Prabir Purkayastha

10th October 2011

THE more things change, the more they remain the same in telecom. Even after the massive 2G scam that has rocked the country, more of the same are in the offing. In 3G, various parties are now violating their license terms and conditions by offering services in service areas where they do not have licenses. And true to form, the department of telecommunications (DoT) continues to wink at such violations despite unions in various organisations including the Bharat Sanchar Nigam Limited (BSNL) unions having brought this to their notice.

CONTOURS OF CURRENT SCAM

Briefly, the salient features of the current scam is that 3G licenses were offered for auction in 2010, using a multi-stage bidding process. In this regard, Vodafone, Bharati Airtel and Ideas, decided that they would not bid for all the service areas but bid in a way that at least one of the three parties secured license for each state. This strategic bidding becomes obvious if we see the successful bids --- in none of the service areas we have all the three parties, and yet virtually no service area has been missed out, one or another party has secured license for every service area except the lone state of Orissa. Out of 22 service areas, Vodafone has secured license for 9, Airtel for 13 and Idea for 9. Against the total license fee of Rs 16,750.6 crore, Vodafone has paid Rs 11,617.9 crore, Airtel 12,295.5 crore and Idea only 5,254.6 crore, saving thereby over Rs 20,000 crore, if they had to secure a pan-Indian license. And yet, by using each other's network, they are now offering full-blown pan-Indian services --- they now have customers in areas for which they do not hold licenses.

In fact, wherever they are offering services where they do not have a license, they pretending that they are using roaming arrangements. The GSM Association, representing GSM operators worldwide, defines roaming as “…..the ability for a cellular customer to automatically make and receive voice calls, send and receive data, or access other services when travelling outside the geographical coverage area of the home network, by means of using a visited network.” Clearly, roaming cannot involve subscribers who do not have such a home network but are roaming on another network as home. It cannot be used to offer services in areas where the operator does not have a license or a network.

Interestingly, one of the recurring features of telecom scams have been that the current scam becomes incorporated in the next policy. Now a new telecom policy is in the offing – the NTP 2011. True to form, there are now indications that the policy will allow “sharing” and “trading” of spectrum to “regularise” the current violations. For example, Shades of the Limited Mobility, under which guise Reliance Communications, earlier Reliance Infocomm, tried to offer full-blown cellular services, was finally regularised as UAS license in 2003 by the NDA government.

REGULARISING THE VIOLATIONS

A set of services can be offered using wireless spectrum: through radio waves, it is possible to offer mobile voice services or Internet services. The G in 2G or 3G refer to the kind of technology used: 2G is Second Generation technology, both GSM and CDMA. India never used first generation cellular or mobile technology which was analogue – it started straight way with digital technology, which was considered second generation. Initially, like many other countries, India chose GSM technology as the standard, allowing easy roaming by the subscribers, not only between circles but also abroad. GSM was the de facto global standard except in the US and countries close to US technology players. In the US, instead of GSM, digital AMPS was used initially, followed by CDMA technology.

The cellular tenders for both metros and the circles had GSM as the only acceptable technology. Subsequently, the Basic Services Operators (landline operators), who were allowed Wireless in the Local Loop (WiLL) --- connecting the subscriber's homes to telephone switch via wireless --- started using CDMA for this purpose. This resulted in the infamous Reliance Infocomm's scam in which the WiLL spectrum was used to offer full mobility in violation of the license terms and conditions. This was fought in TDAST and in the Supreme Court, with both judging that the Basic Service Operators could not convert WiLL to full-blown cellular services as it was a different license. Finally, Arun Shourie overrode these orders by bringing in a Unified Access Service License in 2003 that allowed Basic Service Operators to offer cellular services by paying the 4th operator's equivalent license fee. This is the UASL license fee --- Rs 1,658 crore --- discovered through a multi-stage bidding process in 2001. This is of course also the sum that Raja fixed in 2008 for the new 2G license.

The 3G license is an amended version of the original UAS License and refers to the 3G spectrum for mobile voice, data, video and internet services. It is clearly a new service requiring a separate license, which was what the 3G auction was all about.

As per the UAS License, it is very clear that under clause 2 (a)(i) the licensee is not allowed to offer any other service if it requires another license. Obviously, offering 3G service in a service area for which the operator did not have a license is explicitly barred under this clause.

