Sunil Jain: See you in court

RATIONAL EXPECTATIONS

The government may or may not choose to react to the outrage over Communications Minister A Raja's decision to arbitrarily decide on a one-week cut-off date for applications for 2G spectrum, which firms need to provide connectivity to subscribers, especially since it is not clear whether the decision had the approval of the Cabinet. But the larger point is, it appears the matter is headed straight for the courts "" that would ensure no new players came in, something the existing players would welcome! It would also ensure the country does not move to 3G mobile services since the telecom regulator, the Telecom Regulatory Authority of India (Trai), has recommended (it hasn't been accepted, though) that only existing telecom firms should be allowed to bid for 3G spectrum.

For one, under the law, the government does not have the right to take a unilateral decision on issues like market entry. The matter has first to be referred to Trai; Trai solicits opinion through open houses and then gives its recommendations; if the government wishes to tinker with them, it has to send them back to Trai. If Trai still refuses to budge, the government has the right to go ahead and take a decision.

In this case, in April, Trai was asked for its recommendations on whether there should be a cap on the number of mobile phone access providers, among other issues. After considering all opinions, it said no cap was needed. And yet, without referring the matter back to Trai, the ministry's decided to restrict even the number of players in the heats!

But say, the government decides to allow a month for the last application, reasonable enough time for wannabe players to find partners and arrange for the cash they need "" firms must have a minimum net worth of Rs 1,380 crore for an all-India licence. Here's the next problem: a committee has been set up to come up with new criterion for allocating the spectrum "" it may retain the current one, it may decide that new entrants must experience in providing such services (this was the criterion in 1994, when private telcos were first allowed), and so on. Until this criterion is made public, how are firms to even apply? So, if the new criterion requires a firm (or its joint venture partner) to have a million mobile customers, the government has to give those who have applied, or want to apply, sufficient time to find a partner that has the requisite qualifications. Anything less will be unfair and will be easily challenged in the court.

This, however, isn't all. Let's assume that even this is done. While not everyone (there are 11-12 applications for spectrum in each of the country's telecom circles) will manage to find a partner with the requisite qualifications (assuming the committee does change them), it is likely at least 4 or 5 firms will. So, how is the government to choose between them, without anyone going to court? Eventually, as this column has argued before, auctioning spectrum is the only way out. Indeed, if this is to be done, there is no need to have a last date for applying for spectrum or even any criterion for who can bid. Since an auction fetches the market price, there is no money to be made by selling the licence later "" so, only serious telcos will take part in the auction. And since they'll have bid serious money, they'll be under pressure to roll out the network at the earliest.

Of course, even auctioning could lead to the courts, given that those at the head of the queue for getting spectrum under the current first-come-first-serve policy will be adversely affected, but as a policy it is more defensible "" if a government has 12 applications and can give spectrum to only two, how else can it decide?

The usual bogey raised on auctions is that this will raise tariffs. That's untrue. For one, Trai can always put a ceiling on tariffs, and if this is announced before the new spectrum is auctioned, all bidders will keep this in mind. But, more than this, competition will ensure prices don't rise "" anyone with higher tariffs will lose customers. The best example of this is Vodafone "" after paying $11 bn to buy Hutch's India operations, the firm is not raising tariffs, but is finding ways to reduce them by offering mobile phones at costs far lower than those available in the market! Three firms, including Vodafone and existing players, have tried to hike SMS charges, and they're being investigated by the Telecom Dispute Settlement and Appellate Tribunal (TDSAT). So, the customers' interests are well taken care of.

The other issue that needs to be dealt with is the Rs 1,633 crore that the existing players and the ministry (both of whom are anti-auction) constantly refer to as the entry fee for new players' spectrum. This is illogical, since the Rs 1,633 crore figure was discovered (through a competitive bid, it must be pointed out!) in 2001, at a time when the entire country had just a little over 4 million subscribers "" today, the industry adds as many in 15-20 days. In 2001, firms that paid this entry fee for the fourth cellular licence were valued at a small fraction of what they are now ... the list goes on. The answer is clear. The question is whether the government wants to hear it.