However, bundling the spectrum with a service licence is an inefficient arrangement. Radio spectrum is a scarce and essential input for telecom services. It’s important to ensure that spectrum assignment adapts to changing demands and reflects the value of alternative uses. It seems self-evident that if users do not face the true value for the use of a resource such as spectrum, then they have little incentive to adopt economically efficient technology or allocate spectrum to highest value users.

To allow for a fair, non-discriminatory and non-arbitrary allocation, economists since the time of Ronal Coase (1959) have been advocating auctioning radio spectrum. A “well-designed” auction is most likely to allocate resources to those who value it the most. Rather than relying on bureaucrats to assess the merits of competing telecom operators, an auction forces operators to put their “money where their mouth is”. An auction can extract and use information that is otherwise unavailable. The credibility of offers made for spectrum by various companies can be tested only in a proper auction.

Second, such a mechanism will be non-discriminatory as the potential new entrants will be placed at par with existing operators. A first-come, first-served policy obviously favours current operators and even leads to the attenuation of competition. This is quite evident, as there are 575 mobile telecom service applications, from about 40-odd companies, 15 of which wanting a pan-Indian licence, that are pending. However, scarcity of spectrum is cited as a reason for the queue. It is impossible to determine the scarcity of a resource in the absence of a price discovery. Similarly, given the incentives, it is quite possible that it is underutilised by the current operators. Moreover, defence is sitting on a large amount of high commercial value spectrum, with a huge opportunity cost of usage. The resources required for defence to vacate this spectrum and move to other spectrum bands are small in comparison to the opportunity cost.

Third, once priced correctly through auctions, the government will be able to raise a large amount of resources to finance its social welfare programmes. The resources can also be used by defence to buy equipment in other bands, once it vacates the commercial spectrum. Finally, auctions will eliminate the arbitrariness inherent in the specification of criteria and the consequent evaluation of the plans. This arbitrariness of the ‘beauty contests’ makes the process time-consuming, opaque, prone to controversy and vulnerable to lobbying, creating the perception of favouritism and corruption. Indeed, some governments choose beauty contests precisely in order to favour ‘national champions’ over foreign firms. But can this protectionism be justified?

A common fear regarding auctions is that the costs incurred by the firm in an auction will be passed on to the customer in the form of higher prices. While this may hold true for auctions in which firms bid royalties, this is generally not the case for auctions in which firms make lump-sum payments. This is because firms charge prices that maximise their profits and these are based on forward-looking costs and revenues and are independent of sunk costs like licence fees. Another objection is that large licence fees may constrain future investment. However, this argument implicitly assumes that the government has better information about the firms’ prospects and should use its own judgment in place of the judgment of commercial aspects implicit in the bids.

It is time the government understood the cost of a flawed public policy regarding spectrum pricing. With new technologies and a liberalised environment, allocation of spectrum has shifted from its being purely an issue of planning to being an effective tool in the creation of a competitive environment. Policies should recognise this. Radio spectrum policy should be seen in the broader context of numerous empirical studies establishing the link between Information Communications Technology and growth. The ‘beauty contests’ have indeed turned ugly!

The writer is a reader in economics, University of Delhi

payal.malik@gmail.com