Reality Check India

An analysis of Kapil Sibals all-in-one essay on 2G and auctions

Posted in Uncategorized by realitycheck on September 26, 2012

Shri Kapil Sibal, the Union Minister for Telecom and Information Technology as well as Human Resource Development has written an article in the Times of India “On 2G, the policy dilemma remains“. Even though the country has moved on post the 2G judgment, Shri Sibal seems inconsolable. The points he makes in his article are nothing new and have been addressed by various people including myself in “Arbitrary and Capricious” and “2G Spectrum and TRAI ” . But this is the first time Shri Sibal is laying down his talking points in a single place. So we get to address them all at once.

Suppose you were to hold on to an irrational belief that you refused to surrender to contrary evidence, you get really really upset when it is rejected. In this case, we have a double cabinet minister who refuses to see the light even after the CAG report on 2G as well as an emphatic decision by the Supreme Court. In this article, he turns on the CAG and even takes a swing at the Supreme Court questioning their respective boundaries.  While doing so, he hits on so many little issues because there isn’t a single ‘winner’. But it is easy to  play whack-a-mole and they are all out in the open here.

1. It was a nascent sector, we didnt know how to deal with it.

Did those who cried foul fully understand the complexity of a sector that was nascent? We were traversing virgin territory. There were no examples to learn from. Other nations were also learning from their mistakes.

Source : TOI (Sibal – On 2G the policy dilemma remains)

It was certainly a nascent sector in 2001, but it was far from a virgin in 2008 having been around the block for 8 years. Other nations had long established an auction regime, even those who entered India had bid and won auctions in countries from Egpyt to USA to Slovakia. In India, newcomers would have the benefit of having a decade of balance sheets of leading players, tried and tested business models centered around outsourcing operations to the likes of Nokia Siemens and Ericsson.

2. Bundling license + spectrum

This is a technicality that is almost meaningless. The license is not a resource you can roll out service on, it is just a piece of paper that artificially restricts operators in a service area for mobile and unrestricted for other service types such as broadband.  The spectrum whether bundled or paid for separately is the key issue.  We wont spend any time belaboring this point.

3. But new guys will go to court and we might be prosecuted

By far the most stunning part of his essay is this :

I don’t know. Had that been done, the resultant resentment between telecom operators would have resulted in court wrangles. The new ones would have argued that government, by introducing a non-level playing field, was throttling competition. Allegations of undue favours being bestowed on existing players would have been made. After all, how can one have two regimes in the same 1800 mega hertz band with the new players paying for spectrum through their nose and established players having got it for free? For doing that, an overenthusiastic court could have ordered an investigation, and consequent thereupon, prosecution. The facts would have been irrefutable. Prosecution of the policymaker was inevitable.

What he says is. Had we opted for a price discovery for 2008, the new ones who purchased those licenses at the higher prices would go to court and allege undue favours to operators who had set up shop 7 years earlier !!  Not only is he sure that the court would have found the case of the new operators compelling – but also irrefutable.

This flies against all commonsense because it ignores ‘time‘. After all, the court would never find the current situation that new entrepreneurs cannot get a 19 Acre plot that Infosys got  in Electronics City in 1990 for the same price outrageous enough to be illegal.  The only compelling  fact is that the new entrants shared none of the risks the incumbents did when they started out in late 90s. They had the market scoped, sized, sourced, and ready.  Once again see how the only arguments being made are on the level playing field, while the touted social benefits find no research or backing.

4. No one talked about it until CAG report

Between January 10, 2008, when the new players were granted licences under the old regime, and August 2010, not much happened except for a dubious single petitioner in court, whose antecedents were allegedly suspect. The petition failed. Then came the report of the CAG, who calculated presumptive loss to the exchequer of the order of Rs 1,76,000 crore. All hell broke loose.

What he means is very few in the national media, the likes of NDTV and CNN-IBN talked about it. He is right, but the internet, the vile medium of unchecked commentary, was always abuzz.  The Daily Pioneer carried a persistent account of the 2G allocation. In any case, that can hardly be a mitigating factor because then that would only encourage a clampdown of airing contrary facts that challenge your irrational position. Wait ! That is exactly what they tried by blocking outstanding commentators like Barbarindian and Kanchan Gupta.

5. Look at the mess now, cancelled licenses, BIPA, arbitration, we are sweating

These are repercussions that our unfortunate country is having to bear for the capricious acts of those in power. The Supreme Court has cancelled the licenses not on a whim but  because the govt could not pass the ‘test of arbitrariness’. Then and now the agencies involved have not been able to  produce records that show a linkage between the 2001 prices and the purported social benefits. Instead the nation found new entrants to the Forbes Billionaires (the USD version) list on one hand and mere personal assertions on the other saying how such enrichment was good for the social fabric of the country.

