Opinion The least worst option

The resource in question is radio frequencies or “spectrum”. It is a prerequisite for all wireless communication and its shortage can blunt growth and hurt quality of service. Today,thanks to the growth in the sector,the demand for spectrum far exceeds supply. The court ordered the government conduct an auction to decide which telecom companies can use it and has asked the Telecom Regulatory Authority of India (TRAI) to finalise the process in the next four months.

Should we worry the court has pronounced so comprehensively,rejecting the views of expert bodies like TRAI,on a matter that even professionals often find too technical? Will telecom companies raise call rates to recover the high costs of spectrum that auctions will inevitably cause? Will investors skip critical infrastructure projects fearing mid-course reversal of government rules? Is the remedy worse than the disease?

Fortunately,such anxiety is vastly exaggerated. The court has overruled technical bodies,but not on matters that are technical per se. Its judgment is extraordinary as are the allegations it examined,and complaints relating to public interests that are very much its domain. It has found Raja conspired to award licences to cronies who had knowledge of his key decisions and were,in many cases,unqualified to receive them. It was found many beneficiaries could produce bank drafts of over Rs 1600 crores ($3200 million) within hours after the Department of Telecommunications (DoT) posted the rules!

The court deserves credit for ending a critical and divisive dispute about allocation and pricing of spectrum that has plagued the telecom sector for over six years. It has rejected arbitrary rules and ordered transparent auctions that,until now,DoT or TRAI have failed to institute.

There is a popular view companies will raise call rates to recover the larger price they will end up paying in the spectrum auction. Such fear ignores simple economics,which tells us market entry costs are “sunk costs” with negligible effect on prices. For example,spiralling real estate prices will mean a new grocer will pay more to set up shop than others who came years ago. However,if the grocer attempts to recover these costs by hiking prices,he will find it impossible to attract customers.

The forced exit of some players could mean the end of freebies newer players offered to customers. Reduced competition might raise call rates too,marginally. However,six or more players will remain in each circle,even in the unlikely event that players affected by the court judgment shun the market. The economic analysis of TRAI shows that beyond approximately six players,competition brings marginal benefits to consumers. Further,the over 20 per cent rise in call charges in recent months suggests the low prices are beginning to hurt companies. Fortunately,the prices are low enough today that even a 50 per cent increase,however unwelcome,will be arguably affordable. In any case,it cannot be anyone’s case that companies that obtained spectrum acquired illegally be allowed to retain it to keep user prices low. Subscribers of the affected companies too will justifiably resent the inconvenience and the costs. The roughly 5 per cent who will be affected,will need to go to companies that were presumably not their first choice. Companies that provide towers and other infrastructure stand to lose business if the affected licencees fail to bid. Investors in the cancelled licences are fuming.

It would be tempting to club Indian companies who got these licences at bargain basement prices with other investors,especially reputable foreign ones they roped in to their business. This might be harsh,since the latter paid the market price for their asset. The Indian government did issue the licence they bought into,and approved the foreign equity they brought. (Indeed,they paid precisely the price the government was duty bound to ask from the original companies). However,they cannot claim to be unaware of risks accompanying their deals. They finalised them at a time of raging allegations that Raja’s licensing regime was tainted. They are by no means blameless. So,this collateral damage notwithstanding,serious players will need to see the higher costs that auctions could force on them as a price for much needed transparency and stability in a key part of their business. This applies to Indian and foreign players.

It is not that auctions are all good. They bring the so-called winner’s curse. Winning bids are often so huge,leaving little to spend on much-needed network infrastructure. It is worth recalling that alternatives to auction,like “beauty contests” or lotteries,are by no means less prone to abuse. There is a new approach (“software radio”) where companies can share spectrum without any particular company having its exclusive use or ownership. The approach works for wi-fi networks but is untested for commercial mobile networks. Auctions seem the most transparent way of addressing the huge demand and supply mismatch.

The disadvantages of auctions can be reduced,even eliminated,by designing them better. For instance,strict controls on the subsequent sale of spectrum is bound to dampen gung-ho bidders expecting to hoard spectrum to profit from later.

The Supreme Court has given us a tough,no-nonsense judgment. It has also charged the TRAI with offering contradictory recommendations on the subject. This is the TRAI’s chance not just to redeem itself,but also to suggest how the collateral damage discussed above can be minimised.

The writer consults on telecom regulatory issues