Events & Issues

New Delhi, 28 March 2011

Spectrum Scam

TRANSPARENCY VITAL

By Col. (Dr.) P. K. Vasudeva (Retd)

The media report about the peculiarly one-sided contract between the Indian Space Research Organisation (ISRO) and a private entity called Devas, wherein satellite transponders and a wide swathe of frequency spectrum were leased out for a fraction of the latter's current commercial value, once again brings into sharp focus the need to constitute an body that will oversee the allocation/leasing of spectrum.

The Comptroller and Auditor General (CAG) is asking questions from the Department of Space in this regard. It believes, on a presumptive basis, more than Rs 2 lakh crore might have been foregone by the exchequer as a result of the contract. Eventually figures might vary, but the revenue loss cannot be overlooked. Notwithstanding the Government annulled the contract and the Defence Ministry asked why it wasn’t consulted on this serious security issue. Such losses have to be prevented in future.

Importantly, in purely economic terms, wireless spectrum is no different from oil or gas field, coalmine or even plain Government land. The common feature is Government ownership and the constantly changing commercial value. For example, the S-band frequency used to have some value, this dropped to almost nothing when the technology changed but, with another change in technology, it has once again acquired value.

It was partly in recognition of this that the Government constituted a committee to advise it on spectrum pricing two years ago. It will be argued by some that such committees do not serve the purpose for which they were intended. While there is some truth in that, going by the principle of something is better than nothing, the time has surely come to dilute the absolute power of the Government in such matters --- be it a resource, under the land, over it or above it --- by introducing a system of checks.

Who knows, what's been going on in the Defence sector, which is squatting on huge amounts of spectrum? Who would have thought that the Department of Space, which is directly under the Prime Minister, would have been so careless? Under any shroud of secrecy, costly mistakes can be made, even when there is no mala fide. Secrecy cannot be compromised. The last 63 years bear ample testimony to this.

In a sense, what needs to be done is to introduce a well-regulated market for spectrum, which is the composite name for a range of frequencies that are put to different uses. Such a market will ensure reasonably accurate price discovery and it will be superior to the current system where private information, Ministerial discretion and plain negligence can and do lead to thoroughly undesirable outcomes.

The Government needs to create a well-regulated market for spectrum, which will ensure accurate price discovery. It is time India moves to a system where prices of scarce resources are determined by the market rather than by a command-control-corrupt model. 

One of the premises of the economic reforms that Prime Minister Manmohan Singh initiated when he was Finance Minister during 1991-96 was that bureaucrats would no longer manage businesses. A sub-set of this was the non-negotiable requirement that they do not set prices because, as everyone knows, price distortions are a major reason for the misallocation of resources.

But habits die hard, especially when they can be beneficial as well. So it should come as no surprise, even if it causes some dismay that the Telecom Regulatory Authority of India (TRAI) in formulating pricing of 2G spectrum, used by the current set of mobile phone companies, should have decided that prices are best left to the markets.

As a result it has not provided a long-term solution to pricing a scarce resource; nor does it address issues that queer a level playing field. What it does is to create more confusion in an industry already bogged down by various scams.

The calculations are based on a number of assumptions that leave too much room for bureaucratic interpretation. It also seems to have ignored the fact that the recent auction of 3G spectrum has firmly established that the cost of a resource such as spectrum should be determined through a market-based mechanism.

Instead of suggesting such a mechanism, the telecom regulator has stuck to linear calculations. In May 2010, TRAI said that 2G spectrum should be allocated on a pro-rata based on the 3G price. Nine months later, after a review by four external consultants, it has thrown up another figure. Perhaps another review by a different set of experts would suggest a new price. Rather than relying on some mathematical equation, TRAI should have found a way to put the spectrum in the market place.

Thus, it suggested the Government should collect a one-time fee from operators with 2G spectrum at the rate of Rs 1,769 crore per MHz of spectrum up to 6.2 MHz and Rs 4,571 crore per MHz for anything beyond that. This will cost the telecom firms about Rs 16,000 crore, according to Government estimates. Over the next few years, this could go up to Rs 40,000 crore, when the operators go for renewing their licences.

While there is no denying that spectrum should be priced at contemporary levels, asking operators to pay with retrospective effect seems incorrect. Phone companies can trade off spectrum requirements with additional investments in infrastructure such as cell sites; their assessment of how much spectrum they will seek is therefore conditioned by the price of the marginal spectrum and the marginal investments they need to make.

Arbitrary price setting, especially one that disregards these economics and dynamics, can cripple the industry and push it towards a structure comprising a small oligopoly, just three or four firms, instead of a more robustly competitive market with eight or more players. The former would encourage collusion and the consumers' happy hours would be over. It is time India moves to a system that allows prices to be determined by the market rather than a Soviet-style command-control-corrupt model.

The Government is now thinking of bringing industry top guns, prominent bankers and former regulators on board in order to amend the entire financial sector norms and also to suggest ways to fortify its supervision system for checking frauds and irregularities. The panel would be responsible for reviewing and updating the entire financial sector regulations. According to sources, lawyers will also be included in the group and a Supreme Court judge might chair it.

Looking at the growing number of scams, the need to rewrite financial sector regulations has become more relevant. Important legislations like the RBI Act, framed in 1934, Insurance Act of 1938, Public Debt Act of 1944 and Securities Contract Regulation Act of 1956 are some of the old financial rules that need to be rephrased. It is never too late to carry out reforms. ----- INFA

(Copyright, India News and Feature Alliance)