First-come-first-served: Sibal's barking up the wrong tree. Again

In their landmark judgment on Thursday cancelling 122 telecom licences issued by former Communication Minister A Raja, Justices GS Singhvi and Ashok Kumar Ganguly ruled that allotting spectrum based on the principle of "first-come-first-served" (FCFS) - in the way that Raja had done - was at the core of the problem.

Given that the FCFS policy was implemented during the NDA government's time, the matter immediately became the subject of political wrangling. Kapil Sibal, whose 'zero-loss theory' on the 2G spectrum sale stands smashed to smithereens by the Supreme Court verdict, pounced on it to claim that Raja's crime had its roots in the NDA government's telecom policy.

Well, the reality is a bit more complex. The first-come-first-served policy was implemented by the NDA government at a certain time with a certain objective, which did not apply in 2008. In particular, there was no elongated queue waiting to enter the Indian telecom industry at that time. The problem was the sad state of subscriber growth.

As Sunil Jain wrote in The Indian Express, "The critical difference between the NDA and Raja's FCFS was that when the NDA gave out such licences, there was no great mismatch between demand and supply - when Raja gave out 122 licences, there were 575 applications. In any case, during UPA 1, the government had come out with its own licensing policy and was under no compunction to stick to FCFS."

But before we dissemble Sibal's claim, it's worth going into the details of the Supreme Court judges' observations on the demerits of the first-come-first-served policy.

The judgement noted:

"There is a fundamental flaw in the principle of first-come-first-served in as much as it involves an element of pure chance or accident. In matters involving award of contracts or grant of licence or permission to use public property, the invocation of first-come-first-served principle has inherently dangerous implications.

Any person who has access to power corridor at the highest or the lowest level may be able to obtain information from the Government files or the files of the agency/instrumentality of the State that a particular public property or asset is likely to be disposed of or a contract is likely to be awarded or a licence or permission would be given.

He would immediately make an application and would become entitled to stand first in the queue at the cost of all others who may have a better claim... the duty of the Court to exercise its power in larger public interest and ensure that the institutional integrity is not compromised the State and its agencies/instrumentalities must always adopt a rational method for disposal of public property and no attempt should be made to scuttle the claim of worthy applicants.

India's former telecommunications minister played fast and loose with a policy that may have served the purpose when it was implemented in 2001, but had perhaps outlived its utility. Reuters

When it comes to alienation of scarce natural resources like spectrum etc., the State must always adopt a method of auction by giving wide publicity so that all eligible persons may participate in the process. Any other methodology for disposal of public property and natural resources/national assets is likely to be misused by unscrupulous people who are only interested in garnering maximum financial benefit and have no respect for the constitutional ethos and values."

In other words, in the judges' estimation, the distinction is very clear.

First-come-first-served is opaque and therefore bad. An auction process is fair and transparent.

But India's experience of experimenting with both these forms of realising revenues from the sale of "scarce natural resources" like spectrum, right from the early 1990s up until now, makes for a somewhat more nuanced narrative.

Consider this: any telecom policy of a certain time must be judged on the basis of the objectives that it seeks to achieve, and the manner in which it is implemented.

It's worth recalling that in the period between 1991 and 1996, when the Congress government headed by PV Narasimha Rao was in power and Sukh Ram was the Telecom Minister, basic services licences were sold through an auction that would have lived up to the expectations of Justices Singhvi and Ganguly.

But there was no great clarity on what the sale of licences was to achieve - except maximising revenue. With an inadequate understanding of the Indian market, telecom companies bid sky-high prices and were saddled with hugely expensive bids for licences in markets that didn't have a critical mass of subscribers.

Cellular call rates in the period after the initial opening up were as high as Rs 32 per minute; even the few subscribers who had signed on wouldn't take calls on their hand phones for fear of running up huge bills, which led to an interesting cultural practice: the 'missed call'.

If Mrs Pattabiraman wanted her husband to pick up some groceries on the way back from work, she would call him from their landline at home on his mobile phone - and leave a missed call. He would then call back from his office landline - and be briefed on the grocery list.

