Spectrum Wars Or Looting The Exchequer?

 

The spectrum wars have got curious and curiouser. The Department of Telecom and the minister have tied themselves in knots on how to allocate new licenses and spectrum. Having talked of a first-come first-served system, the date of first-come is now being changed. To make it worse, Reliance Infocomm, who it might be remembered received a mobile license after violating its WLL license, has jumped the queue of 575 new license applicants and secured GSM license and additional spectrum on the specious plea that as they have a CDMA license, they should be given a cross-over license for GSM. In the battle between the CDMA and GSM operators, a lot of skeletons in the closet have come tumbling out, as each side exposes what the other side has done. Missing in all the spectrum wars is the consumer, with the prime minister also talking of how the telecom sector can help in filling the national exchequer.

What is spectrum and why is it important for mobile telephony? Wireless signals need frequency bands which it utilises for transferring information. Any wireless signal can be made to carry information – the radio stations use certain frequencies to bring us voice broadcasts that we can listen to by tuning into those frequencies. The mobile telephony also uses wireless signals and does this tuning transparently for us. But behind the voice we hear in our mobile handset, is a wireless network that uses radio waves to transmit the voice. That is why turning the mobile handset to an FM radio is quite simple.

The problem of using the wireless frequencies or the frequency spectrum is that only a part of the total frequency spectrum can be used for mobile telephony. The international body, ITU decides the frequency band that is to be used for different services. If we want the hand sets and the switching equipment to be kept as global standards, we need to also allocate the same frequencies here for similar services. That means that there is limited spectrum available for any service – it is not an unlimited resource that can be given to anybody and everybody.

The question of spectrum was not important when the mobile services started in the country. The initial licenses that were given had the spectrum – called the start-up spectrum – bundled with it. The initial metro licenses were given away virtually at a pittance. The market value of these licenses are astronomical today.

GREAT LOSS TO EXCHEQUER

In the next round, the licenses again had the start-up frequency bundled with it. It was also mandated that all mobile services should be based on GSM technology. Though large license fees were promised, after securing the license, the private players all wriggled out of paying the license fees and went into a revenue sharing arrangement, courtesy the NDA government ruling then. The loss to the exchequer was of the order of Rs 40,000 crore. After the change to a revenue sharing regime, the freebies for the GSM operators did not stop. From the initial 4.4 MHz of start-up frequency, they now hold about 10 MHz each without paying any extra spectrum fees.

The initial mobile rates were kept artificially very high, even though the license fees were now no longer there and the capital cost per line was a fraction of the cost of installing landlines. There was virtually no license fee, no spectrum fee and only some money to be paid to the exchequer as a revenue share; this was cushy times for the GSM operators, who raked in the money with high call rates. It was only after the public sector players BSNL and MTNL were allowed to provide and other operators coming in with Wireless in the local loop (WLL) did costs for mobile services come down. It was at this time CDMA technology was also accepted and CDMA licenses were also issued. This led to the explosive growth of telecom we are seeing today. Before the government and the private operators claim the credit for this, the history of cartels, high call rates and a compliant TRAI must also be remembered.

DoT’s role is supposed to be one of setting the policy, while administering the license is TRAI’s responsibility. TRAI however has taken very little interest in enforcing license terms and conditions, which have been openly flouted by private operators. One such violation is not providing rural land lines as decreed under the license for basic services. The other is violating the long distance call rates by routing such calls to a local number and then pretending this to be a local call. Reliance has been caught on this and has got off with a rap on the knuckles. Similarly, Reliance also violated its WLL license to provide mobile services, for which it was again given a light penalty. However, administering the license is TRAI’s job, even though the minister and the Department of Telecom routinely claim it is their sphere.

INCREASING COST TO SUBSCRIBER

The current controversy is regarding new licenses and award of spectrum for the new entrants as well as the existing operators. Both TRAI and also the prime minister have expressed that there should be no restriction on new entrants. From what the PM has said, it also appears that he is in favour of an auction in allocating both the spectrum and new licences.

The problem here is that mobile voice services have seen an explosive growth only because the call rates have been brought down drastically. If we auction the spectrum and the licenses, we would increase the cost to the subscriber as it will be recovered from the subscriber through higher call charges. As the spectrum is a finite resource, an unlimited number of licences with fixed license fees would lead to a problem of how to allocate a limited bandwidth to any number of players. .

