WINDFALL PROFITS FOR SPECTRUM ALLOTTEES

It is hardly surprising that within a few months of securing coveted Universal Access Service Licences (UASL) for 2 G services, two of the lucky allottees have already made windfall profits by offloading a part of their stakes to international telecom companies. Significantly, both these licencees are primarily in the real estate business. It is obvious that they were attracted to the field of telecommunications because of the possibility of making quick windfall gains.

The main attraction of the licences issued by the Department of Telecommunications (DOT) in the last round was the slice of spectrum that came bundled with them. Spectrum, as every user of a mobile telephone is painfully aware, is a scarce and finite resource, whose intrinsic value will continue to rise in this age of breathless expansion in telecommunications. The DOT, in its wisdom, however, decided to give out these licences on a ‘first come first served’ basis, at a throw away price of Rs 1,651 crore for a pan-India licence. This was the price discovered way back in 2001 in the auction for fourth telecom operator licence. The proposal of the DOT was questioned by many, including Common Cause. Our suggestion, made in a letter dated October 17, 2007 addressed to Secretary, DOT was that the DOT should allocate spectrum in a transparent manner by adopting the internationally accepted method of auction. Suggestions to this effect were also made by the Ministry of Finance and the Prime Minister’s Office, but the DOT went ahead and distributed its largesse to the applicants whose
requests had been received by an arbitrarily determined cut-off date.

Shortly afterwards, Swan Telecom, owned by the real estate and hospitality business group, Dynamix Balwas, sold 45 percent of its stake to Emirates Telecommunications Corporation for $ 900 million (Rs. 4,113 crore). Swan Telecom has a UASL licence in 13 telecom circles. Now Unitech, which has a UASL licence in 22 circles, has divested 60 percent stake in its telecom arm to the Norwegian telecom operator, Telenor, for Rs. 6,120 crore. With hardly any investment in infrastructure development, these allottees have made a killing by encashing a part of the intrinsic value of the spectrum so generously bestowed on them by the DOT, ostensibly in the interest of the consumer. While it is hard
to see how the gains made by these smart operators are going to benefit the consumer, it is obvious
that the exchequer, faced with a mounting fiscal deficit, has suffered a huge loss.

In the light of these developments, it will be interesting for our readers to peruse the following letter
that we wrote to Secretary, DOT last year.

“Dear Shri Mathur,

As you may perhaps be aware, COMMON CAUSE is a civil society organizationwhich has, since its inception in 1980, been crusading for probity in public life and articulating public causes. We have been following the developments in regard to the policy for allocation of spectrum and are given to understand that the Department of Telecommunication is in the process of finalizing the terms for allocation of 2G spectrum to existing players as well as new applicants for UAS licence. It has been reported that the Department proposes to accept the recommendation of the Telecom Regulatory Authority of India (TRAI) for continuance of the old policy of allocation of spectrum at a predetermined price on a ‘First come first served’ basis. We also understand that the other recommendation of the TRAI for tightening the norms of allocation of additional spectrum to the existing operators based on their customer base is proposed to be rejected.

We would like to submit that the spectrum is a precious and finite national resource. Its pricing should be based on sound economic principles and not on an administratively determined historical price. The true economic value of spectrum can be discovered only through an ascending auction, as has been demonstrated in the auctions held in the USA for 1.7 GHz and 2.1 GHz bands in the year 2006. In any case, there is no justification for adopting the pricing formula followed in the year 2001 in view of the total transformation witnessed in the telecommunication industry. There has since been a sharp acceleration in the growth of customer base, making India the fastest growing telecom market in the world. Technological advances have greatly enhanced the efficiency of spectrum utilization. The Indian Telecom Industry has now attained maturity and has seen its valuation soar to dizzying heights. It will also be pertinent to mention here that spectrum is the most important element in the valuation of a telecom operator, allowing it to make a windfall profit in the event of merger and acquisition, as evidenced in the recent Hutch Essar – Vodafone deal. There is no reason why the Government, as the custodian of national resources, should part with this limited but extremely valuable resource to players in a mature and thriving industry at less than its true economic value. Moreover, it will be iniquitous to let the quirks of chronology determine the beneficiaries of this largesse. As the number of players in each band is limited for technical reasons to 3 or 4, it will be appropriate to let all the applicants for spectrum compete in a transparent manner in an ascending auction, which will ensure efficiency of allocation and generate additional resources for the Government which can, inter alia, be deployed to develop telecom technology and infrastructure and tackle the problems of universal coverage.

The claim of the industry that the policy of spectrum allocation through auctions would hurt the consumer is unfounded and self-serving. In a competitive market, the consumer price is not dictated by the cost paid by the producer. The price of US $ 22 billion paid by Vodafone for 67% of Hutch Essar has not been passed on to the customers of Vodafone.

It is also necessary to compel the existing operators to utilize the spectrum allocated to them in the most efficient manner and surrender any unutilized spectrum which they might be hoping to capitalize on. It goes without saying that the existing players should also be made to compete for allocation of additional spectrum.

In view the foregoing, we would request you to dispel the apprehensions in the minds of the public and enunciate a transparent, equitable and economically sound policy for spectrum allocation.

With regards,
Yours sincerely,
(Kamal Kant Jaswal)
Director

Dr. D. S. Mathur,
Chairman, Telecom Commission &
Secretary to the Government of India,
Ministry of Communications &
Information Technology,
Department of Telecommunication,
Sanchar Bhawan, New Delhi – 110001

We intend to pursue the matter to its logical conclusion.