US$10
bn price tag renews India's 2G
row By Raja Murthy
MUMBAI - Amid protests from a shocked
cellular phone industry, the Telecom Regulatory
Authority of India (TRAI) has recommended a
minimum reserve price of US$678 million per unit
in the auction of spectrum for 2G services - a
13-fold increase from 2008 during the tenure of
former telecommunications minister A Raja.
If accepted, the TRAI recommendations
could guarantee the government over $10 billion in
revenue. [1] Industry stakeholders fear the new
pricing could cripple the highly competitive
cell-phone industry in India, the world's
second-largest after China.
Telecom
companies told the media that the new TRAI minimum
reserve price was out of touch with market
realities and debt-servicing logistics. The
Cellular Operators Association of India
(COAI) and the
Association of Unified Telecom Service Providers
of India (AUSPI) said in a strongly-worded joint
statement on April 23:
[The] Industry has repeatedly been
facing contradictory and regressive approach
from the Regulator which is detrimental to the
future of the sector that is often touted as the
poster boy of India's economic reforms. From
deciding to link the price of 2G spectrum to 3G
spectrum auctions, to its own expert committee's
inputs without the application of any logic; and
unilaterally trying to interpret DoT's
[Department of Telecommunications] own license
terms like "extension" as "renewal", the
Regulator's actions appear to be unfair and
biased against all operators for reasons best
known to it.
The stakes are high, with
the private sector having an 86.09% share of the
total telecom industry. India had 926.55 million
subscribers at the end of December 2011, with
wireless phone connections forming 96.47% of the
market.
On April 24, the Supreme Court
extended its earlier deadline of June 2 for
auctioning telecom second generation (2G)
spectrum, and ordered auctions to be held by
August 31. 2G services form the bulk of high-speed
data exchange in telecommunications. Faster and
larger multi-media data transfer in
third-generation (3G) and 4G phone services are
already evolving in use.
The 2G auction is
to allot bandwidth available from the 122 telecom
licenses the Supreme Court had cancelled on
February 2 this year, after what it deemed was
illegal underselling of licenses. India is
estimated to have lost $20 billion in potential
revenue.
From being accused of
underselling telecom licenses in 2008, the
government has leapt to the other end of the
spectrum in being accused of over-pricing and
killing the goose laying the golden telecom egg.
The telecommunication spectrum is being
seen as a fat cash cow for revenues to ease
budgetary deficits. Finance Minister Pranab
Mukherjee has projected a deficit of $34.8 billion
for 2012-13, or 1.8% of India's gross domestic
product.
Auctioning of 3G spectrum in
April-May 2010 generated nearly $10 billion in
revenue. Vodafone Essar, Bharti Airtel and
Reliance Telecom successfully bid about $621
million for each of six spectrum blocks in Delhi
and Mumbai, two of the 22 demarcated
telecommunication service areas across India.
But most of the companies that had bought
3G bandwidth in the May 2010 auctions are said to
be struggling to make good their investment in a
market were low costs drive growth. Obviously the
regulator and the regulated have differing
viewpoints on whether the new 2G reserve auction
price could be a proverbial last straw in the
telecom camel's back.
Mobile-phone
companies are estimated to need about five units
of 2G spectrum in the widely used 1,800-MHz band
to be operational. Under the TRAI proposal, a new
entrant would need $3.4 billion as starting price
in auction for an all India permit. According to
TRAI, India has a total of 581 units available in
the 1,800 MHz spectrum across the 22 service areas
nationwide.
TRAI chairman J S Sarma said
that recommendations were the fruit of
consultation with all stakeholders, including an
open house meeting in New Delhi on April 4. A
communication gap though seems apparent between
the industry regulator and the industry.
The TRAI has based its recommendations on
calculating the total telecommunication industry
revenue in 2011 of $42.2 billion growing to $46.1
billion by the end of 2012, and reaching $61.3
billion by the end of 2017.
Sarma said the
new pricing would only result in a marginal rise
of 1.5 to 2 paise per minute in call tariffs
annually over a 20-year period that is the
duration for owning the spectrum. (There are 100
paise to the rupee, of which there are 52 to the
US$.)
