GoM needs to balance massive revenue against threats of tariff hikes
The telecom industry is anxiously waiting to see if the newly appointed chairman of the Group of Ministers (GoM) on Telecom, Sharad Pawar, will deliver on the difficult mandate of finalising the reserve price for 2G spectrum auctions at his first meeting on Monday.
“Since the GoM has to follow the Supreme Court’s directive to hold the auctions in August, we minimally expect a decision on the reserve price and the quantum of spectrum to be put on the block tomorrow [on Monday],” says Director-General of the COAI Rajan Mathews.
However, sources in another lobby group say it may be difficult for Mr. Pawar to deliver a decision so soon.
The Telecom Regulatory Authority of India had recommended Rs. 18,348 crore as the reserve price for 4.4 MHz of spectrum — a quantum jump from Rs. 1,658 crore, the price at which the former Telecom Minister, A. Raja, allocated pan-India licences/spectrum in 2008. Following a CVC complaint on corruption, a CBI FIR and the Supreme Court’s February 2, 2012 judgment, the 122 licences were declared illegal and cancelled. Spectrum from these licenses is now required to be auctioned within the next 60 days.
Following widespread industry opposition, the government had sent a reference back to the TRAI to reconsider and explain its high reserve price. However, the TRAI remained unyielding.
Since then, the decision has been pending with the GoM led by the former Finance Minister, Pranab Mukherjee. Now that Mr. Mukherjee has demitted office, Mr. Pawar has been asked to step in as the GoM chairman.
Based on multiple reports, the industry has forecast that this high reserve price will lead to a tariff hike of roughly 30 paise-Re. 1/minute, depending on the circle and amount of spectrum auctioned. Two reports, one by E&Y and the other by PWC, have been submitted to the government.
In contrast, the TRAI’s estimates show a negligible tariff impact of between 1 to 4 paise, which will decline over the 20-year period for which the spectrum will be awarded.
The GoM faces multiple challenges in making this decision. First, it has been the UPA’s stance in its multiple press releases (November 7, 2008, January 7, 2011) and affidavits (November 11, 2010) while defending Mr. Raja in the Supreme Court that the TRAI is an expert body and that the government diligently followed its recommendations during his controversial award of 2G spectrum in 2008 at a 2001 price of Rs. 1,658 crore. The government is acutely aware that overruling the TRAI now, especially after detailed consultation, will generate certain ridicule and perhaps lead to filing of a PIL petition.
In the past, the government used the cover of “policy decision” to overrule the TRAI. This GoM does not have this luxury since computing the reserve price for spectrum auctions is a matter of science (spectrum efficiency and propagation characteristics) and economics which take into account the number of subscribers, scarcity, previous benchmarks and future availability. The GoM will be hard-pressed to demonstrate how its calculations are superior to that of a sector-specific regulator, especially since the TRAI has stood by its estimate despite examining the matter a second time.
Thirdly, it will be equally difficult for the TRAI’s new Chairman, Rahul Khullar, to reverse the recommendation of his predecessor, as for the most part, this is the outcome of the work of economists and specialists at the TRAI. Nothing new has occurred between April and July to force Mr. Khullar to change the TRAI’s recommendation unless he discards the efforts of his entire team.
Further, the Finance Minister requires large revenue receipts, given the sharp rise in the fiscal deficit and an economic slowdown, which has adversely impacted tax and revenue receipts. Apart from 2G auction revenue, the reserve price will also set the price benchmark for spectrum beyond 6.2 MHz, which has been held by operators since 2002.
Lastly, the decision is prone to political pressures. Samajwadi Party chief Mulayam Singh Yadav has shot off letters to the government, demanding that the TRAI’s reserve price remain unchanged, while counter-lobbying for a drastic cut in the reserve price is simultaneously taking place behind the scenes.
However, unlike previous occasions, this decision of the GoM will need to withstand the full scrutiny of the Supreme Court — since it has itself directed that this auction take place. It is by no means an easy decision. Keeping the reserve price at the current level may result in several large companies — if not all — skipping the auction, while on the other hand, if even one bid is received above the reserve price, it will seal the fate of spectrum prices for the future.
In the event of the GoM needing more time to study the matter, it will need to approach the Supreme Court seeking a further extension till September-November for holding the auctions.