Banquo’s ghost and 2G spectre

A battle is raging in India’s telecommunications industry. Mobile phone operators are split down the middle over the April 23 recommendations of the Telecom Regulatory Authority of India (Trai) on pricing and allocation of electro-magnetic spectrum, a finite and, hence, scarce natural resource. Spectrum is thin air but akin to the proverbial highway that enables wireless cellular communication services to take place.
On one side of the battle are three incumbent operators, Airtel (headed by Sunil Bharti Mittal), Idea (led by Kumar Mangalam Birla) and Vodafone (with Vittorio Colao as its India CEO). The first named, whose company has virtually ruled the country’s air waves since the government gave up its monopoly over this sector in the mid-1990s, has gone to the extent of describing the prevailing situation as “the most destructive period” in the “regulatory environment I have seen in 16 years”.
On the other side of the skirmish are three biggies, Reliance Industries Limited (controlled by Mukesh Ambani, the richest man in India) which is already dominating the broadband wireless access (BWA) space, Reliance Communications (headed by his estranged younger sibling Anil Ambani) and Tata Teleservices (led by Ratan Tata). Even as the “big three” are shouting themselves hoarse, the silence of the “other three” has been deafening.
Sitting on the sidelines and watching helplessly are two public-sector companies, Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited. These two once monopolised the telecom industry but have today been systematically and deliberately marginalised by government policies.
The mess India’s telecom sector currently finds itself in is largely a legacy of the recent past. Operators had winked at, turned a blind eye to or actively colluded with a bunch of corrupt bureaucrats and politicians as the regulator displayed great reluctance to do its job, that is, regulate. It took three years after the Department of Telecommunications (DoT) led by former Union minister for communications Andimuthu Raja mis-allocated and under-priced spectrum in late 2007 and early 2008 for the scandal to surface. The former DMK minister was stripped of his post in November 2010, days before the Comptroller and Auditor General of India presented a damning report on the scam arguing that the “presumptive” or “notional” loss to the exchequer could be as much as `1,72,000 crore, or nearly $40 billion.
Government functionaries, including Prime Minister Manmohan Singh and P. Chidambaram, who was finance minister when the scam took place, tried to play down the scandal. Kapil Sibal, who replaced Mr Raja as communications minister, floated a “zero loss” theory, while the Prime Minister compared cheap spectrum to subsidised fertilisers. While all blame for following faulty and opaque processes of allocating and pricing spectrum was sought to be passed on to the disgraced former minister, what was also claimed was that inexpensive spectrum had enabled mobile phone services to be provided at dirt-cheap rates to ordinary citizens and was the principal reason for the rapid spread of telephony across the length and breadth of the country.
But these were at best half-truths, if not downright lies. Almost exactly a year after Mr Raja was placed behind bars — he has been in Tihar Jail since February 2, 2011 — the Supreme Court ordered the cancellation of 122 telecom licences offering second generation (2G) services and called for fresh auctions, throwing the entire industry and the government into a tizzy. By then, the 122 licensees, who Mr Raja claimed would be able to break the stranglehold of a cartel, obtained a market share of barely 12 per cent and were not able to significantly reduce the dominance of existing players.
The recent set of recommendations by Trai has upset the “big three” because the “reserve price” or the base/floor price for auctions has been fixed at 10 times the price paid for spectrum from 2001 onwards. Adding insult to injury, Trai has recommended “refarming” or re-allocation of spectrum from the more efficient and powerful 900 MHz band to the 1,800 MHz band ostensibly to ensure that the most efficient spectrum is used to provide the most modern (mainly 3G and 4G) services such as high-speed data transfer and mobile television.
As telecom expert Mahesh Uppal points out, “By creating an extraordinary situation of spectrum scarcity, the incumbents had to bid high for 3G spectrum in June 2010 to secure future supplies of spectrum which have now become the artificially high reserve price for spectrum recommended by the Trai.” He adds that while the government did not spend anything from the $20 billion it earned from auctioning 3G and BWA spectrum in mid-2010 for developing telecom networks and instead used the money to bridge the budget deficit, what the Trai recommendations have ended up doing is add huge costs to the industry without adding benefits to consumers.
At the same time, Trai has slashed the spectrum usage charges levied on existing 2G operators from a low of three per cent of adjusted gross revenue (AGR) for 4.4 MHz of spectrum to a high of eight per cent of AGR for 15.2 MHz of spectrum or an average of 5-6 per cent for the “big three”, Airtel, Vodafone and Idea, to one per cent of AGR if the operator pays the current market price for spectrum that is administratively assigned. So why are they still cribbing? These three have in the past managed to ensure that the policy regime works in their favour and now “this has become a convenient ploy to divert attention,” says the head of a rival telecom firm who spoke off the record.
In this tussle, the ordinary user of mobile phones stands to lose the most. Services will become more expensive with little or no improvement in quality, even as corporate captains desperately lobby to influence the Empowered Group of Ministers led by finance minister Pranab Mukherjee (who else?) that has to ensure that the auction process is completed by the end of August, the extended deadline set by the Supreme Court.
India’s telecom story has come to paradoxically symbolise the best of deregulation and the worst of crony capitalism. Like Banquo’s ghost in Shakespeare’s Macbeth and Ottavio Quattrocchi’s role in the purchase of Bofors guns, the 2G spectrum scam will return to haunt the government again and again despite its best efforts to cover up the scandal.

The writer is an educator and commentator