ON A HOT MAY MORNING, while the rest of Delhi sizzles, the tree-lined avenues of Pandara Park, where many of New Delhi’s bureaucrats live, are still somewhat pleasant. Or at least it seems that way to a group of boys playing cricket in the park. I interrupt the game to ask for directions, which are easily given—the house I am searching for overlooks the park. There are no clues that prove the inhabitant is one of the most controversial persons around today—a platoon of armed guards, TV vans, gawking passers-by. But that’s how J.S. Sarma, the recently retired chairman of the Telecom Regulatory Authority of India (TRAI), wants it. Sarma’s recommendations on the auction of telecom spectrum have placed him at the centre of a raging battle between the government and telecom operators. He has, in fact, stirred up a hornets’ nest.

The doors to Sarma’s house are flanked by statues reminiscent of the dwarapalakas (doorkeepers) that guard most temples across South India. Inside, there’s an idol of Ganesha, the elephant-headed god worshipped as the remover of all obstacles. Sarma touches the feet of the idol, as if seeking blessings, every time he steps past it. And he does wander out sporadically during our long conversation, seeking out his Man Friday, Gopal, for cups of tea.

It’s all very laid-back and casual, so bringing up the subject of the controversial recommendations seems out of place. Also, Sarma is reluctant to talk about them, saying the new TRAI chairman, Rahul Khullar (formerly the commerce secretary), has taken over so it’s up to him to comment. Pushed, he says his recommendations are in line with what the country and the industry need. Operators vociferously differ, and so begins a new round in the country’s great telecom battle.

THE ROOTS OF THE CURRENT skirmish lie in the 2G scam, where it was claimed that several telecom operators bidding for 2G licences and spectrum in 2008 paid far below the market price. In February 2012, the Supreme Court ruled that licences granted on or after Jan. 10, 2008 were illegal. The court came down heavily on the companies (and certain government officials) accused of corruption in this case. Around 122 licences were cancelled and the spectrum allotted to them had to be auctioned afresh. The court ordered the government to put in place a new, transparent bidding mechanism by the end of August 2012. Enter Sarma, as head of TRAI, the body that was to create it.

Sarma recommended separating the licence from spectrum (so far, operators got a licence with 4.4MHz of spectrum bundled with it). What has the industry in a tizzy is Sarma’s suggestion that the reserve price for the new auction be raised to a whopping Rs 18,000 crore for a 5MHz slot. That’s over 10 times the price of 2G licences in 2008. Though operators have not specified an optimum price, word on the street is that they want it between Rs 8,000 crore and Rs 10,000 crore. “Keep the base price as low as possible and let the auctions decide the upper limit,” says R.S. Mathew, director general, Cellular Operators Association of India (COAI), which represents GSM operators.

While the telecom industry knew a high reserve price was in the works, it was still taken aback by the increase. “The current recommendations will kill the industry. I don’t think it makes sense for anyone to participate in the auction at these prices,” says Kumar Mangalam Birla, chairman of Idea Cellular. If the auction is a failure, the government will be forced to come out with more acceptable recommendations, some analysts claim. But, “what if there is only one bidder? Will that mean the base price is the right price? It is more of an administered price,” says S.C. Khanna, secretary general, Association of Unified Telecom Service Providers of India (AUSPI), which represents dual technology and CDMA operators.

“TRAI’s recommendations over the last 18 months are deeply flawed, inconsistent, and destructive for the industry,” said Sunil Bharti Mittal, chairman of Bharti Airtel, in one of his early statements to the media. Operators prefer to go on record as a group. The logic is that since they are in this together, it makes sense for them to take a united stand. Much of what they say is through the COAI and AUSPI. Never before has the entire industry joined forces against the regulator. Although GSM and CDMA operators have not joined hands, they are separately singing the same tune.

SARMA'S RECOMMENDATIONS also have international repercussions. Norway’s Telenor Group (which has partnered with Unitech in India for the Uninor brand) and Russia’s Sistema (partner in MTS with Shyam Telecom) are both lobbying with the Indian government and their home governments to get the recommendations watered down. The Norwegian Trade and Industry Minister Trond Giske and the president of the Telenor Group, Jon Fredrik Baksaas, met the deputy chairman of the Planning Commission, Montek Singh Ahluwalia, as well as telecom minister Kapil Sibal. The substance of all these meetings was that if the future policy reflects TRAI’s views in its current form, it would be difficult for Telenor to operate in India and suffer a loss of almost $3 billion in less than four years. “Fifty-four percent of Telenor belongs to the Norwegian people. It will be the biggest loss for a Norwegian company outside the country,” said Giske. With this loss, he added, it would be difficult to recommend India as an investment destination. It is speculated that Telenor and Sistema will get concessions to absorb their losses if they win the auctions.

