3g auction rigged?

Prashun Bhaumik |

The DoT has favoured a select coterie of existing telecom players by tilting the scales heavily against new Indian and multinational entrants. In the process, 3G telecom will benefit a privileged few while the exchequer will be short-changed.

By Paranjoy Guha Thakurta

The manner in which the government has structured the impending auction of third generation (3G) telecommunications licences with electro-magnetic spectrum has made a mockery of the term “auction”. Not only is the playing-field far from level, the outcome of the so-called auction can be confidently predicted well in advance – the maximum number of 3G licences would be hogged by three groups, Bharti-Airtel, Vodafone-Essar and Tata Teleservices. After much of the cake has been gobbled up by these three large existing players, the crumbs would be picked up by Idea, Etisalat and Aircel (probably in that order) with a possibility that Reliance Communications could be left out in the cold.

As of 20 March only nine companies – Aircel, Bharti, Etisalat, Idea, Reliance Telecom, S Tel, Tata Teleservices, Vodafone and Videocon Telecom – had applied to bid for the 3G auction. There wasn’t a single new company on the list, thus severely compromising the inherent competitiveness an open auction is supposed to ensure.

The story does not end here. The new 3G spectrum would primarily be utilized to bolster voice services by the major existing mobile telephone service providers while the much talked-about data, video and high-speed internet facilities using mobile handsets would be used by a minuscule minority of users. In other words, the highly hyped 3G experience would remain the prerogative of a privileged few in the foreseeable future. Electro-magnetic spectrum or radio frequencies comprise a scarce, finite and hence, extremely precious national resource that is used by, among others, mobile telephone operators. Each 3G licence will come with 5 Mhz of bundled spectrum.

Moreover, although the government had set for itself an ambitious target of raising an amount in the region of Rs 35,000 crore through the auction of all-India 3G licences with bundled spectrum and two broadband wireless access licences, this impressive sum will certainly not be raised. Current indications are that the government should consider itself lucky if it is able to raise Rs 25,000 crore through the 3G auction. In fact, few will be surprised if the actual amount that is eventually raised is less than Rs 20,000 crore.

Now, how is it possible to anticipate the outcome of an “auction” that is soon going to take place in what is supposed to be not just the world’s second-largest, but also the most-competitive, market for mobile telephone services?

Answer: the auction that is scheduled to begin on April 9 has, for all intents and purposes, already been rigged to favour a few influential players who wield considerable clout in the corridors of power, especially in Sanchar Bhavan, the headquarters of the Department of Tele-communications (DoT) presided over by the controversial Union Minister for Communi-cations and Information Tech-nology Andimuthu Raja who belongs to the Dravida Munnetra Kazhagam (DMK). While the outcome of the 3G auction may not elicit the kind of public outcry that the allotment of second generation (2G) telecom licences and spectrum generated did in January 2008, the process leading up to the 3G auction has been no less opaque and, even, scandalous.

Here are four important overlapping reasons why the winners of the 3G auction can be easily predicted:

1. High barriers to entry have been erected against new Indian entrants;

2. High barriers to entry have also been erected against multinational corporations who could have provided effective competition against the major existing players in the Indian telecom market;

3. The industry regulator, the Telecom Regulatory Authority of India (TRAI) together with the government (that is, the DoT) have dragged their feet finalizing guidelines for mergers and acquisitions (M&A) before the 3G auction takes place on April 9; and finally,

4. The DoT and the TRAI have, perhaps deliberately, refused to decisively settle a slew of issues related to trading, sharing and resale of 2G spectrum that have been kept pending from May 2009.

The consequences: the 3G auction has almost become a “mom-pop-uncle” affair with a few small cousins thrown in. If one is more charitably inclined towards the government, what the 3G auction has degenerated into is a “friendly fight” among a select few members of an exclusive club. Consider in greater detail each of the four anti-competitive reasons that have been cited.

1. High barriers to entry for new Indian telecom companies:

New Indian entrants are not allowed to bid unless they have specific 3G experience. This is mentioned in Section 3.1.1 (ii) (a) of the much-delayed Notice Inviting Applications (NIA) issued by the DoT the day the Union Budget for 2010-11 was announced on February 26. The relevant portion of the Section reads: “Any entity: …(ii) that: Has previous experience of running 3G telecom services either directly or through a majority-owned subsidiary; can bid for 3G Spectrum (subject to other provisions of the Notice).”

