Opinion | Spectrum of woes troubles India’s telecom auctions

At the heart of wireless communications is radio frequency spectrum, which allows over 95% of Indians to benefit from affordable telephony and internet access. But India’s spectrum management has been flawed and counterproductive.

Spectrum is the crux of a mobile telecommunications licence. It gives the holder the right to use radio frequency spectrum, a finite and scarce resource. Payments to the government for the licence are, in effect, the price of spectrum. The licence also gives companies the right to deploy infrastructure, such as towers, ducts, etc., on public land. However, since the operator pays separately for the latter—viz. Rights of Way—to municipal bodies, the payments by holders of mobile licences are de-facto the price for use of spectrum.

Rules for allocating and pricing of spectrum are crucial for wireless operators. The frequency band and amount of spectrum that an operator can access—and at what price—determines the services (e.g. telephony, data, 2G, 3G, 4G, etc.) it can offer, including their range and quality.

There is no rigorous method to determine the price of spectrum. Many compare it to land. Economists advocate auctions to determine a market price for spectrum to reflect its value to the buyer at that time.

India’s spectrum pricing has been contentious. In 1995, companies selected to offer mobile services—in the four metro cities of Delhi, Mumbai, Kolkata and Chennai—paid a fixed fee for their licences that came bundled with spectrum. A year later, the government decided to auction licences for provision of mobile services in the rest of the country to companies willing to pay the maximum fee to the government. It repeated this for auctioning additional mobile licences in 2001.

In 2005, the government changed tack again. Licensed operators could obtain an additional spectrum, without any competitive process, based on the number of subscribers on their network. In 2007, the government awarded 122 mobile licences, with bundled spectrum, without auction, at a price discovered in 2001. This led to the so-called 2G scam. The Supreme Court cancelled the new licences and ordered the government to henceforth auction all spectrum.

Nearly half of the spectrum auctions held in India have failed, unable to find takers for spectrum on offer. While the 3G auction in 2010 delivered windfall revenues to the government, the auction for 700 MHz spectrum in 2016 attracted no bids.

The failure to find bidders for scarce spectrum suggests an auction design which prioritizes government revenues over other objectives, such as the roll out of services or optimal use of spectrum.

Auctions designed primarily to maximize revenues are distorting spectrum management and exacerbating the sector’s debt burden, which is already over ₹ 7 trillion. The current practice of linking reserve prices to winning bids of previous auctions ignores the changing value of the resource. The practice of levying licence fees and spectrum usage charges, on top of a spectrum price determined through an auction amounts to multiple payments for the right to use the same spectrum. Finally, the current levies, computed as a share of operator revenue discourage efficient use of spectrum and deployment of productivity-enhancing technologies. They encourage ‘creative’ accounting. India cannot afford such distortions.

Currently, the approach to 5G spectrum is a similar distortion. Trai’s recommendation of a reserve price of ₹492 crore for 1 MHz of 5G spectrum in 3.5 GHz means that a company would require at least ₹ 36,900 crore to acquire 75 MHz to launch 5G services. This is a recipe for another auction failure, jeopardizing the deployment of a powerful technology. This is no way to protect the interests of India’s users or the economy.

Mahesh Uppal heads Com First (India), a company specializing in policy and regulation.