No real rationale for spectrum pricing, and changing spectrum block sizes also arbitrary
Communications minister Ravi Shankar Prasad would do well to take a close look at the Telecom Regulatory Authority of India (Trai) recommendations on spectrum pricing since, in their current form, they make little sense and, in fact, will prevent players like Vodafone and Idea from offering 4G services on a pan-India basis. This newspaper has already written on how the price recommended for 700 MHz spectrum band is irrationally high—buying all 35 MHz on offer at even the reserve price will cost over Rs 400,000 crore as compared to the Rs 290,000 crore that the government has mopped up in five auctions since 2010.
More important, there is no reasonable rationale for why the 700 MHz band is valued at almost double that of the 800 MHz spectrum band, especially when the propagation properties of both bands are not too different and, most important, while there are several reasonably-priced phones available in the 800 MHz band, there are just a few high-priced devices for the 700 MHz band—in other words, the 800 MHz band is a better one to buy today; the 700 MHz band will take a few years to mature, which is why most telecom operators were in favour of holding back on its auction.
The recommendation, it appears, is based on one made by the Trai way back in 2012—this said the 700 MHz band should be priced at 4 times that of the 1800 MHz band—and has been accepted by the regulator in 2016 “in absence of any other better approach”. Actually, there was a better approach since the auction last year had given a value for the 800 MHz band spectrum (around R5,400 crore per MHz) and the 700 MHz band could have been put at around that level.
It turns out, as analysts point out, the 2012 recommendations by Trai weren’t that scientific either. Trai used the auction prices of 700 MHz and 1800 MHz bands in various European countries and then applied this same formula to India. First, as has just been pointed out, there was no reason to apply some European formula when an auction in India had given perfectly good results. But, even this was not applied properly. While Trai used a factor of 4, this differed from 28.5 in Germany to 3.1 in Italy, 1.4 in Portugal and 1.8 in Sweden. Why didn’t Trai take the German number or the Italian or the Portuguese one? If you take the average of all—and there is really no scientific reason for doing even this—you come to a value of 2.8. How, and why, Trai chose a number of 4 is a mystery, and communications minister Ravi Shankar Prasad would do well to ask it for an explanation.
Apart from the fact that a regulator cannot just put a price on the basis of a whim, the high price has serious repercussions. Firms like Vodafone, for instance, have enough spectrum to offer 4G services in just 4-5 states, apart from the lucrative markets of Delhi and Mumbai. In such a situation, Vodafone may still have bid for 700 MHz band if the price was reasonable, but at this price, it would be suicidal.
Fortunately, after the protest that the move would benefit primarily one non-incumbent operator (RJio), Trai has given up on its earlier proposals to club all sub-1GHz spectrum into one band, and do the same for the 2300 MHz and 2500 MHz bands. Right now, there is an overall cap of 25% which means no telco can own more than a fourth of all spectrum across all bands. In addition, there is a 50% band cap for each individual band such as the 800 MHz one, or the 900 MHz one, and so on.
Kotak Institutional Equities has a good explanation for what would have happened had all the sub-1 GHz bands been clubbed for purposes of the 50% cap. There is roughly 35 MHz of spectrum in the 700 MHz band, 15 in the 800 MHz band and 20 in the 900 MHz band—which means that no telco can hold more than 17.5, 7.5 and 10 MHz of any of the bands. Put them together—that’s 70 MHz of spectrum—and any one telco can theoretically own all the spectrum in the 700 MHz band or all the spectrum in the 800 MHz and 900 MHz bands put together. Relaxing the caps, as this newspaper has argued, is a good thing since higher amounts of spectrum lead to large efficiencies in usage and lower costs dramatically. Also, if an operator has more spectrum in the same band, as opposed to across bands, the costs of electronics also reduce significantly. The problem, however, is that this can’t be done half way through a process since five auctions have already taken place under the earlier rules.
What’s been done in the latest recommendation, however, is quite similar in the sense of being arbitrary. Just 40 MHz of spectrum has been auctioned in the 2300 MHz band, of which half is with RJio. Since another 20 MHz is to be auctioned in 2016, RJio can’t buy any of this—the bids are in blocks of 20 MHz, so were RJio to win, it would have 40 MHz and thus violate the 50% cap. By now recommending that auctions in the 2300 MHz band take place in blocks of 10 MHz instead of 20MHz, RJio can participate in the auction. Once again, a telco being able to get more spectrum in a band is a good thing, but if one tweak can help an RJio, another tweak can be done to help a Bharti Airtel and a third can be done to help a Vodafone or an Idea.
With the Trai having made its recommendations, it is up to Prasad to help fix the sector as he has over a period of time—from ensuring 15 MHz of 2100 MHz band spectrum was released for commercial use by the defence ministry to clearing spectrum trading and sharing norms that were stuck for years. Apart from the fact that Prasad needs to take another look at relaxing the caps across all bands—not just one or two as the Trai had proposed—he needs to augment spectrum supplies.
Deciding not to auction the 700 MHz band will be easy, but what is needed is more spectrum. Prasad has been pushing for harmonisation of the 1800 MHz band—this can immediately release around 2 carriers of 5 MHz each across most circles in the country—but this has got stuck for some reason; he needs to push it again. He also needs to relook the high 13% charges for license/spectrum fees since telcos are paying such huge entry costs and scrap the 1% SUC for BWA spectrum while all other users in other spectrum bands pay 5%(this is the one part of the Prashant Bhushan PIL that makes sense, bit.ly/1OZPorL). Above all, he needs to explain to the Trai—and the nation—that the Trai’s method of last-auction-bid-equals-next-auction-reserve-price is a recipe for disaster since it locks India’s telcos in a death spiral of higher and higher prices. The telcos certainly cannot afford it—without a significant hike in user charges which, in turn, hits Digital India—and if they go belly up, chances are the PSU banks that have lent to them will also be in trouble.