March.30 : There is something strange about an auction if the likely winners can be shortlisted before the auction takes place. This is precisely what has happened in the much-delayed auction of third generation (3G) telecommunication licences with electro-magnetic spectrum, a scarce national resource used by mobile phone operators among others. It can be predicted that the maximum number of 3G licences would be bagged by three corporate players, Bharti-Airtel, Vodafone-Essar and Tata Teleservices, while a few would be obtained by Idea, Etisalat and Aircel and Reliance Communications (possibly in that order).

The outcome of the 3G telecom auction — scheduled to start from April 9 — can be easily anticipated because the department of telecommunciations (DoT) has shaped norms in such a manner that the scales are tilted in favour of existing players and against new entrants, both Indian and multinational. The consequence will be that 3G telecom will end up benefiting a small section. At the same time, the exchequer will be deprived of revenue it could have potentially garnered.
What will take place is that the new 3G spectrum will be used by existing telecom players to strengthen voice services whereas the much-hyped data, video and high-speed Internet facilities using mobile handsets would be used by a privileged few. The Indian market for mobile telephony is dominated by voice services which accounted for as much as 92 per cent of total industry revenues in 2009 with the share of short messaging services standing at only six per cent, followed by download of ringtones at two per cent. The important point to note is that no telecom operator can hope to earn profits by providing only 3G services. Since mobile telecom networks in metropolitan areas are highly congested — witness how frequently mobile phone calls “drop” — existing operators are greedily waiting to grab 3G spectrum to enhance their existing second generation (2G) services that offer relatively slow data and video transfer.
While the government had set a target of raising Rs 35,000 crores through the auction of 3G licences and two broadband wireless access licences, this amount is almost certainly not going to be raised. There are indications that the final sum could be barely Rs 20,000 crores. Why? The DoT is auctioning three slots of 3G spectrum in 17 out of the 22 telecom circles against four originally envisaged. After months of wrangling, the Empowered Group of Ministers, headed by Pranab Mukherjee, decided that all successful bidders would receive spectrum only on September 1 instead of an earlier proposal to stagger allocations of spectrum depending on availability. Thus, the auction for the fourth slot has been kept in abeyance pending release of spectrum by the ministry of defence.
Then, the fixation of the minimum or “reserve” price was postponed several times as there was indecisiveness over the availability of spectrum and the number of operators who should be allowed to operate in each telecom “circle” or region. The DoT was at loggerheads with the defence ministry over the latter’s alleged reluctance to vacate the designated spectrum for commercial use. The defence ministry argued that it delayed releasing spectrum on account of the public sector Bharat Sanchar Nigam Limited not being able to complete on time an alternative telecom network for it.
After many missed deadlines, the reserve price for a pan-India 3G licence with spectrum was eventually fixed at Rs 3,500 crores. Many argue that over the last two years, the appetite of investors has diminished due to risk perceptions going up on account of industry profits getting squeezed due to intensification of competition with six new players entering the fray. It was also easier to borrow two years ago and the government could well have earned more revenue from the auction of 3G spectrum.
Experts believe the Indian market for 3G is between five per cent and 10 per cent of the total number of mobile phone users. Just about seven per cent of the roughly 500 million mobile telephone users in the country at present have handsets that are enabled for 3G services.
The cheapest 3G handset is currently priced between Rs 6,000 and Rs 7,000 against Rs 1,200 for an inexpensive 2G handset.
There are four inter-related sets of entry barriers that have restricted the competition for 3G licences. New Indian entrants are not allowed to bid unless they have prior 3G experience. This means that the only way a new Indian entrant can participate in the 3G auctions would be to find a foreign/multinational partner. But there’s a second catch. The reason why foreign firms will not participate in the 3G auctions is that it will have to first acquire an all-India unified access service licence by paying an amount of Rs 1,651 crores without any guarantee that 2G spectrum would be bundled with such a licence.
Thirdly, as stated, operators would have to combine 3G and 2G services if they hope to become financially viable, which means that guidelines for mergers and acquisitions (M&A) should be clear before new companies — foreign or Indian — place bids for 3G spectrum. However, the government has (deliberately?) not formally approved new M&A guidelines. As per current restrictions under the existing M&A guidelines that were formulated in April 2008, no intra-circle merger is possible for an operator for a period of three years from the effective date of the licence. This would mean that even if a new entrant won a 3G licence, it would not be able to combine 3G spectrum with 2G spectrum for the first three years. Finally, the DoT and the Telecom Regulatory Authority of India have not finalised the norms for sharing, sale or resale of 2G spectrum.
These entry barriers have ensured that the 3G auction has become a “friendly contest” among members of a “closed club”. Foreign or multinational groups that had earlier shown interest in the 3G spectrum auction and which have dropped out of the race include AT&T, Verizon, British Telecom, France Telecom, MTN, Orascom and Deutsche Telecom. One foreign company with an Indian partner, Uninor, has gone on record stating that it chose not to participate in the 3G auctions because it had not yet received the 2G spectrum that it had already paid for.
This is truly a travesty of a level-playing field for a government that prides itself on having shaped policies that are meant to attract foreign investors.

Paranjoy Guha Thakurta is an educator and commentator

Paranjoy Guha Thakurta