Recent events in the telecom sector suggest that investors must gear up for huge costs and the government for more litigation.
Take ?refarming? of the spectrum allotted to companies that won the first mobile licences in the mid-1990s. The spectrum was in the 900MHz frequency band, which, thanks to advances in wireless technology and market, is now worth a fortune. The Empowered Group of Ministers (EGoM) has broadly accepted proposals of the Department of Telecommunications (DoT) to deploy?or ?refarm??the 900MHz band and moving all 2G operators to the 1800MHz band. The auction of the refarmed spectrum could fetch the exchequer thousands of crores and take away the early movers? advantage and promote 3G mobile broadband services. GSM incumbents are annoyed; others claim the field is now level.
The early operators who use the band saved hundreds of crores since they needed fewer towers. On the other hand, the only spectrum available for later entrants was in the relatively less efficient 1800MHz band.
The opposition of incumbent GSM players to the refarming of 900MHz seems understandable but exaggerated. They do have licences that were awarded in fair and transparent processes in which their current detractors lost. However, the government is not proposing to amend licences prematurely or disallowing use of the spectrum during their tenure. Arguably, rights or privileges of some licence-holders cannot possibly be allowed to continue beyond the expiry of their licences. The incumbents are also not the only potential investors now as they were when India opened its telecom markets.
Let?s look at the bigger picture. First, access to spectrum must be equitable. Second, India?s telecom sector needs huge investments, especially in broadband networks. An auction of 900MHz serves only the first objective. Refarming is expensive. Incumbents who can win back the 900MHz spectrum will inevitably pay the steep new price based on auctions. Those who lose will need huge sums for new towers and replacement of existing equipment that will become redundant.
Regulators elsewhere recognise the need to create incentives for refarming. France, for instance, set up a fund to facilitate refarming. This may be unrealistic in India?s context for several reasons: spectrum is proposed to be refarmed after licences expire, budget deficits need plugging and, sadly, incentives that promote corruption in today?s climate.
The government can hardly defend adding to the players? burden. Whimsical policymaking and regulation is costing the sector dearly. This is evident in Trai?s recommendations relating to spectrum auctions that DoT has all but accepted. There is little evidence that the two agencies ever considered the likely risks of poorly-designed auctions. The EGoM last week followed this with a veritable patch work solution by proposing a one-time payment for spectrum allotted in the past. This reinforces the view that government is willing to visit the sins of its bureaucrats and politicians, and operators who presumably received the favours, on the sector as a whole. The response to Supreme Court?s findings against the DoT and Trai has been less to fix responsibility and more to punish the sector with higher costs, in the name of transparency. The proposed 2G spectrum auctions are just that. The idea is to force high bids from players through a massive reserve price.
However, despite the considerable room for better design, spectrum auctions are here to stay. India?s telecom network is predominantly wireless-based, with spectrum supplies unlikely to ever meet the rapidly rising demand. There are few transparent alternatives to spectrum auctions. Mandating prospective users to share spectrum could avoid an auction, but the option has really only worked for Wi-Fi type networks. It hasn?t been shown to work for mobile telephony, the predominant service offered on the current networks. We cannot escape spectrum auctions?and the resulting high prices?until companies can provide existing services without exclusive use of spectrum and conveniently bill customers!
The exorbitant spectrum price compounds the already high costs that telecom players incur in government levies. At around 29% of sector revenues, the levies were some of the highest in the world. This is a dubious distinction for a sector in need for large investments. It is difficult to understand the imposition of licence fees after receiving an auction-determined ?market price? for spectrum. After all, a rationale for licence fees was that they were proxy payment for the ?free? spectrum that came bundled with mobile licences. Similarly, it is illogical to levy spectrum usage charges running into hundreds of crores for use of an inexhaustible, if limited, resource. There is little justification of charges beyond recovering administrative costs.
It?s not surprising that many potential bidders?even deep-pocketed Indian and foreign players like Reliance and MTS?are staying away from the forthcoming 2G auctions. Several companies have threatened litigation on the one-time fee. This is ominous and needs immediate review of spectrum rules. The government cannot demand its pound of flesh in advance while operators struggle to run viable businesses. Besides fair play in the market place, fair sharing of risks between government and private investors is a prerequisite for the growth of such a key infrastructure sector.
The author is a telecom consultant