Column: Managing risk in spectrum auctions

Written by Mahesh Uppal | Updated: Nov 7 2013, 10:19am hrs
The Telecom Regulatory Authority of India (Trai) recently reiterated its proposals for the forthcoming auction of radio frequencies or spectrum for 2G wireless services. By mostly accepting them, the government will bring back bidders and break the impasse in the sector. However, recent experiences in India and abroad show that while spectrum auctions remain the best bet for transparency, additional handles may be necessary to minimise other risks.

Several governments and regulators are taking measures to deal with unwelcome auction results. In March this year, Czechoslovakias regulator CTU called off an auction for LTE mobile broadband spectrum when the bids were still rising after reaching $1 billion. CTU argued that bids were too high and discouraged new competitors. It has proposed a new auction which would inter alia focus on creating the conditions for the entry of another operator with nationwide operations by reserving one spectrum slot for new entrants.

In the UK, the government received barely 66% of its revenue target from the last auction for 4G (800 MHz and 2.6 GHz spectrum). The UK national auditor is undertaking a review to benchmark the conduct and outcome of the auction against good practice and the results of similar auctions in other countries. Separately, the UK government directed the sector regulator, Office of Communications or Ofcom, to set new licence fees for 800 MHz and 900 MHz spectrum since the rules now permit holders to deploy them more flexibly following the spectrum liberalisation. The government wants the new spectrum licence fee to reflect the current market price, with particular regard to sums bid for licences in the 4G auction. Ofcoms proposals envisage raising spectrum licence fees for 900 MHz and 1800 MHz by over 300%. This will be finalised after the mandatory consultation with stakeholders.

The success of auctions, of course, depends on their design. Relevant parameters, including the reserve price, the proportion of available spectrum being auctioned, the type of bidding (e.g. open or closed, single- or multiple-stage), the method of payment (upfront or staggered), the obligation to rollout services, permission to share or resell, etc , are set with auction goals in mind.

However, not all goals (revenue targets, rollout targets, competition, etc) are, or can be successfully reconciled or factored in the design chosen. Stakeholder objectives vary in importance and urgencythe consumers look for affordable services, the government is keen on maximising revenues to contain budgetary deficits, and the operators seek viability and profits. High bids might boost the exchequer but discourage winners to roll out services to less profitable customers or regions, adding a tangible risk.

Some risks associated with auctions are unique to spectrum. For instance, wireless technologiesall need some spectrumare in continual change. Technologies like 4G, LTE, Wi-Fi, Bluetooth, hotspot, etc, which occupy much mind space today, were unfamiliar a decade ago. Technologies like WiMax have struggled, despite big investors like Intel. Many more disruptive ones are on the horizon. The technology risk in spectrum is huge and yet unquantifiable and exacerbated by the fact that wireless networks often cost hundreds of crores of rupees to deploy.

Indias own experience demonstrates that risks also vary with the types of spectrum auctioned. Operators are yet to deploy 4G services on any significant scale even after paying the exchequer R38,500 crores in the 2010 auction. This is partly because there are still too few 4G devices, especially affordable ones, for customers to use the service with. Data markets, for which 4G could have been especially powerful, are still struggling. Usage of data services and their revenues are nowhere near those for conventional voice telephony, for which, ironically, 4G cannot match even existing 2G or 3G services. 4G is a potentially formidable technology but deploying 4G services prematurely, in the Indian environment, poses a risk.

The risk would be even higher if the government auctioned more 4G (700 MHz) spectrum, which promises great bandwidth in the future, when the 4G ecosystem is sufficiently mature. However, because 4G spectrum is limited, as all spectrum is, operators would bid aggressively so as not to forgo its use in the future. Thus, a premature auction of 700 MHz will again lock huge investments in spectrum that might remain unused for several years.

However, if the government was to auction 3G spectrum in the 2100 MHz band, risks are virtually absent. This spectrum could raise comparable revenues, since no private 3G operator has a nationwide spectrum and 3G voice and broadband services are offered by a wide choice of devices both fancy and affordable. Such an auction would be more of an opportunity than a risk!

Another risk in spectrum auctions is the possibility of a windfall to winners due to changes in technologies or the marketplace. This has led some to oppose Trais proposals to reduce reserve price for the next auction leaving the body with little flexibility to redesign it. This risk can be mitigated if the government retains specific options to act after the auctions.

I have advocated in this newspaper earlier that the government replace licence fees and spectrum usage charges with an annual levy on each wireless operator. The government would set its revenue target as a proportion (P%) of the total revenues of the sector (T) and collect it from individual operators based on the share(S%) of total spectrum allocated to them. Formally, the amount payable then would be the product of P, S and T. The government could comfortably remove any artificial restrictions on the use of spectrum and Trai could tweak the approach, if necessary. Such an approach would protect the governments revenues, and encourage efficiency, with inefficient operators, viz. BSNL, paying more for retaining large amounts of unused spectrum. This would retain the auction but encourage a flexible design.

Spectrum auctions are indispensable as long as the demand exceeds supply, as it does now. However, they cannot possibly balance all policy objectives. Indias challenge is especially big, since the governments understandable priority for revenues will hurt efforts to expand access to services, develop new markets, and encourage niche players or promising technologies. It makes eminent sense for governmentsas some are already doingto take additional steps, provided they are transparent and proportional, to reconcile their goals with those of the other stakeholders.

The author is a telecom consultant