The 1.76 lakh crore affair- An understanding

Every day, I get up to find one or the other custodian of our country fighting over a 1.76 lakh crore figure. The CAG defends it, the congress attacks it, the media sensationalizes it and BJP- is well- clueless. I’m pretty sure half their leaders do not even realise how many zeroes we are talking about.

In the now famous report, the CAG states “Any loss ascertained while attempting to value the 2G spectrum allocated to 122 licencees in 2008 can only be 'presumptive', given the fact that there are varied determinants like its scarcity value, the nature of competition, business plans envisaged, number of operators, growth of sector etc. which, depending upon the market situation, would throw up the price that it commands at a given point of time. Instead of attempting to come to a specific value of 2G spectrum which could have been possible only through an efficient market discovery  process,  we  have  looked  at  the  various  indicators  to  assess  a  possible (presumptive) value, from the records made available to Audit rather than going for any mathematical/econometric models.”

Further, the CAG gives the following figures:

So basically, in layman terms, the CAG did what ESPN does while a cricket match. At any particular point of time, they come up with projected scores at different run rates. For example a team with 200 runs in 40 overs with 8 wickets in hand has 60 balls to go. At a 6/over run rate, they will reach 260; at a 10/over rate, they will reach 300, and at an exorbitant 20/over, they will reach 400. Now imagine, the team scores a dismal 230. The commentators start accusing the players of match fixing, the board sacks the players for below par performance and the public  start throwing stones at their house, all clamouring the “400” figure.

No doubt 8 wickets falling in a span of 30 runs is below par performance, but here, the benchmark provided is wrong, or at best, doubtful. Same is what happened with the CAG Report. No doubt it was a scam. There’s nobody in the government who can deny that Raja gave undue favours to a few people and some others were systematically sidelined. This was the precise reason why Raja went to jail. What the media did was to latch on to an unusually high figure to give it a sort of unprecedented sensationalism. The nation has remembered that figure ever since.

Understanding the various potential losses worked out:

1.       The S-Tel rate: 67364 crores
This was on the basis of the price that S-Tel was ready to pay for a share of the spectrum immediately after losing out in the auctions. Those who understand a bit of Economics will understand that the price that someone is willing to pay for a scarce commodity usually reflects its value in the eyes of the buyer. That a company to willing to pay this price means it valued the spectrum AT THAT PRICE, not the CAG.

2.       3G Auction:  176,645 crores
The report states “TRAI in its report of 2010 has observed that 2G services today are actually offering 2.75G services.  Therefore “while  comparing  spectral  efficiency  and  other  factors,  it  is  fair  to compare existing 2.75G systems with 3G systems”.

The Authority recommended 3G prices to  be  adopted  as  the  current  price  of  spectrum  in  the  1800  Mhz  band  and  intends  to separately  study  the  subject  for  apprising  the  Government  of  its  findings.  They  have recommended even higher pricing at 1.5 times of 1800 MhZ band for the 2G spectrum in 800 and 900 Mhz band. “

Even here, the comparison is illustrative. 3G may have fetched a higher price due to its enhanced data capabilities, reason current mobile operators could have valued higher than basic calling facility. Also, a time gap and the opportunity lost on 2G may have been a factor for the higher pricing. Hence, this figure had to be treated with as much seriousness as the statement that “Since Yuvraj can hit 36 runs in an over; he should be scoring at least 30 in every over”.

The fact also remains that the Government got ` 1.03 lakh crore from the auction of 3G and BWA spectrum against their own estimate of ` 35,000 crore.

3.       Sale of Equity by new licensees: INR 69626 crores, and INR 57,666 crores

Anyone remotely familiar with valuations will know that a buyout will consider all assets and liabilities of the firm on offer. This includes things like intellectual capital and other similar items. The value offered for the “non-quantifiable” items again follows the demand and supply model.

If it comes to valuations for a takeover, for example, Mckinsey & Co will be valued at a far higher price than the land-bank owning DLF, primarily on account of its “non-quantifiable” items like intellectual property, alumni base, existing relationships etc.

Similarly, in the 2G case, Etisalat DB, a renowned telecom operator of the Middle East, and Telenor, a huge Norway based telecom operator, entered into a JV (bought equity) with Swan and Unitech AFTER the latter acquired the spectrum. Since both the Indian players knew nothing about telecom and had no systems in place, it can be safely assumed that the price offered was the price of spectrum, the only asset these companies had.

These, precisely were the potential losses, and how they were calculated. The government may well say that in order to keep the prices of telephony low, we gave spectrum for free. But it can never say that there was “Zero Loss” or “No Scam”.

The potential losses worked out by the CAG are based on the value different people saw in it. The government gathering 9k crore today in the auction reflect the values these people see in that asset today. In a dynamic market that has seen 2 recessionary phases since 2008, expecting an asset, especially a technology asset, to hold its value against time, is well, idiocy.

But at the time this was given away, the presence of 500 bidders meant that the government COULD have realised a lot more money, if not 1.76 lakh crore.

Disclaimer: No use of any privileged information has been made in preparing this article. All info provided is available in the public domain.