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The cost of auctions

Outcry at Trai suggestions is unwarranted

Business Standard  |  New Delhi 

The new recommendations from the Telecom Regulatory Authority of India, or Trai, on have led to much public heartburn. Auction reserve prices, according to telecom operators and some observers, have been set inexplicably high, at Rs 3,622 crore per MHz for the 1800 MHz band and Rs 7,244 crore for the 900 MHz band. On worries that these would cause the business to become unviable, and will spike, telecom stocks have fallen for two days in a row. This angst, however, does not seem to be grounded in facts. Consider how Trai has come to set this reserve price. It has based it on what so many observers have declared is the only useful way to discover the price of a natural resource — through auctions. In the 3G auctions of 2010, operators bid Rs 3,350 crore for a pan-India licence in the 2100 MHz band. This price has been indexed to State Bank of India’s prime lending rate of 12.63 per cent. Trai has benchmarked spectrum in the 1800 MHz band (conservatively) as being 1.2 times more efficient than in the 2100 MHz band. And the reserve price has been set, sensibly according to auction theory, at 80 per cent of the expected bid. Based on these three factors, Trai has arrived at the price of Rs 3,622 crore per MHz. Trai has said that the price of spectrum in the 900 MHz band should be double this because it is at least twice as efficient as the 1800 MHz band.

Any argument from telecom companies that spectrum for and is different, and thus price comparison is unfair, comes up against Trai’s established from quite some time back, that technical considerations determine they are similar. In fact, this similarity was central to the Comptroller and Auditor General’s discussion of the losses to the exchequer from the 122 licences given out by former telecom minister A Raja in 2008 — which incumbent companies did not contest at the time. They were busy using it to fight newcomers who had caused tariffs to plummet and profits to slide. In truth, what worries incumbents is that they will no longer benefit from their first-mover advantage: exclusive access to the more efficient 900 MHz band. Other arguments are as easily disposed of. For example, that it will now take a new player Rs 18,110 crore to start a pan-India service. Possibly; but this new policy is nevertheless competition-friendly. Those who buy spectrum can pay one-third of the money upfront and the rest over 10 years, with a two-year moratorium thrown in. They will be allowed to mortgage spectrum, which will also be service-agnostic. Thus, in the event of a default, a lender can recover costs from another auction. Any surplus over the liability will come to the government. Refarming of unused spectrum, also proposed, is essential — and another reason, according to economic theory, to have a substantial reserve price.

Finally, there’s the question of the effect on consumers. Indians pay among the lowest call tariffs in the world, and it would be absurd to expect that to last forever. In any case, Trai estimates that a company that buys 5 MHz of spectrum in the 1800 MHz band will face a resource cost in the first year of 14 paise per user per minute. This assumes 50 million users, 340 minutes of usage by each subscriber every month, and an annual outgo of Rs 2,856 crore towards spectrum fees. With growth in the number of subscribers, this will come down further in the days to come. These are not unreasonable figures — and they are, after all, the cost of the price discovery that has been clamoured for of late.

First Published: Wed, April 25 2012. 00:46 IST