Letís see some auction

May 26 2008, 21:44 IST
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SummaryA clever auction design can resolve all these problems to a large extent. The solution isnít simply in the realm of theory either. It lies in the 3G auction conducted in the UK

The government is taking its time in accepting the inevitable generational change in mobile telephony. The move from 2G to 3G will give consumers, among a range of better services and benefits, high-speed access to the internet from their phones, and video telephony. The extra spectrum (radio frequencies) required to enable 3G have also been procured after freeing them from the unnecessary and wasteful control of the armed forces. The stage is set but the script is still under dispute and discussion.

As is usually the case in India, there are a number of stakeholders involved in the process all of who have differing and conflicting interests. The consumers obviously want better services at reasonable prices. The existing operators want to get the 3G licences free of charge, as a matter of right, or with minimal competition. New and foreign players want to have the right to bid for the 3G licences. The Telecom Regulatory Authority of India (TRAI) supports the idea of an auction but wants to keep new and foreign players out, so that bid prices, and licence fee, remains reasonable. Excessive licence fee in the presence of more numerous bidders would, in their view, get passed onto the consumers in the form of higher tariffs. The finance ministryís stand is in opposition to TRAIóthe ministry would like the maximum number of bidders involved, including new and foreign players, so that the government can maximise revenue from licence fees. The hapless Department of Telecommunications has to play the role of arbiter and is, for the moment, leaning towards accepting the TRAI view of things.

In doing so, it is hiding behind a set of Ďtechnicalí and Ďlegalí hurdles, which would rule out new and foreign players. On legal grounds, DoT believes that it would have to grant successful new bidders a unified access service licence (UASL), which would make it difficult to deny them 2G operations in addition to 3G. Even if the law is suitably amended to deny new players access to 2G, there is a Ďtechnicalí hurdleó-the spectrum allocated will only enable an extension of an existing network and not the establishment of a new 3G network altogetherówhich will effectively prevent new bidders from operating any services at all.

A complete lack of imagination and an ignorance of auction design have created these illusions of Ďhurdlesí and irreconcilable interests for the DoT. A clever auction design can resolve all these problems to a large extent, and mollify most interests. The solution isnít simply in the realm of theory either. It lies in the 3G auction conducted in the UK some years ago, hailed by all as a very successful auction, both in design and in outcome. DoT has to simply replicate it in India.

Like in the Indian case, the government in the UK was auctioning five licences for 3G operations. The UK government reserved licence A for new bidders only. Licence A had a much higher spectrum, and was thus more powerful in a technological sense, than the other four licencesóthis, so that the new entrant could compete with the existing operators without facing any Ďtechnicalí hurdles a la DoT. This licence was eventually sold to TIW at a price of 4.384 billion pounds. The contest for the remaining four licences was reserved exclusively for the existing operators. Licence B had a significantly higher spectrum (and was thus more powerful) than the other three, and went to Vodafone for the highest bid price of 5.964 billion pounds. The other three licences, of similar spectrum, sold for just over 4 billion pounds each. The combined value of the bids was a whopping 22.47 billion pounds all of which accrued to Gordon Brownís Treasury.

Incidentally, the minimum price, set by the UK government, on each of the licences added together was just 500 million pounds. This price was topped in two rounds of auctioning. It took 70 rounds to reach the final licence fee. Most experts had predicted a maximum revenue gain to the government of around 5 billion pounds. It was more than four times that.

By following a similarly designed auction, it is easy to see how DoT can reconcile the different interests. At least one new or foreign player will get a look in, and on a level playing field, but only after paying a large priceóthere will obviously be some losers among the new players but that would happen in any fair auction. TRAIís recommendations for limiting the auction to existing operators should be accepted for four out of the five licences. That is a fair compromise. Even the existing operators should accept this happily. This should also address the concern of the consumers on prices as supported by the telecom regulator. Last, but by no means least, the Finance Ministry will be beaming all the way to the bank if the revenue outcome is similar to that in the UK.

I donít see any conflicting interests anymore, no hurdles either. Will the DoT open its mind and eyes wide, please?

dhiraj.nayyar@expressindia.com

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