2G Auction A Planned Disaster

Whether the recently concluded 2G auction is a failure or not will always be a debatable topic. Unlike developments in other industries, the issues pertaining to telecom, be it the scam related to 2G license allocation in 2008 or the freshly concluded airwaves auction, have become an issue of national interest. From the sectoral ministry, to regulator to CAG to RBI to political parties-both in power and opposition-and the industry, along with the judiciary, everyone has something to say about the telecom affair of the country. And that's not all, they have also gone ahead with fixing the price of this scarce natural resource according to their own interpretation and calculations.

Whether it's a loss of `1.76 lakh crore or a 'zero loss' to the exchequer will always remain controversial. But what the entire government and the industry stakeholders missed in the entire drama is if any of their actions is helping the industry move forward on a positive note or providing better services to its citizens.

If seen from one angle, then at end of the auction no one is happy. The government collected `9,407 crore instead of its own projected `40,000 crore...a huge loss. The Finance Ministry expected to minimize the fiscal deficit from the revenues collected from this auction, their hope's shattered. 122 licenses were canceled and the telcos expected to get their licenses afresh and continue with their business but most of them stand nowhere. And finally, the subscribers, who always wish to get cheaper services and affordable handsets, will now be at the mercy of operators who are planning to increase tariff, citing their new investments into the industry by way of buying more spectrum as the reason.

What was surprising was the immediate reaction of the government post the disastrous spectrum auction. “Mr CAG where is the `1.76 lakh crore?,” asked Manish Tiwari, Minister of Information and Broadcasting, immediately after the auction concluded. As if the entire spectrum auction exercise was to prove the CAG wrong and justify telecom minister Kapil sibal's 'zero loss' theory. “This must be the first government of the world which is celebrating its defeat. The auction for 2G which did not yield the desired amount is a failure of the UPA government. But instead of accepting its own follies it is blaming the CAG, CVC, the Supreme Court and everybody else,” BJP spokesperson Prakash Javadekar said. It seems the entire exercise was well thought out to even prove the apex court wrong and send a message-'let us do our business and you do yours.' It, even without going deep into the intricacies, seems that the government knew about the outcome of the 2G auction, that it would not get its own-projected `40,000 crore. Not only the government, even the industry knew that the auction would not last more than two days. Bharti Group chairman Sunil Mittal could even predict that the auction might end in just one day and that too, one week before the actual auction took place!

The Plot

The macro view of the current happenings in the Indian telecom sector, in particular, the steps taken by the executive suggest a contrasting picture of the government against what has been shown . Off-late the steps taken by the policy makers in the telecom arena have actually uprooted the new players like weeds from the legacy market of the incumbent players like Bharti, Vodafone etc. This eradication helps the government save its name by making the auction fail, questioning the entire genesis of the 2G scam.

On February 2, 2012, the Supreme Court ordered 122 UAS (Unified Access Service) licenses issued on or after 10.01.2008 to be quashed, spectrum allotted to be canceled, asking Trai to give fresh recommendation for the allotment of the same.

Trai gave its recommendations on auction of spectrum on April 23, 2012 stating the availability and procedures for allotment of spectrum. The government, after rounds of deliberations, put forth the spectrum in 1,800 MHz partially for auction. The government did not accept these recommendations in totality. The most vital part of these recommendations was that the reserve price suggested by Trai was for liberalized spectrum which permits use of spectrum for providing any service under any technology.

However the government has chosen to put restrictions on technology use and has mandated the use of technology. The government has auctioned the non-liberalized spectrum for GSM, CDMA,WCDMA, LTE technologies. By restricting the use of technology, the government has auctioned the non-liberalized spectrum spectrum as recommend by Trai. This has killed the interest of the potential takers.

In today's environment when technology in the ICT sector is developing at a galloping pace, no investor would like to be bound by restrictions on technology and be at the mercy of bureaucracy each time it wants to introduce new technology in the market. Worldwide, most of the advanced and developing countries realize this fact and do not pose unnecessary hurdles like these in the proliferation and advancement of power technologies.

