Spectrum: Making sense out of some of Trai's nonsense

By Aditi Roy Ghatak and Paranjoy Guha Thakurta

If the act of placing content on the web ensured transparency, life would have been simple. But such an act can sometimes result in a diametrically opposite consequence.

Consider the communication between the Telecom Regulatory Authority of India (Trai) and the Telecom Commission which has resulted in greater opacity on the contentious issue of allocation and pricing of scarce electro-magnetic spectrum. The Department of Telecommunications (DoT) has put out on its website a 30-point agenda of issues that the Telecom Commission has with Trai’s recommendations, which have already been blasted, primarily by three bigwigs in the mobile telecom industry: Bharti Airtel, Idea and Vodafone.

All eyes are now on 18 May, when the Empowered Group of Ministers (EGoM) headed by Finance Minister Pranab Mukherjee (who else?) will decide the future of the telecom sector on issues relating to refarming or reallocation of spectrum, especially in the 900 megahertz (Mhz) band (that Airtel, Vodafone and Idea principally use), its pricing and modalities of allocation.

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Reliance Communications (Anil Ambani group) has some 900 Mhz spectrum but these are not in critical telecom circles (geographical areas)- – it has spectrum in Assam, Bihar, Himachal Pradesh, Madhya Pradesh, the North East, Orissa and West Bengal. The Tata Group does not have any in this spectrum band.

[caption id=“attachment_303649” align=“alignleft” width=“380” caption=“Trai’s stated purpose of making the playing field level is welcome though clearly there could have been greater focus on roll-out of networks in spectrum bands possible”]  [/caption]

Trai has set the sequence of the auctioning and allocations beginning with the auction of 5 Mhz of spectrum from the 1,800 Mhz band to establish the market value of spectrum, as early as possible (to meet the end-August revised deadline set by the Supreme Court). It has also issued a set of recommended reserve prices or floor prices for auctions. Allocation of an additional 1.25 Mhz spectrum to the holders of 4.4 Mhz spectrum in the 1,800 Mhz band will be subject to legal opinion.

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Next, Trai wants auction of spectrum in the 800 Mhz band, again in the current financial year. The auction of spectrum in the 900 Mhz band should be conducted in the first half of 2013-14, preferably in the first quarter, so that there is adequate time for deployment as and when 900 Mhz spectrum (currently used by the big players) becomes available by November 2014, says Trai.

So why is the Trai under attack from almost all directions?

Let’s begin with the proposal to auction 5 Mhz immediately. This is simply too small a chunk of spectrum to ensure fair price discovery. “This has been the most destructive period of regulatory environment I have seen in 16 years”, thundered Sunil Bharti Mittal last Thursday (3 May). Rarely has the head of the Bharti Airtel group, who has pretty much called the shots in the telecom industry post-deregulation from the mid-1990s onwards, used such vituperative language.

Of the two government-owned operators, Mahanagar Telephone Nigam Ltd (MTNL) has to return spectrum in excess of two multiplied by 10 Mhz in Delhi and Mumbai -MTNL has 2x12.24 Mhz against the maximum permissible quantum of 2x10 Mhz. The public sector company has chosen to stay silent so far, possibly because there is a dispute pending in court. The matter is sub judice. But the “big three”, Airtel, Vodafone and Idea, working in the 900 Mhz space, have not taken to their prospective eviction favourably.

On the face if it, a more simplified set of recommendations may have made better sense with a focus on immediate auctions, lower reserve prices and a bit more spectrum put on the block to encourage more newcomers to get an entry into the telecom sector. Nevertheless, Trai’s stated purpose of making the playing field level is welcome though clearly there could have been greater focus on roll-out of networks in spectrum bands possible, to increase coverage and competition, rather than blocking a huge quantum of spectrum, which can only be utilised incrementally in stages over a period of 10-12 years.

In terms of the letter and spirit of the 2 February Supreme Court judgment, all 122 licensees whose licences have been cancelled should be given an opportunity to win back these licences. This, in turn, necessitates that all spectrum be cancelled to be part of the auctions to enable that opportunity in the 1,800 Mhz band where spectrum is to be re-farmed.

