Improving AGR Regulation

The whole purpose of regulating the telecom sector is to use incentives/disincentives as tools to drive government objectives. What are these objectives? These are:- 1) to expand telecom coverage to the remotest part of the country; 2) to make telecom services affordable so that even the poorest can buy; 3) to motivate the operators to invest in the most advanced technologies in order for them to provide latest and best quality service; 4) to ensure that all bottleneck resources like spectrum are optimally used and not wasted; 5) to ensure the market is sufficiently competitive so as to drive innovation. The purpose of this note is to investigate whether the current AGR based licensing policy is aligned such to drive the above-mentioned objectives and if not then why?

Deficiency of the Current Policy

As per current policy, all operators pay a certain percentage of their total revenues as license & spectrum fees. The definition of revenue is quite expansive. It is without any deductions (barring few, like IUC, roaming etc). Initially, such a policy worked, as prevented the operators from imminent bankruptcy (1999). However, with the passage of time, it has become a bottleneck in driving the government's objectives stated above. Why? Let me explain.

It penalises business efficiency - The operators who are efficient (making more revenue) ends up paying more license fees compared to those inefficient.

It penalises spectrum efficiency - The operators have no incentive to light up all their spectrum holdings in all geography.

It penalises expansion in rural areas - The operators will incur more costs, and since costs are not deductible from revenues, their profits will get diminished.

It penalises the sharing of assets - The operators will pay approximately double the license fees on revenues that emanate out of sharing arrangement as costs are not deductible from revenues.

It increases transaction costs - The transaction cost will increase significantly as the calculations to determine revenue are complex, thereby resulting in constant litigation.

Proposed Solution

The political will to demolish the current licensing policy will be low, given the history associated with it. Also, the fear of causing "loss of revenue to the exchequer" will prevent anyone from moving in this direction. Hence, the proposed solution has to innovative given the huge challenge (on deficiency) that we have before us. One option could be to charge license fees as a percentage of the total industry revenue which then gets assigned to the individual operators based on their individual spectrum holding. The percentage value will be decided by the government based on its revenue target. Doing so will not only protect the revenues of the government but also remove the deficiencies of the current arrangement. Let me explain how.

It will promote spectrum efficiency - The operators will be motivated to make more revenue with as less spectrum as possible, so as to reduce its share of license fees. This is in alignment with the government's objective as described earlier.

It will promote the sharing of resources - The sharing of resources between operators and licensees without spectrum will become attractive since such licenses (without spectrum) will pay zero license fees. Therefore, there will be no double taxation. Note this is critical for the success of 5G.

It will reduce transaction costs - The total revenue of the industry can just be an estimated number. It does not entail detailed calculation. The government can set a target number for each year by looking at the historical data, thereby removing all transaction cost and associated litigation.

It will protect the government's revenue - The license fees will be paid by the operators who hold spectrum, and in alignment with the objectives stated above.

It will promote investments - The licensee without spectrum will be motivated to have a business arrangement with operators with spectrum and make investments in both passive and active equipment. Such an arrangement will be efficient and without the shadow of double taxation, as all fees will get paid only once by the operator holding spectrum.

It will promote the expansion of networks - Once the operators get motivated to partner with players without spectrum it will make MVNO's more efficient, thereby promoting the expansion of networks.

Conclusion

As described above, the current AGR based licensing system needs an urgent overhaul. As explained above such changes can be effected without causing any loss to the exchequer. This will also make the regulatory system more efficient, thereby fulfiling the policy objective and will be in the interest of the consumers.

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

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