Praveen Chakravarty: Resource Curse or Winner’s Curse ? What’s worse?

Praveen Chakravarty
January 20, 2013

Drunk driving is not an argument against driving; the 2G scam alone cannot be an argument against fixed-price resource allocation policy

Watch an IPL match live for Rs 10” was the promise. The first truly inclusive success story of free India, mobile telephony, promised to carry the nearly 850 million mobile subscribers to the next giant leap — mobile applications such as mobile commerce, mobile trading, live TV on mobile and so on. This was back in early 2010 around the time of the 3G spectrum auction process, which culminated in a government revenue windfall of $25 billion and was lauded as the near-perfect way to allocate state resources.

The bad news: the IPL match will now cost Rs 300 to watch live on your mobile phone, rendering it unaffordable to the vast majority of the 850 million subscribers who, on average, spend Rs 125 in an entire month. And to the chagrin of the consumer, the monthly charges for even basic calls will now increase by 20 per cent on average. With a paltry estimated 12 million 3G subscribers in the first year of launch, poor 3G service quality as a result of insufficient spending on infrastructure and even basic call charges starting to rise, the 3G auction of February 2010 threatens to wreak havoc.

Amid the outrage over favourable, discretionary allocation of telecom spectrum by some of our cabinet minister(s), opinion pages such as this have vociferously argued for replacing a system of fixed-price allocation with a market-determined price discovery mechanism of state resources such as land, minerals, spectrum and so on. The 2G scam was the fountainhead of the anti-corruption anger eventually manifesting itself in the form of the Jan Lok Pal protests recently. A sample analysis of the impact of different spectrum allocation policies in the telecom sector reveals a real danger of the proverbial “Winner’s Curse” in auctions that can potentially be more disruptive to society than a titillating temptation for corruption induced by a “Resource Curse”. While one analysis cannot be conclusive proof, it provides an alternate hypothesis to the seemingly accepted notion that auctions are the most efficient manner to allocate resources.

In the last 17 years since the first telecom spectrum allotment in 1994, spectrum has been allotted eight times. Four times – 1994, 1995, 2001 and 2010 – the allocations were through a market-determined price discovery policy and four times – between 2004 and 2009 – they were through a fixed-price allocation policy. During the initial period of market-based allocation up to 2002, call prices dropped 70 per cent and service providers added 14 million subscribers. However, during the fixed-price regime from 2003 to 2009, receiving calls became free and charges dropped a further 90 per cent, leading to another 600 million people becoming mobile-enabled. After the aggressive 3G auction in 2010, besieged under heavy 3G spectrum winners’ prices, mobile telecom operators have started to increase call rates for the first time in the country’s 17-year mobile telecom history. The mobile voice bill for an average consumer is set to rise by 20 per cent and data charges by 20 times!

Of the 62 original licensees that received licences through bidding during 1994-2001, only 28 are still in business. In contrast, all of the 83 licensees in the fixed-price scheme during 2003-06 are still in operation. While one may be tempted to dismiss this as healthy market Darwinism, the longevity of companies that won telecom licences is important for continued telecom service in the country. Whether the 3G auctions prove to be a death curse for some of the winners remains to be seen.

In countries such as the US, the auctioning of spectrum began in 1994 with an explicit prohibition of allocation of spectrum licences purely to maximise federal revenues. While it may be tempting to look at international best practices and try to adapt those for India, 20:20 hindsight reveals that our fixed-price spectrum allocation policy has evidently enabled mobile telephony penetration surpassing even the most bewildering expectations.

To the mathematics purists’ charges of confusion between correlation and causality and an attempt to prove the counter-factual, I plead guilty. This is merely an attempt to infuse some data-based reasoning to the current emotionally-agitated climate of public policy preaching. While we embark on policy initiatives of auctioning state resources such as minerals, land, spectrum and so on, there is not enough statistical evidence of the merits of auctions in the context of India’s goal of inclusive growth. The “Resource Curse”, which argues that countries rich in natural resources are more susceptible to cronyism and oligarchies, is a genuine concern but as our analysis above shows, so is a “Winner’s Curse” in an auction, especially in the modern developmental paradigm of inequity and unequal economic growth of nations. The case for a market-determined price discovery mechanism for allocation of resources as merely a solution to curb temptation for corruption through fixed-price allocation is like the cliché “throwing the baby out with the bathwater”. The former telecom minister, if proven guilty by our judiciary, may be akin to a drunk driver and cannot be the sole reason to change driving regulations.

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