Expect very successful 2G spectrum auction: Rahul Khullar

Amidst telecom companies' crying foul and experts calling it expensive, TRAI Chairman Rahul Khullar is still confident of a very successful 2G spectrum auction. In an exclusive interview to CNBC-TV18's Siddarth Zarabi, he said that the government is free to set the reserve price and there is no reason to believe that the 'auction will be anything but successful'.

Defending the government's 2G reserve price, Khullar said, "When you got spectrum for a song nobody said we got it cheap and that is why we became rich."
On a very positive note, Khullar stressed "parties already told me they will bid in auction". He dismissed telecom's blame of high spectrum by adding that telecom companies cannot blame government for making wrong business decisions. "Industry not in trouble due to high cost of spectrum," he reiterated.
The cabinet had fixed a minimum or base price of Rs 14,000 crore for the Supreme Court mandated auction of telecom spectrum. The cabinet, headed by Prime Minister Manmohan Singh, fixed the reserve price at the lower end of the Rs 14,000 crore to Rs 15,000 crore band that was recommended by an Empowered Group of Minister (EGoM).
Meanwhile Khullar assured that pricing of spectrum should not throttle competition and telecom companies will continue to see competition even post 2G auction. Here is the edited transcript of the interview on CNBC-TV18. Q: My first question to you deals with the biggest thing that TRAI did before you came in and this was to submit its recommendations on the proposed spectrum auction of Rs 18,000 crore. The cabinet has now decided to bring it down to Rs 14,000 crore. You were asked for a rethink or a review on what would the tariff impact be, let me therefore ask you for your first comments about this decision taken by the cabinet. How successful an auction is this going to be?
A: TRAI had indeed recommended a price of over Rs 18,000 crore for spectrum, but as you know the recommendations of TRAI are not binding on the government. The government is free to decide what it wishes.
Two, we did an analysis on the request of the government as to what the tariff impact would be and that is in the public space. The analysis was done, we put it on our website and everybody is free to read it. Comprehensive analysis demonstrated that a tariff increase of about 5 paisa per minute would more than recover the cost of spectrum and in fact if you push it up by 10 paisa per minute then you are talking of the industry as a whole recovering a huge amount of the legacy cost that it has incurred already.
Please understand that Rs 14,000 crore that has been set is the floor price, the reserve price. It is not the final auction price. Now, much depends on how the auction proceeds, how many bidders are there and I have no reason to believe that the auction would be anything, but successful.
A number of people, parties, which are interested in bidding have already told me that they are going to bid. I have at this point of time nothing to worry about in terms of the auction taking place. Now we are waiting for a final schedule to emerge and get the DoT's next steps because they will need to go back to the Supreme Court and get validation for the entire thing. So, the bottom-line is, I think there will be a fairly successful auction.
_PAGEBREAK_ Q: When the TRAI gave its original recommendations of Rs 18,000 crore, TRAI was criticised by industry players and written statements, written comments and public comments said that the TRAI had over estimated the elasticity of demand, it was not taking into account the financial difficulties that this sector was passing through. It was also said that the tariff impact would not be 5 paisa, 10 paisa or 30 paisa, it would perhaps go even beyond 100 paisa. You then came in and did a tariff review – you did not obviously relook the recommendations on the reserve price. Industry is now saying that after the cabinet decision this is not an auction, this is going to be extortion?
A: I think the question you are really asking is whether Rs 18,000 crore would cause the huge problem which the industry is claiming in terms of tariff impact and there I have been unequivocal from the time we concluded our analysis. The price of spectrum will indeed affect tariffs. But, the entire team which is refarming, pricing of excess spectrum held, repricing of spectrum, repricing when licencing takes place and the higher capex and apex involved will cause at best a 5 to 6 paisa increase. Therefore, if you are making a case that the high price of spectrum is the result in tariff increase, that does not hold.
The other point you are making is a separate one and I have been the first to concede that the industry is in dire difficulty. But, that is not because of the price of spectrum. The industry is going through a bad time and its margins are under pressure. The EBITDA margin today for the industry, in 2012-2013 is going to be in the order of about 12 to 14% which roughly means the profit before interest and taxation is going to be negative.
That means you are going to draw down on your pool of depreciation reserve to discharge your interest liability and you won’t end up paying taxes of course. But, this prognosis continues for next two to three years and the reason for that is huge amount of legacy costs. Decisions have already been taken in the past, those decisions are on your books, your profit and loss account and on your balance sheet. Q: Are you referring to the 3G bids?
A: Not only that I am referring to a number of things. I am referring to a host of decisions and I have said this publicly. One, people took decisions, firms took decision about choice of technology. Whether you chose a bad technology or you chose a good technology is your luck.
