Reality Check India

2G Scam – The arbitrary and capricious policy test

Posted in Uncategorized by realitycheck on September 28, 2011

It looks like the government is going to brazen it out and here is the grand strategy.

There is no scam because what was executed was exactly the policy of the UPA government.

What about the gigantic loss pointed out by the CAG, you might ask ?

There was no loss because the policy was never to make money. Put another way, the so called “loss” you talk about is factored into the policy agreed by the then duly elected Congress Finance Minister , Prime Minister and A. Raja and D. Maran of the DMK.

If you are like me, you would come away with Maybe the policy itself is the scam ?”   Can you call a policy decision a scam – isnt it sacrosanct  ? That is the topic of this blog.

I know the United States is not India, but here is how they deal with challenges on policy decisions. If an agency (such as DoT/TRAI) makes a decision with as far reaching revenue implication as the 2G auction it must be prepared to pass scrutiny. You cant forward a post facto ‘electromagnetic social justice’ argument unless that argument can be shown to have been the driving force and all other views were adequately factored in.

Here is a overview of how USA/Canada/ deal with this issue :

A reviewing court may set aside an administrative decision if it is unreasonable (under Canadian law, following the rejection of the “Patently Unreasonable” standard by the Supreme Court in Dunsmuir v. New Brunswick), Wednesbury unreasonable (under British law), or arbitrary and capricious (under U.S. Administrative Procedure Act and New York State law). Administrative law, as laid down by the Supreme Court of India, has also recognized two more grounds of judicial review which were recognized but not applied by English Courts viz. legitimate expectation and proportionality.

Mark this : The Supreme Court of India has two extra grounds – legitimate expectation and proprotionality.

Source : Internet

Lets look a bit more at the American Law here, as I think this is most apt for the 2G case. The US standard of scrutiny is called the “Arbitrary and Capricious Test”.  Check out the book Administrative Law by Jack Beerman for more on this. Again I beg you to stay with me – I know India is not the USA.

“Courts will set aside agency decisions found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). As the Supreme Court has explained: “The scope of review under the ‘arbitrary and capricious’ standard is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). Agency action is arbitrary and capricious “if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Id. Reviewing courts “may not supply a reasoned basis for the agency’s action that the agency itself has not given.” Id. (quoting SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)).” — Fox v FCC, Docket No 06-1760-ag, slip 18-19 (2nd Cir. June 4, 2007)

 

I imagine the entire Congress Party is getting ready to forward that they knowingly dropped revenue consideration in favour of increased spectrum user fees. Note that I am purposely sidelining the “level playing field” . This is a bogus argument which will be dropped somewhere along the way. As soon as they realize this will lead them into the legal trap of unjust enrichment of private individuals.  Besides it is highly debatable if it is indeed a level playing field if new entrants can gatecrash into a market that was proven by others without partaking in any of the risks.

So the entire defence is going to eventually rest on this :

You cant fault us for policy – there is no loss because the goal was teledensity and not revenue on licence.

Once they do this : The case is cleanly split into two – 1) the policy decision and  2) Raja’s manipulation. On the second case, the damage is limited because cancellation of all licenses can not be on the cards. On the first case, the government will  enter into a familiar standoff with the judiciary questioning its authority to entertain challenge to policy decision.

The hope is the court doesnt miss the irony here : On one hand, the UPA government is saying Rs 32 per day is the standard of wretchedness and on the other it says forgoing 50,000 Cr on capital account can be justified for teledensity and level playing field.

 

Arbitrary and Capricious policy Vs Wrong Policy

I noticed this article by Pratap Bhanu Mehta in todays paper. The way the questions are framed should bother us all. Consider this :

It puts Chidambaram on the spot only when you assume three things: that the policy was wrong, that being associated with the policy does put a question mark on your integrity, and that the decision was not the responsibility of the prime minister or cabinet as a whole.

Source : IE (emp mine)

There is no wrong policy. Because Wrong isnt a working word. The question should be – “Was it an arbitrary and capricious policy?”  This nuance is important.  What is right for PC/Raja/Unitech  may be wrong for Indians.  On the other hand,  a  policy can be fairly tested as Arbitrary and Capricious .  If you accept this nomenclature – the next question will be. Is there enough evidence to prove that the policy, of forgoing tens of thousands of crores in exchange for teledensity, can pass a ‘reasonable basis’ test ?

