The real sensation in the saga is the number 1.76 lakh crores. How did Mr. Rai come up with this figure? Let is analyze the CAG report and see how it arrived at the above figure.
The CAG reports starts off rather cautiously:
5.1.2 What could be the value of the spectrum which was allocated to 122 licensees in 2008 at the price discovered through bidding for licences way back in 2001?
Any loss ascertained while attempting to value the spectrum in hindsight can only be ‘presumptive’, given the fact that there are varied determinants like its scarcity value, the nature of competition, business plans envisaged, time of entry, purchasing power of the people, growth of economy etc., which, in a market condition, would throw up the actual price at a given time.
It then proceeds to apply three different methodologies to arrive at the “presumptive” value of the loss to the exchequer:
As can be seen above, the magic figure of 1.76 lakh crores is derived from the price 3G auctions fetched, and this figure is nearly thrice the figures arrived at bu the other two methods!
The first method seems reasonable. A company called S Tel twice voluntarily offered to pay more than the 2001 price as fixed by DoT. They further expressed willingness to increase even more in the event of a competitive auction.
5.2.1 UASL applicant had offered higher price
On 5 November 2007 S TEL Limited, who had applied for UAS licence in September 2007, in its communication addressed to the Hon’ble Prime Minister voluntarily offered to pay additional revenue share of ` 6,000 crore to the DoT for a Pan-India licence over and above the spectrum charge/ revenue share payable as per existing policy. S TEL Limited in a further communication addressed to Hon’ble MoC&IT dated 27 December 2007 enhanced its earlier offer of ` 6000 crore to ` 13,752 crore over a period of ten years for allotment of 6.2 MHz GSM spectrum. The Company further agreed to increase the bid price in the event of any counter bid or auction of spectrum for GSM on a Pan-India basis.
In other words, S Tel clearly indicated it consider the price demanded by DoT as being too low. By this yardstick, the loss to exchequer was Rs. 76, 364 Cr.
The second method derives the presumptive 2G price from the actual price discovered by the 3G auction. The CAG argument is that the current 2G is actually closer to 2.75G, and hence it is fair to compare it with 3G.
TRAI in its report of 2010 has observed that 2G services today are actually offering 2.75G services. Therefore “while comparing special efficiencies and other factors, it is fair to compare existing 2.75G systems with 3G systems”
This, in my opinion, flies in the face of experience. I have EDGE on my Airtel service and it crawls. My experience tells me it is nowhere close to 3G speeds. We have all seen the DoCoMo “Why crawl when you can fly” ad which nicely contrasts 2G and 3G speeds:
Hence this method of assessing presumptive loss is deeply flawed from a technical standpoint and deserves to be rejected outright. This is the method that resulted in the Rs. 1.76 lakh crore figure. Hence, this seems to be a sleight of hand used by the CAG to create a sensation.
The third and final method is even more flawed, but from a business standpoint. The CAG argues that the allotees such as Swan, Unitech and Tata Teleservice “sold the spectrum” for multiple of the license price.
The CAG does acknowledge that what happened in reality was that all these companies brokered foreign direct investment (FDI) in the form of equity stake, i.e. the sold equity in their companies. Equity participation is a common investment vehicle and there is nothing criminal about it. In reality such investment decisions are made based on projected ROI, which in turn depends on factors such as market size, competitive dynamics, market share which the target company is likely to corner over a specified time period, projected cash flows, net present value of project cash flows based on desired discount rate, etc. The CAG ignores this fact and argues that these investment decisions were made on the basis of “how much did you pay for spectrum? I will pay you a multiple of that”.
Anyone familiar with corporate finance can spot this sleight of hand immediately. Except for Karan Thapar, Rajdeep Sardesai, Vikram Chandra, Arnab Goswani et al. Either these gentlemen did not bother to read the CAG report or they are very very ignorant of corporate finance.
The media also makes a big deal of the fact that this equity sale happened soon after spectrum allocation. Think about it – why will a foreign company invest in an Indian company that does not have spectrum allocated and hence cannot operate telecom services in India? It is only reasonable that allotment of spectrum was a pre-requisite for the FDI. Again, nothing criminal about it.
To summarize, of the three methods used by CAG to value presumptive loss to exchequer, two are obvious sleight of hand. The third is a valid method which arrives at a presumptive loss of Rs. 67, 364 Crores which is one third of the Rs. 1.76 lakh crores sensationalized by the media. This method basically says if an auction was held, these same allotees would have been willing to pay a higher price. As explained in my earlier post, Kapil Sibal has acknowledge this and pointed to the 10th Five Year Plan for the policy basis of choosing not to auction.
So, where is the scam?
Not in the “loss to the exchequer”. The media insinuates that the entire loss to the exchequer was swallowed up by Raja, out PM and the Gandhi family and hence this is the biggest scam in the history of India, yada yada yada. In my opinion, such hysteria is completely unwarranted and is based on two sleight of hand tricks by the CAG.
The real scam is in the undermining of the first-come-first-served process by Raja, for which, in all probability, money changed hands. The CBI has investigated this, the SC is hearing this case, and let us see what comes of it.
As for the loss to the exchequer, I am convinced of the policy reasoning. There is not scam on this count.
I 100% agree with your comments in this report. Even the first method of S-Tel offer which you have considered reasonable is also completely baseless and untenable. The CAG itself has stated in the report that S-Tel was not eligible for six licenses which he had applied in the normal course because of the requirement of paid up capital.
If the company was not eligible for even six licenses, how could its offer for 22 licenses be considered. The offer, therefore, is invalid.
Moreover, CAG itself has stated that as per the licence conditions the initial allocation of spectrum is only 4.4 MHz. S-Tel desired to have 6.2 MHz which is in violation of the licence conditions and UASL Guidelines dated 14.12.2005.
Thus, the application was invalid, ineligible, in violations of licence conditions and hence this method of calculating alleged loss is completely flawed.
To add to your points of calculating the loss based on 3G auction price as recommended by TRAI. It is interesting to note that the TRAI gave its recommendations in May 2010 recommending 3G auction price as the price for 2G spectrum based on which CAG calculated the loss of Rs. 1.76 Lac Crores.
The TRAI within one week withdrew its recommendations or sent a letter to DOT to put this recommendation on hold. Therefore, this recommendation of TRAI became in fructous.
In February 2011 TRAI has given revised recommendations for 2G spectrum pricing without linking it with 3G auction price.
Therefore, the entire method of calculating the alleged loss is without any basis. The CAG gave its report in November 2010 and was well aware that the recommendation of May 2010 has been put on hold. CAG deliberately ignored this aspect.
In a recent interview to LiveMint, Mr. Rai summarizes his three models for calculating loss to exchequer, but with one difference. He no longer says “spectrum was resold”. He now admits it was FDI:
“Some of the companies that received (telecom) licences sold their equity in the market. The price at which they sold their equity is well documented in stock exchange notices. The FDI (foreign direct investment) that came in was also documented. I based my second model on that.”