High cost of spectrum a hurdle for digital money flow

In the first of a three-part series, Business Standard analyses the merits of the auction policy as the sole means to allocate natural resources

Telecom spectrum to iron and coal mine auctions have often stood for transparency in allocation of natural resources. But, there are questions around the end-goal of an auction. Has it helped bring about digital inclusion in rural areas or has it been effective in blocking cartelisation by bidders? And, could the auction of natural resources short-change Indian growth prospects? In a three-part series, Business Standard tries to find answers to such questions. The first part analyses the merits of auction policy as the sole means to allocate natural resources.

Within Sanchar Bhawan, headquarters of the ministry of telecommunications here, the big takeaway for consumers from the demonetisation exercise, digital money, is a worry. 
 

Digital money needs bandwidth to travel but the best consumer-friendly band, 700 MHz, found no takers in the recent spectrum auction. 

It is easy to push data on and does not need too many towers to be constructed to make the signals reach far into rural India. 

Thanks to the high reserve price set in the sixth round of auctions that got over in October, no company bid for a single MHz of this airwave or spectrum. At Rs 11,500 crore per MHz for a pan-national roll out, it is four times the cost of the comparable band in the 1,800 MHz. 

“There is a clash between public good and the price being demanded for those. I understand that it comes from the ghosts of the past, but auction cannot be the only policy,” says R Chandrashekhar, former telecom secretary and now president of Nasscom. 

For instance, as Delhi battles a heavy coat of smog this winter, town planners are putting their bets on the Smart Cities initiative. A lot of those would, however, need land to build facilities for the public, like bus depots. Delhi has space in its depots for only 5,000 buses but would need three times the number to serve the population. But, the new regime for land pricing torpedoes costs in the national capital or elsewhere. 

In Andhra Pradesh, prices of land per acre in the proposed capital of Amaravati range from  Rs 1.16 crore for villages at the periphery like Ananthavaram to Rs 2.56 crore for villages like Uddandarayunipalem, at the core. These numbers vary each month.

 A central government committee last year estimated the cost of building the new capital at Rs 27,000 crore. Those seem an underestimation. 

For instance, for the road transport sector, the Centre was forced to revise the costs of a plan to build 1,120 km of national highways across six states by 24.4%. “The cost has increased due to higher bid prices, and increase in cost of land acquisition, resettlement, rehabilitation and other pre-construction activities,” a ministry release noted. 

Prices on the boil

For the stressed construction companies, the revision in their bid prices was puny — it was the combined higher cost of land and rehabilitation. In every sector in India, where auction of resources has become state or central government policy, prices have sharply spiked. Those high costs make setting up of an industry or an infrastructure difficult. Road projects came almost to a halt as bidders offered to repay the Centre than ask for viability gap funding, something that happened for coal mines linked to power sector, too. So, costly roads, coal or telecom airwaves make it difficult to light up power plants or make possible transport of farm produce to larger markets or even provide education and banking services via cell phones in smaller towns and rural areas. 

Sanjay Chakraborty, professor at Temple University, Philadelphia, who was the first to point out the risks from higher compensation for land buy in the 2013 land Act, agrees. “It is almost impossible to conceive of any rational cost structure for industry the way land prices are shaping up.”

The concern was also flagged by the Ashok Chawla-led committee on allocation of natural resources, set up in 2011. The committee had pointed out investors would be willing to pay a higher price so long as they saw the markets were expanding. But, once the rate of growth of the economy slowed, high prices could be a drag. In bureaucratic speak, it noted: “Transparent mechanisms of allocation of natural resources (would) need to be supported by investment in complementary physical and social infrastructure in order for markets to work effectively and for the process to be efficient and sustainable.”

Efficiency gets lost when the prices, as in telecom or for land, reach the sky. 

Sustainability takes a beating when as in mining of the 31 coal mines that were handed out to private companies through auctions more than a year ago, government data show till July this year, only 11 have moved to get theirs’ ready. Since the money for these investments come from banks, there is an additional cost for the economy. 

SBI Research data show despite sluggish investment by these companies, their debt has soared. 

Mining companies’ debt rose 15% as of March 2016, year-on-year. Telecom service companies’ debt was up 24% and infrastructure developers and operators saw a 11% rise in theirs. The list is led by sectors where auctions have become the norm.