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2G verdict: 'Scrapping of licences was like throwing baby with bathwater'

The philosophy of maximising public gains through auction as the only means to allocate resources has proved counter-productive, says Jayesh Desai, a nominee director on the Uninor board in 2010-11

Anjuli Bhargava 

Jayesh Desai, EY, uninor

Jayesh Desai, a former consultant who spent a large number of years with EY, was a nominee director on the board of during 2010-11, when he worked with Unitech Infrastructure. He spoke to Anjuli Bhargava on the unexpected 2G judgment, the telecom industry as it is today and the unintended consequences of the 2012 judgment on the allocation of spectrum. Edited excerpts:
Did the recent 2G judgment come as a complete shock to you?

Way back in 2011, when the charge sheet was filed, I didn’t think the (CBI) had enough to prove criminality – so no, it did not come as a shock. They didn’t manage to put together the evidence needed to prove criminality on the part of those accused.

I also think that we as the public are so vested in seeing the 2G episode as a scam that we tend to see it more as a case of “not proven” rather than “not guilty”. In that sense, even those who might be innocent have been condemned as guilty without any proof.

I read somewhere that the conviction rate for the CBI is less than 5 per cent. The body needs to be upgraded urgently. Particularly when financial crimes are involved, forensic skills of a certain level are needed; the CBI simply does not possess that. It might have an Economic Offences Wing but I can’t think of a single scam – right from the Harshad Mehta scam way back in 1992 – that it has managed to prove. The CBI and ED seem to be completely lacking in the necessary forensic skills as far as financial frauds are concerned. Unless we modernise these agencies, we will continue to see more such cases that are heavily hyped but can only end up as having to be dismissed.

What is your view of what has happened to the telecom sector since the 2012 judgment?
We are in a position to analyse the 2012 judgment now – a few years down the line. I think that we will always regret the manner in which the SC at that time moved from a pre-conceived notion to a pre-determined conclusion. They decided before any hearing that Raja was guilty (it is quite likely that he may be – though the CBI special court says otherwise) but then chose to punish the completely wrong parties.

Worse, I think there were a lot of unintended consequences which stemmed from the judgment. The SC seemed to say that auctioning is the only basis for allocation of resources (a stand which had to be clarified by a later Constitutional Bench judgment) and use it to nullify the largest foreign direct investment (FDI) that we had till then. It did not serve the country well.

Auction is not necessarily the only way of allocating public resources. I actually believe that the allocation of licences served its purposes in terms of creating competition, increasing teledensity and reducing telecom costs (in three short years after the licences were allocated, the number of mobile phone users moved from 400 million to 700 million and costs fell by nearly 50% from 65 paise per minute to 34 paise per minute. For sure, I believe that we could have implemented the process better and in a more transparent fashion, but throwing out the policy to punish these guys because of unproven personal benefits was like throwing out the baby with the bathwater.

While the Supreme Court’s Constitutional Bench subsequently ruled that auction need not be the only way of dealing with natural resources, in a manner of speaking, the philosophy of auction seems to have become a part of public policy now. This has resulted in spectrum being auctioned at very high prices. The high spectrum prices mean that it is no longer economically viable or justifiable for a new player to challenge the incumbents. As a result, the telecom market has today become a three-player market. The higher spectrum costs will be passed on to the public at the end of the day.

So, this whole philosophy of needing to maximise public gains or gains to the exchequer – no matter what – has proved to be counter-productive. This is one of the unintended consequences of the judgment.

A second – and to my mind more serious fallout – has been the impact on foreign investment. Effectively, for Telenor, and Sistema – all of whom invested a lot of money, time and resources in India – this single judgment wiped out all their investments. In a sense, they were like innocent bystanders. I think this has hurt the sentiment of foreign investment much more than we realise. Until 2012, we could stand up and say – except in the sole case of Enron, where there were powerful reasons for the action, that the Indian government or state has honoured whatever contracts and agreements it has entered into. After this judgment (and a series of other ones that followed – whether they related to coal mines or roads), we can no longer say that. I would say that we ultimately ended up hurting the wrong parties.

Besides, foreign investment is a sub set of the overall investment. That too has disappeared, partly as a result of the judgment. So, when we look at that judgment in retrospect, I think we have ended up hurting ourselves both from an economic and public policy point of view.

Take for instance, the later judgment by the on the allocation of coal mines. While I have to say that that Bench was at pains to distinguish itself from the stand of the Bench in the 2G case on the matter of auctioning being the only way to allocate natural resources, it did, in a manner of speaking, seem to be taking its inspiration from the judgment on 2G. It focused only on the irregularities in the process of allotment and did not seem to consider any other factors. For instance, one of the points made in relation to the allocation of mines between 1993 and 2003 was that they did not lay down the guidelines for inter se prioritisation of bidders in this period. The reality in this period, of course, was that there were no takers for coal mines and there was no need for any inter se prioritisation. As a consequence of this judgment, the allocation of coal mines was cancelled with retrospective effect, ignoring completely the investments made after the allocation (not just in the mines but in the downstream sectors like power and steel). We can again see the deleterious effects of this – the coal mines taken back were subsequently auctioned and the same mines which had reached a peak production of 42 million tonnes produced just about 10 million tonnes last year.

The effects on the thermal power sector were worse. The private sector, which set up close to a 100,000 Mw of power plants between 2007 and 2014 (and remember the total private sector capacity in thermal power in 2007 was less than 10,000 Mw), has since gone into complete hibernation – we have not had private sector starting construction on any capacity whatsoever in the thermal power sector since 2014.

If therefore we are missing any private sector investments today, at least a part of the blame can be traced back to the 2G judgment.

So was this scam only in the head of Vinod Rai, as some Congressmen have been claiming?
Let me say this – the Rs 1.76 lakh crore number never held much conviction. Even in the CBI charge sheet, the number had come down to Rs 30,000 crore. In my mind, trying to arrive at any kind of number was always incorrect.

The aim of public policy is not necessarily just to maximise gains for the exchequer from allocation of natural resources. Look at any road project, for instance. The cost of land is always prohibitive. However, when you give the road to a concessionaire, you are giving him land free to use for the next several years. If we start factoring in the cost of the land and saying we must maximise the value for the land, the tolls would be prohibitive and the projects would never take off. Do we then say that it is a scam when we give road concessions and quantify the value of the scam as the cost of the land?
At the end of the day, we can either maximise the revenue the exchequer receives from the allocation of natural resources or seek to ensure that the savings that a concessionaire makes are passed on to the public in terms of lower cost of service and increased competition – in either case, the private concessionaire has to make profits – and therefore if you charge more for natural resources, the costs will be passed on to the users. So maximising the revenue receipts cannot necessarily always be the aim of public policy and to quantify losses on that basis (particularly when the stated aim of the government is to increase teledensity and reduce costs to the end user) is completely incorrect.

Where does all this leave us in the end?
From a public policy point of view, we need to examine whether there are fairer and more transparent ways of allocating natural resources like spectrum where the cost to the operator and the public does not go up – the damage from an investment perspective can only heal with time. The foreign parties involved are likely at some stage to come back with claims and we will have to suffer those costs. The damage to confidence in public policy can also only be healed with time.

Finally, the CBI in my view is overworked. It lacks experience, resources and perhaps even competence to handle financial frauds. I think the officers may be competent in their own way but there is an urgent need to modernise it in terms of tools, manpower and training.

First Published: Fri, December 29 2017. 11:04 IST