|Economics 101 for SIbal|
|Tuesday, 07 December 2010 00:00|
If there are 575 applications and 122 slots, auctions are the only allocation mechanism that works
The PM thinks Raja should have auctioned the licenses. Sibal doesn't seem convinced. So the BJP should get the PM to argue its case in Parliament!
Will the real Kapil Sibal please stand up? The new telecom minister is busy removing his predecessor A Raja’s men and is even trying to cancel 85 of the 122 (41 dual-technology licences were also issued) licences he issued. But, at the same time, he’s defending Raja. This column, yesterday, dealt with how the ministry’s affidavit in the Supreme Court is still defending Raja’s actions, but you had to see Sibal on Karan Thapar’s The Last Word on Sunday to know just how Sibal is defending Raja. Perhaps he was scoring a point somewhere, it wasn’t clear what or where, but the defence was amazing.
In response to a question, Sibal asked Thapar how he’d deal with the situation (like the one facing Raja) where:
l Raja’s predecessors had given out 51 licences without auctioning in 2004-06, so why was he wrong in doing the same?
l How do you resolve a newcomer having to pay an auction price when the incumbents didn’t have to do this?
Wow! And Sibal still told Thapar he wasn’t defending Raja! Sibal said he was raising these questions because he was hoping a debate in Parliament would help clear the air a bit. Sibal is clearly trying to put the BJP on the defensive since Arun Shourie gave out several of these licences, but it does appear he’s being briefed all wrong—any lawyer as smart as Sibal knows that if a briefing isn’t good, what’s a poor lawyer to do?
51 free licences versus poor Raja: There is little doubt all 51 licences should have been auctioned instead of being given at the 2001 auction prices. The question, however, is whether the auction price would be much higher than the one got. It’s not possible to make the past happen again, but we can make some educated guesses. We know 51 licences were issued in 2004-06, and we know Raja gave 163 (including the 41 dual-technology ones) licences, so the government had enough licenses/spectrum for 214 areas. So, in 2004-06, there was one application for every four licences the government had spectrum for. In 2008, by contrast, there were 575 applications on October 1, 2007, and the government gave out 122 licences, which means there were 4.5 applications for each licence. The exact opposite of 2004-06! Which auction would fetch a higher price, Mr Sibal?
Also keep in mind that, of the 51 licences issued, 21 were in ‘C’ circles like Bihar, Himachal, Orissa and J&K, where, in 2001, there were no bidders. Indeed, in even the 3G auctions, these circles fetched just a fourth of the bids for ‘B’ circles, a twentieth of the bid for ‘A’ circles. So it’s not obvious there was a huge revenue loss for the government in 2004-06 on this account. Another 9 licences, of Tata Teleservices, were part of the full-mobility policy of 2003. As for those given in 2006, well, that was a UPA government, wasn’t it?
It’s interesting to keep in mind that none of these arguments are new, and PM Manmohan Singh was as much aware of them when he wrote to Raja, on November 2, 2007, asking him to auction. The PM knew that the government had enough spectrum to give out 200-odd licences, and he knew there were 51 licences issued in 2004-06; the PM knew the government had 575 applications and could give out only 122 licences. Yet, he was in favour of auctions. Perhaps the PM thought he had a better handle on economics than a lawyer?—like Sibal, Raja is also a lawyer.
As a leading lawyer, Sibal knows it is okay to stretch the truth, but he knows it is a crime to tell the Court lies, and to do this on affidavit is tantamount to murder. Yet that’s what the telecom ministry did under Raja (see Innocent of the law, FE, November 20, www.financialexpress.com/news/column- innocent-of-the-law/ 713547), and that is what the ministry under Sibal continues to tell the court. The ministry’s affidavit, for instance, says it is implementing the Trai advice of not putting a cap on the number of telecom service providers. But given that it had 575 applications, giving licences to 122 was a cap, wasn’t it? By the way, this tells you just how brazen the government is—the government made this exact we’re-implementing-the-no-cap-recommendation argument while defending Raja in the STel case, this is the argument the Delhi high court turned down, this is the argument the division bench and the Supreme Court also turned down, and yet Sibal’s ministry goes and makes it all over again before the Court.
Unitech vs Bharti Airtel: Why should Unitech, by way of example, be asked to pay an auction price for its spectrum if incumbents like Bharti and Vodafone got their licences free? This is the crux of the question Sibal and other Congress defenders are asking aggressively. Companies like Bharti and Vodafone will give you details to show this isn’t quite true—around 15 of Bharti’s licences, for instance, were got in auctions and/or bought in the market from existing players (and keep in mind the point made about the ‘C’ circles), but let’s ignore this for a while, let’s assume Sibal is right. The question, however, is: Should a person who’s buying land in Gurgaon today pay the same price as someone who got land in Gurgaon at a time when there were few takers several decades ago? That doesn’t need answering, does it, Mr Sibal?
Also, let’s understand what determines prices. Demand and supply, right? We’ve discussed the 1:4 versus 4:1 demand-supply equation, but what’s even more interesting is to see the subscriber numbers. In 2001, when the first auction took place, India had 4 million subscribers; in 2006 when Dayanidhi Maran gave out licences there were around 110 million; in 2010 when the 3G auctions took place, there were 620 million—in other words, with the subscriber base rising, and Raja giving out 163 licences in 2008, firms were desperately starving for spectrum in 2010 and were ready to pay anything for it.
To get back to Sibal’s demand for a debate in Parliament, given what’s just been said, Sibal would be better served by avoiding a debate since much of this will be pointed out. Imagine a situation where, to counter Sibal, the BJP calls upon the Prime Minister to defend the pro-auction policy! If that sounds absurd, keep in mind that all BJP leaders need to do is to read out the PM’s letter to Raja, again and again. And again.