COLLUSIVE BIDDING

However, though the three parties --- Vodafone, Airtel and Idea --- have been advertising for subscribers in areas for which they do not hold licenses and have openly declared on their websites that they have such subscribers, there are two sets of issues that arise out of the violations of the 3G license. One is the loss to the exchequer that has taken place for violating the conditions of bidding and entering what is patently collusive behaviour in the 3G auction. The second is the damage to other parties who secured licenses and are operating within their license conditions, particularly the BSNL and MTNL who together have a pan-Indian license. We will take each of these issues separately.

The 3G auction was a multi-stage bidding conducted in April-May 2010 --- over 34 days and 183 rounds of bidding. A total of 9 parties participated for the 22 service areas. In some of the areas, based on the frequency or spectrum avoidable, there were 4 slots/licenses available while for others, there were only 3 slots. Though the reserve price for the 3G spectrum for all the 22 circles was Rs 3,500 crore, the price went to Rs 67,719 crore, indicating the value of the 3G license.

The procedure for the auction was that in each round, parties would bid for the round price, with the first round starting at the reserve price. If the bidders were equal or less than the number of slots for the service area, the bidding would stop. If not, in each successive round, the round price would be increased by a percentage varying from 1 to 5 per cent, depending on the excess demand --- the number of bidders that was more than the number of slots in that service area.

Obviously, if the bidders could collude amongst themselves, they would reduce the number of bids and could keep the round prices lower. As the bidding went on over 34 days, the bidders could --- if they wanted to violate the bidding terms --- work out a collusive strategy. They could decide that they would not quote for all the service areas but allocate who would bid for which area. If we look at the winning bids, we see a clear pattern --- the three parties (Vodafone, Airtel and Idea) in the final round did not have any service area where all the three had quoted. They had at most two bids amongst themselves for each of the service areas in the final round, in some cases, only one. Apart from Orissa, they had at least one successful bid in every service area in the final round. This is almost statistically impossible as a coincidence --- without collusive bidding.

There is no doubt that without such collusive bidding, the final 3G license prices would been higher. The round prices would have been higher in each round with more bids in the fray and therefore more excess demand and the number of rounds would have also increased. By artificially reducing the numbers by such collusive bidding, the three parties have kept the final prices lower by at least 25 per cent. Not only they, but also all the successful parties have paid lower and the total loss to the exchequer is therefore of the order of Rs 15,000 to 20,000 crore.

DEFRAUDING THE EXCHEQUER

However, this is not the whole story. This collusive bidding was not only for keeping the final license price low. It is now clear that the parties had no intention of abiding by the license terms and conditions and wanted to offer full 3G services in all the areas by using each others licenses. This is particularly important as there are now a whole generation of equipment --- tablets, I-Pads, Kindle book-readers all of which need 3G services to provide full benefits of the devices. For an operator to provide all India coverage is important as obviously manufacturers of such devices would like to tie-up with parties who have such spread.  Having limited coverage would mean that other operators with a better spread would have an advantage. Therefore, collusive bidding was only one part; the other part was to offer all-India coverage without the necessary licenses. By doing this, even if we take the current final price, they have saved for themselves around Rs 20,000 crore --- the cost of the final licenses for those service areas they did not bid but are offering services.

This is not the only saving that these companies have made. As per the 3G license, each of the successful parties has a roll-out obligation and also need to take clearances for their networks and equipment from various authorities. For example, BSNL had already spent Rs 2,700 crore way back in early 2010 to get ready for 3G services. By not having any roll-out of infrastructure --- towers, cells, switches, other equipment --- these parties have saved not only license fees but also the capital expenditure required for building this infrastructure.

This is where the level playing field comes in. Now we have two sets of operators --- those like the BSNL and MTNL, who have paid full value of the license, have put in all the required infrastructure, have taken all the required clearances, and others who are just piggybacking on their “partners.” By sharing spectrum and infrastructure among themselves, they are spending much less to provide the same service.

