Trai has never been consistent about how to price & allocate spectrum
V RANGANATHAN, Former member, TRAI

On January 10, 2008, the DoT sold licences with 2G spectrum at 2001 prices, realising about Rs 10,000 crore, ostensibly on a firstcome-first-served basis, but actually violating even this.

There was a feeling that the government lost revenue, fortified by CAG that assigned a dramatic Rs 1.76 lakh crore number to it. Swan got the licence for Rs 1,347 crore, and sold 45% to Etisalat for Rs 4,200 crore, valuing the firm at around Rs 10,000 crore. These raised suspicions about corruption.

But there have been parallels. The UK government, when it sold 2G waves through 'beauty contests' or bureaucratic allotments based on subjective criteria, realised only £44,000, whereas its 3G auctions in 2001 realised a staggering £22.3 billion. But UK's polity did not bicker with the advantage of hindsight.

It was considered as part of evolution. In India too, 3G auctions were conducted, netting Rs 1 lakh crore for the government and there has been no controversy over that. When Centaur hotel was sold in auction by Arun Shourie, the buyer resold it subsequently at a huge profit.

Therefore, just the fact that there was no auction or that it got resold at a higher price may not be due to corruption, but inefficiency. To make a mistake is not criminal. Otherwise the executive can't function.

However, actions with the mala fide intention of gaining pecuniary advantage is a criminal act. This has to be established. But in the present surcharged atmosphere, fixed-price supporters are seen as abettors of corruption and auction-wallahs as honest and patriotic. Trai has been affected by this syndrome and is reacting to it.

In 2003, there was no problem and in its recommendations on how to add new players, Trai said that subject to spectrum availability, the government could introduce new players through a multi-stage bidding process: it was clearly in favour of auctions.

In 2007, one year prior to 2008, the atmosphere was charged with debate on auction vs fixed price sale. That Trai was torn between its professional duty and loyalty is seen by its 2007 recommendations:

"The allocation of spectrum is after the payment of entry fee and grant of licence. The entry fee as it exists today is, in fact, a result of the price discovered through a marketbased mechanism applicable for the grant of licence to the fourth cellular operator.

In today's dynamism and unprecedented growth of telecom sector, the entry fee determined then (i.e., in 2001) is also not the realistic price for obtaining a licence. On the other hand, spectrum usage charge is in the form of a royalty which is linked to the revenue earned by the operators, and to that extent, it captures the economic value of the spectrum that is used. ...The authority-...is conscious of the legacy, i.e., prevailing practice and the overriding consideration of level playing field.

Though the dual charge in the present form does not reflect the present value of the spectrum, it needed to be continued for treating already specified bands for 2G services, i.e., 800, 900 and 1,800 MHz.

It is in this background that the authority is not recommending the standard options pricing (sic) of spectrum, however, it has elsewhere in the recommendations made a strong case for adopting auction procedure in the allocation of all other spectrum bands except 800, 900 and 1,800 MHz."
-------------------------------------------------
Here, Trai may have misspelt 'auctions' as 'options'. Trai believed that it was necessary for new entrants in the 2G space to be able to compete with incumbents and offer affordable services. It, therefore, felt that new entrants should follow the same pricing rules as incumbents.

But Trai was clear that spectrum for new services like 3G and BWA should be auctioned. Trai said that it wouldn't make sense to auction 2G spectrum because players were allocated bandwidth at different times, held different amounts and across GSM and CDMA technologies.

Taking a cutoff and beginning auctions could be arbitrary and tilt the playing field against some players. So, in 2003, Trai favoured multi-stage auctions, as was done for the fourth cellular operator, to add new players.

In 2007, Trai was torn between market dynamics and the necessity of realistic pricing and supporting the status quo of fixed pricing on the grounds of affordability and level playing field. In one paragraph, two halves talk of opposite principles. It supports auctions for the future and fixed pricing for the past.

It justifies both, arguing for fixed price on grounds of affordability, growth and the need for all players to have a level playing field. This, even though regulatory tweaks like number portability and mandatory open access to others' networks have already made the field pretty level.

Trai can equally argue in favour of auctions by saying that spectrum is a scarce resource and efficiency would require its price being discovered through auctions. The 2010 recommendations certainly have the flavour of a lawyer's brief rather than that of a regulator.

