A great amount of heat has been generated over how the spectrum has been allocated in the past. Was 2G scam real? Was it misunderstood? Can there be a scam on 3G, 4G, 5G as well? It’s worth analysing this technical behemoth.
Auction of spectrum started as early as 1991 in India. However, changing technology never allowed any method or purpose to settle. Changing over from Analog to Digital communications, while opening a great window of opportunity, has stressed the system like never before. A spectrum auction is a process whereby a government uses an auction system to sell the rights or licences to transmit signals over specific bands of the electromagnetic spectrum. After the new government came to power it streamlined the auction process. Effective allocation of frequency would go a long way to realise programmes like digital India, smart city etc. During March 2015 auctions, the government earned a revenue of Rs. 82,000 crore ($13 billion) from spectrum allocation. Could this have been much more? We need to explore credible answer to this, though the exercise may not be simple, since high end technology is at the front of a purely commercial proposition.
Having said that, despite the apparent success of spectrum auctions, important disadvantages, limiting efficiency and revenues are demand reduction and collusive bidding. The information and flexibility in the process of auction can be used to reduce auction prices by tacit collusion. When bidder competition is weak and one bidder holds an apparent advantage to win the auction for specific licenses, other bidders will often choose not to bid for higher prices, hence reducing the final revenue generated by the auction. In this case, the auction is best thought of as a negotiation among the bidders, who agree on who should win the auction for each discrete bit of spectrum. Further, spectrum bands can even go unsold, forcing the base price to be brought down. Is it not prudent then, to not go below a base price that is pitched above a bench marked market price? Would Delphi method, albeit twisted a little, where, for the same spectrum band, a base price is arrived at, by averaging final auction prices of various countries be a better option? Why should this not be a price at which the spectrum is now sold?
The radio frequency spectrum is an electromagnetic spectrum from 3 Hz to 3000 GHz. Not all of this range is economical to use. Further, this is finite and an increasingly precious world resource, and needs to be managed effectively. Dependence on radio communications in one form or another has grown dramatically in recent years. The growth in the number and variety of applications, many of them bandwidth hungry, place ever-increasing demands on the radio spectrum.
Fixed and mobile communications, sound and television broadcasting, aviation, railway and maritime transport, defence, medical electronics, emergency services, remote control and monitoring, radio astronomy and space research, as well as many other applications, all make extensive use of the radio spectrum.
Obviously, interference between all of these different uses is possible and hence many parts of the radio spectrum are regulated by all Nations, coordinated by an international body, the International Telecommunication Union (ITU). One reason for doing so is that radio signals do not stop at national boundaries and hence can be tampered with. Regulation typically involves giving a right to use certain frequencies for certain applications over a specific geographical area.
Because it is a fixed resource which is in demand by an increasing number of users, the radio spectrum has become increasingly congested in recent decades, and the need to utilize it more effectively is driving modern telecommunications innovations such as spread spectrum or ultra-wideband transmission, frequency reuse, dynamic spectrum management, frequency pooling, and cognitive radio. All these technologies have a potential to disrupt the economics of the game.
It is imperative here to consider, for a moment why telecommunications companies want exclusive use of spectrum. The reason is to avoid interference caused by two or more parties using the same spectrum in the same place at the same time. In the past, prices skyrocketed due to this need. As technology progressed, things have changed and hence spectrum management has gained ground.
First generation or 1G was voice only, 2G moved from Analog to Digital and was limited to SMS and MMS. 3G progressed to a lot of data, video calling and mobile internet. 4G, the current standard, supports mobile web access like 3G but also gaming services, HD mobile TV, video conferencing, 3D TV and other things that demand higher speeds. 5G promises significantly faster data rates, higher connection density, much lower latency, among other improvements. The progress chain obviously is a bandwidth guzzler.
Of particular interest is a range of frequencies around 700 MHz that has been freed up as a result of the move from Analog to Digital television. The frequencies in this band of spectrum are particularly attractive because they are close to optimal as far as mobile communications are concerned. These frequencies happen to be among those at which long term evolution (LTE) standard or 4G can operate. They are the “waterfront properties” or the “premium spectrum” we’ve heard of lately.
One other spectrum band of particular interest is the Industrial, Scientific and Medical bands (ISM), operating at around 2.4 GHz and 5.7 GHz. These bands are those at which wireless LANs, Bluetooth and other short-range, private communications systems operate.
Since a great amount of world view was focussed on the process of allocation followed in India for 2G Spectrum, some clarity of thought is called for. In 2008, 122 new 2G Unified Access Service (UAS) licenses were granted to telecom companies on a first-come, first-served basis at the 2001 price. CAG had revealed that 2G licenses were issued to telecom operators at throwaway prices causing a loss of Rs 1.76 lakh crore to the exchequer. An important part of the CAG report went on to say that license owners had in turn sold significant stakes to the Indian and foreign companies at high premium within a short period of time. The premium earned by these new entrants to the telecom sector was estimated to be the true value of the spectrum. Only a legal scrutiny backed by a very careful, adroit and technically intelligent investigation could have possibly differentiated a presumptuous loss from an actual loss. However, this resulted in a no evidence legal scrutiny and hence found all acquitted.
The government in all probability will go for a fresh auction in 700 MHz band, which drew a blank last year as companies complained of high reserve price. The 5G auction will be conducted by selling spectrum in bands over 3,000 MHz. Also, on sale will be remaining spectrum in bands such as 800 MHz, 900, 1,800, 2,100, 2,300 and 2,500 MHz Since the premiums and stakes are high, the government must be wary of a few large telecom players coming together, creating a cartel, since there may not be a large number of players. Ideally all bidders must be risk-neutral and do a private valuation for the item independently, drawn from some probability distribution. This is equally true for the Government.
The Government also must be wary of the auctioneer becoming an agent of the seller as was alleged in the 2G scam. On the other hand, we could even have the auctioneer orchestrating bid rigging by inviting a bidder to either lower or raise his bid, whichever is more profitable. The interplay between these two types of corruption gives rise to a complex bidding problem resulting in corruption not only redistributing surplus away from the seller, but also distorting efficiency. Most of the times, both, the auctioneer and bidders, may have a vested interest in maintaining corruption. The government with transparency and good governance as its supreme tenets must lead the way to prevent flight of public money.