What this clause in the NIA makes amply evident is that no new Indian entrant will be able to commence 3G operations on its own, since none has previous experience of running 3G services. Therefore, the only way a new entrant can participate in the 3G auctions would be to find a foreign/multinational partner. Here lies the catch. Very cleverly, the government has imposed a slew of entry barriers in form of onerous licence conditions that are applicable to foreign/multinational telecom players to ensure that such entities do not bid in the auction to effectively ensure that no Indian new entrant enters the fray. These restrictions or entry barriers are now detailed.

 

2. High barriers to entry for foreign/multinational companies:

The obvious reason why foreign/multinational companies will not participate in the 3G auctions is that Section 3.1.1 (ii) (b) of the NIA makes it clear that a foreign partner of an Indian telecom company will have to acquire an all-India unified access service (UAS) license by paying an amount of Rs 1,651 crore without any guarantee that 2G spectrum of 4.4 Megahertz would be bundled with such a licence. The relevant portion of the Section reads: “Any entity:…(ii) that: (a) Gives an undertaking to obtain a UAS license through a New Entrant Nominee UAS Licensee as per DoT guidelines before starting telecom operations; can bid for 3G Spectrum (subject to other provisions of the Notice).”

The price of Rs 1,651 crore was determined in 2001 as the cost of a UAS license accompanied by 4.4 MHz of start-up spectrum. By forcing foreign/multinational operators to acquire a UAS license for this price, the DoT has gone against the grain of competition – instead of hiking the fee for new entrants, the Department should have lowered the fee, if indeed it wanted to encourage the entry of new competitors. The DoT is well aware that no foreign entrant will pay a sum of Rs 1,651 crore for a piece of paper called a UAS licence without any assurance that airwaves in the form of 4.4 Mhz of spectrum will come bundled with it to enable the operator to actually commence mobile telephony services. Certainly no such guarantee is provided in the fine print of the NIA. As a matter of fact, fresh entrants would be placed last in a list of 343 companies whose applications for 2G spectrum are currently pending with the DoT.

 

3. Reluctance of TRAI/DoT to finalize new M&A guidelines before 3G auction

The DoT knows perfectly well as does the TRAI that the entire business model proposed for an operator to provide only 3G telecom services is next to impossible to achieve, certainly in the market conditions currently prevailing in India. Operators will have to combine 3G and 2G spectrum if they hope to become financially viable in the country’s intensely-competitive market for telecom services. This, in turn, would imply that the guidelines for mergers and acquisitions (M&A) should be clear before new companies – foreign or Indian – placed bids for 3G spectrum. However, till date, the government has not formally approved the M&A guidelines. Was this delay deliberate and pre-meditated?

According to Section 11 of the TRAI Act, the due legal process that should be followed is that the TRAI should first put out a consultation paper in the public domain, then seek consultations and invite comments and suggestions from the public at large as well from industry associations like the Cellular Operators Association of India (COAI) and the Association of Basic Telecom Operators (ABTO) – the two lobbies of mobile telecom operators using the competing general system of mobile (GSM) communications and the code division multiple access (CDMA) technologies respectively — before new M&A guidelines are finalized by the DoT.

But that’s not the way it has happened. We in India are, after all, different. A committee of the DoT headed by Additional Secretary Subodh Kumar first finalized the new M&A guidelines after consultations with lobbies like the COAI and ABTO. This document was then sent to the TRAI that has been conducting consultations over the last six months. Consequently, the new M&A guidelines are still hanging fire.

As per the current restrictions that operate under the existing M&A guidelines that were formulated in April 2008, no intra-circle merger is possible for an operator for a period of three years from the effective date of the license. This would mean that even if a new entrant won a 3G license, it would not be able to combine 3G spectrum with 2G spectrum for the first three years unless, that is, the M&A guidelines of April 2008 are changed. The implication of the reluctance of the TRAI and the DoT to expeditiously finalize the new M&A guidelines is that it made it next to impossible for a new entrant (Indian or foreign) to bid for 3G spectrum.

“The government has deliberately created uncertainty by not issuing the new M&A guidelines,” a knowledgeable telecom expert told CURRENT on condition of anonymity. “This is the best way to ensure no new entrant will participate in the 3G auction and no bid can be placed to challenge the hegemony of the already well-entrenched coterie of existing telecom players. And I can confidently tell you that soon after bidding in the 3G auction gets over, the TRAI and the DoT will finalize the M&A guidelines with mock alacrity.”

