Grandstanding in auctions isn't rare and globally, few lessons have been learnt from mismatch between revenue earned & acquisition cost of the spectrum, resulting in unfortunate bleeding
The ongoing auction of airwaves, 46 MHz in the 900-MHz band and 385 MHz in 1,800-MHz band, is likely to close by the end of the week. The bids received so far are fast approaching the final auction price determined in the last auction for third generation (3G)-technology related spectrum auction in 2010. Grandstanding in auctions isn't rare and globally, few lessons have been learnt from the mismatch between the revenue earned and acquisition cost of the spectrum, resulting in unfortunate bleeding. After first five days of auction, the Government treasury has an additional Rs 54,600 crore. Though the auction has not been concluded, the bidders have sobered after the initial excitement.
There are positive features emerging from the auction. The spectrum allotment and management would be transparent, with the adoption of the auction route. This eliminates the discretionary exercise earlier resorted to by the department of telecom. The mess created in the sector by the grant of licences for the second-generation (2G) technology in January 2008 is well known. The two positive outcome of the Comptroller and Auditor General's report regarding assumed losses to the government has been the restoration of the legitimacy of the Telecom Regulatory Authority of India' s recommendations and transparent National Telecom Policy 2012. The contribution of the judiciary by deciding to cancel the licences granted in 2008 was no doubt historic.
The present auction, fair and just as it is, has some distinct features. First, the terms and conditions are transparent and have been shared with the bidders. Secondly, the bidders in this auction are in two categories - those already providing services with licences and spectrum expiring in a year and those aspiring to enter the sector. Thus, the end goals of the bidders do not converge. Few want to survive by protecting their sunk investment by renewing their licences. The new players are enthusiastic on the basis of future offering. Then, companies are awaiting the government's policy regarding spectrum trading. As part of the strategy, the owners of the spectrum hope to monetise via trading. Besides these unique features, the companies will be competing in a new rounds of auction in about two years, when more licences expire beginning 2016-17. Therefore, the benchmark of price bids determined in the present auction will have a major influence on the base price of future auctions.
The final outcome might take a few more days, as the final hammer would only be exercised after all the circles have confirmed supply matches demand. This has resulted in strategic bidding, with players moving from one circle to another in any band any time. As the 1,800-MHz band has the largest amount put on the block, there is a distinct possibility that the coveted 900-MHz band would remain open to bidding for a longer period. The welcome feature is that there is no collusion among bidders, because of the quantum of spectrum as well as the structure of the action.
Vodafone and Bharti Airtel have high stakes in these auctions. They would naturally try to retain licences and, thus, customers. Any slippage would mean higher capital cost for creating network and portability for their old customers moving to other telcos. These developments are further complicated by the prospects of merger and acquisitions. It would influence the transactions at the time of due diligence, if the subscriber numbers are re-determined.
The price bids will directly influence rates and quality of service. Both voice and data rates might need to be revised to balance companies' top and bottom lines. On a present reckoning, the adjusted gross revenue for financial year 2013 is not remunerative to pay for the bid price. The financial implication in the metro circles is likely to be negative unless earning from data services rise. A few experts watching developments in the sector have already raised concerns over the financial health of companies in the sector and have warned irrational bids would hit these at a time they are struggling to recover.
Then, there is the issue of consumer satisfaction and rural telephony. With diversion of funds for retaining spectrum, telcos are thinly spreading capital expenditure on infrastructure development. It will also hit rural coverage and spread of broadband services.
In the circumstances, it is important to check the aggression in the auctions so that the winner's curse does not revisit companies.
The author is director, Public Interest Foundation, and former chairman, Telecom Regulatory Authority of India.He can be reached at email@example.com