Tuesday, July 10, 2012

Kudos to the SC for revisiting its own “auctions only” ruling….

It was an obviously wrong ruling. How could the SC possibly prescribe policy and that too on such a major subject? How could the SC even have the intellectual wherewithal and expertise to prescribe a particular policy for allocation of natural resources? And yet….when on Feb 2nd this year, the SC did just that, its ruling was greeted cheerfully by some sections of civil society activists and the opposition. But did that cheering mean that the ruling was right? Was the SC not pandering to public opinion? Thankfully the Constitution bench of the SC has indicated that it may revisit its ruling.

There are two separate issues involved here. One is about ensuring transparency in the allocation process, even if the allocation is done “Free Of Cost (FOC)”. The second is about maximizing revenues using auctions as the route for allocation. Most people of this country are fed up with the all pervasive corruption and hence cheered the “auctions only” ruling. But they perhaps did not realize the consequences of such a ruling. In achieving one goal, were were sacrificing another larger one? Let me elaborate.

If “auctions only” was the route to allocation of resources, the rich would corner most of the resources. In an ascending e-auction methodology as followed in the 3G telecom auctions, the highest bidder wins. Obviously, the well endowed are in a position to bid higher and take the associated risks. The less endowed are sidelined. Only the biggest global and domestic players won the 3G licenses. In contrast, when 2G licenses were first given away without auctions, we had several new entrepreneurs (including the present big daddy Sunil Mittal) being created. Is an “auctions only” policy in line with our goal of inclusive growth then?

Secondly, “auctions only” would lead to a huge increase in end consumer pricing. Take (in a very different context), the IPL. Everything in the IPL is bid for. The teams are bid for. The TV broadcasting license is bid for. Even the players are bid for. As a result, the cost structure in the IPL is very high. Since there is so much money involved, several things (good and bad) happen. The quality of the game improves dramatically – Indian stadiums are the best in the world now. Global standards are met and surpassed – the IPL is as professionally organized as the EPL or the Euro Cup (there are no typical 3rd world hiccups). But at the same time, the advertising rates for spots on TV are exhorbitantly priced. Advertisers pay through their nose, but they also get a high order viewership. This is the classic “rich country” pattern – where products and services are of very high quality, but the pricing is also high. As such, this kind of a model is inappropriate for a developing country like India, where whether we like it or not, a lower product quality-lower pricing model is more appropriate.

For India, a hybrid model works best. Hockey in its current avatar is in a very poor condition. The quality is very poor and the viewer experience is even worse. If cricket represents extreme capitalism, hockey does socialism. Quite clearly, we need an in-between place. Clearly a capitalistic “auctions only” policy is a misfit in the Indian context.

Let’s look afresh at some of the recent corruption controversies. The crux of the allegation of the CAG of a loss of Rs 1.75 lacs crores to the exchequer is that the spectrum was given away “free”. If “free” meant that the government did not get the money in its coffers, then it didn’t need the CAG to tell us that. But the real allegation was that this was a case of corruption. An impression was created that someone had pocketed Rs 1.75 lac crores. At least, that’s the way most people in the country have understood it. How was giving spectrum away free a case of corruption? Who made the money? Did private companies (as alleged) make the money? Just check out the profit margins of telcos. The most profitable of them all, Airtel, makes 14% Net Profit Margin. The 2nd biggest Vodafone recently declared its maiden profit after being in this country for nearly 20 years. Idea’s NPM is 3% and Reliance’s 1.4%. Clearly, the private companies passed on the “free spectrum benefits” to their customers. Who ultimately benefited? The people of this country. A completely idiotic theory was presented then that the winners of the new telecom licenses had made huge profits by offloading equity to new foreign partners. Idiotic, because “offloading” wasn’t like the seller was “taking home” any profits. The new money the foreign partner brought was just parked inside the company, just like happens in almost all joint ventures.

Ultimately, everything the government does must be for the benefit of the people. What would have happened if the government had auctioned and made the so claimed Rs 1.75 lac crores from 2G auctions. Firstly, the mobile call pricing would have been so high that teledensity would have remained some 20% or so. And we would have been a sub-saharan economy not the tiger that we are today. Secondly, the government would have used the Rs 1.75 lac crores for its various spend programs, 85% of which would have gone on bureaucratic expenses and only 15% towards benefitting the people. Such is the size of our government that it ends up being the biggest beneficiary of any government income. That is why it is said that the size of the government should be as small as possible. Government must get out of businesses. The benefits of 2G were much more when left to the private sector to distribute them to the public.

Take coal block auctions. Now this is the biggest piece of misinformation spread by the CAG and lapped up by the opposition and media. It is believed again that the private companies benefited unduly by the “free” coal blocks. Again, let’s apply the test of profit margins of power companies that got these free blocks. Here’s a piece from my post of June 2, 2012: The ultimate test of corruption has to be if some person or some company gained personally. Check out the financial results of different private sector power companies. Tata Power: Revenue Rs 8496 crores. Net Profit Rs 1170 (13.7% margin). Bhushan Power: Revenue Rs 9941 crores. NP Rs 1024 crores (10.3%). Lanco: Revenue Rs 8605 crores. NP Rs 116 crores (1.3%). Jindal: Revenue Rs 13334 crores. NP Rs 2110 crores (15.8%). Adani Power: Revenue Rs 3949 crorese. Net loss Rs 294 crores (-7.4%). Check out the public sector NTPC for a benchmark: Revenue Rs 62053 crores. NP Rs 9223 (14.8%). So which private sector company has made super-normal profits? If the “proof” of corruption is that these companies benefitted from the government’s “gift”, surely their margins should have been far higher????

In fact, in the case of coal blocks, there was an auction conducted, but it was at the power utilities’ end. The power companies which got the coal blocks free were granted the permission to set up power plants on the basis of a reverse auction. The reverse auction ensured that the state got the cheapest rates for power. That’s why private power companies do not show super normal profit margins. They’ve passed on the benefits to the people.

Media in this country is of course behaving in an ignorant, self-serving and politically motivated manner. Rather than understanding issues and presenting them in an unbiased manner, it tends to spin sensationist stories so as to improve its own business. Media needs to decide for itself – just like the SC has now done for itself – whether it needs to course-correct or not.

The real truth is that auctions may be an efficient method of allocation, but they cannot be the only method. Auctions have many flaws….most importantly that they lead to concentration of economic wealth in the hands of the rich. Secondly, there are many ways to ensure transparency in the allocation process, without necessarily relying on a capitalistic auctions process. Thirdly, we need to be mature and sensible as a nation. We need to differentiate between genuine corruption (as no doubt there must have been in both the 2G and coal block allocation processes) and government policies. If we cannot, and if we are dumb, then we will lose our rights to enjoy the fruits of democracy….

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