 

4. Refusal by DoT and TRAI to finalize norms for trading/sharing/resale of 2G spectrum

To be able to combine 2G spectrum and 3G spectrum in case operators wish to consolidate operations, they will need to know the rules for sharing, sale, resale or re-farming of 2G spectrum. Whereas these rules have not been approved by the TRAI for nearly six months now, DoT officials had drafted a report on these norms in May 2009. Ten months down the line, the report is nowhere near implementation and hence, there is no clarity on any of these crucial issues.

This essentially means that any operator wanting to bid afresh for 3G spectrum will have to make a blind bid, be forced to pay Rs 1,651 crores for a piece of paper called a UAS license without any guarantee that the licence will be accompanied by 2G spectrum. Thereafter, this operator will be at the mercy of politicians and bureaucrats who would decide whether 3G spectrum could be combined with 2G operation or whether either 3G or 2G spectrum could be sold or bought at a later date. The consequence of these convoluted conditions is that the DoT has ensured that no new Indian company can bid for 3G spectrum unless it is accompanied by a foreign or multinational partner and also that no foreign player will bid because a number of “irrational” entry barriers have been erected to keep them out of the reckoning.

“It’s a bit like asking a person to occupy a house without first specifying whether the property is situated on land which is freehold or leasehold and without telling him whether the house has to be purchased outright or would be given on rent – that’s the kind of uncertainty that is prevailing,” said a telecom expert.

According to the schedule put out by the DoT, the last date for submission of applications was March 19. The publication of ownership details of applicants would take place on March 32 and three days later, on March 26, bidders would have to submit ownership compliance certificates. Pre-qualification of bidders are scheduled for March 30. A mock auction will take place on April 5 and April 6 and the final auction will commence on April 9. The entire process is expected to be completed in ten days, if not earlier. Commercial 3G services are supposed to begin from September 1 onwards.

The government is selling three slots of 3G spectrum in the following17 telecom circles (out of the 22 circles in the country) broken into three categories: Category A – Delhi, Mumbai, Kolkata, Maharashtra, Gujarat, Andhra Pradesh, Karnataka, Tamil Nadu (including Chennai) and Kerala; Category B – Haryana, Uttar Pradesh (East), Uttar Pradesh (West), Rajasthan and Madhya Pradesh; and Category C – Orissa, Assam and the North-East. The exceptions are the following five circles where four slots of 3G spectrum are on offer: Punjab (Category A), West Bengal (Category B), Bihar, Himachal Pradesh and Jammu & Kashmir (Category C)

One 3G slot has already been given to the two government-owned operators, Mahanagar Telephone Nigam Limited (MTNL) for Delhi and Mumbai and Bharat Sanchar Nigam Limited (BSNL) for the rest of the country.

It was originally envisages that four slots would be auctioned in each telecom circle but after months of wrangling, the Empowered Group of Ministers (EGoM) headed by Pranab Mukherjee decided that all successful bidders would receive spectrum only on September 1 instead of an earlier proposal to stagger allocations of spectrum depending on availability. Thus, the auction for the fourth slot was kept in abeyance pending release of spectrum by the Ministry of Defence.

Japan was the first country in the world where 3G services were launched in May 2001. Thereafter, such services (that allow for access to broadband internet connectivity, high-speed downloads, video conferencing) have become available in 90-odd countries across the globe. In India, 3G services were originally supposed to have been launched in 2007. However the auction of 3G spectrum and the fixation of the minimum or ‘reserve’ price were postponed several times as there was indecisiveness over the availability of spectrum and the number of operators who should be allowed to operate in each circle.

The DoT was at loggerheads with the Ministry of Defence over the latter’s alleged reluctance to vacate the designated spectrum for commercial use. The Defence Ministry, in turn, contended that it delayed releasing spectrum promised to the DoT on account of BSNL not being able to complete on time an alternative telecom network for it.

After many missed deadlines, the reserve price for pan-India 3G spectrum was eventually fixed at Rs 3,500 crore. The government was initially hoping to garner Rs 35,000 crore from the sale of spectrum for 3G and Broadband Wireless Access (BWA). However, with the number of players reduced to three in most of the circles from the four planned earlier, the government is certain to fall short of this target. It is believed that the government will be lucky if it is able to raise Rs 25,000 crore from the auctions and at least two experts told CURRENT that they will not be surprised if the actual amount that is raised falls short of Rs 20,000 crore since bids are likely to be placed close to the minimum or reserve prices.

