Big redistribution in telecom. Why during the war and who will benefit from this (not subscribers)?
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At the end of June, the Ministry of Finance prepared and published on its official website for public discussion a draft law that allegedly proposes to simplify the administration of rent for radio frequencies.
“Ministry of Finance” understood what the bill actually entails and how the innovations will affect the industry, and most importantly, the pockets of mobile users.
We are talking about the so-called spectral coefficients, which in the project from the Ministry of Finance are proposed to be canceled and to leave the standard rent on frequencies. This is presented as a “simplification” of tax administration for businesses and tax preparers.
And for some reason, the Ministry of Finance believes that in the midst of a war, such drastic changes in legislation are on time, which, to say the least, is surprising. Especially taking into account the fact that the communication infrastructure suffered a significant blow, and many Ukrainians in the de-occupied territories were left without communication, the restoration of which requires billions of hryvnias.
In fact, there are many nuances in the topic of spectral coefficients. Telecom experts do not understand why the legislator is in such a hurry to adopt a bill that significantly affects the investment and competitive climate in the industry.
After all, such drastic changes in the tax rules of the game, which give advantages to one operator at the expense of losses to another, will unbalance the industry and will have noticeable consequences for all users.
Why do they want to cancel spectral coefficients
New tax regulations for mobile operators may come into effect as early as January 1, 2024. This date is specified in the draft law from the Ministry of Finance – “On Amendments to the Tax Code of Ukraine and the Law of Ukraine “On Electronic Communications” regarding rent for the use of the radio frequency resource of Ukraine.”
The main innovation is the cancellation of spectral coefficients for rent rates for the use of radio frequency resources.
Spectral coefficients were introduced in 2017 by the regulator – at that time the National Commission, which carries out state regulation in the fields of electronic communications, radio frequency spectrum and the provision of postal services.
Then the regulator introduced a differentiated base rate (20,000 hryvnias per 1 MHz) and a scale of coefficients for frequencies of different ranges – increasing for some, and decreasing for others (from 0.75 to 1.4).
In this way, they tried to bring order to the frequency resource, where the spectrum was divided unevenly for many years.
“The main task is to create equal conditions for users of the radio frequency resource in all promising bands, defragmentation of the spectrum and implementation of market mechanisms to avoid unjustified concentration of the spectrum”, – explained the NKEK at the time.
The innovation was launched in radio frequency ranges suitable for the introduction of new technologies (including 4G): 791-821 MHz, 832-862 MHz, 880-915 MHz, 925-960 MHz. 1710-1785 MHz, 1805-1880 MHz, 1920-1980 MHz, 211-2170 MHz, 2300-2400 MHz, 2500-2690 MHz.
At the same time, several radio frequency bands with a width of 20 MHz in the range up to 1 GHz, 20 MHz in the range of 1-2 GHz, and 40 MHz in the range over 2 GHz were determined to be optimal for the introduction of LTE technologies.
The increasing factor (1.4) was introduced when any user exceeded the optimally required width of radio frequency bands in the relevant bands of 4G implementation.
A factor of 1.2 was applied for inefficiently fragmented radio frequency bands. And the reducing factor of 0.75 could be used by those who take measures to release an economically feasible radio frequency line.
The relevant norms were prescribed in the Tax Code.
It should be noted that spectral coefficients had an effect not only on the pages of the law, because companies began to exchange frequencies, trying to achieve spectrum defragmentation and optimize their business models.
This streamlined the radio frequency resource and made possible the rapid deployment of LTE technologies in Ukraine. Despite the war, Ukrainians do not sit without mobile Internet, 4G works, and mobile operators even continue to connect more and more settlements to high-speed mobile Internet, and 5G is on the way.
So, the introduction of spectrum coefficients by the regulator has proven its effectiveness for the industry, they have been working well for mobile operators for seven years.
And, according to experts, they are still needed, because they establish rules of the game in the market that are understandable for operators and investors and ensure its stability.
But suddenly the coefficients offer to cancel. The actions of the bill’s initiators cause cognitive dissonance – why change something that already works so well?
The drafters of the bill explain this by the need to improve rent administration and equalize working conditions in the electronic communications market. The Ministry of Finance believes that spectral coefficients have already played their role and can be removed. But is it really so?
Why de-occupied territories can remain without communication. Risks of cancellation of spectral coefficients.
The planned innovations have already raised a discussion in the profile community. Experts highlight several aspects of possible problems that may cause the mentioned law to enter into force.
The first risk is investment risk
The abolition of spectral coefficients, which at one time contributed to the order and defragmentation of the radio frequency resource, can now play quite the opposite.
Namely, to provoke the monopolization of a limited and valuable frequency resource by one market player who has already accumulated it. He will get competitive advantages, and for the rest of the operators, the conditions will only worsen.
They will bear the unexpected burden of additional costs that may slow down the implementation of investment projects to expand coverage and restore electronic communications networks.
This calls into question not only the introduction of new technologies after the war, but also the restoration of the infrastructure that was badly damaged during the war, in particular in the de-occupied territories.
“When operators bought licenses and planned investment projects, they counted on certain tax conditions. Changing these conditions can significantly adjust the terms and the very possibilities of project implementation.
