Column : Broad spectrum trouble

Written by Rishi Raj | Updated: Apr 25 2012, 09:21am hrs
Trying to correct historical wrongs is generally a dangerous exercise jeopardising the present. Trais latest recommendation on spectrum auction, knowingly or unknowingly, falls in this trap. What should have been aimed as a limited exercise to give a window of opportunity to some operators who had entered in 2008 and found their licences cancelled in February by the Supreme Court has ended not only in making business hugely expensive and unviable for them but also for the existing operators. No wonder all sections of operators have criticised the recommendationsthe existing GSM and CDMA operators (who in the past have rarely seen eye to eye on most matters but stand united on this one) as well as a new operator like Uninor.

In short, while stating that spectrum should be granted through auctions, Trai has set an abnormally high base price for participating in the auctions at R3,622.18 crore per Mhz in the 1,800 band (GSM). Going by this, a new operator like Uninor whose licence has been cancelled can only remain in the Indian market if it pays R18,110 crore to get 5 Mhz spectrum. The company has already invested around R14,000 crore in the Indian market to create networks etc so far. It is anybodys guess whether the business case is viable for the company to take the plunge if these recommendations are accepted by the government in its present format.

Lets take the case of another new operator Sistema Shyam that operates in the CDMA segment whose licences have also been cancelled but is interested in carrying on business in India. Since the base price of the CDMA spectrum in 800 Mhz is double that of the GSM, the company will have to pay around R36,000 crore for procuring 5 Mhz spectrum. Since currently GSM operators are given a start-up spectrum of 4.4 Mhz and CDMA the half of it, Sistema would also have to pay R18,110 crore if it wants to retain its current spectrum.

To be fair, the task before Trai was a difficult one. If the reserve price was too low, the charge would have been that a sham auction is being conducted. A high reserve price is being criticised because it makes business unviable. A middle path would have been better, which has been abandoned in the recommendations since it seems that the ghost of 2008 was hanging over the regulator.

The logic is that the value of spectrum is high and operators paid high rates for getting 3G spectrum in 2010, so why complain now Here Trai seems to have got the historical perspective wrong. One cannot go back in time and correct the wrongs. The times were different in January 2008 when former telecom minister A Raja gave licences to nine firms at R1,651 crore. Spectrum was scarce and demand for it was at its peak. The Sensex was around 21,000 points, operators were adding anywhere between 12-15 million subscribers per month, a year back Vodafone had acquired Hutchs operations in India for a steep $11 billion. In short, telecom was a thriving business and there was enough money in the system to buy spectrum. Had Raja auctioned it then at the reserve price suggested by Trai today the results would have been different. Sadly, he shunned auctions.

Serious existing operators who were choking for spectrum saw it being given to a set of new operators at cheap rates and also crowding the market. They had no option to buy clean spectrum other than the 3G bids in 2010 where bids went high and the government garnered more than R1 lakh crore through sale of 3G and BWA spectrum.

Trais attempt seems to recreate that era once again. But times have changed. The operators who entered the market in 2008 at cheap rates have failed. They could not create any magic in the market and were looking for exit options. The court verdict shattered them even further. Of the nine, only two have publicly said that they want to continue with their operations in India. Rest have started winding up their operations.

Where operators were adding 12-15 million users every month in 2008, they are adding only around 6-7 million today. The liquidity in the system has also dried up and the entire telecom revenue model is undergoing a transformation, so to fix a base price of the yesteryears in todays scenario would not work. Spectrum, which was a scarce resource in 2008 and 2010, is in abundant supply today. According to Trai, the availability stands at 629 Mhz in the 1,800 Mhz band. The scenario is such that the supply is more than the demand and therefore to regulate it Trai has said that in the first batch only 110 Mhz would be auctioned. This is like a scenario where theres enough water but the government wants to regulate consumption.

Coming to the existing operators like Bharti, Vodafone, Idea etc, who also badly get hit by the current set of recommendations, sure, these firms have enough spectrum today to not participate in any auctions at such a high base price. Still most of their licences are coming up for renewal around 2013-15, and according to the new telecom policy they would have to pay for the spectrum they hold as per the auction prices. Going by this, rough calculations suggest that operators like Bharti, Vodafone and Idea would have to pay around R30,000 crore, R45,000 crore and R21,000 crore, respectively, as renewal charges for spectrum! Not only this, the 900 Mhz spectrum they hold by way of being early entrants, which is no more available would be taken back from them as per Trais recommendation and they would be given 1,800 Mhz instead. The 900 Mhz would then be auctioned at an even higher base price of R7,244 crore per Mhz. Rules of the game are being changed more than 15 years after starting operations in the name of level-play!

Trais answer to all such contradictions is that spectrum usage is being liberalisedyou can do 4G with 2G spectrum now onwards, allowing a 10-year payment period for the bid amount with an initial two-year moratorium, allowing mortgaging spectrum and limited spectrum trading.

The grave implications of these recommendations are that the two operatorsUninor and Sistemawhich want to carry on operations in India may not bid at all and may look at exiting the country and dragging the government to international tribunals to recover their investments. The existing ones would say its better to close down businesses and move to Tanzania. The result would be that auctions would get a bad name and critics of itthere are plenty of them within and outside the governmentwould then say that these do not work in India so lets allocate natural resources through some first-come-first served model.