“The appetite of investors has diminished and risk perceptions have gone up as industry profits have got squeezed due to intensification of competition,” said one expert, adding: “Two years ago, the number of players was six short of the present number and it was relatively easier to borrow funds.”

The Indian market for mobile telephony is essentially a market for voice services which accounted for as much as 92 per cent of the total revenues generated by the entire industry during calendar 2009. The share of short messaging services (SMS) was only 6 per cent of the total while download of ring-tones accounted for the remaining two per cent. The point that needs emphasizing is that no telecom operator can hope to earn profits by providing only 3G “triple play” services for speedy transmission of voice, data and video. Because of growing congestion in the already-saturated networks in metropolitan areas, existing operators are lasciviously eyeing 3G spectrum to enhance their existing 2G services (that offer relatively slow data and video transfer services).

There is consensus that the market for 3G services is quite small at present and is expected to be used by somewhere between five per cent and ten per cent of the total number of mobile phone users in the country at present. Barely 7 per cent of the roughly 500 million mobile telephone users have handsets that are enabled for 3G services. The cheapest 3G handset is currently priced at between Rs 6,000 and Rs 7,000 against Rs 1,200 for an inexpensive 2G handset. At the upper end, of course, both 2G and 3G handsets can be exorbitantly priced at between Rs 40,000 and Rs 50,000.

The anomalies and entry barriers in the existing policy regime have been pointed out on numerous occasions. Internal notes prepared by DoT officials themselves have highlighted a host of policy loopholes that could become legally contentious – as had happened in the case of the controversial first-come-first-served policy of farming out 2G spectrum that is currently a subject matter of an inquiry by both the Central Bureau of Investigation (CBI) and the Comptroller & Auditor General (CAG) of India.

The Finance Wing of the DoT as well as its wireless division have pointed out that the way in which 3G auctions will take place “does not provide a viable business proposition” for a stand-alone 3G operator. One internal note written by the Department’s Wireless Adviser, that was accessed by CURRENT, categorically states that the clause that effectively prevents new entrants from participating in the 3G auctions “will effectively deter new entrants… as there would be no guarantee of allotment of 2G spectrum…In order to address the problem, it would have been appropriate to have a separate category of service licences for 3G services…”

The Communications and Information Technology Ministry recently dismissed a complaint from the Central Vigilance Commission (CVC) that warned the government that the DoT’s 3G spectrum auction policy was biased as it was heavily loaded in favour of the interests of a handful of existing Indian operators. The CVC wanted fairness and greater transparency in the policy but the DoT pooh-poohed the arguments of the CVC by pointing out that the 3G policy was finalized after consultations with the TRAI, the EGoM and the Cabinet Committee on Economic Affairs.

The DoT reportedly told the CVC that it allowed new foreign/multinational entrants to bid for 3G spectrum though the TRAI had specifically recommended that only existing players be allowed to participate in the 3G auction. This claim by the DoT is somewhat hollow since the conditions that have been created ensure that no foreign/multinational will participate in the auction. “You have consciously created a Wild West-like situation by setting a stage where only the guys who can manipulate government policy are allowed to participate in the auctions,” said a representative of a multinational company who declined to be identified. “Nobody wants to enter a minefield without knowing
how the rules of the game could be suddenly changed,” this person added.

In the past, the following foreign or multinational companies/groups had shown interest in participating in 3G spectrum auctions in the world’s second-largest and fastest-growing market for telecom services: AT&T, Verizon, British Telecom, France Telecom, MTN, Orascom and Deutsche Telecom. However, not a single one of these companies or groups have placed bids in the 3G spectrum. This is truly ironical for a government that frequently claims that its economic policies are aimed at attracting foreign direct investments.

One foreign company with an Indian partner, Uninor, has gone on record stating that it chose not to participate in the 3G auctions because it had not yet received the 2G spectrum that it had already paid for. The ground has thus been prepared for three groups – Bharti-Airtel, Vodafone-Essar and Tata Teleservices – to pick up the lion’s share of
3G licences that will be auctioned. Given the past track record of Reliance Communications in winning public auctions, experts that CURRENT spoke to, were not particularly optimistic about the company’s prospects. Idea could pick up licences in a few circles and so could Etisalat and Aircel.

What is taking place in the name of public auctions is nothing short of crony capitalism. Not too many lessons have apparently been learnt after the 2G spectrum scam. They’ve done it again. Congratulations, Mr Raja and Dr Manmohan Singh!