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Spectrum Price

Taking the evolution of auction pricing from arbitrary bureaucratic “beauty contest” to highly sophisticated auction where academicians have ruled the practical space, this article outlines the monopoly and missteps of civil servants and argues for the professionalisation of the regulator and elimination of redundant bureaucracy.

The Telecom Regulatory Authority of India (TRAI) recommended a reduction of 35% to 40% in res­erve prices for spectrum auction, but the industry association—the Cellular Operators Association of India (COAI), consisting of Jio, Airtel, and Vodafone Idea
—was not happy, since they had wanted a 90% reduction (Bhargava 2022). In an auction, the reserve price is set to signal the minimum price expectation by the seller below which they are not bound to sell the product. The COAI had also protested TRAI’s recommendation to permit Captive Wireless Private Networks, thus depriving the already stressed ind­ustry of a profitable segment. Here, the TRAI was giving the client industry more options, thereby making the demand more elastic, which is a good thing. But what is the controversy about the reserve price? Why should this price matter?

TRAI’s reduction of reserve price ent­ailed going down from `6,600 crore per megahertz (MHz) to `4,000 crore for the 700 MHz band, and from `492 crore to `317 crore for the 5G-related bands; the 700 MHz band reduced the customer serving cost to one-third. Intriguingly, the TRAI report mentioned government revenue of `5 lakh crore for a proposed sale of one lakh MHz of spectrum, corresponding to only `5 crore/MHz as the reserve price (Bhargava 2022). To understand price discovery through auctions and the friction between TRAI and the industry, we need to go back to the days when the spectrum was allotted.

The 2G Imbroglio

 

Allotment at an out-of-date price: The first spectrum price row was over 2G, when in 2008, the government allotted telecom licences at the price paid by the fourth cellular mobile operator at the multistage auction held in 2001, despite a spectacular growth in the intervening eight years. The then telecom minister Andimuthu Raja justified keeping the same price saying that he went by TRAI’s recommendation; TRAI, with Nripendra Misra as the chairman at that time, hedged. He said that though the auction is the best method to discover the price in view of the dynamic and spectacular growth of the telecom sector in this particular case, the incumbent firms have been given various amounts of spectrum, bundled with licence, at a fixed price and therefore there is an imperative to have a level playing field for the entering firms as part of fair competition.

The 2007 recommendations of the TRAI state:

The allocation of spectrum is ­after the payment of entry fee and grant of license. The entry fee, as it exists ­today, is, in fact, a result of the price discovered through a market-based mechanism applicable for the grant of license to the 4th cellular operator. In today’s dynamism and unprecedented growth of telecom sector, the entry fee determined then (that is, in 2001), is also not the realistic price for obtaining a license. On the other hand, spectrum usage charge is in the form of royalty which is linked to the revenue earned by the operators and to that extent it captures the economic value of the spectrum that is used … The authority … is conscious of the legacy, that is, prevailing practice and the overriding consideration of the level playing field. Though the dual charge in the present form does not ref­lect the present value of the spectrum, it needed to be continued for treating ­already specified bands for 2G services, that is, 800, 900, and 1,800 MHz. It is in this background that the authority is not recommending the standard options pri­cing of spectrum,1 however, it has, else­­where in the recommendations, made a strong case for adopting auction procedure in the allocation of all other spectrum bands except 800, 900, and 1,800 MHz.

Talking about the pricing of spectrum for new entrants in 2G (the 800, 900, and 1,800 MHz bands), TRAI’s 2007 recommendation says,

As far as new entrant is concerned, the question arises whether there is any need for change in the pricing methodo­logy for allocation of spectrum in the 800, 900, and 1,800 MHz bands. Keeping in view the objective of growth, aff­ordability, and penetration of wireless services in semi-urban and rural areas, the authority is not in favour of changing the spectrum fee regime for a new entrant. Opportunity for equal com­petition has always been one of the prime principles of the authority in suggesting a regulatory framework in telecom services … This approach assumes more significance particularly in the context where subscriber acquisition cost for a new ent­rant is likely to be much higher than for the incumbent wireless operators.