On would have thought that the past scams in telecom would have kept the DoT and the Telecom Regulatory Authority of India (TRAI) alert. But alas, we have the same scenario repeated all over again --- a scam is brought to light, authorities refuse to act, a hue and cry takes place, the courts intervene, but all the while the scam continues. Ultimately, even if a few Rajas are caught, beneficiaries of the scam still enjoy the benefits. If the 2G licenses were procured fraudulently as is now accepted, none of the parties that procured licenses by such corrupt prices have had their licenses cancelled. In the WiLL conversion to full mobility via UAS License, the companies perpetrating the scam finally got a full pan-India cellular license without ever quoting for one. And now, we have yet to see any action against parties offering 3G services without licenses. Instead, we have the minister of communications and information technology talking about an NTP 2011 which will allow spectrum sharing and spectrum trading. No wonder Airtel jingle sings --- har friend zaroori hota hai (every friend is needed). The question is: Who are these zaroori friends? Are they only Vodafone and Idea, or does the friendship extend much further?

Prabir Purkayastha

4th October 2011

THE United Progressive Alliance (UPA) is sinking deeper and deeper into mire in the 2G case. It is now clear that the then finance minister, P Chidambaram, had indeed given his concurrence to pegging the license fees for 2G in 2008 to the 2001 level. This is the core of the 2G scam that has led to a huge loss to the exchequer. It is not, as Kapil Sibal, the current minister of communications and information technology, would have us believe that the scam is merely of procedural violations in award of the licenses. In Kapil Sibal's scheme, there has been “no loss” to the exchequer, a claim repeated ad naseum by him and the Congress spokespersons: only some lapse in which some people jumped the queue and got licenses in preference to others.

CLEAR ROLE

It is now clear that the finance minister, after initial opposition to awarding license fees in 2008 at the 2001 prices, had finally fallen in line with A Raja and given his consent. This is now public – thanks to an RTI application. The minutes of the Meeting on Allotment and Pricing of Spectrum between A Raja and Chidambaram of January 30, 2008 in its Point 5 states:

“FM said that for now we are not seeking to revisit the current regime from entry fee or revenue share.”

Finally comes the admission that the finance ministry had given its consent to pricing of spectrum at throw-away prices. If Chidambaram's involvement was in doubt, the note of the finance ministry dated March 2011makes it amply clear that the finance ministry had the possibility of stopping the issuing of licensees on a number of occasions. Though the LOIs were issued to the parties on January 10, 2008, the actual license agreements were signed after the meeting in which Chidambaram had given his consent and the allocation of spectrum took place only in April 2008. The note reiterates in a number of places that though the finance ministry officials disagreed with the Department of Telecommunication (DoT) officers on the spectrum allocation and pricing, there was “consensus at the levels of the ministers concerned.”

On February 16, 2011, in a meeting with TV editors, the PM had stated that the finance ministry and the DoT had “concurred” on the issue of spectrum pricing, consistent with the requirement of the NDA’s cabinet decision of 2003. The cabinet decision on October 31, 2003, while clearing various licensing issues, had recorded that “The Department of Telecom and Ministry of Finance would discuss and finalise spectrum pricing formula, which will include incentive for efficient use of spectrum as well as disincentive for sub-optimal usages.”

The Justice Shivaraj V Patil report, that went in telecom matters, also states, “The spectrum pricing had to be finalised by DoT and MoF as required by the cabinet decision dated 31.10.2003.”

This was also the understanding of the CAG, as borne out by its report.

Even without this explicit reference to the need of finance ministry for concurrence in the cabinet decision of 2003, Rule 4 of the Government of India (Transaction of Business) Rules,  Article 77(3) of the Constitution, clearly stipulates that any decision which  may involve “any abandonment of revenue or otherwise have a financial bearing whether involving expenditure or not,” cannot be done without the concurrence of the finance ministry. In case this is not forthcoming, the decision has to go up to the cabinet.

THE KEY QUESTION

The key question therefore has been this: Did the finance ministry agree with the DoT that the license fees for 2G licenses must be at the 2001 level as the PM had said? Or was there a difference between the finance ministry and the DoT?

The question assumes importance as there is ample evidence in the files that senior officials of the finance ministry, including the D Subba Rao, the then finance secretary and now the governor of the Reserve Bank, had opposed the allotment of licenses at the 2001 prices. In a letter written on November 22, 2007, Subba Rao had said:

“The purpose of this letter is to confirm if proper procedure has been followed with regard to financial due diligence. In particular, it is not clear how the rate of Rs 1600 crore, determined as far back as 2001, has been applied for a license given in 2007 without an indexation, let alone current valuation. Moreover, in view of the financial implications, the ministry of finance should have been consulted in the matter before you had finalised the decision.”

