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"TRAI Analysis On Impact Of Recommended Spectrum Pricing"
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Tuesday, July 17, 2012:
Cellular Operators Association of India (COAI) highlighted that the TRAI, in its revised analysis submitted to the EGOM, has concluded that despite an increase of over ten fold in the price of spectrum and despite the high costs of “Re-farming” of 900MHz spectrum (INR 391,239 crores); there will not be any significant impact on tariffs. Rather, TRAI has assured the EGOM that tariffs would remain affordable, industry profitability will increase and the Government revenues will grow dramatically (INR 692,000 crores)!
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It thus appears from the TRAI impact analysis that high pricing of spectrum will lead to a win-win situation for all stakeholders. The catch however is that the TRAI assessment continues to be based on some very tenuous and unrealistic assumptions such as:
· Assumption of a dramatic and inexplicable increase in subscriber Minutes of Use in the early years, which is in contrast to the declining trend that is being witnessed in recent years;
· Continued assumption of a very aggressive increase in non-voice revenues to an astonishing 50% of total revenues, which is unprecedented in any market barring Japan;
· Disregarding the fact that increased spectrum will be required (which will come at an increased cost) to support assumption of increase in non-voice services/revenues;
· Assumption of increased voice penetration with no commensurate increase in acquisition cost,
· Assumption that increase in tariffs can be sustained with no drop off in demand which is contrary to the highly price elastic demand which is an unmistakable market reality in India,
· Assumption of constant to increasing profit margins, which is again in contrast to market realities, etc.!
It is also distressing to note that TRAI continues its non-transparent approach in not sharing the cost-model on which it has based its above conclusions. Even the current analysis dated 21-June-2012 was placed on their website only on 12-July-2012.
An independent study of the TRAI analysis conducted by PricewaterhouseCoopers (PwC) has pointed out that;
· The MOU numbers assumed by TRAI (though corrected to remove incoming minutes as was pointed out by COAI in the earlier round), are still grossly exaggerated; TRAI assumes that MoUs per Subscriber would grow by 33% from 321 in 2012 to 435 in 2032 whereas the industry is witness to a steady and steep declining trend over the last 5 years
· Unrealistic Projections for Non-Voice Revenues - as against TRAI’s estimate of 35% - 50% of revenues coming from non-voice services, industry estimates that non voice revenues can be expected to reach about 28% (est. from Merrill Lynch) of the total revenue by 2032,
· TRAI has not factored in the additional spectrum that will be needed to cater to its projected voice and non-voice traffic increase
· Cost estimates appear to have been computed to deliver certain predicted profitability margins;
· There is no analysis of how the industry will finance the staggering costs of spectrum and refarming, especially in the first 5 – 7 years, given the present leveraged state of the industry and the banking sector’s unwillingness to take on more exposure to the telecom sector;
· The full impact of Spectrum Refarming cost has not been accounted for, which would be in the range of approximately INR 234,700 Crore
· The industry profitability parameters (EBIDTA, PBIT and ROCE calculation) are based on flawed assumptions, (see above), which paints a far more optimistic picture than warranted by market realities and trends. The PwC analysis indicates that two of the main profitability parameters, PBIT and ROCE, will remain negative for most of the 20 year period
TRAI Chairman himself has in a news report today acknowledged the dire financial straits of the industry resulting from the high debt of approximately INR 2,00,000 crores and is, therefore, not left with any capacity to raise this further by the cost of spectrum acquisition and associated costs (INR 150,000 Crore as per Chairman’s estimate). TRAI Chairman is also of the opinion that raising even INR 20,000-30,000 crores from the equity market is going to be very difficult for operators. These views of the Regulator echo the industry sentiment regarding the negative impact of the recommended high reserve price of 2G spectrum on the sustainability of the sector.
Mr. Rajan S Mathews, Director General, COAI while expressing concerns on the flawed analysis also pointed out that it was important to also consider a situation as to what would happen if market reality were to belie these assumptions (which is very likely).
He once again pointed out that the fundamental flaw in the regulatory approach is that TRAI’s recommendations appears to have confused the reserve price and the market price to be obtained through auctions. He emphasized that a reserve price is only the beginning price for an auction and it is the market which discovers the final price.
He again requested that EGOM should reject any price that seeks to second guess the market and honour the letter and spirit of the Supreme Court Judgment by conducting fair and transparent auctions and allowing the value of spectrum to be determined through the market and not through yet another flawed administrative determination.
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