By Abhilasha Sahay

The recent telecom spectrum auction, held in February 2014, raised the much needed revenue for the fiscally strapped Government, amounting to INR 61,000 crore. However, it failed to address the long-standing industry demand for more quantum of spectrum. Yet again, this has drawn industry and policy attention towards examining auction-design for assigning telecom spectrum in India. This article aims to deconstruct India’s present auction-design and suggest alternatives, one of them being, adoption of ‘packaged bidding’.

The need for auctions stems primarily from the excess demand for Telecom’s sine quo non– spectrum. Prior to auctions, the Government of India followed administrative assignment of spectrum. Post liberalization, reliance on market forces was realized by way of auctions to efficiently allocate spectrum. The first auction was held in 1991 wherein a limited number of cellular mobile and basic fixed service licenses were assigned. It was believed that auctions would ensure efficient use of spectrum by assigning it to those who value it the most and generate government revenue too[1]. However the mere usage of this tool did not guarantee complete success; roll-out of services remained slow due to unforeseen problems with the design and rules of the auction.Once the licenses had been granted, the winning bidders reported that they had over-bid and that their businesses were not viable[2]. The government then relieved them of the obligation to pay further installments of their committed license fees and allowed them to move to a revenue sharing regime. Several alterations to other aspects of license such as calling charges, rentals, duration of the license and choice of technology have been made ever since. Today, a Simultaneous Multi-Round Open Ascending (SMRA) auction design is followed. Table 1 below gives details on recent telecom auctions, all of which followed SMRA:

Table 1: Telecom Spectrum Auctions

Year Product Revenue Comments
2010 3G and 4G USD 18 b Success
2012 2G (GSM+CDMA) CDMA cancelled; GSM- USD 1.6 b Partial failure: unusually high reserve prices
2013 2G (GSM+CDMA) USD 340 m Only one bidder (MTS)- unusually high reserve prices; negligible participation
2014 2G USD 10 b Success: reduced reserve prices; impending expiry of licenses of market-leading telecom operators

Source: Compiled by author

The Indian market is divided into 22 telecom circles. Under SMRA, each circle is bid for individually and simultaneously. Simultaneous bidding keeps the procedure fairly flexible, i.e. players can switch to a second-best option, if the first becomes too expensive[3]. Sequential bidding (wherein each circle is bid for one after the other), on the other hand, makes the process more aggressive since players don’t have a ‘look-back’ option. Further, as compared to sealed-bid auction, an open auction as followed under the SMRA format, reduces uncertainties associated with valuation assessments and diminishes chances of winner’s curse (players tend to value the commodity much more than its real valuation and thus over-bid). The use of SMRA design is justified on the above grounds. However in recent times, this format has gained international criticism for its inefficient outcomes and its inability to internalize changes in industry demand.

Telecom has emerged as a sector having far-reaching impacts. Owing to its pervasive and interconnected nature, synergies among different telecom circles cannot be overlooked. In this regard, individual bidding, as used in SMRA, exposes bidders to aggregation risks especially if synergies among circles are significant. In a scenario where circles A and B are complements and only stand-alone bids are allowed, a bidder may overbid for A in the fear of being outbid for B. In the February 2014 auctions, actual revenue raised was 41 per cent higher than what was estimated by the auctioneer; thus suggesting some degree of over-bidding. Typically, in subsequent rounds of auction, a player’s willingness to participate may get overpowered by his fear of being subjected to a winner’s curse, leading to lower levels of participation and thus inefficient trade[4]. In this context, packaged bidding as used in combinatorial auctions could be an alternative. Combinatorial auctions have gained significant success in countries such as UK, Nigeria, Switzerland and Netherlands.

Figure 1:

Mathematical equivalent of positive synergies among two circles A and B:

Valuation (A+B) > Valuation (A) + Valuation (B)

 

To implement package bidding, the regulator needs to gather information from bidders on how they value different packages of spectrum and create bundles accordingly. Each player then bids for these packaged circles. Based on true revelation of valuation by bidders, this mechanism mitigates aggregation risks. Additionally, it induces contiguous spectrum outcomes as aggregated band plans tend to emerge endogenously in the bidding process. Need for contiguous spectrum has most recently been recognized as a pre-requisite for the fast emerging data market. It would also lead to consolidated outcomes, i.e. lesser number of players operating in each circle, which may help overcome the industry challenges due to spectrum fragmentation. Packaged bidding would also facilitate procurement of national licenses and creation of a single pan-India license.

However adoption of such a design comes with certain caveats. This procedure typically requires highly processed information which lies beyond the scope of modern computation methods. For instance, in an auction comprising of 22 circles and their respective combinations, the valuation set would consist of 222 numbers. Additionally, it is important to define parameters on the basis of which circles should be packaged and have a clearly spelt-out mechanism.

A simplistic change in design would not guarantee efficiency alone. Prior information regarding availability of spectrum would be required to develop and plan robust strategies. In the absence of which the industry resorts to knee-jerk reactions, creating inefficiencies.It is vital to have a more dynamic auction mechanism with timely modifications to the auction rule in accordance to changes in technology and market conditions. Mostimportantly, re-prioritization of objectives with greater focus on efficiency is imperativeto bring about the envisioned change.

[1] Jain, R. S. (2001). Spectrum auctions in India: Lessons from experience. Telecommunications Policy25(10), 671-688

[2] Ibid

[3] Robert Porter’s presentation at The Neemrana Conference (2011), session on Telecommunication Services

[4] Hendricks, K., Porter, R., & Tan, G. (2003). Bidding rings and the winner’s curse: The case of federal offshore oil and gas lease auctions (No. w9836). National Bureau of Economic Research.

*Abhilasha Sahay is a Research Assistant at Indian Council of Research on International Economic Relations (ICRIER). Views are personal.

Posted by The Indian Economist | For the Curious Mind