Monday, September 9, 2013

Vinod Rai must be squirming over TRAI recco on 2G reserve fees….

The man who many say destroyed India’s telecom sector – with brazen intrusions into policy making and bizarre claims of “notional” loss – must be squirming upon reading today’s newspapers. TRAI has recommended a further cut in 2G reserve fees – the starting point for auctions – by up to 60% compared to the March 2013 levels in a desperate bid to start auctions and allocate spectrum. At the newly recommended levels, the reserve fee is now just a little over half of the Rs 14000 crores for 5 MHz of spectrum in the 1800 Mhz band set for auctions first held in Nov 2012.

Vinod Rai – the CAG who brought out the 2G “scam” – could still argue that the reserve fee itself is higher than the Rs 1651 crores final fee the government decided to take from telcos in 2008. True, but does he realize how the higher spectrum charges have changed the contours of the telecom industry? Telecom tariffs have grown by anywhere between 20-50% since the new auctions policy came about. The price of expensive spectrum is being paid by the subscriber. So in effect, assuming that spectrum auctions succeed now, the government is raking in the moolah, at the cost of the subscriber. Now there is nothing wrong in this model per se, but should policy be decided by the government of the day, or by the CAG?

When successive auctions in Nov 2012 and March 2013 failed, Vinod Rai said something to the effect that the big telecom companies had formed “cartels” and decided not to bid so as to pressurize the government into lowering reserve fees. That’s a convenient argument, without Rai offering any proof of the same. But it’s quite a desperate argument really, because if anything, telecom companies are the most worried today about renewing their current licenses, with their expiry date – Sept 2014 – fast approaching.

Vinod Rai’s arguments were always flawed. First, he benchmarked the 2G loss on 3G, knowing fully well that 3G is an advanced technology used to ferry data at high speeds, for which consumers would be willing to pay higher rates. That aside, what has the 3G experience been? India has somewhere around 35 million subscribers of 3G (900+ million on 2G). Data accounts for less than 7% of telecom revenues (global average: 20% or so). Indians – some 150 million of them – are condemned to use slow-speed 2G to fulfill their data needs because they cannot afford 3G. Clearly, 3G spectrum rates were too high; it was a flawed auction. Yet Vinod Rai made that one of the benchmarks. Second, he used an even more bizarre benchmark for calculating the loss. He claimed that since Swan, Unitech and Tata had sold off stakes in their companies at much higher valuations after acquiring cheap spectrum (Swan: 45% for Rs 4200 crores; Unitech: Rs 6200 crores for 65%), this higher amount reflected the true value of the licenses. This is plain silly. Everyone knows that spectrum is only one of the ingredients in telecom. There are thousands of crores of equipment to be procured, another few thousands of operational expenses to be incurred, and many more thousands of crores of losses to be borne in the initial years (which can extend to more than 15 years, as in the case of Vodafone). Where are all these expenses going to come from? The higher valuations that Rai used led to capital inflows into the company, so that it could be deployed for all this. The promoters of Swan or Unitech did not take any money home. They didn’t make any profits, forget windfall profits. The auditor – a Harvard educated man I am told – did not understand this simple thing? And third, Vinod Rai used a loose offer made by Singapore Telecom (which it later withdrew) to the PM apparently (is this how this country does business) to value 2G higher.

Vinod Rai is now safely retired. He is a hero for many, most certainly for the BJP which spun his notional loss into a “national” loss. Imagine the legacy of Vinod Rai. First, as auditor, he didn’t understand basic accounting. Then he inspired othes, including the likes of – believe it or not – CBI to become accountants and put their own estimates of loss out. Then his pathetic report provided the germ of the idea for Anna Hazare’s “my way or the highway” April 2011 fasts/farce. And later, he virtually compelled the Supreme Court to take one of its worst economic decisions ever – canceling all 122 licenses issued by Raja. What wrong had they done in following the country’s policy? Collectively, the CAG, CBI, Anna and the SC hit at the very credibility of this government. Why it could not defend itself more strongly is something I can’t understand. Why they could not back Kapil Sibal who said “no loss” because the government “wanted to keep spectrum cheap” is something only they can explain. The government cowered under the attack, giving the impression that it was guilty. Our insane, illiterate and irresponsible media feasted on all this, amplifying the “tamasha”, forcing PCI Chairman Markandey Katju to comment (maybe in a different context) that journalists in India were “mediocre” and they should take qualification tests before being entering the profession. And our people, fed on a daily dose of Ekta Kapoor’s hyper-sensational dramas, lapped up the gossip without understanding one word of it. The telecom sector in the meanwhile crashed. Airtel’s net profits have plummeted from some Rs 7744 crores in 2008-9 to Rs 5096 crores in 2012-13; its market capitalization has been dented more than an accident-hit car.

The real truth is that TRAI has made a sensible recommendation of lowering reserve fees significantly. Should reserve fees – the starting point for bidding – have been set even lower? I believe so, since a low fee would attract more bidders and help determine final prices more realistically. But even with what it has done now, TRAI will restore some sanity – which Vinod Rai destroyed – to the telecom sector….

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