Confused CAG can't decide whom to blame for auction failure

New Delhi: So did telecom companies form a cartel or did faulty policies of the Department of Telecom lead to failed auctions in 2012 and 2013? The country’s leading auditor, Comptroller and Auditor General (CAG) can’t seem to make up its mind. On the one hand, CAG has said in its draft report to Telecom Secretary MF Farooqui on 20 May that telcos seemed to have formed a cartel and together decided not to place bids in the two spectrum auctions of November 2012 and March 2013 despite having repeatedly asked for additional spectrum in almost all telecom circles in India in the last decade.

On the other hand, the same report alleges that faulty policies of DoT and fixation of “extremely high and artificially determined reserve price in these auctions have also acted as a deterrent for participation in these auctions.”

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Mr Auditor, is DoT to blame or did telcos play dirty? How can both parties-the first which stands to earn revenue from auctions and the second which has to shell out the mega bucks-be at fault? Is the auditor then suggesting that both, telcos and DoT formed a cartel? This sounds rather far fetched.

The DoT is expected to give a detailed reply to CAG’s observations, which will then be incorporated in the final report the auditor prepares.

Anyhow, auction facts are these: The Government determined a base price after accepting TRAI recommendations which were based on the price of 3G spectrum auctions in 2010. After telcos protested and participation was minimal in the November auction, the Government then subsequently lowered prices for CDMA (halved the price eventually) and also GSM spectrum in four top circles. Due to apparent cartelisation, the government was able to raise less than a third of the targeted Rs 28,000 crore in the November auction but in March this year, despite lower prices, only one CDMA telco - Sistema Shyam - participated. Not a single GSM telco even agreed to place bids in this auction.

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The report pointed out that there was a huge quantity of spectrum lying idle, valued at Rs 85,014 crore. But it did not go on to term this figure as either presumptive loss or something the government missed earning in entirety. So yes, there has been revenue loss because of non-participation of telcos on the two auctions but even CAG has not put a figure to this loss.

It has merely said inefficient use of spectrum and its hoarding meant that the Department of Telecom missed out on thousands of crores as revenue from spectrum usage charges during the last five years. It has not made an estimate of this loss. In its report, the CAG has also noted the “huge” quantity of spectrum lying idle in circles to bolster its observation on revenue loss to DoT.

CAG has observed that one service provider has been catering to 91 lakh subscribers with 10 mhz of spectrum, another operator in the same service area of Delhi with 12.4 mhz spectrum was providing mobile services to barely 26 lakh subscribers! Yet another operator with 4.4 mhz spectrum had a reported customer base of 28.51 lakh in the same service area.

The CAG report says as on December 31, 2012, Bharti Airtel was catering to 90.28 lakh customers in Delhi with 10 mhz spectrum and its adjusted gross revenue (AGR) for 2011-12 was Rs 2,621.62 crore. But four other operators were having total spectrum of up to 29.2 mhz and their total AGR for the same period was only Rs 1757.16 crore. This means the four telcos has AGR which was only two-thirds that of Bharti. “It was therefore evident that scarce spectrum is not being utilised efficiently, economically and optimally…. and causing huge loss on account of spectrum usage charges to the Government exchequer”.

AGR is the benchmark on which telcos pay a spectrum usage charge to the government. So by pointing out the discrepancy in AGR and spectrum held by telcos, CAG is basically speaking of lost revenue of crores to the government which would have accrued had the spectrum been used efficiently.

CAG has levelled charges of hoarding against Aircel, which had insignificant number of subscribers in four circles of Gujarat, Haryana, Himachal and Madhya Pradesh as of December 2012 compared with other telcos who were awarded the same quantum of spectrum as Aircel. So what CAG is saying is Aircel got spectrum but did not use it like others to provide mobile services and had this spectrum been allotted to others, the government would have earned revenue as spectrum usage charge.

CAG has also made another interesting point: five new telcos Uninor, Videocon, Loop, Sistema Shyam and Etisalat were given 105 of 121 new licences in 2008 but these telcos together accounted for only 10 percent of additional subscribers added to the country’s mobile network between January 2008 and January 2012. So the startup spectrum awarded to 92 licensees was hardly utilised while existing telcos were clamouring for additional spectrum all this while. Also, in at least 50 service areas awarded to these five telcos, they had nil or negligible presence even four years after the licences were granted.

“It was therefore no wonder that a top TSP which had not participated in auctions held in November 2012 and March 2013 opted to have a private tieup with two TSPs for sharing 2G spectrum in many service areas in 2013 rather than approaching DoT for award of spectrum through auction”.

CAG has also noted that state owned MTNL and BSNL have also had lower number of subscribers in many service areas compared with private telcos; it has wondered at no action by DoT on TRAI’s recommendation that at least 2.4 mhz spectrum be withdrawn from these PSUs.

So how is the DoT responsible for the crores of rupees of loss to the exchequer if telcos are not using spectrum efficiently, hoarding it? CAG says DoT has not incentivised efficient and effective use of spectrum, it has not strictly implemented its own quality of service standards and its inappropriate decision making has meant substantial amount of spectrum is going waste. So going by the auditor’s comments, every stakeholder in spectrum auctions was working to thwart the process.