Who killed the 3G revolution?

Mixed signals Telecom companies who formed partnerships for 3G spectrum are now paying a heavy price
Mixed signals Telecom companies who formed partnerships for 3G spectrum are now paying a heavy price. Photo: Shailendra Pandey

Every heart skipped a beat when the Comptroller & Auditor General (CAG) revealed that the 2G spectrum scam was worth a whopping Rs 1.76 lakh crore — the biggest India has ever seen. But, if the notional loss in the 2G scam rewrote history, it also shifted the focus from what was going on in the acquisition of 3G and ultimately 4G spectra by mobile operators.

This isn’t a story of corruption in which corporates profited by bribing government officials or about secret deals in hotels or favours to companies directly or indirectly owned by MPs or ministers. It is a chronicle of how the government put a heavy cost, ultimately borne by the smartphone-wielding consumer of telecom services, along with an actual and not notional loss of thousands of crores in public money given as loans by banks to the telecom operators. It is also about how an arbitrary decision by the government tied the telecom industry in expensive litigation. Of course, the consumer is paying the ultimate price for that too. The final loss due to the 3G mess could add up to Rs 1 lakh crore.

And the price is high because one of the ways by which the CAG calculated the loss in the 2G scam was by comparing the price of spectrum with the 3G auction, which resulted in the notional loss of Rs 1.76 lakh crore. In the case of Vodafone, Idea and Airtel, the government also imposed fines averaging at about Rs 1,000 crore each, which has been challenged before the courts.

In 2010, the government declared that it would auction 3G spectrum in blocks of four to the 22 mobile telecom circles in the country. It decided that out of the four, three blocks would be auctioned off to the two highest-bidding private players. The fourth was reserved for government-owned telecom companies BSNL and MTNL. Both would have to pay the same amount for the spectrum as the two highest-bidding private players had in the same circle where it was purchasing the spectrum.

This sounds like a fair deal as per the country’s anti-monopolisation policy and competition laws and even the public companies did not get the spectrum at a lower price. Later, in 2010, the department of telecommunications (DoT) floated a document called notice-inviting applications (NIA), listing important information for the bidders. The telecom companies had also sent in their set of queries to decide the size of their investment and the business strategy they would have to adopt.

Despite the high base price set by the government, telecom companies invested in the spectra assuming high returns. They decided not to play the Coke-Pepsi game of going bankrupt by outdoing each other and entered into partnerships to bid for the spectrum, except the Anil Ambani-owned Reliance Communications (RCOM).

The government already allowed inter-circle roaming for telecom companies and users. For example, if Company A has users in State X but not in State Y, where Company B operates, the companies enter into an agreement under which subscribers of Company A can use Company B’s network in State Y for a fee that is regulated by the government.

When the NIA was floated, the companies, in six different ways, queried if intra-circle roaming would be allowed. On 25 October 2010, the government said ‘yes’ to all the six questions, provided that the companies had the State-mandated Unified Access Services (UAS) licence. The government’s response along with the questions was carried in the NIA document.

In effect, this meant that all licensed telecom companies could forge partnerships with other companies even within the same circle and offer 3G services to new and existing subscribers. So, Company A’s subscribers could use Company B’s 3G network even while in State X.

For example, Tata Docomo went into a partnership for a pilot project with Aircel though they were otherwise competitors in the sector. So, though Tata Docomo did not bid for 3G spectrum in Rajasthan, when Aircel got 3G in Rajasthan, Tata Docomo could give 3G SIM cards to subscribers because they were in partnership.

The government did not say ‘yes’ on a whim. The telecom companies were operating under the UAS licence and by DoT’s order (No 842-725/2005-VAS/269 dated 12 June 2008), which allowed intra-circle roaming. The licence permits the companies to provide all access services regardless of the allocated spectrum.

