Reality Check India

Attacks on CAG on 2G spectrum scam

Posted in Uncategorized by realitycheck on November 27, 2012

Tonight I watched a show on NDTV  featuring former auditor RP Singh.  In the wake of the failed 2G auction questions are being raised about the motives and competence of the CAG Vinod Rai. Various Congress politicians have even launched a broad-spectrum attack on the institution itself.  In parallel, some sections in the media are seeking to exhume the zero loss theory that was given a state burial.

2G scam simplified  – it is the low price or the arbitrary allocation ?

The basic issue is one of  allocation. Here is the question : If there are 500 applicants for 122 licenses, how would you go about selecting who should have it ? Economics demands that the applicants who are most efficient should win. You can find out who the most efficient ones are by

  1. an entrance exam or a powerpoint interview – aka beauty contest (such as  Coalgate)
  2. who applied first
  3. who pays the most upfront yet is confident enough of its business abilities to compete in a market which already has powerful incumbents.

The option with the least possibility of intrigue and highest possibility of social benefit is the auction.  Be that as it may,  selecting the alternatives such as  FCFS or a beauty contest is a policy decision.  But this decision has a cost,  these two methods increase the likelihood  you have left money on the table due to the act of not following a market methodology.

The question then is, “Well how much did you leave on the table ?” The Congress and the media channel in question promote that argument that “We didnt leave anything on the table, because there is no table”  We didnt want to maximize revenue at all. Enter the social argument.

Social welfare argument

The argument here is that FCFS winners will offer low prices and do rural telephony in line with the benign government vision. This conveniently omits the fact that all aspirants have to meet strict rollout obligations as per the UASL license conditions.  That being the case, it is counter intuitive to suggest that FCFS winners possess some kind of altruistic gene that will make them go over and above their license obligations. Such policy making is dangerous because you are indirectly mandating some kind of virtuous behaviour at the expense of legitimate profit seeking.

What about what Raja did ?

Lets be honest here, if there was any loss at all to the exchequer A Raja of the DMK didnt cause it. He just rearranged the beneficiaries in some non-random, capricious way. This is of course illegal – for which he will probably pay a price. But lets say, he stayed with the first come first served criteria as date of receipt, and it so happened that the same companies miraculously  won. Would we then say that there was no 2G scam and no loss ?  Absolutely not.

3G auction figures for 2G, etc, etc

On the NDTV show Mr RP Singh said that since the 3G auction concluded in May 2010, it fell in Fiscal 2011 which was outside the timeframe of the CAG. Such technical talk is important but betray the lack of confidence of  Mr RP Singh.  Is he saying that if the audit window were to be extended by 2 months to May 2010, then the 1.76 Lakh Crore figure would make perfect sense ? If yes, then he has destroyed his own argument on a technicality.  The other arguments about 3G (Basmati rice) numbers (2100Mhz) and 2G (Ration rice) numbers (1800Mhz) have been analyzed threadbare many times over we are not going into it.  Also at this point, it is well understood by the public that winners who won the 2008 licenses then conducted private auctions to select a foreign partner and discovered a price on their own.

What about the failed 2012 Auctions

The real disaster is the UPA’s handling of the biggest 2G fallout – the cancellation of all 122 licenses by the Supreme Court.  They always seemed to adopt a thinly disguised passive-aggressive resistance to the court ordered auction.  Were the auction to succeed, maybe not to the 1.76L Crore extent, but to a lower number, t hat would totally vindicate the CAG. Show the Congress and DMK ministers in very poor light.

The  2008 allocation was not without its positives. A key one was that incumbents could not participate –  this was designed to shake off any cartel. Unfortunately this condition was removed in 2012.  This leads us to the two basic goals of an auction.

  1. Prevent collusion
  2. Increase participation

Both these goals  were adversely impacted by various policy decisions  a) a one time charge at winning price applied to all holding over  6.4Mhz  b) refarming (vacating the 900Mhz band) at the winning price c) pegging the starting bid for CDMA (800Mhz) at 1.3x the winning price d) no clarity on when the 700Mhz band will be available – this is where 4G LTE is most efficient e) no clarity on whether enough spectrum will be available in 800Mhz for data services like Photon+, Reliance, MTS  (say 5Mhz or 10Mhz). Into this quagmire , you add a curious tendency to honour any and all “level playing field” arguments brought forth by various players. You never know what you are getting into. In short the policy climate is messy.

Do you want to sell ?

A common tip to  newcomers on  eBay is  “Do you really want to sell your stuff?”

Say you had a guitar which you dont mind keeping, but for Rs10,000+ you will sell it. So you go on eBay and set the starting bid at Rs10,000.  If the participants find your starting bid too high they will simply assume you are too greedy and walk away. There are millions of such items on eBay with no bids at all. You dont care because you are in no hurry to get rid of the guitar and are not in immediate need of money.  This is the exact effect a stupendously high starting bid of Rs 14,000 Cr for a pan India license has had.  Telecom Minister Mr Kapil Sibal boasts that he got down TRAI’s recommendation of an even more ridiculous Rs 18,000 Cr figure.

So in effect, a high starting price combined with all the other factors decreased competition. Did it increase collusion ? We dont know, but obviously if one of the Big 3 (Idea, Vodafone, Airtel) bid and won high, it would rebound and impact all of them via the one-time levy. It would also impact the CDMA holders by setting their staring bids at 1.3x and so forth.  There is no way this auction could have succeeded.

Increasing competition by injecting disruptive players is key, not just for the auction, but for growth of the sector.  China has AT&T why cant India ? What are the policies that hinder their participation ? You need players from the west  like AT&T, Verizon, T-Mobile, Telefonica to participate. That would certainly make collusion that much harder among the incumbents because it is hard to buyout the big dogs at advanced rounds in an auction. If the meaningless 74% FDI cap on Telecom has to go, so be it.

As the auctions fail to generate any enthusiasm; nationwide  a total of 500+ Mhz lies unused. This is causing real loss in spectrum usage charges. Perhaps Mr Vinod Rai can take a look at this next.

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2 Responses

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  1. rc said, on November 27, 2012 at 7:03 pm

    Please excuse grammar and typos – will edit later

  2. Divya said, on November 28, 2012 at 10:29 am

    Very well analyzed. I think it was rather obvious that the government designed the auction to fail so they can cry hoarse about the CAG and the “dubious losses” it is quoting.


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