It’s not just the high reserve price that has operators up in arms; it’s the fact that the exorbitant amount will be for the less powerful 1,800MHz band instead of the 900MHz band that many of them use now. Sarma has not just recommended guidelines for the spectrum auction, he’s suggested refarming the 900MHz band after 2017. It means the 900MHz band will no longer be used to provide only 2G services but can be used for more advanced technologies and services (data services, for instance, as in Europe).

Refarming has been successfully done in other parts of the world, notably in some Scandinavian countries and in parts of the U.S., where telecom operators had been given 20MHz of spectrum each, most of which they did not use. This unused portion was taken back and sold separately to operators who wanted it for, say, 3G and data services instead of just voice. The problem in India is that few operators have unused spectrum (the only exceptions are the PSU operators, MTNL and BSNL); moving them to another band is the only way to free up the 900MHz band. So, for instance, Airtel, which operates on both the 900MHz and 1,800MHz bands now, has to renew its licence and buy slots in the 1,800MHz band at a price set in the August auction. If Airtel wants 900MHz, as and when it is made available, it has to pay an even higher price.

The operators say Sarma has exceeded his brief in recommending the refarming. All that he needed to do, says one operator, was to set out guidelines to re-auction the spectrum vacated by the 122 companies whose licences were cancelled. That was what the industry expected.

Sarma doesn’t agree. One, he says, is that the spectrum roadmap is something operators had been demanding. They now know exactly how much spectrum there is and in what bands; they also know how much of the 900MHz band will be available to them after 2020 (which is when the last of the 2G licences will come up for renewal, and the 900MHz band refarmed). This will help them plan their networks better and also help in their long-term business plans (how much to keep aside for future spectrum acquisition, etc.).

Two, according to the telecom rules, the application for licence renewal has to be made 30 months before it expires. The recommendations say the auction should be done 18 months in advance to accommodate the first renewals and the refarming process to begin, Sarma explains. The first set of licences—Bharti Airtel and Vodafone for the Delhi and Kolkata circles, and Aircel for the Chennai circle, expire on Nov. 24, 2014.

Sarma is known for thinking ahead. In 2000, he was with the ministry of rural development and responsible for the Pradhan Mantri Gram Sadak Yojana. This project was launched to replace the mud roads that connect villages with metalled roads. Sarma, in consultation with international and domestic experts, ensured that broad tar roads were built. Critics said the roads were unnecessarily broad, but Sarma said this was done because experience showed that villagers would buy more cars and tractors if there was a way to drive them.

His logic for refarming and spectrum reallocation is somewhat similar—that it will serve the long-term needs of the industry. But operators say what hurts is that they have to shell out more today, at a time when the economy is going through one of its worst patches. They say moving to a less efficient band will mean that their networks will have to be replanned, and more towers put up, all of which will push prices up. It is estimated that refarming alone would result in Rs 1.25 lakh crore incremental capacity expansion costs and Rs 25,000 crore as asset write-offs for the industry. It would also increase its debt burden of Rs 1.85 lakh crore by another Rs 2.72 lakh crore in the next five years.

Sarma counters by saying that any inconvenience now is a small price to pay for being able to get a contiguous spectrum of the 900MHz band when that comes up for auction. The contiguous spectrum, which has been a long-standing demand, will help operators provide better data services.

All of which sounds like a good idea, except that all 2G licences are not coming up for renewal at the same time. While some companies will have to renew in 2014, the other renewals go on till 2020. This means the government will be hoarding the spectrum till the entire 900MHz band is cleared. This, say operators, will create an artificial scarcity, leading to higher tariffs. The Department of Telecommunications (DoT) asked TRAI to clarify this point. (TRAI is part of the DoT and is funded by the department. When asked, TRAI sends recommendations to the department, although DoT is not constrained to accept these recommendations. In this particular case, the final decision will be taken by a group of ministers.)

