Auction farce

The 2G spectrum auction indicates a passive collusion between the government and corporate interests aimed at discrediting the CAGs estimates of massive losses in the 2008 sale.

THE recently concluded re-auctioning of the 2G spectrum in 22 telecom circles, touted as a flop show by the government and sections of the media, is being used as ammunition by the United Progressive Alliance (UPA) government to attack the Comptroller and Auditor Generals (CAG) estimate of a loss of Rs.1.76 lakh crore to the national exchequer in the previous spectrum sale in 2008.

Minister for Communications and Information Technology Kapil Sibal went to the extent of blaming media-led sensationalism for killing the telecom market, while Finance Minister P. Chidambaram termed the 2G scam as a pure myth. However, a careful scrutiny of the process of auction will clearly indicate that the loss as a result of the disbursal of telecom licences on a first-come, first-served basis by former Telecom Minister A. Raja was a permanent loss to the exchequer, which is hard to recover through any sort of re-auctioning because of the change in the market conditions.

An analysis of the present re-auctioning, in conjunction with the proposed National Telecom Policy 2011, points to the regulatory authorities adopting a laissez-faire attitude at a time when the telecom market is going through a phase of transition and there is a need for suitable regulation in the interest of the consumer to prevent cartelisation and other anti-competitive practices by the larger players. The Centres attempt to use the apparent failure of the re-auctioning of 2G spectrum has not cut any ice with the Bharatiya Janata Party, the principal opposition party, and others, who have vehemently refuted the governments theory.

Even the Supreme Court has come down heavily on the government for its lackadaisical attitude towards the 2G spectrum auction. A Bench of Justices G.S. Singhvi and K.S. Radhakrishnan on November 19 directed the government to file a fresh affidavit within two days explaining why the entire 2G spectrum, licences for which were cancelled on February 2, was not put on auction on November 12. In fact, the governments narrative has conveniently avoided an explanation for not putting up the entire spectrum freed as a result of the cancellation of licences by a Supreme Court judgment in February. The spectrum sale earned the government Rs.9,407 crore against the budgeted Rs.40,000 crore. However, this is the amount earned through auctioning only a portion of the spectrum and cannot be used to term the CAGs projected losses as merely notional.

Passive collusion

The re-auctioning of the 2G spectrum was carried out only in 800 MHz and 1,800 MHz bands and not in the 900 MHz band. The government withheld 136 MHz spectrum out of 431 MHz in the 1,800 MHz band. Also, the cellular operators complained of a high reserve price of Rs.14,000 crore set by the government, which dissuaded small and medium players from competing and led to the auction not yielding expected revenues. There were no bidders for the four circles of Delhi, Mumbai, Rajasthan and Karnataka in the 1,800 MHz band. Also, there were no takers for the 800 MHz CDMA (code division multiple access) band. Videocon and Tata Teleservices withdrew their applications for the bidding earlier in November.The withholding of spectrum has been criticised as a move meant to limit the amount of revenue that would be garnered through auction. This move has drawn flak from across the political spectrum and has been perceived as one to artificially prop up a defence against the CAGs indictment of the government. The BJPs national spokesperson, Prakash Javadekar, said in a statement: The attempts of the UPA government to browbeat the CAG is unfortunate, unacceptable and undemocratic. In fact, the CAG findings are vindicated as only 22 licences have fetched more amount through auction than the whole lot of 122 licences which were given in 2008 on a first-come first served basis. Further, the CAG has calculated the figure for 2008 and not for 2012. The Communist Party of India (Marxist) alleged that both the government and the corporates had vested interests in ensuring that the auction did not succeed.

A scrutiny of the manner of the auction as well as the present utility of spectrum for private operators does point to a possible passive collusion between the government and corporate interests. Speaking to Frontline, Prabir Purkayastha, a member of the Delhi Science Forum, pointed to gaping holes in the governments theory: Only 40 per cent of the total spectrum freed up after cancellation was put up for auction, out of which only 43 per cent was sold as a result of auctioning, which means in effect that only 17 per cent of the original spectrum was sold and that fetched Rs.9,407 crore. This means 83 per cent of the spectrum is still unsold. So, there is no way in which these figures can be used to discredit the CAG findings. On the contrary, this only proves how the method of first-come, first-served adopted by Raja has caused huge losses to the exchequer.

The methodology of designing of the auction also points to a possible passive understanding between the private operators and the government which is mutually beneficial to both. Purkayastha said: The government wanted to underplay the losses estimated by the CAG and the private operators did not want to bid too high for a spectrum which is no longer as attractive as it was in 2008 when the bidding took place. This is because there is limited opportunity for adding additional subscribers in the 2G spectrum as the market is already saturated. There were about 300 million subscribers in 2008, now there are some 900 million subscribers, so there is little scope for adding more subscribers. For a lot of the existing players, the licences are coming up for renewal and they did not want to spend on additional spectrum.

