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Bhupesh Bhandari: Why reserve prices vary

This would hit the noble cause of rural telephony, and make the business case totally unviable

Bhupesh Bhandari 

I don’t want [Telecom Regulatory Authority of India] to go into my P&L [statement of profit and loss] and calculate how much my tariff will go up,” the senior executive of a top-notch telecom service provider thundered. He was unhappy with the reserve price for spectrum auction that suggested on Monday. Service providers like his company, he prophesied, would have no option but to raise tariffs; this would hit the noble cause of rural telephony, and make the business case totally unviable. During the 15-minute conversation, he frequently used words like “absurd”, “dismayed” and “seasonal” (to mean inconsistent).

It would be instructive to see how arrived at the reserve price of Rs 3,622 crore per megahertz in the 1800 MHz band and Rs 7,244 crore in the 900 MHz for an all-India licence (22 telecom circles). It first removed the distinction between 2G and 3G spectrum. On February 25, 2010, the notice that invited applications for the auction of spectrum for 3G and broadband wireless access (BWA) had said that if any further auction (of 3G and BWA spectrum) takes place within a year then the bid price in the current round will be its reserve price. Thereafter, the reserve price should be raised every year by a rate equivalent to the prime lending rate, or PLR, of the public-sector (SBI). That auction was completed in May 2010, almost two years back. Companies paid Rs 3,350 crore per MHz for a pan-India licence in that auction (the amount varied from Rs 6.06 crore in the Jammu & Kashmir circle to Rs 663.39 crore in Delhi). Trai’s next step was to take this figure and multiply it with SBI’s PLR of 12.63 percent.

The 3G spectrum was in the 2100 MHz band. The next auction will be in the 1800 MHz band. has opined that the 1800 MHz band is 1.2 times more efficient than the 2100 MHz band. What is the basis of this observation? Quoting Analysys Mason, a research and consulting outfit in the telecom, media and technology sectors, has said that 0.037 base stations are required in every square kilometre of suburban area and 0.018 stations in remote/rural areas in the 2100 MHz band, compared to 0.027 and 0.013, respectively, in the 1800 MHz band. In the 1800 MHz band, the cell range is 0.558 km in urban areas, 0.918 km in suburban areas and 10.949 km in rural areas, while the range is 0.470 km, 0.772 km and 9.753 km, respectively, in the 2100 MHz band. Hence, the reserve price (indexed to SBI’s PLR) was raised by a factor of 1.2.

then got down to studying the various auctions held globally in the last three to four years, which showed that the reserve prices are generally around 0.5 times the final prices. In “the context of Indian telecom sector, where the demand for spectrum is considerably higher”, decided to use a factor of 0.8 to determine the reserve price. Hence it arrived at the figure of Rs 3,622 crore per MHz (Rs 6.55 crore for Jammu & Kashmir to Rs 717.26 crore for Delhi). Since the 900 MHz band is twice as efficient as the 1800 MHz band, the reserve price for the auction of spectrum in that frequency has been doubled (Rs 7,244 crore per MHz for a pan-India licence).

It is also quite revealing to know what telecom service operators and other stakeholders told during the consultations that have resulted in these suggestions. Many said that the reserve price should be the bid amount in the last auction of 2001 (for the fourth operator) in which a pan-India licence went for Rs 1,659 crore adjusted for SBI’s PLR. That licence came with 4.4 MHz of spectrum, which could be raised further to 6.2 MHz after the subscriber had hit a certain customer base. The cost of spectrum in 2001 was, thus, Rs 267.58 crore per MHz. Eleven years later, in 2012, given SBI’s PLR of 12.63 per cent, this becomes Rs 990 crore per MHz — a little over 27 per cent of the reserve price suggested by earlier this week.

Some argued that this needed to be adjusted further in view of the changes that had taken place in the telephony market since 2001. Thus, the urban and semi-urban markets have reached saturation, and further growth in numbers is coming from the rural markets. The addressable market in 2013 would be just 170 million. Average revenue per user has plummeted from Rs 600 in 2001 to Rs 100 now. Telecom tariffs in India have fallen to amongst the lowest in the world and the cost of finance has risen. One stakeholder calculated the “weighted average impact of these competitive indices to be around 66 per cent on the 2001 auction discovered price for 6.2 MHz spectrum. On the bases of this indexation method, the stakeholder argued that the reserve price should be in the range of Rs 1,800 crore to Rs 2,100 crore”.

A few said that the 3G reserve price should be used as the reserve price for the next round of auctions also, though one said that some “skewing” of price may have taken place in 2010 because of the scarcity of spectrum. It was also suggested that the reserve price be indexed to the enterprise value of and Swan Telecom, in which stakes were sold to foreign companies when the only asset on their books was the telecom licences (and the embedded spectrum). was valued at Rs 9,100 crore in October 2008 when Telenor bought 67.25 per cent in it. Swan Telecom’s valuation in December 2008 came to Rs 7,145 crore when Etisalat acquired a 45 per cent stake in it (unlike Unitech Wireless, Swan had licences in only 13 circles; hence the lower valuation). If is the benchmark, each megahertz of spectrum was then valued at Rs 1,468 crore, which would now, three years later, be worth Rs 2,097 crore.