THURSDAY, JUNE 3, 2010

Business Standard
India's Sorry Spectrum Story

How not to do ICT for development

Shyam Ponappa / June 3, 2010

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 up-
front 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 usage would drop, the sheer inconvenience,
and the impediments to productivity.

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 Rs 12,300 crore and Rs 11,600 crore
respectively up front for 3G spectrum. This is one reason why India won’t get
widespread broadband networks in a hurry, nor 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: 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 assigned a sliver of spectrum exclusively . 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 (see Figure 1), which sounds good until you factor in
the increased costs and opportunity losses.

Figure 1: Spectrum Efficiency in Delhi & Mumbai compared with London,

Singapore & Hong Kong
 Source: 'An assessment of spectrum management policy in India',

Plum Consulting, December 2008: David Lewin, Val Jervis, Chris Davis, Ken Pearson.

http://www.plumconsulting.co.uk/pdfs/GSMA%20spectrum%20management
%20policy%20in%20India.pdf

The report from which Figure 1 is taken estimates that spectrum assignments
increased to international norms would have lowered industry costs by 21 per
cent (Rs 11,700 crore or $2.6 billion in 2008). This would have resulted in 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
TRAI (Telecom Regulatory Authority of India) 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 (ee
Figure 2).

Figure 2: Telecom Stocks After TRAI's Fees Recommended For 2G

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.

shyamponappa at gmail dot com