Wanting 4 times the 2015 auction value will kill telcos
With the telecom industry in the kind of trouble it is in right now, any government looking to help revive its fortunes would have addressed the high cost of spectrum—along with its scarcity—as well as the exceptionally high levies imposed on telcos. Fixing the industry’s fortunes is, of course, important if telcos are to be able to deliver world-class service to an India which is now consuming data in ever-increasing amounts. Instead, what the telecom regulator (Trai) has gone and done is to try and kill the goose that lays the golden egg. The telecom industry is, no doubt, a money-spinner for the government—apart from the Rs 22,000 crore or so that the government gets by way of licence/spectrum-usage fees every year, it got Rs 109,000 crore in the March 2015 auction, Rs 61,000 crore in the February 2014 auction and Rs 106,000 crore in the June 2010 auction. But by expecting telcos to, in 2016, fork out more than four times the amount they did in last year’s auction, the Trai is virtually ensuring the industry dies a quick death. Based on just the reserve prices in the 700 MHz and 2100 MHz spectrum bands—35 MHz is to be auctioned on a pan-India basis in the first band and 15 MHz in the second one—the 2016 auction is expected to fetch Rs 460,000 crore.
By putting 35 MHz of 700 MHz spectrum along with 15 MHz of 2100 MHz spectrum on auction, Trai has addressed the issue of shortage of spectrum. But, as in the past, it has used the price discovered in the last auction as the reserve price for the next one—in other words, the industry has been put on a fast-speed escalator where, after each auction, the industry will bleed even more; and given that auctions are being held each year, industry has no time to recoup from its injuries. So, in the 800 MHz auction, the government got Rs 5,400 crore or thereabouts per MHz of spectrum—this was 1.8 times higher than the reserve price. Instead of pegging its 2016 reserve price for the 800 MHz spectrum in relation to the reserve price in the 2015 auction, it has increased the 2016 reserve price to around R5,900 crore. In the 900MHz band, where the auction price was just under twice the reserve price in the last auction, the auction price in 2015 has been made the 2016 reserve price. The killer, of course, is the 700 MHz spectrum reserve price which has been put at more than double that of the reserve price for the 800 MHz band though both bands have similar propagation characteristics and, worse, there are no reasonably-priced handsets in this band. Given this irresponsible behaviour of the telecom regulator—which seems to think its primary job is to get more money for the government —the government would do well to reject the recommendations. Both communications minister Ravi Shankar Prasad and finance minister Arun Jaitley—and their boss, Narendra Modi—would do well to keep in mind that if telcos are going to be arm-twisted into paying larger and larger amounts for spectrum each year, the amount left with them to invest in infrastructure is going to be minimal; that means the quality of calls/internet will only worsen, not improve. You would have thought the telecom regulator would have done its best to recommend reasonable reserve prices and lower licence/spectrum charges, perhaps even remove the spectrum caps, but it has made things worse.
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If the Telecom Regulatory Authority of India (Trai) has its way, financially burdened telcos could end up bidding more than four times the Rs 1,09,000 crore they bid for spectrum a year ago. This, at a time when telcos are under pressure to invest more capex to improve the quality of their networks, not just to take care of call drops but to be able to handle the data traffic that is increasing every day.
If the auctions go through — it is up to communications minister Ravi Shankar Prasad to accept the recommendations — telcos will be bidding an astronomical Rs 4 lakh crore for just the 700 MHz spectrum which has excellent propagation qualities but for which there is, as yet, no reasonably priced equipment available.
Theoretically, telcos can choose not to bid for the 700 MHz spectrum, but if one firm bids — say, an RJio — it will be difficult for the others to not participate in the auction rounds.
It is difficult to understand how the telecom regulator has arrived at its reserve price of Rs 11,485 crore per MHz of spectrum in the 700 MHz band since the 800 MHz band has a reserve price of under half at Rs 5,955 crore per MHz.
While it is true the band is better than the 800 MHz one, the propagation characteristics are not so superior as to command double the price. More important, apart from high-end devices like the iPhone, few other phones work on this band — in which case, it will be a few years at least till the ecosystem is mature enough for this band to have real value for telcos.
Though there is little justification for this, Trai has followed the practice of using the auction price in the last auction as the reserve price in the next auction. In the last 800 MHz auction, the government got Rs 5,400 crore or thereabouts per MHz of spectrum — this was 1.8 times higher than the reserve price. Instead of pegging its 2016 reserve price for the 800 MHz spectrum in relation to the reserve price in the 2015 auction, it has increased the 2016 reserve price to around Rs 5,900 crore.
In the 900 MHz band, similarly, where the auction price was just under twice the reserve price in the last auction, the auction price in 2015 has been made the 2016 reserve price. This principle of last-auction-price-equals-new-reserve-price has been followed in other bands like 1800 MHz and 2100 MHz as well, though in both these cases, the 2015 reserve and auction prices were not too different from one another.