Was he finally overruled by his minister? Why did the finance ministry not pursue the issue further?

Did the finance ministry have the power to stop this decision that DoT and the ministry of communications & information technology was taking, clearly involving a loss of revenue?

Under Rule 7 of the Government of India (Transaction of Business) Rules, all the cases specified in the second schedule, which include cases involving financial implications on which the minister of finance desires a decision of the cabinet and the cases in which a difference of opinion arises between two or more ministers and a cabinet decision is desired, must be brought before the cabinet.

So there are three clear grounds on which Chidambaram could have stopped the 2G scam. One was the cabinet decision, which clearly stated that on all future spectrum pricing the ministry of finance and the DoT would jointly decide on the pricing; the second was Rule 4 of the Business Rules; the third was the Business Rule 7. To date the picture given is that all that Chidamabarm did was that in spite of his opposition, his only act was one of omission; he did not bring this to the cabinet and allowed Raja to proceed in violation of all the three procedures cited above. Now it transpires that there was something more – he had met with Raja and had agreed that this matter was now closed and Raja could proceed on this matter.

SERIES OF MEETINGS

The finance ministry's note is being used by the media to indicate that this is only a difference between two senior ministers in the union cabinet. This is of peripheral importance to the country. What the finance ministry's note of March 25, 2011 really does is that it details out all the options that the finance ministry had before it to stop Raja's 2G scam. It systematically details the finance ministry's position and how, from a position of opposition to licenses being given at the 2001 prices, the finance ministry finally held consultations with the DoT only on the prices of spectrum beyond the start-up spectrum bundled with the license. On the rest, it had given its consent.

Chidambaram has been extremely coy about his role on the entire issue. For a long time, the only meeting about which people knew was the one held between Raja and Chidambaram in May 2007, in which no minutes were issued. Till the documents came out of the PMO on the minutes of the meeting of January 30, 2008, nobody knew about this meeting, nor was anyone aware of its content. Nor were people aware of the number of meetings held between the finance ministry and the DoT on the 2G issue. The finance ministry's note to the Prime Minister’s Office (PMO) of March 25, 2011 makes it clear that indeed a series of meetings did take place between the finance ministry and the DoT and that finance ministry was only limiting itself to matters beyond the initial spectrum, the core of the scam.

The standard tactic of the UPA has been to bury the Joint Parliamentary Committee (JPC) and the Public Accounts Committee (PAC) under a mountain of papers while withholding vital evidence. However, it is becoming increasingly difficult to claim, as the Congress has been doing, that Raja was a rogue minister and that the 2G scam was entirely his doing. Now there is ample evidence to show that the finance ministry, the law ministry and also the PMO were fully aware of the issues and about what Raja was doing. There was a statutory obligation of the finance ministry to agree to the license fees being maintained at the 2001 prices, which the finance ministry was fully aware of and had indeed brought this to the notice of the DoT. The finance ministry had ample opportunities to stop the scam at various stages. It was the finance minister who finally gave his consent to the scam, overriding the officials in his ministry.

The fact that Chidambaram as the finance minister gave his consent to the 2G scam does corroborate what the PM had said in February 2011, but does not absolve him either. After all, India has a cabinet form of government, where the entire cabinet is responsible for its actions. On a matter involving 1.76 lakh crore rupees, the argument cannot be that it was the act of only two ministers. The PM as well as his other colleagues knew about what was happening. The PM was the leader of his team and fully in the know, and still he let the scam take place. He may still talk about his honesty; his personal integrity is not the question. The question is of a prime minister allowing a scam to take place with his full knowledge; the fact that he has not benefited in money terms from the scam is hardly the issue. Integrity is not only a question of personal honesty; it must also be ensured that the institution he heads – the union cabinet – remains honest. Unfortunately, today the picture the nation has is that he is heading the most corrupt government ever, where scams worth thousands of crores appear to be mere chicken feed. That is the real tragedy of this country.

