ANALYSIS
ANALYSIS
India learned the hard way, by initially shunning an auction process. Their 2008 2G scandal resulted from discretionary allocation of licenses. The state raised far less than it should have, leading to a massive public outcry. A report by the Indian comptroller and auditor general called the process“ arbitrary, unfair and inequitable”.
As business journal Knowledge at Wharton puts it,“ India’ s telecommunications ministry caused nearly US $ 40 billion in losses to the exchequer by selling the licenses at 2001 prices and by conducting the sale on a so-called first-come, first-served basis( as opposed to auctions) to benefit a few select bidders, according to an audit by India’ s Comptroller and Auditor General( CAG).”
When it came time to issue 3G and 4G spectrum, India switched to transparent online auctions. This process in 2010 was widely regarded as competitive, avoiding the distortions of political patronage. An Indian“ Supreme Court judgment in 2012 cancelled all 2G licenses awarded through first-come-first-served( FCFS) and mandated that all spectrums had to be allocated through auctions.” The decision understandably led to some industry upheaval but has been“ hailed by anti-corruption campaigners.”
3. Good for the little guy
By their very nature, large asset purchases can exclude smaller participants. Or, if not outright exclude them, hamper them through inefficiency. This can be a competitive advantage to incumbents and established players. The time and cost of pursuing big-ticket items –“ transaction costs” in the economic jargon- can be borne by multinational firms. Legal fees, time, bureaucracy and the significant risk of failing at the last hurdle, however, are often insurmountable to smaller players.
Sometimes the barriers are necessary. Sale of a going concern, for example, demands complex legal processes and a strategic fit between buyer and seller. Here the time and red tape are necessary evils. Where no such need exists, a well-designed auction allows for a more even playing field.
37