Prior to Misra, TRAI regulator Pradip Baijal during Arun Shourie’s term as the telecom minister, also justified selling the spectrum at a low and administratively determined price as the policy of low input price ­enables low output price for customers, that spurred the phenomenal mobile exp­ansion (Baijal 2012). The fallacy of this argument is equivalent to a man asking for a piece of land at the same price as another who bought it 10 years ago! Low spectrum price is neither a necessary nor a sufficient condition for low consumer price; the determinant for that was the intense competition of telcos, as Jio made it abundantly evident later on. The money spent by telcos on the spectrum is considered a sunk cost and has no bearing on their pricing decision. In an oligopoly where there is Bertrand price competition, consumers are benefited, but producers are hurt because of the inability to recover huge fixed costs (Ranganathan 2012, 2013). The exit of some firms and industry consolidation are the nature of the beast and its inevitable consequences.

TRAI’s IUC Determination

A similar situation arose in 2012 when the TRAI had to decide what price it has to allow for interconnection utility charges, also called the mobile termination charge. Many other countries do not have this problem, as the telcos in those countries charge for making as well as receiving calls. So, they follow the simple “bill and keep”; each utility charges its own customers for their network receiving calls from another network. But in India, we have the calling party pays regime, enjoyed by a large section of poor people, giving the “missed call” innovation. In this case, it is necessary to regulate the price that one telco can charge from the other to receive their calls. Normally, big telcos are the net receivers of this money and small ones are the net payers. Accordingly, big telcos will argue for full cost reimbursement as they are the net receivers of money whereas the small ones will vouch for incremental cost reimbursement as they are the net givers of money. The incremental cost, which is close to zero as no firm makes an investment just to receive other’s signals. There is nothing to differentiate a switch from sending and receiving. Hence, many regimes of the TRAI consistently brought this cost down. When big firms argue that it will hurt their financial via­bility, the TRAI offers what is called a waterbed argument; it says that “the final price, under forbearance, is within your control, so why don’t you increase it and make for viability?” This is just to show that the link between input costs and output prices is tenuous and depends on the situation.

The 2G scam came to light when ind­ustrialist Anil Dhirubhai Ambani-owned Swan Telecom and another real estate firm Unitech started offloading shares at a whopping price of `4,500 crore and `6,200 crore, respectively, in September 2008. The criminality was not the fixed price and first-cum-first-served method of allocation. No government is legally mandated to tread the optimal path. The criminality in the 2G spectrum case came about in the Department of Telecommunications (DOT) arbitrarily preponing the deadline by some five days and secretly informing selective telcos of this so that they were ready with the demand drafts to qualify for the application, leading to the suspicion that this unseemly haste cannot happen without a whiff of corruption. Yet, finally, money trail could not be proved and no one was convicted, though the court cancelled all the licences (including coal allocations).

The Comptroller and Auditor General of India (CAG) who audited this transaction bec­ame famous and won even a Padma Bhushan in 2016 for his hyperbolic computation of the money lost to the exchequer as `1,76,000 crore (CAG 2010). It was a rather simplistic arithmetic in ratio and proportion. Based on the actual bids in a subsequent 3G auction in various circles, the highest bid for a particular area was taken as the basis and the bid per MHz was computed, which was then multiplied by the total MHz sold on the implausible assumption that all MHz of the spectrum had the same value, in which case there was no need to conduct the laborious auction process for various areas.

Another argument for the low pricing of spectrum was that there was no mandate that the revenue should be maximised because the focus was on creating a vibrant telecom sector with low price to the consumers, providing extensive coverage, including the rural areas, and making sure that the supply firms remained healthy. The idea of spectrum becoming an important source of deficit reduction came much later; for information goods in an oligopolistic setting with price competition, the inexorable exit and consolidation were part of the game, beyond the control of the regulator, which was not well-appreciated.

In the United Kingdom (UK) also, initial administrative prices for spectrum through “beauty contests” and their evolution into auctions later, were similar to India, but the public took the vicissitudes in their stride without crying foul over corruption. The 2G allotment fetch­ed barely £40,000 in the UK, but the subsequent 3G auction in 2001, by Paul Klemperer, Oxford University, brought the treasury an eye-popping £2.2 billion, bankrupting the telcos in its stride! Though there was media criticism of this embarrassingly high revenue to the government, no one asked why it was not so earlier. In India, on the contrary, the “uns­eemly haste” of the DOT was criticised by the CAG.

