2G Spectrum Auctions Are A Huge Challenge

The last week has seen the government, telecom companies, banks, media, and analysts discussing the possibilities of 2G spectrum auctions in an animated fashion. Turns out, not one is happy. The government hasn’t got the 400 days it wanted, the Supreme Court is clearly unimpressed with the government’s plea for additional time, incumbents are threatening price hikes, new entrants are raising questions about the effects of such an auction on competition, with the media and analysts representing views and news — all this when there is deafening silence from the 700 million existing consumers (notwithstanding what the government tells you) and another half a billion who have yet to make a phone call from their own mobile phone.

Let me attempt to address the implications and the possible way forward in a few brief steps, especially given the August deadline for auctions and license extension and the reserve price, plus sequential spectrum auction recommendations across multiple 2G bands by the Telecom Regulatory Authority of India (Trai).

First, this is a complex task which requires an end to posturing, defensive behaviour, and certainly the gross misrepresentation of the truth that has been going on for nearly four years now, especially since end-2010 when Raja resigned. Unless someone can prove the Trai wrong, it is clear that Sibal needs to immediately give up any residual claims on ‘zero loss’ or ‘auctions adversely impacting affordability’ or that somehow, everyone else — the NDA, the Trai, Raja — is to blame for the colossal mess, The sooner these issues are buried, the faster we can look towards a fresh start. After the Supreme Court judgment and the Trai recommendations, all issues of legality, valuation, procedure and transparency have been settled. It will be best for the government to raise their hands, come clean, and move on.

Second, the issues involved in spectrum allocation are so complex and require such meticulous planning, especially given the fresh deadlines, that the matter goes way beyond corruption and the spotlight now is on the government’s competence. It is now fairly explicit that seniormost officials within the DoT, the Planning Commission, and the ministry of finance are out of their depth on this issue. The political leadership requires serious reinforcements with experts without an agenda, who need to focus on broad policies at one level and on minor details at another. Speed, transparency, and a near perfect balance between the policy objectives of telecom growth and government revenues will need to be achieved. We should all be concerned that the current administrative and bureacratic players simply don’t have the expertise, nor have exhibited any. Where and how soon a high level, empowered, ‘clean’ team can be assembled will be crucial to the success of these upcoming auctions and the process of getting the telecom sector slowly back on track.

Third, on the issue of reserve price, and unless someone can prove the Trai’s public declaration that the prices will go up only by a handful of paisa is wrong, the resolution needs to be reached without guess work. If there is a gap between the operators’ version and the Trai’s version, then the final decision must prove who was wrong and by how much. While the Trai little incentive to distort prices, the Telecom operators crying foul certainly seem self-serving. They could well be right, but someone needs to prove that and announce that. No behind-the-door deals this time around.

Fourth, the quantum and sequence of spectrum to be auctioned needs to follow the principle of ‘demand exceeds supply’. Nobody anywhere in the world will put all spectrum for bidding at one time. That’s not just disastrous fiscal policy but also public policy - since new uses and users of spectrum that science hasn’t touched yet could be on the anvil. The Trai must formally unlock itself from its policy of forbearance wherein it has handcuffed itself. It should be forced to stand by its public announcements and come down on any rate rise under Section 11 of the Trai Act by regulating rates in public interest —in fact, regulating rates, especially in rural areas. Let’s use market forces to bring in competition and discover the fair price of spectrum. For protecting the interest of rural mobile users, let’s go back to good old tariff regulation till such time the prices settle again. It’s been done between 1994 and 2001. No reason why it can’t be done again to protect the consumer.

Last, the Supreme Court has done its job admirably. The Trai, for the first time, seems to have put together a comprehensive set of recommendations which it is also obliged to defend. I have written earlier about this being a test for Trai in terms of setting right its dismal and often dubious track record. It has passed that test. That’s the other impact of the Supreme Court judgement — getting the regulator to start doing its real job.

The industry is having its routine fights — GSM versus dual technology — but it is also seeing temporary and unusual friendship between existing and new GSM operators. The government must remain unfazed by these noises; it is now required to do its job in an honest, transparent manner. Time is short, and any deviation from the Trai’s recommendations will not only be watched under the microscope, but will need serious, detailed and public disclosure, especially on issues of reserve price, quantum, timing, and sequence of spectrum to be auctioned. We are faced with serious issues and it’s a time for serious people. The next six months will be the toughest test, not only of the government’s integrity, but perhaps for the first time, of its competence — which has become a huge concern on Monday, perhaps creeping close to the problem of corruption.

This article appeared in Business Standard on May 01^st, 2012