Most assume that auctions are the best way to get a fair price for anything. So now that the 3G auction details have finally been announced, we are confident the government can no longer manipulate anything, in anyone’s favour or against anyone.
That is largely true, but there is little doubt that government policy influences the bids. The fourth round of bidding for cellular licences, for instance, was conducted when the government was turning a blind eye to Reliance Infocomm illegally offering mobile phone services on its fixed line licence, so it is very obvious the Rs 1,651 crore bid got for an all-India licence was an artificially low one.
In the current case, the government has decided a total of four new 3G licences will be auctioned (apart from the one BSNL/MTNL already have) while, theoretically, a total of 12 can be given out — the lesser the number, the higher the likely bid price. This is both good and bad. The government has decided that whatever price it gets from the 3G auctions will decide the one-time penalty existing cellular operators like Bharti and Vodafone will have to pay to regularise the ‘extra’ 2G spectrum they have — while their licence authorises up to 6.2 MHz, thanks to liberal government policy at that time, these firms have 8-10 MHz of spectrum. So, the policy of limiting the number of new 3G licences, which will allow users high speed internet access comparable to what they get on their broadband fixed line connections right now, will hurt the industry. Ideally, the government should have got the defence to vacate more of the spectrum — indeed, those bidding do not even know how much spectrum will be available for them, and when, after the initial 5 MHz gets used up.
Ironically, the policy of keeping a lower threshold auction price for Broadband Wireless Access (BWA) will make the bid price go down. While the reserve price for the 3G auction will be Rs 3,500 crore, that for BWA will be half on the grounds that cheaper broadband services, and which are mobile, will help the economy. Since the BWA licences carry double the amount of spectrum that a 3G licence does, that effectively means the reserve price is a fourth. And given that it is possible to do 3G telephony in BWA licences as well once new telephones come in (a year or so is the timeframe most give), this means there is a cheaper licence alternative. This policy then drives down 3G prices while the earlier one sought to drive them up.
| EFFECTIVE 3G REVENUE SHARE | |||
| Operator 1 | Operator 2 | Operator 3 | |
| 2G Spectrum, in MHz | 4 | 6 | 13 |
| Revenues per quarter, Rs cr | 125 | 200 | 400 |
| Revenue-share licence fee, % | 2 | 3 | 5 |
| Revenue-share licence fee, Rs cr | 3 | 6 | 20 |
| 3G Spectrum, in MHz | 5 | 5 | 5 |
| Revenues per quarter, Rs cr | 25 | 25 | 25 |
| Revenue-share licence fee, %* | 3 | 4 | 6 |
| Revenue-share licence fee, Rs cr | 4.5 | 9 | 25.5 |
| Effective licence fee on 3G revenues,% | 8 | 12 | 22 |
| *3G licence fee applies to both 2G and 3G revenues | |||
There is more. There is, right now, no clarity on the annual revenue-share licence fee the government will charge. While the Trai had initially recommended the government charge a 1 per cent revenue share, this was shot down on the grounds that it wasn’t possible to segregate 2G and 3G revenues — so the current view is that the annual licence fee should be levied on the total 2G and 3G revenues, and this has to be 1 percentage point greater than what is levied currently. So, if an operator has 4.4 MHz of 2G spectrum and pays a revenue share of 2 per cent, the new revenue share will be 3 per cent.
A broad rule of thumb tells you an operator with 4.4 MHz of spectrum earns around Rs 125 crore per quarter in each telecom licence area. Let’s assume the operator now earns an additional Rs 25 crore in the first year from 3G services — thanks to the incremental fee, the effective licence fee on the 3G revenue (see table) works out to 8 per cent! Assume each operator, the ones that have 6.2 MHz or 12.5 MHz, also gets similar revenues — the effective licence fee goes up to 22 per cent. Clearly such a high licence fee will depress the auctions.
There is still time to fix these anomalies. The sooner it is done the better.
