Spectrum Pricing: Someone In Trai Surely Didn't Read The Golden Goose Comic

If the Modi government accepts the Trai proposal, it will be guilty of killing two geese and not just one. One, of course, is telecom; the other will be the banking sector.

The telecom regulator, Trai, has dropped a bombshell by announcing skyhigh reserve prices for the next spectrum auction, where the prize being offered is the 700 Mhz band, touted as the most useful band for mobile broadband and 4G services. But the industry is likely to reel under sticker-shock: at the recommended reserve price of Rs 11,485 crore for one Mhz of all-India 700 Mhz spectrum, it is almost twice the price of 800 Mhz spectrum.

We strongly recommend that the Telecom Regulatory Authority of India (Trai) read the classic Goose That Laid The Golden Eggs comic. In the story,  the goose’s owner saw that one particular hen was laying a golden egg daily. Suspecting that the goose must be having a hoard inside her, they cut her open, only to kill the poor feathered treasure. The moral is, of course, that greed kills.

Coming back to Trai, what it has proposed is the sale of the new – previously not on offer – 700 Mhz spectrum along with large tranches of 800 Mhz, 1,800 Mhz, 2,100 Mhz, 2,300 Mhz and 2,500 Mhz spectrum (plus a bit of 900 Mhz) at inflated prices that could conceivably raise Rs 5,00,000 crore for the government if it all gets sold.

Arun Jaitley should not be counting his chickens before they are hatched. It is clear that such a large offering will not be sold at the prices mentioned by Trai for the simple reason that no one – including the government – can afford it.

While the industry clearly needs more spectrum – the sheer amount of call drops in a one-billion subscriber industry tells us why – it is absolutely in no shape to pay for it. It is already overstretched trying to roll out 4G services. Along with that in increasing the cell tower base, it is staggering under loads of debt.

Barring the top three operators – Bharti Airtel, Vodafone and Idea Cellular – and possibly one more operator (Reliance Jio, which is yet to launch) – the rest of the industry is ripe for sale or consolidation. At these prices, the government will be left two more walking dead public sector losers – the public sector stretcher cases, BSNL and MTNL.

After the last major auction of February 2015, Jaitley collected loot of nearly Rs 1.1 lakh crore, but the industry’s debt was said to have risen to a staggering Rs 3.5 lakh crore due to that – and this can only increase.

If even half the spectrum now on offer gets sold, the industry’s debt will simply double, for it does not have the cash flows to bid for so much spectrum right now, or even later this year, when call ad data rates could fall with the entry of Reliance Jio.

Put simply, Trai is effectively recommending a flop auction. It could not have chosen a worse time to offer so much spectrum at such a high price. It is right to put nearly all the available spectrum on offer so that there is no artificial shortage of spectrum, but it clearly has to rethink its pricing.

Before we discuss what needs to be done, a brief flashback on what happened in the past is necessary to understand the way forward. The telecom industry has been through four phases of spectrum pricing.

In the first phase, which was the first wave of bidding for telecom licences under Narasimha Rao, everyone overbid and the net result was the industry could not grow due to the completely unaffordable pricing of mobile services.

In the second phase, under the 1999 New Telecom Policy, the unviable bids were allowed a transition to revenue-share based pricing, and the industry gradually recovered its mojo. In the third phase, the NDA upped spectrum prices to roughly market-determined levels in 2001, but the prices were kept relatively low in order to allow the industry to expand teledensity.

In the fourth phase, the UPA used what was meant to be a limited policy of cheap entry to ensure non-market-based pricing where cronies could reap the benefits of low-priced spectrum – this was the Dayanidhi Maran-A Raja phase, which inevitably led to the 2G scam.

We entered the fifth phase, of purely market-determined pricing in the final years of the UPA, under pressure from the courts and public opinion. While auctions are clearly the superior system given the abuses seen under UPA, the system also needs to be tweaked now.

If the high prices of previous auctions were the result of offering less spectrum than was possible, this time clearly that is not the case. This means either the pricing must reflect the higher availability, or a new mechanism adopted to ensure the success of the auctions.

The only logical way out is this: the base prices need to be set lower, and bids should be on the basis of revenue shares, so that the upfront costs do not kill either the success of the auction or the industry, or both.

There is an additional reason why Arun Jaitley should read the Golden Goose story. Even if the auctions succeed, it will be a pyrrhic victory for they will come at the cost of another failure – the banking system.

Let’s be clear: money for spectrum bids comes less from the telecom industry’s profits and more from banks. With public sector banks already staggering under loads of bad debts, what they don’t need is another big demand for loans, especially under political pressure.

If Jaitley gets his golden eggs, it will be because he shifted them from his own pocket – from his banks to the telecom industry. To mix another metaphor, his chickens will come home to roost sooner than later.

If the Modi government accepts the Trai proposal, it will be guilty of killing two geese and not just one. One, of course, is telecom; the other will be the banking sector, though it currently looks more like the ugly duckling than a golden goose.

The way forward should thus be clear:

One, keep spectrum reserve prices just at last year’s levels, and allow bids beyond that on revenue shares. This will at least keep cash haemorrhage limited.

Two, liberate spectrum pricing and sharing where the government does not look at this as yet another way of making money.

Three, liberalise consolidation in the industry by allowing any spectrum acquired in the M&A process to be priced at the old rate till it is time to renew.

Four, allow some telecom prices to rise to economic levels without raising Cain over it.

Five, no nationalised bank should be pressured to lend to telecom just to make auctions a success. The banking system is already down; there is no point in putting its lights out.

And yes, the Golden Goose comic should be required reading in Trai, North Block and the whole of the government.