It vigorously defends the giving of 2G at fixed price in 2008, first as a matter of policy, as if it is sacrosanct.

It debunks the financial loss argument by saying, "why look at 2008 alone, they were doing the same way right from 2001, and even giving spectrum free". Here, one can see the anxiety of the regulator to please the government that appointed him.

If in the process it requires faulting the ministry, running down fellow-bureaucrats, it is par for the course: Trai has also argued that "the department has been giving (spectrum) free all the time". Thus, there are situations where the regulator is captured by the favour he was done in being appointed.

The 2G case illustrates how there is a different form of regulatory capture, this time the regulator being indebted to the master who appoints him.
Auctioning cannot said to be the right policy while allocating all scarce resources. In India everything is scarce, be it rail tickets, LPG, land for housing LIG/MIG as well as for industries, seats in premier institutions or even tickets for a popular sports event. Do we auction each one of them to earn more revenue and to prevent a few from making money in the black market? How amoral would it be if the Indian Railways were to auction the Taktal tickets every morning with a view to maximise the revenue, not to speak of the ten million tickets sold every day at low prices on a first come first served basis? The vast majority of the mobile users are from the lower strata of the society, as the high share of prepaid subscribers (close to 97 p c) would indicate. Prior to Raja issued licences in Jan 2008, 51 licences were issued during the period Jan 2004-Mar 2007, all at the entry fee prevailed in 2001. So are they also to be cancelled, on the ground of them having been given at throw away prices? If this mode of recovering the licence fee/spectrum charges was wrong, the Supreme Court is in effect annulling the Telecom of Policy of 1999 that moved away from charging an upfront fee to revenue sharing and asking to revert to 1994 policy that was based on auction. If 2G were to be auctioned it should be made a precondition that the tariff cannot be increased beyond 50 paise per min. One can see what price it would then fetch! A review of the Supreme Court judgment is called for.
Another misconception is that the spectrum was given at throw away prices. NTP 1999 moved away from charging a high fixed upfront fee to that of revenue sharing. It is like charging a rent for a building or royalty payable for a coalmine based on production, instead of an outright sale for a price payable upfront. By this the govt has already collected about Rs 100000 cr and still collecting 13.8 p.c of revenue or Rs 14000 cr p.a as licence fee/spectrum charges. Keeping entry fee low was a strategy that paid rich dividends; the tariff has fallen from Rs 14-16 per min in 1999 to less than 50 paise (the lowest in the world) and the subscriber base gone up from less than a million to more than 900 million! Imagine increasing the entry fee on the licences issued in 2008 higher by Rs 176645 cr-the amount supposedly lost by the govt in the CAG’s assessment. That would have imposed an extra cost of Rs 27000 cr p. a, to the industry-towards financing and amortization of the fee paid upfront. Apart from the fact that it would have imposed a heavy burden to the new entrants, how could the govt have prevented the operators from recovering the same by way of an increased tariff? In turn it would have adversely affected the growth. Auctioning would be like killing the goose that lays the golden eggs!
-------------------------------------------------
The public perception on the 2G scam is muddied by the CAG placing the loss to exchequer at Rs 176645 cr ($35 bn) by giving away licences in Jan 2008 at an entry free discovered in 2001. Though the methodology adopted in arriving at the loss was bizarre, few dared to question it. While in 2001 a pan-India licence fetched Rs 1659 cr, the CAG argued that it should have been valued at Rs 16750 cr, the price obtained for 3G in 2010 on the ground that 2G has the capability of 2.75 G! How could this be accepted? If it were so the bidders were not so stupid to pay ten times the price for 3G they paid for 2G and instead rolled out the value added services on the back of 2Glicences they already had. The Telcom Policy 1999 had set its objectives as growth, affordability, level playing field to all operators and competition. Further the tenth plan document stated that the revenue in the sector was not the prime consideration. TRAI had diligently implemented this policy by consistently advicing not to auction 2G as it would not give a level playing field to the new comers more so when their cost would be higher as they had to go deeper into areas hitherto not serviced. However, wrt 3G there were no such considerations and therefore it recommended auctioning. TRAI’s was thus a well thought out advice not to auction 2G, keeping in view of the objectives of NTP 1999.
2G licence scandal rattles India's telecom nirvana
The scandal convulsing the Indian telecoms market threatens to deter foreign companies from investing there and could call into question the business case for expanding into emerging markets in general.

