Sep 21, 2013 05:39 PM IST | Source: CNBC-TV18

Averaged many valuation methods to get spectrum rate: TRAI

TRAI chairman Rahul Khullar says the telecom body did not rely on any one method to derive the spectrum price. The telecom regulator has cut 900 MHz spectrum reserve price by 60% and 1800 MHz spectrum reserve price by 37%.

Days after recommending a new path for spectrum valuations for future auctions, TRAI chairman Rahul Khullar spoke exclusively with CNBC TV18's Siddharth Zarabi on a whole gamut of issues related to telecom and even broadcasting. Here are the excerpts from that exclusive conversation.

Also Read: TRAI to take up TV channels pricing issue

Below is the verbatim transcript of Rahul Khullar's interview on CNBC-TV18

Q: Why did you suggest such a drastic cut in spectrum prices, given that there had been so much hype that spectrum has been sold for a song and that the nation has lost thousands and thousands of crores of rupees?

A: The TRAI was acutely conscious of the fact that two auctions had already been held and markets had already revealed their preference. If we had gone ahead and done exactly what we did before, the problem was not going to be solved. Secondly, we looked at the problem in a completely different manner.

Traditionally, the approach from the time of the 3G spectrum auction in 2010 was to arrive at a pan India valuation, which was then allocated across 22 telecom circles. This is what we did the last time around. We indexed the 3G price for inflation and then applied it across the circles. That approach had two problems: firstly, arbitrary allocation from a pan India level to an individual circle ended up distorting the level of relative prices. And this was more than apparent when you look at the prices of 1800 Mhz band spectrum, because what they reflected was the relative prices of the 3G auction.

So, we decided to go bottom up rather than top down. That’s the one big change we made and once we did that, then we had to find out the value of spectrum at the local service area. We came up with five or six different methods – econometric, cost production function, opportunity cost model – among others. Broadly speaking, most of these models gave you completely different valuations.

Q: Why did they give different valuations, because the 3G or BWA spectrum auction was a completely different ballgame from the 1800 or 900 Mhz spectrum? Some people, say they are not comparable. Why did the valuations fall off the cliff? There is a feeling that the TRAI has completely reversed the clock in the other direction.

A: That is wrong. The TRAI has not reversed any clock or done any such thing. All we have done is to impart scientific methods and used market information as revealed in the auctions to derive prices.

Q: Did the previous TRAI not use scientific methods?

A: I would not say that. I think scientific method varies from time to time. My method is somewhat different from their methods. The question is not so much about method but the way you approach the problem of spectrum. The truth of the matter is that how a TSP values spectrum from its individual perspective is not known to me.

All the authority can do is to try and make an objective assessment of what these valuations would be and come up with an average. We cannot do all possible valuations because we would end up doing that for the next 20 years. Hence, we restricted the methods that we had on hand, and that is why we came up with these numbers. So the valuation was derived from a different set of methods, working bottom up.

We had offered all these methods to stakeholders for comments and told them that if you don’t like them, give us some other alternatives. Nobody, gave us an alternative which was workable. 

Q: Post the recommendations, the COAI, which represents the likes of Bharti Airtel, Idea and Vodafone among others, said even these reserve prices are unrealistic and that they should not be the floor to start the next auction from.

A: I will not comment on what industry associations say. I think the authority has done a fair job. We have been transparent and shared every possible approach, at every stage. It was then that we finalized these recommendations. Individual parties are free to comment on them, but the Authority can no longer entertain this as an ongoing discussion for ever and ever. Our recommendations are made. It is over.


Q: On the issue of 900 Mhz refarming, the commentary is that the TRAI has not been clear and it has not accepted what the stakeholders had to say. Clear the air for us. Have you changed your stance on the issue?

A: Not at all and I don’t understand what you are talking about and what the confusion is about. If the 900 Mhz spectrum is up for auction, what do you think that means? That means, refarming. If you don’t buy the 900 Mhz spectrum in the auction, move up to 1800 Mhz. The 900 Mhz auction is open for all to bid. I thought that was the purpose of refarming. So, perhaps you are reading a little too much into things or people are misleading you.

Q: I will restate the question. If there is no change as far as refarming goes, how does that impact the health of the industry? Larger players are worried about the cost.

