Corporate Nov 15, 2012
New Delhi: On the morning after the dismal failure of the 2G spectrum auctions, when the government is wondering how to bridge the mounting fiscal gap and telcos are assessing the spoils, one pertinent question begs to be answered: how committed was the government itself to avoid a flop?
Telecom Minister Kapil Sibal was heard saying on Wednesday that he went entirely by the recommendations on spectrum pricing given by regulator Telecom Regulatory Authority of India (Trai). In essence, he implied that if Trai had recommended a much lower base price for 2G spectrum, these auctions could have been much more successful.
Trai did, under two different chairmen, lower the base price from Rs 18,000 crore to Rs 14,000 crore but that did not seem to make much of a business case for the telcos. The same prices, however, seemed to make huge sense in the 3G auctions of 2010. Sibal himself asserted that market conditions were different in 2010 from those prevailing in 2008 and more so in 2012. Was the minister trying to say that the basis of pricing itself was flawed? And if so, why did it not make the changes needed, especially when the Supreme Court in the presidential reference said that such decisions were best left to executive judgement?
Another question is: did Sibal do anything to persuade India's telecom billionaires to participate in these auctions to ensure they did not fail? Sunil Mittal, promoter of the country's largest telco Bharti Airtel, had famously predicted just a week before the auctions that the entire process would be over on the first day itself and that his company was participating merely because it did not want to be seen as boycotting the auction process. True to his words, Mittal won spectrum in just one circle - the 'C' circle of Assam. His total outgo? A paltry Rs 8.7 crore, according to calculations done by Goldman Sachs.
Mukesh Ambani, the other significant billionaire who could have made the auctions a roaring success, also chose to stay away, as did his brother Anil. This, when the senior Ambani needs airwaves to offer voice services to supplement its 4G services and has enough cash reserves to buy airwaves even at the current base price.
When the moneybags did not even participate, how could the auction have been a success? Of the 13 telcos doing business in India, only five participated and even among these five, three were those which had lost licences after the Supreme Court cancelled all licences awarded by A Raja in 2008. These three, Telenor (through joint venture company Telewings), Videocon Telecom and Idea Cellular had not much of an option since non-participation would have meant winding up their respective telecom businesses.
This leaves only two players-Bharti and Vodafone-who participated to win additional spectrum. Bharti was a fringe player but Vodafone surpassed all expectations by winning 14 circles entailing an outgo of Rs 1,127.9 crore. It has bagged spectrum in one category 'A' circle, 7 category 'B' circles and six category 'C' circles. So why did Vodafone bid aggressively? Why did the base price make sense for only one incumbent which did not lose any license to the SC order?
Four analysts of Goldman Sachs said in a note to clients this morning that "We believe Vodafone is strengthening its spectrum footprint by acquiring contiguous spectrum in 14 circles as it leads to lower opex/capex. Bharti's bid in just one slot in one circle in our view was an indication that it is not boycotting the auction."
An industry expert pointed out that Vodafone perhaps thought this was as good a price as any to get additional spectrum in those circles where it had only 4.4 Mhz till now. Vodafone's official statement explained that the company participated in the auctions "to secure additional spectrum in many circles where we have not received any new 2G spectrum since 2008. Our customers grew in that period from 60 million to 153 million today".
So Vodafone saw the auctions as an opportunity to get precious spectrum virtually at the base price. If Vodafone could invest much money in getting the required spectrum, why did Bharti not see the same value in acquiring a precious resource, at least in some circles?
The Goldman analysts said that Telenor secured 5 Mhz of spectrum in Andhra Pradesh, UP East, UP West, Bihar, Gujarat and Maharashtra by paying Rs 4,018.3 crore (or 2.3 percent of Telenor's market cap) "but the company will cease operations in circles Mumbai, Kolkata and West Bengal, where it was not awarded licences. Although Videocon acquired spectrum in six circles, we believe a greenfield operator with limited footprint is unlikely to lead to any higher competitive intensity, particularly at these tariffs."
The government has been able to collect less than a fourth of the targeted revenues from these auctions at Rs 9,400 crore and even this money may not flow into its coffers entirely since it will have to refund licence fees to those who return spectrum taken earlier. Also, telcos are allowed to pay only 33 percent of the due amount in the first year, and the rest in instalments.
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