2G spectrum: Look beyond reserve price, says telecom secy

In an exclusive to CNBC-TV18, telecom secretary R Chandrasekhar says that companies will find it easier to raise money and banks will find it easier to lend money now and the deferred payment will also make the process attractive for telecoms.

"We are not dealing with a greenfield situation like the 3G auction," he explained. All spectrum is being auctioned as liberalised spectrum and new operators will have to bid for at least four blocks existing operators can bid for a maximum of two slots block of 1.25 Mhz to allow players to bid for 5 Mhz.
All participants have to keep the letter and spirit of the Supreme Court's order in mind. The government has to ensure supply is calibrated to demand. "Our immediate goal is to select the auctioneer," he said. Now the initiative rests with the auctioneer and the bidders. The schedule of the auction is to be finalised in consultation with the auctioneer. Below is an edited transcript of the interview on CNBC-TV18. Q: While the government has shaved off about a USD 1 billion from what TRAI had recommended as the reserve price, telecom companies are still unhappy. They have, in fact, gone as far as to call it an 'extortion' and not an 'auction'..
A: Actually, the reserve price that has been fixed, as you just heard the minister, is only the starting point of the auction. There are several other factors equally important and which need to be taken into consideration. Firstly, there is the decision on the spectrum usage charge, which continues with the existing slab rate, starting from 3% and goes up to 8% depending on the quantum of the spectrum held.
Two other decisions will have a major impact on how one should look at this decision. The first one is on the mortgage of spectrum. As far as mortgage of spectrum is concerned, it can be mortgaged to banks and this would make it easier for companies to raise money.
It would make it easier for banks to lend money and banks have also been given the flexibility to auction the spectrum in the event of default, a factor, which was regarded as important for the comfort-level of banks. So, taking all these together the flow of funds would become much easier.
The other decision is regarding the terms of deferred payment, which actually makes payment possible in several installments, the upfront payment is only 33% in the case of GSM, 25% in the case of CDMA and up to a two-year moratorium the rest of the amount is to be paid over 10 annual installments, so all this makes the entire package much more attractive than just a number, which is only the reserve price.
_PAGEBREAK_ Q: Some of the reactions from industry after the Cabinet decision has been regarding the design- the manner in which the 5 Mhz block will actually be broken up into four blocks of 1.25 Mhz. What is the government’s intention?
A: You have to keep in mind that in this particular auction we are not dealing with a greenfield situation as in the case of the 3G auction where all entrants were first-timers. Obviously, given the technology requirement, it is not possible to offer 3G services with less than 5 Mhz and therefore the block size was kept at 5 Mhz.
In the case of the current auction, which is for 2G bands, all the spectrum is being auctioned as liberalised spectrum, which allows an operator to use any technology. But there incumbent operators who are already holding some spectrum and there are people who would be bidding as new operators in this auction.
So all of them will be bidding in the same auction and all of them do not need 5 Mhz. In order to come to a block of 5 megahertz, which is required, you have to use any of more recent technologies like 3G or advance technology.
So, this block size of 1.25 Mhz  is intended to allow existing players, who may need smaller amounts of spectrum, and new players who need a minimum of 5 Mhz of spectrum to bid in the same auction.
New operators will need to bid for a minimum of four blocks of 1.25 Mhz to ensure that any new operator starts with at least 5 Mhz. But they can bid for as many as five blocks, which means they can go upto 6.25 Mhz.
Similarly, if you consider the existing incumbents, they have to bid for a minimum of, in any case, one slot, but a maximum of two slots. So, they can bid for either 1.25 or 2.5 Mhz.
Given the fact that all the existing players have 4.4 Mhz, that again takes them beyond the 5 Mhz-mark. So, I think all of these factors have been taken into account by the TRAI when they recommended 5 Mhz in blocks of 1.25 Mhz.