Related spectrum must be auctioned together

Updated: Nov 25, 2014 2:25 AM

There is no reason to continue with the plans to separate the auction of intimately related spectrum

The ministry of defence (MoD) and the Department of Telecommunications (DoT) have reportedly made a major breakthrough on spectrum. The respective ministers met to discuss pending issues and reportedly agreed that 15 MHz of 3G spectrum currently with the defence will be swapped with an identical amount of 1900 MHz spectrum currently held by DoT. While details or a formal agreement may not have been worked out yet, the new in-principle agreement arrived at a ministerial level can go a long way to resolving current challenges and prevent serious mistakes.
The 2100 MHz is valuable 3G spectrum and is in great demand from operators. The new spectrum can now augment the limited amounts of 900 MHz and 1800 MHz spectrum that will be freed up by mobile licences expiring in roughly a year; DoT planned to auction this right away. The Telecom Regulatory Authority of India (Trai) has argued that such an auction, without additional spectrum, could lead to dangerously high bids that could put the whole sector at risk. Its recent recommendations say bluntly that there is “obvious and compelling need to make available additional spectrum for the conduct of a fair and equitable auction.”

It will take time before the agencies can assign the promised 3G spectrum. However, an early auction is a priority and not problematic. DoT’s reported view that there is insufficient time to include it in a combined auction flies in the face of spectrum management practices in India as elsewhere. Governments and regulators do not typically regard the immediate availability of spectrum as a prerequisite for auctioning it. They are comfortable auctioning it in advance if the spectrum in question can be made available in an acceptable time-frame. An early auction could make commercial sense too, if auction winners are expected to pay large sums upfront as they do in India. Indeed, the 3G auctions in 2010 illustrate both points. The Notice Inviting Applications (NIA) explicitly stated that the spectrum would be available only in September 2010 and the winning operators paid 100% upfront. Similarly, spectrum auctioned in February 2014 was assigned eight months after its auction. There are several instances where the operators have yet to receive spectrum for use in all parts of their services areas, long after they won the auctions. Globally, in the US, 700 MHz digital dividend spectrum auction (Auction 73) took place in January 2008 with the government’s commitment to release the spectrum in February 2009 (this actually happened in 2009!).

An early auction is important because it brings for its winner the all-important legal right and comfort that it will have spectrum to deploy in an agreed time. This enables a wireless operator, for example, to undertake several steps critical to the business. For instance, critical and commercially sensitive decisions relating to choice of technology can now be taken. They depend critically on amount of spectrum available, its type, quality (contiguous or fragmented) and its price. For example, such factors can determine whether an operator deploys 1800 MHz spectrum for 2G or 4G services. The risk for an operator taking technology decisions, without clarity on the spectrum he can deploy, is enormous. This is especially true for Indian operators, since the government is their only source of spectrum and spectrum trading is not legal. Spectrum uncertainty can lock a company into unsuitable technologies for several years and hurt its business, often irretrievably.

Timely auction of spectrum also offers the much needed regulatory predictability. Governments are key players in allocation, pricing and the use of spectrum. The rights to use spectrum can require investments running into thousands of crores of rupees. In 2010, winning bidders paid nearly R1 lakh crore upfront for the 3G and BWA spectrum auctioned. It is in everybody’s interest that the investors feel confident making such massive investments.
Combining the auction of 900 MHz, 1800 MHz and 2100 MHz spectrum makes sense far beyond the obvious increase in amount of spectrum being put to bid. The high demand for these frequencies is inextricably linked since they all support mobile broadband. The 900 MHz and 2100 MHz spectrum both support 3G services. And 4G (LTE) services are increasingly being deployed in the 1800 MHz band. They are central to operator’s plans as they move from their current focus on voice to broadband data services.

Trai has argued strongly in favour of combined auction of these frequencies. Its underlying economic and technological analysis reflects many of the same assumptions. India’s networks are sparse and largely narrowband. This cannot change unless operators have incentives to expand and upgrade networks. The ambitious Digital India programme cannot succeed without nationwide broadband. Also, since India has little fixed infrastructure to support broadband, it has a unique stake in wireless technologies and spectrum management. Poorly designed spectrum auctions—segregated ones for different frequencies undoubtedly are an example—present a serious risk. They can hurt precisely those areas and people who it is already less profitable to serve. Trai has consistently warned against a piecemeal auction of spectrum despite the short-term gains to the exchequer from the high bids in the auctions. They seem be fuelled not by the inherent scarcity of spectrum but by an approach which exploits it to maximise revenues.

It’s important that the Telecom Commission takes the right call on Trai recommendations. The Commission, a body with no comparable expertise or process to Trai’s recommendations, has frequently overridden or opposed the views of the statutory expert body. It is worrying that most of its interventions and reversals of Trai’s recommendations are limited to the impact of the regulator’s proposal on revenues of the exchequer. Such a limited approach could be especially damaging.

The dangers of ignoring Trai’s recommendations are easy to see. DoT can avoid these dangers, thanks to MoD’s willingness to release the 2100 MHz spectrum. There is no reason to continue with its earlier plans to separate the auction of intimately related spectrum. If it persists, the benefits of the landmark agreement between the two ministers could disappear.

Mahesh Uppal

The author consults on regulatory issues
mahesh.uppal@gmail.com

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