CAG allegation of cartelization in 2G allocation is misleading
Recently, the media reported that the Comptroller and Auditor General (CAG) of India, in a communication to the Department of Telecommunications (DoT), has made a surprising observation that the telecom operators of the country acted as a cartel in the recently concluded spectrum auctions to influence the pricing.
The Cellular Operators Association of India (COAI) is dismayed and shocked at such an unsubstantiated allegation coming from a responsible government body such as the CAG. The allegations are far from the truth and misleading since the concept of cartel is difficult o conceive in a market with one of the highest number of players offering he lowest tariffs in the world; some of whom withdrew from participation in the 2G auctions, only due to the exorbitant reserve price.
What is Cartelization?
By definition, a ‘cartel' essentially means ‘an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of a product, or, trade in goods or provision of services.
The decision by all operators to pull out from the 2G auctions due to unrealistically high spectrum prices is thus, a case of unviable business scenario, and not ‘cartelization'. Also, cartels usually occur in oligopolistic industries, where the number of players is small. Thus, it does not apply to a highly competitive Indian telecom market with 10-12 players operating in every circle. Further, the aim of any cartel agreement is to increase individual members' profits by reducing competition and increasing prices. The spectrum auctions clearly did not result in either high consumer tariffs or extra profits for the operators and the country continues to enjoy one of the lowest tariffs across the globe.
Non participation in a flawed auction cannot be treated as a cartel.
Apparently, the CAG has overlooked the sectorial realities and the real reasons behind the failure of the 2G auctions-- an artificially high reserve price which had no congruence to market realities, and a number of operators who had to bid as a result of having lost their licenses and in spite of the igh prices and the limited availability of spectrum, bid simply in order to protect their years of investments and sustain their customers and businesses.
The Supreme Court in its order dated 15.02.13 recognized these realities and has directed the DoT to put the entire quashed spectrum to auction.
The auctions for 1,800, 900 and 800 MHz spectrum should be seen in the context of the 3G auctions, where a fair and rational auction process was followed, with a reserve pricing mechanism which was market tuned; encouraging operators to come forward and bid aggressively, resulting in high realized prices for the spectrum and generating massive revenue for the government. Subsequently, market experience brought about learning for the operators that such exorbitant prices did not make business
sense. However, in the 2G auctions the government failed to utilize these learnings to optimize its effectiveness in the process, as well as the result.