TRAI adds to the spectrum of confusion
The telecom regulator has tried to provide a roadmap for future auctions but its recommendations are likely to create new problems instead of solving old ones
By Paranjoy Guha Thakurta
Photos: Vijay Pandey
A substantial section of the telecom industry is up in arms against the Telecom Regulatory Authority of India (TRAI) over its 23 April recommendations on auctioning and “refarming” scarce — and hence, precious — electro-magnetic spectrum that has followed the Supreme Court’s order on 2 February cancelling 122 licences that were issued in an illegal manner from January 2008 onwards. Whereas much of the fractious telecom industry has come together against the TRAI’s recommendations, there are three notable exceptions: Reliance Industries (headed by Mukesh Ambani), Reliance Communications (led by his younger sibling Anil Ambani) and Tata Teleservices (headed by Ratan Tata). Therein hangs an interesting tale.
This is a story that paradoxically epitomises the best of deregulation and the worst of crony capitalism. This is a story replete with suggestions of conspiracy. Cutting through the technical jargon that is used selectively and often to obfuscate, a few issues clearly stand out. The three corporate groups mentioned stand to gain the most if the recommendations are accepted in full by the Centre, which, of course, may not happen. At the same time, significant sops have been offered to the three big incumbents, Airtel, Vodafone and Idea, despite their cribbing.
What the TRAI’s recommendations implicitly signify is that the government, namely, the Department of Telecommunications (DoT) will continue to “hoard” spectrum and will effectively play the role of a “broker” rather than that of a “developer”. As for the proverbial aam aadmi, especially those in villages and remote areas, the consumer is at the receiving end and is certainly going to end up being the biggest loser — even as corporate captains desperately lobby to influence the Empowered Group of Ministers led by Finance Minister Pranab Mukherjee that has to ensure that the auction process is completed by the end of August, the extended deadline set by the apex court.
Among the many recommendations contained in the 178-page TRAI report, the four most contentious ones are:
1. The fixing of the “reserve price” or the base/floor price for auctions at Rs 3,622 crore per megahertz (MHz) in the 1,800 MHz band and Rs 7,244 crore per MHz in the 900 MHz band for all-India licences (covering 22 telecom circles or geographical areas), which are roughly 10 times higher than the prices of spectrum paid from 2001 onwards.
2. The “liberalisation” of spectrum or the granting of freedom to an operator to use any technology or service — second-generation (2G) or 3G or 4G — in the allocated spectrum band rather than specifying a technology as part of the licence conditions.
3. The “refarming” or reallocation of spectrum from the more efficient and powerful 900 MHz band to the 1,800 MHz band ostensibly to ensure that the most efficient spectrum is used to provide the most modern services (mainly 3G and 4G) such as high-speed data transfer and mobile television.
4. The less-talked-about recommendation of the TRAI is to slash the spectrum usage charges levied on existing 2G operators from a low of 3 percent of adjusted gross revenue (AGR) for 4.4 MHz of spectrum to a high of 8 percent of AGR for 15.2 MHz of spectrum or an average of 5-6 percent for the “big three”, Airtel, Vodafone and Idea, to 1 percent of AGR if the operator pays the current market price for spectrum that is administratively assigned.
The controversy that has been generated by the TRAI’s recommendations is a direct consequence of the sins of the past revisiting the telecom industry, the government and the regulator — for either turning a blind eye or actively colluding with the now-disgraced former telecom minister A Raja (who has been in Tihar Jail since 2 February 2011) and his cohorts who used an opaque process to deliberately misallocate and undervalue spectrum.
Claiming that a cartel had to be broken, the DoT under Raja gave 122 licences (which have been cancelled) to operators who managed to obtain barely 12 percent share of the total Indian market over the past four years. As telecom expert Mahesh Uppal points out, “By creating an extraordinary situation of spectrum scarcity, the incumbents had to bid high for 3G spectrum in June 2010 to secure future supplies of spectrum that have now become the artificially-high reserve price for spectrum recommended by the TRAI.”
