Spectrum sale a vindication of auction process

Regardless of how successful the current round of spectrum sale is, the impact of auctions on the business culture in India is undeniable. The era of favours and kickbacks fostered by the old system of awarding licences through beauty parades is clearly discredited particularly in rent-seeking industries like mining, power and oil and gas, besides telecom. As compared to that old method where the government decided who they wanted to favour when giving out licences, auctions ensure the arbitrariness along with the corruption it inevitably engendered is minimized.

That might not be such a revelation today. But when the idea of auctions as a way of deciding who would be given licences to operate telecom services was first mooted, one of the arguments against it was that rooted in the old way of doing business by stealth, Indian companies could never be forced to follow such a transparent process. Of course, there were other arguments, that the high prices paid in the auctions would eventually be loaded on to customers or even that auctions would force companies to bid their way to the bottom. The first didn’t happen and though we have seen a fair bit of the second (of the original list of 20 odd bidders, no more than half a dozen have survived) the problem may only have been in the design of the process rather than the process itself.

Subsequently, there have been auctions for private FM radio as also to lease coal and gold mines. Irrespective of the financial viability of the ensuing bids, there is no question they were the best way of ensuring fair play, besides maximizing returns for the government while minimizing costs for customers.

In fact, a May 2015 analysis by Climate Policy Initiative and the Indian School of Business demonstrated that auctions for solar power, worldwide and in India, have resulted in tariff reductions of up to 58%. In countries other than India, auctions for wind power have resulted in tariff reductions of up to 30%. The report also posited that using auctions to procure renewable energy projects can be effective in meeting the government’s dual goals of the deployment of ambitious renewable energy targets and meeting those targets cost-effectively.

Also Read: Reliance Jio, Vodafone, Airtel target select spectrum bands after a lukewarm start to auction

Of course, it hasn’t always been smooth sailing. In India, telecom licences were first auctioned for basic and cellular services in 1992 by the Department of Telecom (DoT). It wasn’t an ideal situation. DoT was then policy maker, regulator and service provider. Yet despite some hiccups, the auction served its purpose though there were pointers of abnormalities in terms of the pricing for spectrum. To address these, in 1993, the government set up the Spectrum Management Committee which looked at parts of the auctions that had not been so successful leading to defaults. Its offshoot, The Spectrum Pricing Committee looked at various ways of pricing spectrum and recommended that “auctions, transferable and flexible spectrum rights, and well-designed fees can enable a number of the benefits of a market approach to be realized”.

The auction model came up for scrutiny again in 1995 when the government auctioned another chunk of spectrum in the 900MHz band for GSM-based mobile services in non-metro circles. Unfortunately, consequent to a design flaw, a single company, Koshika Telecom, bagged 14 licences. With its turnover at that stage less than 1% of the estimated licence fee of about ₹ 57,000 crore, it was obviously a non-starter. That and the fear of a state monopoly being replaced by a private one forced a rule change whereby a company could choose to be active in only three circles.

The final nail in the coffin of discretionary processes came when the Supreme Court in 2012 cancelled licences issued to telecom companies by “administrative allotment” in 2008 for the 2G spectrum. The court directed that fresh licences should be granted by auction of the spectrum and came down heavily on the government for selling them on a first-come-first-served basis rather than conducting a transparent public auction. It called the allocations an “arbitrary and unconstitutional exercise”, which facilitated corruption.

Auctions, in whatever shape and format, are clearly the proven way of selling natural and other resources that belong ultimately to the citizens of a country. As newer sectors like defence are opened to the private sector, the government would do well to keep in mind the lessons of the last two decades in creating more transparent processes.

Also Read: Muted response to spectrum auction

Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week. To read more from The Corporate Outsider, click here