It?s finally started?official deliberations on allocating 3G spectrum. The empowered Group of Ministers held its first meeting recently. Before the process is over, all decision-makers must agree to two things. First, learn the lessons from 2G spectrum allocation. Second, and following from the first, don?t allocate all spectrum at one go. If this is not done, taking spectrum allocation decisions out of A Raja?s sole purview won?t deliver the full benefit.
Spectrum for 2G was allocated by bundling it with the licence to operate telecom services. As and when operators meet a pre-defined per-circle number of subscribers, they are given additional airwaves. This process is years old. But why is it that only recently there have been such furious controversies over spectrum allocation? Because as the number of operators has increased, as competition has become tougher and as stakes have become higher, the infirmities of the system have been exposed more. Therefore, auction of 3G spectrum must not make the assumption that what looks okay initially will stay that way later.
The eGoM?s basic responsibility is to fix the slots. How the slots are fixed will determine the reserve price. Revenue considerations are paramount. But demand for spectrum has to outstrip supply, otherwise the entire purpose of auctions gets defeated.
Will this condition apply? It depends on the model the government chooses. DoT wants auction of 3G spectrum for only four slots in most of the telecom circles. One slot is reserved for state-owned MTNL and BSNL. So, under this model there will be five operators per circle who will get spectrum via auction. Most circles have around 7-8 operators. Therefore, under this model, there will be fierce competition to bag spectrum. The first mover advantage will be a big incentive. It follows that the reserve price need not be set very high. Competition will ensure the government gets good money.
The other aspect of this model is conserving some spectrum. Technology moves fast. DoT?s own estimate says India is five years behind in 3G technology. Newer technologies, including 4G, are coming up. If a certain amount of spectrum is conserved now, it can be offered to operators for newer technologies. This saves time and gets the government more revenue.
The alternative model is to auction whatever spectrum is available at one go and go for a higher number of slots. In certain circles, spectrum availability can accommodate 12 operators. This is not a case where the demand for spectrum will comfortably outstrip supply. So, the government will need to set a higher reserve price to try and maximise revenue, and there will be no real discovery of price. Indeed, it would be better to allocate spectrum to all operators on first come first serve basis and charge a flat fee.
In theory, both models seem to have merit, depending one one?s initial assumptions. But the 2G experience shows the second model has the potential to generate plenty of controversy, when competition in 3G will get stiffer, when newer technologies arrive and when it will be proved that when the government allocated the spectrum, it didn?t earn as much as it should have.
The first model avoids all this?by making bidding at the auction competitive, by guaranteeing high revenue and by keeping spectrum in reserve for later rush. The eGoM should have no doubt which model to follow.