2G scam: Centre must spell out whether sale of public assets is maximisiation of revenue or welfare, says Meghnad Desai

By: | Updated: December 25, 2017 5:00 AM

In the sale of public assets or goods, the govt must spell out whether the principle underlying is maximisation of revenue or welfare

2G scam, Congress, bjp, bjp government, Vinod Rai , FCFS rule, private consumer good, Kapil Sibal, Manmohan Singh, PSU banks, air india, income yielding asset, 2 g spectrum caseThe auction method treats the spectrum as an income-yielding asset whose value is measured by the discounted sum of future earnings accruing to the people who have access to the asset.

The 2G judgment has many ramifications regarding the revival of the Congress, the problem it creates for the credibility of the anti-corruption narrative of the BJP, the impression it creates of a colossal waste of resources having a seven-year trial which examines 80,000 documents and then comes to a ‘not proven’ judgment. But the more important point it raises for the whole issue of disinvestment or disposal of public assets is one that deserves much more discussion. The special court judge, OP Saini, denounced the exaggerated stories about the scam, and quite rightly so. But the Supreme Court, in its 2012 judgment to cancel the licences, obviously accepted the story of the scam. Who is right? When the CAG Vinod Rai announced that the sale of 2G spectrum had resulted in a loss of Rs 1,76,000 crore, there was a justifiable outcry. It took some time before people realised that this was a notional loss. It estimated the amount the government could have made if it had allocated the licences by auction rather than by a ‘first-come, first-served’ (FCFS) rule. Economists are quite used to such notional categories. The concept of opportunity cost is one such.

The issue, however, is: Should the asset—access to the spectrum—be disposed of so as to maximise the revenue from the sale or to maximise consumer welfare? The auction method treats the spectrum as an income-yielding asset whose value is measured by the discounted sum of future earnings accruing to the people who have access to the asset. A perfectly valid alternative view is from the classic literature on marginal cost pricing of public facilities. There is a classic paper in French by Marcel Boiteux who was the first to state the principle. The bridge across the river which facilitates traffic should be priced not on a cost-plus basis to maximise profits, but on a marginal cost basis to maximise use. The state should bear the fixed cost entirely. The UPA government took the view that the mobile telephony which the 2G would make possible would contribute to human welfare and, hence, should be sold in a way which would maximise public use.

Therefore, the issue in 2G to discuss is not whether a mobile telephone is a private consumer good (which it is), but whether the network which makes it possible for millions of mobile phone users to communicate with each other a public good or a private one? There is no doubt that by waiving the auction and selling off the licences cheap, the government made the use of mobile phones spread much farther down the income line than it would have had it compelled the providers to charge a profit-maximising fee. There is also no doubt that penetration is very deep and mobile telephony has been an empowering device for women, children and the less well paid. Given the size of mobile telephony use at 800-million plus, no other consumer good is this popular. There are obvious network economies. Thus, an economist would approve of the sale of the spectrum by a method other than auction. I recall saying at the time that Rs 1.76k crore would mean a welfare gain of around Rs 2,000 per mobile phone user. Kapil Sibal argued that it was a notional loss, but no one explained the sound economics behind the decision. Perhaps the then prime minister, Manmohan Singh, should have donned his academic gowns and given a lecture with blackboard for figures and numbers.

There is a wholly separate question as to whether the FCFS system was fairly implemented or whether some bidders were treated like insiders relative to others? Also, there is the question of whether the insider status was bought with a bribe to the minister or the official concerned? These would be criminal activities to be tried in the courts. But that issue is entirely independent on the loss of Rs 1.76k crore and whether it was a scam. Of course, each provider getting a licence made a profit. But competition between them ensured that they would price their services competitively. Since they did not have to pay for the spectrum, they could price their services at a cheap rate—hence the rapid growth of mobile telephony. If they had to also charge for the revenue maximising price, the use of mobile telephones would have been confined to the better off. One hopes that the government would dispose of a lot of its assets beginning with Air India but also PSU banks and other assets. It should make clear in each case whether the relevant principle is revenue maximisation or welfare maximisation.

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