April 9,2010 will be an important date in the history of telecom services in India. This is the day on which the country would experiment with a spectrum auction for the first time. This is an important step in Indias telecom evolution. Hopefully,the country will stick to this practice for allocation of all kinds of spectrum in the future. It is important that the auctions are completed in a smooth and seamless manner leading to real price discovery. And so far as the auction design is concerned,this newspaper has illustrated that it promises to deliver price discovery efficiently. It is not that the telecom sector would be experimenting with auctions for the first time on April 9,however much telecom minister A Raja would want public memory to fade on this account. The beginning of the entry of private players in this sector in the mid-nineties happened through auctions and this process continued till as late as 2004. At that point,it was not spectrum but licence to provide services that was auctioned. However,in both cases,the auction process is broadly the same. As far as 3G spectrum auctions are concerned,the government appears to have learnt the right lessons from its own history vis-à-vis auctions. Much of the credit here goes to the regulator,the Telecom Regulatory Authority of India (Trai). Our first experiments with auctioning telecom licences were fraught with problems,which the opponents of 3G spectrum auction have used to argue against the practice. What must be understood is that the earlier auctions were not designed in the controlled manner that we are seeing today with the spectrum auction. As a result,companies ended up bidding exorbitantly,only to soon realise that they had bought into unviable business propositions. Those,of course,were the times when the telephone was a luxury product and the latent demand for this product had been overestimated. Much wrangling and debate took place as various companies were unable to pay the committed amount. Next,the government came out with a new telecom policy in 1999,changing the licence fee payment from upfront terms to a revenue-sharing basis. The opponents of this switchover argued then that since the concerned businesses had failed to gauge the market correctly,they be allowed to sink rather than receive a bailout from the government. The government sensibly took a larger,developmental view instead. When we look at the vibrant telecom landscape today,its clear that this was the right decision. An interesting fact about 3G spectrum auctions is that the credit for making the government examine this concept goes to Tata group chairman Ratan Tata. It was Tata who in 2006 made a unilateral offer that if spectrum for 3G services was to be auctioned,he would be prepared to pay Rs 1,500 crore for it. The telecom industry,as a whole,opposed his suggestion. Some argued the complicated history of telecom auctions in India. Others cited examples of similar auctions in European nations,which had seen astronomical bids that in turn led to business failures. It was also alleged that because Tatas own company,Tata Teleservices,had lagged behind in subscriber additions,which were the basis of spectrum allocation,that he was asking for auctionshis company would otherwise miss out on future spectrum allocation. There were also apprehensions about what the auctions would do to the cost of services. As companies would seek to recover the bid price through tariffs,consumers would have to bear the brunt. This argument fell flat when UKs Vodafone bought Hutchs India operations for a mammoth $11 billion in 2007 but tariffs only moved southward! Later,it was Trai that suggested auctions alongside a methodology which would control the spoiler power of exorbitant bids. The auction design was further refined by the department of telecommunications and the auctioneer NM Rothschild. Once it was settled that auctions were definitely the only way forward for allocating scarce resourcesto encourage optimal utilisation as well as the right price discoveryconversation shifted to auctioning the 2G spectrum also. Its another matter that by tweaking the Trai recommendations,Raja favoured around eight companies by awarding them licences at prices discovered in 2001,something for which he continues to face the music even today,with the Central Bureau of Investigation still investigating the whole affair. In all probability,once 3G auctions go through,Trai would come out with another set of important recommendations on auctioning 2G spectrum in the future. This would,of course,pertain to all allocation of additional spectrum to the existing operators. Though it would not be proper to speculate about what kind of methodology Trai would suggest,common sense suggests that there is no sense in reinventing the wheel. The government should stick to the design undertaken for the 3G auctions because apart from the different bands of spectrum everything else would remain the same. In fact,another important lesson to be drawn from our entire journey towards 3G is not to try to fix something that aint broke. The government tried to do this by tinkering with the Trai recommendations and instead allowing newer global players to enter India by bidding for 3G services. In the process,it forgot that all major international players were already present in India and a few that were not could always enter the country through the M&A route. Things got delayed in the process. Yet,once the names of all those who have applied came out,one found that not a single new foreign player had applied!
