The Indian telecom muddle

The Indian telecom muddle

The process by which India will allocate further spectrum for mobile and wireless telephony services is currently in chaos. After a deluge of licence applications arrived, telecom minister A. Raja announced that the department of telecom would stop accepting mobile licence applications after 1 October—in effect instituting a cap on the number of applicants. This was an unusual step since potential market participants had been told there would be no such cap.

To put Indian consumers first, telecom officials must set market conditions so that as much competition is permitted as possible. There is always a concern that any time the government makes available something of value, the politically well-connected or entrenched interests benefit at the expense of new entrants, entrepreneurs and consumers. And worries abound that the process under way has already become unwieldy due to political pressures and concerns.

The markets’ earlier understanding that preference over critical 3G spectrum would be given to existing incumbents in the 2G space was partially responsible for adding to the rush for telecom licences. But bureaucratic limits are a mistake. The original allocations of 2G licences and spectrum occurred when market conditions in both India and around the world were different and less evolved than today.

The only way to ensure the fullest realization of spectrum—3G or 2G—for today’s market is to ensure that a broad range of participants can participate. The distribution of spectrum needs to be done in the most efficient manner—and designed with the Indian end-user in mind. The most sensible way to distribute a finite resource such as spectrum is through a transparent auction system. Making sure the licences are distributed in a clear, fair manner is the first step in ensuring this.

For many years, the US has wrestled with the best way to allocate spectrum, and a transparent auctions system has proven prudent, sensible and fair to consumers. In the past, the US government had two options available to it. It could hold “comparative hearings" in which the merits and abilities of each competing applicant are weighed. Or the government could run a lottery system in which assignments of spectrum were random. Either way, spectrum was given awayessentially for free.

There were many problems with these approaches. Both make it impossible for the full market value of the licences to be realized. This makes it difficult for investors to know where and how to allocate capital. Moreover, these methods are suspect to corruption. Given the value of the underlying asset, the temptation for well-connected businesses and politicians to cut deals or to rig the lottery is enormous. The period of public hearings that must accompany such giveaways is time-consuming and costly.

The benefits of an auction system, on the other hand, are many. For starters, it generates revenue for public coffers. In the US, a recent open auction for broadcast-spectrum licences generated more than $12 billion. And an auction conducted over the years, 1994-98, generated $27 billion. These additional revenues ease budget pressures, which can translate into relief for taxpayers.

More importantly, an auction unleashes an important discovery process by yielding how entrepreneurs value the assets in question. Indeed this is one of the key functions that markets provide.

Only serious market participants are likely to enter a well-designed auction process. This makes the process more efficient and leads to quick resolution. In the long run, ensuring these process efficiencies, particularly in large markets such as telecom, saves money for consumers.

Some may object that an auction, with competitive bidding, will push up spectrum prices and raise prices for Indian consumers. But the non-partisan Congressional Research Service in the US found in a report in August that the opposite is true. Since auctions ensure that resources go to those best able to harness them, consumers benefit by having the most motivated, efficient and innovative participants serving them. But Indian telecom regulators must ensure the process is open and fair from the start. The recent arbitrary decision to shut out potential market participants is a worrisome sign. Telecom authorities should try to avoid steps that prompt protracted and costly litigation. It is not too late to get India’s mobile telephony future back on track.

Nick Schulz is research fellow at the American Enterprise Institute and writes the Techno-Ideas column for Comment at