Impact of Extending Spectrum Payment Tenure on Operators

Yesterday an article in the Economic Times reported that the Government may extend spectrum tenure to provide relief to the telecom operators. The following note is an attempt to measure the impact on the telecom operators by comparing various scenarios, a) extending the moratorium period (currently 2 years from the date of upfront payment), and b) expanding the spectrum payment tenure (currently set at 10 years). In this regard, I will also encourage you to refer to my earlier note titled "Indian Spectrum Outflows" dated 2nd July 2017, which captures the spectrum outflow data on current payment scenario for all the operators.

Upfront vs Deferred Payments

The following table captures the snapshot of upfront vs deferred payments for all the operators for the current payment conditions (2 years of moratorium and 10 years deferred payment)

The amount of upfront payment is different across bands and auctions. For example, before the 2016 auction, it was 33% for bands above 1 GHz and 25% below 1 GHz. But in 2016 auction the operators winning bands above 1GHz were asked to pay 50% of the auction value as upfront payment. Note that Bharti's numbers include that of Telenor, Videocon, and Tikona as well.

Current Scenario (Gross vs NPV)

Following the base case for deferred payments spread over a period of 10 years after 2 years moratorium for the date of the upfront payment.

The equal yearly installments are calculated using the interest data provided in the NIA (Notice Inviting Application) for various auctions. It is 9.75% for the auction held on 2012 & 2013, 10% for 2014 & 2016, and 9.3% for 2016. In the above figure, the chart on the right is the NPV (Net Present Value) of all deferred payments discounted by the interest rates stipulated for the respective years. This gives an idea that how much the impact to the operator (in real terms) is spread over the various years of deferred payment. One can clearly see that the impact of deferred payment is highest in the early years than on the later years. This is the key characteristic of all deferred payments divided equally to be paid in the subsequent years. Note that Bharti's numbers include that of Telenor, and Videocon as well.

Changing Moratorium (With 10-year Tenure)

Here we investigate the change in the total outflow of the various operators, once the number of years of the moratorium is incrementally changed from 2 to 5 years. The table below summarizes the results.

Increasing moratorium by a year enhances the operator outflow by approximately 10% compared to the base year. The exact multiples of the base year are 1.1, 1.21, 1.33 respectively. Note that Bharti's numbers include that of Telenor, and Videocon as well.

Changing Tenure (With 2-year Moratorium)

Here we investigate the change in the total outflow of the various operators, once the tenure is incrementally changed from 10 to 15 years. The table below summarizes the results.

Increasing the tenure of deferred payment enhances the operator outflow by approximately 4% compared to the base year for each year of increase. The exact multiples of the base year are 1.04, 1.08, 1.12, 1.17, and 1.21 respectively. Note that Bharti's numbers include that of Telenor, and Videocon as well.

Operator Yearly Payments (2-year moratorium & 15-year tenure)

The chart below captures the operator wise changed yearly payment numbers for the 15-year tenure.

You can see the yearly payment numbers are lower by approximately 20% (compared to 10-year tenure), but the overall payment has also increased by the same factor.

Summary

Though increasing the tenure or moratorium of deferred payment changes the overall outflows of the operators, but the NPV calculated (by discounting with the interest rates specified) remains the same. Hence, for the government, it is much easier to implement an altered payment structure, as they (Govt) end up collecting the same amount whatever the payment conditions they finally choose to stipulate. Also, note to prevent the model getting too complicated the deferred payments already made for the year 2015 and 2016 are not netted out of the calculations. This, however, will marginally impact the results, as these initial outflows are negligible.

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