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Uniform Licence Fee in Telecom: Way Forward

Telecom service providers are required to obtain a licence before starting any kind of service in India. They pay a certain percentage of their revenue as a licence fee to the government on a quarterly basis and the percentage of revenue to be shared depends on the type of service offered and the area of operation. This article argues that such a differential system of licensing is flawed and leads to cross subsidisation and possible arbitrage. It estimates the impact on individual operators and the government's revenue, in case the government implements a uniform licence fee for all services in each area and also argues for a reduction in the licence fee in line with revenue growth.

NOTES

Uniform Licence Fee in Telecom: Way Forward

Rajkumar Upadhyay

percentage of revenue share and a one-time non-refundable entry fee equal to the pending licence fee payments before a new regime came into effect.

Licence Fee as Revenue Share

The payment of licence fee as a fixed per-

Telecom service providers are required to obtain a licence before starting any kind of service in India. They pay a certain percentage of their revenue as a licence fee to the government on a quarterly basis and the percentage of revenue to be shared depends on the type of service offered and the area of operation. This article argues that such a differential system of licensing is flawed and leads to cross subsidisation and possible arbitrage. It estimates the impact on individual operators and the government’s revenue, in case the government implements a uniform licence fee for all services in each area and also argues for a reduction in the licence fee in line with revenue growth.

C
onsequent to liberalisation, there has been tremendous growth in the telecom sector with the participation of the private sector. The government and the Telecom Regulatory Authority of India (TRAI), at various stages, have taken necessary steps to maintain the growth momentum. When the telecom sector was opened to competition initially, operators, to gain entry, had bid an exorbitantly high fixed licence fee for telecom circles depending upon the perceived revenue potential of each circle. These licensees were to pay a fixed amount of licence fees annually, based on the agreed amount during the bidding process. The licence fee per customer worked out to around Rs 500 per month in the beginning. As the revenues were meagre, it became difficult for the operators to pay the instalments of licence fee and the industry was on the brink of the collapse. To bail the operators out, the then National Democratic Alliance government scrapped the predefined fixed licence fee, which was based on a very high amount offered during bidding process, and gave way to a revenue sharing model. Accordingly, operators were permitted to migrate to the New Telecom Policy (NTP) 1999 regime, wherein they were required to pay a licence fee as fixed

Table 1: Entry and Licence Fee for Various Types of Services

centage of actual revenue earned came into effect from 1 August 1999. For segments like national long distance (NLD) and international long distance (ILD) also, which were opened to a competition later, the licence fee was required to be paid as a percentage of actual revenue earned. The licence fee and the entry fee for various types of services are shown in Table 1. The licence fee for basic, mobile and universal access service licence (UASL) depends on the type of circle categorised as Metro, “A”, “B” or “C”. Initially, this percentage was fixed in three slabs (10%, 12% and 15%) of revenue depending upon the category of the circle as A, B, C or Metro. The revenue to be taken into account is the adjusted gross revenue (AGR). The AGR is calculated after excluding all interconnection charges, roaming charges, access charges being paid to other operators for using their network and revenues like through handset sale. Although there has been a reduction in the percentage of revenue to be shared due to increased revenues, the differential slabs for licence fees continued. With effect from 1 April 2004, the licence fee for basic, mobile and UASL, excluding spectrum charges, was set at 10% of AGR for Metro service areas and category A circles, 8% of AGR for category B circles and 6% of AGR for category C circles (Table 1). Currently, in

Type of Service Service Area Entry Fee Annual Licence Fee
(% Revenue Share)
Basic, mobile and universal access service Circle Different for Metro and A - 10
licence each circle B - 8
C - 6
International long distance International Rs 2.5 crore
National long distance National Rs 2.5 crore 6
Very small aperture terminal National Rs 30 lakh 6
Internet service providers National, circlewise, SSA wise Nil Rs 1 (6 for
internet telephony)
Global mobile communication by satellite International Rs 1 crore 6
Rajkumar Upadhyay (rajkumaru07@iimb. ernet.in) is with the Indian Institute of Management, Bangalore. Public mobile radio trunked service Citywise and circlewise Nil Infrastructure providers Cat I National Nil Infrastructure providers Cat II National Nil Source: Based on various guidelines on different licences on Department of Telecom’s web site. 5 Nil 6
Economic & Political Weekly November 7, 2009 vol xliv no 45 71
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NOTES

