How are auctions held? And how transparent and feasible is this process, in a highly regulated and litigation-prone industry, like telecom? What are the advantages of using the auction process, as opposed to the traditional method of awarding licences?

Auctions are a natural consequence of the liberalisation process. Earlier, licences were issued on the basis of what I call the beauty contest. There is a government committee which gets proposals from the companies and that decides which one is the best. However, the earlier process has many drawbacks. It takes a lot of time and often is followed by much litigation. Since it is not transparent, hence the government makes itself vulnerable to criticism. Further, government officials often do not have all the market information necessary for a sound decision. In the Netherlands, for example, Dutch Telecom did not win the GSM license in spite of being one of the dominant operators.

In auctions, on the other hand, the basic principle is reduce the selection process to one dimension, which is a financial bid upfront. The highest bidder gets the license, and the highest bid is the result of the stringent approval of the financiers, who need to be convinced that there is a sound business plan backing the project and the projected revenues can actually be generated at the estimated costs.

When and how did auctions evolve as the preferred means of issuing telecom licences?

The auction business in telecom arena started around 1992-93. It began with the UK. The Anglo-Saxon world adopted the concept first. Later on the US copied the UK experience, and started considering auctioning of the spectrum.The simplicity and transparency, coupled with the income it generates and the litigation it manages to avoid has made auctions the preferred route to issuing licenses. It also means less risk to the consumer. However it also has a flip side. Often, there is a concern whether the operator should be charged such high licence fees for a business that does not exist, because there is the danger, that operators might pass on the burden to the consumer. In truly competitive markets, however, that does not happen.

What are the lessons for India, from the European experience?In GSM, most licences were issued on the beauty parade concept. One of the few auctions that took place in the GSM arena was when the Dutch government issued license for GSM in the 1800 Mhz band in 1997-98. It was a successful auction in that it generated good revenue for the government. However, there was criticism from the operators who felt that they had paid too much for the licences. That soon disappeared because, they had underestimated the market by a factor of two. The other countries took note and for the UMTS or 3G licences, most went the auction route. The expectation of revenues was immense, but the final experience was varied. Those who did not go in for auctions, like Spain realised very low revenues due to low financial bids in response to the fixed entry fees. In UK, however, the same operators paid several times more. The UK auction therefore was a success, but a shock for the operators. Thereafter, the operators started thinking of a pan-European market and decided the areas where theywanted their footprint, in order to avoid the costs attached to the auctions.

In this case, the Dutch auction happened after UK, but before the German auction. Hence, there was the resource problem and hardly any bids. As a result, in many cases, the number of bidders were equal to the number of licences, and the licence went for the bare minimum price.

This situation is parallel to the Indian situation, where there will be a fourth cellular operator in different circles. Hence, the government officials must reconsider how to package the licences in such a way so as to have competition in every circle. That is the lesson from Europe.

The message is that every auction deserves its own thorough and very careful preparation. Short of that either one ends up with unrealistically low revenues or unnecessary litigation which gives bad publicity.

I appreciate that the Indian government wants to issue licences as soon as possible, but there should be considerable investment of energy in the preparation.

The Indian Government followed a kind of an auction process in 1994-95 for the cellular and basic operators at a time when these practices were just gaining ground in other countries. However, the decision backlashed, since most operators were unable to cover the high costs of bids and the government was finally forced to forgo most of the amount? What is your perception of the process followed?

While, I confess not to know the details, but my perception is that it was not a multi-round auction. It was more of a sealed bid kind of an auction. Hence, there is not much price information on the market.

Second, was the case of annual licence fees instead of an upfront payment. That is very, very risky and introduces the chances of the initial bids not being realistic. However, the imbroglio that followed is not typically Indian. It is found in every country. Experience in US and South American countries shows that.

What are the key concerns that were expressed by the various government officials and private service operators whom you met recently?From the government's side, the major concern was not to repeat the performance of the 1994-95 of giving licences. From the operator's point of view, it was the fear that the new operator shall be given easier terms and conditions than were available to them.