He then proceeds to lament that they have set the reserve price too high fearing some judge ‘might think we are favouring the telcos’. This is a sad state of affairs. The my way or the highway strategy.  First they set about a dubious prejudice of what the court might do, much like the level playing field (see 3). Then citing an imaginary safe harbour, they set  a sky high reserve price. The reality is a much more reasonable reserve price can be set and argued effectively in court.

 

6. Court better to look at criminal cases

He goes on to say that the court cannot step in and scrutinize administrative action on the basis of arbitrariness. Clearly in this case, the TRAI and DOT did not consider all facts on record but only those that suited their position. His position, possibly shared by a large swathe of our ruling class is the following :   Short of criminality, such as a bribe, every policy no matter how egregious, random, or with disregard for national property has to be exempt from judicial and audit scrutiny.  What he means is there should be no institutional checks on administrative action, and the only acceptable punishment should be at the polls. This is hardly the blueprint for a modern democracy where institutions are the key.

 

7. Can you auction land or school

This is a theme the government is recycling for the coal block allocation too. The thought experiment goes like this:

Say the govt had 10 acres to spare and wanted a private party to set up a school on that land. How would you go about allocating it if a dozen parties wanted in ? If you chose an auction route, the price of the land would be bid up and the winner would have no option but to hike the fees to make up the investment, thereby placing the school out of reach for poor kids. So the thought experiment fails miserably if auction were the route.

Unfortunately, Arun Shourie too thinks along these lines. He says can you auction a city’s water supply which would lead to the winner pricing drinking water our of reach of the poor.  As a matter of fact, Chennai  Municipality actually auctions Metrowater tankers and there has been no extortion.  Farmland owners  conduct private auctions for drawing water from their wells by water tankers. These tankers supply 90% of requirements of IT companies and star hotels. This isn’t ideal but the bigger problem here is not auction but cartelization. Across the country, auction is the method for cutting down a tamarind tree, right to fish in a pond, granite, riversand, etc. Why then does the thought experiment fail ?

The thought experiment fails because it ignores there are TERMS and CONDITIONS against which the resource is allocated via the auction route.  The bidders are fully aware of the terms while making a business decision whether to bid up or exit at any stage.  In the school example, if the terms built around social objectives required setting aside 50% of free seats,  then obviously the winner cannot ignore that and indeed the auction might work.  The alternatives aren’t pretty, out of the dozen contenders you cannot always run a beauty contest as in the case of coal blocks. The politically connected will always win because they can always call foul citing this or that reason when losing based purely on perception.

The academic drawbacks of auction route cited by the government of course is insincere and intended to tire you out. The argument falls apart  because both in the case of 2G and Coal Blocks they announced ahead of time that the  method (FCFS for 2G and Beauty Contest for Coal) was a one time sop and all future allocations would be strictly via the auction route.  Yes, the same auction route that denies poor kids education and hospital care.

 

8. An accountant should remain an accountant

To charge the government with not preferring auction for allocating a public asset is not just ignoring the unpredictability of the market but arrogating to yourself a role you are not necessarily equipped to perform. An accountant should remain an accountant and calculate all losses that accountancy permits.

Obviously the CAG is equipped to perform that role, the question is whether the constitution authorizes the auditor to quantify the impact of procurement and allocation options. Lets try this from the procurement side, you would certainly want the auditor to compute the losses of buying a lightbulb from me for 1Cr while the same can be procured via a tender (another form of auction) for much less. Why is it so jarring if the audit covers the allocation side too.

Unfortunately, the government far from being wiser due to the CAG and Supreme Court intervention in the 2G case is appearing to be brazen and lashing out these democratic institutions. The patchwork arguments put forth by the honourable minister are unconvincing and do not align with common sense wisdom.

Deep down it betrays a political body that is deeply hurt and one that  yearns to be free of the only remaining institutional checks against total arbitrariness.

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One Response

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  1. Mukunthan Iyer (@mukunthaniyer) said, on September 26, 2012 at 6:04 am

    A wonderful take. Point by point rebuttal. ‘Zero Loss’ Sibal is one noted lawyer in the nation with the reputation of non-refutable argument in the court halls. But, I doubt if he is or if he ever was, after reading this. It’s fantastic to read this:
    “The alternatives aren’t pretty, out of the dozen contenders you cannot always run a beauty contest as in the case of coal blocks”. A very poignant advocacy for auctioning as an appropriate alternative. Good work. Happy reading it. 🙂


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