Getting Rid of Revenue Share

Background

The decision to charge a license fee as a share of revenue was offered by the DoT as a "migration package" on 22nd July 1999 to bailout the then licensee from the risk of bankruptcy due to excessive bidding in the auction held after NTP (National Telecom Policy) 1994. This speculative bidding was triggered by the auction rules which allowed the bidders to pay a large proportion of the "bid value" in installments (not up front), spread over a number of years. Later, similar rules were emulated in the spectrum auctions, resulting in the accumulated deferred payment of a much greater magnitude than earlier (Indian Spectrum Outflows). Hence, the operators are now obligated to pay both license fees (% of Revenue) and yearly cash flow on account of deferred payment - a double whammy situation. These onerous obligations have elevated the Indian telecom industry as one of the most heavily taxed when compared globally. Note, that the Chinese operators pay neither (spectrum auctions and license fees), and therefore are in better position to leverage their earnings for investment in networks and infrastructure. Apart from the various ills of revenue share as listed in my earlier note (What is the basic problem with revenue share?), the issue has been marred by constant litigation between the DoT and the licensees centered around the "definition" of AGR "Adjusted Gross Revenue" since last 14 years, with no resolution in sight ("License Fees @ % of Revenue: What is the dispute all about?).

Government Earnings

License fees and spectrum fees @ % of operator revenue (8%+4% = 12%) is a sizable earning for the government. It was Rs 22,492 Cr for the period between April 2016 to March 2017. The circle wise picture is depicted as under.

Individual circles are marked with a 2 to 3 letter code, and receipts on account of Pan-India licenses like ISP, NLD, ILD etc are clubbed under the "India" head. Hence, seeking to abolish it totally will result in the government forging a sizeable amount of yearly revenue - leading to it resisting any dilution, leave alone total abolishment. Therefore, the industry has to offer an innovative solution to circumvent any such resistance.

Possible Solution

With spectrum delinked from the license, it (license) has been transformed into just a paper document. Therefore, seeking exorbitant fees for it does not make any sense, that too when the license does not anymore guarantee access to any bottleneck resources (spectrum which was earlier bundled with the license has been delinked lately). Hence, the existing obligation on account of license fee can be transposed with the operator's spectrum holding. For example, if the total obligation of the industry on account of the license fee is Rs 100, then an operator with 30% spectrum holding will pay Rs 30, and those with less will end up paying less. This can have multiple advantages, a) encourage the operator to use spectrum efficiently and those unable to will be motivated to share/trade resources, b) prevent loss of revenue to the government, c) remove the ills of revenue share, like double taxation etc and encourage sharing of resources - "How Effective are the VNO Guidelines?", d) nullify the debate around "equal services equal rules" involving the OTT players.

Spectrum Holdings

Evaluating spectrum holdings of the operators could be challenging since the assignments are spread out in different bands with diverse propagation characteristics. Hence, to measure holdings, bands are needed to mapped under few identified categories. For the purpose of simplicity, I have categorized bands under two heads, a) Less than 1 GHz, b) Greater than 1 GHz. In order to aggregrate spectrum across diverse bands, the holdings of operators above 1 GHz have been reduced by half (50%), as the bands below 1 GHz can be considered as twice as efficient (in it ability to cover distances) than those above 1 GHz. Note, it is always possible to tweak the categorization scheme based on inputs from stakeholders, but once decided it will be applicable to all concerns. Based on the above assumptions, the Pan-India holding of all the operators across all bands is as under. This is calculated using revenue weights of the total industry for the various circles (WA).

License Fees: Existing vs New

The operator's existing revenue share % distribution is depicted in the figure below.

You can see that Bharti has the largest outflow (35%) followed by Vodafone (25%) and Idea (21%). But if we take spectrum holding into account, the equation changes - Bharti (21%), RJIO (16%), BSNL/MTNL (15%), Vodafone (14%), Idea 12%.

The comparison between current outflow vs the proposed new outflow is shown in the figure below.

The figure on the right is the existing revenue share distribution and the left when it is linked to the operator's spectrum holdings. The rightmost column in the table above indicates the increase/decrease in the operator outflows. Please note that total bucket for the overall revenue increases under the new scheme, as it has been assumed that all license fees, including those charged to NLD, ILD, ISP etc are to be abolished. You can see that for BSNL the increase is more than 10 times, for Tata, it is less than double, for RCOM it is a little more than 1.5 times, for RJIO the situation can be evaluated only once it starts to charge its customers, for others (Bharti, Vodafone, Idea, Aircel) there is a sizable decrease. Hence, it is obvious that those with higher commitment will complain and try to resist any such change. To mitigate the pain, the govt can propose a gradual transition from the existing method to the new method, spread over a fixed number of years (let's say five). This will provide enough opportunity for those impacted to either try to increase their revenue or decrease their spectrum holdings to a reasonable level.

Conclusion

There is no doubt that license & spectrum fees in terms of revenue share have outlived its utility. It is also responsible for increasing transactional costs of the operators in terms of increased litigation, and double taxation. Hence, it is high time that it gets abolished. The best solution for the government is to eliminate it and forgo all revenue associated with it, as it has enabled for itself an alternate revenue from spectrum auctions (absent at the time when it decided to charge revenue share). If that is too much of an asking, the next best solution is to link it with spectrum holding as described in this note. Charging license fees as a % of revenue share was a transformative idea at that time, and therefore get rid of it will require an equivalent radical idea, as nothing short of it will work.

(Views expressed are of my own and do not reflect that of my employer)