February 4, 2012

The What Ho! Guide to the 2G Scam

There’s a storm brewing in this country, in the form of the alleged 2G scam, which has the potential to unseat the government. Given the complexity of this case, and our own lack of time to comprehend what’s being reported, not to mention who to believe about what, I figured I’d put together a simple dossary of facts and observations on this. Here’s everything you’ve always wanted to know about the 2G scam but were too afraid to ask.

The What Ho! Guide to the 2G Scam

Pertinent Facts 

1. 2G is a technology used to provide voice and data services by operators such as Vodafone, Airtel, BSNL, etc

2. Offering voice and data services requires something called spectrum – a band of frequency specifically allocated for this purpose – which is allocated to qualified operators.

3. Spectrum is scarce because it is limited to a specific band of frequencies.

4. To the seller, spectrum is free. There is no cost to creating spectrum since it’s simply the right to use air waves. This complicates things when you try to price it. If something cost Rs. 100, you could add a profit and arrive at a price for it. When a good does not have any intrinsic cost, pricing is subjective and purely driven by demand.

5. In countries all over the world including India, spectrum is treated as a national asset very much like land owned by the government, and sold by governments to buyers in the form of licenses.

6. To the buyer, spectrum is not free since there are limits to availability, and further because governments would like to derive income from the sale, just as they would if they sold a public sector company to private sector

7. The price paid for spectrum by operators affects the tariffs offered by them. As the price goes higher, so will the tariffs since operators have to recover their costs and make profits on the services offered

8. If the prices offered by operators are too high, the common man may not able to afford the services. So, it is not surprising that a government could deliberately set a low price for licenses so as to enable telecom services to reach the masses.

9. If the government deliberately under-prices spectrum, it need not necessarily be misconstrued as “losses to the exchequer”. In any case, any and all “losses” are notional since the government is not losing money out of its pocket. They are “lost” revenue (what could have been).

10. Hence it is the responsibility of governments to devise a proper mechanism so A. operators have a free and fair shot at winning spectrum bids. This creates a conducive business environment and promotes competition in the country which in turn benefits the customer. B. ultimately the needs of common people (consumers) are met, in the form of reasonable tariffs at adequate quality

11. There are several methods to selling a national asset. A couple are 1. Auctions – there are many types of auctions. Highest bid auction is the most well known. 2. First Come First Served (FCFS) – typically used to sell a distressed asset for which there are few takers

12. For something like 2G licenses which are in great demand and have high value and counterbalanced by the need to promote telecom services to the masses, selecting the procurement method is not simple and straightforward.

What happened

1. The NDA govt mooted the idea of First Come First Served. It was never made into policy or ratified by the PMO/Cabinet at that time.

2. The UPA govt which followed continued the FCFS line of thinking and converted it into policy. This was led by Dayanidhi Maran first and executed by A. Raja who followed him. Apparently, the PMO had objections, although I’m not sure exactly what and how forcefully they made them. Net of the story is that FCFS came to be the policy

3. The Telecom Minister A. Raja led the process of procurement – in which it is alleged that favoritism was exhibited in the FCFS process. In other words, some companies were prevented from coming in first, others were favored and another lot of them decided to stay out of the fray not fancying their chances.

4. A number of winners came out of this process – a good number of which turned out to be companies unconnected to Telecom. Some of them were clearly real estate companies and entered the fray for the sole purpose of not creating a telecom business but to re-sell their licenses to an operator for a profit. Think of them as touts and blackmarketeers who buy movie tickets in bulk in advance and sell to movie watchers for a profit. However, there is nothing illegal about a real estate company buying a telecom license, especially if the govt considered them “qualified buyers” when they bought them.

5.  Some of the companies who ended up as “winners” of 2G licenses, promptly turned around and sold their licenses to foreign operators for a hefty profit. The questions that this raises are: A. Did the govt have the right policy in place? B. Did they implement the policy fairly? C. Was the process of bidding subverted in favor of a few, friendly buyers? D. Couldn’t the profit made by these fly-by-night operators (adds upto to Rs. 20K crores+) have been made by the govt instead? E. Were there any individuals or companies who benefited illegally from this? In short, this looked and smelled like a scam when these details came out four years back.

A landmark Supreme Court judgement earlier this week

Earlier in the week, SC quashed 122 licenses granted by the government and asked for these licenses to be re-bid. The court did not place culpability or guilt on any specific person. Instead, it commented on the inherent unfairness of the FCFS buying policy as it pertained to sale of 2G licenses and also on the shoddy way it was implemented by the govt.

It also asked a Trial Court to decide if there should be a probe into the role of Home Minister, P. Chidambaram, who was Finance Minister during the period the licenses were awarded.

Observations

To even the most naive and under-informed observer, it is clear that there’s something rotten in Denmark. This smells like a scam. The reluctance of the govt to act/correct for four long years adds fuel to the speculative fire. This has gone on long enough. Our Prime Minister needs to speak up.

The UPA govt and the Congress party are trying to put lipstick on a pig when they blame the NDA govt. Blaming the NDA govt for FCFS is like Dhoni blaming Sourav Ganguly for losing in Australia. They are barking up the wrong tree. The Govt should stop patronizing the people of India and come right out and admit if there were mistakes, and penalize those who committed them. Their reluctance makes one wonder how deep this rot goes.

The BJP has done a poor job of holding people’s attention to pertinent details of this scam. The usual cry of the BJP to call for the resignation of the PM or Chidambaram is likely to fall on deaf ears as the party has 1. done nothing to expose the corruption 2. done nothing to merit their status as an opposition party. In fact, every statement made by BJP may actually weaken the case against the govt. Nothing works worse than a bad argument for a good cause.

Does the SC judgement mean that our cell phone tariffs are going to go up? Well, the telecom companies whose licenses are cancelled cover only 5% of the subscribers. It’s unlikely that prices will go up because of this judgement. The prices may go up for other reasons like  prices have gone far too low for operators to make profits in this market.

Update: The trial court has dismissed the petition from Subramanian Swamy to initiate a probe against P. Chidambaram. Subramanian Swamy has the option to appeal this judgement in the High Court and then the Supreme Court. Interestingly, Swamy’s petition to quash licenses was first rejected by the High Court before the Supreme Court upheld it. This legal battle is far from over.

There are some details which I’ve skipped to keep this readable. Do write back with your observations.

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