Let us start with a few caveats. This piece doesn’t imply that the former telecom minister, A Raja, was correct in selling 2G spectrum cheap in January 2008. It doesn’t indicate that there were no irregularities or a strong whiff of corruption in the manner in which spectrum was allocated to new and existing telecom players. What this article proves is that though the Comptroller and Auditor General (CAG) had the right facts, its calculations about the benefits that accrued to private players were wrong.
The estimate of Rs 1,76, 645 crore being touted as the “notional loss to the exchequer” is a highly optimistic figure. Even the lower figures, between Rs 57,666 crore and Rs 69,626 crore, that CAG has calculated through other criteria may be way off the mark. The “real” loss to the government in the 2G spectrum scam would have been close to Rs 40,000 crore, which is still a huge figure by any stretch of imagination.
According to the CAG report, the higher figure of Rs 1,76,645 crore was arrived at by comparing the prices paid by telecom operators for 2G spectrum in 2008 to those paid during the auction of 3G spectrum in 2010. It justifies this by quoting from a Telecom Regulatory Authority of India (Trai) report (2010) that “2G services today are actually offering 2.75G services. Therefore, ‘while comparing spectral efficiency and other factors, it is fair to compare the existing 2.75G systems with 3G systems.’”
However, this is an unfair method to compute the notional value of 2G spectrum in 2008. Trai, in its September 2006 report, had recommended a reserve price of Rs 1,010 crore for the auction of 3G spectrum; this figure was enhanced later by the Empowered Group of Ministers to Rs 3,500 crore. But the fact remains that 14 months before the allocation of 2G spectrum, Trai’s reserve price for 3G was less than what was paid for 2G (Rs 1,658 crore).
In addition, the economics of the telecom sector had changed between 2008 and 2010. In 2008, mobile services became commoditised; margins were under pressure due to a steep fall in tariffs and ever-decreasing ARPUs (average revenues per subscriber). This was witnessed in the re-rating of telecom stocks, which took a severe beating in the stock market, partly due to the global recession and partly due to the pessimistic future of the sector.
Combine this with the fact that the allocation of 2G spectrum to new licensees meant the entry of newer players and, hence, implied more competition. This, in turn, would have resulted in a further squeeze on revenues, ARPUs, and margins. Given these reasons, any new player was liable to pay less for 2G spectrum allocation in 2008.
Between 2008 and 2010, the market dynamics changed. Despite competition, the market grew by leaps and bounds. Raja said that his allocation policy resulted in a huge increase in the number of subscribers — from 300 million to 650 million. But thanks to this, the existing players, especially biggies like Airtel, Reliance and Vodafone, were desperate to acquire 3G spectrum in 2010 merely to sustain their normal services like voice calls, with customers complaining about call drops all the time. Hence, they were liable to bid much more to acquire 3G spectrum than what they did for 2G.
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It should be added here that in some respects, comparing 2G and 3G is like comparing apples with oranges. 2G is used more for low-value services like voice calls and text, while 3G is supposed to generate higher margins through high-value services like data transfer. Hence, the value of a 3G licence should technically be more than a 2G licence; even if 2G operators are currently offering 2.75 G services, the data download can’t be compared with 3G.
The other method that CAG employed to compute the losses was to compare the price paid for 2G spectrum in January 2008 to sale of equity by new licensees, who acquired it in the second half of 2008. For instance, Swan Telecom sold 50 per cent of its stake in two tranches, which valued the company at just over Rs 7,000 crore, or over four times the Rs 1,658 crore it paid for the spectrum. Unitech sold 67.25 per cent at a price that valued the company at just over Rs 9,000 crore. Using these examples, CAG computed that the loss was between Rs 57,666 crore and Rs 69,626 crore.
Such calculations are beset with problems. Although CAG justified this by saying that the new buyers only paid for spectrum in such sales, this can’t be taken for granted. One always pays a premium to a seller who already holds the licence, especially since the new buyer would have had to wait for the auction of 3G spectrum (in 2010) to find a foothold in the Indian market. Time saved (in this case one-and-a-half years), in business parlance, is premium paid.
Finally, CAG used a third route to calculate the losses. “On November 5, 2007 S Tel Ltd, which had applied for unified access service (UAS) licence in September 2007, in its communication addressed to the Hon’ble prime minister voluntarily offered to pay an additional revenue share of Rs 6,000 crore to the DoT for a pan-India licence”, and through a further communication to the telecom ministry on December 27, 2007, “enhanced its offer… to Rs 13,752 crore”. If the last figure is taken as the real value of 2G spectrum, the notional loss works out to Rs 67,364 crore.
The Department of Telecommunications (DoT) pointed out to CAG, the S Tel offer came with a few “attached conditions to their offer which were not acceptable to the government”. The CAG report doesn’t mention these conditions. Well, if these included restriction on the number of new players in the future, it can be concluded that STel was willing to pay a premium over the actual price of the spectrum. Therefore, unless we know the conditions, this example cannot be used to calculate the losses.
So, the actual loss to the exchequer was definitely lower than Rs 57,666 crore, calculated according to the stake sale by Swan Telecom. If one feels that Etisalat paid a premium of, say 20 per cent, to buy a huge stake in Swan, the figure comes to less than Rs 50,000 crore. If the premium rate is raised to 25 per cent, the figure will be closer to Rs 40,000 crore.