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Getting spectrum pricing right

THOMAS K THOMAS
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There can be no going back to the first-come-first served model for allocating spectrum. — K.K. Mustafah
There can be no going back to the first-come-first served model for allocating spectrum. — K.K. Mustafah

The Government needs to iron out flaws in the auction design – and not reject the auction process.

Ever since private operators were given telecom licences 18 years ago, the Government has been grappling with one aspect — how to allocate spectrum and at what price. And each time it takes a decision it seems to get it all wrong.

Back in 1994, when telecom licences were being given out for the first time, a flawed auction design allowed non-serious players to bid astronomical sums of money and then default on payments. The Government was forced to convert the auction fee to an annual revenue share under a New Telecom Policy in 1999.

Three years later, in 2002, the same operators were given additional spectrum on a subscriber-linked criteria without any upfront fee. This was the first time anywhere in the world when spectrum was given based on the number of subscribers. Now the current Government, as if to rectify a mistake, wants to impose a one-time fee on all operators who got additional spectrum over the last ten years.

In 2008, the then telecom minister A. Raja decided to give away 122 licences on first-come-first-served basis at throwaway prices to a few players, despite having as many as 40 players waiting in line. These allocations were later cancelled by the Supreme Court on grounds of impropriety.

Auction’s the way

The latest efforts to allocate spectrum, this time through an auction mechanism, have once again failed. 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.

Except for Bihar, the auction got over in the rest of the 21 circles at the base price. There were also no takers for CDMA spectrum in the 800 Mhz band. Bidders and analysts have blamed the high reserve price for the damp squib.

It seems that the Government just can’t get it right when it comes to pricing spectrum. In 2008, when there were as many as 40 applicants, pan-India mobile spectrum was given on first-come-first-served basis for Rs 1,650 crore each. In 2012, when there were only five players interested in buying spectrum, pan-India spectrum was given through an auction with a minimum price tag of Rs 14,000 crore.

To be fair, spectrum allocation and pricing is a complex task, more so in the Indian market where operators have entered at different points of time with different entry fees. But it’s not rocket science either.

There is significant international experience by now to prove that auction is the best way to allocate spectrum in a fair and transparent way.

The recent auction failed because it had a flaw in its design. The first thing the Government must do is to kill the thought of reverting to the first-come-first-served policy or subscriber-linked criteria.

Auctions ensure efficient use of spectrum by allocating it to those entities that value it most.

Viable business models

The key challenge, therefore, is to design auction in such a way that it meets Government objectives and at the same time offers operators a viable business model. For this, the first thing is to set the reserve price at a level that reflects the market condition.

A high base price for spectrum is like taxing upfront investments made by a manufacturer of goods. Auction should attract more new players to prevent collusion among existing operators for which the base price should not be very high.

The Government could also look at other auction models where the operators have to pay a flat upfront fee, fixed at a reasonable level to keep out non-serious players, and then the bidding can happen on various parameters based on Government’s objectives.

For instance, if the objective is to ensure mobile services to the rural and unconnected areas, then the bidding could happen on the contribution to the Universal Services Obligation fund. All telecom companies currently pay 5 per cent of their revenues to this fund. The operators who promise a higher revenue share to the fund can be given the spectrum.

The bidding can also happen on rollout obligation, with the spectrum being given to operators who agree to reach maximum geographical area in shortest time.

The selection can also be done on the basis of annual profit share. At present operators pay a share of their annual revenues to the Government as licence fee and spectrum usage charge. Operators bidding higher share of their profit, instead of revenue share, can be given spectrum.

Scrap one-time fee

Apart from the auction design the Government would do well to de-link the outcome of the auction to the one-time fee to be collected from incumbent players.

The Empowered Group of Ministers has decided to impose a one-time fee on all operators with more than 4.4 Mhz GSM spectrum and 2.5 Mhz of CDMA spectrum.

The fee will be extrapolated from the final bid price of the auction. This linkage forces the incumbent players to sit out of the auction.

Ideally, the one-time fee should be scrapped as it tantamounts to changing the rules of the game mid-way.

Operators were given spectrum by the Government, rightly or wrongly, based on subscriber-linked criteria for a 20-year period and it could be seen as detrimental to investor confidence if a fee is collected now.

In any case the fee must be de-linked from the spectrum auction to get aggressive bids from incumbent players.

The Government has already announced that the next round of auctions will be held before March 2013. In this round, the Government should focus on selling spectrum in the four circles where it did not receive any bids, by lowering the base price.

In other circles where it has unsold spectrum, the auction should be done only a year later. Otherwise, the telecom companies who have bought spectrum in the latest round of auction at a high base price could claim a reduction in their bid price, which is not desirable.

After cancelling 122 licences, the Government now has over 500 Mhz of spectrum available in the 1800 Mhz band but it had put only one-third of it for sale in the recently concluded auction.

The balance has been reserved for re-farming 900 Mhz band from incumbent players when their 20-year licence gets over. The Government should change its strategy on re-farming by putting all spectrum available in the 1800 Mhz band on the block one year from now.

Simultaneously, the auction for 900 Mhz band should also be held so that the incumbent players can exercise their option to buy spectrum in either of the bands.

To make more spectrum available for re-farming, the unsold airwaves in the CDMA- 800 Mhz band could be made technology neutral and offered to those who want to deploy next generation technologies.

(This article was published on November 18, 2012)
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