Since the 3G spectrum was being allocated under the existing UAS licence, it was but natural that the government also allowed intra-circle roaming for 3G services. Unlike 2G, 3G meant faster Internet speeds, close to broadband Internet, unleashing a whole new market for mobile phone users and hi-speed Internet access becoming mobile in the country.

The government pointed out that it did not have a roaming policy under the current regulatory regime and that roaming would be as per bilateral agreements between telecom providers based on the UAS licence terms. Clause 2.2 of the UAS agreement says that licencees (telecom companies) can enter into agreements with other telecom companies for roaming. Question No 230 in the NIA read: “Will intra-circle roaming be allowed for 3G & BWA (broadband wireless access)?” The government’s response was: “The provision for intra-circle roaming is as applicable to the service licencee, and is not different for/specific to the spectrum being currently auctioned.”

Question No 48 was important. The companies said that, after 3G auctions, all existing UAS licencees would not hold 3G spectrum in all licenced areas due to the limited 3G blocks on offer. So, would customers of UAS licences who do not hold 3G spectrum be allowed to roam on the 3G networks of other players in the same licenced area, ie even in the same circle?

Money talks As a result of bad policy, customers end up paying more for 3G service.  Photo: Naveesh Tejpal
Money talks As a result of bad policy, customers end up paying more for 3G service. Photo: Naveesh Tejpal

In fact, some telecom companies wanted that the government make such roaming mandatory until more 3G blocks were auctioned. The government refused this request but said that “the roaming policy is applicable to the licences and not to specific spectrum bands. Hence, roaming will be permitted”. As all government documents will, the NIA carried a disclaimer that the answers were not binding upon them.

Having discussed these questions at length and to their satisfaction, the companies bid for 3G spectrum and were sold the same, generating Rs 68,000 crore in revenue, of which Rs 50,000 crore was from the private players. It is important to know that the companies raised around Rs 21,000 crore through bank loans. They then set about developing infrastructure to use the 3G spectrum.

RCOM won 3G spectrum blocks in 13 of the total 22 circles and did not enter into roaming partnerships for the rest of the circles. An RCOM official told TEHELKA that the reason the company stayed away was because it apprehended that the government would not allow the roaming arrangements. “The government would allow roaming within the circle only if a company had blocks inside a state but not in a particular area within the same state,” he says. “For example, if a company had spectrum in Punjab but not in Chandigarh, then intra-circle roaming would be allowed.”

Private telecom players paid around Rs 75,000-80,000 crore, of which RCOM shelled out Rs 13,000 crore. Tata Docomo spent around Rs 10,000 crore for the spectrum, licences and infrastructure development. The interest would be an average of at least 10 percent per annum. This means, in the past four years, it had to pay around Rs 4,000 crore just in interest. If you take the entire Rs 80,000 crore plus infrastructure costs for all the private operators, and even at a conservative estimate if half that amount were through loans, then that would mean around Rs 20,000 crore as interest in the past four years.

Has that paid off? Not for any of the companies. RCOM paid Rs 13,000 crore for 13 blocks in the 3G spectrum auction. Its total number of subscribers is 126 million, of which 35.2 million are Internet users and a total of 11 million are 3G users. Even with such high figures, it is not enough to pay off debts plus interest after fees and revenue to the government.

It is believed that in October 2011, the Telecom Regulatory Authority of India (TRAI) sent a letter to the DoT secretary pointing out that cellular operators had started to offer 3G services even in places where they did not have the 3G licence. So, the government was concerned that it was going to be cheated out of revenue. What the government failed to understand was that the telecom industry had made a simple business pact to share spectrum and to ensure that all its existing customers were able to benefit from the new technology. Plus, this was the only way that consumers could get 3G services at a low rate despite the exorbitant input costs of buying spectrum, licence and setting up infrastructure.

In November 2011, Airtel, Vodafone and Idea wrote to Prime Minister Manmohan Singh asking that the money they paid for the spectrum be refunded if the government was going to declare their intra-circle agreements illegal. By this time, the 2G scam broke. At the same time, many scams were tumbling out of the closet, inflation was peaking and the UPA government was already facing heavy criticism. Manmohan Singh replied saying that new policies would be devised soon to address the telecom industry’s concerns.

