The Ministry of Communications (Mincomsvyaz) intends to withdraw some of the frequencies used by the “Big Four” telecom companies to build a fourth generation network and transfer the frequencies to a newly established state-owned company. Operators are outraged.
The Ministry of Communications (Mincomsvyaz) submitted to the Presidential Administration a draft executive order on redistribution of frequencies for the purposes of setting up and developing national 4th generation mobile networks (4G LTE), as well as an explanatory note thereto. The plan is to transfer to the Mincomsvyaz the right to use 720-750 MHz as well as 761 -862 MHz frequencies, “as well as all the frequencies within the range of 390- 470 and 694- 876 MHz available presently and in the future” in order to facilitate “development of the broadband access and overcome the digital divide”. After that frequency range is secured, the Mincomsvyaz plans to set up an open 100% state-owned JSC, and to assign those frequencies to an entity that will be in charge of building a “unified state-owned LTE network infrastructure”. The network will be available to any operators at government regulated tariffs.
The Mincomsvyaz recommends, that the statutory capital of the OJSC (that is called “a unified LTE operator” in the draft document) be set up by the operators. For this purpose it suggests to use the proceeds of the universal service reserve (to which operators contribute 1.2% of their profits), as well as operators’ payments for frequencies. Also the project provides for the Ministry of Finance, the Ministry of Communications and the “Vnesheconombank” (VEB) to draft proposals on “investment financing” of the newly formed unified LTE operator. The Mincomsvyaz estimates the total investment in the LTE infrastructure at 60 billion roubles. According to the ministry’s estimates, about 30,000 base stations will be required.
Last year over half of the frequencies in question were assigned as the result of a Roskomnadzor (Federal Service for Supervision in the Sphere of Telecom, Information Technologies and Mass Communications) tender to the “Big Four” operators – MTS, “Megafon”, “Vimpelcom”, and “Rostelecom”. Each of them undertook to set up a federal LTE network by 2019, and to launch first regional networks by June 2013.
However the Mincomsvyaz decided that the winning bidders have taken a formalistic approach: over the first year they have only built less than 1,000 base stations and have been developing only the most vacant “upper” band of 2.5-2.7 GHz. The ministry concluded that they are not interested in hurrying the process. First, each operator is building its own infrastructure which results in “multiple overlaps”. Second, in pursuit of quick profits they begin with coverage in larger cities without due regard to quality of service. Third, they deliberately underfunded development of “advanced technologies” (LTE), trying to get all they can from the existing networks (GSM and 3G). And finally, the ministry doesn’t think that the frequencies are distributed efficiently: instead of the “standard 5 MHz” each operator received two bands of 7.5 MHz. That means that over 30% of the scarce frequency resource is not utilized”.
Nikolai Nikiforov, the Minister of Communications, submitted these proposals to Vladimir Putin on Friday. “It’s still a way to go until a final decision is made,” — that’s all Dmitry Peskov, the president’s spokesman, said. He wouldn’t comment on the Mincomsvyaz proposal, explaining that the project is only “tentative in nature”. A Roskomnadzor spokesman said that his agency was not aware of the Mincomsvyaz initiative.
According to the “Big Four” representatives, MTS, “Megafon”, “Vimpelcom”, and “Rostelecom” meet all their licensing requirements. However, there is an issue with the 791-862 MHz band that the Mincomsvyaz intends to take away: the operators received those frequencies from the former users, mostly the military and air controllers. One of the tender requirements was that the successful bidders would pay for frequency conversion. In spring of 2012, the Radio Research Institute estimated that it would cost the operators about 73-84 billion roubles. However, once the tender was over they realized that the Ministry of Defense cannot receive funding from extra-budgetary sources. At the same time operators are not able to pay for the conversion directly to the budget. The budgetary law does not provide for earmarked receipts. Accordingly, it cannot be guaranteed that the operators’ resources will be used strictly for conversion.
Eventually the operators decided to negotiate with the military some kind of shared use of frequencies. It worked: according to Mr. Dmitry Solodovnikov, the MTS representative, by the end of 2014 the operator plans to launch 4G in approximately 600 locations, and to invest about 40 billion roubles in LTE networks over 2013-2014.
According to the law, in certain cases, for example, for national security purposes, the state can reclaim frequencies assigned to an operator, says Natalia Ivaschenko of “Pepelyaev Group” law firm. However in return an operator must receive other frequencies, or some monetary compensation. If an operator disagrees with the amount of the compensation, it has the right to sue.
Anna Aybasheva, the “Vimpelcom” spokesperson, warns that the Mincomsvyaz initiative can negatively affect the investment climate in Russia. “It is unknown in the modern history of telecommunications in Russia that operators would be assigned frequencies based on a clear tender rules and licensing requirement, and then the same frequencies would be arbitrarily confiscated”. If that proposal is approved it will negatively affect the industry, Yulia Dorokhina, the spokesperson for “Megafon” agrees.
Another operator’s manager calls the plans to set up a state-owned LTE operator “surreal”. First of all he is sure that 60 billion roubles will not be enough to develop a national LTE network. Even the operators undertook to invest at least 15 billion roubles a year apiece. Over the seven years, that amounts to 105 billion roubles per operator. To build 30,000 base stations would cost more than 230 billion roubles: 180 billion to set them up and a minimum of 50 billion to build the network, according to an expert from another telecommunications company. Such an entity would have to be forever financed from the budget, he concludes. The anonymous “Vedomosti” sources stress that you cannot complete the conversion in just two years, not even in five years.
One of the priorities set by the Mincomsvyaz – to overcome the “digital divide” – is provided for in the presidential decrees and has to be realized, said Mr. Nikiforov. According to him, different options are being considered. In particular, accessibility and quality of communications could be ensured by launching a low-band nationwide LTE network.