(Weekly Organ of the Communist Party of India (Marxist)
November 23, 2008
THE 2G LICENSE SCAM
Giving Away Spectrum Free to Builders and Speculators
IT is now clear that another huge scam has taken place in the award of the 2G GSM licenses to new mobile and CDMA operators. The extent of the money lost by the country is of the order of Rs 60,000 crore, with companies who have got their new licenses selling it within a few months for 6 times what they have paid for it. It is plain and simple loot of the exchequer that has occurred --- price the licenses and spectrum cheap and allow the companies to resell this at market value without any restriction.
A LIMITED RESOURCE
The spectrum allotment has always been a very fishy affair, as not many people understand its implications. Using this lack of popular understanding, successive governments have given away the spectrum to favoured parties, at the cost of the national exchequer. Before we try and understand the current telecom scandal, we need to understand how the spectrum is used by telecom operators and how it should be priced.
Before the wireless era, telecom services came over physical wires --- cables had to be laid physically up to the consumers’ premises. The wireless telephony changed all that. Each of the mobile phones we use is in essence a transmitter and a receiver, capable of receiving signals over the electromagnetic waves. The sum of all electromagnetic waves is the spectrum. Therefore, for wireless services, telecom operators no longer need to lay cables. Instead, they need to get from the government a slice of the electromagnetic spectrum, which is then used for transmitting data or voice.
Wireless signals therefore use slices of the spectrum --- or frequency bands --- for transferring information. Any wireless signal can be made to carry information --- the radio stations use certain frequencies to bring us voice broadcasts that we can listen to by tuning into those frequencies. The mobile telephones also use wireless signals and do this tuning transparently for us. But behind the voice we hear in our mobile handset, is a wireless network that uses radio waves to transmit the voice. That is why turning the mobile handset to an FM radio is quite simple.
The problem of using the wireless frequencies or the frequency spectrum is that only a part of the total frequency spectrum can be used for mobile telephony. The international body, ITU, decides the frequency band that is to be used for different services. If we want the handsets and the switching equipment to be kept as global standards, we need to also allocate the same frequencies here for similar services. That means that there is limited spectrum available for any service --- it is not an unlimited resource that can be given to anybody and everybody.
The 2G means second generation of wireless telephony and is what we use as GSM, CDMA and GPRS services. They have limitations of how efficiently they use the spectrum that originated primarily for voice services. Though they are used for data services also (e-mail using data cards with the laptops), they have low bandwidths and are quite slow. The 3G refers to third generation technology and is much more efficient in the way they use the spectrum. It also uses a different frequency band from that of 2G. The 3G technology permits not only voice telephony but also high-speed internet connections. The 3G license will be auctioned, it has been agreed. However, there are still serious problems with its license terms and conditions, which can come back to plague us in the future.
MASS MARKET WITH BIG BUCKS
The current issue is with the award of new 2G licenses. This is where the bulk of the subscribers are likely to be, with 3G catering only to the well-off subscribers and corporate clients. This is the mass telecom market and the one with really big bucks. And this is where the major scams in the telecom sector have taken place in the past as well.
The question of spectrum was not important when the mobile services started in the country. The initial licenses that were given had the spectrum --- called the start-up spectrum --- bundled with them. The initial metro licenses were given away virtually at a pittance. The market value of these licenses is astronomical today.
In the next round, the licenses again had the start-up frequency bundled with them. It was also mandated that all mobile services should be based on GSM technology. Though large license fees were promised, once they secured the licenses, all the private players wriggled out of paying the license fees and went into a revenue sharing arrangement, courtesy the then ruling NDA government.
But, even after the changeover to a revenue sharing regime, the freebies for the GSM operators did not stop. From the initial 4.4 MHz of start-up frequency, they now hold about 10 MHz each without paying any extra spectrum fees.
It is with the award of the 4th GSM license and permission to all CDMA operators also to offer GSM services that the current scam started. It is obvious that as spectrum is a limited resource, it cannot be given away free or well below market prices. The argument that the ministry of telecom used is that if the spectrum is priced high, the cost to consumers would be excessively high. Their solution was to peg the license and the spectrum fees to the same level as existed in 2001 and give it on what it called a ‘First Come First Served’ basis. The CDMA operators were allowed to jump the queue and also given GSM licenses and spectrum again at the 2001 prices.
