Trai has repeatedly got it wrong, and not just on auctions, but govt continues to blindly follow its recommendations. Govt must relook its approach if the farce is to stop
The Department of Telecommunications has sought reference on holistic aspects of the matter, including entry fee, licence fee, bank guarantee, spectrum usage charges etc.
It is easy – even if correct – to blame the telecom regulator, Trai, for the dismal failure of the just-concluded spectrum auction where just around a third of the quantity of spectrum was sold, and for less than a fifth of the value the government was hoping to get; though telecom minister Ravi Shankar Prasad tried to put on a brave face and say that the final proceeds of Rs 77,815 crore were greater than what the government expected, if that were true, why would the government put Rs 392,000 crore of spectrum on the block?
As it happens, this is not the only auction that has bombed; if you take all the auctions conducted since 2012, around 44% of the spectrum has remained unsold. While 67% of the spectrum remained unsold in 2012, this rose to 85% the next year and while it fell after that, no auctions were held after 2016 till the one that has just concluded.
The reason for auction failure, as this column has documented over the years, is that Trai’s model has been one that ratchets up spectrum prices deliberately. In 2010, when a limited amount of 3G spectrum (2100MHz) was auctioned, the massive shortage of spectrum – and the bullishness over the new 3G technology – ensured that the bid price for Delhi reached Rs 663 crore per MHz as compared to the reserve/base price of Rs 64 crore; Mumbai was auctioned at Rs 649 crore and had the same reserve price. So, in 2012, when 1800MHz spectrum had to be auctioned, even though it was used for 2G services, Trai decided to use the 3G auction as the base and set the reserve price at Rs 717 crore for Delhi and Rs 702 crore for Mumbai.
The auction failed and, in 2014, Trai slashed its recommendations, to Rs 175 crore for Delhi and Rs 165 crore for Mumbai. That auction, as it happened, fetched Rs 364 crore for Delhi and Rs 272 crore for Mumbai. This then became the reserve price that Trai recommended in 2015!
Similarly, despite using various models to make its reserve price-setting exercise look well thought out (https://bit.ly/3qirIIE), Trai essentially uses old auction bids and indexes this using inflation to arrive at the new reserve price. In the auction of the 700MHz spectrum that was to fetch the maximum money this time around, the Trai’s miscalculation was much worse. In 2016, Trai used some odd logic to argue that the band should cost around four times what the 1800MHz band did (Rs 11,485 crore per MHz for pan-India spectrum vs Rs 2,644 for the 1800Mhz band), never mind that it should have been priced close to what the 800MHz band did (Rs 5,819 crore) considering they were so similar; when mistakes were pointed out in Trai’s calculations, it lowered this to two in the next auction!
But all of this is well known, just as the Trai’s bias and the adverse comments that the telecom appellate tribunal, Tdsat, and the Supreme Court have made from time to time on the regulator’s functioning (read https://bit.ly/3bYyGgI and https://bit.ly/3bVQo4f). What remains unclear, though, is why the government has done nothing about it; indeed, in a first for any regulator in the country, the then Trai chief RS Sharma was even given an extension when his term was over, suggesting the government was quite happy with his work.
Given Trai’s track record, surely the Digital Communications Commission (DCC) – a group of powerful secretaries that takes all decisions on telecom policy in the country – could have lowered the reserve prices to more realistic levels? And, if the bureaucrats in the DCC didn’t want to take a chance of being accused of favouritism, surely the Cabinet should have taken this call? If all that the government needed to do was to rubber-stamp what the Trai said, you don’t need either a telecom minister or the Cabinet; while an individual minister may worry about taking a decision that can be questioned later, taking it to the Cabinet makes it the prime minister’s responsibility.
Indeed, most of the problems the sector is facing today, and that includes massive amounts of government dues being at risk, are due to a failure of the Cabinet to take a decision at the right time. Despite it being obvious that the AGR issue was becoming bigger by the day, this was allowed to move back and forth between various courts instead of a Cabinet-stamped solution. Had a suitable solution been worked out, as in 1999, all parties could have been asked to withdraw their cases and there would be no AGR problem; the net present value (NPV) of what telcos owe the government on AGR is a whopping Rs 138,000 crore and over a third of this is on account of the troubled VodaIdea.
Similarly, though the NPV of VodaIdea’s dues on account of spectrum it had bought is Rs 62,000 crore – this is nearly half what all telcos owe the government – the government persists with the policy of letting telcos pay the money over time instead of all of it upfront. While this may make life a bit easier for telcos, it ties the government’s future with the health of the telcos as, if the telcos go bust, the government can stand to lose all its dues; theoretically, it can get this by reauctioning the spectrum the telcos hold, but it is unlikely it will get that kind of money given the industry’s finances.
Indeed, while the government is protecting itself by saying it retains the right to confiscate the spectrum in case a telco is unable to pay its dues, the flipside of this is government-owned banks are in serious trouble. Many of them lent tens of thousands of crore rupees to telcos on the assumption that they had the lien on the spectrum; once again, the government not being able to take a decision on this is worrying.
Even if the government doesn’t want to scrap license fees and spectrum usage charges – though it should given these were introduced in lieu of market prices for spectrum – it has to change its approach towards the sector. Since the Trai system, for instance, is clearly not working, a solution needs to be found. And there are too many pending issues – as indeed there are in sectors like electricity – that are crippling the sector. Till recently, it could be said the Narendra Modi government wasn’t fully focused on the needs of business. Over the past few months, however, that seems to have changed; so some quick decision-making in telecom has to be top priority.