Telecom Reforms — No SUC for future spectrum, but will it reduce outflows?
In India, not only one needs to acquire spectrum through auctions but also has to pay for its usage. Payment has to be made @ % of AGR (Adjusted Gross Revenue). Now, different auctions have spelt out different rules — making the SUC (Spectrum Usage Charge) payment rules the most complex in the world. So much so, that one needs a good understanding of the subject (including maths) in order to make the necessary calculations. This makes the implications of GOI’s simple announcement of not charging SUC for spectrum acquired through future auctions, very difficult to understand. In order for us to appreciate this fact, we need to understand how SUC calculation work.
How SUC is Calculated?
SUC is calculated based on a complex weighted average (WA) formula. Though this formula is simple to understand, however, the changing rules for SUC over the years have made this formula extremely complex. Let me make an attempt to simplify it.
a) Spectrum acquired without auctions (2G)
SUC Rates are based on slabs that depend on the quantum of spectrum held, for the GSM operators the rate is up to 4.4 MHz — 3%; up to 6.2 MHz — 4%; up to 8 MHz — 5%; up to 10.2 MHz — 6%; up to 12.2 MHz — 7%; up to 15.2 MHz — 8%. Similarly, there is a separate rate list for CDMA operators as well which is not relevant now.
b) Spectrum acquired in 2010 auctions (3G, BWA)
Here the rates are more complex than what has been spelt above. For the 3G spectrum in 2100 MHz, the rate applicable will get decided by the 2G spectrum held. But if the 2G spectrum has expired, then it will be charged at a flat rate of 5%. For the BWA spectrum in 2300 MHz, the rate is 1% with revenues from this spectrum to be reported separately.
c) Spectrum acquired in 2012 auctions (2G)
Here the rate same as the 2G rates described above in (a), but for the purpose of identification of the slab, the quantum of spectrum acquired through auctions will get added to the administered spectrum.
d) Spectrum acquired in 2014 & 2015 auctions (4G)
Here the rate is simply 5% for the spectrum that gets acquired without any caveats.
e) Spectrum acquired in 2016 & 2021 auctions (4G)
Here the rate is simply 3% for the spectrum that gets acquired without any caveats.
The final SUC rate is calculated on a circle basis using a weighted average formula. Which is the sum-product of the spectrum held in an array with the respective SUC rates listed in a corresponding array. Note the TDD (unpaired) spectrum is halved for the purpose of aligning with the FDD (paired) spectrum. Also, note that the final SUC is floored at 3%, even if the formula throws up a lower number.
Using this formula, I have calculated the SUC rates for the three key operators in various circles. See under.
Bharti SUC Rates
As already mentioned we need the spectrum for Bharti listed in an array (matrix). See under. The spectrum cells with different rules are colour for easy identification.
The SUC Rates & Calculations for Bharti is listed in the table below.
You can clearly see that Bharti is above the floor rate of 3% in all the circles, except J&K. Rates fluctuate between 4.18% for UPE, and 3% for J&K.
VodaIdea SUC Rates
As mentioned earlier the spectrum map for Vodafoneidea is listed in the matrix below. The spectrum cells with different rules are colour for easy identification.
The SUC Rates & Calculations for VodafoneIdea is listed in the table below.
One can see the SUC rates for VodaIdea based on the WA formula works out to be higher than Bharti in many circles. The reason — A large amount of administered and spectrum acquired in 2012.
RJIO SUC Rates
The spectrum map for RJIO is embedded in the chart below.
The SUC Rates & Calculations for RJIO is listed in the table below.
One can see that RJIO has hit the floor of 3% SUC in many circles. Hence their SUC rates are the lowest compared to Bharti and Vodafone.
Note — These calculations do not include the rates the operators have to pay for the MW spectrum. Those are charged extra on top of the access spectrum.
Impact of Telecom SUC Reforms
As per the GOI notification, the SUC rates for all future spectrum will be 0%. But doing so will it help the operator save on cash flows on account of spectrum charges? The simple answer is NO. Why? The culprit is the 3% floor. Unless the floor of 3% is removed the operators will get no benefit from the GOI announcement. But removing the floor will impact the government’s revenues also on the existing spectrum. The reason is as the operator acquire more spectrum the denominator of the WA formula will expand (leaving the numerator unaffected), thereby pulling down the overall SUC rate.
SUC Rates With Floor Removed
Let’s take the example of UPE. Here Bharti has 52.2 MHz of spectrum. Now if Bharti acquired 100 MHz of 5G spectrum in 3.5 GHz band, then as per the current WA formula the SUC rate for Bharti for UPE will get reduced by 50% to 2.3% only. The same is applicable for all other circles. The biggest beneficiary will be RJIO, whose SUC rates are already low compared to others. VodaIdea will gain only if they acquire more spectrum, which they will find hard to do given their financial owes.
Any Other Options?
There is one more option. The GOI can come out with a rule that they did for the BWA spectrum in the 2010 auction. Which is to charge the revenues emanating out of that spectrum block separately. This they abandoned later for the same band when acquired in 2016 auction due to the fear of arbitrage. Hence, it is highly unlikely that the GOI will go this path as it will create huge confusion and increase the cost of administration with the possibility of arbitrage.
Conclusion
By simply stating the there will be no SUC on the spectrum acquired through future auction does no good due to the legacy attached with the SUC calculations of the past. If no change is made on the WA formula the operators with higher SUC will get dragged to the floor of 3%. This means the benefit will be around 0.5% to 1% for Bharti and Vodafone.
(Views expressed are of my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
