Newspaper reports suggest that the auction for 2G spectrum, starting on November 12, will probably fail and end within a couple of rounds of bidding. The government then will miss its ambitious revenue target of R40,000 crore. This will hurt the credibility of several agencies such as the Telecom Regulatory Authority of India (Trai), the Department of Telecommunications (DoT) and, pertinently, the Comptroller and Auditor General of India (CAG). This will also be a serious setback for India?s already-struggling broadband markets. However, the outlook can improve if the government undertakes?and its detractors allow it?an urgent review of its approach to spectrum auctions.
Only six companies (Airtel, Vodafone, Idea, Tata, Telewings and Videocon) are bidding in the 2G auctions. Major players?Reliance (both groups), MTS, BSNL, MTNL, Aircel and Loop?and holders of licences that the Supreme Court cancelled are abstaining. New players are not bidding either, even though Indian or foreign companies?even 100% foreign-owned?can do so without first complying with several rules relating to licence and foreign equity. A partial exception is Telewings, formed after Telenor substituted its old partner Unitech with Sun Pharma.
Data released by DoT reveals that, based on earnest money deposits (EMDs) submitted by companies, none will qualify to bid for all the 22 telecom circles. Only Idea?s EMD comes close. No other company has submitted sufficient EMD to qualify for spectrum in even half the circles. If companies bid only partially since there is no obligation to bid even after submitting an EMD, government receipts could be even lower.
Metros and A circles, with high reserve prices, may see little bidding. Reserve prices are disproportionate to the current revenues, an important indicator of the value of spectrum in these circles. Major bidders such as Airtel and Vodafone already have the spectrum they need in these circles. Tata?s EMD is too small to bid for any such circle. Telewings seems equally unlikely to bid for them, in view of its modest EMD and its publicly-stated intention to attempt to regain its licences in the nine circles (B and C type) where it already has infrastructure investments. Also, other circles require relatively low EMDs. Videocon too could conceivably maximise the bang for its relatively small EMD by bidding for more B and C circles.
Given the level of interest in the auction, bidding players can expect to win the spectrum easily within 1 or 2 rounds. Old players can bid for a maximum of 2.5MHz and new players for a maximum of 6.25MHz. Reports suggest the auction will probably end in two rounds, except perhaps in some circles like Bihar and West Bengal where demand seems marginally higher. While irrational behaviour is possible, surprises seem unlikely.
This has lessons for future pricing of spectrum. When the price is unreasonably high, as in this upcoming auction, it will ensure that even serious players simply walk away. However, when the price is unreasonably low, as A Raja allowed in 2008, it attracts even real estate players like Unitech, Swan etc. When risks are shared between government and private players, as they were in 1999 after revenue-sharing replaced earlier upfront licence fees, both make big bucks.
The reserve price implies that Trai and DoT disagree. CAG?s calculation of a loss of R1.76 lakh crore (R1.76 trillion) to the exchequer by Raja?s award of under-priced spectrum is absurd because it assumes that all companies would have paid the full price in the auction. The nature of interest in the 2G auction demonstrates that Raja?s spectrum ?sale?, like bargain sales for clothes and appliances, encouraged people to buy a product they didn?t plan to use. Subsequent events have proved this.
Linking reserve prices to winning bids of previous auctions, without factoring in the changed circumstances, is illogical and dangerous. The current 2G reserve price, based on the earlier 3G auction, ignores key facts. High bids for 3G reflected not that companies saw huge revenues from data, but that they sought to mitigate the risk to spectrum supplies and future voice revenues resulting from Raja granting substantial new rights to spectrum by awarding 122 licences.
Administrative pricing lacks transparency. However, spectrum auctions in India show that transparency is necessary, but not sufficient. The decision by bureaucrats to allocate spectrum to operators based on number of voice subscribers was a disaster. It ignored data usage, when, in fact, expanding it should have been a priority and worthy of additional support. Irrational pricing of spectrum has hurt broadband growth, despite the auction of 3G spectrum for over R60,000 crore, which left companies indebted and spectrum underutilised.
The point is not to abandon auctions but to accept that high reserve prices pre-empt market-determined prices and deter serious players who bring quality investment. They hurt competition, our chief weapon for customer protection. Advance rent-seeking could kill nascent broadband markets in need of active development. Unless the designs of upcoming auctions, including those for 700 and 900 MHz, reflect this comprehensively, the telecom sector and broadband growth will continue to suffer.
The author is a telecom consultant