Industry readies rebuttal as TRAI digs in its heels and EGoM loses elbow room

The telecom industry is set to oppose the TRAI’s confirmation to the Empowered Group of Ministers (EGoM) on Thursday that a Rs. 3,622 crore/MHz base price for the upcoming 2G auctions will only increase tariffs by 5-10 paisa per minute.

Despite the awareness that the Telecom Regulatory Authority of India’s presentation could have near-sealed the final decision, the industry is far from giving up its fight.

Cellular Operators Association of India (COAI) Director-General Rajan Mathews confirmed that the industry would prepare a strong rebuttal to the TRAI’s fresh impact analysis of the reserve price on tariffs.

The industry alleges that the TRAI has changed its assumptions on the growth of total minutes in its bid to achieve a pre-defined conclusion.

The TRAI’s original recommendations suggesting a base price of Rs 3,622 crore/MHz were sent to the DoT by its former Chairman, J.S. Sarma, on April 23, 2012, followed by an impact analysis on tariffs on May 13. After opposition by the industry, the DoT referred the issue back to the regulator on May 29, asking for a further assessment of its price benchmark on the country, consumer and industry.

Telecom operators point out that though the DoT’s critical questions had originated from the industry, the TRAI still did not consult it before finalising its impact analysis on tariffs on June 21, 2012.

The industry also expressed surprise that despite this exclusion, the TRAI had claimed to the EGoM that its impact analysis had been finalised “after taking into consideration inputs received from various stakeholders including analysts and service providers.”

Where actual financial analysis is concerned, the industry will examine the impact analysis on whether the TRAI’s assumption of 99% penetration — which includes rural India — will follow through even with the 5-10 paise tariff hike conceded by the TRAI. Further, whether the sharp increase in data which forms the bedrock of the new analysis by the TRAI, also takes into consideration the cost associated with additional spectrum to accommodate the gradual but massive increase in non-voice revenue.

According to S.C. Khanna, Secretary-General, AUSPI, “The TRAI, in failing to consult with the industry has made the error of focussing on cost alone, while ignoring the cost of raising such huge funds for the auctions in an environment of dipping ARPUs as the poorest of poor are added on to networks.”

Repeated requests to TRAI’s new chairman Rahul Khullar for his response to these allegations went unanswered.

Mr. Khullar has broadly supported his predecessor, while accounting for the variance in his own analysis as: “At that juncture the object of the simple exercise was not to assess profitability of operations or determine possible tariffs.”

Further explaining the difference between the TRAI’s numbers with those of the industry, the TRAI told the EGoM that its approach focussed on incremental cost and the incremental cost per unit of output while private parties “have invariably couched their conclusion on the impact on tariff.”

The TRAI pointed out that it had moved well beyond that, using far more sophisticated model for analysis. It alleged that while “the industry associations have continued to maintain that the impact of the tariffs would be high, none have provided detailed model, statistical analysis and industry-wide computations on which such conclusions are based”.

The TRAI has also presented international data which shows that in at least 6 of the 19 cases of spectrum auctions in 2010-11 across the world, the auction price equalled the reserve price. Even in such a scenario the impact on the 20-year government revenue will be upwards of Rs. 3 lakh crore.

The industry is poised for rapid political lobbying armed with financial analysis from its own global consultants to overturn the impact of the TRAI’s position. On the other hand, the EGoM finds itself with little elbow room to accommodate demands for a lower reserve price. Rather, now the EGoM finds itself in the unenviable position of having to keep the reserve price in the same range, while the government in the future may have to direct the TRAI to exit its “tariff forbearance” position to ensure that tariffs are kept within its projected levels after the auctions. Even politically, that is the only simple decision open to the EGoM — given the industry pressure and media scrutiny that it finds itself under.

Keywords: 2G auctions