Extractive Charges on Spectrum & Petroleum

The article published in the Business Standard on March 5, 2014 was mirrored in Organizing India Blogspot on March 6, 2014.

spectrum auction last month ended with over Rs 61,000 crore (about $10 billion) bid for the 900 MHz and 1800 MHz bands. Everyone seems upbeat: the government at high bids, and operators at staking out spectrum so that they can continue offering their services. The public at large seems enthused. Is there reason for good cheer? Consider some of the outcomes and the likely consequences.

Outcomes

• Dominant operators, namely, Bharti Airtel, Vodafone and Idea, have won enough spectrum to continue building their businesses. So has a new potential contender, Reliance Jio.
  
• Winners must pay the amounts they've bid, in addition to making further investments in networks. Their financial compulsion will be to increase prices to amortise a payment of nearly Rs 18,300 crore, followed by the remainder to be paid in 10 annual instalments after a two-year moratorium. Competition will provide a countervailing effect against price hikes. The annual payment by all operators after two years will amount to about Rs 4,400 crore. To put this in perspective, Bharti's profits for FY 2013 were around Rs 5,000 crore and Idea's around Rs 800 crore.

• This perpetuates the approach of operators paying first for the right to use spectrum, then dividing available spectrum for their mutually exclusive use. The corollary is that unless operators choose to share some of their infrastructure, as some do for mobile towers, each operator must invest in its own infrastructure. In the absence of voluntary infrastructure sharing to the extent permissible, multiple investments are needed to build parallel networks. This is comparable to railways or transportation companies setting up multiple countrywide railroad and road networks, each for their own exclusive use. The result is a very capital-intensive approach requiring much more investment, while not being sufficiently remunerative.

Consequences

• To the extent that there are front-loaded government charges, operators have less capital for network investments.
  
• Resource constraints result in service deprivation in low-potential areas, as is prevalent now. In other words, urban areas may be well served, but not less densely populated rural areas where the majority reside. It is for the same reason that metro cities are better served by airlines or transportation services: the profit potential is higher.
  
• The lack of amenities in rural areas means there is continuing demographic pressure to migrate to cities. The overwhelming societal need for the provision-of-urban-amenities-in-rural-areas ("PURA") is entirely sidelined. Yet, these are the amenities people need most for economic empowerment, productivity and better living conditions.

Contrast this with Sweden's approach to broadband, for instance. Sweden is a pioneer in the use of 700 MHz for broadband. A loosely translated quote from Sweden's information technology minister reads: "A hundred years ago, it was the ability to build good railways, good roads and good physical infrastructure that laid the foundation for jobs and growth. Today it is also about fast enough build-out of good mobile telephony." [1]

Another instance of constructive intervention, and that too in a developed metropolis, is the London Enterprise Panel's approach, because London's broadband is considered insufficiently competitive. Funds "will be invested where the market is failing (particularly where this is proving a barrier to business growth)".[2]

In India, the efficient 700 MHz and 800 MHz bands have not yet been assigned except for limited 800 MHz spectrum for CDMA. These bands are most effective for broadband in rural and semi-urban areas. However, auctions and high reserve prices militate against their effective deployment at low cost, thwarting an apparent remedy for our deficient coverage. Also, GSM operators have just bid aggressively in the recent auction to survive, and are loaded with debt. Only the financially strong Reliance Jio, which has not bid as much, can offer high bids. Vodafone may also be able to do so. So, one problem is reduced bidding capacity, but a bigger problem is reduced investment capacity: the higher they bid, the less likely they are to provide countrywide broadband quickly at reasonable prices.

Petroleum Levies

Petroleum levies comprise another range of high government charges on critical inputs. In 2006, the taxes on petrol amounted to 52 per cent of the retail price, and on diesel, 30.4 per cent with Rs 45 to the dollar, (Delhi price: Rs 45/litre when Brent crude was $65/barrel). Tax collections now amount to around 30 per cent for petrol and 18 per cent for diesel, with Brent crude at around $110/barrel, and petrol in Delhi at Rs 74/litre. While the percentages collected are lower, the amounts collected are about 70 per cent higher than in 2006 because of the increase in the price of crude oil at a time when the economy is slumping.

There is a rationale for collecting reasonable charges to cover construction and maintenance, environmental impact mitigation and waste disposal (clean-up), and to provide incentives. But it's time our governments stopped being extractive, and rationalised charges based on objectives and policies in the public interest. Governments and politicians should be addressing these, instead of doles and giveaways. The aim should be to maximise life-cycle benefits, which can be optimised by reducing short-term capture in favour of longer-term accruals from growth, and from policies designed to deploy productive infrastructure including applying the principle of common carrier access.

[1]. "Digital TV [700 MHz band] will now provide frequencies for cell phones", writes IT Minister Anna-Karin Hatt - Dagens Nyheter, February 27, 2014: http://www.dn.se/debatt/digital-tv-far-nu-lamna-frekvenser-till-mobilerna/

[2]. London Enterprise Panel - 2014-2020 European Structural & Investment Funds Strategy for London, January 2014: https://www.london.gov.uk/sites/default/files/London LEP ESIF Strategy 2014-20 (1).pdf