Two, you bid for 3G spectrum, you estimated demand for 3G services and that demand has not materialsed. The rollout of 3G has been lesser than what you expected. Three, it is not as if companies have only spent on 3G spectrum and only spent on BWA spectrum, companies have also bought assets overseas.
_PAGEBREAK_ Q: You are referring to Bharti Airtel?
A: I am not referring to anybody in particular. I am saying there are a slew of decisions that the industry took. As far as I am concerned, those are legacy decisions, those are legacy cost future bond. You cannot turn around now and say that the blame for those legacy decisions lies at the doorstep of government, that's unfair. You took those decisions.
Somebody asked me this question the other day and I responded like this, when you got spectrum for a song, nobody said that we got spectrum cheap and that's why we became rich. Then it's all attributed to your enterprise, your risk taking behavior and how good a businessman you are. Suddenly, when spectrum is priced more realistically and you are going through financial distress, everything is the problem of the government. You can't have it both ways, you can't keep calling it like that. Q: That's a very good point you made, especially about spectrum being sold for a song. But let me now turn to the most recent example of Broadband Wireless Access (BWA). In 3G like you clearly said that there have been far lesser rollouts than there should have been and in fact all operators have actually cut tariffs which was something that took everybody by surprise. The fact is that in BWA we saw huge bids and we haven't seen any sort of rollouts so far. That in some ways has become a benchmark for subsequent pricing of spectrum. I am going to ask you a basic question, is it right to equate 2G spectrum with 3G or other spectrums and argument of the previous policy establishment that 2G was for the aam aadmi while 3G is for the rich aadmi?
A: A number of questions are there. Let me separate the three. On BWA, firstly I don't think it's correct to say that nothing has been rolled. I believe 4G has been rolled out in Kolkata, but it's a trial network and a beginning has been made.
I also understand that another party which bid and got spectrum in BWA is in the process of getting its fibre network built. So you should see rollout. The answer on the BWA is very straightforward. Yes, it has not happened yet but it is for the future and I am reasonably confident it will happen.
Next question is about 2G and 3G. First, the auction is not about 2G spectrum or 3G spectrum anymore. We were careful. As the regulator said, we are selling what is called liberalized spectrum. You use it for any technology that you wish to. Q: The Cellular Operators Association of India (COAI) has issued a press release regarding a TDSAT order that states that spectrum is already liberal and because other decisions had been deferred, this is not a complete package. What are your comments?
A: I don't wish to disagree with COAI or TDSAT. I am very clear. In the past when licenses were given, they were dependent on technology. The spectrum that is now being sold is not tied to any technology. The auction will allocate or sell spectrum on the understanding that the purchaser of the rights of using that spectrum is free to use it with whatever technology he wishes to.
Let me explain 2G and 3G prices in simple layman terms. The 2G spectrum was purchased at an effective price of about Rs 10,000 crore a couple of years ago. In 2008 companies bought and sold the spectrum to others who came in at Rs 10,000 crore. Q: Companies just had spectrum and that was their valuation.
A: You are saying it, not me. So if Rs 10,000 crore was the value of that spectrum four years ago, what would its value be today? Q: Well, the price would have to take into consideration the normal rate of inflation.
A: Did the companies who bought in at Rs 10,000 crore thump their chests and say we need a tariff increase of 50 paise per minute? They competed with others who didn't pay Rs 10,000 crore at exactly the same prices and they are not crying about it. I think you need to think about that a little more carefully. Q: But doesn't it also mean that because of judicial intervention, those very same operators who came in under the licensing framework and due approvals from government of India, and cut down tariffs are now in a situation where they will have to invest more and will no longer be able to be cut prices?
A: Again, I have to disagree. I have interacted with some of these providers and they have given me good reason to believe that they are competitive even at the prices that have been set today. So I am not going to comment on that anymore.
I agree that pricing of spectrum should not result in throttling competitiveness. Q: The Supreme Court decided to cancel a certain set of licences which freed up a certain amount of spectrum. Why did the TRAI and the government subsequently decide to only put up a part of that spectrum in the form of slots, which have been further subdivided? Doesn't the government stand accused of looking at spectrum purely as a revenue source when it restricts competition to just two slots?
A: There are two different contexts regarding competition that are being referred to here. My view is about competition in the industry. Companies paid Rs 10,000 crore and gave incumbent operators a run for their money. I am reasonably confident that they will continue to provide competitive pressure. So, the spectrum price is not throttling competition.
Now to answer your question on the limited amount of spectrum on offer artificially inflating prices:  TRAI did not make recommendations only on pricing spectrum. It made a significant recommendation on re-farming, which the industry conveniently wishes to ignore.