On the other hand, the government has not put forward the whole of the spectrum to be vacated on cancellation of 122 licenses but has made available only 10 MHz of spectrum in most of the circles . On top of this, the reserve price for the non-liberalized spectrum auctioned has been kept close to the true market value of liberalized spectrum. In addition, the condition that the new players can bid for not less than 4 blocks of 1.25 MHz, that too with no guarantee whether these blocks will be contiguous, has further discouraged new participation as it restricts the use of technology. This, along with the permission to incumbents to take one block which empowers them to wipe out the competition in the bidding process, has totally eradicated the new participation.

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Besides, the government has deliberately not taken any action on implementing the long pending Unified Licensing Regime before this auction. This has further increased the hesitation among new players in entering into a contract on allocation of spectrum which is contingent upon the license which does not exist as on date. Thus, once bitten twice shy, no new player is ready to take the risk on uncertain licensing conditions-because of the flawed policies of the government.

This is not all, the government further killed the competition and safeguarded its interest by providing, in the information memorandum for auction in 2012, that foreign companies would have to participate through Indian companies as partners only, unlike the 3G and BWA auction held in 2010. This gave the foreign players very little time to form joint ventures before filing the applications. This killed the interest of the foreign inverters considering the regulatory problems faced by Qualcomm or for that matter Telenor's conflicts with Unitech. However, to save themselves criticism, the (Finance Minister) government, much later, liberalized the norms for foreign participation, and even for the external borrowing, which was of no use as the same was done at the eleventh hour thus leaving hardly any time for those concerned/interested to respond effectively.

In addition, the government had first denied any financial relief for the canceled licensees on the grounds of the entry fee of `2,658 crore already paid by them. On the eleventh hour, the government declared that the entry fee money of such parties will be adjusted from the successful bid amount. Had these amendments in the policies been declared at the time of the bidders' meetings, this auction could have seen better participation, at least from those whose licenses are due for cancellation.

With so much of uncertainty surrounding the auction policy, no new player could have been interested in entering the Indian telecom market. After all, nobody wants to swim in troubled waters.

The result was that no bidders appeared for the 800 MHz spectrum auction. Those who applied had withdrawn the application before the start of the auction. In the 1,800 MHz spectrum auction, there was limited participation of 5 applicants wherein most of them were old incumbent players. The participation from old players was evident by the fact that this auction was to fix the one time spectrum charge on their existing spectrum holding and thus, there aim was to cartelize and keep the auction prices closest to the reserve price.

Besides the auction, the incumbents have been protected quite nicely from paying for the excess spectrum beyond the contractual amount held by them for the entire period of holding. The government has declared the retrospective charge to be from 2008 and not backwards. Moreover these players have also been promised to be allowed to retain 2.5 MHz of the spectrum in the highly precious bands of 900 MHz, after their licenses expire. The fast track mode of this decision again indicates the favoritism towards the incumbents. Had this assurance not been given before the auction, various circles like Delhi would have definitely seen demand for 1,800 MHz spectrum from the players whose licenses are closing termination and would have to vacate the 900 MHz band.

After dirtying the waters, the government is now saying that there was no 2G scam. While analyzing the events one can clearly see that the impact of all these newly drafted policies is that the telecom markets which actually saw rational pricing policies of 'per second billing' and amazing tariff declines of even below one paise per second, are back to square one with incumbents empowered back to cartelizing for pricing. Rather, they have now been equipped with a valid rationale that spectrum costs have gone up. As a result, the Indian customer is once again going to be burdened with high tariff, which was never the intent of the judgment of the supreme court.

The Killer Factor

Irrespective of industry standings and affiliations, stakeholders of the industry, be it experts or associations, even the planning commission vice-chairman Montek Singh Ahluwalia attributed the auction disaster to the high base price of the airwaves.

