India's spectrum auctions must go past govt coffers

After a sparkling Diwali, the 2G spectrum auctions in India came as a damp squib. Now, the government is blaming the Comptroller and Auditor General of India (CAG) for giving an inflated estimate of INR 1,760 billion (US$32 billion) as the loss due to the 2G scam.

The other party bearing the blame of the 2G flop show is industry regulator, Telecom Regulatory Authority of India (TRAI). On Wednesday this week, telecom minister Kapil Sibal said he went entirely by the TRAI's  recommendations when deciding on the spectrum pricing. He implied if TRAI had recommended a much lower base price for 2G spectrum, the auctions could have been much more successful.

The base price was kept high to avoid a repeat of the 2G scam, where the government was accused of giving licenses and spectrum on favorable terms to telcos.

The government was targeting to generate between INR 280 billion (US$5.09 billion) and INR 400 billion (US$7.28 billion) as revenue from the sale of 2G spectrum in the GSM band. The poor response may upset its efforts to meet the revised fiscal deficit target of 5.3 percent of the country's GDP.

The 2G auctions have generated only INR 94 billion (US$1.71 billion) and even this money will not flow into government coffers entirely since it has to refund license fees to those who returned spectrum taken earlier. Also, telcos are allowed to pay only 33 percent of the due amount in the first year, and the rest in installments.

There are several theories doing the rounds about why the auctions were not a success. The first one is that the large telecom operators deliberately chose to stay away. Of the 13 telcos doing business in India, only five participated and even among these five, three had lost licenses after the Supreme Court canceled all licenses awarded in 2008. These three--Telenor (through joint venture company Telewings), Videocon Telecom, and Idea Cellular--had not much of an option since non-participation would have meant winding up their respective telecom businesses.

But why did the large Indian players stay away from the auctions? They may have done this for two reasons: to tell the government that a regulatory overhang doesn't bode well for business; and to prove that there was no scam in 2008 and the figures brought out by the CAG were grossly inaccurate.

A week back, Sunil Mittal, promoter of the country's largest telecom operator Bharti Airtel, predicted that the entire process would be over on the first day itself and his company was participating merely because it did not want to be seen as boycotting the auction process.

Similarly, Mukesh Ambani, promoter of Reliance Industries, also chose to stay away and so did his brother. In fact, reports say that Mukesh Ambani needs airwaves to offer voice services to supplement its 4G services and has enough cash reserves to buy airwaves even at the current base price.

The only player that bid aggressively was Vodafone. It won 14 licenses and has bagged spectrum in one Category "A" circle, seven Category "B" circles, and six Category "C" circles.

The additional spectrum will probably help Vodafone address its growing customer base better, since it has not received any new 2G spectrum since 2008. Meanwhile, its customer base has increased from 60 million to 153 million today.

The second and more plausible theory doing the rounds is that the reserve price set by the TRAI was indeed way too high and the market has changed considerably since 2008. "It is very dangerous to extrapolate 2010 prices to 2012. The nature of the market in 2008 and 2010 is different from that in 2012," Sibal told a newspaper on Thursday.

The one clear lesson for India from this auction is to stop looking at the telecom sector as a cash cow. This may also be a reason why Ambanis and Mittal chose to stay away from the auction. The attempt to maximize government revenue by increasing spectrum prices went futile.

The result? The Indian telecom sector today has lesser competition and the use of spectrum may be suboptimal. In fact, there are also reports that there may be a revision of telecom tariffs in the near future.

The telecom sector has played a key role in the growth of the Indian economy. It would be unfortunate if the sector can't continue to be the growth engine for the Indian economy.