The problems with 3G auction

With 8-10 million new mobile phone subscribers each month and most existing firms starved of spectrum, you would think auctioning new 3G spectrum would be a piece of cake.

And given how firms like Etisalat and Telenor have just paid Swan Telecom and Unitech five-six times what these firms paid the government less than a year ago for their 2G spectrum, you would think the government would be able to get a pretty good price for it. Yet, it continues to get it wrong and several in the industry are convinced the auctions will not take place in this government's tenure.

Hopefully they'll be proved wrong, but if this can happen in an area where there is great demand and the potential bidders are not cash-strapped, you shudder to think of the fate of the governments famed infrastructure push in other areas.

First of all, Communication Minister A Raja goofed up badly. While the Trai had first issued its recommendations on 3G in 2006, there was continuous back and forth and, even after the investor conference on December 23, 2008, there is no clarity on what the 3G licence fee details!

All this when, according to the schedule, the actual bids were to be conducted on January 16 given the Christmas and New Year holidays, this means the government was giving foreign investors just about a week or so to make up their minds on a project (licence plus the network buildup) which could cost $4-5 bn.

Even the clarifications on the questions asked in the conference, which are so critical as they become part of the eventual licence conditions, are still not out!

Even more curious, while the law says foreigners can have only up to 74 per cent equity in a telecom firm in India, the 3G Information Memorandum says foreigners can bid without having Indian partners if they win the bid, they can then set up an Indian firm and comply with the rules.

While that sounds like a nice and friendly move to encourage foreigners to bid, the problem is that no foreign firm of any decent size (there were no new foreign firms at the 3G pre-bid conference) wants to bid since the view is the bid is restricted to just the existing players.

If there is such a huge gap in perception, surely someone from the government needs to be sitting down with these investors to figure out just what the problem is?

One problem is that the rules say all the money has to be brought in with a week or two of the bid but since this requires FIPB approval which is time-consuming, the bid has no real chance of working out.

The other, of course, is that a firm which does not have an existing telecom service in India has to pay Rs 1,651 crore (Rs 16.51 billion) as a one-time payment over and above the bid amount.

And now, to make things worse, the Prime Minister in his avatar as Finance Minister has suggested the reserve price of 3G auctions be doubled from Rs 2,020 crore (Rs 20.20 billion) at present to Rs 4,040 crore (Rs 40.40 billion).

This is supposedly the reason why the bid date has now been postponed to January 30. Its nice that the PM-qua-FM has doubled the reserve price particularly since, if the number of bidders is limited, the bid could end up being pretty near the reserve price.

The PM is doing this since, after having been helpless when Raja dished out 2G licences worth Rs 55,000 crore (Rs 550 billion) for just Rs 9,000 crore (Rs 90 billion), he now wants to save Rs 8,080 crore (Rs 2,020 crore into the four 3G licences on offer) a classic case of bhagte chor ki langot sahi (at least grab the thiefs underwear)!

But did the PM/FM need to wait till the 11th hour to do this the Trai view on the reserve price was known two years ago, and by September when Etisalat/Telenor happened, it was pretty clear the actual spectrum prices were way above what they were being sold for.

Why not intervene then especially since, as his actions in postponing the date of the auction and in sending the 3G licence fee matter to the Cabinet for clearance have made it clear, Raja is quite amenable to suggestions on 3G policy.

What is even more alarming is how incomplete the PM/FMs intervention is. It is well-known that Broadband Wireless Access (BWA) spectrum can just as well be used for doing 3G telephony.

So, instead of demarcating separate bands for BWA and 3G and then auctioning them separately, the government should auction them together, allowing winners to use them for data or voice services as they choose worse, the BWA reserve price is a fourth that of 3G.

While firms who win 3G spectrum can also bid in the BWA auctions which are to take place after the 3G ones are over, the chances of them making aggressive BWA bids are low given their 3G commitment will run into $3-4 bn. In which case, a 3G loser has a very good chance of picking up a BWA licence cheap and then offer 3G-equivalent services on it!

Given the clear role of greater telecom/broadband connectivity in making the economy more efficient, it would be nice if all the confusion/policy flaws are removed quickly and the auctions begun. Or does the government think its enough to just put out a Montek Singh Ahluwalia to announce a stimulus package every now and then?