Neither the government nor the regulator takes ad hoc decisions. The entirety of the spectrum has been taken into consideration. If 900 Mhz needs to be used for better LTE technology, then that spectrum has to be vacated and operators have to be moved to 1800 Mhz. Then the spectrum of 1800 Mhz has to be made available and that limits the amount of 1800 Mhz of spectrum that can be put on offer.
_PAGEBREAK_ Q:  The government itself has not taken a decision on that. The point is that certain crucial aspects of the TRAI recommendations, which were a composite package and your former chairman, your predecessor in fact said that it would be a tragedy for them to be a looked at on a piecemeal-basis and that is what has precisely happened, I am not blaming you for it or seeking answers.
A: I don't think you are blaming me. Q: But why push away refarming for that matter?
A: I think you are misreading the government’s intention. I think the mere fact that you did not have a public announcement over decision on refarming does not mean that there is not going to be refarming. Yes, many in the industry hope that there will be no farming and some in the industry hope there will be refarming.
For those who are hoping against hope that there will be no refarming, the thing is - please wait, be patient, government will come with the decision at the appropriate time and then you will know. Q: But what should that appropriate time be as a regulator?
A: I think it is important to dispel the notion that refarming is off the agenda. That is wrong. Q: Can I ask you as the regulator what should the ideal timeline be for that beyond what you have already suggested and recommended?
A: I think the point of the matter is that we need to get through the initial auction first. Even when refarming was to be done it was never to be instantaneously done. Q: Absolutely, there was a proper roadmap.
A: The roadmap was, you do the auction now for the 1800 Mhz. Then you come 18 months later with the other auction and that’s when the refarming would get done.
_PAGEBREAK_ Q: So is it your sense that as far as those long-term decisions are concerned, it will pan out over 2-3 years? Is that what will happen and is that what will restore the health of the sector?
A: I think that is likely to happen. I am no soothsayer and I am no decision-maker because the decisions are those of the government, they have the license. But I cannot believe that this decision has been wished away. It is just a matter of time before it will be announced and then probably it will be time for you to have another interview. Q: Let us now turn to the issue of pricing existing spectrum, again a hugely controversial issue, your predecessor authority did a lot of work on that, you will perhaps get engaged with it some time again in the future, but my general point as someone who is TRAI chairman and economist by training and interest – the retrospective pricing of spectrum is something that has again been left in some sort of 50-50 kind of a situation. We have a very strong lobby against it and a very strong lobby for it. What is your view on it because that also would determine the long-term health of this sector?
A: Let me break it up with the two issues. One is the pricing of what is called excess spectrum, in the sense that there is this whole business of contracted spectrum and spectrum held in excess of that is called excess spectrum. Now you and I can squabble about whether that contracted spectrum was 4.4 or 6.2 or whatever, this is an endless discussion.
The point of the matter is that what we have done in our competition, at least as far as tariffs are concerned is to look prospectively. It means you will price the spectrum, excess spectrum and then you will re-price spectrum as and when licensing comes up. Example, I hold a license, I hold spectrum. My license will come up for renewal two years from now. Suppose I am holding 10 Mhz of spectrum then the question is what is the price? Two years from now that entire 10 Mhz has to be re-priced, so that's one thing off the table, which is given.
Then it is between now and the time of the licensing. Now the question is what is the cut-off for excess? Q: Should you go back all the way?
A: No, I am saying between today and two years from now, that's not retrospective. When you cover that how much is excess and what price you will apply to it is beyond the pale of controversy.
The problem arises when you say I am going to charge you not only for this excess between now and 2014, I am going to take it back 2 or 3 years and trouble you retrospectively. Q: Or even 10 years in the case of certain licenses?
A: Yes 10 years also. Now that is a decision which has not yet been taken. Q: Should it be taken?
A: It is a matter on which some decision has to be taken, yes.
_PAGEBREAK_ Q: So should they look backwards or forwards?
A: That's a tricky one. I think at this point of time, it is tricky for two reasons. One is that the decision to price the excess spectrum was taken some time ago and time has gone by. So the real issue is at least from the time when that decision was taken, there is simply no case for not taking the spectrum. Going further beyond, I think that’s going to be caught in legal and other difficulties. Q: If you were asked for a fresh set of recommendations on that?
A: I hope not. Q: If at all, what would you recommend, exactly what you told us now?
A: Practically, if somebody was to ask me today what you should do, I would say since I have taken charge from today, I would take a perspective from today. Then they would turnaround and say, but the decision was already taken.
Let's say this decision was taken in June 2010, that the companies own 2 Mhz of excess spectrum and they must pay market price for it. Then I think it is beyond legal dispute since a decision had been taken as far back as 2010, the liability should extend upto 2010, beyond that I think is stretching it.