24th June 2011

Prabir Purkayastha

LAST week we had dealt with the broad issues in the KG Basin Gas scam, in which the CAG’s findings are only one element. In this article, we will focus on what the CAG has noted in its draft report about the KG-6 block and the production sharing contract (PSC) between the government of India and the Reliance consortium. In this consortium, Reliance held 90 per cent shares and Niko 10 per cent, with Reliance being the operator.

CAG’S KEY FINDINGS

The key findings of CAG (Comptroller and Auditor General of India) are as below.

1) Even though the PSC envisaged a phase wise vacation of the contract area for exploration under the New Exploration License (NELP), finally confining the operator to retain only the area from where commercial production takes place, the Directorate General of Hydrocarbons (DGH) and Ministry of Petroleum allowed the Reliance to retain the entire exploration area as “discovery area” in gross violation of the contract.

2) The Reliance never submitted a comprehensive field development plan, as called for in the contract. Instead, it submitted an initial development plan (IDP) with an outlay of 2.2 billion dollars in 2004 and issued an addendum to the IDP (AIDP) worth an additional 6.6 billion dollars.

3) The Reliance started procurement action even before the Addendum was submitted or passed, indicating clearly that they took the government’s approval for granted.

4) Reliance added 746 million dollars to its cost, which it had not incurred, as “estimated liabilities,” in violation of specific provisions of the contract and of all accounting norms.

5) Various sweetheart deals with its suppliers, the most flagrant one being that for a floating production vessel for 1.1 billion dollars. It appears that this was a 26 million dollar vessel, converted to a floating production vessel taken by the Reliance on a 10-year lease.

The CAG has stated that it would like to go into each of the sub-contractor’s prices and audit them further. Prima facie, a number of these contracts seem to be completely ad hoc, based on single party offers, change of terms and scope during the course of the contract, etc.

If we look at the provisions of the PSC, there are two major classes of violation. One is the Reliance keeping the total area given to it for exploration as discovery area, when the area of the major developed gas and oil fields there is less than five per cent of the total. The other is jacking up the capital cost.

The Reliance benefited in two ways – it recovered the inflated cost right in the beginning as “cost” petroleum, the second because of the nature of the profit sharing deal in PSC, it got a much higher share of the profit petroleum, then it would have otherwise. Though the CAG has not computed the total amount of scam as it wants to examine in more detail the inflation of costs, our rough estimate indicates the scam to be of the order of 10-12 billion dollars. Added to this, the additional area that the Reliance has grabbed from keeping the entire exploration area for itself and therefore any future discoveries here would go to the Reliance. As such, the scam is indeed comparable to the 2G scam, if not bigger.

CONVERTING EXPLORATION AREA TO DISCOVERY AREA

As per the draft report, the total exploration area for KG Block 6 was 7,645 km. This was an offshore deep-water block and was awarded to Reliance in 2000 under NELP 1. Under the contract, Reliance was required to retain only 75 per cent and 50 per cent of the exploration area after Phase 1 and Phase 2 of the contract respectively. After Phase 3, it was supposed to retain only the area here it had made discoveries or developed gas or oil fields. Phase 1 was supposed to finish in June 2004 and Phase 2 by June 2005. Not only did Reliance not release any area, as it was supposed to do under the contract, it claimed that the entire area should be considered discovery area as various 2D and 3D surveys showed that there were hydrocarbon deposits in the entire block. The ministry of petroleum and DGH accepted this claim and in February 2009 agreed that Reliance could keep the entire block as discovery area.

The CAG has pointed out the following:

1) Discovery in the contract was clearly based only on exploratory wells drilled and finding of petroleum at the surface, and not 2D and 3D seismic surveys.

2) The wells sunk by Reliance, as visible from the map of wells drilled by 2010, showed that it covered only the north west part of the block and therefore had not drilled any exploratory wells in other areas.

3) Even the seismic surveys carried out – the 2D and 3D surveys – covered only a part of the block.

4) Till the end of Phase 2, only 4.5  per cent of the area had been designated as discovery area and therefore Reliance had no basis to claim that the entire area was “discovery area.”

5) During Phase 2 of the contract period, DGH was on record asking the Reliance to relinquish 25 per cent of the area as per contract. It suddenly did a volte face later and decided that the entire exploration area could now be considered as discovery area.

