Thursday, December 4, 2008

The Coming 3G Auction Blunder

Shyam Ponappa / New Delhi December 04, 2008

Why tie ourselves in knots instead of building broadband services

India began systemic reforms in telecommunications over 10 years ago with auctions. You may remember that disaster. Many victors choked on the “winner’s curse”, as has been observed repeatedly elsewhere.* Thereafter, network rollouts stalled, and operators struggled with high-cost installations and unrealistically-priced services, while users suffered self-inflicted limitations for years. Then, there was a radical change. With NTP ’99, high auction payments were replaced with revenue-sharing.

One can fault the revenue-share rates for having been high (disincentives), and there were no incentives for broadband services that would greatly facilitate education, health services, and economic activity and productivity. But there’s no denying the sea-change that swept telecommunications. We now have some 350 million subscriptions, growing at several million a month. From the perspective of the government’s revenue foregone from the auction fees, there’s little doubt that the new revenue-sharing approach has led to much higher collections than could have been imagined from any auction.

Now, with third-generation (3G) technology and services, we face an analogous situation. The spectrum for 3G is to be distributed, and the Department of Telecommunications plans to auction 5 MHz chunks. Users have the same needs, and more so away from the major cities. Namely, proper broadband (at least 500 kbps) at reasonable prices, whether for essential services like distance education or health care services in our scattered villages and rural population, or for commerce, information, and entertainment.

Yet, our policy makers blunder on heedlessly to set up conditions and constraints that amount to binding ourselves hand and foot. Whether it is the TRAI using defective logic in making recommendations for auctions of 3G spectrum, or the Ministry of Telecommunications misapplying principles to make arbitrary awards of rights for spectrum, with selective biases in favour of BSNL or certain private awards, the same lack of good processes, ie, clear objectives followed by rational thinking applied for the common good, informs our approach, policies and procedures.

Many among our elite think they/we are far removed from the blight of these developments, insulated from such needs with our access to good schools and urban services. Let us banish these misapprehensions, because the effects are broad and cut close to the bone, as described below.

Suppose the 3G rights are awarded by auction. A flawed approach and incompetent or misapplied execution look set to ensure that potential foreign investors looking for policy clarity will be left on the sidelines, eg, because stand-alone operators need at least 10 MHz while they can only bid for 5 MHz, or that FIPB approval is required but not guaranteed for winners. With such a capacity for self-inflicted damage, we don’t need enemies to keep us down.

Then, there will be several years of struggle by the hapless winners of the auction, as they fight to balance the realities of a muddled and capricious regulatory environment with the attractiveness of an expanding potential market. After all that time has been lost for enabling services as a contributor to factor productivity, some brave soul/s may seek to bring about change, as happened with NTP ’99. Perhaps their efforts will work, perhaps not, but we will have to carry the burden of our ill-conceived policies as our albatross. Millions of people who could benefit from the opportunities for education, training, jobs (because with good communication links, proximity is not a limitation for knowledge industries, and travel and leisure services thrive when facilitated by communications), will forego those benefits for the foreseeable future. The immigration into the cities that might be stemmed will continue unchecked, adding to our monstrous slum cities. So don’t think your life is not touched by some abstruse spectrum auction…

The best way to distribute spectrum in a developing country is to limit government collections to taxes, with incentives for the wide deployment of services at reasonable prices. (An implicit assumption here, which may be moot, is that tax rates are set for the greatest common good — but I won’t get into that.) This is because additional taxes are inefficient from a societal perspective, as they constitute an inefficient levy and detract from productivity, killing the goose-that-lays-the-golden-eggs. Ideally, spectrum distribution should be combined with the award of the much-delayed unified licences focusing on user services, and not be driven by misplaced enthusiasm for short-term government revenue collection, or an optimum number of providers (we have seven in large cities already), or some specific technology.

For how this affects prices, consider the capital costs of an outright auction versus no such additional burden. In practice, we experienced this some years ago when up-front licence fees were abolished, with a steep reduction in tariffs after many years of very high rates. Even with the imposition of a revenue-share percentage, the pricing of calls halved, then quartered, from Rs 32 per minute for mobile calls to settle at less than a tenth of that today.

Those who insist on collecting additional revenues from the sale of public property — investigative journalists, the CVC, the CAG, and any judiciary review… — should first consider desirable end-objectives (user services), before haring off after the ‘rightful’ pound of flesh.

If the government must charge for spectrum, the next-best way is to charge existing service providers a percentage of revenues that is not onerous, with incentives for extensive rural coverage, eg, reduced charges. After all, if we are seeking rural communications services, we should be paying people to come out and provide them… Low spectrum charges will help sustain low tariffs.

If we absolutely must have an auction, use a criterion that combines service offering (eg, broadband at 500 kbps or 1 Mbps), plus percentage revenue-share, plus rural coverage, with a higher weightage for coverage, eg, x connections for STD code 8274. Prohibit sales/participation/alliances for some period, with penalties for breach.

If you find these arguments compelling, act now. Mobilize your political, professional and judiciary contacts with a single, uncomplicated message for our political leadership: This country needs excellent communications services at the lowest possible cost to bootstrap our population’s capabilities. People need enabling circumstances and opportunities, and communications is a profound enabler. If you can, consider a Public Interest Litigation suit.

* For disastrous 3G auctions in Europe, see 'Winner's Curse', Chris Anderson, Wired, May 2002: