Home > Uncategorized > Telcom Scandal – Who decided FCFS policy should continue and why?

Telcom Scandal – Who decided FCFS policy should continue and why?

Quote 1:

“The PMO noted that “it was well known at that time that there were conflicting interests between existing operators and new entrants. The Prime Minister felt that this matter required detailed examination and deliberation by the Department of Telecom in consultation with TRAI and others.”

 

Quote 2:

“The Prime Minister’s Office has clarified on a file noting dated January 15, 2008 related to the 2G. The noting by his Principal Secretary said the Prime Minister wants to be kept at arm’s length on the issue of the sale of spectrum.”

 

Up there in those two paragraphs you have the heart of the Telcom Scandal. There was a clash of interests between existing operators, [read Bharti group] and new entrants, [read Tatas, Essar, Rcom] and Government was required to find a via media between the conflicting interests of the two groups. The existing players had been the ones who got their licenses dirt cheap in the first round of liberalization. They had been in business for almost 10 years and were running a highly profitable operation.  They were naturally keen to protect their turf and franchise. The new entrants on the other hand, were keen to enter the business having belatedly realized just how profitable the business could be. They wanted to enter the business as cheaply as possible. The existing players were keen to see that the Government charged them a high entry fee for their licenses.  That was the corporate war being waged behind the scenes. The PMO clarifications now establishes facts for the first time and confirms the clash of commercial interests for us as well.

 

Let us examine step by step how GoI went about resolving the commercial conflict of interest between the two warring groups forgetting its own vital interests in the process.  But first a word on the First-Come-First-Serve policy that GoI had adopted at the time of liberalization when the first bunch of Telcom licenses were given out in 2001.

 

FCFS policy has a rationale when [a] the Government is not able to properly price a service or a license and hence does not know what to charge, [b] the fee itself doesn’t matter in the overall public good and [c] the Government needs to be fair to all those who apply for the license or service. All three conditions obtained when the licenses were first given out to private players.  At that time, through stupor or whatever, Tatas, Rcom, Essar et al missed the bus because they never applied in time. They therefore have nobody to blame but themselves. The sole purpose of FCFS is to attract participation in a new venture being privatized for the first time because the potential is unknown. It is a one-time exception to the rule not a policy for all times to come.

 

By 2008, the Government had 10 years of data on private players in the Telcom field and was thus in a position to determine precisely the value of the licenses it was to give out.  Secondly, given the huge profitability of the existing players, the intrinsic value of the spectrum was known to be humongous.  Giving it away free should have been properly weighed against all options available to the Government including that of auction. There is absolutely nothing to show that somebody in Government carried out such an valuation exercise. Lastly, fairness demanded that existing and new players be treated differentially rather than on the same basis because existing players had taken on far more risk than the new entrants and thus were entitled to preserve their first mover advantage.  Hence, on all three considerations, there was no case for continuing with the FCFS policy in 2008.  That it was continued is itself highly irregular and the reasons that weighed for it to continue expose the real dimensions of policy errors that the Government made or was induced to make.

 

By the PMO’s own admission, the new entrants were actually fighting to get into the Telcom business by hook or by crook. If FCFS is meant to attract participation from potential players the very fact that they were fighting to get in shows there was absolutely no justification for FCFS from a public policy perspective.  Nobody was in any doubt as to Telcom’s profitability and attractiveness after 10 years of operating data from existing private and public operators.  The continuation of FCFS ipso fact is the single biggest contributing factor in the whole Telcom muddle.  Why did it happen?  This question has been neatly ducked by GoI spokesmen including Sibal as if the need for a level playing field among operators justified the continuation. That is logically incorrect. A level playing field in fact demanded the opposite!

 

An examination of the “level playing field” hypothesis trotted out by Sibal exposes a deeper contradiction in the way GoI went about resolving the corporate war between existing operators and new entrants.  As we saw, the existing players were within their rights to seek to preserve their first mover advantage in the form of a lower operating cost structure.  But let us put that aside and look at the matter purely from a Government’s policy perspective.  Government did not need to attract new players. They were fighting to get in and common sense shows they would have paid a fair price for the privilege of entry. Why not charge everybody, existing and new players, by auctioning the spectrum to be made available?  That would mean existing players would pay the same higher price for additional spectrum as the new players but also preserve the advantage on existing spectrum already with them.  So a level playing field for all.  But more importantly, GoI would earn a huge fee for the spectrum so auctioned.  As we know, this revenue could have run into a lac of crores or more. Not a small amount. So GoI gives up about 15% of its total annual tax intake just to ensure that new players are given the same benefits that existing players had with retrospective effect going back 10 years!  Does that make sense?

