Telecom companies may well be right when they argue Trai’s new calculations that a R18,000 crore reserve price per 5 MHz of spectrum will only raise tariffs by 5-10 paise (some tables in the report, though, suggest a higher 10-15 paise) are not correct. The PWC study commissioned by telcos, for instance, spoke of a 20-25 paise hike, going up to 90 paise in the metros; that, even after the savage price cuts, 3G data packs cost 50-100% more than what 2G data packs cost is probably a function of the much higher spectrum costs. But they could just as well be wrong since, after it bought Hutch’s India operations for $11 billion, Vodafone did not raise tariffs. Which is why, the telcos’ strategy to argue against a R18,000 crore reserve price for the 2G auctions on grounds this would cause a dramatic hike in telecom tariffs was always a dicey one.
The real problem, however, is the manner in which Trai has gone and done its calculations. Trai, under its new chief, has sought to do an altogether more rigorous analysis of the impact of higher reserve prices on tariffs than the Trai had done under the previous chairman. Even the model being used is a different one. As the report puts it, “Some of these private analyses continue to use Annexures VII & VIII of the original recommendations as the basis for their commentary. It is pertinent that TRAI has moved well beyond that, using a far more sophisticated model for analysis.” If the model is different, surely a wider industry consultation would have been in order before the results were finalised? More so since, assuming the EGoM will take a decision on the reserve price based on what its tariff impact will be, surely the industry should have been given enough time to be able to react to the Trai analysis.
What is even more curious is the manner in which the reserve prices were arrived at. The original Trai recommendation shocked everyone since India’s price of spectrum was 10-20 times that in much richer OECD countries. The original Trai report said reserve prices were usually 0.5 times the final price globally, but it took a 0.8 value for India given the higher demand. While this was curious in itself, the new Trai report points out the ratio of reserve prices to auction prices follows no pattern—it was 0.004 for Germany in 2010, 0.03 for Hong Kong in 2011, 0.1 for Spain in 2011 and 0.45 and 1 for two South Korean auctions in 2011. In other words, every option seems to be open for the EGoM. A word of caution though: lower reserve prices in themselves don’t necessarily mean the auction bids will be low. Or high. They just mean the market needs to be allowed to decide instead of the government putting in an artificial floor.