The stakes are this :

If the policy is found to be arbitrary and capricious – then the policy can be cancelled. The fruits of the policy will be voided and they can be redone to benefit the Rs 32/day wretched people who have the most to lose.

Can the government’s teledensity argument stand up to the test ?

What happens if an equivalent to the American standard of “Arbitrary and Capricious” is applied by the court. As mentioned in my previous blog post – we have the former Finance Secretary Dr Subbarao on record stating that teledensity was neither an objective not a factor at any point of time.

But I think that has to be an explicitly  objective and indepth study of costs and benefits of foregoing a certain amount of revenue against what would be the returns by way of increasing teledensity.  We had not done that at any point of time.  We were always arguing on the basis of level playing field rather then on the basis of any growth dimensions this might have subsidise that a..

Source : RC – TRAI says cant price spectrum

 

I leave you with a short comparison of 2001 vs 2008 – the governments defence should start from these points.

 

2001

Subscribers : 40 Lakhs

Those who want spectrum : 12

Available  : 210 licenses based on free spectrum

Demand from operators : Zero

2008

Subscribers : 24.9 Crores

Those who want spectrum : 575

Available : 157  (122 new + 35 crossover)

Demand from existing : Severe – 150 existing operators in queue

(Source : Rajeev Chandrashekar’s presentation)

 

 

Next ?

A point by point rebuttal of all arguments of the Delhi Super Lawyers club – all of whom stand to make windfall profits from any confusion they can introduce into the case. Amazing they get so much airtime to put forth their clients interests before a gullible country.

 

2G scam – TRAI says cant price spectrum

Posted in Uncategorized by realitycheck on September 1, 2011

See important updates at end of this post.

Two news items that might give you an idea of where CBI is going with this

Maran gets clean chit (well almost) without even questioning him. Aides say Maran delayed files.

In what comes as some relief for former telecom minister Dayanidhi Maran, the CBI on Thursday told the Supreme Court that no element of coercion was found in sale of Aircel. The CBI, told this to the Supreme Court, in the status report filed today in the 2G spectrum allocation scam.The CBI said that it has so far found no evidence that Dayanidhi Maran misused his office to ensure that Aircel was sold by its owner to an entrepreneur who was close to Mr Maran and his brother, Kalanidhi.

Earlier, Maran had to resign as Union textiles minister in July after C Sivasankaran, who owned Aircel in 2006, complained against him and the CBI began investigating tha matter.

Source : HT

I am going to ignore the Maran story for now.  There seems to be great hurry for the CBI to wrap up a weak case because the accused have threatened to call in the PM and FM as witnesses.  One wonders if the case will even go to trial at this stage.

Lets focus on the other story. About the TRAI.

TRAI toes Raja’s line

Exonerating the former minister and Dravida Munnetra Kazhagam (DMK) leader, TRAI has told the CBI that his methods of selling and not auctioning spectrum were indeed according to rules and also it was not possible to estimate the revenue an auction would have fetched, reports said.

TRAI’s stand could weaken the CBI’s attack on Raja, when a special court, hearing the 2G case, will decide on Sept. 15, whether charges against the former minister and 16 others are valid enough to mandate a trial.

Source: IB

But the people of India are smarter. Way smarter than that.

Consider the issue on the table.

The Indian people have taken a 1.76Lakh Crore hit.

We are told that revenue generation is not good for us even though the money could have directly gone into constructing schools, hospitals, and infrastructure. 

A levy on AGR  instead of making money on sale is the better way it seems. We are also told that increasing tele-density and allowing rural poor to own a phone demands this hit .

This is where the genesis of the scam lies. The DMK ministers were adamant from day one on control of the pricing and allocation methodology. The CON leaders pushed for a while, probably alarmed at the scale of the wrongdoing, but suddenly fell in line.

Lets assume for a moment that the twin goals of a) inclusive telephony and b) a level playing field were worthy indeed in a country where teeming millions live in squalor. So worthy, that the government felt that leaving $40B on the table was a bargain.

That leads us to this question  :

Where is the study that balanced the two goals ? If there was no study at all – then it just means this whole line of teledensity, rural poor, inclusive telecom is a bogus argument.  We also know there was no study done – because inclusive telecom wasnt even a goal. Just a post facto alibi after being caught.  There was no homework done because the teacher gave no homework.

Dr Subba Rao puts it across the best in his testimony to the PAC.

