These are the questions that are coming up after the results of the 2G auction of telecom spectrum this week came to be known. Government earned a meagre Rs 9407 crore from the auction of 2G spectrum for 101 blocks out of 176 blocks that were on offer. Following the flop auction, Kapil Sibal, telecom minister, had mocked the CAG’s calculation while asking in a joint press conference on Friday: “Where is the Rs1.76 lakh crore?”

The telecom industry’s response to the offer of auction of the 2G spectrum was bordering on non-participation. What else could have happened? After all, the first consideration for participating in an auction enthusiastically would be the security of ownership of the object being auctioned. The fracas that followed the discretionary allocation of spectrum by the former minister A Raja, and what followed thereafter, had put the entire operation into serious uncertainty.

After Raja had allocated the 2G spectrum to select few on the basis of the so-called “first come first served” basis, the entire issue went to Supreme Court. The apex court cancelled all licences and order fresh auctioning.

Thereafter, the Telecom Regulatory Authority of India (TRAI), highest regulatory body for the sector, got active and started dictating reserve price or base price for the spectrum auction. TRAI’s calculations of base price had to relation to a market price. The regulator calculated on its on norms and basis and felt that was the market price.

Government, beaten badly in the whole affair, first by the revelation of Raja’s discretionary allocation, secondly, by the Supreme Court verdict, and, finally, by the CAG computation of losses to exchequer for not auctioning telecom spectrum, had played it safe and by and large went by court directions, TRAI in holding auctions. Only intervention of the government was by lowering the reserve price a bit from Rs18,000 as suggested by TRAI to Rs14,000 as suggested by a group of ministers.

When policies go through such convulsions, it will be strange if the takers of spectrum feel too enthused about it. Even if the bidder bids actively and gets hold of the spectrum who knows there will not be some other faults found by someone and it is orders for a fresh round of auction or whatever?

The first issue is investor confidence. After all, telecom spectrum is an input for the telecom service companies to provide a product to be sold. This calls for investment subsequent to obtaining spectrum. These also impose certain financial obligations on the spectrum buyers. To induce the telecom players to put at stake substantial amounts of money, the first requirement is stability in policy and operational framework. That sadly was missing since 2008.

The yardstick for judging the 2G spectrum sale and the current auction was the stellar success of the 3G spectrum sale in 2010. The 3G spectrum sale had brought in for the government over Rs 1 lakh crore. A proportional pricing was done for 2G spectrum sale now at reserve price was set at Rs 14,000 crore. The government had calculated that for the limited offer now being put up for auction should bring in at least Rs 40,000 crore. It got less than one-fourth.

However, the economic situation between the two auctions in the country had changed radically. It was no longer the breezy feel-good factor, which had held sway then. There was so much more pessimism following slowing down of the overall growth rate. Hence, conducting an auction on the same principle and guidelines as the 3G auction now for 2G spectrum was sure to bomb. Like the first 3G spectrum sale, it should have been rescheduled for a better time when the current economic gloom would have lifted.

Secondly, the auction has been formulated wrongly. A high reserve price had already dissuaded many players from participating in the auction. A lower price at base with enthusiastic participation by many players would have secured a higher final price. Rather it happened the other way. Three of the most lucrative circles were not bid for and many of the larger players had stayed away. Some industry sources pointed out that many were participating mainly for the sake of taking advantage of their earlier payments to the government on the previously aborted allocation by A. Raja.

Thirdly, the question that should have been addressed first while formulating the auction was whether the objective was to maximise government revenue in the first place through an auction or was it to utilise a natural resource in the best possible interest of the consumers and the country. For many natural resources, the bids are held on profit sharing subsequent to commencement of operation. For example, in case of petroleum and natural gas, subsequent profit-sharing is what is auctioned among rival takers rather than upfront payment of a price.

Whatever methodology is pursued, the objective should be that there is no discretionary allocation on any ground. The norms for allocation should be clearly stated beforehand to all participants. These will be critically important consideration for future as the country will have to take such decisions for development of many of the upstream resources sectors. Even for developing the infrastructure sectors these functional points should be relevant. Underlying all these is of course the fundamental intent of those who are holding public offices for taking such decisions. No amount of checks could replace the basic honesty among them. That is what the CAG’s indictments are all about. (IPA Service)