The great telecom swindle

IT WOULD APPEAR THAT SPECIAL JUDGE O.P. Saini’s order in the 2G spectrum case is paradoxical: a theft of gigantic proportions without a thief in sight or of a massive scam without a swindler to pin it on. Nothing could be further from the truth. In reality, India’s dalliance with mobile telephony, masked by the impressive speed of its pan-Indian rollout in the last two decades, reveals a can of worms.

It also demands a broader understanding of the notion of political corruption. The popular narrative that corrupt practices arise from individual politicians holding office and having access to the levers of policy is clearly inadequate. This understanding of corruption as a random occurrence triggered by the avarice of individual politicians is obviously inadequate because what is called the Great Spectrum Swindle is just one in a long series of episodes where the government allowed dominant industry players to dictate the key elements of policy.

The main disadvantage of the popular narrative is that it is blind to the fact that what is being termed as “corruption” is actually policy capture or regulatory capture, which confers substantial benefits to key industry players. This notion of corruption is not just naive, it actually hides the true beneficiaries of policy capture from the public eye.

In the case of the telecom industry, one must look beyond the spectrum scandal to get an idea of the magnitude of the larceny and understand how licence terms were tweaked and re-tweaked, how operators were allowed to change the fundamental terms of service after being awarded the licences, the manner in which the government looked the other way even when it knew that the licence holders had foreign investment above the prescribed caps, and how the government reined in public sector companies while blatantly favouring private players.

Policy capture

India’s telecom policy over the last two decades may seem to have been ad hoc and irrational, but in every single case the arbitrary tweaks yielded huge dividends to the powerful incumbents in the business. Seen from this perspective, the riddle of an apparent commission of a gigantic fraud without a perpetrator in sight appears to yield a solution. But in order to obtain this perspective, it is necessary to recall key episodes in the last two decades, which suggest a systematic capture of Indian telecom policy by large private companies.

Interwoven in this narrative of capture is also the plight of the Indian public sector telecom service providers, most notably BSNL, which were systematically run down, thereby diminishing competition in the sector. In terms of the political aspect of this policy capture, it is interesting to note that a continuum existed irrespective of whether the Congress or the Bharatiya Janata Party (BJP) was at the helm in New Delhi.

In fact, one of the first instances of an egregious tweaking of policy occurred in 1999 during the short-lived Atal Bihari Vajpayee government, which, despite its caretaker status, made the outrageous decision to change the terms of the telecom licences awarded to companies ( Frontline , August 14, 1999). In effect, it made the decision much after it had been reduced to “caretaker” status when the National Democratic Alliance (NDA) lost its majority in Parliament.

Under relentless lobbying by the winners of the telecom licences, the government decided to change the terms from a licence fee-based regime to a revenue-sharing arrangement. This violated every canon of law, apart from conveying to the bidders that the government was amenable to pressure. Indeed, the very modification of the terms of the licences, after having awarded them, mocked the sanctity of the auction process, apart from significantly diminishing competition.

Significantly, one of the winners was found to have bid in collusion with Sukh Ram, who was Telecom Minister in the Congress government under P.V. Narasimha Rao and later convicted for having accepted bribes. And Jagmohan, the Telecom Minister in the Vajpayee government, was shunted out because he had opposed the shift to a revenue-sharing regime after the bidding process was over.

Later, after the BJP established itself in power on a more secure basis in Parliament, the government allowed two major telecom players—Reliance and the Tatas—to offer full-scale mobile services even though they had won licences only for offering “limited mobility” services with what was then known as Wireless in Local Loop (WiLL) technology. In both cases the companies managed to convert their licences and establish claims over scarce wireless spectrum after paying a relatively paltry licence conversion fee. Even more galling was the conduct of the government and the regulator when Reliance got away with egregious conduct by routing and landing international calls which masqueraded as calls emanating from within India ( Frontline , December 18, 2004 and March 12, 2005).

The public sector service providers BSNL and MTNL suffered losses then estimated at Rs.1,300 crore, although Reliance paid less than half the amount as a fine and escaped unscathed. The then Telecommunications Minister, Dayanidhi Maran of the Dravida Munnetra Kazhagam (DMK), which was part of the NDA government, refused to cancel Reliance’s licence, arguing that this would “cause huge suffering” to the operator’s subscribers.

There were other means by which telecom operators were favoured. At least two Indian operators, Aircel and Hutchsion Max (later Vodafone), were found by multiple Indian regulators, including the country’s central bank, to have foreign investment above the prescribed caps on Indian companies in the telecom sector. Both companies got away scot-free.

In the case of Vodafone, which acquired Hutchison Max, the foreign investment was 89 per cent, 15 percentage points above the legally set cap on foreign investment ( Frontline , May 5, 2007). Incidentally, this acquisition and the capital gains that Hutchison Max made on the sale it made to Vodafone have been the subject of prolonged litigation in which the government has clearly exhibited indications of succumbing to pressure from powerful lobbies.

The manner in which the UPA and the NDA calibrated policy, or rather signalled their willingness to adjust policy to the fait accompli presented by telecom operators, set the stage for the establishment of a set of incumbents, the most notable of which were Bharti Airtel, Reliance Infocomm, and the Tatas, and to a lesser extent Hutchison Max and Aircel.

The most glaring omissions from this list were BSNL and MTNL (the latter restricted to the Mumbai and Delhi metropolitan areas). In effect, the private incumbents were allowed to establish their presence in the initial years without having to contend with the countervailing influence of the public sector companies. By the time the “calling party pays” regime came into effect in 2003, which actually sparked the significant lowering of telecom tariffs in India, the incumbent private operators had benefited significantly from being the early movers.