Including, which is very important for the Ministry of Digital Transformation, there may be problems in restoring severely damaged networks in the de-occupied territories.
According to the World Bank, in the course of military operations, damage to infrastructure was caused to the amount of 2.2 billion. And if the tax burden increases, this may cause problems with financing the restoration of networks.
And this means that many Ukrainians will remain without a mobile connection,” says Stanislav Prybytko, head of the mobile internet development department of the Ministry of Statistics.
Telecom experts also draw attention to the fact that the proposal of the Ministry of Finance violates the state’s obligations to business.
“If the government changes the fee for frequencies, it will be a gross violation of the commitments that were made with great fanfare in 2019 and were later confirmed personally by President Volodymyr Zelensky in the Memorandum of Understanding between the government and operators (ed. – Memorandum signed on October 29, 2019 within the investment forum RE:THINK. Invest in Ukraine).
There, the mutual obligations of the parties were prescribed – the construction of 4G networks on a national scale to overcome the digital divide and the state’s promise to support operators.
At the beginning of 2022, operators were faced with force majeure circumstances of an unprecedented scale and nature. Despite this, they have not only fulfilled their obligations, but also have to bear the burden of extraordinary and unforeseen expenses.
Investment resources of companies are extremely limited. Increasing costs will exacerbate this problem.
In particular, management and shareholders will be forced to once again discuss the expediency of building 5G networks,” says telecommunications market expert Roman Khimich.
What consequences should mobile users prepare for
The second risk is tax
Innovations are planned from January 1, 2024, that is, in a few months. Moreover, we are talking about a radical change in tax rules, on which the telecom business was oriented in previous years, building long-term plans.
Licenses during the 4G tender were issued for 15 years, so changing the rules of the game now is a negative signal for investors who, even during a full-scale war, are considering investing in development in Ukraine.
Cancellation of spectral coefficients will call into question the reliability of cooperation with state authorities, mobile operators say.
In addition, such haste directly contradicts the letter of the law.
“According to the legislation, changes to taxes for the next year should have been approved no later than June of this year. But these deadlines have already passed.
If changes to the Tax Code are adopted now, they should enter into force no earlier than 2025, so that companies can take into account the innovation in their budget planning,” explained Stanislav Prybytko, head of the direction of mobile Internet development at the Ministry of Digital.
He also drew attention to the fact that the tax burden under the new rules will be uneven. For example, for “Kyivstar” it will decrease by almost 70 million hryvnias per year, for “Lifecell” it will increase sharply (by 132.5 million), and for “Vodafone” it will remain approximately at the current level.
This means that the financial indicators of operators will also change, which, in turn, may affect users of mobile communications and the Internet – an increase in the operator’s costs increases the risks of price revisions for subscribers.
That is, price wars and redistribution of spheres of influence may return to the mobile communications market.
It would seem that the Ministry of Finance, for which the issue of filling the state budget is key, should clearly calculate the consequences of tax innovations. But this time, it seems, not even experts in tax law are predicting that the negative effects of the implementation of the law will be clearly greater than the benefits.
The draft law is frankly “raw” and, at the very least, needs serious revision. Pribytko says that the Ministry of Digitization did not approve the document – it sent its list of comments to the Ministry of Finance.
“In general, the tax burden on operators will increase by 132.5 million hryvnias (an increase of 32%). But the smallest operator “Lifecell” will pay for everything. At the same time, additional budget revenues will amount to only 53 million hryvnias (due to the reduction of payments by other operators – ed. .).
This means that working capital will be washed away, which can have an unpredictable effect on the speed and quality of infrastructure restoration and ensuring uninterrupted communication – an important task for the state,” says Andriy Zablovskyi, head of the secretariat of the Council of Entrepreneurs under the Cabinet of Ministers.
The “Lifecell” company calls the changes in tax approaches that are being prepared discriminatory, since compensation for the increase in tax liabilities with additional investments in the development of the network will increase the competitive imbalance and make it difficult to attract foreign investments in the reconstruction of Ukraine.
It should be noted that the share of capital investments in this operator is already 7% higher than, for example, in “Kyivstar”, and the cancellation of spectrum coefficients will only exacerbate this imbalance.
“We call on the government and the parliament to review and reconsider the changes regarding the rent for the use of the radio frequency resource of Ukraine.
We recommend involving experts from various fields in the discussion and taking into account the fate of possible consequences before adopting the draft law,” the Lifecell company added.
If the legislator still sees his logic in the need to cancel spectral coefficients, then such fundamental changes to the rules of the game should be implemented gradually, without injuring either the industry itself or its investors.
But now everything looks like an attempt to lobby the interests of the largest mobile operator, at the expense of others – both service providers and their subscribers.
What in the end? The state should comply with its obligations set out in the Memorandum with operators as early as 2019, as well as the conditions stipulated in the licenses issued for 15 years and the provisions of the Tax Code regarding the preservation of coefficients.
Since last year, they are no longer extended to subsequent spectrum allocations and auctions. That is, for new licenses issued after January 1, 2022, the coefficients are not provided.
But for the current ones, they should work until the end of their term.
The material was released with the support of lifecell.
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