The recommendation of the Telecom Regulatory Authority of India (Trai) on the auctioning of spectrum comes in response to the Supreme Court order mandating that all spectrum be auctioned. The salient features of the recommendation include the transition from a command and control regime to a liberalized environment where an operator has full freedom to decide which generation of technology to employ on a spectrum band it possesses, reservation of spectrum for incumbents who will be asked to vacate spectrum on the expiry of their current licence and the determination of reserve prices for various bands of spectrum.
The liberalization of spectrum reuse is most welcome. However, the liberalization of spectrum use also implies the liberalization of refarming policy, and here, Trai does not take the message to its logical conclusion.
In a liberalized regime, an operator whose licence on a certain band of spectrum expires must be willing to bid in an auction to retain it. In case the operator does not want to do so or loses in the bidding, it has the option of bidding for other spectrum bands in order to service its customers. The onus of retaining enough spectrum to provide uninterrupted services to subscribers rests with the operator, not the government. The welfare of the subscriber, in turn, will be ensured by market competition, roll-out obligations and the Universal Service Obligation Fund.
It follows that there is no need to reserve spectrum for refarming. All spectrum for which the ecosystem is mature should be put on the block and all operators should be invited to bid in line with the existing rules, including the rule related to the maximum allowable spectrum an operator can hold. The definition of “available spectrum” should extend to spectrum that will become available in up to a year’s time as preparations for utilizing the spectrum need to begin in advance.
As of now Trai has blocked a large quantum of available spectrum to execute refarming, which can be executed only in stages over a 10-year period. This represents an enormous waste of national resources and creates an artificial scarcity of spectrum.
In making decisions on 1,900 MHz, the policymaker should evaluate the trade-off between 1,900 MHz and 2,100 MHz. The use of 1,900 MHz will block the use of four slots in the 2,100 MHz band that could otherwise have been made available. This is on account of the defence quota. The 2,100 MHz band is crucial as no operator has 3G spectrum on a pan-India basis.
Among the new entrants of 2008 there is only one serious entity in GSM and one in CDMA. New operators have higher costs due to their small scale of operation. In order to protect the interest of new operators, one block of spectrum in 1,800 MHz and 800 MHz should be reserved for new entrants alone.
In fixing the reserve price, Trai has assumed that in an environment where any technology can be deployed on any spectrum band, the propagation characteristics of the band are the only factor governing the value. Hence, the reserve price of 1,800 MHz is linked to the price for 2,100 MHz discovered in the 2010 auction. However, this principle has not been consistently applied as the reserve price of 700 MHz spectrum has been fixed at twice that of the contiguous 800 MHz spectrum. Indeed the principle is flawed as other factors including the ecosystem associated with a band (including devices available), fragmentation of blocks, harmonization requirements, and quantum of blocks available are crucial determinants of value.
It would be more prudent to peg the value of start-up 1,800 MHz spectrum to the market-based values discovered in the acquisition transactions of Unitech and Swan in 2008. These transactions show that start-up spectrum should be no more than 60% of the value of 3G spectrum on a pan-India basis. The value of incremental spectrum, on the other hand, is of the same order of magnitude as that of 3G spectrum on account of economies of scale. Further, the ecosystem for the use of 1,800 MHz spectrum, including mobile handsets, is far more inclusive than that of 2,100 MHz. Hence, the value of 1,800 MHz spectrum is higher in the category B and C circles while that of 2,100 MHz spectrum is higher in category A circles and metros. The distribution of value of 1,800 MHz across circles can be proportional to the value computed by the 2011 Trai expert panel.
The reserve price for the start-up spectrum should be close to value as the competition is expected to be low. The reserve price for incremental spectrum should be at a greater discount from value as competition is high and bidding should determine the final price. In the highly competitive 3G auction of 2010, the final price was almost five times the reserve price.
The Trai recommendation makes a faltering start towards liberalization in an environment when a fully liberalized regime that protects competition is the need of the hour.
Rohit Prasad is associate professor, MDI, Gurgaon.
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