With the Government sacrificing public interest in pursuit of political mileage and revenue, the consumer has lost out.

The Telecom Ministry has failed for a second time in the last six months to allocate spectrum in a manner that would strike a balance between public interest, market efficiencies and greater revenue for the Government.

If the 2008 decision to give out 2G licences on first-come-first-served policy was fraught with charges of corruption, the latest attempts to auction spectrum have ended in a series of damp squibs, prompting many to wonder if the auctions were wilfully designed to fail.

The key questions, therefore, are why the auctions failed, and who gains as a result of the failure.

High reserve price

When the auctions held in November ended in a flop show, everyone said that the high reserve price was to be blamed. Pan-India spectrum was given through an auction with a minimum price tag of Rs 14,000 crore. Of the 176 blocks of GSM spectrum (each block equal to 1.25 Mhz), the Government received bids for 101 blocks.

There were no bidders for key markets such as Delhi and Mumbai, which were once considered among the most lucrative telecom markets in the world. The auction ended in two days, at the end of which the winning bid amount was the same as the reserve price set by the Government before the auction started. There were also no takers for CDMA spectrum in the 800 Mhz band.

After operators and analysts criticised the auction design, the Government dropped the reserve price for GSM spectrum by 30 per cent and CDMA spectrum by 50 per cent for another round of auction supposed to be held in March.

But this time the auctions ended even before they started with only one telecom company showing interest for bidding. Sistema Shyam submitted its application to bid for CDMA spectrum in the 1800 Mhz band. There were no takers for GSM spectrum despite the Government slashing the base price by a third.

Flawed assumptions

Messing up spectrum pricing and allocation is not new to the Department of Telecom. Since private operators were given telecom licences 18 years ago, DoT has had multiple opportunities to get the spectrum allocation policy right. And each time it seems to get it wrong.

Back in 1994, when telecom licences were given out for the first time, a flawed auction design allowed non-serious players to bid astronomical sums and then default on payments. In 2002, operators were given additional spectrum on subscriber-linked criteria without any upfront fee. This was the first time anywhere in the world spectrum was given based on number of subscribers. In 2008, the then telecom minister A. Raja decided to give away fresh licences on first-come-first-served basis at throwaway prices to a few players, despite having as many as 46 players waiting in line.

The mistake the policy makers committed in each of these instances is that they did not make the right assumptions about information related to bidder resources, risk-acceptance and -aversion, and the structure of bidder preference. These matter because they imply things about how the real world operates. The past ten years of spectrum allocation policy have amounted to an experiment that demonstrates that the assumptions on the basis of which spectrum allocation were done fail dramatically in their prediction of real-world outcomes.

Take the latest instance where the Government repeated its mistake of trying to fix a reserve price aimed at filling the exchequer’s coffers. After the November auction managed to fetch only Rs 9,400 crore, compared with expectations of Rs 40,000 crore, one would have thought that the Government would let the base price be fixed based on market realities.

If in 2008 there were more than 40 applicants interested in entering mobile telephony business, today the market has changed dramatically with most operators servicing huge debts, thus struggling to remain profitable.

Politics at play

Rather than guessing the final value of spectrum, the Government would be better off letting the market forces decide the actual price based on future prospects. The Department of Telecom has announced that it will conduct another round of auction this year wherein it plans to pool in all available spectrum in the 1800 Mhz band. While this greatly reduces entry barriers, the next thing to do would be to fix the base price at around Rs 4,000 crore based on the reserve price fixed in 2010 for 3G auctions.

Apart from the auction design, the Government should de-link the outcome of this auction to the licence renewal charges and the one-time fee to be collected from incumbent players.

Under the current plan, incumbent operators whose 20-year licence is set to expire from 2014 onwards, will have to pay a renewal fee based on the final price arrived at this auction. The same operators also have to pay a one-time fee for holding excess spectrum.

This fee will also be extrapolated from the final bid price in the next round of auction. Logically, this linkage forces the incumbent players to sit out of the auction because the higher the bid price, the higher they have to pay for spectrum they currently own. This explains who gains from a failed auction.

The telecom ministry seems to be playing along with this impasse because it suits the Government politically.

After the 2G scam broke out, the Comptroller and Auditor General’s observation that the Government could have earned as much as Rs 1.76 lakh crore if the spectrum was auctioned has been used by opposition parties to push the Congress-led UPA alliance into a corner. After two failed rounds of auction, that line of attack has been blunted to some extent.

But amidst all this it is the telecom consumers who are the losers. While the world is zipping away on the information highway, majority of Indian consumers don’t have access to basic Internet services.

The Government now has over 400 Mhz of spectrum which, if allocated prudently, can fire up the broadband revolution in the country. In sacrificing the public interest in pursuit of political mileage and greater revenue we have arrived at the worst of both worlds.

Spectrum auctions have neither served the public interest nor realised the efficiencies and revenue maximisation. Hopefully, the Government will turn it around in the third round of auctions slated for later this year or else it will be three strikes, which in baseball parlance means Out!

(This article was published on February 27, 2013)
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