Atanu Dey On India's Development

The King of All Telecom Scams — Part 6

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[Previously in the series: Part 1, Part 2, Part 3, Part 4, Part 5.]

“Oh! what a tangled web we weave; When we first practice to deceive,” lamented Sir Walter Scott. I suppose the web of deceit becomes less tangled with practice. Politicians and their handlers — I am talking about the likes of Niira Radia, Vir Sanghvi and Barkha Dutt — have over the decades gained such sophistication and finesse that they weave elegant webs of deception worthy of stunned admiration. Gone are the days when a few million dollars quietly taken from the public till was sufficient cause for massive public outrage. Now the sheer awfulness of the crime has transcended human comprehension.

It’s beyond our mental capacity to understand what astronomically large numbers like $40 billion mean. What is worse, that figure being tossed around probably underestimates the actual injury something like the recently exposed telecom scam inflicts on the economy. Crimes of such magnitude by those entrusted with guarding the public interest defy easy estimation of the damages.

When you lose your mobile phone to a pickpocket, the loss is easy to quantify and fixed quite quickly by getting another phone. You are out of pocket for $100 or so, and you make it up by cutting down on a couple of evenings out with friends. Your opportunity cost — what you could have done with the money you were forced to spend to replace your phone — is small, and the effect of that loss will not reverberate down the years. Your children’s welfare will not be jeopardized.

But it’s an entirely different story when every one of a population of 1.2 billion people find that they have been robbed of $1000. That sort of cost has the potential to put the brakes on economic development, thereby preventing hundreds of millions of people from climbing out of poverty.

So how much damage did the telecom scam do? It is hard to estimate the total damage, as I mentioned before. We have to resort to algebra to get a grip on the matter since arithmetic is ruled out. In other words, we will use symbols instead of numbers. We will talk hypotheticals. Let’s get started, shall we?

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Generally, as opposed to private theft, massive corruption by public officials is inefficient.

Previously in this series, we touched briefly on the notion of inefficiency by illustrating it with the division of a cookie. Now let’s consider the pickpocket and your cell phone story. The pickpocket got a phone worth $100, the same amount you lost. His gain is your loss. It is an efficient transfer of wealth. There are very small, if any, secondary effects.

But consider that bit again. What if the pickpocket does not have any use for the phone and the most he is able to get is $20 from someone? That means, the buyer values the phone at $20. You lost $100; the pickpocket gained $20. Total social loss: $80.

Alternatively, suppose the pickpocket sold it for $200. Then you lost $100; pickpocket gained $200. Total social gain: $100. In other words, someone paid $200 because he or she could get more value out of it than you could. In that case, the transfer of wealth increases welfare. This can happen.

(Example. I forget a pack of cookies on the park bench. I did not eat them while relaxing in the park since I was not hungry. Later, an extremely hungry person finds and eats them. The transfer is efficient and welfare improving because his marginal utility of those cookies is greater than mine.)

Now to a hypothetical case of inefficient transfer of wealth. Suppose a certain large software corporation MuchoSoft persuades the minister in charge of education of a state to buy their fancy software for 10,000 schools in the state. Cost of the software: $2 million per year. Total cost for 10 years: $20 million. Assume that for educational purposes, Linux software is totally free and functionally indistinguishable from MuchoSoft’s. Now if Muchosoft gave the minister $100 thousand to persuade him to make MuchoSoft software mandatory in schools, the social loss is $19.9 million.

The minister’s gain is much much smaller than the loss to the state. This is an extremely inefficient transfer of wealth.

So also in the spectrum sale case, a public servant sells a public asset for a low price thus imposing a cost X to the public but gains Y (which is much much less than X). It can easily be the case — we will go into this later — that the cost to India is $100 billion but those involved got a kickback of only $100 million in their offshore bank accounts.

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How much should spectrum be sold for by the government?

That depends on what the objective of the government is. If the objective is short-term revenue maximization, the government should sell off the entire bit to the highest bidder. Why? Because a monopolist in the market makes the largest profits and therefore will be willing to bid the most to get monopoly access to the market.

Suppose as a monopoly supplier of telecom services, HutTel can a profit of $10 billion a year, for a total of $100 billion over 10 years (the period for which HutTel is given exclusive access to the market.)

In an auction, how much HutTel actually pays depends on how much competition it faces for the market from other providers. Suppose the others drop out when the bid reaches $20 billion. So the government gains $20 billion, and HutTel becomes the monopoly supplier.

In this scenario, the consumers lose because there is no competition in the market; all the competition was for the market. How much do they lose? We will go into that in a bit. But for now, let’s see what else the government can do. It can allow some degree of competition in the market.

Suppose it allows two firms to provide service. So now there will be some competition in the market. And that means that there will be lower competition for the market. In this case, the government will collect less than the $20 billion we estimated above. Let’s say it gets a total of $10 billion from the two winning companies, HutTel and TatComo.

The government is not revenue maximizing in the short term in this case. In the long run, this strategy may indeed give higher government revenues than short-term revenue maximization, though. We will also go into the details of how later. For now, let’s use an old analogy we are all familiar with.

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The man with the goose that lays golden eggs. One day, being impatient, the man decides that he’d rather have all the golden eggs now. He kills the goose and gets five eggs. Was it smart of him to do that or not? That depends on his planning horizon. If he was planning for the long haul, then of course five golden eggs are much less than the hundreds of eggs he would have got over the years. But if he knew that his ownership of the goose was limited to only a couple of months, then his is better off killing it to get those eggs.

Public officials have a limited time during which they have the opportunity to make the most of their privileged positions. Given two scenarios, (A) they make $10 million but at that imposes a cost of $10 billion on the nation, and (B) they make nothing but the nations gains $100 billion, it will be the rare public official who will sacrifice $10 million private gain for $100 billion public gain.

This happens quite frequently. Decision makers are bribed to buy substandard equipment (say, artillery guns), and the country ends up with a rotten deal that costs the country many orders of magnitude more than what the decision maker gains. The benefits of being corrupt are concentrated, while the costs are distributed over a very large number. The public official makes $10 million but the cost of $100 billion is distributed over a billion people, and what is more, the costs are invisible. So the public official generally gets away with the crime since it is costly for people to organize and prosecute the official.

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Spectrum is public property. The government does not own it. The government is only the agent that manages the property on behalf of the principals who own it. It’s the citizens of the country who collectively own the spectrum.

The managers of the public property can, and indeed do, use the public property for private gains. It should not come as any surprise that they kill the goose that lays the golden eggs. It is not that they are stupid, and don’t fully appreciate the extent of the harm they cause to the general welfare. They can get the best advice from the most capable economists if they so desire. But they don’t because they are not in the game for public welfare. They have worked hard to get to a position of power where they can make a killing. They would be stupid to give up the perks of power.

In the next bit we will look at how spectrum should really be rented out, and what are the welfare implications of different schemes. We have to pay attention especially to how what you sell spectrum for has welfare consequences for the poor.

That’s it for now.

[Continued in Part 7.]