Thursday, April 17, 2008

Price Discovery & Spectrum Auctions

Shyam Ponappa / New Delhi January 3, 2008

Why spectrum auctions make no sense for a developing country

Some eight years ago, a much delayed telecommunications renaissance began in India. This was ushered in by the policy changes in the New Telecom Policy of 1999 (or NTP 1999). Though botched by its confused goals — despite my involvement — it was redeemed by one path-breaking feature: the renunciation of the onerous licence fees resulting from the auctions of 1994. These auction fees were replaced by a policy of revenue-sharing between the government and private operators. The outcomes have been nothing short of revolutionary.

We need to remind ourselves that the preceding imbroglio was because of the Indian government’s price-discovery-by-auction approach to the development of this most effective (in terms of bang-for-the-buck) form of enabling infrastructure. The primary reason for “success”, defined as growth in the number of lines, was the government’s willingness to give up this venal approach and shift to revenue sharing.

Just as it did then, the government — the Telecom Regulatory Authority of India (Trai), the Department of Telecommunications, the Finance Ministry… — should be questioning the logic of indulging in price discovery through auctions for building enabling capacity in essential services, in this case, of wireless spectrum. If the government is not actively seeking to build enabling capacity in this form of infrastructure in the public interest, it needs to consider why not.

Not asking these fundamental questions results either from a lack of application of mind, or from the flawed thinking of misplaced orthodoxies. These can be of many sorts, such as of market fundamentalists, libertarians, and neo-liberals with the belief that “the market knows best”, that economic liberalism is best for promoting development, or that every interaction should be a market transaction in open, competitive markets. Or of the neo-cons, who take the approach that those who can afford whatever it is can have it. Or of those who believe that cabinet decisions once made are sacrosanct and should not be questioned. Or of those who think the Indian government should make as much money as governments in developed countries have made from the sale of spectrum and other assets. This latter argument is put forward not only by representatives of the government, but also by economists, e.g. V Ranganathan of the IIM, Bangalore, and his students Darshit Shah, et al.*

These articles and arguments ignore the essential purpose of the exercise, and divert attention from the central issue, i.e., Peter Drucker’s dictum: what is your objective? The purpose of distributing spectrum in India as for awarding franchises in infrastructure is to build enabling capacity in the public interest; it is not to collect maximum fees for the government.

This is because infrastructure is a fundamental determinant of productivity at India’s stage of development. Essential services such as telecommunications (and energy, transportation, water and sanitation … etc.) are a basic need for people to be productive and have a reasonable quality of life. These aspects of essential infrastructure provide the underpinnings of the cost structure of the economy. If these services are unavailable or available only at a high cost, several consequences follow. One relates to the cost structure of outputs, which determines competitiveness in domestic and external markets (remember the IT services revolution and how Indian companies got their first break in foreign markets). Another is access deprivation because many people find these services unaffordable. These aspects affect productivity and competitiveness as well as the quality of life.

So, if growth in fixed and mobile lines is not an appropriate measure of success for telecommunications services, what might be a better measure? What if the government focused on user needs, instead of collecting more money for allotting the right to provide telecommunications services, or considering other factors such as incumbency, technology assumptions, the bogey of the efficient use of scarce resources — the rationing and scarcity mentality of our past and present? We could perhaps develop an alternative scenario starting with desirable outcomes, and work backwards to specify the conditions and processes required to achieve these outcomes through a process flow chart or logic diagram. Let us assume this goal is ubiquitous, true broadband (at least 500 kbps) for as many as possible in India, accepting for the moment that this would provide a basis (provided the rest of the systems follow) for hitherto inconceivable opportunities for education/training, health care, public services delivery, commerce and enterprise, information and entertainment. The question is, what mix of policy norms and incentives could deliver this result?

With the caveats that this perfunctory exercise is merely indicative, limited to a conceptual level, and necessarily simplistic, consider how broadband might develop with attractive incentives for achieving this goal. The incentives could be of many kinds, and could include, for instance, additional spectrum for wireless networks, reduced duties and taxes, area franchises, public property usage rights at favourable rates, and reducing fees as a share of revenues. These incentives could be structured to increase with incremental achievement, e.g., higher tax breaks, larger spectrum allocation levels, and reduced revenue share.

In order to be practicable, there are several levels of detailed requirements. The first prerequisite is of basic political will, a concerted multi-partisan convergence to undertake such a complex task over a reasonable time frame of months and years — and not, as a stalwart in the government in the past once told me, something that needs no more than 10 days. Such an effort requires not only the setting aside of greed and opportunism, but also of incompetence. Perhaps this is an unachievable prior condition in India, and no such effort is possible; perhaps it is.

In reality, such an effort would need to be worked out by a diverse group comprising government and private sector participants, with knowledgeable facilitation capable of understanding the technology underlay, content domains for different product-market spaces with adequate segmentation, e.g., within education and training: primary and secondary schooling, undergraduate, postgraduate, specialised modules including technical training and all-round skills such as in presentation and succinct writing, project management, group dynamics, quality, etc., as well as domain expertise, whether in telecommunications and engineering or in finance, economics, biology, sociology, history, the arts...

* “Auctioning spectrum best for the country,” BS December 7, 2007:

“How to run a good auction”, BS October 12, 2007:

No comments: