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Trai has no logic, best to ignore it PDF Print E-mail
Monday, 15 July 2019 04:49
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Thanks to it, Indian spectrum most expensive in the world; its favourite model is to use the last bid as the new base price

 

Not surprisingly, given its history of pushing for progressively higher spectrum prices, Trai has reiterated its high reserve price for the 5G spectrum that the government hopes to be able to auction this year. Based on the views of the Digital Communications Commission (DCC), the Department of Telecommunications (DoT) had asked Trai to relook its recommendations, since the government was keen to provide affordable 5G services to everyone and because, since there were just three private telecom players now, the demand was likely to be muted.

Given this is not the first time Trai has refused to budge from its recommendations—indeed, it just did the same in the case of the Rs 3,050 crore penalties on Airtel, Vodafone and Idea—the ball is in the DoT/DCC’s court, and it is to be hoped that they exercise it quickly. Thanks to Trai’s high reserve prices, in 2012, 67% of the spectrum on auction couldn’t be sold and this rose to 80% in 2013 and has averaged 38% since 2010. In FY17, while the government budgeted Rs 98,995 crore in telecom revenues, including auctions, it got just Rs 70,241 crore; it slashed its expectations to Rs 44,342 crore in FY18, but got just Rs 30,736 crore. It is, though, unfair to blame Trai alone as DoT also played its role and, on several occasions, it didn’t release enough spectrum and in some other cases, it said telco licences wouldn’t be renewed if they didn’t buy spectrum; this forced telcos to bid even more aggressively.

The problem with the Trai recommendations, apart from the fact that they result in India having the world’s highest-cost spectrum, is that there is no logic to how the pricing is arrived at; and once whatever methodology is used, it isn’t used consistently either.

In 2010, when a limited amount of 3G spectrum (2100MHz) was auctioned, the bid price for Delhi, for instance, was Rs 663 crore per MHz as compared to the reserve/base price of Rs 64 crore; Mumbai was auctioned at Rs 649 crore and had the same reserve price. So, in 2012, when 1800MHz spectrum had to be auctioned, Trai decided to use the 3G auction as the base and set the reserve price at Rs 717 crore for Delhi and Rs 702 crore for Mumbai. DoT lowered the reserve price but the industry was so cash-strapped, the auction failed; in 2014, Trai slashed its recommendations, to Rs 175 crore for Delhi and Rs 165 crore for Mumbai; the auction fetched Rs 364 crore for Delhi and Rs 272 crore for Mumbai. This then became the reserve price that Trai recommended in 2015! In Andhra Pradesh, similarly, the Rs 163 crore per Mhz auction bid in 2014 for the 1800MHz band got recommended as the reserve price in 2015; when the bid came at an even higher Rs 243 crore, this became the reserve price for the 2016 auction.

In 2018, Trai decided to try some new methods to estimate what the reserve price should be. It had a revenue-surplus model, for instance—since this means looking at what telcos will profit from each unit of spectrum, it made sense. In the case of 1800MHz, Trai got a price of Rs 3,004 crore per Mhz for a pan-India licence using a ‘producer surplus’ model, Rs 1,653 crore using the ‘revenue-surplus’ model and Rs 1,450 crore using the ‘production function’. Though the results were so disparate, Trai used an arithmetic mean of various results. And, after all that, it went by what it called the ‘achieved price’ in October 2016, and ‘duly indexed’ this using the SBI lending rate. In the case of Delhi, for instance, the revenue-surplus model determined a base price of Rs 128 crore per MHz in the 1800MHz band, Rs 206 crore in the production-function model and Rs 713 crore in the multiple-regression model; surely, as a regulator, Trai should have told us which was better, and why? And even though the arithmetic mean of all models was Rs 368 crore, what Trai recommended was the Rs 457 crore that was based on the 2016 auction, duly indexed by the SBI lending rate. In which case, why even have a Trai, just apply the index to every auction?

 

Nor is it that the indexation is done each time; the 2014/2015/2016 examples given earlier didn’t do this. In the case of the 5G auctions, though, this was done. The 2016 auction bid for 1800MHz was multiplied by 1.15 and the result was multiplied by 0.3 as the efficiency of the 3300-3600MHz spectrum was considered to be 0.3 times that of the 1800MHz band. Once you divide this by India’s population, India’s spectrum is perhaps the cheapest in the world. Ideally, however, the cost of spectrum has to be juxtaposed with the revenues earned, since Indian tariffs are also very low. Once you do this, at $0.0035 per MHz per unit of revenue, India’s spectrum costs are amongst the highest in the world; 54 times those of Germany, for instance, and 6 times those of the UK.

The DoT/DCC need to take into account the near-complete absence of logic, indeed arbitrariness, in Trai’s pricing and quickly fix an appropriate price. Till DoT/DCC also take a call on, simultaneously, lowering the exceptionally high annual licence fee charges, though, it is not clear that this will be enough to ensure a successful auction. And, for the future, Trai needs to rework its model to ensure both consistency and logic.

 

 

 

 

 

 

 

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