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The upshot of this was that while the government may have 'maximised' revenue in theory (of which Sukh Ram partook a fair share, for which he was sentenced to jail in November 2011), the telecom market never really took off. Although ambitious teledensity targets were set, there was no earthly possibility of realising them. The companies that had promised to cough up enormous sums were caught in a bind.

The policy clearly needed to be tweaked, and it was done ostensibly under the guise of preventing concentration of licences. Operators were allowed to retain a maximum of five or six circles, and surrender the rest: in effect it was a way for them to get out of the vastly expensive bids that they had made in the first flush of a getting a foothold in the "billion-plus" market.

It was in that context that the NDA government, with an eye on ramping up teledensity, implemented the New Telecom Policy of 1999. Under that policy, the licence fee arrangement was done away with in favour of a revenue-sharing arrangement. This lowered the threshold for entry of operators, and made the government a stakeholder in the growth of the telecom market, although it didn't help maximise revenue mobilisation in the short run.

Call rates began to fall, and Mr Pattabiraman actually began to receive calls on his handphone.

But again, the policy was hijacked when another policy tweak - this time called wireless in local loop (WLL) - allowed Reliance Infocomm a back-door entry into mobile telephony market through the WLL subterfuge. (The reason was WLL was categoried during Pramod Mahajan's time as fixed-line telephony, which had lower licence fees compared to cellular services). Other operators, who had paid substantially more for mobile licences, felt cheated, and screamed bloody murder - and threatened to go to court, which would have proved vexatious and taken years to resolve.

Prime Minister AB Vajpayee then brought Arun Shourie into the telecom ministry to clean up the mess, which he did by talking the other players out of going to court - and levying punitive fines on Reliance, which levelled the playing field. The final decision was to allow all players to (voluntarily) shift from fixed licence fees to revenue sharing, and lay the groundwork for a unified access service licence (UASL) where a player could offer fixed-line or mobile telephony with the same licence.

As can be seen, the auction process for licences may be transparent and serve to maximise revenue for the government, but to grow the market in a meaningful way, meet the teledensity targets and allow space to grow for pioneers in the industry who had put their money where their convictions lay, successive governments had to give up the auction process, even at the cost of revenue.

But the policy, while appropriate for 2001, was not appropriate in 2008, when teledensity targets had been well met. In fact, a severe shortage of spectrum was emerging and all operators were choking for lack of adequate spectrum. The policy needed to be changed again, which the UPA government failed to do. Failing to auction spectrum, allowed A Raja to use scarcity for his purposes. The 2G scam followed.

The experience of the auction of 3G spectrum (which was a much more transparent process) also reiterates the downside of going in with a "revenue maximisation" mindset. While the government did harvest a windfall (which it has promptly squandered away on assorted welfare schemes), the 3G market lacks depth, and it could be years before the operators who overbid, begin to make money.

In other words, there is nothing inherently right or wrong about an auction or a first-come-first-served policy. Every telecom policy and every exercise in revenue mobilisation from the sale of licences and spectrum must be judged against the objectives of those times, and the transparency of operations.

Even if Raja wanted the spectrum sale to be conducted on a first-come-first-served basis, he could have gone about it in a transparent manner - by announcing precisely how he would go about it (and not set the cut-off date ex-post facto) and by having the whole process vetted by the Comptroller and Auditor-General's office, for instance.

But, Raja played fast and loose with a policy that may have served the purpose when it was implemented in 2001, but had perhaps outlived its utility. And Prime Minister Manmohan Singh and (then) Finance Minister P Chidambaram knew precisely what mischief he was up to - and yet did nothing to stop him. In the larger scheme of things, that makes the UPA government culpable in Raja's crimes, for which he was slammed by the Supreme Court on Thursday.

Instead of addressing that monstrous failing, Sibal is picking on the first-come-first-served policy by leaning on the judges' observations. Evidently, the man is in complete denial about his government's culpability and is barking up the wrong tree.