2G auction: Sauce for the goose, but not for the gander
2G auction: How failure may have been pre-programmed

Corporate Nov 15, 2012

A flop auction does not mean there was no 2G scam

By R Jagannathan

If the pink papers had their way, there would be no such thing called the 2G spectrum scam; there would be no such thing called revenue loss; the Comptroller and Auditor General (CAG) would be labelled economically illiterate - precisely the kind of language Andimuthu Raja has used in the past with those who did not agree with his interpretation of the first-come-first-served (FCFS) policy on allotting spectrum.

An editorial in this morning's Economic Times makes some good points, but equally bad ones, now that it is clear that the spectrum auction has been a resounding flop.

Spectrum issues. Reuters

The editorial, titled RIP, 2G Scam, jumps to conclusions based on just the fact that the auction was a flop. Among other things, it makes the following points:

One, "attempting to maximise government revenue by jacking up spectrum prices is futile. It leaves telecom with reduced competition and suboptimal use of spectrum".

Two, "the CAG's estimate that the government would have netted Rs 1,76,000 crore if it had auctioned the 2G spectrum instead of using the first-come-first-served (FCFS) method is presumptive tosh".

Three, the only 2G scam relates to manipulation by A Raja of the "FCFS policy to create his own priority list of licensees for allocation of spectrum. But in the popular imagination, this was not the 2G scam; rather, the scam involved Rs 1,76,000 crore. That scam, it is now clear, was pure myth".

Each assertion is a half-truth at best.

It is nobody's case that the purpose of spectrum auctions is to maximise government revenues. However, it can also be nobody's case that auctions are not a good way to hawk scarce spectrum. The two-maximising revenues and auctions-are not the same thing.

The fact that the current auction flopped is not a justification for abandoning auctions altogether. It only means the auction was timed wrongly, or designed sub-optimally. Like selling public sector shares, if you sell the in a bad market, you get lower prices. If you hold on till the markets improve, you get a better price.

Auctions cannot be expected to yield huge revenues if you time them badly. If you want a better price, you wait for the right time. Alternatively, you can auction spectrum even in a bad market by putting in a provision for price revisions periodically. It will then not matter even if spectrum is sold cheap today. This is what happens with long term oil or gas contracts - there is a provision for regular revisions based on market prices.

The point about sub-optimal use of spectrum if it is sold at a high price is, to use ET's own colourful expression, pure "tosh". It is when you price spectrum high that the owner will try to use it more effectively, and create more uses and applications for it. When it is cheap, it will be wasted. Try this logic with water, or oil and gas, and see if selling them cheap gets you better usage.

The only thing different about spectrum is that if you don't use it, it is wasted for the period it is not used. So selling by auction is not the problem. If you are able to re-price spectrum at regular intervals, we will neither have sub-optimal usage nor overpricing. More importantly, a high reserve price is only the only way to auction spectrum: you could do it by revenue share too. This way, the damage to balance-sheets is not upfront. This is how the Delhi and Mumbai airports were privatised.

The second point, that CAG was talking through his hat while estimating a Rs 1.76 crore presumptive loss, is partly valid. The operative word is partly. The figure is an estimate based on the last discovered price for spectrum -- the 3G auction of 2010. That price may have been too high, both because the telecom market was bullish and the spectrum offered for auction was too small, but in a market like spectrum-where auctions are few and far between-can there be regular price discoveries asin the stock markets?

The CAG used the best available benchmark at that time.

The other point, that the public identifies the figure of Rs 1.76 crore as the real scam and not Raja's fiddling with the FCFS scheme, is correct. The CAG certainly is guilty of popularising this figure - though it was the media that tom-tommed it.

However, one should see even this in the right light. Would the public ever have known about the big decisions being taken with such opaque processes if the figure had not caught everybody's imagination? If the CAG had merely said that, look, the FCFS scheme has been tinkered with, and opaque processes were followed, the report would have been buried and the public left totally unaware of the conduct of its highest public servants.

There is an ever present danger of overhyping a scam, but without the hype there would have been no correctives too.

We now know that Raja hijacked the FCFS for his own ends, and even bamboozled the Prime Minister and the finance minister. These facts would never have been established without the CAG's sharp spotlight on Raja's activities. It was the alleged scale of the scam that forced a real rethink. For this we should be willing to forgive the CAG for creative licence.

A related point is this: ministers and bureaucrats must have a way of knowing what they are sacrificing to achieve what purpose. If, for example, the idea is that by keeping spectrum prices low, we will achieve so much teledensity, then the costs and benefits are easy to see. But what did Raja do? He merely asserted that his way of pricing spectrum-without even adjusting for inflation between 2001 and 2008-was the best. Can policy be evolved in such a slapdash fashion?

Consider the Union budget's own estimates of revenue forgone due to various tax concessions. These figures are also "presumptive tosh" but without these numbers, can we really evaluate the value of tax concessions?

Look at what a company would do in the same circumstance. To achieve market share, it may price a product low, even below cost, but it weighs the cost of selling low versus the presumptive gain in market share. Did Raja, or Manmohan Singh or P Chidambaram ever do such a simple exercise to arrive at their spectrum price? Surely, public resources cannot be handed out on such flimsy logic or assumption? Surely, the government must do more homework before it takes such decisions? Surely, the CAG's estimate of presumptive loss-if known before pricing spectrum at 2001 prices-would have impacted a final decision on pricing?

To use the flop auction to say that spectrum is priced too high is completely unwarranted for the following reasons.

First, remember, spectrum is being sold for 20 years. Does anyone seriously believe that prices will not rise as usage grows, and especially if India grows at 7-9 percent once the current downturn is over?

Second, in a country of 1.2 billion people, where every passing year is only going to see more usage of spectrum, it would be downright stupid to price spectrum low today because business confidence is low.

Third, the price of spectrum was kept low by Raja in order to enable some Indian promoters to get a free ride on foreign money - as was evident in cases where shares were immediately sold at high premia when there were no assets beyond spectrum in the kitty. Teledensity was the ostensible reason for low prices, but the real reasons lay elsewhere. Otherwise, why would the PM and the FM take the exact opposite position to Raja's earlier - only to be bulldozed by the DMK's coalition pressures.

Make no mistake: Raja did not do the country a favour by selling spectrum cheap. The value of the loss or the scam may not be Rs 1.76 lakh crore, but whatever it was, it was huge.

The flopped auction is no vindication of Raja's stance on pricing. The 2G Scam is not going to RIP, never mind what the pink papers hope.

by R Jagannathan

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