Who can afford such whimsy?

Under the Unified Licensing Agreement of 2003 (that most of the companies migrated to) there was a proviso of spectrum up to 6.2+ 6.2 MHz for GSM and up to 5 + 5 MHz for CDMA. Thus,until the award of the fourth licence,auctions were used to assign spectrum (as the licence auctions were de facto for spectrum assignment till 4.4 + 4.4 MHz (GSM),extendable to 6.2 + 6.2 MHz). The price discovered in this auction was used for migration to unified licence in 2003 and for assigning 2.5 + 2.5 MHz,extendable to 5 + 5 MHz to the basic service operators using CDMA technology.

So by and large,all the licences awarded,and hence the bundled spectrum till 2003 had some crude form of market-based price discovery,albeit not perfect.

However,with growing wireless subscribers,even 6.2 + 6.2 MHz in GSM became insufficient. As an interim measure,Department of Telecommunications decided to adopt subscriber-based spectrum allocation criteria as recommended by the authority. Government issued orders on these lines on January 17,2008,totally disregarding market-based pricing of spectrum. As a consequence and by Trai’s own admission “…several incumbent operators received spectrum beyond the contracted limits free of cost and benefited from the same over several years”.

However,the most indefensible action of the government in this regard,documented in the press and debated in the Parliament,was not to auction licences in 2008. By allocating 2G spectrum to the licensees in January 2008 at an arbitrarily decided price of Rs 1,659 crore (the price paid by the fourth cellular operator way back in 2001). All principles of efficient allocation of this scarce resource were violated. The winners of the licence were the companies who were ahead in a queue in the first-come first-served basis of allocation. Having not paid the true value of the spectrum,they took advantage of their licence and exploited the arbitrage possibilities and resold their licences in the open market at many times the price of purchase.

In December 2007,in a letter to the Prime Minister’s office,A Raja had ruled out auctions as a mechanism for allocation of spectrum. According to him,auctions are “unfair,discriminatory,arbitrary and capricious”. Ironically,as events since this cavalier claim have proved,A Raja’s description of auctions is far more appropriate for his own policy decisions. Had the acquisition cost of spectrum been in line with market demand,suspected hoarding,reckless acquisition and profiteering via arbitrage would not have occurred.

It is the anomalies inherited from the past flawed policies that Trai is set to address. As far as the legacy issue of ‘non-pricing’ of the spectrum allocated beyond the contracted limit is concerned,Trai has been extremely bold in its suggestion that this assignment needs to be revisited and the pricing should be aligned to the market realities.

However,the recommendations and the alternatives offered are still arbitrary and non-transparent. Pricing of 2G using 3G price as a benchmark is arbitrary,since the prices of apples cannot be used to price oranges. Any such act by the government will send a signal of capriciousness and irresponsibility in government policy. The implied loss of credibility can be costly for the government in all its transactions with the private sector. Moreover,responsibility must be fixed within the government for errant policy,especially the 2008 licensing policy. Why is this not being done?

Restoring the status quo ante (that is,auctioning spectrum acquired beyond the contracted limit and re-auctioning the licences given out in 2008) is desirable in an abstract sense but there will be major legal hurdles. Moreover,since the last assignment of spectrum in 2008,the spectrum has already changed hands. The horse has already bolted and it is too late to shut the stable door.

However,there is one window of possibility of cleaning this pricing conundrum. Very soon,many licences will be coming up for renewal. Trai has been reiterating that the contracted spectrum is 6.2 MHz with respect to GSM and 5 MHz with respect to CDMA. The licensee applying for renewal should then be assigned spectrum up to the committed amount as per the current licence. Any additional spectrum that these licensees require to carry out their operations should be priced through a transparent auction.

It is time that the government understood the cost of a flawed public policy regarding the pricing of spectrum. The government can at least fix political responsibility; reams of Trai recommendations will not fix that. In future,it should commit to a rational policy in this regard and forswear capriciousness and political indiscretion.

The author is an associate professor of economics,Delhi University and advisor,Indicus Analytics