Table 2: Distribution of Licence Fee by Type of Circle
Circle Type No of Quarterly Quarterly Average Quarterly Licence Fee Average Lines Licence Fee Licence Fee Expected Licence Increase(+)/Decrease(-)
Circles Gross Adjusted Adjusted Gross Per Quarter in Million Per Subscriber as Percentage Fee at Uniform between Variable (6-10%) vs
Revenue Gross Revenue Revenue Per Circle (Rs Crore) (Apr-June 09) Per Month of AGR Rate of 8.5% of Fixed (8.5%) Licence Fee
(Rs Crore) (AGR) (Rs Crore) (Rs Crore) (Rs) AGR (Rs Crore) (Rs Crore)
Metro 4 6,697 4,979 1,245 494 71 23 10% 423 -71
A 5 11,294 9,152 1,830 908 158 19 10% 778 -130
B 8 10,208 8,202 1,025 655 169 13 8% 697 42
C 6 3,041 2,547 424 154 53 10 6% 216 62
All 23 31,240 24,880 1,082 2,211 450 16 8.9% 2,115 -97

Source: Calculations based on TRAI reports for April-June 2009 quarter.

addition to two state-owned operators, Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL), there are 20 private operators providing fixed, cellular, NLD, ILD, very small aperture terminal (VSAT), internet service provider (ISP) and infrastructure provider (IP) services and paying approximately Rs 2,500 crore per quarter as licence fee to the government.

Recently there have been a few news items in the print media about the proposal of the department of telecom (DoT) to consider a uniform licence fee. In reaction, TRAI has apparently written to DoT, asking to be consulted before doing away with the variable licence fee structure licence fees through bidding was right, a continuing differential licence fee arrangement when migrating to revenue share arrangement was flawed right from the beginning. In the case of bidding for a circle, the quoted licence fee was based on the expectations or net present value of future revenue stream expected during the currency of the licence period and was to be calculated in advance at the time of bidding. Once the fixed licence fee was replaced by the fee based on actual revenue earned, the future positive (or negative) expectations are variables and inbuilt into the system. As can be seen from Table 2, the average revenue from A type circles is higher than in the Metro circles, contrary to the assumption that Metro circles are the highest revenue earning circles. Hence, compared to Metro circles a higher licence fee gets collected from A circles for the same revenue share of 10% for both. The licence fee, even with a fixed common percentage of revenue shares, will automatically be more for higher revenue earning circles and lower for lower revenue earning circles. Hence, there is no need of a differential licence fee between circles. We can see from Table 2 that the licence fee for customers of A and Metro

Table 3: Impact of Uniform Licence Fee on Operators for Different Categories of Licences

Company No of Circles Quarterly AGR Quarterly Average Licence Expected Licence Increase(+)/Decrease(-)

presently followed. TRAI feels that the

Operated (Rs Crore) Licence Fee Fee across Fee at 8.5% in Licence Fee Outflow issue has wider implications for the sector (Rs Crore) Circles (in %) (Rs Crore) (Rs Crore)

and the government’s revenue, and hence, Bharti Airtel 23 6,935 610 8.8 589 -21

the views of all stakeholders must be taken Bharti Airtel (NLD) All India 1,122 67 6.0 95

Bharti (ILD) All India 113 7 6.0 10

into consideration.

The aim of both the government and TRAI should be to ensure that interests of all stakeholders are taken into account before a final decision is taken. Hence, there is a need to debate this matter incorporating various viewpoints, while keeping the consumer’s welfare in mind. This article is a step in that direction.

BSNL 21 5,461 465 8.5 464 -1
BSNL (NLD) All India 986 59 6.0 84 25
BSNL (ILD) All India 278 17 6.0 24 7
BSNL (ISP) All India 177 11 6.0 15 4
Vodafone 23 4,226 389 9.2 359 -29
Vodafone (NLD) All India 324 19 6.0 28 8
Idea 15 2,313 208 9.0 197 -11
Reliance 23 2,290 200 8.7 195 -5
Reliance (NLD) All India 547 33 6.0 47 14

Reliance (ILD) All India 182 11 6.0 15 5

Cross Subsidisation of Licence Fee

Tata 23 1,449 135 9.3 123 -11

The differential licence fee structure was Tata (NLD) All India 287 17 6.0 24

based on the perception that there is an Tata (ILD) All India 126 8 6.0 11 3

Metro and A circles followed by B circles Aircel 18 734 63 8.5 62 0
compared to C circles. In the bidding Spice Communication 2 255 22 8.7 22 -1
system, exorbitant licence fees were bid Loop Mobile 1 121 12 10.0 10 -2
by operators in decreasing order of Metro, Etisalat DB Telecom 13 51 5 9.6 4 -1
A, B and C circles. When licence fee as a HFCL Infotel 1 27 2 8.0 2 0
revenue share was implemented from Sistema Shyam 6 22 2 8.0 2 0
Unitech Wireless 22 13 1 8.4 1 0
1 August 1999, the differential percentag es Others (NLD) All India 236 14 5.9 20 6
of revenue share, in decreasing order of Others (ILD) All India 359 21 6.0 30 9
Metro, A, B and C circles, were also fixed Other ISPs and VSAT providers All India 117 7 5.9 10 3
in accordance with the revenue potential All 29,732 2,502 8.4 2,527 25
of different circles. While differential Source: Calculations based on TRAI reports for April-June 2009 quarter.
72 November 7, 2009 vol xliv no 45 Economic & Political Weekly

inherently higher revenue potential in

MTNL 2 984 98 10.0 84

EPW
NOTES
Figure 1: Quarterly Adjusted Gross Revenue by Licence from NLD and ILD segment constitutes Table 4: Operatorwise Overall Impact of Uniform

