Spectrum charges vs reserve price ducks the real issue
The EGoM’s decision to see whether hiking the annual spectrum usage charges can compensate for lowering the 2G auction reserve price from R18,000 crore for 5 MHz is a bizarre exercise in escapism. Theoretically, if higher spectrum charges result in a telco paying an extra R2,000 crore on an NPV basis, lowering the reserve price to R16,000 crore is revenue-neutral. But will spectrum charges be cut if the auction gives a bid price of R20,000 crore; and if a telco’s revenues fall short after 10 years, will it have to then fork out the balance? In any case, with 2-4% spectrum charges for the older 2G lot and 3-6% for the 3G lot, a third rate of spectrum charges is just compounding the confusion. More important, at the end of the day, the EGoM has not resolved the basic issue of whether the reserve price is a sensible one. Trai chief Rahul Khullar has said the reserve price won’t really hit the industry’s bottom line, but since the reserve price is based on the 3G auction bids which Khullar says were excessive as telcos read the market wrong, surely this means the reserve price is also excessive?
In any case, whether the telcos read the market wrong or whether they panicked after A Raja choked off all avenues for fresh spectrum, they have R2 lakh crore of debt right now—imagine what happens if you add another R1.5 lakh crore to this. And, while a key assumption made by Trai is that telcos will pay R18,000 crore over a period of time, the Telecom Commission has said this is not acceptable! More Trai assumptions debunked by the cellular operators association (COAI) include those on the minutes of usage—while these fell from 455 minutes in FY08 to 327 minutes in FY12, COAI says Trai has assumed they will grow to 410 by FY16. Similarly, COAI says Trai’s prediction that non-voice revenues will form half their revenues in metros in the next five years (10 for the rest of the country) is absurd since the share is stagnant at 12-14% for many years. The cellular industry’s points may not be valid, but surely the EGoM needs to hear it out, especially since Trai didn’t do the mandatory consultation required, even when it says it is using a brand new model to arrive at its conclusions.
But even if you get away from the tariff impact, the larger question is whether a reserve price should be fixed at, in this case, 0.8 times the expected bid price. Earlier, Trai had said the global average reserve-to-bid price ratio was 0.5 but it was taking a figure of 0.8 for India. While this was in itself arbitrary, Trai now points out the ratio 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, there’s no pattern. Sadly, the EGoM doesn’t seem to have even read this part of the report.