India's sorry spectrum story

The network of roads is mostly public property. What if the government decided to make more money from our use of this property? Made users pay for these public assets, whether the roads are there, or yet to be built? Demanded upfront fees for a fixed-term right, followed by annual fees marked-to-market to reflect “fair market value”?

All roads would be expensive, and few people would be able to afford their use. Imagine what it would do to plans to build new roads. Imagine how much you would have to pay for road use, how road usage would drop, the sheer inconvenience it would cause, and the impediments to productivity that will be created.

This is not happening to the majority of our roads, but it is to communications, especially broadband. With some differences, this is what spectrum fees are about. The major difference is that spectrum fees are levied on operators, not end users (the equivalent for roads would be fees from government agencies/road operators).

For instance, Bharti and Vodafone paid upfront fees of Rs 12,300 crore and Rs 11,000 crore, respectively, for 3G spectrum. This is one reason why the country won’t get widespread broadband networks in a hurry, nor would it get reasonably priced services. The investment in spectrum fees and networks is so high that operators will probably offer limited, high-margin products. They will focus on high-traffic routes and ignore the rest, serving 50-100 million, instead of a billion — this is exactly the opposite of what we need.

The spectrum story

This approach to spectrum management is an object lesson in how not to use information and communications technology (ICT) for development. Each operator is exclusively assigned a sliver of spectrum. The resulting “scarce spectrum” predicament demonstrates why this approach is entirely unsuitable for optimising net benefits. Optimisation requires making trade-offs between technology, economics and commercial interests for development and the common good.

The situation is aggravated by three additional factors:

• Too many operators in a franchise area (12-16 in India, as against an international average of three to five), resulting in limited capacity and high capital costs.
• Limited availability of spectrum for commercial use, because of the extent assigned to the government, defence and the public sector.
• The government’s periodic efforts to extract as much revenue as possible from spectrum — an exploitative approach — instead of nurturing capacity to generate fair tax returns over the long term. Even in advanced economies, high auction bids have been disastrous.

Consequences

The average spectrum available per user is of the order of 5.5 MHz in India, compared to an international average of about 22 MHz. Delhi and Mumbai have cell sites that are less than 100 metres apart, compared with around 200 metres in Istanbul, 300 metres in Munich, and 350 metres in Berlin. Decreased inter-cell distances increase interference, thus restricting capacity. If each operator has more spectrum, traffic-handling capacity increases at a lower cost. Improving technical efficiency at the cost of economic efficiency loses out on capacity at low cost. Cellular operators in India are forced to extract greater spectrum efficiency, which sounds good until you factor in the increased costs and opportunity losses.

The report titled “An assessment of spectrum management policy in India”, Plum Consulting, December 2008, by David Lewin, Val Jervis, Chris Davis, Ken Pearson, estimates that spectrum assignments increased to international norms would have lowered industry costs by an 21 per cent (Rs 11,700 crore or $2.6 billion in 2008). This would have resulted in a more extensive coverage at less cost, with greater consumer welfare.

The result is high-cost infrastructure for operators as well as for users. Too many operators make for increased capital costs for each operator, and cumulatively for all operators — unless they use common networks. Higher efficiency requires more base stations and more advanced technology, both adding to costs. Despite this, operators are exhorted to improve their spectrum efficiency. After a detailed assessment, the report concludes:

• The claims regarding the scale of the capacity increases possible with the use of various techniques are significantly overstated.
• In the case of adaptive multi-rate (AMR) codecs, this technique is already being deployed on a widespread basis.
• The claims wrongly assume that the capacity gains from the different techniques are additive. This is simply not true in a number of cases. For example, the gain achievable with DFCA is less if AMR has already been implemented.
• There are substantial costs associated with deploying advanced techniques — both for operators in terms of network upgrades and for end users in terms of new handsets.
• It is important to be aware that deployment of some of the techniques, such as AMR HR, leads to lower quality of service.
• The focus on spectrum optimisation techniques for 2G networks fails to take into account the fact that the efforts of the suppliers have now shifted from 2G optimisation to 3G deployment.

Those making these claims seek more intensive deployment of advanced techniques to maximise technical spectrum efficiency. But a better policy objective, as we argue (in a later section), is overall economic efficiency. From this perspective, it only makes sense to deploy advanced technologies when this is a lower cost way of increasing capacity than adding further base stations. Indeed it is against the interest of the Indian economy to deploy them if this is not the case.

The approach is counterproductive and against our interests. Advanced economies are doing the opposite, encouraging investment in broadband to improve productivity, while India’s policies actually constrain productivity.

A third consequence is the non-availability of spectrum in the more efficient bands, eg, 700-900 MHz. This has a negative effect on last-mile roll-out and services in rural areas. Lack of coverage in the hinterland is a severe deficiency in areas that are poorly served by fixed-line networks. It only perpetuates the vicious circle of low potential in rural areas with deficient broadband and Internet access.

The curse of spectrum auctions

Two recent developments have created additional burdens. One is the 3G auction, with bids of over Rs 67,000 crore (almost $15 billion). Another is the Telecom Regulatory Authority of India’s recommendation that 2G operators with over 6.2 MHz must pay for additional spectrum at prices determined by the 3G auction, resulting in a precipitous fall in the shares of major operators.

Why should governments be concerned when stock prices fall? For the same reasons, they should want stable markets: Investment and prosperity, leading to public welfare. It makes little sense to entice investment into high-potential, sunrise sectors, only to batter successful enterprises with arbitrary “taxes”. Bharti described the changes as “shocking, arbitrary and retrograde”; Vodafone called them “opaque, illogical and discriminatory”.

Like an absurd play, events have taken a surreal turn, with the Department of Telecommunications reportedly demanding spectrum fees from the defence department. However, no additional demands were made on companies cashing in on assigned spectrum rights that sold for windfall gains without any networks or users. This seems equally absurd.

The government needs to give up making short-term revenue killings, and instead, maximise net welfare through building productive capacity. Ubiquitous broadband is good for productivity and for the environment. As for auctions, remember that collections from revenue sharing after the New Telecom Policy, 1999 (NTP ’99), far exceed the bids. Let us have the wisdom to collect those golden eggs over time, instead of eating the goose now.

Read the original in Business Standard