Here two issues are involved. One, should the license and spectrum, which in 2008 have much higher value, be given at the 2001 prices? If they are to be priced cheap in order to keep costs to the subscribers low, should not there have been terms and conditions in the license that the shareholding cannot be changed for a certain period? Or a condition that if they sold their shares or their companies, they would then have to pay the government the difference between the market price and the actual price paid for the spectrum?
The second issue was: should at all the license be given on the first come first served basis? Should the CDMA operators have been allowed to jump the queue and corner spectrum without paying the market rates? Obviously, if spectrum is a scarce and costly resource, giving it away at throwaway prices is a decision that cannot be taken lightly. There should have been a serious consideration on the basis of award of spectrum and licenses, and a decision reached only after a consensus on it. Instead, a so-called ‘first come first served’ policy was hastily announced and licenses given to parties who had no other intention but to make windfall profits by reselling the same.
It was not that the telecom ministry had not received enough warnings of the consequence of such an allotment. Writing to the prime minister on February 29 this year, Sitaram Yechury had pointed out:
1) Spectrum is a scarce, national resource and needs to be allocated wisely and transparently.
2) Existing GSM operators should use the spectrum allocated to them efficiently before considering additional spectrum.
3) The CDMA operators being also given GSM spectrum and being allowed to jump the queue of new applicants is completely arbitrary.
4) The first come first served method of allocating license and spectrum is completely arbitrary and prone to manipulation.
5) Such a scheme will only encourage dummy companies and others to secure license and spectrum cheaply and then auction their shares/companies to earn windfall profits
6) The cost of Rs 1,650 crore decided for a spectrum is nothing but a total give-away of scarce national resources. This is the 2001 price and should never have been used as the price of license and spectrum in 2008.0
This was not an isolated warning. A number of other experts had also warned the ministry of the consequences of such a step. Instead of making attempts to reach a national consensus on this, however, the ministry went ahead with its so-called ‘first come first served’ basis and a throwaway price of the spectrum.
SWINDLING ALL THE WAY
What has been the consequence of virtually giving the spectrum in this way? First, the licenses were cornered by builders and other speculators. A number of the 575 companies in the license queue were known to be dummy corporations, and their purpose was to make windfall profits by securing the licenses and later reselling them at a high price. In other words, the subsidy under 2G by keeping the license fee and spectrum costs low would be reaped not by the subscribers but by the entities who resell these at high prices. Or it will be cornered by companies such as Reliance, who would be allowed entry into the GSM sector with a double benefit --- jumping the queue and almost free start-up spectrum.
The deal between UAE’s telecom operator Etisalat and Swan Telecom, and Unitech and Talenor (of Norway) has brought out the magnitude of the loss. Swan Telecom bought a license for 13 circles along with the necessary 2G spectrum for a paltry Rs 1,537 crore. Subsequently, it sold 45 percent of its stake to Etisalat for 900 million dollars, taking its book value to 2 billion dollars. This is without putting up any infrastructure, let alone starting operations. The Unitech-Talenor (of Norway) deal is no different. Like Swan, Unitech too did not spend a single paisa for executing its license. It has now sold 60 percent of its stake to Talenor for Rs 6,120 crore while paying only Rs 1,651 crore as license fee. The government has actually got only one-sixth of what it would have got, had it gone through a fresh auction route – a loss of Rs 10,000 crore to the exchequer on SWAN and Unitech licenses alone. It is known that other operators are also queuing up to sell their shares or licenses. The cumulative loss to the exchequer is thus of the order of Rs 60,000 crore, making it as one of the biggest financial scams of all times in the country.
Once the license holders started selling their shares and licenses, it became clear that these companies were making huge speculative profits. It was expected that the government would take some measures to either stop this scam or recover the loss to the exchequer of giving away spectrum in this way. Instead, the UPA government argued that nothing could be done as selling shares or licenses are quite legal. And no attempt to ask the simple question of who caused such a huge loss to the country and how it can be prevented in the future.
The minimum this government should now do is to try and recover some of the losses and plug such losses for the future. It is a commentary on this government that it sees the plunder of Rs 60,000 crore from the exchequer as quite legal. And this at a time that we already have a financial crisis in the country and a shortage of funds for basic infrastructure. Not only are there no attempts to stop such sales being made, at the very least the government is not even thinking of imposing windfall tax to take away such ill-gotten gains by these fly by night telecom operators. To argue that nothing can be done is to give up on governance itself.