Column : Why telcos are in love with auctions

Written by Rishi Raj | Updated: Jan 28 2012, 08:21am hrs
If top telecom honchos like Bharti Airtels Sunil Mittal

and Reliance Communications Anil Ambani along with other bigwigs met telecom minister Kapil Sibal twice in the last two months, its not without reason. Its not just former telecom minister A Rajas beneficiaries who are nervous about how the future will pan out;

older operators also feel the same.

Remember that of the R1.76 lakh crore loss estimate of the Comptroller and Auditor General in the 2G scam, R36,993 crore was due from older operators who have got extra spectrum beyond the 6.2 Mhz the licence guarantees.

While older operators such as Bharti, Vodafone, Idea, etc, argue that they got the spectrum as per the prevalent policy of the day, which linked spectrum

allocation to the number of subscribers an operator had, the matter was referred to the Telecom Regulatory Authority of India (Trai), which said that the licence agreement allows spectrum allocation of only up to 6.2 Mhz bundled with the licence. While any further allocation is valid, the government is free to charge for it. It also came out with a formula by which the price of spectrum up to 6.2 Mhz was calculated at around R1,769.75 crore per Mhz and beyond it at around R4,571.67 crore per Mhz.

In December, the Telecom Commission decided that every operator was to pay for spectrum beyond 4.4 Mhz. While the newer ones would pay when they seek additional spectrum beyond 4.4 Mhz, the incumbents would pay for the remaining tenure of their licence period. The amount would be determined by auctions but until the time the modalities and timing of it is decided the incumbents would pay circle-wise either the Trai-determined price or the 3G price, whichever is higher in the concerned circle. If the auction price is lower, the government will refund the balance amount.

Payment criteria for spectrum beyond 6.2 Mhz is harsher. Here the operators would pay by the same formula explained above but it would be on a retrospective basis, i.e. from the date on which the excess spectrum was allocated, which is 2002. Further, here there would be no adjustment with the final auction price.

Going by this formula, the operators would easily have to pay upwards of R30,000 crore. This is the reason that now all of them are saying that please auction the available 2G spectrum to determine the rates. However, the principal difference over paying for extra spectrum and the formula arrived at remains. The new-found love for auctions and unanimity amongst the new and older operators on it has arrived because they know that today theres no scarcity of 2G spectrum and therefore the prices in any bidding would not go as high as they went in 2010 when auctions for 3G spectrum were held.

The math is simple. Consider this: As on date, the total allocated 2G spectrum stands at 1,385.8 Mhz. The Raja licensees were allocated around 668.8 Mhz of spectrum 2008 onwards. The government can today vacate 439.6 Mhz of spectrum and, going by the pending applications of the operators, the demand for spectrum stands at 616.2 Mhz. This leaves a demand-supply gap of only 176.6 Mhz. However, if the licences given by Raja are cancelled or theres an exit policy given to the operators as the government has said or till theres consolidation through a liberal merger and acquisition policy, the bulk of the 668.8 Mhz spectrum would get freed, making the supply far more than demand.

This apart, the new telecom policy talks about spectrum-sharing. So, in the interim, the operators can go for spectrum-sharing instead of getting into a bid war, thus driving down the price of spectrum. For instance, if the demand-supply mismatch is highest in Delhi, visualise a scenario like this: Bharti today requires 1.2 Mhz in Delhi while Etisalat DB is sitting on 4.4 Mhz but has no subscribers. It makes sense for Bharti to share the spectrum rather than enter into a bid war. Further, the incumbent operators are also sitting on 3G spectrum which can be used for voice so theres no great desperation for 2G spectrum at a very high price.

The option before the government is simple: If it really wants to discover a truly market-determined price of 2G spectrum, it needs to first set a high base price for the spectrum. Second, auction of all the available spectrum should not be done at one go but should be staggered.