To meet FY21 tax target of Rs5 trillion in tax revenues, the federal government needs to collect roughly Rs2.8 trillion in the Jan-Jun period this fiscal. That’s a herculean ask, contingent on the economy roaring back to form in the spring and the summer amidst the continuing pandemic. While there is not much juice left to squeeze out of the PSDP to balance the books, the government looks keen to boost non-tax revenues.

Selling frequency spectrum to telco’s is one of the potential avenues to bridge some of the potential revenue shortfall. Last week, the Finance Minister called up a meeting of relevant stakeholders to discuss the process of releasing fresh spectrum to the market. This came after PTA hired an international consulting firm last month to devise strategy, pricing, and auction plan for spectrum in 1800MHz and 2100MHz frequency bands. Finance ministry wants the auction done within current fiscal. The urgency is palpable.

The government’s intent to make available fresh spectrum is good news for the economy. It can lead to higher capital spending by operators towards network expansion in different regions of the country, which, in turn, spurs more economic activity. Further expansion of mobile broadband services can help in reducing digital divide for the excluded population and improve the quality of service for existing users.

On the other hand, the process of spectrum sale (which, thankfully, has been free from transparency-related issues) remains ad-hoc at best. As this space has long argued, the government should have a predictable mechanism for release of new spectrum in the market. On this count at least, operators have long faced difficulties in planning their long-term capital investments.

In recent spectrum auctions, the fiscal planners have been more eager to plug fiscal gaps by scoring windfall non-tax revenues, whereas PTA has been supportive of policies that help with broadband infrastructure development. But a revenue-centric approach, which has often won out, tends to misfire when high upfront spectrum acquisition fees limits the financial capacity of operators to roll out the same spectrum. This point, which has been raised time and again by independent experts as well, is still valid.

Coming back to upcoming auction, the timeline is such that all pre-auction modalities can be concluded before June 2021. What isn’t clear is whether this will be a large-scale auction, for it depends on the quantity of spectrum that will be put up for sale. Recall that back in 2014 mega auction, government had fetched $1.12 billion, selling 10MHz spectrum in 1800MHz band and 30MHz spectrum in 2100MHz band.

Success of the sale remains hinged on the issue of the ‘base price’. If recent auctions are any guide, the base price for spectrum would most likely be set above, not below, $30 million per MHz. If the government puts up about 30MHz of spectrum for sale (3x10MHz), it can net close to a billion dollars with a 5 to 10 percent appreciation over base price. Consistent with previous auctions’ payment terms, half the payment ($500 million, or about Rs80bn) can potentially arrive before the fiscal closing.

Question is: will the operators be interested in helping the government realize those proceeds? While they could always use more spectrum and become more competitive, the likelihood of all operators participating in an auction, one which is to be held three to five months from now, does not seem much encouraging. For context, the pandemic has affected the cash flow projections of telecom industry as well, and leading players may choose to wait before committing large capex on upfront spectrum fee.

Besides, the business environment is also “challenging”, if operators are to be believed. On one hand, Jazz and Telenor are still in litigation with the government over the process through which their licenses were renewed in 2019, and the uncertainty on that count is still not over. What also didn't help was the sealing of the Jazz HQ over a tax dispute in a high-handed manner. However, if operators deemed base price and terms & conditions as “fair,” they would want their hands on some more spectrum.

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