IMPORTANCE OF THE ISSUE

Why is this issue important? This takes us to the NELP and why production sharing contracts have been devised. It has been argued that national oil companies or the public sector does not have resources to explore the country’s oil basins and therefore the case for inducting private capital. The entire argument for inducting private capital is for quick development of India’s hydrocarbon resources. If any company takes a particular area for exploration, it must finish the exploration within a certain time period or release it back to the government for awarding it to others. It cannot sit on top of an exploration area and hoard it for the future. That is why the clause of progressive release of exploration areas back to the government. After Phase 3, the only area that the private party is to keep are those where it had already discovered oil or gas by drilling actual wells or had started commercial production. Everything else had to be given back.

Normally, when gas or oil is struck in an area, its nearby areas are also likely to have hydrocarbon deposits. The value of such areas would therefore go up for any subsequent auction. Hoarding such areas means that though the party considered has not spent the money it was required for exploration, it is still allowed to retain this area and explore it at leisure.

The CAG has commented that, clearly, the contractor never intended to relinquish any part of the exploration area and this was facilitated by the DGH and the ministry of petroleum by “irregularly and incorrectly terming the entire contract area as ‘discovery area,’ when drilling of wells, which is the primary requirement for ‘discovery’ and ‘discovery area’ had not taken place in the major portion of the contract area.”

The CAG has also pointed out that RIL has similarly been granted another contract area as discovery area on the basis of discoveries when discoveries had not taken in a major part of the contract area. As per the CAG, this would open the floodgates for other private operators to follow suit and strike at the very heart of the PSC, “which mandates a time bound exploration process with relinquishment of undiscovered areas so that these can be re-auctioned for exploration and development by other willing parties.”

For all discoveries, the PSC calls for a detailed appraisal program and a appraisal report which identifies the boundaries of the hydrocarbon bearing block, the recoverable petroleum or gas. It is only after this that the contractor can move for claiming a commercial discovery and development of the field. In the case of KG-6 block, the Reliance skipped the appraisal part and went straight way to commercial discovery. As the appraisal report is the basis of the capital expenditure, this meant that all the capital expenditure being incurred had very little basis. The major cost escalation claimed for the D1-D3 area thus had no appraisal report. All the cost escalations and plans for expansion of production from 40 MMSCD to 80 MMSCD was done without a detailed appraisal of the discovery.

CREATING CAPITAL & THEN SIPHONING IT OFF

This was not the only issue. In the case of 2 other discoveries – D5 and D 18 – no proposal for appraisal have been received even after 7 and 6 years respectively. The PSC requires that if the contractor does not submit an appraisal programme for three years, the contractor would relinquish its right to develop such discovery and this area would be excluded from the contract area. Again, in spite of such blatant violation of the contract, no action has been taken by the government and Reliance continues to hold all the original exploration area and the development rights.

Why is the Reliance not exploring the contract area as it had proposed and why does it want to hold on to this entire area? Oil and gas exploration is costly business. If you strike oil or gas, as Reliance did, it would like to put its money in development of the field and getting its money out as quickly as possible. Moreover, if oil or gas has been struck, raising money in the capital market is easy, particularly given the nature of the one-sided production sharing contract that the government of India has awarded. For Reliance, the game was simple --- use the D1-D3 discovery, and the oil discovery in D6-MA-1 to bring in capital and focus on their development. Given the sweetheart deals and the cooking of the contracts as we shall detail later,  this was creating capital out of market borrowings and then siphoning this from the top by inflating capital costs. Reliance did not have to spend any of their own money in this game, only cook the books.

While Reliance was looking for easy capital to finance its oil and gas field development, it did not want to relinquish the exploration area. It did not even want to put in money for the other 16 discoveries apart from D1-D3 and D6-MA-1. However, it is hot property in the oil market, and therefore Reliance wanted to retain the entire area of the D6 block for future exploration and not relinquish it to the government for auctioning again, as called for in the contract and envisaged under NELP.

The CAG’s draft report provides enough details to show how the DGH as well as the ministry of petroleum conspired with the Reliance to keep the entire exploration area. The CAG has indicted V K Sibal by name in the report and has also called for holding other concerned officials accountable for this. As we had noted in our previous article, Sibal has been under the CBI scanner for two years without any concrete steps being taken against him. However, the scale of this manipulation of the contract is not possible without the support of the ministry concerned, not simply DGH and Sibal.

