Welcome rethink on spectrum pricing PDF Print E-mail
Saturday, 17 February 2018 00:00
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As the Niti Aayog chief says, revenue maximisation of government revenue can’t be the main criterion

But don’t use absurd telecom bids to bash Vinod Rai ... you can auction even water with the lowest-price as the bid parameter. In telco case, it was govt greed that did everyone in


Given the havoc the government’s auctions of telecom spectrum have wrought on the industry, it is good to hear NITI Aayog vice chairman Rajiv Kumar saying the government is rethinking its approach to spectrum auctions and wants to balance the objectives of using natural resources for revenue raising and ensuring economic development at the same time. In his words, “this is the beginning of a process whereby you don’t try and always maximize government revenues … you may want to maximise development by bringing in greater benefits to citizens or to the private sector”.

Many economists and politicians like the Congress party’s Kapil Sibal for instance, have used the state of the industry to beat former CAG Vinod Rai, to argue that it was his vastly exaggerated `1.76 lakh crore notional loss theory that is the cause of this, and that many industries have been destroyed by it. In the past, Sibal et al argue, spectrum was given cheap and industry did well; Sibal even argued that distribution of spectrum at low—even free—prices kept telecom tariffs low. Once Rai’s report came in, the argument goes, spectrum had to be auctioned and prices went sky high and even coal/iron ore allocations were cancelled for the same reason that they were not competitively bid.

The argument sounds attractive, but is incorrect since auctions were never the culprit, it was the way they were designed that was the issue. Several other industries, like oil and gas, have similar auctions but never faced the kind of problem that telecom did. As for high auction bids causing tariffs to rise, just look at how telecom tariffs have collapsed since RJio came in, despite the astronomical values paid for spectrum in the past—tariffs are decided by competition and, even in the past like when Vodafone paid $11 billion to buy Hutch’s India operations, the competition ensured it could not raise tariffs.

The problem in telecom was the government did not auction enough spectrum in each round of bidding and, at critical times, by telling telcos their licences would be renewed only if they were able to buy fresh spectrum, it ensured crazy bids since telcos knew they would lose a significant chunk of their entire revenue base if they didn’t win the auctions. And the valuations bid for in these constrained-auctions were, by and large, used as the reserve prices in the next round of auction. So, in 2010, when 3G spectrum was auctioned, limited spectrum and industry exuberance ensured that in Delhi, for instance, while the reserve price for a 5 MHz slot in the 2100 MHz frequency band was `64 crore per MHz, the winning bid was for `663 crore. And when, in 2012, auctions were carried out for 1800MHz spectrum that telcos were planning to use for primarily voice traffic—3G spectrum was primarily for data services—the reserve price was at 3G-type levels of `554 crore per MHz.

While it is good to hear Kumar say the government is rethinking its position on auctions, it is important to keep in mind that you don’t have to sacrifice legitimate revenue needs to ensure the industry does well, just don’t be greedy in the manner the government has been and never conduct an auction without adequate spectrum, and after every auction, find a way to remove the irrational exuberance of the past or the impact of bad policy like the shortage of spectrum (goo.gl/RKpBKv has the nuts and bolts of such a policy).

The other thing to keep in mind is that, if the design is right, you can auction even water while keeping tariffs affordable or even subsidised. The main purpose of an auction is to ensure every bidder has the same chance of winning a licence; whether you want to ensure high revenues for the government or ensure the poor get a service or whatever is then up to you and can be assured through good auction design.

Take the most extreme case of water which is so essential, you’d pay anything to get it. If you were to auction water, the argument goes, the rich would drive up prices and the poor would never be able to afford it. So, as part of the bid conditions for an auction of the city’s water franchise, say, put in a condition that says every household must get 1,000 litres of water a day, or that there must be at least 6 hours of running water in each area, or that 35% of water must go to the slums … keep adding any condition you want, even specify that one litre of water cannot be sold for more than, say, 5 paise. The bidder who wins can then pay any price to the government—the more onerous the conditions, the lower the bid price—but consumer tariffs will remain low.

This is not utopian, it exists in real life. In the roads sector, India has a ceiling toll that can be charged on every expressway and investors bid knowing full well about this. In electricity, airports, ports and so on, bids are made knowing tariffs will be decided by the sector’s regulator, not by the winning bidder. So let’s welcome the government decision to try and fix the auction system in telecom—and hope that it genuinely happens, along with reducing the ridiculously high license/spectrum charges—but don’t for a minute blame auctions, or Vinod Rai, for any of the problems faced by various industries where natural resources are being auctioned.


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