2G spectrum: How the big telcos got away with murder

By Aditi Roy Ghatak and Paranjoy Guha Thakurta

In the first three parts of our story on the mispricing and misallocation of spectrum since 1994 (read here and here and here ), we showed how telecom operators were officially given a certain amount of spectrum, but in reality got twice that amount. But unintended benefits were given not just by one regime, but several of them ranging from the Congress government of the 1990s to the NDA at the turn of the century. Moreover, the policies were changed wholesale to extend licence periods from 10 to 20 years and the basis of fee collection shifted from fixed amounts to revenue share. The big boys got away with murder.

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Former Telecom Minister Sukh Ram was still king when the time came to open up state telecom circles (or geographical areas) to private bidders. When the results of the bidding were out, it was clear that the higher bids went for the lucrative markets while circles like Jammu & Kashmir received no bids for either basic or cellular services and the Andaman & Nicobar Island circle received no bids for cellular services. In basic fixed line services, the Reliance-Nynex groups had bid for all 20 circles while Himachal Futuristic Communications Ltd (HFCL, an India-Israel-Thailand venture), from Sukh Ram’s home state of Himachal Pradesh, bid very high in nine circles.

The firm (valued at Rs 2,500 crore) was initially awarded these lucrative licenses for nine circles for Rs 85,900 crore (or more than three-fourths of the total bid amount at that time). HFCL’s bids were around five times higher than what companies in the Tata, Ambani and RPG groups as well as other players had to offer.

It was evident, however, that the firm did not have the capacity to pay and the government chose to award licences for only three circles to HFCL and invite fresh bids for the remaining six circles later in January 1996. The focus was on everything but spectrum. To put it in more moderate bureaucratic language: since New Telecom Policy NTP) 1994 had also recognised that the government did not have the resources needed to achieve its telephony targets, it opened the basic telephone services segment to the private sector. It invited bids for private investment in 1995 through a competitive process to introduce an additional basic service operator in each service area.

The government then decided that only one new entrant would be granted a licence in each service area for providing basic telephone service in competition with DoT. Three rounds of tenders invited since January 1995 led to the signing of licences agreements for six circles only in 1997-98. Sukh Ram was gone by May 1996, Prime Minister Atal Behari Vajpayee took over for 13 days and he was followed by HD Deve Gowda as Prime Minister. It was under Beni Prasad Verma that the actual awarding of licences for state circles was concluded.

In all, 32 responses were received for the tender notices for cellular services, of which 13 were from North America and 10 from Europe. There was a political storm over selling out to foreign telecom multinationals and the government introduced four changes in August 1995: these were “(1) no single company could receive a licence for more than two ‘A’ category circles in cellular services; (2) no single company could receive a licence for more than three ‘A’ and ‘B’ circles in basic services; (3) 10 percent of all new lines had to be installed in rural areas; and three percent of the bidding weight was assigned to the use of indigenous equipment”.

[caption id=“attachment_328575” align=“alignleft” width=“380” caption=“Why was a deal for 10 years extended mid-way to 20 years without any additional price charged by the Group of Ministers? PTI”] [/caption]

The fact remained that once the dust settled down, the bidders for the circles realised that they had bid too aggressively and while the metro operators were raking it in, the new bidders were in trouble and started demanding concessions. Many of the international winners sold out and quit the country.

Even as the metro operators were earning handsome profits, the circle operators who had paid much larger sums for the licences were in financial trouble and wanted the government to consider changing to a revenue-sharing model. The truth is that what the government achieved after the end of the exercise - after the financially troubled winners had quit - was to establish the raj or the dominance of a few players, who seem to have exercised extraordinary powers over the decision-making process even after Sukh Ram had to quit.

The Indian National Congress lost the May 1996 elections and, after the 13-day Vajpayee government, Deve Gowda became Prime Minister of theshort-lived United Front coalition government (1996-1998). The Congress agreed to support another United Front government under IK Gujral from 21 April 1997. Interestingly, Beni Prasad Verma served as the Union Telecom Minister under both Deve Gowda and Gujral.

The Telecom Regulatory Authority of India (Trai) admits to giving away concessions to the initial operators in a report on “Spectrum Management and Licensing Framework” submitted on 11 May 2010. On migration of licences from a fixed licence fee regime to a revenue-sharing regime, the revenue share was provisionally fixed at 15 percent of the adjusted gross revenue (AGR) subject to review by Trai and was reduced to 12 percent for the metros and ‘A’ circles, 10 percent for ‘B’ circles and 8 percent for ‘C’ circles, when the basic service operators, or BSOs, were permitted to provide limited mobility from 25 January 2001.

The licence fee was further reduced to 10 percent, eight percent and six percent respectively of the AGR from 1 April 2004. Even better, the old cellular licensees (first and second CMTS, or cellular mobile telecom services licensees) were given an additional concession of two percent in their licence fees for a period of four years.

This meant the excess spectrum allotted to the big boys - discussed in the first part of our series ( read here ) - now came with even lower licence payments.

To go back to Sukh Ram and his redoubtable Deputy Director General, Runu Ghosh, did they not understand the theft that was taking place under their noses or was there complicity? Did the telecom ministers who subsequently occupied the most spacious room in New Delhi’s Sanchar Bhavan and their extremely competent secretaries too not understand the meaning of the simple English term ‘cumulative maximum’?

Whatever the truth, the stealing of spectrum continued unabated through 1995. When it came to accepting bids for the 18 circles in December 1995, spectrum charges were again delineated from wireless operating licence fees and were to be paid for separately. What was specified, however, was that a maximum of 4.4 Mhz of spectrum would be given and the contracts were signed for this quantum of spectrum.

