TRAI relies on Keynes, Carveth to justify lower spectrum pricing

The telecom regulator's decision to drop base price for spectrum may be good for telecom companies but what has changed since May 2012 that the regulator has had to revise its own stand within just 16 months.

According to the TRAI the circumstances have radically changed both for the telecom sector and the economy in general. “Moreover, given that the Authority had made recommendations on spectrum prices in 2010, 2011 and 2012, it became necessary to reflect on and question the premises on which those conclusions were based. This is never an easy task for any institution. As Lord Keynes observed, “The difficulty lies not in the new ideas, but in escaping from the old ones which ramify… into every corner of our minds”. The TRAI said in its foreword while recommending the price cut.

TRAI said that in all of a year, fundamentals of the economy have deteriorated. Consumer inflation remains high and growth has stalled and has fallen each successive quarter over the last year. The country faces an unsustainable current account deficit combined with serious fiscal constraints. The rupee has depreciated and remains under pressure. Manufacturing growth has virtually come to a standstill and the possibility of interest rate reductions has abated. Prospects of an economic revival are at least one to two years away.

Second, there are sector-specific changes. The telecom sector has been going through financial duress over the past two years. Unrealistic pricing and indebtedness have taken a huge toll. Operating margins have fallen drastically. Some companies have negative operating margins; leave aside interest and taxation, they are not even able to cover depreciation and amortization charges. In this setting, the operators’ willingness to pay for spectrum has been adversely impacted. Commercial banks’ exposure to the sector has reached prudential limits precluding their ability (despite willingness) to further finance the sector. And, from a larger macroeconomic perspective, there is the serious prospect of non-performing assets in the sector if steps are not taken urgently to prevent this.

Third, spectrum prices have been tested in the market place, not once but twice. In the second auction, there was only one taker for a particular band of spectrum, (that too after a 50% price reduction) and no takers for any other band; this is evidence as good as any of the market’s revealed preference. “This is a reality that needs to be factored into the current exercise. Equally, the Authority is conscious of the need to avert any possible collusive activity. That said, it also needs to be accepted that reluctance to bid in auction with a reserve price does not necessarily represent collusive intent; if the reserve price is set too high, it may dispel all bidders,” the regulator said.

Fourth, the estimate of losses based on presumptions has, in some measure, contributed to the pernicious atmosphere leading to the decision standstill. While no one questions that there was indeed a loss, the egregious estimates of losses that were initially bandied about to sensationalise the issue no longer carry credence. Within the Government, the lurking fears that motives will be imputed for any decision have had its own fallout. And, all of this has entailed real economic losses.

As these changes affecting the sector and the economy have taken place, the national mood has also altered. The downturn for our economy has clearly dimmed prospects for employment and income growth at the household-level. The media has already articulated the growing resolve to put the train back on the rails. The driving concern is to snap out of the trance of immobilised indecision. The shift in mood is tangible and a clear signal “to get on with it”: an urge to quick action and decision-making and a return to solving problems rather than being weighed down by them. The sense of national urgency for “getting back to business” has returned with a strong resolve to bring about the change.

“A successful auction will yield gains in efficiency. Moreover, a successful auction would augment overall spectrum availability, improve the quality of service, and enable Telecom Service Providers (TSPs) to plan for the future. There is another dimension to efficiency: If Government is unable to sell the spectrum on offer, it amounts to idling of a public resource. What public good is served by holding on to spectrum for which there is no other use? For a host of reasons, concluding a successful auction has become imperative," the TRAI said.

“The two recent auctions have revealed market information and preferences: while planning the third auction, one can ignore these facts only at one’s own peril. Clearly these developments have a crucial bearing on how we proceed, especially to the extent that the assumptions and premises on which the pricing of spectrum was originally based have been invalidated. Analytical flaws and proof of failed hypotheses must be borne in mind when formulating any new approach. Ceteris paribus simply does not hold. As Lord Keynes is reported to have said, “When the facts change, I change my opinion. What do you do, sir?”

TRAI sad setting reserve prices are part science and part art. “The driving consideration throughout this paper has been Carveth Read’s observation that, “It is better to be vaguely right rather than exactly wrong”.

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