A: I haven’t heard too many murmurs on that account. Yes, there was a huge outcry last year when 900 Mhz spectrum was priced at Rs 36,000 crore for 5 Mhz. The ballgame has completely changed. Everybody has come around to understand that there will be no reservation in the 900 or 1800 bands. Which means that if you are a telecom service provider sitting on 900 Mhz spectrum, that spectrum is up for grabs and you have to bid in the auction to get it.

It is not yours by right or by license. It is not yours by law and not in perpetuity. Bid, obtain it and move on. If you don’t want to bid, fine! Then bid for 1800 spectrum. Let somebody else take 900 Mhz spectrum. And there are no guarantees that we will give you any reservation. I think that message is clear to everybody. You don’t need to call it refarming, it is still the same. And it is going to happen.

Q: On the issue of the 800 Mhz recommendation, the response is that the TRAI has effectively shut the door in India as far as CDMA is concerned and that you have provided the final policy stance that CDMA has now growth future in India. Is that view correct?

A: That may be the view of segment of industry, but that most certainly is not the TRAI’s or my view. What the Authority is saying is that in the 800 Mhz band, any operator doing voice has enough spectrum to cater to his customers. You know that, I know that and the rest of the world does too. They want to make a noise about it, that is a separate matter. But, people sitting with 5 Mhz in the 800 band or 3.75 Mhz are amply capable of dealing with their customers. In fact, their customers are declining so rapidly that one particular operator has even volunteered to surrender 800 Mhz spectrum. So, let us get the facts straight.

The real issue is what is the opportunity cost of 800 Mhz spectrum. Can I use segments of 800 to create an extended GSM band? If I can, its value would be at least four to five times that of the existing value of this band.

So, is this feasible? The recommendations bring out that with even small changes, we can make 2x5 Mhz of roughly 900 Mhz equivalent spectrum available. Why should we not explore that opportunity? The other issue is that should we auction spectrum for a song rather than explore the opportunity of enhancing and realizing a higher value?

Once that spectrum in EGSM becomes available it will be for all operators. I guess EGSM will become available in six months to a year. And even if it takes a year to get that done, 2x5 Mhz of the 800 band can be auctioned thereafter. The big issue here is that we should not sell 800 when an opportunity exists to enhance its value without disclocating any 800 Mhz band operator in any way whatsoever. We know that in most circles the availability of 900 Mhz spectrum is in the range of 15-17 Mhz. If we can add 10Mhz more, it dramatically changes the 900 Mhz equivalent availability and allows more operators to work in that band. What is wrong with that?

Q: Let us discuss spectrum trading and usage charges. You have now come up with a uniform three per cent levy for spectrum usage. How realistic is this? Are you not being a little too generous?

A: On the contrary, most people in the media have not understood the purport of all the recommendations. There is also a segment of industry which is saying that it is a huge giveaway. It is nothing of the sort.

Currently, you have a bizarre scheme, where you show me the technology and I will show you the rate. This is legacy problem of twenty years.

What we have said is that for anybody who buys spectrum in an auction, the charge should be a flat rate of no more than three per cent.

The current system penalizes anybody from acquiring spectrum, and as the consultation paper made out, no merger or acquisition will take place because the charges creep up.

We have also recommended that when somebody buys spectrum in an auction, we will not add it to his existing stock of spectrum to calculate the SUC rate. This removes the disincentive to acquiring spectrum.

Since the BWA spectrum was primarily for ISP and broadband and now everybody is talking about voice under an unified license, then you will have to have a level playing field and the SUC has to go up to three per cent.

These are not giveaways. The only thing besides is that for everyone else, we have suggested that the SUC be capped at five per cent with effect from April.

Q: Effectively, there would be very few licensees left in the other categories and you will churn the spectrum…

A:  That is precisely my point. In the space of one year between now and the end of 2015, 35 licenses have to be renewed. This effectively takes care of the first and second operator in every circle of the country.

Q: Just help us understand these numbers. In the past TRAI recommendations, Dr Khullar, that license renewal combined with all other impacts would cost the first and second operator between Rs 80,000 to Rs 1,20,000 crore on a nationwide basis. What will be the total cost now?

A: I have no idea, quite simply because the auctions will reveal the final prices and only six licenses are expiring right now in 2014 for which auctions are being held now. 29 more come very much later. So it would be a wild guess to give you a number.

