Home / Opinion / Online-views /  Views | Policy lessons from the 3G failure

Telecom minister Kapil Sibal’s statement about 3G (third generation telecom services) not succeeding in India is true, and it is worrying at multiple levels. At last count India had around 10 million people who had subscribed to 3G services. It also had around 900 million 2G (or 2.5G) mobile connections. Applying a discounting factor of 20% (non-active connections for a variety of reasons), we still arrive at a total of 720 million active mobile phone connections of which 10 million are 3G ones, a proportion of 1.4%.

Meanwhile, the telecom sector, once the darling of investors, has been plunged into despair. A faulty regulatory regime, corruption, and the ensuing investigations have made it a pariah for investors.

Finally, obsessed with regulation and investigation, few telcos have found the time to create an enabling ecosystem (essentially 3G services that people find useful and for which they are willing to pay, even a premium).

India’s experience, in many ways, is similar to that of the US and Europe. In the US, auctions for 3G licences and spectrum in 1999 had to be re-run after it was discovered that companies had bid too high and couldn’t afford to operate (the re-auction attracted only 10% of the $4 billion-odd that was originally bid). In 2000, the UK and Germany auctioned 3G spectrum, but unlike the US they didn’t re-auction the spectrum once the companies ran into trouble. The UK auction raised £22.5 billion. Several analysts attribute the telecom crash of the early 2000s to the European 3G auctions. Since then, several academic papers have been published on the ideal way of conducting auctions for spectrum. The people who designed India’s auction must have studied them for sure. Telcos here, however, objected to the auction design when it was announced (the bidding remained open till the equation between demand in supply in each circle balanced out).

I remain convinced that a well-structured auction is the best way to sell any national resource, including spectrum. However, the nature of the structuring has to ensure that there is no over-bidding (which is difficult in any auction where bidders don’t have to just worry about their own strategies and business models but also what other bidders are willing to pay). And the government has to work out the ideal way using its windfall gains. In this case, I would recommend ploughing it back into the telecom sector in some way to ensure that the high price paid by bidders does not translate into high tariffs for customers. If we agree that access to data-rich telecom and broadband services are GDP multipliers that benefit everyone, this may be the only way to go.

My fear is that the minister’s admission may encourage telcos to start lobbying for the same sort of bail-out they did in the 1990s when they first bid huge amounts for 2G licences and then sought (and got) a change from a fixed-fee regime to a revenue-sharing one.

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