TRAI model wrong, but DoT didn’t object till now either

It is not clear whether the telecom regulator, Trai, will explain the rationale behind its spectrum-pricing recommendations to the department of telecommunication (DoT), but a report in The Economic Times (ET) suggests it may not do so readily. ET quotes unnamed Trai officials as saying that, while the law allows DoT to ask Trai to reconsider its recommendations, there is nothing that says Trai has to give the rationale behind them. In any case, Trai has maintained, as FE reported last month, that its recommendations did, in fact, contain the methodology as well.

That, though, is not strictly correct since, while Trai has given the valuations reached using various methodology, it has not really explained why one or the other methodology should be preferred. So, the multiple regression model yields a value of Rs 3,877 crore as the per MHz base price for pan-India 1800MHz spectrum. The indexed price of the 2016 auction, on the other hand, works out to Rs 3,285 crore. Given the past practice was to, by and large, use the final bid of the last auction as the base price for the next auction, this meant the distortions of the previous auctions got carried forward into the next auction—for instance, bids skyrocketed when telcos were told their licences would expire if they weren’t able to win back spectrum. Trai then used what it called a producer surplus model that gave a value of Rs 3,004 crore and a revenue-surplus model that gave a value of around half, at Rs 1,635 crore; given both sound quite similar, it is not clear why the valuation should be so different. A production function model, the last model used by Trai, yielded a valuation of Rs 1,450 crore. Apart from a detailed explanation for how each model worked and the valuation derived, Trai needs to explain why, for instance, the revenue-surplus model isn’t the most appropriate or why the indexed price model that it finally used wasn’t a flawed one.

It needs to be kept in mind, though, that Trai isn’t the only one who got it wrong since, till now, DoT never asked for its valuation rationale of using the last bid as the next year’s base price. Nor did DoT ask Trai—as it should have—for a recommendation on scrapping annual cesses like the licence fee since spectrum was not being given away free as in the past. Indeed, the only reason why DoT is now asking these questions is that, with auctions failing so often and government revenues from telecom now dipping, it is under pressure.