There is a section of opinion that considers “causing loss to the exche­quer” as a criminal act; that is, mere ine­fficiency is deemed criminal if it leads to a significant loss to the exchequer. This is a recipe for paralysing of the government decision-making.

Setting Reserve Price

But the controversy in the latest pricing recommended by the TRAI is about setting the floor price called the reserve price in the auction. The argument for a high reserve price is that the bidders use it as an anchor and bid around it. A low reserve price would miss the opportunity for the seller to discover the true “willingness to pay” of the bidder. However, this can be remedied by ensuring that there are more bidders than the spectrum bands auctioned so that some bidders will not get spectrum at all. In this situation, a low reserve price or even no reserve price will not matter because there is sufficient incentive for the bidders to bid up their value to not to lose the spectrum and thus the opportunity to make normal returns. On the contrary, a high reserve price would run the risk of no bidder coming forward to bid. This is what happened in the previous auction, with only approximately 35% of the spectrum on offer being bought.

The fact of the matter is that neither the TRAI nor DOT has the capacity to determine the parameters of auction, such as reserve prices. They should leave it to the specialist auction firms and go by their advice. The 3G auction, which was successful, was conducted by a third party, namely N M Rothschild and Sons. While TRAI or DOT determining the reserve price is bad, the Group of Ministers (GoM) determining it is even worse. There is a competition between organisations and groups, the TRAI, the DOT, and the GOM to proclaim who is more “nationalistic.” Setting higher reserve price is seen as being more nationalistic, while it has no effect many a times but can be hurtful on occasions.

Regulator’s Institutional Structure

At present, the TRAI is run by just two people—the chairman and a member (finance); however, one full-time member (technical) and two part-time (economics and management and technical) members’ slots are vacant. The chairman is a retired Indian Administrative Service officer, as always, and the member is an Indian Audit and Accounts Service retiree. In contrast, Ofcom, the UK board, is replete with professionals from the industry, civil service bureaucrats, investment bankers, regulators from other areas, and eminent public personalities. In contrast, India has the DoT, the regulator TRAI, and the telecom industry.

In the UK, wherever there is a regulator, that also doubles up as the department, without duplicating the bureaucratic layer. Also, such an arrangement avoids needless turf wars between the regulator and the department.

The TRAI has a peculiar status where its views must be mandatorily sought by the DOT; how­ever, the final decision rests with the DOT, reducing TRAI to a fifth wheel. Whereas, you can have an efficient set-up with just the TRAI and the industry, without the DOT bureaucracy. Within the TRAI, telecom public sector undertakings like BSNL and MTNL always have a godfather, since the technical member is one of their own kin from the Indian telecom service!

In the United States and the UK, the capture effect of regulator is more. Stephen M Stigler of Harvard University Indian Audit and Accounts Service had posited that the regulator is de jure for the control of the monopoly telecom industry, but de facto makes sure that industry is alive and well. In India, the capture effect is probably there in state electric utilities but not so much in the telecom sector. And that may partly explain both the Indian telecom ind­ustry’s good performance with low prices and also its sickness and consolidation.

Conclusions

In the telecom sector, fierce competition between private sector firms has done more good than either the regulator or the ministry. So far, the best action for the TRAI seems to be to follow the dictum shared by a Chicago-educated Massachusetts regulator: “My job is to extinguish my role” (and let the competition take over). The lack of capacity is a major bottleneck, with civil servants crowd­ing out the professionals with neither technical orientation nor business under­standing. The silver lining is “good people come in sporadically.” Industry fears them and does not respect them; the situation needs to change.

Note

1 TRAI may not have meant “pricing of options” but may have meant “auction pricing.”

References

Baijal, Pradip (2012): “Don’t Kill Telecom by Auctioning Spectrum,” Business Standard, 27 November.

CAG (2010): “Performance Audit of Issue of Licences and Allocation of 2G Spectrum of Union Government, Ministry of Communications and Information Technology,” Report No 19, Comptroller and Auditor General of India.

Ranganathan, V (2012): “To Auction or to Allocate,” Live Mint, 2 October.

— (2013): “Auctioning Spectrum Best for the Country,” Business Standard, 5 February.

Yuthika, Bhargava (2022): “Why Are Telecom Companies Upset with TRAI Despite Its Proposal to Cut Spectrum Prices by 40%?” Hindu, 17 April.

 

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Updated On : 19th Jun, 2022
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