Type (Rs crore)

VSAT

ISP

25.75

ILD 262.83

0%

1%

1056.79

UASL 11363.31 38%BASIC 4227.76 14% NLD 3501.77 12% Mobile 9288.76 31% 4% IP-II 5.5 0%

Source: Calculations based on TRAI report for April-June quarter.

circles works out to be much higher than in B and C circles. Since the licence fee is an element of cost, and assuming other cost structures are similar across circles, it implies that the cost of serving customers in the Metro and A circles will be higher compared to B and C circles. But we observe that almost all operators have the same or similar tariff schemes for all type of circles which are perhaps based on average cost structures. With the average licence fee being Rs 16 per customer per month, the differential licence fee results in subsidies for customers of Metro and A circles, whose licence fee is above average, being funded by customers from B and C circles.

Arbitrage in Licence Fee between Licences

The government considers a possible arbitrage by integrated operators as one of the main arguments for a uniform licence fee. It feels the uniform licence fee can avoid possible arbitrage by integrated operators to load up maximum revenues on licences like NLD, ILD and ISP segment in which licence fee is only 6% of revenue earned compared to 6% to 10% in basic, mobile and UASL services. As per the TRAI report for the quarter ending March 2009 for the wireless segment, which covers more than 90% of the subscriber base, of the total minutes of usage (MOU), 86.6% comes from local or intra-circle minutes and only 12.9% and 0.47% MOU are consumed as NLD and ILD minutes, respectively. Figure 1 shows that AGR

Economic & Political Weekly

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November 7, 2009

Licence Fee (in Rs crore)

12% and 4%, respectively, of the total.

Company Quarterly Quarterly Expected OverallRevenues of 16% from NLD and ILD for AGR Licence Licence Increase (+)/ Fee Fee at 8.5% Decrease(-) in

13% of MOU are more or less in line, con-

Licence Fee

sidering the fact that the difference in

Bharti 8,170 684 694 10

tariff between NLD and local MOU,

BSNL 6,902 551 587 35

although fast disappearing, still exists.

Vodafone 4,550 408 387 -21

Therefore, arbitrage is not clearly visible

Idea 2,313 208 197 -11 from the data. However, there could still Reliance 3,019 244 257 13 be a possibility of arbitrage if data of MOU Tata 1,861 159 158 -1 between local, NLD and ILD minutes and MTNL 984 98 84 -15 corresponding revenues are managed Aircel 734 63 62 0 simultaneously. Therefore, the licence fee Spice Communication 255 22 22 -1 for NLD and ILD can be made in line with Loop Mobile 121 12 10 -2 other licences for uniformity, avoiding Etisalat DB Telecom 51 5 4 -1 possible arbitrage, reducing unnecessary

HFCL Infotel 27 2 2 0

Sistema Shyam 22 2 2 0

work of segmenting revenues, and above

Unitech Wireless 13 1 1 0

all, providing a level playing field for all

Others (NLD) 236 14 20 6

standalone operators. This is more practi-

Others (ILD) 359 21 30 9

cal now as the entry fees for both NLD and

Others (ISPs and VSAT ) 117 7 10 3

ILD have been brought down from Rs 100

All 2,9732 2,502 2,527 25

crore to Rs 2.5 crore.

Source: Calculations based on TRAI reports for April-June 2009 quarter.

Impact on Operators

It appears from Table 2 that Metro and A licence fee is that it will favour operators circles will gain and operators operating operating in the A Metro and A circles at in B and C circles will lose out if govern-the cost of operators in the B and C circles, ment goes ahead with the proposed 8.5% whose outflow on licence fee will increase uniform licence fee. Therefore, an argu-on average by Rs 42 and Rs 62 crore per ment being given against a uniform quarter, respectively. The average licence

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October 31, 2009
The Law, Gender and Women – Kalpana Kannabiran
‘Nonconformity Incarnate’: Women with Disabilities,
‘Gendered’ Law and the Problem of Recognition – M Pavan Kumar, S E Anuradha
Indian Muslim Women, Politics of Muslim Personal
Law and Struggle for Life with Dignity and Justice – Razia Patel
Bringing Rights Home: Review of the Campaign
for a Law on Domestic Violence – Indira Jaising
Conjugality, Property, Morality and Maintenance –Flavia Agnes
Women, Forestspaces and the Law: Transgressing the Boundaries – Sagari R Ramdas

