How to kill an auction

The government wasn’t in favour of auctions — Trai’s sharp hike in base rates ensures auctions won’t happen

Written by Surjit S Bhalla | Published: April 28, 2012 12:30 am

The government wasn’t in favour of auctions — Trai’s sharp hike in base rates ensures auctions won’t happen

The drama of the telecom sector continues. Telecom regulator Trai recently announced reservation prices for 2G spectrum,the very same spectrum that has been the focus of everyone’s attention for the better part of the last two years. In order to understand what Trai has conceived,a bit of history.

In India’s days of innocence a few years ago,licences were parcelled out as favours,and at throwaway prices. In other words,corruption was rampant,and arrogant,that is,I,as a government minister and/ or bureaucrat,can do what I want,and catch me if you can — but you won’t succeed. Then along came the details about the 2G licences handed out in 2008,and handed out for a pittance. In September-October 2010,two corruption scams broke out near simultaneously — out and out corruption in the staging of the Commonwealth Games,and the CAG report on 2G licences.

For reasons quite unknown,but possibly political,the CAG took a valid story and facts about corruption and blew it out of proportion. In particular,the CAG report alleged that Rs 1.76 lakh crore was lost to the government because of not holding an auction. Nobody ever lost money questioning the mathematical competence of the CAG,a bet that was validated when the CAG issued a report on the money lost to the government by the handing out of coal licences. This time,going by the motto “angels never fear when alleging corruption,so the largest imaginable size is best”,the CAG calculated that Rs 10.7 lakh crore was lost to the government. Where did this money go? In the hands of evil capitalists,of course.

In the case of 2G spectrum,most calculations of loss centred around Rs 30,000 crore,or one-sixth the CAG amount. In the case of coal,saner calculations suggest that the money “lost” due to non-auction was about 5 per cent,or one-twentieth the alleged CAG size. The slippage,from one-sixth to one-twentieth,may have been due to a new entrant into the “imagine the level of corruption” contest — the Supreme Court.

Now,no one expects the Supreme Court to get the numbers right,but everyone does expect it to get the logic right. Darting into heretofore unchartered territory,the Supreme Court got into the economic policy racket and opined that in its considered opinion,the only way for a society to justly operate was if it auctioned all natural resources.

When a good is a public good and has “externalities”,it’s true price is not the auction price. And while we are on the question of auctioning natural resources,would the Supreme Court please give us a legal opinion on the auctioning of water,and the auctioning of licences to operate schools,etc?

Kapil Sibal,a leading legal mind and now minister for telecommunications,got into the non-auctioning act early. So early that he went overboard. At the time when the 2G scam was blowing super-hot,Sibal,then only a Congress legal mind and education minister,stated that the lack of a 2G auction did not result in any loss to the exchequer! Why this CAG-type calculation? Because a low price for spectrum meant a low price for calls and a mobile phone in every adult’s hand. The productivity benefits of a “one adult,one mobile” society are large,and considerably larger than the Rs 30,000 crore lost due to a non-auction. Does that mean that spectrum should not be auctioned? Absolutely not — but it does posit an alternative extreme to the extreme of the Supreme Court opinion.

All these detours lead to Trai’s reservation price recommendation. The Trai reservation price for the auction is about 80 to 100 times the spectrum licence price in most developed economies. This ratio is not a CAG-type estimate as it is factual and contained in the Trai report recommending a super-natural price for spectrum! (For an illuminating discussion,see ‘No more phones for Bharat’,

The legitimate question arises — why does a regulator want to set any reservation price for an auction? One reason,in a country like India,is that all capitalists are corrupt and if you do not set a reservation price,they will all collude and cheat the government and the poor of India. Okay,argument accepted. But if concern is with the poor of India,then why set the reservation price at a level 80-100 times that observed in the US,Germany and France? If the rotten capitalists in the West cannot afford such a high price of telephony,then how can even a minister in the government afford the same? The short answer is that he cannot,which means that the reservation price is dead on arrival.

Now for some speculation. Why did Trai do the absurd? Because it was told to do so by the telecom ministry. Why did the ministry do it? For several reasons. First,that the minister involved is none other than Kapil Sibal,of the zero-loss fame. Sibal had made a correct observation that there were externalities involved in the granting of cheap licences,and he was unfairly pilloried for stating the right thing. Sibal is also a card-carrying member of the roll-back government. So,when the recommendation is rolled back,Sibal would be emphasising that he is a team player.

Predictably,and perhaps for the first time,the citizenry is questioning the calculations made by its regulators. If Trai can make a grotesque mistake,so can the CAG,and so can a parliamentary standing committee,and with the permission of the Supreme Court,so can the Supreme Court. So,thank you,Sibal,for helping make India a more literate democratic state. If I were in your place,perhaps I would have also chosen a similar path.

The writer is chairman of Oxus Investments,an emerging market advisory firm

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