricardo – on behalf of telecom operators – mentions that a new license for 3G and 4G is unacceptable as operators already have an operating license under which they are offering 2G services.

He maintains that a new license will mean new framework that will be built on top an existing license to cause serious conflicts in terms of obligations and deliverables from operators’ viewpoint. He suggests that new spectrum can be auctioned with a “spectrum ordinance” – or whatever name PTA wants to give it — and general business rules may remain the same as defined in the earlier operating licenses.

He explains that all the obligations attached to new spectrum can be defined in spectrum ordinance. He said that there can’t be a new license for every new spectrum auction.

He further notes that rollout obligations for 3G and 4G networks are severe and may result into no participation in 4G spectrum auction.

Ricardo argues that operators will first rollout 3G network to build an environment for data services before offering ultra-high-speed 4G services and hence rollout obligations attached to next-gen licenses are not only unrealistic but may hinder the operators altogether to get into the spectrum auction.

Ricardo explicitly wrote that the taxes on telecom services are unjustified. He urged the government to reconsider them to make this sector more fruitful for the people and the government alike.

We are told that all these reservations are already communicated to Pakistan Telecommunication Authority, Ministry of IT and Ministry of Finance.

PTA has said that it will keenly listen to all the concerns and may address to few of them as well.

Consultation period – a time during which operators or any other stakeholders can suggest/recommend/propose changes in IM – will end on March 10th, 2014.

Below are the selected excerpts from Ricardo’s article, which we are producing to share operator’s view point:

Let’s start with technology neutrality. This means that telecom operators can use spectrum they acquire from the government in auctions to deploy any technology they find suitable for delivering services to consumers.

This has been a corollary of Pakistan’s telecom policy since the 2004 Mobile Policy that is still in effect. The current IM for the auctions and the draft license both break with this principle and restrict the use of new spectrum, “only for the Next Generation Mobile Services for which it is permitted.”

This would tie the hands of operators unnecessarily and break with a key principal of telecom policy: governments should not impose technology; the private sector chooses technology.

As in many big mistakes, the break from technology neutrality comes with good intentions. Pakistan waited too long to deploy third generation wireless networks—3G, or HSPA for the acronym of its mainstream voice and data technology.

4G or Long Term Evolution (LTE) came after that. The government’s intention is to accelerate roll out of new networks. But tying the hands of operators is not the best way to achieve this objective. Leaving operators free to efficiently deploy technologies based on each operator’s unique strategy is better and would keep a key principle of policy enshrined in the existing policies and best practices.

Another fundamental issue is the auction design itself. It is designed to create an artificial spectrum scarcity. The country has five operators but only three slots of spectrum in the 2.1 GHz band (a key slice of spectrum for 3G) is being offered. This could create fierce competition and hike up prices in this band, but it could also lead operators not to engage in the auctions. The government is also offering two slots of 1800 MHz (useful for both 2G and 4G) and one in 850 MHz (good for both 3G and 4G).

However, it does not allow all operators to bid for it—only winners of 2.1 GHz (1800) or a potential new entrant could bid (850). A better auction design would allow all operators, existing and new, to bid for all bands simultaneously. Whose new entrant would want to enter a cut-throat auction for 2.1 GHz? The current auction design is self-defeating in attracting a new entrant and can alienate the handful of existing operators; if the auction design is improved, the government will fetch better financial results with the auctions than under the current design.

To give operators flexibility to deploy 3G and 4G, spectrum associated with both should have flexible roll out obligations. Operators most likely will deploy 3G first to develop a mass data market for the common person that today does not exist in Pakistan. 3G devices are cheaper and more suitable to the mass market. Then, they will start deploying pockets of 4G and will expand.

The current obligations for roll out of 3G (2.1 GHz) and 4G (1800 MHz) are too ambitious and discourage bidders. More time (a factor of 2 times more for 2.1 GHz and a factor of 5 for 1800 MHz) would allow operators to bid for both spectrum bands confidently. The current obligations will cause no bidders for 1800 MHz, destroying value for the auctions.

There are additional financial burdens in the draft license that also act to discourage bidders. Future revenues resulting from services provided with this spectrum will be in Rupees but the cost of the spectrum is in US dollars. A mismatch between this big expense (spectrum in USD) and revenues (in Rupees) is not financially sound.

Pakistan needs to go beyond the practice of charging for spectrum in USD. Moreover, if bidders decide to parcel 50% of the payment in installments, libor plus 3% is due. In USD, the financial hedge is there, no interest should be added to it; in Rupees, interest would make sense due to inflation. A number of unnecessary guarantees for payment of regulatory fees also add to the costs of the auction and should be eliminated, as other punishments for non-payment of fees are already in place, including cancelation of license.

On license, there is maybe the biggest flaw in the proposed scheme for the auction. The proposed draft license is unacceptable to existing operators which already have an operating license. The new draft license contradicts the existing one in several aspects forcing operators in fact to create “two accounting operations”—one to serve the existing license and one to serve the new one. It is time to separate operating license from spectrum assignment in Pakistan in order to resolve this problem.

This is a big job for the PTA but it can and it should be done now while there are consultants in house supporting the auction. To start, issuing a simple spectrum assignment with terms of payment, duration, and obligations could address these concerns, while the PTA would move to a definitive separation between operating licenses and spectrum assignments in the next few months. Potential new entrants would get already operating license and spectrum assignment in separate.

Finally, an important element in the environment for the auctions is taxation. In defining how much they are willing to pay for spectrum, operators run an Excel spread-sheet with the potential returns over the period of the license (currently 15 years, better if 20 years).

Taxation is a major factor affecting returns. The Finance Ministry would go a long way to enhance the likelihood of auction success if it eliminates the activation tax of Rs. 250 and bring the GST to the 17% that is normal for most sectors (telecom currently is paying 19.5%). This should be done ahead of the auction to create certainty, instead of only promises that can be withdrawn once the auction is done.

Finance Minister Ishaq Dar, Minister of IT Anusha Rehman and PTA Chairman Dr. Ismail Shah form a dream team that any government would like to have running the affairs under their responsibilities. It is now in their hands to assure that spectrum auctions will be successful. Much work is still to be done, but it must be done for the sake of the common person in Pakistan.

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