Note

Failure of Spectrum Auctions
Bharat Jhunjhunwala

The Comptroller and Auditor General (CAG) had estimated a loss of up to Rs 176k crore due to administrative allocation of spectrum in 2008 at 2001 prices. The Supreme Court had set aside those allocations and an auction was done last year under its orders. Only a part of the spectrum was put up for auction at that time. Receipts were a paltry 10k crore against expected 40k crore. Recently the Government lowered the reserve price for spectrum and initiated another round of auction. Results of this auction are not known at the time of writing but indications are that only a few companies have expressed interest in a small portion of the spectrum offered.

It is difficult to assess the true value of goods that are not freely marketed. It is like a farmer selling his mango orchard to a contractor and then bemoaning the loss he presumptively incurred because of not plucking the fruit himself and selling them in the market. Such estimates are necessarily fickle. The price could be lower than that thought by the bemoaning farmer because of higher supply of mangoes from Andhra Pradesh; or it could be higher because of an export demand. The loss did not actually take place yet the farmer is sad because he thought he could have got a better price and he missed the chance. Similarly CAG had only made a 'presumptive' estimate of loss from administrative allocation of spectrum. It had clearly mentioned in its report: "Any loss ascertained while attempting to value the 2G spectrum allocated to 122 licensees in 2008 can only be 'presumptive', given the fact that there are varied determinants like its scarcity value, the nature of competition, business plans envisaged, number of operators, growth of sector etc. which, depending upon the market situation, would throw up the price that it commands at a given point of time." CAG could not have stated it more clearly-the estimated loss will vary with the economic situation. Similarly, the presumptive loss estimated by CAG is really a hypothetical figure. That said it is still indicative of the kind of revenue involved and cannot be brushed aside merely because of lack of definitiveness about the quantum of loss.

Needless to say, the economic situation in 2008 and now is totally dissimilar. The economic growth rate was buoyant and rising in 2008. It is depressed and falling nowadays. Growth of mobile services was expanding rapidly in 2008. It is tapering off nowadays. New players were eager to enter the market in 2008. The existing players are under stress these days. For these reasons lesser revenues have been garnered. In other words, the error lies in the downside of the economy; not in the calculations made by CAG. The loss of revenue assessed in the buoyant economy of 2008 should not be made the benchmark for assessing the failure or success of the auction made in the present depressed situation.

Another possible reason for low receipts in the auction could be making of a cartel by the telecom companies. According to a PTI report, Sunil Bharti Mittal, Chairman of Bharti Airtel, the nation's largest telecom company, had predicted beforehand that the auction would be over on first day itself because of the high base price. This could be because of an understanding reached among the telecom companies. It is 'normal' for bidders to collude before government auctions. This writer had an occasion to be involved in an auction of machinery of a factory by a High Court. The four bidders met outside the Judge's chamber and conducted 'in-house' bidding. The highest bidder then gave out agreed sums to the other bidders. The four trooped into the Judge's Chamber. Lower bids were made by the bought-out bidders, followed by the 'highest' bid by the pre-decided bidder. The telecom companies may have made a similar cartel. Note that shares of telecom companies have gained after the 'failed' auction.

CAG had pointed towards other irregularities in the allocations done in 2008. These are not overturned because of the poor show at the recent auction. Main among these is the clubbing of license and spectrum. The practice in 2001 was to give a license; and spectrum was attached to the same without additional payment. The Cabinet had decided in 2003 to delink the license with spectrum. This can be understood by a simile. The license given by the municipality to the rickshaw puller is inclusive of the right to carry any number of passengers. The rickshaw puller does not have to pay a separate fee for carrying three passengers instead of the normal two. This does not work for the trucks. They have to obtain a national permit and additionally pay road tax for the states in which they ply. The Cabinet had directed to issue a license and the spectrum separately like that for the trucks. The license gave them the right to offer services. But they would have to buy spectrum separately to do this. The Department of Telecom did not follow these instructions and continued to allot spectrum along with the license. This allotment of spectrum, moreover, was done at 2001 prices. At that time mobile telephony was just spreading its wings in the country. Demand for spectrum was less than availability. The situation had changed dramatically in 2008 with deep penetration of mobile services and buoyant demand for the spectrum. Therefore, the charges of corruption and loss to the exchequer stick even if the presumptive loss of 176k crore assessed by CAG is pooh-phooed.

Frontier
Vol. 45, No. 38, Mar31-Apr 6, 2013

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