The objective should have been to release sufficient spectrum to enable a fair price discovery instead of auctioning limited spectrum to create an artificial scarcity. It would also have made sense to release more spectrum in the 2.1 Ghz (gigahertz or one thousand Mhz) band in order to stabilise 3G (third generation) spectrum availability and by enabling service providers to have pan-India 3G spectrum.

Currently, other than Bharat Sanchar Nigam Ltd (BSNL) and MTNL, no one has pan-India 3G spectrum given that intra-circle roaming among service providers has being declared illegal by DoT. Significantly, 3G spectrum in the 2.1 Ghz band has the highest number of broadband devices (2,500 in 2.1 Ghz, versus 50 in 700 Mhz and 719 in 900 Mhz), as the Trai has itself confirmed. It is likely that if more spectrum in the 2.1 Ghz band was released, the country would have benefited much more from mobile broadband and, possibly, operators would not have been so bitter about the reserve price as they are at present.

It is worth examining the more vexatious issues around the Trai recommendations that have led to the DoT questioning these, including the legality of confiscatory refarming, associated idling of spectrum in the 1,800 Mhz band, the need for limiting immediate auctions to 5 Mhz spectrum, the methodology of reserve price calculation and the change of the price of spectrum in the 900 Mhz band from 1.5 times to twice the price of spectrum in the 1,800 Mhz band.

Some of the recommendations by Trai make reasonable sense; not all. Some of industry’s objections make sense; not all.

So why is Sunil Bharti Mittal fuming? Among other reasons, Trai has recommended a reserve price of Rs 3,622 crore per Mhz in the 1,800 Mhz band, which is 10 times higher than the cost of licences that came bundled with 4.4 Mhz spectrum in 2008 (An amount of Rs 3,622 crore multiplied by 4.4 works out to around Rs 16,000 crore; the cost of the 2001 licence for 4.4 Mhz was just over Rs 1,600 crore!). Trai has considered the price of spectrum in the 2.1 Ghz band as similar to that in the other bands, although the former has a different ecosystem with different device economies.

Unlike in the 1,800 Mhz band, the 2.1 Ghz band is a core band for 3G services with a very mature ecosystem of devices and network equipment. The 1,800 Mhz band is a relatively new spectrum band in India, which is fragmented to boot and will take some time to mature. The industry is asking for an 80 percent reduction in the reserve price. Given the Trai’s current price for excess spectrum, Bharti alone will have to shell out more than Rs 20,000 crore with effect from 1 January 2008. And to retain the same spectrum at the time of licence renewal, the operator will have to cough up more than Rs 44,000 crore. Now you know why Mittal is mad with Trai!

The reserve price calculations by Trai seem to be more than a little curious across the board and have prompted the Telecom Commission to ask a host of questions, suggesting that the usage pattern in the short and medium term, the impact on tariffs, the second order impact on the economy and other such factors be considered while calculating the reserve price.

The worry is not so much the higher cost to operators but the arbitrariness in the manner of calculation. The price of spectrum in the 1,800 Mhz band is arbitrarily linked with the 3G auction price because Trai’s calculation is based on the sole factor of propagation characteristics of that band.

It has ignored other factors like the ecosystem that Trai itself admits to in a chart given out with its 23 April set of recommendations that runs into 178 pages (see PDF here, page 42). The chart points out that in the 1,800 Mhz spectrum band only 50 LTE (long term evolution) devices can be deployed against more than 2,500 HSPA (high-speed packet access) devices that can be used in the 2.1 Ghz band. Besides, there are issues relating to fragmentation of spectrum, harmonisation requirements, roll-out criteria, quantum of blocks available, which are of paramount importance in deploying advanced technologies in these spectrum bands.

Again, Trai has assumed the base price as 80 percent of the final price, which is arbitrary, even though it mentions that the international proportion is 50 percent and India’s experience during 2010 has been otherwise. The base price set for 3G spectrum was 20 percent of the final auction price. An amount of Rs 3,500 crore was the base price and the final auction price was over Rs 16,000 crore.

Why was India’ experience different? Answer: the sins of the past. This was because operators bid very high for 3G spectrum, thanks largely to the scarcity that had been artificially created by the grant of the now-cancelled 122 licences for 2G spectrum from January 2008 onwards when the DoT was headed by disgraced former Union Minister for Communications Andimuthu Raja who has been behind bars for more than 16 months now, to be precise, since 2 February 2011.

View Trai’s recommendations below: