FE Editorial : Markets matter

Feb 27 2013, 01:00 IST
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SummaryThough some have been quick to term the decision by various telcos to not participate in the second round of spectrum auctions—of the 390 MHz of spectrum on offer in November, only 127.5 MHz was bid for at the lowest possible price while there were no takers in the more expensive circles like Delhi and Mumbai—as evidence of their cartelisation, the lesson for the government is that it needs to pay attention to market realities.

Though some have been quick to term the decision by various telcos to not participate in the second round of spectrum auctions—of the 390 MHz of spectrum on offer in November, only 127.5 MHz was bid for at the lowest possible price while there were no takers in the more expensive circles like Delhi and Mumbai—as evidence of their cartelisation, the lesson for the government is that it needs to pay attention to market realities. And not to the fevered imagination of telecom regulators or even some bureaucrats/politicians.

The base price fixed by Trai, under an earlier chairman last year, was based on the prices fetched in the 3G auctions of 2010—and this, in turn, was jacked up several times by putting in a multiple to work out the base price of spectrum in the 800 and 900 MHz bands. But this was always a bad idea. For one, the 2010 auction was a constrained one since, thanks to A Raja’s shenanigans, the older telcos had no spectrum to continue operations—after the 3G bids, where they bid through their nose, the telcos had enough spectrum; more got freed up as they started shedding non-paying customers. More important, the bottom fell out of the telecom market when, along with overall economic conditions plunging, average revenues per user began a steady climb downwards—from R180 per subscriber per month in Q1FY11, they fell steadily to R150 in Q2FY13. In such a situation, it never made sense to be looking at 2010 auction prices as the base—let alone multiples of this—but that’s what Trai did, and under a new chairman, Trai went along with the proposal.

Worse, Trai even mandated a complete change in the way licences were to be renewed, and imposed large costs on industry by proposing re-farming of the 900 MHz spectrum—this meant the debt-laden industry was even more cash-strapped. While the Trai-mandated bid prices were a bad idea, they could still be financed if annual revenue-shares were reduced to a fraction of what they were—the government, however, failed to move on this even though, privately, senior officials said they understood the critical need to do so. Under the circumstances, it made rational sense not to participate in any bid, and that’s what the telcos have done. While the industry continues to play wait-and-watch—how much will government lower prices by—the government would do well to have a new, and complete, consultation on the

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