Once seen as a potential gold mine for its rapid growth and huge population, the Indian market has proven especially nerve-wracking for Western telecom operators because of unexpected regulatory changes and ferocious competition.

Now the latest row has taken on an extra diplomatic edge after the Supreme Court ruled eight companies, including six with foreign stakeholders, would lose some or all of their telecoms permits, following a scandal-tinged 2008 sale.

To make matters worse for the operators, the telecom ministry said on Wednesday it could take about 400 days to hold an auction to redistribute the licences, in a major blow to companies like Norway's Telenor or Russia's Sistema that have poured billions into the market and now face a legal minefield if they are to continue.

"The investor climate in India will be changed forever, for everyone if this happens," Jon Fredrik Baksaas, the chief executive of Telenor, told Reuters, as he warned that his group could still quit India if things did not improve.

The Norwegian government, which owns 54 percent of Telenor, has intervened with Indian authorities to argue Telenor's case after its joint venture Uninor looked set to be stripped of its licences to operate.

Telenor had been the most aggressive of the new entrants and had spent $2 billion in recent years to build up a base of 36 million subscribers as of December.

Baksaas said that much would depend on whether Telenor could convince the Indian authorities to adopt an approach that would allow it to stay and mount a realistic fight back.

That would include limiting the spectrum to players that had lost licences, and not allowing market leaders such as Bharti Airtel and Vodafone to sweep in and scoop up extra spectrum.

For its part, Russian group Sistema, which is also at risk of losing licences, argued that India risked violating a bilateral investment treaty it had with Russia and demanded that the row be settled in six months or else it may have to approach an international arbitration tribunal.

Two other foreign-owned operators have already thrown in the towel. Bahrain Telecommunications said earlier this month that it was exiting, while the United Arab Emirates-based Etisalat has said it will shut down its Indian joint venture after writing off $827 million.

CLOSED DOORS

At the Mobile World Congress in Barcelona, major operators from Bharti to Vodafone lined up to warn that the current climate was unsustainable as the Indian telecoms minister huddled in closed door meetings to hear their concerns.

India is the world's second-largest cellular market by subscribers, with 894 million at the end of December, however fierce competition among 15 operators means call rates are among the lowest while strict regulation has so far discouraged mergers or spectrum sharing.
The tough conditions mean the ruling could benefit the biggest players in the crowded industry, but even they complain that there is still far too much uncertainty over future regulation and how the industry will unfold.

Vittorio Colao, the chief executive of the world's largest mobile operator Vodafone, dismissed as a "half baked idea" the recent proposal to relax caps on market share intended to lead the way for consolidation, when companies did not know if they could acquire more spectrum.

"You cannot talk about M&A unless you clarify the spectrum," he said. "If it's not clear how much spectrum I can retain and how much I will pay for the spectrum who is going to make a bid?"

Even Vodafone's road in the country has been bumpy: it recently won a years-long battle with the country's tax authorities that could have cost it heavily. That decision was seen as boosting the climate for foreign investment in India, but much of that goodwill is now on the line again.

Bharti Airtel Chairman Sunil Mittal told the conference the country had enormous potential for telecom operators but said the market had been made harder by the huge fees needed to buy spectrum and licences over the years.

"We have made structural mistakes in India," Mittal said. "Yes, we have a large population but my average revenue per user is about one-fifteenth of those in Europe, and that is the challenge."

Franco Bernabe, the head of the GSMA telecom operators trade association and Telecom Italia CEO, also warned that India risked alienating the very companies it needed to modernize the infrastructure of its rapidly growing nation of 1.2 billion.

"India is a very large country it needs a lot of investment in networks, but in order to incentivize companies to invest you have to have a stable, fair and transparent environment," said Bernabe in an interview.

"Of course we don't want to interfere in India's internal affairs - we know these issues are very complicated - but the process of giving out mobile licences should be fair and transparent to everyone."

Colin Brereton, the global communications leader at PWC, said the Indian government risked hurting not only its own image, but also those of all emerging markets.

He said companies would worry that if mature Western operators with strong financial backing could not make India work, with its growing middle class and decent infrastructure, then entering markets in Africa would appear even harder.

"India is a hugely important indicator of whether or not this is going to work," he told Reuters. "To write out a cheque the size that the telcos were writing is a risky business."