Braking News: Governments' much hyped 2G spectrum auction crashed, government could fetch only Rs 9,400 Cr against estimated Rs 40,000 Cr from sale of second generation airwaves. Little over half of the 240 MHz spectrum available for sale were bought. Airwaves for CDMA could not be auctioned as it failed to attract any takers. Hopes of government further shattered when it could not even manage to mop up Rs 28,000 Cr through sale of spectrum in GSM band. Not a single operator bade for pan India spectrum, priced at 14,000 Cr for 5 MHz of airwaves. Now the chances of keeping fiscal deficit to below 5.3% of GDP has gone bleaker, or rather impossible to achieve, thanks to rising government spending, inefficient babus' and volatile market that is prohibiting government from going for stake sale in giant PSUs.
Amid all these gloom, the optimist in me see these recent developments as a major breakthrough.
1. You were wrong Mr. Comptroller and Auditor General: The scam that caught the entire nation in a frenzy for past 2 years, chiefly due to much hyped 1.76 Lakh Cr estimated loss to government exchequer, in-fact was a hoax. Loss estimated by CAG was based on simple mathematics, keeping aside even the slightest of business logic. As per CAG report, tabled in parliament, government could have earned Rs 1,76,000 Cr by way of auctioning the airwaves rather than selling it at a throwaway price on first come first serve basis. CAG actually bench-marked the price of 2G spectrum with that of 3G. The calculation was having a basic flaw. The price of 3G spectrum got jacked up due to the artificial scarcity created by offering only a thin layer of spectrum for sale. The recent failure of 2G spectrum affirms that the estimated loss of Rs 1.76 Lakh Cr to the government exchequer was a nothing but a miscalculation. Now the question is, how CAG could be so bad in mathematics. Fact is, CAG was outstandingly perfect in mathematics, an attribute that is a prerequisite for becoming a financial auditor. A financial auditors' job is to ensure that all the account books are in order, earnings and expenses are marked under correct heads and balance shown in books are true reflective of physical realities. Problem erupts when an auditor starts breaching its own boundaries and encroaches discretionary powers of policy makers'. Let it be very clear, an accountant cannot judge and find the intent of expenditure, they are not trained to do so. I would present to you an illustration related to my workplace but relevant to many similar places.
I work in M&S division of number 1 passenger car manufacturer of this country, we are supposed to organize mega events aiming at, building strong and long term relationship with customers, bringing the company closer to customers, enhancing brand equity of company and loyalty of customers, marketing of after sales services of dealerships, that would in turn enable our channel partners to earn more from after sales activities and would make them financially more capable of increasing reach and volume of our business and last but not the least, generating exchange and new car sales inquiries. The budget of these activities runs into crore of rupees. Out of long term, short term, tangible and intangible benefits listed above, only cost per inquiry generated can find its place onto books of account. Suppose we conducted 10 events of similar kind with an expense of Rs 50 Lakh, i.e. Rs 5 Laks/event. We were able to generate 2000 new car sales inquiries, cost per inquiry stands at Rs 2,500/-. If CAG had audited our books, it would have prepared its report somewhat similar to the one below:
"The cost per inquiry of Rs 2,500/- is too high, with conversion ratio fixed at 25%, cost per conversion is estimated as Rs 10,000/- which is equivalent to product margin. 2000 inquiries could have been generated by way of distributing 20,000 newspaper inserts that would cost the company 40,000 Rs. The estimated loss to company is Rs 49.6 Lacs!"
Sounding similar to CAG report on spectrum sale and coal block allocation? It is. Can the benefit of organizing mega events be matched with the distribution of newspaper inserts? Can a newspaper insert bring a company closer to its customers, can it fulfill even a single long term objectives?
2. Does that mean there was no 2G scam? Is A Raja innocent?: Yes, there were nothing like 2G scam, but wait, there was a scam, and it was crafted by then telecom minister Mr. A Raja. A Raja had manipulated First-Come-First-Serve policy to benefit few telecom operators. Unitech got nationwide airwaves through dubious FCFS policy and later sold the company to Telenor at a hefty premium. Unitech did not roll out its services alone even in a single circle neither had invested even a single penny in infrastructure. It had pan India spectrum worth Rs 1400 cr with it as an asset. The company was sold to Telenor for over Rs 6100 Cr. Unitech made a hefty profit of Rs 4,500 Cr. There was a scam and it was brought into notice of the nation undoubtedly by CAG, but the way scam was highlighted and suggestions were made before Public Accounts Committee was wrong. CAG interference to policy making could halt the reforms. CAG has been outstanding in scanning government books and must continue to do so, but it must refrain itself from suggesting parliament the correct methods of policy making.
