In a rare departure from tradition, the ministry of communications and information technology issued a press release on Friday to counter criticism of its licensing processes over two real estate companies that sold stakes in their recently acquired mobile licences—valued at least a billion dollars more than the government charges for them. The ministry claims its role has been misunderstood and that it has merely implemented a well-established telecom policy which helped expand mobile services and lower prices. However, this is a convoluted defence of the failure of A. Raja’s ministry—that he took charge of in May 2007—to manage in a transparent and equitable fashion the most vital resource for mobile communications—spectrum.
It must be conceded that the practice of awarding licences without a competitive process did not start with Raja. His predecessor, Dayanidhi Maran, in a break from practice and in violation of explicit recommendations of the Telecom Regulatory Authority of India (Trai) in 2003, granted mobile licences to several companies, notably Aircel, without a competitive bidding process. Trai’s recommendation of mobile licences at a lower fixed price was for the North-East and Kashmir markets which attracted no bids in the auctions held in 2001.
But Raja exploited this precedent to argue that it is government policy to award licences without any competitive process, even if hundreds of companies, including big global ones, may have expressed interest. To make a mockery of the first-come-first-served approach that he claims the government follows now for awarding mobile licences, nobody was told when players could apply for licences, or when results would be known.
Intriguingly, after several players applied on their own, the department of telecommunications (DoT) announced it would not accept applications after 1 October 2007. Even more intriguingly, it awarded licences only to those who had applied till a week before this date. While most countries limit the number of mobile operators since spectrum is a finite resource, the cut-off date is clearly arbitrary, since none of the new licensee companies has yet received the entire spectrum due to it.
Illustration: Jayachandran / Mint
Raja violated the spirit of India’s telecom policy that he claims to have followed, and when there was evidence that the existing policy had led to many distortions and brazen abuse, he chose to make worse what he needed to fix.
Now, Unitech and Swan have obtained rights to spectrum at prices set in 2001, when the mobile market was barely 2% of its current size and demand for spectrum manifestly low. The press release claims that the huge amounts received by the companies are not a price for their spectrum but their enterprise value, forgetting that the two are indistinguishable for new companies which are yet to deploy infrastructure, acquire customers and add other visible value or build a brand.
It was revealed recently that at least 60 million mobile subscribers in India could not be verified. Earlier, Maran had acknowledged that operators might be inflating subscriber numbers since these determine the amount of spectrum allotted. Rather than remove the incentive for abuse and hoarding of precious spectrum, DoT has gone ahead and created pressure on spectrum by issuing hundreds of new licences to unknown players when most Indian telecom users have a greater choice of service providers than any country in the world and serious players are queuing.
A transparent auction for spectrum could have prevented much of this abuse. The press release implies that, somehow, this will raise tariffs, and that charging substantial revenue shares as fees is incompatible with auctions. It ignores the fact that most major service providers, barring the earliest metro operators and the news players licensed by DoT in recent months who have yet to start operations, obtained licences through auctions, already pay billions of dollars in revenue shares and have delivered some of the world’s lowest mobile rates to Indian consumers.
DoT argues that the current policy helps to expand services in rural areas. Not true. Spectrum rules encourage operators to go to urban areas where subscribers are easier to add and not rural areas where markets need to be developed patiently.
According to economists, it is not the sunk cost of auctioned spectrum that raises tariffs but the huge operating costs created by the high administrative charges—for example, service taxes and other levies—that operators pay. If, as the press release asserts, affordability is DoT’s goal, the approach should be to reduce those charges rather than forgo market price for spectrum and hurt future wireless prospects.
The press release is a knee-jerk and feeble attempt to postpone much needed auction of commercial spectrum. Auctioning is not being opposed on the grounds that it will raise operator costs since a good auction design can take care of that. Is it instead the resulting transparency that deters DoT?
The answer will depend on how fast it completes the process under way to auction 3G spectrum and the speed with which it moves towards auctioning 2G spectrum, the rules for which have created the current mess.
Mahesh Uppal is director, Com First (India) Pvt. Ltd. He consults on telecom regulatory issues. Comment at email@example.com