The proximity of Murli Deora, the former petroleum minister and now minister of corporate affairs to the Ambanis is well-known. The petroleum ministry’s role in this manipulation is clear. A thorough probe in the role of the ministry and the minister is necessary, pending which Murli Deora should resign from the cabinet.

PERTINENT QUESTIONS

The other important issue is: How much did the government lose by the entire contract area having been designated as discovery area? The CAG’s draft report states that this is a huge loss as the government could have re-auctioned this area and it would have fetched a very high price because of its proximity to known hydrocarbon bearing areas. That is why blocks near Bombay High had fetched a high value in earlier auctioning of blocks. More important, blocks have been awarded to private parties in order to speed up gas and oil discoveries.

The question is: What will the government do about this? The response of Jaipal Reddy, the current minister of petroleum, makes it clear that the UPA is in a stone-walling mode, reminiscent of its 2G defence. However, irrespective of who is guilty of favouring the Reliance, what prevents the UPA government of making a simple statement – that if the PSC has been violated, the government will ensure that Reliance will not be able to gain from such violations? Why does the government not simply say we are exploring means of taking back the extra area beyond ‘discovered’ and ‘development’ areas from Reliance? That way, it would at least do some damage control.

This, however, is almost impossible for the Manmohan Singh government to do. Unlike Brazil and Venezuela, who have used their hydrocarbon and other natural resources to bank-roll pro-poor and anti-poverty measures, the trajectory of this government has been to use all natural resources such as spectrum, oil and gas, coal, iron ore, etc to bank-roll the capitalist class. This is the core of economic policies of the Congress-led UPA government. This is neo-liberalism at its ugliest.

28th January 2011

Prabir Purkayastha

KAPIL Sibal has now thought fit not only to pick up all the arguments given by A Raja for giving 2G license and spectrum at throw-away prices to favoured corporate houses, but has also added a few of his own. Thus, if Unitech and Swan made thousands of crores by selling a part of their equity within months of securing the 2G licenses, we should not complain as this somehow has also helped the consumer. Further, according to the minister, the CAG is entirely devoid of arithmetic – it cannot distinguish between Rs 1.76 lakh crore and the number zero; if it only knew its numbers – according to Kapil Sibal -- they would have known that the exchequer has really suffered no loss. In other words, there was no scam, no undervaluation of the spectrum and no loss to the exchequer, only some minor procedural lapses.

Some of the arguments produced by Sibal are not new. Raja had  been advancing them ad nauseum and they have been refuted a number of times. It is unfortunate that with a new minister of telecom, we now have to refute them once again. But some of Sibal's arguments are novel, particularly his arithmetic and therefore does call for new refutation. Let us take them first.

In his arithmetic attack on the CAG, Sibal starts by saying that CAG used the 3G license prices which were auctioned in 2010, ergo it cannot be used for 2008, when the 2G licenses were awarded.

It is interesting that Sibal is arguing that 2010 prices cannot be used for 2008 as the value of money has changed in these two years, as also the subscriber base and the annual revenue. However, he seems to have no such problem in arguing that 2001 license prices be used for 2008. This is, in spite of there being only four million cellular subscribers in 2001 as against a 75 times increase in subscriber base by 2008  and a seven year gap!

The CAG computed the loss by estimating the market price of the 2G spectrum. This market price was estimated in different ways – by the offer of S Tel for a pan-India license, the sale of equity by Unitech, and Tata Teleservices and by comparing it to the 3G auction price. This gave the figures of Rs 57,600 crore to 1.76 lakh crore -- depending on the method adopted. The reason that CAG did not differentiate between 2010 and 2008 prices is quite simple – the market prices in 2007 and early 2008 would have been higher than 2010 as the financial crash took place later and the markets had not fully recovered even in 2010.

