Trai -- the toothless tiger

The ongoing war of letters between the telecom regulator, Trai, and the telecom ministry on the impending 3G licence auctions throws up several issues, most of which point to one thing: The regulatory system in India has become a farce, and needs to be either scrapped, or thoroughly revamped.

First, though, it is hilarious to see the telecom ministry arguing against Trai's recommendation on imposing a 2 per cent administrative charge on 3G licences -- the ministry argues an additional charge will reduce the auction bids. Here's the logic: If a 3G bid goes to Rs 6,000 crore (Rs 60 billion) for an all-India licence, a 2 per cent charge adds up to Rs 120 crore (Rs 1.2 billion) a year -- so, over the 20-year life of the licence, based on a 5 per cent discount rate, that works out to a net present value of Rs 900 crore (Rs 9 billion). If five such licences are to be auctioned, the government will get around Rs 4,500 crore (Rs 45 billion) less.

What's hilarious is that the ministry itself is doing its best to ensure the bid values are kept low. It has, for instance, ensured few new foreign players bid -- they have to pay Rs 1,651 crore (Rs 16.51 billion) more than the existing telecom firms will pay, and there are several more such barriers. Indeed, though Trai recommendations on 3G were first made in September 2006, the back and forth on what the spectrum and other fees will be is still carrying on more than two years later -- all this when the first pre-bid conference is tomorrow!

Also, Trai's administrative fee is a lot smaller than what the telecom ministry itself has done by raising spectrum usage fees by 20 to 50 per cent -- this will then lower the auction bids by a greater amount! In any case, what's Rs 4,500 crore (Rs 45 billion) compared to the largesse of over Rs 60,000 crore (Rs 600 billion) that the ministry handed out earlier this year when it gave 2G spectrum at bargain-basement prices to a favoured few firms?

What is more worrying, however, is the sanctity of the whole Trai process. Right from the time Dayanidhi Maran was telecom minister to now, the ministry has not hesitated to ignore Trai recommendations whenever it felt like. So, Trai recommendations on 3G, given when Pradip Baijal was Trai chief, were ignored; Trai recommendations on 2G when Nripendra Misra took over were similarly implemented selectively; it is true the recommendations were not as clear as they should have been, but when Misra sought to make amends by writing clear letters to the ministry, these were ignored and Misra had to go public saying the government shouldn't cherry pick; indeed, this time around when the ministry is again picking and choosing from the 3G recommendations, Misra has reiterated that the recommendations have to be accepted in totality.

The larger point is that, the way the law has been formulated, Trai is a toothless tiger -- it works well if the ministry chooses to be gentlemanly and takes the recommendations seriously; if the ministry chooses to assert its authority, there's little Trai can do. It's a bit like the President who, after a token refusal, just has to sign everything the government wants. Making Trai's recommendations binding, as opposed to being recommendatory as they are today, is one solution, but fraught with danger since all it means is that instead of decision-making being concentrated in the minister, it gets concentrated in Trai.

Theoretically, the solution lies in the appellate, or Tdsat, process where you can challenge policy decisions. But the problem here is that it limits the type of people who can go in appeal. Take the case where 2G spectrum was given at bargain-basement prices to a chosen few firms against Trai's recommendations. Who got hurt by this? Other firms who were waiting in line for the spectrum. But, under the law, they cannot go to Tdsat; only existing licencees can.

It is true existing licencees have filed a case in Tdsat against the 2G allotments, but it's safe to assume they're not going to push the case beyond a point. If Tdsat rules the licences were under-valued and, for the sake of argument, says the licence fee should be tripled, this will imply that existing licencees (Bharti/ Vodafone/ etc) who have been given extra spectrum beyond the 6.2 Mhz specified in their licence will also have to pay on this basis -- that's around Rs 3,000-4,000 crore (Rs 30-40 billion) apiece.

Similarly, in the current case, both the government and the existing licencees are united in saying Trai's 2 per cent levy is a bad idea. So, if the levy is in fact a good idea, who's going to challenge the government, and where? You or I could go to court, but courts typically don't want to get into government-policy decisions. It would be a good idea to open up the Tdsat process to non-licencees as well -- indeed, even give Trai the right to challenge government decisions.

Postscript: Given the way the government has sought to keep new players out, don't be surprised if the 3G auctions fetch only a fraction of what the minister publicly said they would. Also, the government will accept Trai's Voice-over-Internet-Protocol recommendations only after the Broadband Wireless Access licences are auctioned -- BWA will then become a perfect substitute for 3G telephony but its licence will cost a fraction!