1. Spectrum auctions 2015: A resounding success or a Pyrrhic victory?

Spectrum auctions 2015: A resounding success or a Pyrrhic victory?

Trying to maximise revenue from auctions chokes the other revenue streams and larger potential economic benefits

By: | Published: March 19, 2015 3:10 AM

The Great Indian Spectrum Auctions are moving on like a juggernaut and the yield to the exchequer is over R1 lakh crore and still counting. Much is the excitement in many government circles over this and many are the satisfied smiles over the expected healthy impact on the fiscal deficit. However some small voices are persistently raising the nagging doubt as to whether this is a really great win or actually a Pyrrhic victory. These do make us ponder on some fundamental aspects.

What is spectrum and why all this fuss over it? Spectrum is a set frequencies or waves (unit = Hertz, or Hz) that are available in the environment. It ranges from the very low frequencies like electric rays to very high ones like X-rays or gamma rays. Frequencies of 300 MHz to 3 GHz, called the ultra high frequency (UHF) range, are radio frequencies, used for carrying voice and data messages. In fact, spectrum is the very lifeblood of mobile telecommunication. However, radio frequency spectrum, like land or property, is a very finite resource for any nation.

With the technological advancement of mankind and the growth in mobile telecommunication requirements, the demand for the finite spectrum resource has grown explosively. Keeping in mind the fact that spectrum—as ruled by the Supreme Court in 1995 in the matter of the Government of India (I&B ministry) vs Cricket Association of Bengal—is actually public property and the government is merely its custodian or caretaker, it follows that auctions become the only reasonable, open and transparent method of efficiently allocating this scarce resource.

Hence, most governments tend to use this method only to assign rights to private parties for commercial exploitation of spectrum for providing public telecommunication service. Moreover, governments are fond of looking to the auction proceeds as a way for reducing their fiscal deficit. And, herein lies the rub.

Many are unaware or tend to forget that auction proceeds are not the only revenues to the government that accrue from spectrum. There are at least nine streams of revenue flowing to the nation’s coffers from spectrum that is in use—spectrum usage charges, licence entry fees, licence revenue share, sales tax, service tax, customs duties, Octroi and excise duties, corporate taxes, etc. Moreover, there are also multiple revenue streams arising from handsets and network equipment which happen only due to spectrum being put to active use. Idle spectrum or its delayed or inefficient use would not provide these gains. By trying to maximise the upfront revenues from the auction, one tends to surely choke or throttle the much larger gains and economic benefits from all the other revenue streams.

Several researches—by ICRIER, World Bank, London School of Economics, to name a few—have shown the direct relationship between increased telecom penetration or tele-density and GDP growth. The ICRIER India-specific study showed that for every 10% increase in tele-density in our country, the GDP rise, on an average, is about 1.2%. This is indeed a huge potential benefit through the many ways in which better access to telecom improves efficiencies and productivities. We can therefore ill afford to ignore or underplay the importance of optimal allocation of spectrum.

It was stated earlier that auction is the most open and transparent method of allocating spectrum. However, there are auctions and then there are auctions: It is arguable whether the current auctions have been designed right. It is fairly well known that the Telecom Regulatory Authority of India (Trai) had strongly held views and recommendations with regards to several aspects of this auction, including the inadequate supply of spectrum, the risk of predatory competition, the necessity of including the 15 MHz of “swap” 3G 2100 MHz spectrum, etc. Various telecom consultants and industry experts have also raised serious concerns about this auction. There is a general perception that the government is myopically aiming to make the maximum immediate revenues from the auction rather than take a holistic approach that provides the maximum economic benefit to the consumers, the economy and the nation. It should be remembered that a classic Analysys & Mason research, relied on by Ofcom (the telecom regulator of the UK), showed that of the total economic benefit from mobile services, 80% is due to consumer surpluses and only 20% to producer surpluses.

Not auctioning the 15 MHz of 3G spectrum is itself a huge debit to the economy. A similar quantum of 3G spectrum was delayed earlier, from 2005 to 2010. In May 2011, ace economist, Professor Thomas Hazlett of Fairfax, Virginia-based George Mason University, the US, had opined that “the social losses from delaying spectrum allocation are likely to overwhelm whatever social gains are associated from the immediate public finance dividend from auctions”. He went on to estimate that if the 3G spectrum had been allocated in 2005 instead of finally in 2010, then the Indian GDP would have been higher by nearly $26.3 billion (PPP). He pointed out that mobile voice services would likewise have benefited if spectrum had been more readily available. Summing up, Hazlett observed that “the mid-point estimate yield income increases perhaps $31.3 billion (PPP) annually from more productive use of spectrum”.

One could go on.. It could be shown that the 478 MHz unsold spectrum cost the nation over R2.5 lakh crore in unrealised economic benefits. It could also be shown that the current withholding of 15 MHz (3G) spectrum is itself costing us more than R1 lakh crore, thereby negating the yield from this auction.

Thus, aren’t we stuck with a Pyrrhic victory, missing a huge economic benefit of several lakh crore of rupees, the industry’s debt burden increasing from R2.5 lakh crore to a whopping R3.5 lakh crore with the industry saddled with the winner’s curse, consumers groaning under increased tariffs, and rollout delays? Wouldn’t the aam aadmi be hurting grievously? Wouldn’t the vision of Digital India be damaged? I am reminded of the closing lines of Robert Southey’s famous poem After Bleinheim (on the Battle of Blenheim):

“But what good came of it at last?”
Quoth little Peterkin.
“Why that I cannot tell,” said he,
“But ’twas a famous victory.”

The author is Honorary Fellow, Institution of Engineering and Technology, London

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