He adds that while the government did not spend a paisa from the $20 billion it obtained from auctioning 3G and broadband wireless access (BWA) spectrum in 2010 for developing telecom networks and used the money to bridge the budget deficit, what the TRAI recommendations end up doing is add huge costs to the industry without adding benefits to consumers.
It is not as if the big boys of telecom are a bunch of saints. The “big three” with Uninor and Videocon wrote to the government calling for 80 percent reduction in the auction reserve price on the ground that consumers would otherwise have to pay 25-30 percent for their services without explaining how the two are linked. A few points need to be noted. Spectrum is only a small part of the total expenses of an operator. The TRAI argues that call rates will go up by just 2-3 paise per minute, which operators claim are gross under-estimates. Over the past three years, inflation has been around 30 percent. Last year, market leader Airtel increased call rates by around 10 percent and others duly followed.
As Rekha Jain, professor at IIM, Ahmedabad, explains, by coming out with a framework of auctions for all spectrum bands together, the TRAI has attempted to provide a roadmap for future auctions so that bidders may assess which bands they wish to participate in, how much to pay and when it would be opportune for them to enter the fray.
But many are of the view that the recommendations will create more problems that they solve. First, only one block of 5 MHz in the 1,800 MHz band and another in the 800 MHz band (the exact size of which is unclear) have been opened for auction. This means only 44 licences can be issued in each block and since there are 22 telecom circles, only one operator using GSM (global system of mobile) technology and one using CDMA (code division multiple technology) could obtain spectrum from the auction. “This is a poorly designed auction,” says Uppal, adding that more spectrum blocks need to be offered to enable existing and new players to participate in the auctions.
An industry source points out that TRAI has effectively blocked a large quantum of available spectrum of 162 MHz in the 1,800 MHz band and 172.5 MHz in the 1,900 MHz band for refarming that can be executed only in stages over a 10-year period as licences of existing players (of 20-year duration each) start expiring from December 2014 onwards and therefore cannot be used for deployment of new technologies. “It is criminal to block such a scarce resource for such long periods,” he says, adding that the DoT should not be “hoarding” spectrum like a “broker”.
Why are the “big three” complaining when they stand to gain from a sharp cut in spectrum usage charges? “These three have in the past managed to ensure that the policy regime works in their favour and now this has become a convenient ploy to divert attention,” says the head of a rival telecom firm who spoke on the condition of anonymity.
There are many other problems with the recommendations. Jain and others say that reserve prices have been incorrectly calculated on the basis of relative propagation characteristics based on the experience of six European countries. Moreover, it is argued that it will be inaccurate to link valuation of spectrum in the 800/900 MHz bands with that in the 1,800/1,900 MHz bands using only propagation characteristics. Even if it is assumed that propagation characteristics are the only basis for valuation of spectrum, the same logic has not been extended to spectrum in the 700 MHz band.
The industry source quoted earlier says refarming of 800 MHz spectrum to the 1,900 MHz band would entail making 60 million-odd mobile handsets redundant. He says that the TRAI has itself acknowledged that 2G spectrum has the highest number of devices — 2,500 in the 2,100 MHz band, against 50 in the 700 MHz band and 719 in the 900 MHz band.
Uppal points out that unlike coal, spectrum is a finite but inexhaustible resource that can be recovered at the stroke of a pen, as the Supreme Court did with its 2 February order cancelling 122 licences. He is of the view that the government should be more focussed on ensuring transparency in spectrum allocation than on pricing while ensuring that rights are not given in perpetuity.
At the end of this convoluted story, what is clear is that the two Ambani siblings and Tata could not be unhappy about the fact that their rivals (Sunil Mittal and the CEOs of Vodafone and Idea) could become considerably weaker if the TRAI’s recommendations are implemented. “It’s like aerial bombing the industry with the hope that old incumbents would be hurt and a few players benefited,” a source contended.
As for telecom minister Kapil Sibal, whose zero-loss theory on the 2G scam was shot to smithereens by the apex court, the telecom market promises to become murkier still.
The writer is an independent journalist and educator and a petitioner in the 2G scam case