Wednesday, November 14, 2012

CAG Vinod Rai must quit….2G auctions prove his loss estimates were all baloney

Rs 1.76 lac crores. Isn’t that the number that CAG Vinod Rai had brandished to tarnish the Congress’s reputation and ruin the once-successful telecom sector? Isn’t that the estimate of the “notional loss” suffered by the Government of India in 2008? Isn’t that the amount of profit that he hinted someone illegally made? Why did this Harvard educated CAG’s mathematics go so wrong? Was it just his incompetence or was it evidence of his political agenda? Will the CAG now please stand up and answer? Better still, will he please resign, since it will be impossible to impeach him, given the politics of the country? If he has any self respect left, snubbed as he has been now, he should.

The CAG’s report has been shown to be completely false. Kapil Sibal has been shown to be completely right. There was indeed “zero” loss suffered by the Government. In fact, the Government’s collection of Rs 9600 crores in these auctions is less than what the telcos had paid in 2008 (and which I suppose will have to be returned now that those licenses have been cancelled), even at the 2001 price of some Rs 1650 crores each. The only difference is that now the Government is sitting on spectrum, which no one wants to buy; spectrum that it should have offered in full in the auction process. Had it done so, the pricing would have been even lower. Only five companies participated in the bid. And none in the Delhi and Mumbai circles from where a bulk of the monies were expected… If ever an auditor’s report could ever be disastrously wrong, it was this one.

If Vinod Rai does resign (which I am sure he won’t), he would have the time to think of the reasons why he failed so miserably. And lest he feels like accusing the Government of intentionally rigging the bidding process, let me remind him that the auctions were directed by the SC itself. And in the interim, the Government had turned into a capitalistic monster waiting to garner Rs 40000 crores for itself. The Government is surely not happy, even though it has been proven right.

Vinod Rai would realize that the first mistake (and his first sign of incompetence) was that he equated 2G spectrum with 3G. To be fair, even the TRAI had made such an assumption in one of its notes.  But its impossible for the CAG to hide behind the TRAI. It had no reason to act so “clerically”. It could have disagreed with the TRAI and made its own assumptions. The assumption was fundamentally flawed. How can an old technology used mostly for voice be compared with a technologically superior product that is used mostly for high speed data transfers? As evidence, consider the price that subscribers are willing to pay for voice v/s data. Obviously, the pricing for data is far higher. Data is a business requirement; talking a mostly social need. Data is for upscale people on the move; talk is for basic communications between people. The two are as different as chalk and cheese. And yet, the CAG compared the two. Pathetic.

The second major mistake the CAG will find he made was that he believed that the telcos made huge profits. That since the telcos got license cheap, they must have made a windfall profit. But the CAG ignored the competitive nature of the market that had been created by the cheap spectrum. The competition ensured that telcos dutifully passed on the low spectrum costs to subscribers in the form of low rates. I have pointed out many times earlier that telcos were actually bleeding, not making windfall profits. Even large operators like Voda turned in their first profit only after operating in the country for more than 15 years. The third largest operator Reliance was also making losses till recently. Only Airtel, the leader was generating “decent” margins (nothing exceptional). In fact, it was the experience with cheap tariffs that encouraged Airtel to chance its hand in a market outside India. It’s African model was essentially based on reducing tariffs and gaining market share in a market operating on high fares. The low pricing Indian model was a game changer – evolved in the ruthless Indian marketplace; brought about by the low spectrum pricing. But Vinod Rai didn’t have the gumption to understand this.

Actually the CAG never wanted to understand this. It failed to realize that this was an example of the most efficient of all transfer of national resources ever made by the Government. What would have happened if the Government had collected the imaginary Rs 1.76 lac crores as license fees? A bulk of that money would have been frittered away in feeding the vast bureaucracy. Very little of it would have passed on to the poor. Instead, the private sector transferred all the benefits in the most efficient possible manner; and to the poorest of the poor.

The CAG forgot the cardinal principle that it shouldn’t have – that if someone lost money, someone else should have gain too. In this case, the CAG could never convincingly explain who made the money. The BJP chose to say that the Congress made the money. Ridiculous.

In trying to suggest who made the money, the CAG made the third major flaw. Vinod Rai intentionally misrepresented the stake sale of Unitech’s telecom venture to Telenor and Swan’s to Etisalat after winning the licenses to be a case of profiteering. Unitech’s telecom venture indeed saw it’s valuation increase after it won the license, and it took advantage of this to issue new shares to Telenor. Telenor put money into the company. Unitech did not take home even a single paisa by stake sale. The money that came into the company was deployed to pay the license fees, roll out the infrastructure and cover operating losses. As it was later shown, India proved to be a tough market and most new telcos lost money hand over fist; and as that happened, their valuations plummeted. Even before SC cancelled Uninor’s licenses, its value had plummeted. But that must surely have been expected. No new venture succeeds immediately after roll-out. If Voda – which came in early into the Indian market – took 15 years to turn in a profit, surely Uninor would take much longer to do so? But the CAG was interested in making outrageous claims.

Vinod Rai would never have expected the 2G matter to go the way it did. The BJP spun it into a corruption story. Raja was forced tor resign. And the SC canceled the licenses and ordered an auction. The TRAI recommended that the 3G bid amount should become the starting point for 2G auctions. Such was the climate in the country that no one wanted to be seen objecting to something so downright stupid. Well….the auctions happened and the truth has now come out. 2G licenses simply aren’t valued more than what operators had paid back then in 2008. Vinod Rai’s worst nightmare has come true. He has been proved to be incompetent. He has embarrassed his office. He has no where to hide. In my mind, the only option any dignified constitutional authority has under such circumstances is to resign. But will he? I will bet my shirt he won’t. They say politicians have a thick skin. Well, this CAG has proved he is ready for politics.

The real tragedy of this entire episode is that the real corruption has been forgotten. The corruption figures are probably much smaller, but it would have been better if the focus was kept on the real numbers rather than on the sensational rubbish the CAG put out.

The real truth is that there is spit on Vinod Rai’s face. His incompetence has been proved beyond doubt. Given his academic background, one has to assume that his motivations in putting out such a report were political. To that extent, he is a disgrace for his august office. He should resign forthwith….


  1. I remember having a hard time explaining to my friends abt how wrong the CAG accusations were.. My patriotism were doubted ,for they saw me supporting the "anti-national" congress... So, as much as i feel let down by the fiscal situation of our country, i feel that maybe this a happening for the greater good of the country !!
    I really hope, Mr. Rai resigns !!

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