Women’s Land Rights in South Asia: Struggles and Diverse Contexts – Meera Velayudhan Outside the Realm of Protective Labour Legislation:

Saga of Unpaid Labour in India – Padmini Swaminathan Judicial Meanderings in Patriarchal Thickets: Litigating Sex Discrimination in India – Kalpana Kannabiran

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NOTES

Table 5: Licencewise Impact on Government’s Revenue Due To Uniform Licence Fee

Licence Type Quarterly Quarterly Licence Average Expected Increase (+)/Decrease (-) Expected Increase (+)/Decrease (-) Gross AGR Fee Per Licence Fee Licence Fee in Licence Fee Licence Fee in Licence Fee between Revenue (Rs Crore) Quarter as % of at Uniform between Existing vs at Uniform Existing vs Fixed (7.5%) (Rs Crore) (Rs Crore) AGR Percentage of Fixed (8.5%) Percentage of Licence Fee

8.5 (Rs Crore) Licence Fee (Rs Crore) 7.5 (Rs Crore) (Rs Crore)

UASL 14,674 11,363 994.6 8.8 966 -29 852 -142

Mobile 11,712 9,289 835.9 9.0 790 -46 697 -139

from operators as licence fee (Table 5). With the auction of third Generation (3G) mobile round the corner, the government is expected to earn more revenue from both licence and spectrum fees. In spite of increasing revenues, the total taxes and

BASIC 4,854 4,228 380.9 9.0 359 -22 317 -64 levies on the telecom sector continue to be

NLD 4,380 3,502 209.9 6.0 298 88 263 53 around 31%, which are quite high com-

ILD 2,215 1,057 63.3 6.0 90 26 79 16
ISP 1,241 263 15.7 6.0 22 7 20 4
V-SAT 27 26 1.6 6.0 2 1 2 0
IP-II 6 6 0.3 6.0 0 0 0.4 0
ALL 39,108 29,732 2,502.2 8.4 2,527 25 2,230 -272

Source: Calculations based on TRAI reports for April-June 2009 quarter.

fee for basic, mobile and UASL works out to 8.9% of the AGR (Table 2), and hence, another argument could be that the government will lose out Rs 97 crore per quarter from basic, mobile and UASL operators by setting the uniform fee at 8.5% of AGR. Both these arguments are not valid. First, no operator is operating only in B and C circles; they operate in combination of Metro, A, B and C circles. Therefore, the increase in outflow in licence fee from B’ and C circles will be compensated by a reduction in licence fee in Metro and A circles. As regards loss of Rs 97 crore per quarter to the government, this will be compensated by an increase in licence fee from the NLD and ILD operations, which is currently only 6% of AGR. As all major players are integrated players, operating in all segments of the market, their gains due to overall reduction in the licence fee for basic, mobile and UASL operations will be neutralised by the increased outflow of licence fee from NLD, ILD operations (Table 3, p 72 and Table 5). However, the slight gain or loss for the individual operator will depend upon the portfolio of circles in which it provides services and the scope of operations in segments other than fixed and mobile (Table 4, p 73).

BSNL is expected to lose the highest, Rs 35 crore per quarter, as it does not operate in the Metro circles and Vodafone stands to gain the maximum by Rs 21 crore per quarter on account of higher revenues from Metro and A circles.

Scope for Reduction in Licence Fee

With a rapid growth in the telecom sector fuelled by robust demand, revenues are continuously growing. The revenue growth is primarily fuelled by the wireless segment which is growing rapidly. As the licence fee depends upon the revenue earned, the government is receiving an increased licence fee every quarter. The sector revenues from services, which were less than Rs 10,000 crore per annum during the 1990s, have crossed around Rs 1.3 lakh crore now. The government, in fact, is now earning a much higher licence fee than would have come through fixed licence fee based on bidding amount. Apart from the spectrum fee of around Rs 875 crore, which is also based on the revenue share, around Rs 2,500 crore is collected by government every quarter pared to other countries. Therefore, there is a scope for reduction in the licence fee and the government should also make it a uniform licence fee.

The overall average licence fee for all licences is around 8.4% (Table 5). If the government makes a uniform fee of 8.5%, it will gain marginally by Rs 25 crore per quarter. If it sets the licence fee for all type of services at 7.5%, it will lose Rs 272 crore per quarter. With current spectrum fee of around Rs 850 crore per quarter and the licence fee of Rs 2,500 crore, both of which are likely to increase due to growth momentum and launch of 3G, it will take only 12 to 15 months for the government to bridge this gap. But surely, the reduction in licence fee needs to be translated by service providers into still more affordable tariffs, increasing the likelihood for covering the population which still remains uncovered.

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