Alaskan Crab fishing, logging, coal mining and ice trucking are some of the most dangerous jobs in the world. And then there is the job of being the telecom minister of India. Kapil Sibal is finding this out the hard way. He rode out of the fortress and into the battlefield of doublespeak swinging the wheel of logic and the statistics. He now stands beleaguered and besieged, accused of doublespeak himself. He would desperately want to make it back to the fortress without any further damage to his reputation. When he took over, he said that his 100-day plan would fix licensing, spectrum allocation, tariffs/pricing, flexibility within licenses, spectrum sharing, spectrum trading and merger and acquisitions. But don’t forget his constraints. There are multiple investigations into telecom’s murky past by various agencies like the CBI, CAG, possibly a JPC and finally the Supreme Court which has even asked for chargesheets to be shown to it before they are filed.
So what can Sibal do?
Pay Before You Grow
His big move will be to charge market prices for spectrum. Already, licenses have been de-linked from spectrum, and companies will need to pay fairly significant market-linked rates for spectrum. If we go by the recommendations of the February 2011 TRAI expert committee report on spectrum pricing, a single MHz of pan-India spectrum in the 1800 MHz band could cost anywhere between Rs.1,769 crore to Rs.4,571 crore, depending on whether it was part of the contracted minimum or over and above that.
The single biggest reason behind spectrum suddenly becoming so expensive was the 2010 3G auctions that netted the government nearly $15 billion. J.S. Deepak, then a joint secretary with the Department of Telecom, was the architect of that auction, much against the wishes of his minister, A. Raja, say insiders. “The 3G auctions were the only reform in the telecom sector for nearly five years, and one of far reaching proportions. We got a market-determined price for spectrum, we sold each and every piece of spectrum and the government got its fair share of revenue from it,” he says. Suddenly everyone’s eyes got opened to the immense monetary value of a resource that was being doled out for free.
Of course, operators are up in arms about shelling out billions of dollars for spectrum. Their argument-cum-threat against market prices for spectrum goes like this: Paying billions for spectrum will stretch our balance sheets inordinately, leaving us no choice but to hike consumer prices significantly.
Well, their fear is partly justified because the existing way of doing the telecom business is about to be destroyed. It was Bharti Airtel under Manoj Kohli that discovered the Holy Grail of Indian telecom first. Its three simple tenets were: Build your towers and expand your network, in a vastly underpenetrated market getting customers would never be a problem; give away SIMs for next to nothing and minutes at progressively lower prices, adding both subscribers and network usage in the process; get spectrum from the government for free by showing subscriber growth, all as per policy, mind you.
And as long as the market kept growing, telecom vendors too were willing to give their equipment on a rental basis. Sometimes they even financed the equipment on easy terms for operators. Leading Chinese vendors like Huawei are understood to have offered newer players their equipment almost free of charge for the first two years of usage, with payments kicking in from year three.
Over time, most of its larger competitors caught on to the game as well, thus making the model almost the conventional logic of telecom. What’s even worse, most operators started fudging their subscriber data in cahoots with DoT officials, even submitting false affidavits to back up their claims.
Operators fear that the new regime will make them poorer. But almost all experts say that’s rubbish. Yes, the costs go up, but they go up for everybody. No longer will some people pay high fixed costs to get into business while some others escape that. “In any market with a certain level of competition, an increase in fixed costs will have no impact on consumer prices but only on cash flows. But the high spectrum prices could in effect become a barrier to entry for cash constrained firms, thereby reducing competition for the large players,” says Rohit Prasad, a co-author of the TRAI report on pricing spectrum as well as an economics professor at management institute Management Development Institute, Gurgaon.
“It is misinformation being spread by operators that large spectrum costs will lead to higher prices. For instance, the cost of 3G spectrum amortised over the 20 year period of a license at an average interest of 1 percent per year, assuming even 20 million 3G users, works out to just around Rs.150 per subscriber,” says telecom veteran B.K. Syngal who before his current avatar as a principal with consulting and lobbying firm Dua Consulting, has led both public sector firms like VSNL and private ones like Reliance Communications.
Prasad’s co-author on the TRAI report, Rajat Kathuria, a professor of economics with Delhi-based management institute Indian Management Institute also agrees. “As long as there is competition and number portability, prices won’t go up significantly due to one-time spectrum costs,” he says.
Willing To Mingle