Spectrum pricing: Why Sibal is right and Yashwant Sinha wrong

New Delhi: Scam or no scam? BJP's Yashwant Sinha has alleged that a drastic reduction in base price for spectrum, as recommended by telecom regulator Trai, will favour "few operators" at the cost of national exchequer. Another Trai suggestion, that spectrum usage charges (SUC) be reduced to a flat 3 percent, has also come under flak from Sinha.

Telecom minister Kapil Sibal is obviously not amused. An agency report this morning quotes him as saying "Previously, they said the process was not followed, there was a scam. Now when the process is being followed, there is a scam. Yashwant Sinha should tell us how to auction spectrum and at what price because he seems to be an expert in everything. Yashwant Sinha should think before he makes wild and baseless allegations."

Well, the two issues under contention here are whether spectrum base prices should be lowered or not and whether SUC should be lowered to flat 3 percent against 3-8 percent now. On both counts, Sibal seems to be moving in the right direction:

 Spectrum pricing: Why Sibal is right and Yashwant Sinha wrong

Kapil Sibal. AFP

1) Base price for an auction is the starting price below which bidders cannot place their bids for spectrum or airwaves. It is not the final price, which is subsequently discovered during the auctions. A recent editorial in the Indian Express pointed out that while there is a tapering in the growth of new subscribers for plain-vanilla voice calls, the market for data — people using their smart phones/dongles to surf the internet — has taken off dramatically. Naturally then, firms will pay the highest amounts in the auction for the spectrum that helps them serve this fast-growing market, and not as much for the spectrum used to service just the "voice" customer. This means they will pay more for 900 mhz and 2100 mhz spectrum, and less for the 1800Mhz spectrum.

The upcoming auctions will offer 1800 mhz spectrum in all circles, 900 mhz airwaves in only three circles and there is as yet no timeline or proposal for auctioning 3G airwaves or 2100 mhz. So Mr Sinha, why would telcos want to begin bidding at a very high base prices for spectrum bands which are anyway not going to hold as much value as before for them? There is a very real possibility of another failed round of auctions if base prices are hiked unncessarily. Trai  has recommended that the reserve price for 900 mhz band be cut by about 60% while the price for 1800 mhz be lowered by about 37%. The Telecom Commission has already raised the bar on both bands, by suggesting a 25% and 15% increase over and above the Trai recommendations.

2) In May 2010, telcos paid more than Rs 50,000 crore for 3G airwaves in an auction where base prices had been set high. This amount is now weighing profits down as it did not yield commensurate revenue. In comparison for 2G airwaves, the all-India licence was pegged at Rs 1,650 crore then. In the case of 3G airwaves, which as we said earlier, are preferred since they aid data transmission, high base prices were compounded by unrealistic bids that telcos themselves placed. It led to heavy debt on telco balance sheets and not one telco was able to win pan-India 3G spectrum. So high base prices do not necessarily help the industry going forward, they may at best discourage serious players from coming forward in the auctions.

3) Speaking after the Q2 results yesterday, Vodafone India's CEO and MD Marten Pieters had said that levying high rates of SUC is like penalizing the big telecom companies for having more subscribers. At present, SUC is charged according to a slab rate which varies between 3 percent and 8%, with the big telcos per force paying more since they have larger operations with more spectrum than smaller operators in most telecom circles. Sinha's assertion that capping SUC at 3 percent will mean "huge benefits to existing operators" and lead to "windfall" gains for incumbents is made keeping perhaps the big three telcos - Bharti, Vodafone and Idea Cellular - in mind. Well, world over the telecom market in mature economies sustains just 3-4 big players instead of having 12 operators (as in India) with almost none financially robust. What is to be gained by funding the exchquer if the telecom industry is unable to have viable, robust players? For sustained profitability, telcos must be charged SUC at reasonable rates. Already, because of legacy issues, there are various complexities involved in bringing everyone to a flat 3 percent rate - complexities introduced by previous regimes in the way spectrum was allocated.

Lets not complicate matters further.

An Empowered Group of Ministers (EGoM) is scheduled to meet on November 22 to consider spectrum pricing issues, after which the Union Cabinet will finalize prices.

Updated Date: Nov 13, 2013 17:11:27 IST