 

The question is who decided FCFS should continue?  On what considerations?  Was the alternative of auction considered?  Was the cabinet informed of the revenue loss implied? Who recorded the justification for continuation of a onetime exception to policy that the FCFS is.  Please note the subtle way in which the whole discourse around the Telcom scandal has been shaped to deflect people away from the core question of why FCFS was continued into side issues.  The main revenue loss to GoI and the consequent bonanza conferred on new entrants was occasioned not by Raja’s side show of out-of-turn shenanigans but by continuation of FCFS.  And corporate interest now forbid bringing that issue into central focus. But to get at the truth that is where we must focus, not Raja.

 

The revenue loss occasioned by FCFS has been justified on two counts by Sibal in debates.  Firstly, FCFS was a policy issue and GoI was well within its rights to continue an existing policy of the Government.  We have seen that to be specious and grossly incorrect because continuation of a onetime exception 8-10 years after it was made is ludicrous.  Secondly, Sibal has justified the revenue loss saying it translated into reduced tariffs.  That claim merits careful consideration.

 

We will never know how much of the revenue loss was indeed passed on to consumers by Telcom operators in the form of lower tariffs.  In Sibal’s favor one must concede that Telcom tariffs in India are among the lowest in the world. But was all of the bonanza conferred on the operators passed on to consumers?  That is unlikely to have been the case.  But Sibsl’s defense is bogus for a far more subtle and deeper reason of public policy.  Remember, the revenue lost from spectrum sale belongs to the General Budget as a capital receipt from where it could have been used to construct schools, hospitals, build roads or whatever.  Who is to decide if passing on lower tariffs to Telcom consumers is a more desirable policy goal for GoI rather than building schools or hospitals?  That decision cannot be an un-scrutinized decision of the DoT or the PMO.  Both have no business making such decisions. The proper course for GoI was to charge a fair fee for the spectrum and to make those funds available for allocation from the central budget.  Why should Telcom consumers be favored over say school children or rail and road users?  Hence Sibal’s attempt at explaining away the revenue loss is not only designed to mislead but is also deeply flawed conceptually.  Pity that Sibal’s obfuscation has not been subjected to due scrutiny.

 

The inescapable conclusion is that FCFS was continued in 2008 to favor the new entrants.  This favor went far beyond the contours of just a corporate squabble between new and existing players as it conferred a bonanza on both the groups far in excess of their dreams of avarice running into a lac of crores and more.  Why was this done?  The need for a level playing field is a red herring designed take focus away from the real policy error, induced or innocent one cannot say at this stage.  Furthermore, the people who should be scrutinized afresh are those who made the decision to continue FCFS and that means many more people than Raja alone. Only then will the full scale of policy manipulation come to light.  Raja may have had his own little scam on the side in terms of out-of-turn favors to other operators which the CBI is looking into.  But that wrong doing pales into insignificance compared to the loss occasioned to the exchequer by FCFS. Who decided FCFS must continue and why?  Was the revenue implication of such a policy examined?  If not why not?  If it was examined what was the estimated loss to the exchequer?  Who then decided it was well worth forgoing this revenue in order to create a level playing field for new entrants?  How was such hugely important revenue sacrifice justified?  Surely any responsible Government would have papers on record covering these questions?  Where are they?  Can they be laid on the table of the Lok Sabha to dispel any doubts that we have re bonafides of these decisions?

 

 

 

 

 

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Categories: Uncategorized
  1. Uma Nath
    August 1, 2011 at 8:02 am

    very thoughtful article. No one want to know the truth, everyone is just making noise, we are just noise making society. Even our knowledgeable PM and opposition is not ready to discuss each point in details so that it cant be repeat in future. Only blame game is continuing….

  2. August 1, 2011 at 8:17 am

    Good post. Makes one think. The whole framework seems to be working on smokes and mirrors.

  3. Ankit
    August 1, 2011 at 8:20 am

    Shut up and get lost you congressi chamcha

  4. August 1, 2011 at 8:28 am

    Hi,

    There is some misinformation in the blog

    1) Bharati was an existing player and Tata / Essar / RCom were new players in 2007/08 is a misconception. Essar has been existing(first as Hutchison Max, then Orange, then HUtch, then Vodafone) since ages. Similarly RCOM and TATA were existing players in CDMA and RCOM also went for Universal Licence after paying the charges / fees as decided by the Govt of the time. So, this LEVEL PLAYING FIELD argument is completely hogwash

    2) The author here is either confused or confusing people by linking Telecom Licenses with Spectrum Sale. TRAI had clearly recommeded that both should be delinked which was not followed by Dept of Telecomm

    3) MOF Secretary had clearly raised objection on FCFS policy and revenue loss and there was a detailed communication b/w MOF & DOT regarding the same. Even Fin Min concurred with Secretary’s view regarding revenue loss but one fine day after meeting of Fin Min and Raja, the view changed completely by 180 degrees.