Dr. Subbarao summed up:

“There is an argument to be made that if your forego revenue, you can gain on the welfare side like creating  teledensity and providing telecom access to lower income people.  Providing them opportunities would not only enhance growth but also made them more inclusive.  But I think that has to be an explicitly  objective and indepth study of costs and benefits of foregoing a certain amount of revenue against what would be the returns by way of increasing teledensity.  We had not done that at any point of time.  We were always arguing on the basis of level playing field rather then on the basis of any growth dimensions this might have subsidise that and if they have chosen to do that, then, as a civil servant, it would have been beyond my remit to contest that”.

In other words, the government did no due diligence at all before selling a most precious national asset.

What is a fit punishment for this gross negligence ?

Wont cancellation of the fruits of this malfeasance be the  most just ?

We will get to that in the next post.

Back to the TRAIs statement in the Supreme Court

Seven months after the Central Bureau of Investigation asked telecom regulator TRAI to quantify the loss to the exchequer in the 2G spectrum case, the latter has said that it is not possible to predict with certainty the precise values of spectrum that would have emerged in an auction.

Source : IT

In other words, TRAI is claiming to be incompetent. This is standard issue for those who are caught with their pants down.  This a complete U-Turn by a new chairman secretary Mr Arnold and contradicts TRAI’s own affidavit to the Supreme Court in March. Well guess what, this line is bogus too because it is trivial to deduce a fair value of the spectrum based on a number of parameters.

Some of these points were also made in the PAC hearings.

1. The USA made $32 Billion from selling spectrum just a few months before our own 2G. So there you go – an exact value. Update: See footnote.

2. Even  naive student of economics will apply indexation (based on inflation or PLR) to reprice the 2001 figure.  This, by itself would have priced the 2008 spectrum anywhere between 3,600 Cr to 4,400 Cr.

3. Total Indian market capitalization of all telecom companies in 2007-08 was $200 to $250 B.  Several orders of magnitude more than in 2001. That factor can be used to reprice the spectrum.

4. By 2008, all aspects of running the business were ironed out.  Technology winners had emerged. New vendors slashed prices of base stations and central equipment since 2001. Incumbents were bursting at the seams due to lack of spectrum. Airtel was begging for more spectrum even before 2008.

5. Vodafone paid $10B for a ~55% stake in Hutch in order to enter India. This values Hutch at $20B, it would have been straightforward to value their assets and isolate a figure for the spectrum. In hindsight, they could have entered India for $1.5B like Telenor and Etisalat did.

The CBI chasing down the NDA government is most unfortunate, not because they are doing such a bizarre thing. But because the Indian people are now awake to this sham. The anger will get reflected in unknown ways.

The government of the day being duly elected has every power to reframe and tweak any policies of any previous government.

Please rest assured we will do whatever it takes to spread awareness about the true nature of this monumental scam. Cancellation of all licenses is the only way the country can get justice and recover its lost assets.

Two Updates :

1.  Thanks to twitter.com/ChandrusWeb for pointing out this error. Mr R.K. Arnold is the Secretary of TRAI and not the Chairman. Mr J.S.Sarma is the Chairman.

2. The USA figure of $32 billion was cited by Chairman of VSNL during PAC hearings. I think he combined the numbers from two FCC auctions : Auction 73 and the AWS auction.  Auction 73 raised $19.3 B for the US government (Rs 90,000 Cr), this was won by AT&T  and Verizon. The AWS auction was won by T-Mobile ($4.2 B) and Verizon Wireless ($2.8B) and others – netted $13.2 B (Rs 52,000 Cr) for the US Treasury. It must be kept in mind that the USA is a smaller market than India even though ARPUs are higher due to value adds.

Nevertheless, the point is –  TRAI is misleading the country that it is impossible to reasonably value the spectrum by using a false dichotomy. The TRAI feels (now) that either they  should be able to predict with 100% certainty the precise value or they should be allowed to do nothing.  We are told, they did nothing because “it is impossible to  predict with certainty the precise values of spectrum that would have emerged in an auction”  Obviously such an dichotomy doesnt exist at all, because if it did then there is no need for auctions.  We can just invite TRAI to use its supernatural powers of precise prediction.  The awakened Indian people understand that just because you cant predict with 100% certainty does not mean you cant put a reasonable value on it.

I have never met a person who refused to leave the house because he didnt have an Audi A-8 to go out in.

The media ignores everything and instead of taking TRAI to the cleaners, claims the 2G case is dead.