India - Telecom;Raja at it again (G.Read)

Sunil Jain


Any seasoned campaigner will tell you that if you can’t find fault in an argument, it’s best to confuse the issue. And so it is with telecom minister A Raja and his latest press release on the Government of India website which is, in turn, an extension of his interviews in the The Hindu Business Line and The Hindu over the past few days. The arguments are powerful ones for the audience they are aimed at — those who just don’t know and those who don’t want to know, with Prime Minister Singh falling in the latter category.

As is well-known, Raja gave away 2G spectrum for a song earlier this year and, after token resistance, Singh okayed this since no price was too high for his government’s survival, more so since the price was being paid by the exchequer. This price, we now know was around Rs 55,000 crore, or an amount that’s more than that earmarked for buying defence equipment this year. Of the various beneficiaries of this largesse, two (Swan and Unitech) sought to publicly encash it by selling large chunks of equity in their firms — the difference in the valuations they got and the price they paid for the spectrum was the largesse. Apply this difference to all licences Raja gave away and you arrive at Rs 55,000 crore.

It is this evidence that Raja is now trying to muddy. So he’s argued that the Rs 55,000 crore argument misses the woods for the trees. He argues that because he gave away the spectrum at a low price instead of auctioning it, he’s able to charge a high annual fee from the companies who got the largesse. That is, since there is no huge entry fee burden, the telcos will be able to charge a low tariff and attract more customers and, since the government gets an annual revenue share, it will actually end up getting more money in the long run — why they’ll charge a low tariff is not clear since firms who’ve bought into Swan and Unitech have paid a full-blown market price for the spectrum, even if this was paid to private firms like Swan and not to the government.

For Raja’s logic to hold, (a) it must be the case that these ‘spectrum usage charges’ and ‘administration and usage’ charges can’t be levied on spectrum on which the correct price has been paid; and (b) the revenue that is gained each year in perpetuity from the spectrum that was given away almost free must be more than the Rs 55,000 crore that has been foregone.

To take (a) first, it is well-known that the fourth lot of cellular licences was auctioned in 2001 and, after several rounds of bidding, a sum of Rs 1,651 crore was arrived at as the price. But despite this price being got from auctioned spectrum, the government still charges these companies a spectrum user fee of 2-6 per cent (in addition to a licence fee that varies between 6 and 10 per cent depending on which telecom circle they’re in)! Indeed, there have been no statements from people like Sunil Mittal asking for either their Rs 1,651 crore to be returned since they’re paying an annual fee, or for the fee to be reduced because they paid the market price for their spectrum. In any case, there is nothing in the licence which says the spectrum or licence fee cannot be hiked or that the auction fee is a substitute for annual spectrum charges. By way of illustration, Raja is planning to put a spectrum charge of 1 per cent on the 3G spectrum which is to be auctioned soon (in addition to the 6-10 per cent licence fee), but nowhere do the auction papers specify that the government will never raise this 1 per cent charge.

What about (b)? The revenue that can be collected depends upon the number of subscribers that can be serviced by the 4.4 MHz of spectrum that each of these firms has got. We know from the guidelines on subscriber-linked-allocation that, at an all-India level, 4.4 MHz can service 1.6 crore customers. Given the total number of licences issued by Raja, that’s a maximum of 9.6 crore customers that can be served each year, in perpetuity. Since each customer pays Rs 250 per month, that gives us annual revenues of Rs 28,800 crore.

Now assume [completely incorrectly, given the argument (a) just made] that Raja would not have charged these firms a spectrum fee if they had paid the fair price; but since they didn’t, he now feels free to ask them to pay. This fee, we know from the chart of fees for different spectrum holdings, is 2 per cent (at 6.2 MHz levels, it goes up to 3 per cent). So, the theoretical maximum that Raja can get each year from these firms is Rs 576 crore. What is Rs 576 crore each year in perpetuity worth today? If you assume an interest rate of 10 per cent in a bank, a deposit of Rs 5,760 crore will give you Rs 576 crore per year in perpetuity. The amount Raja has given up (Rs 55,000 crore) is nearly ten times this.

One of Raja’s other arguments is that the valuations may include stuff other than the spectrum — infrastructure, interconnection rights, and so on. He’s right, but none of these firms has any subscribers or any infrastructure. Despite not having any subscribers, it is true, Swan has a roaming agreement with BSNL (that’s another scandal since BSNL doesn’t allow any other telco’s subscribers to roam on its network, and tells you something about the clout Swan’s owners have) but this alone nowhere near justifies the valuation paid for it.

Another argument is that, ever since 2003 when Reliance’s mobile phone service was legalised, the government policy has been to grant licences on a first-come-first-served basis. This is untrue as the TRAI recommendation which was accepted by the Cabinet was that new licences would be auctioned.

If, despite this, Prime Minister Singh and the various Opposition parties who’ve kept completely mum on Raja’s largesse choose to believe Raja, there’s very little left to be said.