The Department of Telecom had earlier decided that the renewal of existing licences and the charging a one-time fee for holding extra spectrum would be based on the price recovered as a result of the auction. This proved to be a further disincentive for telecom operators to bid in new circles. K. Sebastin, general secretary of the Sanchar Nigam Executives Association of India, explained: With the number of subscribers in the voice segment reaching a saturation point, the chances of roping in new customers is very low as a result of which the subscriber base is not growing any more. There is also the issue of a large number of inactive customers for various connections which is factored into the subscriber base but does not yield any revenue in real terms.

A recent report by the rating agency ICRA, released in October, said that the active subscriber base in the mobile phone segment only stood at 76 per cent and intense competition among companies led to frequent migrations between plans by the price-sensitive subscribers, leading to the proliferations of inactive connections. Inactive connections, while artificially inflating the subscriber base, do not contribute to revenue for the players in real terms.

This clearly points to a state of saturation in the mobile segment, especially the voice segment, in the telecom industry in India, which could partially explain the lack of enthusiasm of existing players in bidding for a pan-India licence for 2G. This further strengthens the contention of the CAG regarding the losses incurred as a result of the auctioning of 2G by former Telecom Minister Raja. The 2G spectrum was auctioned on a first-come, first-served basis by Raja at a time when there was still enormous potential for expansion in the market and thereby a huge possibility for revenue maximisation by the government through the sale of spectrum. However, with the 2G spectrum no longer being attractive for private players, the losses incurred by the exchequer are permanent and will be difficult to amend through re-auctioning.

Collusive Spectrum-sharing

The manner in which the 2G spectrum re-auctioning was planned also points to the larger issue of the government trying to legitimise back-door manoeuvres by private players to share spectrum illegally instead of garnering revenue through the sale of spectrum which is at its disposal. It is significant that this is linked to policy initiatives. Sebastin said, The [draft] National Telecom Policy 2011 seeks to legitimise the sharing of spectrum, which essentially means that none of the telecom operators has an incentive to apply for a pan-India licence. There is a possibility of them agreeing to bid only on select circles and then provide services on each others networks. The policy initiative amounts to a tacit encouragement given to the larger private players in the market to enter into a veiled agreement to avoid paying the legitimate licence fees for a pan-India spectrum.

In fact, a kind of illegal roaming agreement existed between operators offering 3G roaming facility. Three private operatorsBharti Airtel, Vodafone India and Idea Cellularwere accused of providing intra-circle roaming illegally in areas where they did not hold the 3G spectrum. Intra-circle roaming entails providing services to subscribers outside the telecom operators licensed zone of operations by entering into agreements at a mutually acceptable fee between partner operators. In December 2011, the government declared it illegal for operators to get into 3G roaming pacts. Subsequently, the Cellular Operators Association of India (COAI), an association of GSM (global system for mobile communication) operators, approached the Telecom Dispute Settlement and Appellate Tribunal (TDSAT) challenging the governments order. Following a split verdict of the TDSAT in July, the operators continued to offer these services. The Department of Telecom later issued show cause notices to Airtel, Vodafone and Idea asking them to stop providing 3G mobile data services through roaming pacts outside their licensed zones. The COAI, however, said that no operator was able to bid for a 3G pan-India licence because of the high costs of the spectrum and were, therefore, forced to go in for 3G roaming pacts.

Purkayastha also explained how policy decisions were increasingly designed to make bidding for circles unattractive. When there will be no extra roaming charges in addition to the call charges, there will be no incentive for the private operators to bid for new circles. The operator will be able to provide services outside the home circles for which he holds a licence without paying for the licence fees for the spectrum.

The lacklustre performance of the private players, for which a high reserve price of spectrum was being cited as a reason, hints at a possible move to rake in revenue from a policy direction which clearly prioritises access to natural resources for private players over revenue earnings for the exchequer. The COAI, however, said in a statement that an artificially high reserve price that bore no congruence to market realities was the key reason for the failure. Even before the auction, the COAI had stated that the high reserve price would ensure that there would be limited players coming into the market to bid.

The government has planned another round of auction on March 31, 2013, for the circles that did not attract any bids. In an environment of slowing economic growth, the revenue earned through the sale of spectrum was touted as a way of bridging the fiscal deficit. The revenue target of Rs.40,000 crore to be raised through the auction was an important component in meeting the governments plan of maintaining the fiscal deficit at 5.3 per cent of the gross domestic product (GDP). However, the manner in which the auction was carried out raises doubts about the sincerity of its commitment.

At a time when the telecom industry in India is going through a phase of transition with the market in the voice segment shrinking and expansion happening in the non-voice, data segments, it is important for the regulatory authorities to prevent monopolies from being formed for profit maximisation by large private players; enlightened regulation would serve the interest of the common man who benefits from affordable call rates in a competitive market rather than cartels that drive up prices. But the policy initiatives seem to be encouraging just the opposite.