Unlike the 3G auctions of 2010, in
which companies had to pay the entire amount for
spectrum bought, 2G spectrum buyers in the auction
will initially have to pay only 33% of the bid
amount, and the rest in equal installments across
10 years.
The market, interested in
short-term returns, did not share the TRAI
chairman's optimism for the next 20 years. Telecom
stocks dived within 24 hours of the reserve price
recommendations, with Idea Cellular slumping
14.7%, Bharti Airtel 7.54% and Reliance
Communications 3.54% in the Bombay Stock Exchange.
Rajan S Mathews, director general of the
Cellular Operators Association of India (COAI),
and formerly chief executive of Birla-AT&T,
said a starting price of around $300 million would
be reasonable for an initial grant "then the true
value can be determined through the auction
bidding process, as was the case with the 3G
auction".
The TRAI states that the
"liberalization" of spectrum (removing
restrictions on how a license holder uses its
spectrum) justifies the higher reserve price but
it has not taken into consideration "the fact that
the supporting eco-system of futuristic technology
is non-existent (network equipment, handsets, etc)
at present and therefore no additional revenue can
be assumed at this point," said Mathews.
"The development of a mature supporting
eco-system is at least five years away. Hence, it
would be totally unjustified to price the spectrum
at such a high price based on assumptions which
have not seen the light of the day and would not
be available in the near future too," he said by
e-mail.
The high price being sought will
also hamper new operators. "For example, if a new
operator is planning to provide 2G services
through the spectrum, he will still have to pay an
exorbitant amount, which is even costlier than
that of 3G, to acquire the same."
The high
reserve price "is driven by certain unjustified
assumptions and not suitably taking into account
the viability of the telecom sector", he said.
Mathews also pointed out that the latest
price derived through auction in 2010 for the 4G
technology spectrum "which TRAI now proposes to
allow in existing spectrum allocation, under the
guise of liberalization" was about one sixth the
TRAI's proposed price per MHz for 2G. "Thus it is
even more puzzling that the purported benefit now
being sought to be given under the garb of
liberalization has itself been valued at much less
price by the market forces in recent past. The
TRAI pricing thus holds no basis."
If the
government accepts the TRAI recommendations, and
with an "inconsistent, regressive and uncertain
regulatory environment", it would not be feasible
for the telecom industry "to be able to deliver on
the government's vision of affordable
communications, rural penetration and rollout of
data services", said Mathews. Rural mobile
penetration would be affected as after the
acquisition of spectrum "at such excessive rates,
the operators would have to face a shortage of
funds for investment in the rural areas".
Competition in the sector would be reduced
through consolidation as more operators would exit
the business as they would not be able to bid for
spectrum. The country's ability to match other
developing and developed nations in access to
mobile broadband would also be damaged, he said.
The new auction reserve prices look set to
intensity the turmoil that has raged in India's
telecom industry since the telecom scam broke out
two years ago. Leading telecom companies like
Vodafone and Bharti Airtel are already in a
running battle with the government over other
licensing and tax disputes.
Vodafone is
fighting a $3.7 billion tax charge the Finance
Ministry says is due from the London-based
multinational buying a stake in the India
operations of Hong Kong-based Hutchison in 2007.
A Vodafone spokesman said the new TRAI
recommendations "will do irreparable harm to the
industry". Vodafone spent $2.17 billion in the May
2010 auction for 3G spectrum, but there is no
guarantee it will buy 2G bandwidth at the new TRAI
base prices. Norway's Telenor has already
threatened to withdraw entirely from India, saying
the new license prices are not viable.
"Promotion of robust competitive markets
for telecom services" is one of the primary
objectives stated in the Department of
Communications Strategic Plan for 2011-2015, but
the high floor price for an auction appears not
very conducive to competition, or in keeping with
fair play of an auction. [2]
The
Department of Communications is studying the
recommendations, and its feedback will be sent to
TRAI for a final view on May 2. Finance Minister
Mukherjee heads a group of ministers who will then
take the final decision - a tricky one that will
affect his budgetary revenue projections if he
reduces the reserve price, but might cause
"irreparable harm" to the industry if he sticks to
it.
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