Spectrum auction in danger, time to act
THE spectrum auction for the introduction of mobile broadband in Pakistan is in danger and the whole economy may fail if the current strong government intervention continues. As a central piece of Finance Minister Ishaq Dar’s budget strategy for fiscal 2013-14 and the first test of foreign capital’s appetite to invest in Pakistan under the Administration of Prime Minister Nawaz Sharif, this should be worrisome. The good news though is that the central issues that are concerning existing mobile operators and potential new investors can be resolved before the auction takes place.
Let’s start with technology neutrality. According to Pakistan’s Mobile Policy 2004 telecom operators can use their licenced spectrum to deploy any technology they find suitable for delivering services to consumers. However, the current IM for the auctions and the draft licence both break with this principle and restrict the use of new spectrum, “only for the Next Generation Mobile Services for which it is permitted,” in turn tying the hands of operators and breaking 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: to accelerate roll out of new networks. But 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 which creates an artificial spectrum scarcity. The country has five operators but only three slots of spectrum in the 2.1 GHz band (for 3G) are being offered. Though government is also offering two slots of 1800 MHz (for both 2G and 4G) and one in 850 MHz (for both 3G and 4G), it only allows the winners of 2.1 GHz or a potential new entrant to bid. This could create fierce competition and hike up prices in this band, but it could also lead operators not to engage in the auctions.
A better auction design would allow all operators, existing and new, to bid for all bands simultaneously. Hence, the current auction design is self-defeating in attracting a new entrant and can alienate the handful of existing operators.
To give operators flexibility to deploy 3G and 4G, spectrum associated with both should have flexible roll out obligations. 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.
Moreover, additional financial pressure will be created due to the currency mismatch between the auction expenses (USD) and revenues (in Rupees). If bidders decide to parcel 50pc of the payment in installments, libor plus 3pc 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. All unnecessary guarantees for regulatory fees add to the costs of the auction and should be eliminated.
The new draft licence contradicts the existing one in several aspects forcing operators in fact to create “two accounting operations”—one to serve the existing licence and one to serve the new one. It is time to separate operating licence from spectrum assignment in order to resolve this problem which should be done while the consultants are available. 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 licences and spectrum assignments in the next few months. Potential new entrants would get already operating licence and spectrum assignment in separate.
Finally, taxation is a major factor in defining how much operators are willing to pay for spectrum licence (currently for 15 years, better if 20 years). If the Finance Ministry eliminates the activation tax of Rs 250 and bring the GST to the 17pc (currently 19.5pc) it will 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.
(The writer is CEO of TechPolis, Inc. and an international consultant on telecom policy.)