The DoT indicated that it was still going to scrap the intra-circle roaming agreements. Tata Docomo and Aircel revoked their partnership and shortly thereafter DoT announced that all such agreements were illegal.

On 23 December 2011, the last working day of the Delhi High Court and the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) before the winter break and a week after the Supreme Court had already gone on break, the DoT sent a notice at 5 pm to Airtel, Idea and Vodafone, imposing fines of Rs 400 crore, Rs 300 crore and Rs 550 crore, respectively for entering into ‘illegal’ intra-circle roaming pacts.

The DoT went back on its earlier projections in the NIA without any just cause. It seemed to have forgotten that even if it withdrew the statements, it could not arbitrarily change the legal basis of the statements it had made.

The telecom industry went into a frenzy with crores of rupees at stake. After the December 2011 order, the private telecom companies got the TDSAT to assemble on a weekend during their break and get a stay order.

In July 2012, the TDSAT gave a split verdict on this order. Former Supreme Court judge SB Sinha said that the DoT had not given the companies time to act while the other member, PK Rastogi, said that the DoT was right because the telecom companies were providing 3G services to consumers without a 3G licence.

Here, it is important to understand the legality of the situation that the DoT had itself propounded in the FAQs of the NIA document. Providing 3G services did not require a separate licence; all existing UAS licence holders (meaning everyone providing 2G services) could provide 3G services.

With a split verdict, the companies approached the Delhi High Court and were given a stay, which it lifted later. The matter eventually went to the Supreme Court, which ordered the TDSAT to hear the matter afresh. The arguments for both sides have been heard and the judgment has been reserved. The government has made no attempt to resolve the issue, which impacts public money, public interest and, above all, the depressed economy with no fresh investments flowing in.

“Nobody really understands what the concept of public interest is all about,” says senior advocate Meet Malhotra, who had been standing counsel for the TRAI for 13 years since its inception. “Myopic people believe that getting the best price for spectrum is in public interest, not realising that it is the public that will eventually pay through its nose to use that service as a consumer.

“It’s amply evident with what happened in 3G. The government may have benefited through a few thousand crore, which it has since squandered, but the 3G service failed. Somehow, nobody seems to be aware of that.

“It is ironic that an auction should be the only way of defraying spectrum when it is a permanent, indestructible resource. In the presidential reform, auction is not the only recourse for coal and other assets that are finite and perishable resources, while spectrum can be used but not used up. To deal with this resource, the apex court has mandated that auction is the only way out. This is what happens when the courts dabble in economic matters. It is a travesty that the courts should have such a role to play in the ill-fortunes of the telecom industry. At one time, we were way ahead of China and now we lag behind South Korea. Ironically, neither the government nor the courts will ever be man enough to shoulder the blame.”

However, it will be an incomplete story if it doesn’t talk about the clever business strategy of one corporate house that, despite the bad investment climate, entered the market with around Rs 30,000 crore.

Mukesh Ambani’s Reliance Industries Limited (RIL) has thrown its hat into the ring. After acquiring 4G spectrum, RIL announced that it will provide 4G services under the name of Reliance Jiyo. Mukesh’s RIL has teamed up with younger brother Anil’s RCOM to use the latter’s towers and intra-city and inter-city fibres. Reliance Jiyo is slated to roll out 4G services in September, just a few months before the cricket World Cup. With the World Cup on and 4G available, millions of fans won’t have to stand in front of electronics stores for a glimpse of the action. All they need is a 4G-enabled smartphone to see the live stream. But, regardless of whether or not India lifts the cup again, this smart Indian industrialist group has already won the mobile data services cup.

But many industry watchers are sceptical and no one knows how the elder Ambani plans to make a profit while the current players are in financial doldrums.




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