Cabinet decision on 2G auction price demolishes zero-loss theory

The reserve price of Rs.14,000 crore/5 MHz set by the Union Cabinet for auction of pan-India 2G spectrum in the 1800 MHz band will eventually translate into a per Megahertz price far higher than even the CAG’s evaluation in 2010, which had invited the government’s wrath and scorn.

This establishes that the CAG was correct in both its upper end calculation of the Rs.1.76 lakh-crore loss and methodology adopted as part of the audit report on the 2G spectrum sale in 2008 which was presented to Parliament on November 16, 2010.

The CAG used the TRAI’s May 2010 recommendations which benchmarked 2G spectrum for 3G auction prices to arrive at its loss estimate. The final 3G bid price was Rs. 3,350 crore/MHz, while the Cabinet has set the base value itself (after discounting the TRAI-recommended base price of Rs 18,100 crore) at Rs. 2,800 crore/MHz, with the expectation that the final bid price will be far higher.

The CAG report prompted the Supreme Court to ask why the then Telecom Minister, A. Raja, had not been questioned by the CBI. This led to his resignation just two days before the CAG report was formally released. Unprecedented protests in Parliament led by the Opposition in the winter session of 2010 and a national outcry swiftly took the 2G scam to centre stage as the biggest scam in India’s history.

With the flames of the 2G fire threatening to spread to 7 Race Course Road, the new Telecom Minister, Kapil Sibal, held a press conference to demolish the CAG’s calculations, using a five-step process to conclude that the 2G scam was a figment of people’s imagination since in effect, there was “zero loss.”

Mr. Sibal questioned the CAG’s wisdom in comparing 2G with 3G spectrum, which, according to him, was like comparing a rural road with a highway. Highlighting the ‘time gap’ between 2G licensing in January 2008 and the 3G bidding in mid-2010, he raised doubts over the CAG’s methodology. However, now, the same 2G spectrum that Mr. Raja allocated on a first come, first served process in January 2008 is being auctioned at a reserve price only marginally lower than the final bid received in the 3G auctions. Ironically, Mr. Sibal, who has spent the last 20 months defending his zero-loss theory, was not only part of the EGoM and the Cabinet which made this decision but also additionally confirmed that he expected the auctions to fetch much higher revenue.

This despite Mr. Sibal’s explanation that the primary reason for avoiding market price/auction in 2008 was affordability and consumer interest. With the last 400 million — mostly the poor and lower middle class segments — left outside the mobile network, this affordability argument should have been far more pronounced today; except that the TRAI has mathematically demonstrated that a high auction price does not disturb affordable tariffs.

“The fixation of the reserve price by the Cabinet is a confessional statement that Mr. Sibal’s zero-loss theory was all propaganda and zero merit. It totally vindicates the CAG and his 2G report of 2008,” said Leader of the Opposition in the Rajya Sabha Arun Jaitley.

Prime Minister Manmohan Singh himself had criticised the CAG along with Planning Commission Deputy Chairman Montek Singh Ahluwalia, who gave several interviews against the loss estimates, including at The World Economic Forum in Davos in 2010. Eminent economists also participated in this exercise, while offering conservative loss estimates of Rs. 20,000-40,000 crore.

Hardly any new entrant

The other remarkable difference between 2008 and 2012, which also strengthens the CAG’s loss estimates, is that while there were 575 new applications pending for the 121 spectrum slots ultimately allocated by Mr. Raja, there is hardly any new entrant in queue for the 44 new slots (two slots of 5 MHz each across 22 telecom circles) that are on offer this time around. Additionally, the availability of debt and money supply as well as interest from foreign investors is low in 2012 compared to 2008.