Did 2G spectrum go for a song?

In calling for a far-sighted policy regime for spectrum pricing, one that "exorcises the ghosts of the past," Tata group Chairman Ratan Tata recently brought up a subject that touched a raw nerve of many.

The reason is that legacy decisions have meant the government has not really charged operators for spectrum, a scarce resource.

By some estimates, spectrum worth Rs 7,690 crore has been given away for ''free'' for mobile licences. Even this is a conservative figure, given that it does not include charges for the four metros, as also operators granted licences in 2001.

The original mobile licences, given to two operators in 1995-96, saw them bid for 4.4 Mhz of spectrum and offer hefty licence fees to the government. In effect, the spectrum was bundled with the licence. The operators also had to pay a spectrum usage charge of Rs 100 per subscriber.

In 1999, a new policy regime moved operators from the upfront licence fee regime to a reasonable revenue share system that made the business viable.

In doing this, only the licence fee terms were changed "" instead of paying upfront, the operators were allowed to pay with incremental revenues.

All other terms, including the allocation of spectrum, remained the same. Instead of a licence fee, the operators were asked to pay 15 per cent of their annual gross revenue, as well as a 2 per cent fee as spectrum usage charge.

As the number of subscribers grew subsequent to this policy change, the then NDA government formulated a roadmap to grant operators more spectrum, linked to their subscriber base.

The spectrum usage charge was revised upwards "" up to a maximum of 4 per cent of the annual gross revenue of an operator for up to 10 Mhz of spectrum. It is this additional allocation that is at the root of the matter.

However, COAI Director General TV Ramachandran did not agree with the reasoning that the government gave away spectrum for free.

"The annual turnover of the mobile industry is Rs 60,000 crore and given that we pay 4 per cent as spectrum fee, it works out to a hefty Rs 2,400 crore to the exchequer annually. This figure is only going to increase in the future as the industry grows," he said.

An industry expert recalled that the original two licences were not explicit about spectrum pricing.

"The licence did not have a clause for allocation of any additional spectrum to an operator once the initial quantum (4.4 Mhz) was used up. The licence did not state how much money or entry fee should be charged for additional spectrum given over and above the original agreement. In effect, while the licence was for 4.4 Mhz, operators were allocated much more spectrum in metro circles.

"This is not only against the licence conditions and means a potential revenue loss, but also has blocked the entry of new players. With some of the present operators having been allocated up to 10 Mhz of spectrum, and the likelihood that another 5 Mhz may be given them in the future, concerns persist. While it can be argued that the government made telephony affordable by keeping charges low, the fact is that operators have no incentive to optimally use the scarce resource," he said.

Another industry expert said the affordability aspect of mobile services was not due to the allocation of additional spectrum, but because of additional competition in the form of more operators.

"Today, we have six or seven operators per circle. There can be more, but there is no spectrum available for them to launch services. Revenue share is loose change compared to entry fee. Now, that the TRAI has suggested pricing of third generation mobile spectrum, the government should look at pricing 2G appropriately, perhaps even in retrospect," he added.

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WHY THIS NUMBER?

The methodology for arriving at the Rs 7,690 crore figure is as follows: For 4.4 MHz, the total entry fee charged per operator, barring the four metros, was around Rs 9,400 crore in mid-1999. This means that the per megahertz cost of the spectrum was Rs 2,136.36 crore. An additional minimum 1.8 MHz was later given to each operator in these circles. If this had been priced, the operator would have had to pay Rs 3,845 crore. Even the Cellular Operators' Association of India pegs the opportunity cost of the "free" spectrum at around Rs 5,000 crore.

Given that there were two licensed operators initially, this figure works out to Rs 7,690 crore. Since this does not include the lucrative metros, the real amount would be manifold higher than this sum. Even for the fourth operator in 2001, the bidding was for a similar 4.4 MHz allocation. The total bid amount for the nationwide fourth licence was nearly Rs 1,633 crore. Even this opera-tor was given an additional 1.8 MHz subsequently.