Why call CAG to account?

Now that the Comptroller and Auditor General (CAG) is being hauled over the coals over his Rs 1,76,000 crore “presumptive loss” estimate in A Raja’s 2G allocations, it is worth revisiting what he actually said in his report of 8 November 2010.

Contrary to popular belief, CAG boss Vinod Rai did not give the Rs 1.76 lakh crore figure as his final opinion. In his report, he actually gave out four different ways of calculating the potential loss to the exchequer (read the relevant chapter here), and these worked out to Rs 67,364 crore, Rs 69,626 crore, Rs 57,666 crore, and Rs 1,76,645 crore.

(These figures include three components – (1) the loss on 122 new licences issued by Raja, (2) the loss on undercharging for dual-technology licences, and (3) the loss for allotment of spectrum beyond 6.2 Mhz). The Supreme Court cancelled only the first – and hence the loss on this count is much lower even by the CAG’s calculations (Rs 1,02,498 crore, and not the full Rs 1,76,645 crore).

The first overall loss estimate of Rs 67,364 crore was based on an offer by S Tel—owned by C Sivasankaran—to voluntarily pay Rs 13,752 crore over and above the spectrum charge/revenue share payable if it was allotted a pan-India GSM spectrum of 6.2 Mhz. S Tel even said it would pay more, if someone countered its offer with a higher bid.

The S Tel offer was made in December 2007, just days before A Raja made his whimsical decision to award 122 licences with spectrum for a total revenue of Rs 9,014 crore.

The second estimate of Rs 69,626 crore was based on the sale of equity at a premium by Unitech to Telenor. CAG worked out this revenue loss on the assumption that spectrum was the only thing being bought, since Unitech, Telenor’s partner, had nothing to add to the venture in terms of value.

The third estimate of Rs 57,666 crore was based on a similar equity valuation, this time by the price paid for equity in Swan Telecom, which later became DB Etisalat.

It was only the last estimate—Rs 1,76,645 crore—that was based on the 3G price discovered in 2010.
But did CAG tout this as the right presumptive loss?

Not quite. Far from it. It merely restated what the prime minister and the Finance Minister themselves believed – that spectrum prices must be determined by the market. The report said: “Audit reiterates that (the) specific value of 2G spectrum could have been discovered only through an efficient market drawn process and, in its absence, these are the indicators available which give the hints towards the loss government could have suffered. The revenue realised through (the) auction of 3G at the rate fetched through a market process is highlighted in this report to project the benefits of resorting to an open price discovery process and the value that spectrum could command without compromising with the policy of open competition (Italics ours).”

Clearly, what the CAG was trying to do was “hint” at an estimate of what could have been lost by failing to resort to a market-driven price discovery process. It was not trying to highlight Rs 1.76 lakh crore as an unimpeachable figure of real losses, as Messrs Manish Tewari and Kapil Sibal have set out to prove. The obsession with Rs 1.76 lakh crore began with the media and opposition politicians – and that happened due to the fact that it was the highest estimate of presumptive loss.

When DoT objected to these potential loss calculations, CAG reiterated the same point emphatically: “The attempt by audit is only to highlight that the price discovery of spectrum through a market mechanism would have fetched a much higher value and thus increased receipts for government.”

We know that revenue maximisation need not be the only goal of policy, but CAG had a counter-poser to that. “Non-discovery of price of spectrum through competitive bids/auction in 2007-08 has resulted in a huge undue advantage to some of the newly incorporated firms with little or no experience in the telecom sector. This is particularly so when the government of India had followed the market mechanism to determine value of cellular mobile licences since early 1990s.”

CAG is essentially saying that if government does not extract a market premium on scarce resources, some private party will. By implication, it is asking: does allowing private parties to make easy money helping the cause of cheap call rates or teledensity?

CAG also points out that the teledensity argument may be overstated, since the national goals on this had already been achieved when Raja issued his licences. The problem in 2007-08 was to optimise spectrum usage by revising its fees. CAG says: “While targeted growth in teledensity had already been achieved, and a reduction in tariff in the telecom sector had benefited the customer, as envisaged in NTP-99 (New Telecom Policy 1999), a policy to ensure optimal utilisation of spectrum and a method to discover its market price was not considered.”

The scam, in CAG’s view, was not really about Rs 1,76,645 crore. It was about the licences Raja gave at throwaway prices, and particularly in the way he went about it.

Chapter 6 (read here) of the CAG report contains the main conclusions on what it thinks is at the heart of the scam.

First, it says, “the entire process of allocation of UAS (unified access service) licences lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner. The Hon’ble Prime Minister had stressed on the need for a fair and transparent allocation of spectrum, and the Ministry of Finance had sought for the decision regarding spectrum pricing to be considered by an EGoM. Brushing aside their concerns and advices, the Department of Telecommunications, in 2008, proceeded to issue 122 new licences for 2G spectrum at 2001 prices, by flouting every canon of financial propriety, rules and procedures.”

Second, “the DoT did not follow its own guidelines on eligibility conditions, arbitrarily changed the cutoff date for receipt of applications post facto and altered the conditions of the FCFS (first-come-first-served) procedure at crucial junctures without valid and cogent reasons, which gave unfair advantage to certain companies over others”. This is the heart of the 2G scam, not Rs 1.76 lakh crore.

Third, “the Department of Telecommunications also did not do the requisite due diligence in the examination of the applications submitted for the UAS licenses, leading to the grant of 85 out of 122 UAS licences to ineligible applicants. These companies, created barely months ago, deliberately suppressed facts, disclosed incomplete information, submitted fictitious documents and used fraudulent means for getting UAS licences and thereby access to spectrum”.

CAG goes on to indicate many other lapses, but it does not make a fetish of the Rs 1.76 crore loss figure. It concludes: “The fact that there has been loss to the national exchequer in the allocation of 2G spectrum cannot be denied. However, the amount of loss could be debated.”

Even in its conclusion, CAG is not saying its estimates are god’s truth. They are open to debate. So one wonders why Manish Tewari and Kapil Sibal are calling the CAG to account.

It is they who must rethink their zero-loss theory. Or, maybe, they should read the CAG report again.