Catch the Signal of Change

Economic Times, February 27, 2012

By Pradeep S Mehta

Delinking spectrum from licence will bring in transparency, competition among telecom players

Is India a banana republic or a dirigisme economy? Neither. Firstly, we are not a small country with a single export item, and we are neither a state-controlled economy. However, there is a preponderance of both elements in our governance system. In a colloquial sense, we are no better than a banana republic, where public interest is given the short shrift and crony capitalism rules.

The state does control a large part of our economy, particularly natural resources, and has failed in allocating them in a fair manner to the best possible bidder, whether it is minerals or oil or spectrum. And private interest overrides public interest, coupled with unjust enrichment of the polity, babus and businesses.

The doctrine of public interest has been reinforced again and again in all recent Supreme Court judgments. The latest one on cancellation of 122 mobile telephony 2G licences has been the most daring and forward-looking. This order will have an impact on other sectors as well as the whole governance system. Alas, it has affected many foreign phone companies, and thus raised fears over dampening of the investment climate. The manthan will most certainly lead to a better, predictable and cleaner policy environment in future.

The apex court is doing what the government should have done, but as we all know, the government has been behaving in a cavalier fashion, for obvious reasons. There has been no check on what it has been doing – or not – at all levels in our government system.

But for the apex court’s direction, a new Central Vigilance Commissioner would not have been appointed, and we would have had a compliant person who would not rock any boat. Prosecution of corrupt administrators, that happens rarely, too has been given a fillip by the court when it observed that approvals for action should be given within 3-4 months.

Quite often, it is the huge discretionary powers that the administrators have which leads to distortions and arbitrary behaviour. In terms of the latter, the apex court has set aside the huge tax claim on Vodaphone, and thus reinforced investment policy certainty and investors have heaved a sigh of relief. The government has filed an appeal against the order and what would be its outcome is yet to unfold, but it will be an interesting story.

Even in the case of the cancellation of the 122 licences, the court has asked the government to use the auction route and settle the matter within four months, rather than do it at their leisure. The government may ask for more time from the court, since they cannot do it so swiftly.

This is rather odd, that if the 122 licences could be awarded within a record time on a first-come-first-served basis, why would it be so difficult to conduct auctions within the time period. The limited time period is to ensure that serious parties, rather than rent-seekers, can bid.

Hopefully, firms such as Uninor and Sistema, who had already invested in rolling out networks, would get an opportunity to submit their own bids.

In all fairness, they should be given a preferred treatment. That would send a signal to the investor world that we are not a banana republic and can be pragmatic as well.

We have been pragmatic in the past. When the first set of mobile telephone licences were awarded during 1994-98, they were done on lump sum fees to be paid by the operators. Later, when operators found it difficult to pay out the huge sums, the conditions were changed to an easier revenue-share model in 1999.

Granted that bid conditions were changed post facto, and losing bidders were at a disadvantage, but no one complained as all of them had got a slice of the cake.

This experience has to be borne in mind by the government when going in for auctions of the 2G spectrum. Because there is always a risk of parties bidding very high in exuberance, that may end up in prohibitive costs and both the licensees and consumers would suffer.

To deal with this awkward situation, it has also been suggested that a hybrid model be adopted, wherein bidders can offer a bid with a one-time payment and a periodic payment for usage linked with earnings and spectrum-usage charges. For illustration of the second part, no user owns a tolled road, but pays for the usage through tolls whenever used. The Ashok Chawla Committee on Allocation of Natural Resources (CANR), in its May 2011 report, has also recommended the delinking of spectrum with licences, though not precisely recommending this method.

The CANR was established by the government in January 2011 to evolve a transparent, fair and predictable system for allocation of natural resources, after a spate of corruption scandals. It looked into all the kamdhenu sectors such as coal, minerals, petroleum, natural gas, spectrum, forests, water and land.

Expectedly, it hit various road blocks for the radical, though well-reasoned, recommendations to improve the system and reduce crony capitalism. Some of its recommendations are still being debated. While the government has published hard copies of the CANR report, it has been shy of putting it out on its website – so much for transparency and good governance.

Reverting to the issue of spectrum auctions, the apex court has directed that Trai should formulate recommendations for grant of licences and allocation of spectrum through an auction process.

Nothing prevents Trai to suggest the aforementioned hybrid model, with safeguards, as the most pragmatic one. A counter-argument would be that such a system is not being followed anywhere.

But as the noted jurist Lord Denning said, “If we never do anything which has not been done before, we shall never get anywhere. The law will stand still while the world goes on and that will be bad for both.”

The author is secretary general, CUTS International.

This article can also be viewed at: