The telecom scenario is almost emerging as an albatross around the neck. While the service providers are in an unenviable situation, the government too is not optimistic of the forthcoming spectrum auction.

The recent Empowered Group of Ministers' decision to allow the telecom service providers to retain 2.5 MHz of spectrum in the 900 MHz band (and pay the auction-determined price at the time of license renewal) and refarm the rest in the 1800 MHz band has evoked deep concern from the Cellular Operators Association of India.

The association believes that it will be a daunting task for the operators to serve 400-500 million subscribers in the 900 MHz band with limited 2.5 MHz and the remaining on the 1800-MHz band.

"Failure to consider the impact of this technical matter may give rise to a decision, which may end up destroying the high-scale and globally competitive network in India, causing irreparable damage to the country's telecommunication infrastructure," says the letter issued by COAI to Salman Khurshid, Minister of External Affairs.

The COAI has urged the minister to frame a high-level technical committee to discuss the feasibility of the option of retaining 2.5 MHz spectrum.

"Partial spectrum refarming as approved by the EGoM will also not provide the financing relief the industry desperately needs to be able to reduce the industry debt to EBITDA margin ratios, which at around 5 are currently too high," asserts Mohammad Chowdhury, leader telecom, PricewaterhouseCoopers International India.

As of March 2012, telecom service providers have an accumulated debt of Rs. 185,720 crore, two-and-half times the debt four years earlier, according to estimates by PricewaterhouseCoopers (PwC), and poised to increase to perhaps Rs. 400,000 crore by March 2016. With operating margins below 30 percent, the industry is in the midst of a financial crisis.

The three leading operators, Bharti Airtel, Vodafone, and Idea Cellular, may not currently be as financially stretched as Reliance Communications, Aircel, Tata Teleservices, and Telenor. However, the one-time combined cost of refarming for the operators is likely to be at least Rs. 100,000 crore. The initial blow could be mitigated if the government offers the option of deferred payments.

Unlike the 3G spectrum auction, in which the entire bid amount was paid upfront, for the coming 2G spectrum auction, operators have to pay only a third of the bid amount upfront, while the remaining amount would be paid in 10 annual installments beginning December 2015.

The large operators have not been aggressive in their 2G spectrum auction bids. Both Vodafone and Bharti could have bid up to 2.5 MHz across the country as incumbents. Yet, Bharti has bid at 9.69 percent of its actual potential while Vodafone has bid at 21.6 percent of its bidding potential. The only notable exception is Idea Cellular, which has bid at over 97 percent of its bidding potential. For CDMA too, Tata has bid for only 3.24 percent of its bidding potential; and Videocon has withdrawn its application.

The EGOM have additionally made sure that no windfall gains are made on sale of licences, at a higher price than what was paid to the government by the original allottees. Companies buying an existing operator will have to pay the government a market price determined at the upcoming auction. This would render mergers and acquisitions expensive.

The Analysys Mason study on spectrum refarming provides an insight on the impact of refarming on operators, consumers, and environment.

The operators will need to replace existing base stations, and install additional base stations
to provide equivalent coverage on 1800 MHz frequency. This will result in an incremental CapEx and incremental annual OpEx including tower rental, electricity, and diesel charges, and other associated costs for additional towers. Operators will also have to write off their existing 900 MHz assets.

There is a risk of reduction of existing geographic coverage, loss of connectivity for subscribers, coverage discontinuity with an increase in the number of call drops, at least during the period of migration and optimization, which may take up to three years. With increasing capital expenses, business viability of services in rural areas may be impacted, resulting in a potential decline in rural tele-density.

Also, additional sites and new operators will mean more telecom towers, resulting in incremental emission of carbon dioxide.

The government too is edgy over its plans to control fiscal deficit at around 5.1 percent of GDP during 2012-13. In 2010, at the auction for 3G spectrum the government received a staggering Rs. 67,000 crore, as against the most optimistic expectation of Rs. 35,000 crore. Now, in 2012, with the second auction scheduled for November 12, the mood is despondent. With some telecom operators having stayed away from the auction, the government's target of getting Rs. 40,000 crore may be completely misplaced.

Is it the case of having killed the goose that lays the golden egg too soon?