In most telecom circles, BSNL was allowed to enter only as the third or fourth operator, but even then it was severely restricted despite setting a blistering pace of customer acquisition. In fact, BSNL’s unique selling point in those years was its offer of “billing integrity” in an industry that customers widely perceived to be notorious owing to the non-transparent billing practices of private operators. However, BSNL could not keep pace with the private operators because it was systematically denied government permission to ramp up its network infrastructure in order to cater to the needs of a fast-growing subscriber base. Mass desertions by subscribers were a natural result of the negligent attitude of the government to its own company.

Spectrum squatters

By 2007, as the Indian mobile subscriber base grew, the incumbent operators aimed to establish a stranglehold by using access to wireless spectrum as a barrier to entry and, therefore, competition. In fact, the seeds of the spectrum scam can be traced to this period. The critical issue was that scarce spectrum was made available on a first come, first served basis. It soon became evident that the incumbents were squatting on excess spectrum simply to prevent the entry of rivals into the space.

As industry lobbies whipped up fears of an impending shortage of spectrum, and even as the regulatory agencies did precious little to ensure that the incumbent operators deployed technologies that resulted in more efficient use of their spectrum, an unprecedented number of applications were filed for mobile telephony service licences. The Department of Telecommunications, flooded by 575 applications from nearly 50 companies for licences in 23 telecom circles, abruptly closed the window for applications. Uproarious scenes were witnessed at Sanchar Bhawan, the seat of the Telecom Ministry in New Delhi, where executives in suits climbed over gates and engaged in fist fights with rivals.

Among the applicants were companies only remotely connected with the telecom business—real estate and construction companies and several others obviously acting as proxies of the incumbent players. Naturally, there was apprehension that the policy vacuum provided spectrum squatters an ideal opportunity to make a quick buck by trading the resource if and when they won a licence.

Once it became clear that the incumbent operators had made windfalls from the spectrum they were allotted as part of their licences, and as criticism mounted, they changed tack, arguing that this policy had actually made the mobile revolution possible in India. Advocates of the policy, who are also the same set of people who argue that there was no spectrum scam, argued that cheap mobile telephony services would not have been possible without such a policy.

A senior executive who worked for two of the top four mobile phone companies during that period told Frontline that both of them made “significant profits from the spectrum they had gathered at throwaway prices”.

“Even if this was the conscious objective of government policy in order to provide cheap telecom services, it ought to have been done in a transparent and non-discriminatory manner,” he added.

Congress politicians have been gloating that the Saini judgment implies that the government incurred no losses. They have attempted to rubbish the notion of “presumptive” losses of Rs.1.76 lakh crore estimated by former Comptroller and Auditor General Vinod Rai. However, although one may quarrel with the estimate itself, there is nothing fictitious about a “notional loss”. Indeed, in economic parlance the comparative postulate would be that of the opportunity cost that the government incurred, also notional, by not leasing spectrum after a price discovery through an auction.

A telecom industry veteran explained it thus: “If you have just sold your house for Rs.100 crore, after purchasing it for Rs. 50 crore, but missed an offer of Rs.120 crore, you incurred an opportunity cost of Rs.20 crore although you actually made a net profit of Rs.50 crore.” The mere fact that only a notional loss can be computed on such a deal does not render the loss fictitious, he added. “Indeed, you would be well advised to take such a loss seriously.”

The BJP, which swept into office in 2014 on the promise of a scam- mukt Bharat, has done precious little to alter the perception that the Indian telecom industry is game for match-fixing. Its failure to prevent Reliance Jio from using its spectrum, which was acquired in an atmosphere vitiated by the elimination of competition, is a clear indication of the continuum in the policy regime it inherited from the UPA ( Frontline , September 30, 2016). The manner in which the spectrum was acquired, the manner in which the licence terms were tweaked after the auction, and the lower costs that Reliance incurs vis-a-vis competition are clear indicators of the continuity in the permissive environment large companies are allowed to operate in.

Policy making and corruption

Most of the attention on the 2G spectrum scam has been focussed on politicians, bureaucrats and some lesser-known executives of private companies, all of whom were exonerated by Justice Saini in his recent order. In contrast, the string of scams that the Indian telecom industry has seen in the last two decades since the Indian telecom revolution took root has received much less attention in the media as well as in popular imagination. This arises from a narrow understanding of political corruption as mere private gains made by politicians at the expense of the public exchequer.

This simplistic perception of corruption arises from the abject failure to appreciate that politicians who “fix” deals can only pocket a fraction of the benefits they provide to those who benefit from such tainted deals. Therefore, it stands to reason that the major beneficiaries are not the politicians themselves but those who benefit from their actions, which are often recklessly arbitrary, as the Indian telecom policy has been for most part of the last two decades.

From this perspective, the playground of policymaking offers a much larger field for political corruption, which is characterised not so much by individual acts of corrupt practices but by a wholesale rigging of policy that favours large corporations. The fact that they result in a loss of public revenues, the burden of which falls on ordinary and hapless citizens, makes the rigging all the more reprehensible.

The key takeaway from the Great Indian Telecom Swindle, a show running for the last two decades, is this: the ground for scams of much bigger proportions is prepared in the realm of economic policy and regulation. Shades of what happened in the case of the telecom sector can also been seen in the oil industry, the power sector, and many other areas of the economy where policy is held hostage by powerful vested interests. That this happens in the name of “liberalisation” of policy is the irony of our times.