Ashok Sud, secretary general, AUSPI said, “The reserve base price set by the government was too high. The government should take the entire ownership rather than blaming Trai for it. As the government had full mandate to revisit the recommendations made by Trai.”

“Operators like Telenor and Videocon had no option but to come and participate in the bidding and save their business and support their investment. So, in a way, they were forced to put in their money,” he added.

“All along the COAI has maintained that the reserve price was guaranteed to have a detrimental impact on the auction. The COAI had stated that the high reserve price would ensure that there would be limited players coming into the market to bid, and had also indicated that there would be extremely muted bidding with several circles having no bidders at all. The root of the problem lies in the procedure adopted by the government in executing the auctions. Moreover majority of the bidders are actually operators who have lost their licenses and are compelled to participate in the auctions despite the high prices and the limited availability, simply in order to sustain their customers, businesses and to protect their years of investments. Finally, the limiting of spectrum available for auction which, contrary to the Supreme Court's ruling, added to the sense of uncertainty and fear of irrational bidding for many potential bidders,” a COAI statement said.

An official statement from Vodafone said, “Vodafone firmly believes that the entire spectrum that is currently unused (800 MHz, 900 MHz and 1,800 MHz) should be put on auction at the same time with a much lower reserve price. The spectrum auction should be held simultaneously for all the service areas.”

Speaking about the win, Mr. Himanshu Kapania, managing director, Idea Cellular said, “The high reserve prices notwithstanding the need and desire to ensure continuity of service to our subscribers was upper most in our mind.”

Showing concern over the high reserve price for the auctions, the company said that in the overall analysis the high reserve price and several large markets remaining unsold, will prove to the government that though spectrum may be an infinite resource, it certainly does have a finite price, and increasing the reserve price to stratospheric levels will not result in any greater value being realized.

“The results of the spectrum auctions are not too surprising, especially looking at the current economic climate, poor investor sentiment, significant existing debt burdens on the telcos and low relevance of 2G 1,800 MHz spectrum in the country,” said Abhishek Chauhan, senior consultant, ICT Practice, Frost & Sullivan. “The outcome of the 2G spectrum auction was absolutely on expected lines. As the reserve price was so high, the telecom players didn't find much economic viability to bid for spectrum at these prices. Further, post the legal uncertainties faced by the industry, the global telecom players must not have been enthusiastic to bid for spectrum on an aggressive basis.

In a country with 120 crore population, there are already 100 crore mobile connections. There may not be much upside demand in the over-crowded and over-saturated telecom industry at this point.

Prashant Singhal, partner in a member firm of Ernst & Young Global echoes the sentiment. He said the results of the auction clearly indicate that the reserve price was completely off the mark, with one of the interested operators also not pitching for the circles that they had committed to participate publicly.

“The government's plan of earning `40,000 crore has fallen flat and it would now need to go back to the drawing board with respect to 800 MHz and Delhi, Mumbai and Karnataka on 1,800 MHz to figure out the market driven price. All in all, a big embarrassment for the Indian government but one could see it coming, and a big disaster,that could have been avoided by a more sensible reserve price,” he added.

Govt Could have Collected `20,000 crore

The high reserve price was the biggest factor that doomed the auction and shattered the government's expectations of getting `40,000 crore. Had it been a more thought out process and the reserve price much lower, the government could have collected more revenue than it got. According to Voice&Data calculation, if the base price was halved from the current reserve price of `14,000 crore, the government could have collected around `14,000 crore. If the government's base price were ¾ of the current base price, the exchequer could have collected around `20,000 crore, that too just at the base price.

Other Alternatives

The key challenge, therefore, is to design an 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. An auction should attract more new players to prevent collusion among existing operators, for which the base price should not be very high.

Besides, other auction models should have been explored where the operators have to pay a flat upfront fee that is fixed at a reasonable level to keep out non-serious players, and then the bidding can happen on various parameters based on the government's objectives.

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