As one has noted, the change in government meant better times for the telecom sector. The one Telecom Minister with a difference was, of course, Jagmohan. For the industry, he struck a jarring note. Jagmohan (who was Telecom Minister between December 1998 and June 1999) tried to clean up DoT - not very successfully. Operators owed the government around Rs 3,500 crore in licence fees and the minister found no reason to waive the money.

Sure enough, he was evicted, thanks to intense lobbying by telecom companies and their allies among politicians. The cellular telephone industry was reporting losses worth $92 million every month but Jagmohan did not find the reasons proferred by telecom firms convincing and was not prepared to waive their debts. His departure laid the grounds for the taking over of this vital portfolio by Prime Minister Vajpayee himself, that is, till he handed over charge to Ram Vilas Paswan in October 1999.

Indeed the new government had already been greeted with complaints from the telecom sector that it was feeling stifled, prompting the creation of a Group on Telecom (GoT) in 1998 that was to recommend a new telecom policy. The Union Cabinet under Vajpayee, with Anil Kumar as Telecom Secretary (who served between 28 August 1998 and 7 February 2000) considered and approved the New Telecom Policy 1999 (NTP 99), effective from 1 April 1999; All Fool’s Day.

The redoubtable NK Singh was the then Secretary to the Prime Minister, apart from being the Member Secretary of the Task Force on Telecommunications between August 1998 and April 2001.

By an order dated 1 October 1999, cellular licences were made technology-neutral. Vajpayee was still in charge of DoT, Jagmohan having been removed from the position by then. Prior to that, it was mandatory for the licensees to use GSM technology. NTP 99 also allowed licensees to migrate from a fixed licence fee regime to a revenue share arrangement with effect from 1 August 1999. NTP 99 mentioned that licences would be awarded for an initial period of 20 years and would be extendable by additional periods of 10 years thereafter.

The government allowed the public sector Mahanagar Telephone Nigam Ltd (MTNL) to enter as the third mobile operator and granted it a licence in 1997 for the Delhi and Mumbai service areas. The other public sector corporation, Bharat Sanchar Nigam Ltd (BSNL), was licensed as the third cellular mobile operator in the year 2000 for all service areas except Delhi and Mumbai. A fourth cellular mobile service provider was introduced in 2001 through a multi-stage bidding process.

The stated purpose of the new telecom policy was to ensure investments and competition in the sector, affordable and effective communications for the public, encourage development of telecommunication facilities in remote, hilly and tribal areas of the country and to resolve problems facing the existing licensees. The answer lay in migrating the existing licences from fixed licence fees to a revenue sharing regime from July 1999.

Other exciting developments happened in this period as well. Out of the blue, under the guise of helping everyone, the government not only allowed the circle operators to migrate to the revenue-sharing model but also extended the licence period from 10 to 20 years free of cost. Worse, it extended this advantage to the metro operators, who were doing pretty well for themselves. All this was done under the NDA government headed by Prime Minister Vajpayee, who, incidentally, holds a record of sorts having held the telecom portfolio no less than five times.

Under the migration package, the existing licensees gave up their duopoly rights and additional operators were inducted in a regime of multiple players and the government issued cellular licences to MTNL and BSNL in 1999-2000 as the third CMTS operator. Under the guise of compensating the operators for the loss of their duopoly to a competitive regime, two sops of sorts were offered to the original licensees. The advent of public sector operators could hardly make a difference to the private operators: the former were hamstrung in every aspect - lack of autonomy being the main one. This deprived them of the nimble-footedness to take on sharp competition from the private operators head on.

By scrapping the Rs 5,000 per subscriber clause and enhancing the rental of Rs 156 permitted charge per subscriber to Rs 600 and then doubling the licence period from 10 to 20 years for the CMTS operators and from 15 to 20 years for the BTS licence holders, it can be argued that these actions constituted yet another change of rules after the game was begun.

Since when can the government increase the tenure of a concession without charging an appropriate fee? Again, while there was logic in allowing the circle operators to migrate to a revenue-sharing model, there was none in extending the concession to the metro operators who were raking in huge profits. To supplement it with a free doubling of the licence period was simple manna from heaven for them.

The loss to the government would have run into thousands of crores of rupees. Every time a lease is renewed it is done under new commercial terms. How on earth was this deal done to benefit the metro operators, who had already been given an excellent deal in terms of pricing and free spectrum? Why was a deal for 10 years extended mid-way to 20 years without any additional price charged by the Group of Ministers? This is yet another unanswered question.

The Mad Hatter’s Telecom Party continued. Today, under the scrutiny of the apex court, the incumbent Communications Minister Kapil Sibal is again talking of a 10-year licence period. This is what should have been the case from Day One. What logic or what sums of money persuaded the government to change its mind in 1999 is yet another unanswered question.

The story did not end there. Yet another facility was provided: the date for paying licence fees was extended by six months, again under Vajpayee as Telecom Minister. Like all good ministers, the former Prime Minister was probably keen on increasing the reach of telephony in the country but left the arithmetic of the business to his bureaucrats. The good news was that at least some of the benefits were passed on to the consumer because, after 1999, the use of mobile phones expanded exponentially with tariffs plummeting, resulting in a stupendous rise in the country’s subscriber base of mobile phone users. The only loser was, of course, the government - willingly so.

(Read Part 1 , Part 2 and Part 3 in this series)