Monday, January 19, 2009

Whither 3G and Broadband?

There have been several opinions, including a couple of editorials in the Mint , that have supported the doubling the reserve price in the 3G and BWA spectrum auctions in India. While the objective of maximizing Government revenues is generally admirable, this last minute googly and consequent confusion in the auction process will only reinforce the image of India as an uncertain investment destination.

It is indeed surprising that the issue of reserve price has been brought up now, after the auction Information Memorandum was released and the time-table announced. That the 3G reserve price would be about Rs 2000 crores was known for several months; indeed, the guidelines for auction of spectrum were announced over five months ago on 1 August 2008. Has the Ministry of Finance become aware of the "low" reserve price only now? In fact, it might be argued that since August 2008 the global (and Indian) economic environment has worsened, telecom valuations have taken a beating (down 30-50% during this period) and liquidity - even for good projects / investments has considerably dried up - therefore, the reserve price should be reduced in order to attract more bidders for the spectrum. Hong Kong did just that, and cut their BWA reserve price by 50% between October and November 2008!

Policy decisions in the telecom sector are being taken on the fly. New licences announced, terms & conditions changed, and scarce resources awarded without any sense of predictability. The number of players involved in this process are numerous, often leading to myopic and locally optimized decisions. The industry regulator has been relegated to a 'recommendator', whose opinions are occasionally sought and frequently rejected or modified. And, operators and investors indulge in guess-work and waste precious resources on creating regulatory arbitrage instead of focusing on developing new services or technologies.  

Coming back to the issue of the reserve price, what is the basis for somebody in the Government seeking a 100% increase? Why not 125% or 150% or 75%? It is the job of the regulator to study the economics of the business, analyze international benchmarks and assess current market conditions to determine the base price for a scarce asset. When was the last time TRAI was consulted to make such an assessment? What basis does someone else use to change the assessment made by an independent industry regulator? 

It would be an easy and safe decision to double the reserve price and / or delay the auction process by a couple of months. After all, nobody in the Government will lose their jobs or sleep over that. What it does to the business case of rolling out Broadband in India and consequently, overall value to the country is forgotten in the process. The tougher option is to find ways to encourage greater level of participation in the auction. A fair, transparent and well-managed auction will ensure that an appropriate market value for spectrum is determined for the first time in nearly 5 years. Opening up more spectrum slots for auction would have a multiplying effect on Government revenues as well as Broadband penetration. Clarifying some of the long pending (at DoT) regulatory issues like number portability, Internet Telephony, MVNO and calling cards would further enhance the "value" of the spectrum, particularly to new entrants and foreign operators.

2 comments:

tirumeni said...

Interesting, the question. As is evident, the regulatory authority and its parent body have been at constant logger heads over matters of policy, not just about pricing, but also about auction procedure and fairplay.

While a regulatory body has been installed with the right intentions, it has been rendered defunct thanks to the lack of decision influence it can generate.

The rot, in essence is at the leadership. While the government has woken up to the potential of telecom industry, its resources are scarce, be it for coordinating the legal procedures or for bringing order to market demands, or surprising still, to communicate between the various arms of the government itself.

Was someone looking for Mr. Maran?

Thomas K Thomas said...

You are right if decision making was based on economics. In this case it seems there is huge corporate interest that is leading to the flip flop. Otherwise issues like base price and number of slots to be auctioned is no rocket science that it would take 3 years to finalise policy