It is this issue that has the ministry tied up completely in knots. They want any number of operators, do not want to auction the license or the spectrum. So what could be the mechanism? The ministry has some criteria of ‘first come first served’ basis of giving licenses. Apart from being an extremely poor way of giving out limited resources, the ministry has further compounded it by letting Reliance Infocomm not only jump the queue by offering it a “cross-over” license but also free spectrum. If the rest of the licenses are given now on a ‘first come first served’ basis, this would lead to real esate developers (Parsnath Builders, DLF) and stock broking companies (India Bulls) also securing telecom licenses, presumably for the purpose of re-selling their licenses (or their companies). A number of the 575 companies in the license queue are known to be dummy corporations, and the purpose is to make windfall profits by securing the licenses and later selling them at a high price. In other words, this would mean the subsidy in 2G of keeping the license fee and spectrum costs low would actually go not to the subscribers but to those entities who resell these at high prices. Or to companies such as Reliance, who are allowed entry into the GSM sector with again a double subsidy – jumping the queue and free start-up spectrum.

NEED FOR STRONG REGULATION

The GSM operators, who have been screaming blue murder at all these shenanigans, are also hiding the fact that they are either hoarding spectrum or making very inefficient use of it. Their spectrum utilisation is way below comparable global standards. The dropped calls, and frequent saturation of the network is due to not investing in more cells and other network equipment. What they hope is that if the CDMA operators, so close to the heart of the telecom ministry, is given various concessions, if they make enough noise, the telecom ministry will buy them off also with some further concessions.

If we take the issue of keeping GSM and CDMA costs low for the subscriber for the 2G segment, and not allow this intended subsidy to generate windfall profits for the license holder, then the regulatory regime that needs to be put in place will require to be much stronger. Otherwise, any scheme that does not choose the auction route will lead to inevitably windfall profits for the promoters of these telecom companies at the expense of the public exchequer and the subscribers. The current model that the minister is favouring including the cross over license to Reliance Infocomm is the worst of both worlds. It keeps the entry cost and the spectrum cost low while allowing huge speculative gains to be made by the promoters who receive such licenses. Neither is the PMO’s argument of unrestricted entry and auction appropriate for 2G as this would inevitably jack up the call rates for the subscriber.

The regulator should be given a mandate to work out the economic value of the spectrum and how it can be indexed to rising revenues. Instead of a one time fee, the spectrum price can be calibrated to the profits and revenues that these companies would be making. The TRAI should also work out strict norms and market restrictions for transfer of shares or mergers/acquisition of these companies. The spectrum that the companies have received gratis, needs to be costed and this cost realised for the future. Otherwise, this is a “hidden” asset for existing license holders.

A 2G spectrum cost should be set by TRAI and any allocation should be based on criteria that TRAI should fix taking into account the cost of the spectrum and the efficiency of its utilisation. In no case should additional spectrum be given to existing operators without fulfilling this criteria and paying the additional spectrum charges. It is unfortunate that existing GSM mobile players have been given additional spectrum free, when it is not only a limited resource but has obvious market value. A proper enquiry should be conducted on who was responsible for giving away spectrum free. Those who have got the spectrum free should either vacate this or be asked to pay its price. No hoarding of spectrum should be allowed.

The government’s decision to allow Reliance to jump the queue for GSM services and give it free spectrum is further loot of public resources. The government seems going out of the way to favour CDMA players now after having favoured the GSM players earlier. As far the public is concerned, both set of favours are at the expense of the public and this mode of giving away spectrum free is nothing but allowing the continued loot of the exchequer.

Arguments are being advanced that BSNL and MTNL should also be charged for license fees as spectrum. It may be noted that it was only the introduction of BSNL and MTNL into mobile services that brought cellular rates down. Therefore, a public carrier which prevents collusion and therefore controls the tariffs is a must in the current environment. When the ADC rates were brought down by TRAI, the consequent benefits were not passed on to the subscribers, and the long distance call rates were actually increased. In the past, a number of cases of collusion and artificial rate setting has been used the cellular operators. Therefore, the spectrum and licenses given to BSNL and MTNL should continue in order to promote public good and curb profiteering.