Using auction funds

Using auction funds

The new revenue raises an important question on how it should be used – a subject on which there has been little debate.

The much-anticipated auction of broadband spectrum was completed last month, with the government of India booking over Rs 61,000 crore from selling bandwidth to wireless companies. The auction has tangled origins – from the report of the Comptroller and Auditor General of India (CAG) and subsequent litigation including arrest and imprisonment of former telecom minister, Raja.

In 2008, CAG estimated the notional or presumptive loss of revenue at over Rs 1,70,000 crore from the government’s failure to collect consideration for allocating bandwidth. The recent auction fetched Rs 61,000 crore, which is less than a third of CAG estimate. Yet it represents a substantial inflow into the public exchequer over the next several years. This new revenue raises an important question on how it should be used – a subject on which there has been little debate.

For the bandwidth auction, the government of India published a “Notice inviting applications” in December 2012. It explains the auction process and related particulars, including eligibility of bidders and caution against anti-competitive practices. According to the terms, telecom operators who succeed at the auction need not pay the entire bid amount upfront. They must pay a quarter or third of the amount immediately, depending on the category of bandwidth (1800 or 900 MHz),and then they get a holiday of two years. Thereafter, the balance must be paid in ten annual installments.

Perhaps not surprisingly, the 104-page document makes no reference to the use of proceeds from the auction. This is, after all, a new source of revenue and its application is a matter of public interest. It has implications for transparency and accountability which have emerged as important norms of democratic governance.The subject has important constitutional and legal implications as well.

To understand the financial powers of the government, it is necessary to go back a bit in history. Following the British model, the Indian constitution vests in the government complete sovereign powers over everything – including airwaves which are arguably a natural phenomenon and resource. Incidentally, this type of omnipotent government would be an anathema in Gandhian philosophy and even in classical Indian thought. In any event, sovereign powers of the government are a fact in the constitution adopted in 1950, after independence.

Another quibble is about the nature of the revenue the government derives from spectrum auction. The question whether it is a tax or a fee can affect government’s power. Governments’ powers to levy tax and spend tax revenue are virtually unlimited – subject only to electoral compulsions of the political class. With fees, on the other hand, government powers are more limited. Fees can only be collected for specific services the government provides and the amount must be justified by the services. The tax powers of governments are quite sweeping and inconsistent with the ideals of democratic governance and accountability. The archaic rules, dating back to monarchical Britain, are still valid although they are ripe for review. There is a need to update the law and align it with emerging notions of accountability of governance institutions.

Conventional understanding

Revenue from the sale of broadband spectrum would be neither tax nor fee, as conventionally understood. It is more in the nature of a royalty charged by the owner of an asset for use of the asset by another person. It is similar to the payments made to government for mineral rights (this is at the root of the so-called illegal mining issue in Bellary which rocked Karnataka recently). At any rate, there are few constraints in law on the powers of the government over the money it receives for the use of what are clearly public assets – mineral deposits in land or airwaves in the sky. It must be a concern of public policy and healthy democratic governance to develop norms on how the resources raised from the sale of broadband spectrum must be used.

The importance of proper utilisation of revenue from spectrum auction is self-evident; the money is going to be paid, in effect, by the public. The wireless companies that have purchased the spectrum will recover it from their customers. Shortly after completion of the auction, Vodafone announced that it will increase its charges every year. This is only stating the obvious.

For better or for worse, the free regime for broadband spectrum allocation is over. Wireless operators must now pay for the bandwidth and this cost will be passed on to cell phone users. Meanwhile cell phones have become ubiquitous in India and are a “must-own” gadget for everyone, regardless of economic condition or social strata. Last year a UN study reported that in India more people have cell phones than toilets. Apparently, the poor take enormous pride in owning cell phones. Obviously they derive a sense of satisfaction from this, living as they do in a hierarchical and status-conscious society.

Ironically, the DMK president Karunanidhi reflected the fact of cell phone ownership cutting across economic and social barriers when he spoke in the context of the arrest of former telecom minister, Raja, a DMK representative in the government at the time. He argued that by allocating spectrum for free, Raja had helped the poor who could now use cell phones at a lower cost.

To reiterate, the government will receive over Rs 61,000 crore from broadband spectrum auction over the next several years and wireless companies will recover this cost from users. At a minimum, the government must be held to a standard in using the money it will receive from the auction for improving telecom infrastructure in the country and lowering costs for consumers. This will probably require another round of litigation. Without such efforts, the additional revenue will probably disappear into the bottomless hole of government’s fiscal deficits. That would be a regrettable climax.

(The writer is an assistant professor at University of Ottawa, Canada)