Opinion Going… going… gone

Spectrum is a valuable and non-renewable natural resource; it belongs to the people of India. It should be allocated to those who can make the most efficient use of it and will not trade or hoard it. And it should fetch the state a fair,neither too low nor exorbitant,market price. The best course for determining the fair price is through competitive bidding. Other natural resources such as oil,gas and coal,even the concessions for infrastructure projects under the PPP model like airports,bridges and highways,are auctioned by us. What justification then is there for not following the same principle for spectrum? This has never been properly explained by the telecom authorities to the public.

Two grounds against competitive bidding have been generally mentioned: one,competitive bidding will raise costs of the service providers and thereby make mobile telephony services more expensive for the common consumer; and two,it will lead to speculative bidding which will be unsustainable in the long run as indeed had happened in the poorly executed auctions in the first round of spectrum sale in India.

Both arguments are rather specious. In a competitive market,the consumer prices of mobile services are more directly dependent on the prevailing market prices; so if Airtel or Idea is charging 60 paise a minute,a spectrum bidder cannot hope to charge higher and yet survive in the market. Further,2008 was not the same as 2001; in those seven years,the market had grown far more competitive. For example,Vodafone paid a hefty price for buying out Hutch,but it has had to match rivals’ prices in the market,and in fact competition has led to an all round fall in tariffs. As for discouraging speculative bidding,the auction process can certainly be designed on sound economic principles,and sufficient experience and expertise are available worldwide,if only we are willing to learn from them.

In most countries today,auction is the accepted norm for selling spectrum. In the US,initially the spectrum was given away administratively (as in India in 2008). The process was inefficient,unfair,encouraged rent seeking,and sometimes led to bizarre results. In one case,a group of dentists (yes,dentists) won the license for the Cape Cod area and promptly sold it to Southwestern Bell for US$ 41 million (a’la Unitech and Swan in India). Finally,Congress directed the US Federal Communications Commission to resort to auctioning. The FCC in turn engaged game theory economists to design the auction. The bidders too employed game theorists to guide them towards rational bidding. The auction,billed by The New York Times as the “greatest auction ever”,was a resounding success.

Since then,the US and other governments,such as the UK,Germany,Australia,and New Zealand,et al have earned large amounts from spectrum auctions instead of the windfalls being reaped by private bidders. Only in a handful of cases,the auctions were not properly designed on economic principles,and these resulted in speculative bids or dirt cheap bids winning the auction. Corrective action was taken by these governments later. Why were we keen on repeating their mistakes,instead of learning from them?

In December,2007,while I was head of the Competition Commission of India,my article,“Spectrum Bids and the Beautiful Mind” arguing for competitive bidding appeared in the financial press. The Competition Commission of India wrote to the Ministry of Telecommunications and met senior officers at the ministry. But the ministry never replied to the Commission’s arguments,and persisted in its flawed policy. My efforts with some other high government functionaries on this issue also bore no result at that time. Reportedly though,Government has recently decided to auction the 3G spectrum.

It is only to be hoped that in all future spectrum sales (3G and beyond),not only will competitive bidding remain the definitive norm,but that the bidding process will be professionally designed,with expert economic advice,to ensure its success and inter alia,to discourage speculative bidding on the one hand,and throw away prices on the other.

The writer was former secretary,Corporate Affairs,and is acting chairman,Competition Commission of India