dna edit: Win-win auctions

At the end of 10 days of intense bidding for airwaves, the government and telecom companies have much to be happy about. India’s leading private telecom players have won enough spectrum to operate a wide bouquet of services, including the next generation 4G services, for the next 20 years. The government —  saddled with a burgeoning fiscal deficit — earned Rs61,162 crore against an initial estimate of Rs48,000 crore, of which Rs18,296 crore will be realised this fiscal. While telecom companies have made the usual noises about call tariff hikes to account for the huge cash outgo in the short-run, they are silent about the significant long-term returns over this 20-year-investment. More importantly, the balance amount on the successful bids — Rs43,000 crore — has to be paid to the government over a 10-year period as equated annual installments. Even Telecom Minister, Kapil Sibal — he of the infamous “zero loss” theory on the 2G spectrum scam — had to eat his words and term the auction “extremely successful”.

The latest round of auctions — reminiscent of the 3G auctions of 2010 that had netted over Rs67,000 crore for the government — once again vindicates the Comptroller and Auditor-General and the Supreme Court’s view that scarce natural resources must be auctioned. The road to the February auctions was anything but smooth. At stake for India’s two largest telecom companies, Bharti Airtel and Vodafone, were its licences in the lucrative Delhi, Mumbai and Kolkata circles, which were expiring after a 20-year-period and alongside that, the spectrum in the efficient 900 MHz band. Their contention that occupying this spectrum for such a long period invested them with exclusive rights to it was rejected by the ministry and the courts. Their nervousness seemed to stem from the entry of Mukesh Ambani’s cash-laden Reliance Jio into the telecom space and the debilitating consequences of a bidding war on the auction process in these circles.

The success of the auctions is evident from the fact that the winning bids from the three metros stood at Rs23,590 crore — an 85 per cent jump from what was a very low reserve price. Of the spectrum blocks available for auction, all the blocks in the 900 MHz band and 85 per cent of the 1,800 MHz band were sold. Rewind to 2007-08, when former telecom minister A Raja doled out 122 licences to new telecom entrants for a paltry Rs9,200 crore by foregoing the auction route. Raja also refrained from hiking the low reserve price for licences, discovered in 2001 when the market was in its infancy, or setting a reasonable lock-in period to prevent those who were awarded licences and spectrum from selling it a premium. As a result, realty companies like Dynamix and Unitech, attracted by rent-seeking profits to be made, jumped into the telecom business, and quickly sold equity to foreign companies Etisalat and Telenor for huge profits.

Coal block allocations had a similar scam to tell. Coal blocks, valued at a conservative Rs1.86 lakh crore by the CAG, were doled out to private and public sector companies without auctions, lock-in periods, or time-limits to commence coal production. There is an important lesson from this auction. Once a level-playing, transparent environment is created for companies to compete, market dynamics and price consciousness will help discover a rational market price. The new government that takes power after elections must not forget this in its liberalising zeal.