Folly of Mandating Spectrum Auctions

This article by Jayna Kothari was published in the Business Line print edition dated November 24, 2012.

It was reported that as against the expectation of Rs 40,000 crore, the Government received bids for just Rs 9,224 crore. The turnout was so weak that only 18 of the 22 telecom circles received a bid.

The auctions were conducted in fulfilment of the mandate given by the Supreme Court — that for spectrum, auctions were the only equitable manner for allocation.

This was first held by the Supreme Court in its judgment in CPIL and Others vs Union of India and Others (“the 2G case”), where the Court set aside the 122 spectrum licences that were allotted on a first-come-first-served basis, and went so far as to declare that for spectrum and all natural resources, auctions would be the only method for allocation that would fulfil the constitutional requirements of fairness, equality and transparency guaranteed in Article 14.

Contrary Positions

This was a highly problematic declaration — to mandate allocation of spectrum and all natural resources through auction. This observation was taken to Supreme Court once again in a Presidential Reference by the Government. In its September 2012 order on the Presidential Reference, the Supreme Court held that for all other natural resources auction cannot be mandated as the only method, but oddly carved out an exception for spectrum.

It reiterated that for spectrum, auctions shall continue to be the only method for allocation. The judgment held that the observations in the 2G case, “….could not apply beyond the specific case of spectrum, which according to the law declared in the 2G case is to be alienated only by auction and no other method.”

On the other hand, in the Presidential Reference it was held repeatedly by the Court that “…it cannot, and shall not, be the endeavour of this Court to evaluate the efficacy of auction vis-à-vis other methods of disposal of natural resources. The Court cannot mandate one method to be followed in all facts and circumstances. Therefore, auction, an economic choice of disposal of natural resources, is not a constitutional mandate.” When this was the opinion of the Court, it is hard to understand why auctions were mandated for spectrum.

Justice Kehar’s separate opinion perhaps provides support for an interpretation that auctions were never meant to be the only mandate for all distribution of resources, even for spectrum.

In the Presidential Reference, the Supreme Court did perhaps not want to appear to interfere in its earlier judgment where the 122 licences were set aside. The government also, in an attempt to not have the entire Reference rejected, conceded that it was not seeking an opinion of the court on spectrum allocation and accepted auctions as the only method for allocation, although several core questions in the Reference were concentrated on spectrum.

An Intervention Brief was filed on behalf of the Centre for Internet and Society urging the Court to reconsider its mandate specifically for spectrum, citing examples of spectrum auction failures around the world.

These arguments were not accepted because both the Court and the Government did not want to touch spectrum allocation — it was a delicate issue, and they tiptoed around it. The mandate of the court on auctions, as being the only method for spectrum allocation, stood firmly reinforced.

Alternatives to Auctions

Are auctions, with all their promises of maximisation of revenue, the only mode in the common public interest for allocation of spectrum? Clearly not, going by the recent auction failure which failed due to underbidding, where none of the promised revenue was recovered.

The Constitution in Article 39b mandates that the State shall, in particular, direct its policy towards securing that the ownership and control of the material resources of the community are so distributed as best to subserve the common good. Thus, it is clear that the State’s object cannot be merely to maximise revenue but the policy of allocation and distribution of spectrum chosen must be towards securing the common good and keeping the public interest in mind.

There have been several instances worldwide where spectrum auctions have failed. A 2006 Report by Gregory F. Rose and Mark Lloyd, analyses spectrum auctions in the US from 1993 onwards and found that along with problems of overbidding, auctions had also failed due to underbidding in the US. Collectively, these trends of overbidding, pre-emptive bidding and underbidding characteristic only to auctions, sometimes result in disastrous consequences. Thus the argument that auctions maximise revenue, fails in the face of the recent failure of the 2G auctions. This affects the quality of services rolled out to consumers.

The present fiasco shows the danger of mandating any one method, such as auctions, for spectrum allocation. With the Government’s hands tied by the Supreme Court mandate, other possible options for spectrum such as the revenue sharing model, spectrum sharing and the creation of a spectrum commons are now not available. Perhaps these and many other modes of allocation would be in the fulfilment of the common good at a time when auction may not be right.

Courts and Policy

So, where do we go from here? Do we look for an interpretation in these judgments that would give a way out for the government to implement different modes of allocation for spectrum? Or would this give ground to a fresh case for review? These are all possibilities that need to be explored.

It is time we re-look at the role of the courts in policy matters. As far back as in 1995, the Supreme Court, when dealing with airwaves in Secretary, Ministry of Information and Broadcasting and others vs Cricket Association of Bengal and others, held, that, matters of policy are for Parliament to consider and not for courts.

Let us take this principle seriously and learn lessons from this auction failure. Mandating any one mode of allocation as a constitutional mandate can never be in the interest of the larger common good.

The Supreme Court should not have been rigid about allocating spectrum only through auction, given its mixed record the world over.