Rather than relying on government bureaucrats to assess the merits of the competing telecom operators, be it the incumbents or the potential new entrants in spectrum applications, an auction forces the operators to put their “money where their mouth is”

source: FE REFLECT

The minister of communications, A Raja, committed a major policy blunder in not auctioning the cellular licences awarded in January 2008, and in bundling 4.4+4.4 MHz of start-up spectrum with the licence. He may now say that he followed the Trai recommendations in this matter and try to wash his hands of it, but the previous Trai chairman, Nirpendra Mishra, has gone on record to say that Trai’s recommendations were chosen in piecemeal fashion and the final policy on allocation of licences violated the spirit of the recommendations.

However much we desire, our breed of policy economists do not have as much influence on policymaking as their counterparts in the West have. The path of policy influence and research is complicated and tenuous. This is especially true at the micro level, where the ministries are still trapped in their planning mentality, even though the associated services have been liberalised. They just cannot let go and leave allocation to the markets as it takes away their discretionary powers. It is precisely these discretionary powers that are a source of rent seeking for the ministers and the bureaucrats manning these ministries.

So, while we have the likes of Paul A Klemperer, Edgeworth professor of economics, Nuffield College, advising the British government on how to allocate 3G spectrum and design the auctions, we have some DoT officials and a minister deciding what should be the price of the cellular licence in 2008 in a totally arbitrary fashion.

Way back in December 2007, in a letter to the Prime Minister’s office, Raja had ruled out auctions as a mechanism for the allocation of spectrum. According to him, auctions were “unfair, discriminatory, arbitrary and capricious”. By ruling out auctions, he had implicitly endorsed the then existing spectrum allocation policy that bundles spectrum with telecom service licences. In such a purely administrative mechanism of allocation, after a licence has been granted, spectrum allocation is linked to subscriber numbers and not to actual usage. The operators pay an administrative price for this allocation. The allocation of spectrum through fiat is referred to as ‘beauty contests’ in the literature on auction theory.

However, bundling the spectrum with a service licence is an inefficient arrangement. Radio spectrum is a scarce and essential input for telecom services. It is, therefore, important to ensure that spectrum assignment adapts to changing demand (so the value of the licence, that is spectrum, in 2001 cannot be the same as in 2008) and reflects the value of alternative uses and users. It seems self-evident that if users do not face the true value for the use of a resource such as spectrum, then they have little, if any, incentive to adopt the economically efficient technologies or to allocate spectrum to highest value users.

To allow for a fair, non-discriminatory and non-arbitrary allocation, economists since Ronald Coase have been advocating auctioning radio spectrum. What are the merits of this mechanism? A ‘well-designed’ auction is most likely to allocate resources to those who value it the most. Rather than relying on government bureaucrats to assess the merits of the competing telecom operators, be it the incumbents or the potential new entrants in spectrum applications, an auction forces the operators to put their “money where their mouth is”.

An auction can extract and use information that is otherwise unavailable to the government. More importantly, around that time I had pointed out in an article in The Indian Express that auctions would eliminate the arbitrariness inherent in the specification of criteria and the consequent evaluation of plans. This arbitrariness of the ‘beauty-contests’ makes the process time-consuming, opaque, prone to legal controversies, and vulnerable to lobbying and political intervention, creating the perception of favouritism and corruption.

However, by allocating 2G spectrum to nine companies in January 2008 at an arbitrarily decided price of Rs 1,651 crore (the price paid by the fourth cellular operator way back in 2001), Raja violated all the principles of efficient allocation of this scarce resource. The winners of the licence were the companies who were ahead in the queue and were the lucky few in the first-come first-served basis of allocation. Having not paid the true value of the spectrum, they took advantage of their licence and exploited the arbitrage possibilities. So, Swan and Unitech resold their licences in the open market.

Etisalat and Telenor paid many times the price of the licence to acquire Swan’s and Unitech’s telecom businesses. Given that the two acquired firms had no infrastructure, it is obvious that the entire value paid was for the spectrum and for the possibility of rent seeking.

Thus, these companies appropriated the money that could have come to the public exchequer. A loss of Rs 60,000 crore ($13 billion) can in no way be condoned by any government. Never in the history of India’s policymaking has the exact cost that a government policy has imposed on the society been this clear. World over, spectrum sale is a major source of revenue for governments to carry out their social programmes. The minister denied the country of huge amount of resources and his actions were a huge public policy blunder. So, the minister was indeed wrong!

It is high time our ministers took responsibility for the costs they impose on the public by their errors in judgment on major policy issues. Scam or no scam, such a grave error of judgement should not go unpaid for. Without getting into the criminality of the issue, accountability asks for Raja to lose his job, but will this ever happen in our country?

We await the Prime Minister’s judgement in this matter. Hopefully, he will prevail upon the minister and ask him to resign. At least, we will be assured that bad economics does not go unpunished. Of course, if the CBI is successful in proving the criminality, the licensing process should be reversed and the society must get the true value of its public resource, which truly belongs to it.

The author is associate professor at Delhi University, and advisor at Indicus Analytics This e-mail address is being protected from spambots. You need JavaScript enabled to view it