JS Deepak, a joint secretary in the commerce ministry who has been given additional charge to oversee the auctions since he was the official who conducted the 3G auctions, in a 17-page note that has been reviewed by FE, has faulted Trais recommendations mainly on three grounds: 1) Mathematical errors in computing the reserve price of R18,110 crore for 5 MHz spectrum; 2) No provision to charge market-discovered price from dual-technology operators who were also given spectrum at R1,658 crore in 2007-08; and 3) Liberalisation of spectrum without mentioning that if this applies to 3G and broadband wireless access (BWA) spectrum holders, it would upset the level playing field and lead to loss of revenue to the government.
Additionally, Deepak has faulted Trai on the auction design suggested by it. He has also criticised the regulator for overstepping its mandate in recommending the auctions, meaning that while the department of telecommunications (DoT) had asked for auctioning spectrum accruing as a result of the the 122 licences cancelled by the Supreme Court, Trai has gone ahead and recommended the same in 800, 900 and 700 MHz. The official has also questioned Trai recommending an auction calendar, which he says would depress demand for spectrum as operators would know when the next round of auctions is slated.
He has concluded by stating that whenever the government has agreed with Trais recommendations, the results have been disastrous and that the 3G spectrum auction was a success because the regulators recommendations were improved upon by the empowered group of ministers.
What complicates matters further is that despite Deepak pointing out the anomalies to the Telecom Commission in his note dated April 30, the commission the highest policymaking body in the DoT did not bother to seek clarifications on these points by Trai. The commission had met on the same day and sought certain clarifications from the regulator on certain other points.
This is significant because Deepak is part of the inter-ministerial government (IMG) panel that has been entrusted to conduct the auctions.
Pointing to the holes in Trai's mathematical exercise in computing the reserve price of Rs 18,110 crore for spectrum in the 1,800 MHz band, Deepak has said that the regulator has failed to compute the net economic value of spectrum correctly. For instance, in the 3G auction for 5 MHz spectrum in 2.1 GHz, the price of which came at Rs 16,750 crore, operators need to pay 3% of their adjusted gross revenue (AGR) as spectrum usage charge over their 20-year licence period. While recommending the base price of 2G spectrum (1,800 MHz) higher than 3G, Trai has valued the former as 1.2 times more efficient than the latter. But Trai has suggested spectrum usage charge at only 1% of the AGR. What the official means is that if 1% AGR was charged for 3G, the auction price would have been higher. This means that if for 2G Trai has suggested an AGR of 1%, then by that logic the base price should have been even higher at Rs 20,000 crore for a block of 5 MHz spectrum.
While there may be a rationale in having a nominal spectrum usage charge of 1% of AGR, the combination of 1% spectrum usage charge with upfront price received in the 3G auction is wrong and needs to be changed, Deepak has pointed out.
In a step that is sure to rake up controversy, the officer has criticised Trai for being silent on the grant of 35 dual technology licences at the old price of 1,658 crore in 2007-08. Four firms Reliance Communications, Tata Teleservices, Shyam Group and HFCL got these licences. According to him, Trai should have recommended that the government ask these operators to also pay the auction-discovered price in the interest of a level playing field.
One of the reasons why allocation of 2G spectrum in 2008 is termed scam is that spectrum was allocated well below the market price and under the dual-technology regime also, CDMA operators were given 4.4 MHz spectrum in the 1,800 MHz band at the same price charged from the GSM operators whose licences have been cancelled by the Supreme Court. While the Supreme Court hasn't cancelled these licences, it is my understanding that this is also 2G spectrum. Trai hasn't given any recommendation on the same. It appears in the interest of a national level playing field that these operators who have been given dual technology, 2G spectrum at Rs 1,658 crore per block of 4.4 MHz spectrum in the 1,800 MHz band should also be asked to pay the price that would be determined by the auction of spectrum that is subject of the Trai recommendations. Since this also has huge repercussion on the government revenues as well as a risk of potential legal challenge, Trai should be asked to give specific recommendations on the issue, Deepak pointed out.
On liberalisation of spectrum usage, meaning allowing the use of 2G spectrum for 4G services and vice-versa, too, Deepak has faulted Trais recommendations. He has said that the 3G and BWA spectrum did not allow liberalised use so if thats to be allowed now, the government should charge more for it. For instance, an operator like Reliance Industries has pan-India 20 MHz of BWA spectrum in the 2.3 GHz band, which it was supposed to use only for data services and not voice. If Trai allows liberalised use, then an operator like RIL would be able to provide voice services on the same spectrum by paying a lower price.
It is my understanding that the conditions of auction of BWA spectrum in 2010 will hold and the holders of ISP licence who won BWA spectrum will not be allowed to provide voice services without paying a liberalisation charge to the government. This is an extremely important issue and needs to be clarified by the regulator, Deepak has written.
* Trai advice shows it has understated reserve price for 1800 MHz spectrum
* Dual tech holders should also be asked to pay the price for 4,.4 MHz spectrum
* Encourages operators not to bid for spectrum under dodgy assumptions
* BWA spectrum holders should pay liberalisation charge for voice telephony