Sunday, February 12, 2012

Think of the spectrum like the village commons

In a shock ruling ten days ago, the Supreme Court cancelled 122 mobile phone licences that had been deceitfully awarded in 2008. The ruling sent the telecom industry into chaos, confirmed dreadful corruption in the government’s decision-making process, and damaged the reputation of our nation in the eyes of the world—especially foreign investors. There was much euphoria inside the country, however, for justice had seemingly been served.

The Supreme Court also instructed the telecom regulator (TRAI) to auction the illegally gained 2G spectrum, as it was done in the case of 3G spectrum. “While transferring or alienating natural resources, the state is duty bound to adopt the method of auction by giving wide publicity so that all eligible persons can participate,” said the Court judgment. Auctions are certainly a better way to allocate a scare resource than first come first served, but what Mr Raja did was, of course, preposterous — he subverted the “first come first serve” policy by changing rules mid-way; he allocated spectrum out-of-turn in a non-transparent manner, and that too at 2001 prices, thus creating the biggest corruption scandal in India’s history.

But is auctioning the best way to allocate radio spectrum? Although it is scarce, should it used as a money making device by government? Since water is scarce, should it be auctioned? No. The risk in an auction is that “animal spirits” of entrepreneurs forces them to bid very high, which is then reflected in high tariffs, and this forces the poor out of the market. Thirty one countries have used spectrum auctions and many have regretted it for this reason. India is, perhaps, the world’s most successful telecom market with the lowest tariffs in the world. Hence, it has the highest number of subscribers who are poor. The credit for this goes to the previous government which had the courage to change policy from high license fees to revenue sharing between the telephone company and the government. If the state had been “duty bound to hold an auction”, cell phones would not have reached the poor.

In the ideal world, radio spectrum would be like sunshine which is not owned by anyone or any government but everyone enjoys it without any cost. But unlike sunshine, spectrum is finite and hence it has been historically controlled by governments. It is widely accepted that government allocation is inefficient and leads to corruption. Ronald Coase, the Nobel Prize winner, exploded the myth long ago that governments should control spectrum to prevent airwave chaos. Today many experts think of spectrum as a common grazing ground around a village, which is open to everyone to use freely. They claim that new spectrum sharing technologies allow a virtually unlimited number of persons to use it without causing each other interference--this eliminates the need for either property rights or government control. This is why the United States has gone ahead and designated a 50 MHz block of spectrum in the 3650 MHz band as a “commons”.

If the spectrum were a “commons” nobody would own it nor need to auction it. A telecom company would merely register with an authority, which would assign it a spectrum frequency for its use. When the company reached the limit of its spectrum, the authority would release it some more. Just as a villager pays a nominal tax for maintaining the commons, depending on how many cattle he grazes, each cell phone subscriber would pay a nominal fee, say a paisa per minute, towards upkeep of the spectrum. It would be form a part of the monthly bill, and transferred by the phone company to the authority. Just as a village needs rules to prevent over-grazing, there would be rules in maintaining spectrum to avoid a “tragedy of the commons”. The rules would be transparent, monitored in real time, and no one would be able to corner the spectrum.

Unfortunately, the Supreme Court judgment has come out so heavily prescriptive in favour of auctions that future governments in India will be shy to adopt a better alternative. Technology is developing very rapidly and soon the world will be ready for an “open spectrum” regime, but the Court’s inflexible judgement will inhibit the Indian government in doing the right thing. A pity!


Unknown said...

India, we often go by the rules available in the books and tested by time and our honorary courts are no exceptions.
To implement something new, we need risk taking capability, which in general we are shy of ( whether we belong to common masses or government )
What you are saying is a suggestion with a brilliant vision behind it but it deviates away from the common rule-book.
Unfortunately for us (the Indians) because of our basic attitude mentioned above, we can't think of something better to go with.

Unknown said...

It's an very good comment...

Pranshu Gupta said...

Nice Observation Sir!
The judgement has punished the operators only, & has been silent about the corrupt govt. officials who shall evade unscathed in due course of time.
The ultimate sufferer shall be the common man, who shall be punished by the Govt. in the name of duty.
Mobile communications have evolved to a great extent & are bound to grow even further,& the last person in the country stands to benefit.
Alas! these aspects were not taken into consideration while deciding the fate of 122license holders...

m.p.singh said...

In India,we find loopholes in laws even before they are passed.Seen in that light,the Supreme Court ruling in the 2G Spectrum case is not surprising.

Enigma said...

superb article

YouBihar said...

Actually you have a good point, perhaps auctions is not the right approach. Many things should be considered when selling the spectrum.

shirin goel said...

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Narinder Jit Kaur said...

Very thoughtful and thought-provoking article. The analogy is very interesting.

Pramod Dikshith said...

I disagree with the argument that a lower price of commodity to service providers will reduce the tariffs. What is the guarantee that the providers will pass the profits to the customers? Does apple pass any % of it's profits to customers to make apple products affordable? No..They don't...Its the corporates who benefit because they eventually make money through share dilution and selling equity to foreign companies. What auction prevents is arbitrary awarding of licenses which happened in this case where the ministers used their discretionary powers to issue it to people who bribed them. Auctions brings in more transparency, government will benefit through higher revenues which will enable them to spend on value added sectors and also restore the fiscal health.

m.p.singh said...

Notwithstanding the scams,our teledensity has grown by leaps and bounds.Our telecom tariff rates are the lowest in the world.So the telecom policy must have resulted in a great deal of public good.But the points made in the post above are valid.

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