The TRAI reply (on Sunday, May 14, Sarma’s last day in office): “The apprehension of DoT that recommendation of not auctioning all the spectrum would mean keeping a large quantum unutilised is unfounded.” However, there’s no explanation why this fear is unfounded. When asked, Sarma says this is not a case of hoarding; instead, what it will do is create a demand-supply gap to realise the market value of spectrum.

Meanwhile, operators say the additional capacity expansion costs will be passed on to customers and the average hike in tariffs would be around 30 paise per minute. With regard to the recommendations, an assessment from consulting firm PricewaterhouseCoopers reads “due to various considerations, the impact on cost per minute is likely to be far greater. The impact on metros would be even more prominent, with cost per minute increasing by 90 paise, while the all-India average increase would be 34 paise.” That’s because the cost of spectrum in the congested metro areas would be much higher than other circles, apart from the added cost of putting up more towers to serve the same demand on a less powerful spectrum.

The consultancy says the industry might not be in a position to absorb the cost increases as post-tax margins have been falling in the last few years. It adds that Indian telecom operators have the lowest average operating margins among emerging Asian countries; India’s average is at 28.9% for 2012, while the highest in the region is the Philippines with 62% and the average around 45%.

The assessment adds that the debt of Indian telecom operators has increased significantly since 2009: “In our assessment, once the debt/Ebitda ratios exceed 3.0 in the telecom sector, it becomes difficult for operators to satisfy creditworthiness to banks for further lending.” Including domestic and external debt, the debt/Ebitda ratio for Indian telecom firms has risen from 3.0 in 2009 to 4.9 in 2012. “It’s turning out to be a zero sum game for the operators with only the government walking away with the cake,” says Mohammad Chowdhury, executive director (telecom industry leader), PricewaterhouseCoopers India.

Sarma says his team has taken all possible considerations into account, and TRAI has 12 possible scenarios tabulated (including various spectrum usage charges and growth rate in usage patterns), and for each the cost per minute does not cross 4.4 paise. He adds that the industry is trying to see ghosts in the dark and deliberately frightening itself.

The industry believes the government is being greedy. The 3G/broadband wireless access (BWA) spectrum auctions were successful and it mopped up Rs 1.06 lakh crore. Now, the government sees more money can be made from the sector, which can be used to bridge the budget deficit. And almost as if he’s rubbing salt into the telecom industry’s wounds, Sarma has recommended that the base price for the 800MHz and 900MHz bands be double what has been recommended for the 1,800 MHz band.

With a huge windfall in sight, it seems unlikely that the government will turn down the TRAI recommendations, despite industry heavyweights lobbying hard against it. In fact, there are reports of a DoT panel suggesting an even higher reserve price. No one in the government is willing to take the risk of watering down the recommendations and attracting criticism. Bureaucrats call this “The Behura Effect” (after former DoT secretary, Siddartha Behura, who was arrested on charges of corruption after he retired) where no official wants to take responsibility, believing that if anything goes wrong he will be hounded by investigative agencies.

And that, says Shiv Putcha, principal analyst, Ovum, a telecom technology advisory firm, is the problem. “The long-term perspective for the sector is missing within the government. It seems policies are being made on the fly and indicate arbitrary discussions happening among the DoT officials.” Legal experts and some analysts say the government’s hard-nosed stand is the aftereffect of the telecom scam.

MEANWHILE, THERE ARE VOICES WITHIN the industry that claim that the recommendations unduly favour one operator—Reliance Infotel. “It is a repeat of 2002, when the company manipulated the policies and got a backdoor entry into mobile telephony by paying a Rs 500 crore fine. This time it is not so direct,” says a corporate affairs executive with a leading GSM operator. Infotel holds a pan-India 20MHz chunk of the 2,300MHz band, after winning the BWA auction last year. There are a few other players who successfully bid for BWA spectrum, but Infotel is the only one that is present across the country. (Reliance bought out Infotel as soon as the BWA auction was complete, resulting in more heartburn among competition—a story that has been told many times.)

The government has made it clear that the 4G spectrum auction (in the 700MHz band) will happen only in 2014-15. While BWA may be a less powerful band, the sheer amount of spectrum that Reliance Infotel holds means that it can take on all future 4G players with its first-mover advantage. According to a Citigroup Global Markets paper, 700MHz is among the most efficient spectrums for wireless data—needing 1/16 of the cell sites that 2,300MHz needs. However, the reserve price (four times the price of the 1,800MHz band) could prove a huge deterrent.