CLAIMS OF NO UNDERVALUATION

CAG also stated that an alternate method would have been to choose econometric models for projecting the 2001 prices to 2008 and then computing the losses. It chose the market prices as the basis because it felt that this was a better indicator than projecting the 2001 prices to 2008. Incidentally, the methodology that Sibal is suggesting of using time value of money and increase of subscriber base and revenue would be a form of econometric model exercise. Though CAG did not do this, TRAI has done this exercise. In its Recommendations on Spectrum Management and Licensing Framework dated May 11, 2010, TRAI estimated the price of license in 2009  using just the time vale of money. With a standard discounted cash flow, TRAI calculated that based on a 15 per cent discounting rate, the 2001 price of 1658 crore would have been worth 5074 crore. Taking the Adjusted Growth Rate per MHz, TRAI also computed a figure of  8,285 crore for the 2G license or five times the amount that the government collected. If indeed Sibal felt that this was a better method to compute loss  to the exchequer, why did he not suggest any of these figures for computing the loss? Why claim that actually, there has been no undervaluation of the spectrum at all?

TRAI however, like CAG, finally suggested using the 3G license fee price for fixing all future license fees. The reason given was the same as CAG – this is the price discovered through a market mechanism and is a better indicator of price.

Sibal has argued that the efficiency of 3G spectrum is more than 2G spectrum and as it will be used for high value added services, it should have a different price. This is the same as Raja's BPL rice as 2G and basmati rice as 3G. In its May 11 recommendations, clauses 3.80 to 3.82, TRAI has discussed this in great details. It has analysed why the efficiency of the 2G and 3G spectrum is not very different and has shown that  2G spectrum should really be regarded as 2.75G with current technologies in terms of efficiency. It has also pointed out that it is not just efficiency of the spectrum but also the size of the market and supply-demand position that determines the price of the spectrum. Obviously, the existing voice market is much the larger market and will be a major determinant in deciding the price of the spectrum. Taking all this into account, TRAI's recommendations were: The Authority, therefore, recommends that the 3G prices be adopted as the ‘Current price’ of spectrum in the 1800 MHz band. (Clause 3.82, page 189, Recommendations on Spectrum Management and Licensing Framework dated11th May, 2010)

The last point that Sibal raised was with respect to the quantum of frequency allotted to the new 2G licensees. He claimed that since only 4.4 MHz has been given as start-up frequency to new 2G licensees, therefore the amount computed as loss should not have been based on 6.2 MHz as CAG has done. Unfortunately for Sibal, he himself has queered his case by stating that additional charges for spectrum will be levied only beyond 6.2 MHz. Obviously, the contracted amount – as per the 2G license -- is 6.2 MHz, even though only 4.4 MHz is being given initially.

TRAI in its recommendations of May 11 quoted above has also dealt with this issue. In its executive summary, it notes “After due examination of the provisions of licences issued from time to time and related factors, the Authority concludes that the committed spectrum is 6.2 MHz in respect of GSM and 5 MHz in respect of CDMA”.

FACTUALLY UNTRUE

The argument that the consumers have benefited from the low license fees is factually untrue. If the companies receiving the licenses had not resold it to others (what DoT now calls “dilution of equity”) at 6/7 times the price that it had itself bought the licenses, there might have been some merit in this argument. However, once sale of equity was allowed by Raja by changing the merger and acquisitions guideline all that has happened that instead of a public auction held by DoT, the licensees have held private auctions. The impact on the consumer is same, irrespective on who has held the auction.

This is one of the points that the Left had brought repeatedly – that if keeping the price to the consumer low as the objective, there should have been a lock-in so that buyers cannot buy cheap and dear by holding private auctions. Instead of a lock-in, even the existing guidelines on M&A and the TRAI recommendations of not allowing any change of equity before the roll-out obligations are met, were changed by the then telecom minister, A Raja.

The issue of which corporate house was favoured over which one is certainly important but not the major part of the 2G scam. The key issue is that a scarce national resource was given away at a fraction of the price. No amount of arithmetic jugglery can take away this simple fact. The reason that Sibal is unwilling to accept this is equally simple. Making a gift of natural resources – from spectrum to mineral wealth -- to the capitalist class is the hall mark of this neo-liebral order. This is what Sibal wants to continue.

The neo-liberal order in India has been different from, for example, the regime of Hugo Chavez in Venezuela and Lula in Brazil in the way it has used its natural resources. In Venezuela and Brazil, the oil wealth of the country was used to make large sca