Let us examine the recent telecom
spectrum mess which has been widely reported. The genesis of TRAI
recommendations arose after the last two auctions announced by Government of
India for spectrum went completely bust with no participants for most circles.
The reason for above was high base price quoted by DoT which amounted to almost
INR 14000 crore for a 5 MHz pan-India spectrum. In theory, auctions are widely favoured as
aiding in price discovery where it is difficult to place a price on an asset,
however, it has been reiterated again and again that the reserve price or the
base price has to be rational and in tune with times. Rightfully, TRAI had suggested
a 37% cut in the base price for spectrum in the 1800 MHz band and up to 60% cut
in the reserve price of airwaves in the 900 MHz spectrum. However, DoT panel
has rejected the TRAI proposal and have questioned the pricing formula being
used by TRAI. We really need to examine this argument before we arrive at a judgment.
First, TRAI may have got the pricing formula incorrect as there is no sure shot
way of arriving at a number, however, the very design of auction has an inbuilt
mechanism of ensuring that price discovery happens. When TRAI lowered the
prices, at no point it meant that this is the final price, on the contrary it
was achieving its primary purpose of ensuring high level of participation in
the auction. Once auction is put in place, the market forces would take over
and assuming that the participants have greater incentive to get hold of
spectrum as compared to collusion (tacit or otherwise) the price discovery
would be fair. So a reduction in reserve price is by no degree tantamount to
selling spectrum cheap by any standards.
The second issue of interest here
is the spectrum usage charge (SUC). Presently DoT charges 3-8% of the revenue
as SUC, but TRAI had proposed a flat charge for the same, which has also been
rejected by DoT. The argument given by DoT is that older players own cheap,
pre-auction bandwidth and so it does not give a level ground for the new
players who need to invest in costly spectrum. This argument if examined from
an economics perspective, does not hold as the new players are making
investment knowing fully well that incumbent players have inherent advantages.
If the new players are keen to invest, it would be based on some future outlook
and earning potential that they see in telecom sector. If the new players
cannot compete with the incumbents on any parameter, they are better off
sitting out of the market. Besides, most licenses given 20 years ago are anyway
coming for renewal and they are not going to go any cheaper as the firms in
business would need to protect their investments made over the years not to
mention the fact that they would anyway need spectrum to be in business.
However, if we look at the argument from a business cycle perspective, it holds
more value. Three years ago the 3G spectrum raised over 1 lakh crore for the
government. At the time, the general macroeconomic outlook was bullish and
telecom firms anticipated high value business from data intensive services
through 3G. However, the scenario never really played out and the firms ended
up being in huge debt with deteriorating network and service quality. However,
this business oversight cannot be blamed on the Government. At the end of the
day, firms bid those amounts anticipating huge revenues. If the economic
outlook today had been better, the firms would have again bid at astronomical
prices. But having said that, this does not mean that DoT should offer these
firms, spectrum at lower prices just because economic outlook is gloomy. A year
down the line when the environment improves, it may result in higher returns
for the firms at a high cost for the exchequer. So what is the way out?
It has been proved beyond doubt
that whenever telecom auctions have been conducted across the world with very
high reserve prices (examples of UK, and other countries in Europe are a case
in point), this leads to either lower penetration of the costly service (with
high price being passed on to the consumers) or no uptake by the telecom firms
citing high prices. A better way out is to keep a reserve price may be on a
lower side but argue for a higher percentage of revenue share in the form of
SUC as it ensures that money keeps flowing both during crests and troughs.
Moreover, lower one-time payment enables firm to keep the service charges
rational to ensure greater penetration of telecommunication services.
