How to prevent licensing scams

Governments should govern. When misgovernance is exposed, as in the 2G spectrum scam, remedial action should follow. Yet we are seeing theatre parading as principle.

A rowdy opposition has paralyzed the current Lok Sabha session. Opposition parties insist that they will let the Lok Sabha function only if a joint parliamentary committee is appointed to probe the telecom 2G licences scam. The government has refused, and instead appointed a one-man inquiry committee. Because of the deadlock, Parliament has not functioned at all for 21 days.

The Times of India has calculated that the cost of a Parliament session is Rs 7.8 crore per day. In that case, the non-functioning of Parliament this session has already amounted to a Rs 164-crore scam. Whether or not former telecom minister A Raja will be found guilty in the telecom scam remains to be seen. But all political parties are dead guilty of the Rs 164-crore scam of paralyzing Parliament—this is a scandalous misuse of taxpayer’s money.

Congress worthies sanctimoniously blame opposition rowdies for sabotaging Parliament. Yet the Congress, no less than the opposition, is engaged in political theatre. If the Congress were serious, it would simply ask Speaker Meira Kumar – an old Congress hand – to suspend the rowdies and let the others continue with normal legislative business. This is indeed what used to happen in the Nehruvian era.

But not anymore. The Congress itself resorts to the same disruptive tactics when it is in opposition. So, all parties have come to a disgraceful, unwritten agreement that the right to paralyze Parliament is a fundamental political right of MPs, taking precedence over established norms of democratic functioning. All else is political theatre.

The comptroller and auditor general’s report on the 2G scam turns up little that was not known before. It was well known in 2008 at the time of licence allocation that Raja had subverted the process by first decreeing that licences would be given on a first-come first-served basis, and then tipping off favoured parties so that they could be first in line. When some of those licences were later sold at astronomical prices, many journalists highlighted the huge sums the government had foregone by not having an auction.

In no well-governed country are scarce licences handed out in such a manner. How on earth can a queuing system reward the most deserving? In any case, the licences were won, not by those who applied first but by those who first submitted the required documentation, and these were the ones tipped off through insider information. What did they pay for this inside information? Nobody knows, but everybody can guess.

It is easy to point fingers at Raja, but Manmohan Singh and his cabinet went along with this disgraceful licensing formula, and so are fully culpable. Even the Marxists, who are now waxing eloquent with rage, are culpable. They had the ability to topple the government in 2008 when the 2G licences were awarded, and actually tried to use this ability in regard to the Indo-US nuclear deal. But they never even tried to stop the 2G licensing formula that was obviously tailored for corruption.

Not even the BJP made a really big fuss. The truth is that all parties made so much money through dubious distributions of permits and licences in various states that they could not summon enough outrage in 2008 at the 2G money-making formula.

For the future, we need a law that prohibits the discretionary misuse of power apparent in so many allocations of land, mines, and licences of all sorts. We need a law that lays down that no government permit or licence shall be granted save on the basis of an auction, of which the full details and documentation are available to all, at least three weeks in advance. One exception will have to be made. An auction raises costs, and can mean that the winner has to charge high rates to recover his auction bid. In cases where the aim is to keep public prices low, licences can be distributed free of charge by lottery to pre-qualified candidates that will also be corruption-free. Any government allocation without such transparency should be legally null and void.

Of course, politicians will resist any such law. It will end the very lucrative games they have been up to all their lives. Yet politicians are sensitive to public outrage, and will give way when politically necessary. If this reform happens after the 2G scam, it will yield a public dividend several times the size of the scam itself.

5 thoughts on “How to prevent licensing scams”

  1. sir,your solution is great but the problem is government has not taken such long time to decide on the first course of action that is whether JPC should be instituted or not ,then how long it will it take them to get the process of allocation right and what will compel it to do so.public opinion cannot force governments to be just and fair.

  2. Dear Swami,

    A very good article, as always!

    However, I am not sure I agree with what you say here:

    “An auction raises costs, and can mean that the winner has to charge high rates to recover his auction bid. In cases where the aim is to keep public prices low, licences can be distributed free of charge by lottery to pre-qualified candidates that will also be corruption-free.”

    1. Does auctioning really raise the final cost to the ultimate customer, in the (applicable) long run? I don’t think so. Wouldn’t market forces eventually take care of punishing those who bought the rights at higher-than-realistic costs—provided the market really was fully free? And, in the process, therefore, of their going out of business, wouldn’t their property rights become available for buying to the better producers in the market, at lower, realistic prices, eventually?

    Your assessment that auctions raise cost seems short-range—which is so uncharacteristic of your writing.

    2. In today’s information age, and given the nature of the property under consideration, I find the idea of giving away licenses (rights, really) for free, and that too in a lottery, ridiculous.

    Spectrum is not a metaphysically given; it is man-made. Someone has to produce this property before it can be traded—or grabbed by a government for “allocation” to others.

    However, you do indirectly bring out a fine point that the government really can at all think of not grabbing any money out of an “allocation” of licences. A complete impossibility of corruption is merely one good side-effect. Observation of citizen’s basic individual rights (including property rights) is the main good here. The government indeed may not interfere in any economic matter. In this sense, giving the licenses for free might be taken to mean: the government keeping itself out of the economic transactions of spectrum buying and selling.

    Yet, if this is what is meant by “giving it for free”, then what principle is available for the government to act as the chooser, to distinguish one applicant from another? None.

    Further, a lottery would simply make a mockery of natural justice—both to the property rights of the producers of the spectrum, and to the better buyers’ rights to engage in free-trade. What if the best producer was denied even a bare entry because the lottery threw him out?

    So, both the ways: auctioning or “for free” are counter to the individual rights. The government must keep itself out of the economy. Then, the market will take care of the matters.

    The atomosphere is so bad that none knows what all property rights are involved in a situation like this—because no discussion or argument even mention of the word “private/individual property rights” occurs, in the context of spectrum. … If economists had done at least that much, one could have been more consistent in one’s opinions/comments. Unfortunately, that is not the case here. (I am just an engineer-cum-physicist, and write my comments on the fly.)



  3. I agree with Ajit. It’s well established internationally that scarcity-power is what will determine prices, not the underlying cost. 3G will cost 2000 per month irrespective of whether the provider got it at 30k cr or 1 rupee. If you don’t auction it, the monopoly profits will go to the company. With an auction, it will go to the treasury.

    The risk here is that the government will design an auction so as to increase monopoly powers (eg 6 licenses instead of 12) thus creating more revenue for itself but still resulting in higher prices and lower quantities for consumers.

    The solutions are below normal swaminomics quality.

  4. Abhishek Newatia

    Hey Swami,

    You have very beautifully drawn the reason for stalling of the Parliament. However, the solution is no where near your standards.

    Hopefully we will have some better alternatives from you in time to come.

  5. Dear Mr. Jadhav,

    You are right that the market forces eventually take care of punishing those who bought the rights at higher-than-realistic costs—provided the market really was fully free?
    But dont you think that still the 3 g spectrum is not successful because companies are not able to invest in infrastructure which will make it available for common man. People like you and me can afford 3G if at all it becomes twice the price & company will make profit also( 3G will become a class product rather than mass produst). But for a all round development of the country where people need communication for development higher prices will deter the common man from the service.
    I dont know about how sucessful Swami’s plan of lottery will be. But thr should be some alternative for finding the rgt. price for such things.
    I wish Swami puts some more light on this with facts & figure.

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