Halving reserve price, clubbing spectrum is expert's advice to govt

The government is hoping to garner more than the Rs9,407 crore it did — at the recently concluded 2G auctions — from the upcoming auction in March.

However, given that needy operators have already acquired the necessary spectrum to continue operations and the cash crunch existing in the sector, experts say a diversely different outcome is unlikely.

That is, unless the new reserve price is halved, and all remaining spectrum is put up for the auctions, as per the Supreme Court diktat.

Rohan Dhamija, co-head India practice for global telecom consulting firm, Analysys Mason, says there are three reasons why the Telecom Regulatory Development Authority (Trai) will lower the reserve price of unsold spectrum in March.

First is, the current reserve price is 3-4 times more than international benchmarks of recently concluded auctions for the same spectrum band (on a $ per Mhz per block basis adjusted for purchasing power parity).

Secondly, the fact that a lower reserve price does not prevent the market from determining the best price from the auction (classic supply demand theory that comes in to play in any auction).

“As a result, one would imagine that Trai could lower the reserve price of unsold spectrum for the March auctions.”

Dhamija said the reserve price could thus be calculated as between 50% of the cost of existing circles of unused spectrum and 50% of the current reserve price of Rs14,000 crore.

That’s is because in the recently concluded auction, the reserve price was 40% the cost of the Mumbai and Delhi circle spectrum, jointly amounting to Rs5,500 crore.

This would mean almost halving the current reserve price to about Rs6,000-Rs7,000 crore.

The industry, however, is rooting for a lower Rs3,000-4,000 crore to start the bidding process. While this figure seems very low compared with the last reserve price, it must be noted that the government has already got over Rs17,000 crore in its kitty (Rs9,400 crore from the auctions and Rs8,000 crore from one-time spectrum fee), experts said.

Thus, the reserve price will be calculated on the basis of the remaining odd-Rs23,000 crore it needs to get to meet its auction target of Rs40,000 crore.

The reserve price will also have widespread impact on several other important decisions.

Among them, the one-time excess spectrum fee for unsold spectrum, spectrum refarming cost for the 2.5 MHz of 1800 MHz spectrum that incumbent operators are entitled to, and the base price for the 900 MHz spectrum auction (which the government has said it will price at 1.5 times the market-discovered price of the 1800 MHz auction).

All this, said telecom analyst Mahesh Uppal, has put the government in a bind.

“The best way out is to hold consultations with the industry and find out the minimal price at which operators are willing to bid, while at the same time setting a limit that does away with speculation,” he said.

Uppal belives there is no risk even if the reserve price is very low, as telcos are aware of the value of spectrum and will accordingly drive the market price up.

“Moreover, with more than half the spectrum available currently unsold, there is a good chance that the government may be able to garner more funds from the new auction and meet its `40,000 crore target, if it sets a sensible reserve price,” he said.

The reserve price is also linked to spectrum availability in the new auction.

Rajan Matthews, director general, Cellular Operators Association of India, said all spectrum in the 1800 Mhz, 800 Mhz and 900 Mhz bands should now be put up for auctioning together.

“Moreover the 800 Mhz spectrum should be made technology agnostic —  as being a more efficient spectrum, it can be used not only for CDMA, but also for extended GSM,” he said, suggesting different reserve prices for each of the bandwidths.

“And then the market should decide the final price. But ideally the price for each block should be between `2,000-4,000 crore.”
The Supreme Court is likely to pass a resolution on the amount of spectrum to be auctioned in March on Monday. In case all the spectrum is auctioned, it will prevent the need of another auction towards the end of 2013 (as some licenses come up for renewal in 2014).

The silver lining in this categoric mess is that the market as it stands has been thrown open to M&As, as the auctions have already halved the number of telecom operators.

Hemant Joshi, partner, Deloitte Haskins & Sells, said while the sale of spectrum is not the way for the government to overcome the fiscal deficit, much-needed consolidation has set in. “However, regulatory clarity on spectrum is the need of the hour,” he said.