Why the telecom spectrum auction plan may not be well thought out

There are three major objectives behind the spectrum auction scheduled for February. One, to discover the price of airwaves and maximise revenue for the government so as to reduce the fiscal deficit to the extent possible; two, to provide enough spectrum to cellular operators who have been crying hoarse over shortage of spectrum; three, to improve the worsening quality of service to the consumer.

In the long-term interest of the consumer, the sector and the government, the latter has to ensure none of them is short-changed. However, that's not the reality on the ground. Rather, it appears the government is working at cross-purposes.

First, by sticking to its stand to charge a substantially higher floor price for spectrum auctions than the bidders would have liked, the government has sent out a clear message of revenue maximisation. But at the same time, by offering just 5 MHz spectrum - instead of the 15 MHz that the defence ministry is vacating in the 2100 MHz band - it will also lose potential revenue. The move goes against the target of providing adequate spectrum to telecom companies and will surely not improve services to the consumer.

Come February, the government will go for 2G and 3G auctions. The operators' argument against higher floor price does not hold water. Even at Rs 4,000 crore to lock-in the spectrum for 20 years, the cost is a measly Rs 200 crore a year - something most operators can easily afford for pan-India exclusivity. The floor price the government has set is way below the Rs 4,000-crore mark in any case. Also, since the bid amount is to be paid over the first 12 years of the licence period, including a two-year holiday after the upfront payment.

Telecom companies are required to pay 25 per cent upfront for all bands (except for 1800 MHz where they are required to pay 33 per cent right away). Hence, around Rs 25,000 crore is expected to flow into the government's kitty before 2014/15 ends. Any premium it receives over and above the floor price will proportionally get added to this kitty.

Secondly, operators and consultants alike have been demanding a lower floor price saying very high valuation will harm their debt- laden balance sheets. They have been attacking the government for what they call the government's attempt to kill the goose that laid the golden egg. The reality is to the contrary. Ever since telcos raised tariffs in the middle of 2014, their financials have been improving every quarter.

Bharti Airtel reported a net profit of Rs 1,170 crore in the quarter ended June and Rs 1,345 crore in the quarter ended September, 2014 as against Rs  869 crore and Rs 502 crore in the same period a year earlier. Other major telcos Idea and Reliance Communications too have reported improved financials.

Unless the Reliance Jio 4G offerings - which have been deferred year after year -are hugely disruptive on pricing to force a price war, domestic telcos will continue to report healthier balance sheets in the years to come. That justifies the government's decision of a higher floor price.

However, one of the biggest mysteries of the upcoming auction is the government's move to offer only 5 MHz of spectrum in the 2100 MHz band meant for 3G even though the defence ministry has agreed to vacate 15 MHz of spectrum in that band.

This has two implications: the unlikely implication is that the government's decision to reduce supply in the band will create artificial scarcity and raise bids to unviable levels. The thinking within the government was that cellcos will bid aggressively to become pan-India 3G players (they have roaming agreements amongst them right now). However, that's not likely. The likely implication is that if the bidding gets aggressive, the industry will let this opportunity pass in 2100 MHz and wait for the remaining 10 MHz (perhaps even 15-20 additional MHz) coming their way in the next round of auctions planned some time towards the end of 2015 or early 2016.

Meanwhile, the industry is hoping against hope that the Telecom Regulatory Authority of India (Trai) will stick to its stance of pricing the 3G spectrum in the 2100 MHz at Rs 2,720 crore as it had recommended earlier. The inter-ministerial telecom commission had asked Trai to reconsider its suggestion. Even if Trai sticks to its previous recommendations, it's likely the DoT and the Telecom Commission will override the recommendation to propose a valuation closer to what has been suggested for the 2G bands.

Perhaps, the spectrum-related decisions could do with better cohesiveness.