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Why telecom sector is exciting again

By Sunil Jain
October 15, 2007 17:26 IST
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From a policy point of view, India's telecom industry is getting exciting once again. After a lull of a few years, we're back to the same half-truths from regulators/policy makers, and the all too familiar attempts to help favoured firms.

So, earlier last week, the Telecom Commission, which is headed by the telecom secretary, okayed Reliance Communications' February 2006 proposal to offer GSM-cellular technology for its mobile services - currently, Reliance uses CDMA technology to offer mobile services.

On the face of it, the clearance seems trivial, given how telecom licences are technology agnostic - you can use GSM or CDMA, how does it matter?

Actually, it does and it doesn't. Sure it doesn't matter if Reliance gives its subscribers connectivity by using either CDMA or GSM technology. But the catch is that Reliance cannot use GSM technology on the spectrum airwaves allotted to it - each type of equipment typically works on pre-specified spectrum bands and, so, CDMA works on the 800 MHz band while GSM-cellular works on the 900 and 1,800 MHz band.

So, by virtue of allowing Reliance to use GSM, the Telecom Commission has said that Reliance will now get fresh spectrum in the 1,800 MHz band as well! Interestingly, six years ago, GSM firms asked the government to allot them CDMA spectrum since the licences were now technology-neutral, but the government told them to get lost - they were told that while they could use GSM or CDMA, it would have to be in the spectrum bands already allotted to them.

What this means is that while over 500 players slug it out for fresh spectrum in various telecom circles, Reliance will definitely get it. Right now, Reliance Communications associates Swan and Cheetah are 3rd or 4th in the line to get spectrum in most telecom circles.

But since the government is going to get only 20 MHz of extra spectrum once the defence forces vacate it, and it has to keep at least 10 MHz to meet the expansion needs of the existing players, only two new players can get spectrum in most circles (the minimum each firm will get is 4.4 MHz). So, Swan/Cheetah may or may not get the spectrum (the others, like real estate firms DLF/Parsvnath may as well go home!) - but once Reliance Communications' dual-use spectrum is approved, the company moves up to second position and it becomes certain it will get GSM spectrum!

Imagine the irony, and the lesson to be drawn. Reliance (then owned by Mukesh Ambani) decided to use its fixed-line licence to provide mobile services in 2001, so the government legalised that and said they could do CDMA mobile on it - now the same CDMA licence is to be treated as a GSM one. Sure, the company will have to pay Rs 1,660 crore (Rs 16.60 billion) for it, but that's a pittance compared to what the spectrum is worth.

That, of course, is just one part of the story. Ever since the great spectrum sale began, and columns such as this one pointed out that first-come-first-served would just allow firms to get scarce spectrum cheap and then trade in it, officials have been pooh poohing this.

Various parts of the Trai recommendations are cited in this context. There's a rollout obligation - unless firms roll out their networks, they cannot merge or get acquired (Section 5.27iv) or get fresh spectrum (Section 5.27ii) - in addition, the government is contemplating putting in a lock-in, whereby the firm getting spectrum will not be allowed to change shareholders for a certain period of time.

All of this sounds very good, but all of it is hogwash. One, in 1997, the fixed-line providers had rollout obligations for village phones by 2000 that entailed a capital expenditure of Rs 5,000 crore (Rs 50 billion) - firms fulfilled just 12 per cent of their obligations by 2003, and all that happened was the obligations were rolled back.

Rollout obligations for long-distance services existed, but also got rolled back. So, there's no reason why these ones shouldn't.

In any case, the rollout obligations aren't onerous - you have to reach 30 per cent of the country's district headquarters within three years.

If you don't, under the current policy, you have to pay a maximum fine of just Rs 1 crore (for GSM) to Rs 7 crore (for CDMA) - while your licence was to be terminated if the rollout delays were 20-52 weeks, TRAI has recommended that no termination be done and that, instead, a monetary fine be levied (5.27i)!

In any case, TRAI has made a separate recommendation that "active infrastructure" sharing be allowed - that is, Company A be allowed to use the towers/radios of Company B to provide services for its customers. Once this is allowed, rollout obligations have no meaning since, if Company A does not want to invest in infrastructure, all it needs to do is to sign an active infrastructure-sharing agreement with Company B to cover its rollout obligations!

As for a lock-in period before share transfers are allowed, this was the policy in 1995 as well. The reason why it was changed was simple, bankers couldn't lend to firms as long as this was in place! After all, if Company A takes a loan of Rs 100 crore (Rs 1 billion) but goes bankrupt, bankers/creditors need to take over the assets - but they can't if the law prevents them.

The moral of the story: there will be trading in spectrum and the benefit of this won't go to the government, but to the companies just by virtue of them being first in the queue - even lotteries don't reward people for being the first in line to buy tickets.

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Sunil Jain
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