    4) 2 Ministers viz Jairam Ramesh and Salman Khurshid had raised the objection this policy and as per Rules of Governance, a GOM shud have been set up for the same. But Raja brushed aside the objections stating they were out of context.

    5) The author suggests that Raja might had his mini scam running – If it had been a mini scame there would be no need for Raja to
    a) Change the way in FCFS is determined
    b) Give 45 minutes to applicants to submite DDs of 1680 crores.
    c) Prepone the cut off dates.

    The above are just observations at the first sight. If the author needs I can pontificate it para by para.

    • August 2, 2011 at 1:51 am

      70% to 80% of mobile telephony business in India is GSM for which RCoM or Tatas had no licenses. Essar had a limited patchwork in partnership with Hutch and were keen on a pan-India license of their own. Had all of them had what they wished where was the commercial conflict of interest that the PMO now concede existed?
      Imputing motives & and ad hominem commentary are typical traits of twitter trolls and merit no response other than contempt.

  5. abhijit ray
    August 1, 2011 at 8:55 am

    You made a very good point that why was FCFS needed in 2008 when people were fighting to get into telecom sector because of profitability. Raja continued with FCFS and gave preference to those close to him. Monetary loss to GOI, though presumptive, is a huge amount. This money if collected could have been used for greater social good. Instead private players made a killing. It is also right to say those who had taken an risk and made telecom sector profitable should be treated differently. But it can also be argued that they have already got the reward for their risk.

  6. Umesh Dhingra
    August 1, 2011 at 3:04 pm

    Congratulating you a another excellent balanced blog,wherein you hv covered the complete “spectrum” on the issues involved in the 2g case,or more important the genesis of this case.
    Hope to see some more similar blogs by you,soon.

  7. August 7, 2011 at 2:59 am

    A very good article.

  8. September 21, 2011 at 5:19 pm

    I like ur arguements focussed on fundamentals. Are you then elluding that the then fin minister had commercial interests in approving to the FCFS inspite of reservations by fin secy subba rao. Does it make him therefore guilty of unjust decisions and probably someone whose role needs to be investigated further?

  9. Abdulla Madumoole
    September 26, 2011 at 5:27 am

    Rubbish.Normal rhetoric, nothing new. Lacks basic business knowledge, knowledge of public policies and how the governments are run. Assuming that government is a business entity is height of stupidity.

  10. Bharathi
    September 26, 2011 at 5:55 am

    This is the most sensible/detailed analysis of the issue which I have read. There are also a few more points which we need to consider.

    1) The moment Unified Licence came in, the GSM/CDMA issue is kind of over. Tata/RCom were as much important players in the market(albeit smaller) as Airtel.

    2) Secondongly, we are jumping stright from 2001 to 2008. There have been additional spectrum handed out to existing operators(mostly GSM) few times between 2001 & 2008. And its also equally common knowledge that there were some players who did not get spectrum prior Unified Licence & subsequently due to lopsided(biased) allotments, many players suffered.

    3)”Subscriber-linked spectrum allocation” & hoarding. While the risk capital of the early movers like Bharti undoubtedly deserve a differential treatment in their favour. Its also true that the early mover advantage gave them a chance to deliberately “show higher subscriber nos” & hoard extra spectrum. The level playing filed was not needed if the early GSM players earned their advantage by merely employing HIGH-RISK CAPITAL & playing with the straight bat on extra spectrum. However, they were no saints & they lobbied hard & used all means to garner extra spectrum. They denied spectrum to late entrants(not brand new players), this bolstered the case of continuation of same policy.

  11. September 26, 2011 at 9:38 pm

    Good post and raises some aspects, hitherto not discussed – for e.g. who makes a call as to who should be the beneficiary of govt. largess – Telecom consumers alone or society as a whole (Via schools, banks, hospitals, etc.), and the need to re-review FCFS vs. auctioning in 08.

  12. soumitra das
    September 28, 2011 at 5:31 am

    Excellent article based on thorough understanding of the subject.thanks soumitra das

  13. Gujarati
    December 14, 2011 at 10:22 am

    Perfect explanation of 2G Scam …

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