Reliance Infotel, meanwhile, will have a three-year headstart in data services, and possibly voice. “If the voice business is rendered unviable on one side and on the other side there is a squeeze on data revenues, who do you think will benefit? Reliance,” says a consultant who has worked with Reliance as well as other operators and is familiar with their business plans. Reliance Infotel refused to go on the record with its reactions to these accusations as well as the recommendations.

Sarma too refuses to comment. “I ask one question: Am I being fair? If the answer is ‘yes’, then I stand by my decision,” is all he says. Insiders say it’s not possible that Sarma did not anticipate such reactions from the industry. “He understands the implications of what he is doing, at least qualitatively,” says Mahesh Uppal, director, ComFirst (India), a Delhi-based consulting company that specialises in policy, regulation, and strategy.

Understanding the implications, however, does not mean that Sarma is particularly tactful. He has a reputation for being blunt and to the point, something that he himself admits to. “I am not in the popularity game,” he says with a laugh. A look at the official TRAI response to clarifications sought by the DoT is evidence enough. “While we have no comments to make, it appears highly inappropriate to seek legal opinion on recommendation 14, which is itself that the government should consult [the] Ministry of Law!” goes one response.

IT IS THIS KIND OF PLAIN SPEAKING THAT has seen Sarma through his four decades in the corridors of power. An IAS officer from Andhra Pradesh, he is known as an administrator who brought positive changes to the education machinery in the state. He is also credited with starting Andhra Pradesh Technology Services, which laid down the foundation for computerisation which later became the hallmark for Chandrababu Naidu when he was chief minister of the state.

It was only in late 2002 that Sarma was made additional secretary, telecom. That was when GSM and CDMA players (Airtel-Vodafone and Reliance Infocomm) were lobbying heavily to get policies in their favour. In those days, Sarma was not part of the policymaking team, but he learnt from what was going on around him. In 2005, the then telecom minister, Dayanidhi Maran, made him special secretary of DoT. This was seen as a highly political appointment, although Sarma brushes off any question of him being politically inclined. Some analysts say Maran may have thought he could use Sarma as a puppet. But differences soon cropped up and Sarma was shunted out of telecom into the fertiliser department.

Political ructions caused Maran to be removed as telecom minister, and the post went to A. Raja, who promptly got Sarma back into telecom, this time as member of the Telecom Disputes Settlement and Appellate Tribunal. The tribunal was set up to hear and settle appeals against TRAI orders, as well as settle disputes between telecom operators, customers, etc. (Insiders, somewhat cynically, say Raja brought Sarma back to telecom because the bureaucrat was seen as anti-Maran.)

Asked if he wanted to get back to telecom after the Maran episode, Sarma says he never sought any particular appointment, and adds that he was not even empanelled to become a secretary in any ministry. The biggest surprise for Sarma (and the industry) was his appointment as TRAI chairman. His name was not on the list, as he had not applied for the job. “I got a call from the search and selection committee to come for an interview, which again was being done for the first time. There were five or six other candidates. It was the second interview of my life for a job after the civil services,” he says.

Meanwhile, a Citigroup Global Markets report says further regulatory shocks are unlikely. But telecom operators say this is not really a silver lining, as they are still struggling after the tariff war caused by the entry of new operators two years ago. If they accept the high reserve prices and refarming, their businesses will become unviable at least in the short term, as they have to take on more debt to replan their networks.

“The maturity of the sector needs to be given due recognition. TRAI and DoT must realise that policies can no longer be made by issuing diktats,” says Kunal Bajaj, former partner at telecom consultancy Analysys Mason. “There is always scope for negotiation, and solutions can be found by discussing across the table,” adds Manoj Kumar, managing partner, Hammurabi & Solomon, a New Delhi-based law firm.

There’s no decisive outcome to this battle, and the fight is raging in and out of the government’s offices. “The new TRAI chairman can come out with a suo moto recommendation to address the key pain points. This might be a face-saving measure,” says B.K. Syngal, a telecom sector veteran, and senior principal, Dua Consulting.

Even as we go to press, there are meetings being held and more clarifications sought. But Sarma is unaffected by the strife. He’s packing his bags and heading for his home in Hyderabad. He’s done his job, he says. It is now up to the industry and government to arrive at a compromise.

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