3. What is the take away?: I hope CAG will understand its limitation that it is a national auditor and not a national policy reviewer. Government could be able to justify its decision of allocating coal mines for captive use to private players as the recent developments made it clear that auction is not the only way of selling natural resources and there are other factors need to be taken into account.
Let us hope that government takes full advantage of this development and accelerate the pace of economic reforms.
Amid all these gloom, the optimist in me see these recent developments as a major breakthrough.
1. You were wrong Mr. Comptroller and Auditor General: The scam that caught the entire nation in a frenzy for past 2 years, chiefly due to much hyped 1.76 Lakh Cr estimated loss to government exchequer, in-fact was a hoax. Loss estimated by CAG was based on simple mathematics, keeping aside even the slightest of business logic. As per CAG report, tabled in parliament, government could have earned Rs 1,76,000 Cr by way of auctioning the airwaves rather than selling it at a throwaway price on first come first serve basis. CAG actually bench-marked the price of 2G spectrum with that of 3G. The calculation was having a basic flaw. The price of 3G spectrum got jacked up due to the artificial scarcity created by offering only a thin layer of spectrum for sale. The recent failure of 2G spectrum affirms that the estimated loss of Rs 1.76 Lakh Cr to the government exchequer was a nothing but a miscalculation. Now the question is, how CAG could be so bad in mathematics. Fact is, CAG was outstandingly perfect in mathematics, an attribute that is a prerequisite for becoming a financial auditor. A financial auditors' job is to ensure that all the account books are in order, earnings and expenses are marked under correct heads and balance shown in books are true reflective of physical realities. Problem erupts when an auditor starts breaching its own boundaries and encroaches discretionary powers of policy makers'. Let it be very clear, an accountant cannot judge and find the intent of expenditure, they are not trained to do so. I would present to you an illustration related to my workplace but relevant to many similar places.
I work in M&S division of number 1 passenger car manufacturer of this country, we are supposed to organize mega events aiming at, building strong and long term relationship with customers, bringing the company closer to customers, enhancing brand equity of company and loyalty of customers, marketing of after sales services of dealerships, that would in turn enable our channel partners to earn more from after sales activities and would make them financially more capable of increasing reach and volume of our business and last but not the least, generating exchange and new car sales inquiries. The budget of these activities runs into crore of rupees. Out of long term, short term, tangible and intangible benefits listed above, only cost per inquiry generated can find its place onto books of account. Suppose we conducted 10 events of similar kind with an expense of Rs 50 Lakh, i.e. Rs 5 Laks/event. We were able to generate 2000 new car sales inquiries, cost per inquiry stands at Rs 2,500/-. If CAG had audited our books, it would have prepared its report somewhat similar to the one below:
"The cost per inquiry of Rs 2,500/- is too high, with conversion ratio fixed at 25%, cost per conversion is estimated as Rs 10,000/- which is equivalent to product margin. 2000 inquiries could have been generated by way of distributing 20,000 newspaper inserts that would cost the company 40,000 Rs. The estimated loss to company is Rs 49.6 Lacs!"
Sounding similar to CAG report on spectrum sale and coal block allocation? It is. Can the benefit of organizing mega events be matched with the distribution of newspaper inserts? Can a newspaper insert bring a company closer to its customers, can it fulfill even a single long term objectives?
2. Does that mean there was no 2G scam? Is A Raja innocent?: Yes, there were nothing like 2G scam, but wait, there was a scam, and it was crafted by then telecom minister Mr. A Raja. A Raja had manipulated First-Come-First-Serve policy to benefit few telecom operators. Unitech got nationwide airwaves through dubious FCFS policy and later sold the company to Telenor at a hefty premium. Unitech did not roll out its services alone even in a single circle neither had invested even a single penny in infrastructure. It had pan India spectrum worth Rs 1400 cr with it as an asset. The company was sold to Telenor for over Rs 6100 Cr. Unitech made a hefty profit of Rs 4,500 Cr. There was a scam and it was brought into notice of the nation undoubtedly by CAG, but the way scam was highlighted and suggestions were made before Public Accounts Committee was wrong. CAG interference to policy making could halt the reforms. CAG has been outstanding in scanning government books and must continue to do so, but it must refrain itself from suggesting parliament the correct methods of policy making.
3. What is the take away?: I hope CAG will understand its limitation that it is a national auditor and not a national policy reviewer. Government could be able to justify its decision of allocating coal mines for captive use to private players as the recent developments made it clear that auction is not the only way of selling natural resources and there are other factors need to be taken into account.
Let us hope that government takes full advantage of this development and accelerate the pace of economic reforms.
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