I want to clear the air on the spectrum usage charge. The essential spirit of many of these recommendations is to transition everybody to a uniform regime so that everybody is on the same level playing field, the same roll out conditions. You are right on the three per cent charge-I cannot do it immediately as there would be a huge write-off. But, as I have explained, it is a very nuanced approach we have taken. The balance of it is that it will not cost revenues significantly and certainly not of the orders that are being bandied about by certain interested parties. On trading again, the intent is to move everybody forward to allow everybody to trade – regardless of the spectrum band.


Q: By when would trading happen?

A: On sharing and M&A, we made recommendations but final decisions haven’t come. For a long time, trading was a no-no. For the first time, we put it on the table in the consultation paper. Thereafter, the DoT asked us to examine the idea of trading and we have done so. One of our other recommendations is that if these things are accepted in principle, then please remit the matter back to us because we would like to consult the industry and finalise the trading guidelines within a space of six to eight weeks. Our game plan is that rather than let trading be in limbo, we are saying that accept these, come back to us and we will then go ahead and finalise everything in that period.

Q: Let me move to another bit and this has to do with the broadcast space. While you practice forbearance on telecom tariffs, you are seen as interfering in television finances through a 12-minute cap on advertisements. What is the justification for such an intervention in a sector which is bleeding equally?

A: I don’t think ad regulation has anything to do with tariffs and the two things are completely separate.

Q: Sir, but you have never told telecom operators that they cannot earn or they cannot sell inventory beyond a certain level. The TRAI in it history has never done that. Why come up with something like this?

A: The broadcasting space is different from the telecom space. All over the world there are restrictions and limits on how much advertising can be aired in an hour.

Q: But, that does not apply to newspapers. No one has told newspapers that they cannot sell an entire front page for an advertisement? 

A: I am not the newspaper regulator. I am the broadcast carriage regulator and please understand what I am saying. The world over, broadcast carriage regulators impose time limits. Those time limits are honoured without throwing up hands and saying that this is a restriction on freedom of speech or that it is affecting finances.

Q: But if the telecom sector is in difficulty, so is the television space. And I know, that I ask this question as a vested party in the matter, but why interfere at all?

A: Quite simply, there is a law which says 12 minutes and pardon my saying, since you are making it personal, which you brazenly violate and nobody says anything to you. And you then say it is my birthright to brazenly violate, precisely because it does not suit my business model. This is a remarkable proposition.

In most countries, people adjust their business model to the rules and regulations of the regulators. You are telling me to change my laws, change my regulations to suit my business model. I am sorry. I do not accept that proposition. Before you ask me my moral justification, you ask yourself your moral justification for that position.

Q: What about tariff forbearance in telecom then?

A: Tariff forbearance in telecom is a completely separate issue and that too came after hectic competition. The counterpart issue which you should be asking of broadcasting is of tariff regulation in broadcasting. Broadcasters have asked me – why shouldn’t content be priced freely? Now, there is a history here and there is a matter which is sub-judice at the Supreme Court right now, which ties my hands and ability to move towards forbearance in tariffs in the broadcasting sector.

Q: Let me now come to foreword you wrote to the spectrum reserve price report.  You mention several things including that our country got carried away with navel gazing. How badly did we get carried away?

A: Very badly. We have paid a huge real cost for all this navel gazing, self flagellation and these are real costs.

Q: Who bears the responsibility? You are not referring to the CAG?

A: I think everybody was involved. Yes, I think the CAG, if you want a candid answer, yes. I think I made the proposition very clearly that this business of presumptive losses does not carry credence. I don’t think hypothetical presumptive losses are the basis on which you decide how to move forward and I think to that extent that was off. But that’s not all.

The point of the matter is that there is no doubt that there was a loss. We can quibble about the quantum, but that is a separate issue. Ask yourself about the last two years, on any public issue which has come up through the electronic media. Instead of giving anybody the benefit of the doubt, malafide is liberally alleged and imputed.

I am not concerned about whether the media is doing it or whether I in the bureaucracy am doing it so somebody else is. All of us got carried away and the truth of the matter is that it has resulted in real losses because you have paralysed decision making.

There are real rationale fears arising from the lack of not being given the benefit of the doubt when taking decisions. Thank you very much, but I will not take the decision.

I have served 40 years in the civil service and the presumption has constantly been that the officers bonafide is not suspect and he is acting in public interest. Yes, all of us make mistakes, but if every mistake is going to be converted into something for which malafide is going to be alleged, then government is just going to come to a grinding halt. 

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