EGoM reserve price cut for 2G spectrum auction mere tinkering

The government committee set up to determine the reserve price for 2G, or second generation, spectrum auction has ended up merely tinkering with the telecom regulator’s recommendations on pricing. News reports suggest the committee, made up of ministers, will recommend a floor price of around Rs 15,000 crore for 5MHz of pan-India spectrum, lower than Telecom Regulatory Authority of India’s recommendation of a reserve price of Rs 18,100 crore.

Needless to say, even a price of $2.7 billion is high. But worse still, reports suggest the committee has suggested an increase in spectrum usage fee to 5% of adjusted gross revenue, compared with 3% recommended by Trai. According to a research note by JM Financial Institutional Securities Pvt. Ltd, a 200 basis points increase in spectrum usage fee corresponds to a 15% reduction in the reserve price. One basis point is one-hundredth of a percentage point. The government committee has cut the reserve price by 17%, implying it is more or less looking for a full recovery of the loss from the reduction in reserve price.

The only positive for telecom companies is that it seems to be willing to accept staggered payments for the spectrum price. But again, it remains to be seen what rate of interest the government expects for these delayed payments.

In short, the government appears to have gone ahead with Trai’s recommendations of setting the bar high for telecom service providers. As pointed out earlier, such high costs for spectrum will not only lead to higher tariffs, but will also result in an oligopolistic situation in the industry.

Of course, it still remains to be seen how things work out. With a high reserve price, the auction may even fail, causing the government to tone down its expectations. Based on the government committee’s recommendations, however, it looks like the industry is headed towards a high tariff, low usage structure, as well as one which is laden with high debt.

A report by Avendus Securities Pvt. Ltd says, “Three telecom service providers have shut operations in the last four months, giving a strong sign of the impending consolidation in the industry. Additionally, while new competitors have increased revenue market share, this was accompanied by large losses. This coupled with a high cash outflow in 3G and broadband wireless access auctions is likely to catalyse mergers and acquisitions activity.”

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