India: Failed 2G spectrum auction doesn't mean govt was right to allot licenses

The United Progressive Alliance (UPA) government's effort to erase its past failures with the auction of 2G telecom spectrum licenses that were cancelled by the Supreme Court due to allegations of corruption in the allotment process has turned out to be a flop. But its failure to spark a bidding war between industry giants should not be confused with proof that there was nothing wrong with the first-come, first-served system used in 2008, argues's R. Jagannathan.

As GlobalPost reported earlier, the government supposedly hoped to generate some $7.5 billion in revenue from the auction, but the bidders had other things in mind.

But the auction doesn't vindicate former telecom minister A. Raja, who is accused of taking kickbacks in exchange for bumping certain firms to the head of the line in the "first come, first served" allotment of licenses -- which has nothing to do with the theoretical value of the licenses set by the Comptroller and Auditor General in arguing for a transparent auction. And it doesn't let replacement telecom minister Kapil Sibal off the hook for defending "the indefensible: sale of 2008 spectrum at a non-market determined price of 2001," Jagannathan points out.

Here's his eight "take aways" from the damp squib.

1. More corruption?

"First, there was probably a degree of collusion or prior agreement among the big players that they will not bid seriously. This needs to be investigated."

2. More corruption?

"Second, it is highly unlikely that the government would not have known how the bids would go. Bharti Chairman Sunil Mittal gave the game away when he said the auction would be over in a day." 

3. Bad timing.

"Third, the failure is more the result of wrong timing and bad investment climate – both of which are the result of the UPA’s inability to manage its policies right over the last three years. If the 3G auction timing came when business optimism was rising, this time it was the exact opposite. Moreover, the auction may have fared better without a high floor price."

4. The time for cheap licenses is finished.

"Fourth, there is no case for pricing spectrum low – especially when India has achieved high teledensity."

5. Back to first-come, first-served?

"Fifth, the government should not now make the mistake of lowering the reserve price. Instead it should allot spectrum at the reserve price to whoever needs it. It can be first-come-first-served again – and this time it could work better since players would have no opportunity to collude."

6. Government-fixed prices, instead of cartel-fixed prices

"Sixth, since the one-time spectrum fee and other prices are decided by the auction, the government will have to fix new prices for these. It should now fix them on the basis of the reserve prices and not buckle under the pressure from industry."

7. Foreign investment can beat corruption?

"Seventh, some policy changes will change the picture. If, for example, 100 percent stake is allowed to foreign players, it would be impossible for the spectrum price to remain unbid for long. This is a key correction needed in policy since it is clear that many Indian players do not have the money to grow the market and are in the game only to collect rents."

8. More corruption?

"Eighth, the fact that big players like RCom and Reliance did not bid means the failure was preordained. Wonder why the government never asked why. The first clue came when the CDMA auction had no bidders."