The Telegraph
Thursday , November 15 , 2012
  This website is ACAP-enabled
Since 1st March, 1999
Calcutta Weather
Min : 18.50°C (-1)
Max : 30.00°C (-1)
Rainfall : 0.00 mm
Relative Humidity:
Max : 87.00% Min : 41.00%
Sunrise : 5:50 AM
Sunset : 4:53 PM
Mainly clear sky. Minimum temperature likely to be
around 18C.
CIMA Gallary

2G flop show casts cloud on cure-all auction therapy

New Delhi, Nov. 14: The 2G spectrum auction ended today after raising a modest Rs 9,407.64 crore in just 14 rounds of bidding — less than a quarter of the Rs 40,000-crore the government had been hoping to raise from the 20-year lease-out of scarce radio waves.

In contrast, the 3G spectrum in May 2010 had raised about Rs 70,000 crore after 183 rounds of bidding spread over 34 days.

But the disappointment over revenue earnings was overshadowed by an uncanny coincidence: the auction “discovered” a per megahertz price for 2G spectrum in the top six circles that worked out exactly to a 16.42 per cent discount to the 3G price.

Industry experts were quick to dismiss the back-of-the-envelope calculations as pure coincidence and contended that this was expected as the government had offered tiny slivers of 1.25Mhz each in the 1800Mhz band in the country’s 22 circles.

But there were some troubling questions about the effectiveness of the system of auctions itself and whether it was the best possible method to maximise revenues.

In January 2011, the telecom regulator Trai had asked a group of experts to determine the value of spectrum in the 1800Mhz band. At that time, Trai had indicated that it was not feasible to auction spectrum in the 800, 900 and 1800Mhz bands — the three principal spectrum bands used by mobile telephony companies.

In its report submitted to the government in May 2010, Trai had recommended that “3G prices (should) be adopted as the ‘current price’ of spectrum in the 1800Mhz band”. In the just-concluded auction, the prices were well short of the prices discovered in 2010.

Later, the regulator lobbed the ball to the group of experts and asked them to give their independent opinion on the value of the spectrum in the 1800Mhz band.

At that time, spectrum came bundled with the telecom licence. In most cases, the contracted spectrum was 6.2Mhz. But in some circles, the older telecom circles had incremental spectrum over and above the contracted amount.

In the case of contracted spectrum, the experts suggested a price per Mhz of Rs 149.78 crore for Delhi and Rs 101.11 crore for Mumbai. It suggested a value of Rs 49.48 crore in the case of Calcutta, Rs 153.77 crore for Andhra Pradesh, Rs 117.14 crore for Maharashtra and Rs 187.38 crore for Tamil Nadu.

Wednesday’s auction yielded revenues in all of these circles that were higher than the valuation set 22 months ago for contracted spectrum.

But if the value of the incremental spectrum suggested by the experts in a few key circles is taken into account, the 2G auction came up pretty short. Incremental spectrum in Maharashtra, for instance, was valued at Rs 302.08 crore while it was fixed at Rs 361.61 crore in Tamil Nadu and Rs 287.84 in Gujarat.

Ambivalent attitude

Ronald Coase — the British-born American economist — was the first to suggest the auction of electromagnetic spectrum in 1959 as a more efficient way to allocate a scarce resource. But it wasn’t until 1994 that the Federal Communications Commission (FCC) asked a bunch of economists and game theorists to suggest an innovative way to farm out the radio waves.

Ever since, there has been a raging debate over whether or not auctions yield the best possible way to maximise revenues from the sale or lease of an asset and whether the money so raised actually enhances public good.

At first, the proponents of the auction system — especially those who devised the spectrum auctions — won all the accolades.

Notable among them were people like the Oxford don Paul Klemperer who devised the auction of 3G spectrum in the UK in 1999 that raised a whopping $35.5 billion after eight weeks and 150 rounds of intense bidding among 13 contenders. At the end of it, five came through as winners.

But those high prices brought into sharp focus the concept of the “winner’s curse” —a sort of pyrrhic victory arising from the fact that the winning bid far exceeds the worth of the auctioned asset.

Within a couple of years, the telecom companies in the UK realised they had overpaid for the 3G spectrum and got sandbagged by investors who pummelled their stocks. Klemperer, however, continued to defend his auction system, arguing that his job was to maximise revenues for the government.

Not everyone agrees with Klemperer.

Bengt Nordstrom, who heads a Swedish consultancy, believes that auctions are really stupid and argues that regulators should focus on developing the sector rather than make money for governments.

Nordstrom believes that all the bidders who took part in the FCC’s first auction in 1994 eventually became bankrupt. That auction also led to the fragmentation of the US mobile telephony market and impeded the development of a nationwide mobile service. It’s only now after a series of bankruptcies and mergers that the US has some semblance of a nationwide telecom network.

“Auctions may be the best way of maximising revenue but revenue maximisation may not always be the best way to subserve public good,” a four-member bench of the Supreme Court headed by then Chief Justice S.H. Kapadia had said while handing down their verdict on a presidential reference back in September.

The presidential reference had arisen from a Supreme Court verdict of February 2 that scrapped the 122 licences doled out to a cherry-picked bunch of telecom companies in January 2008 in a scandal-tainted process initiated by disgraced telecom minister A. Raja.

The February 2 verdict had also suggested that auction was perhaps the best way to alienate natural resources from government ownership. The presidential reference questioned such an open-ended mandate from the court and wanted to know why it had come out so heavily in favour of auctions.

The four-member bench gave the government some wiggle room when it said: “Disposal of all natural resources through auctions is clearly not a constitutional mandate.”

The results of the latest auction are likely to force a re-think on the effectiveness of auctions to unlock the value of inestimable goods and services.

It will also bring some sobriety after the mind-numbing figures that the comptroller and auditor general tossed about in its November 2010 report while trying to estimate the presumptive loss the government had suffered as a result of Raja’s alleged excesses.

 More stories in Front Page

  • 2G flop show casts cloud on cure-all auction therapy
  • Chased to roof by mob, IPS officer fires
  • Crime pays in Assam, the rebel zone
  • Tampa temptations conquer war horses
  • Cheating racket fallout: PGI cancels MD/ MS entrance tests, 7,300 docs in a limbo
  • Six held for planter murder