Learning from 3G Auction

The government may have taken inordinately long to actually auction 3G spectrum, but there’s little to doubt the success of the auction once it took place, both in terms of transparency of conduct and revenues raised for the exchequer. Now, according to a report in The Financial Express published on Monday, the government is keen to replicate the “clock auction” model used for 3G in the auctioning of a third set of FM radio licences. What is special about the clock auction model? For one, its operation is completely electronic and involves no human element. Unsurprisingly, therefore, it is more transparent than the conventional auction method where bidders hand their bids over in sealed envelopes; the possibility of human tampering in the latter system makes it more vulnerable to misuse.

Second, the clock auction method will yield more revenue for the government than a conventional auction. In a conventional auction, the bidders put in their bids once and the highest bid wins straight away. A clock auction is a long, continuous bidding process, where the auctioneer starts with a reserve price and continues to raise it upwards until the number of bidders (who name their price without knowing what other bidders are doing) are reduced to the exact number of slots available to be given out. The clock auction for 3G spectrum and broadband and wireless access earned the government Rs 1.06 lakh crore in revenue, three times the budget estimate of Rs 35,000 crore. The massive revenues have even made a significant dent on the fiscal deficit in the first five months of the year.

The stakes in the FM auction may not be as high as in 3G, but are significant nonetheless for a government that needs to trim its deficit down further. The government is planning to allocate 806 stations across 283 towns in this latest round. Obviously, there will be different bid categories, with the largest metro cities in the top tier likely to command the highest prices. Interestingly though, the ministry of information and broadcasting, which is responsible for handing out the FM licences, had earlier turned down the clock auction method in favour of a conventional auction. But the government, in the interest of maximising its own revenues, has fortunately succeeded in persuading the ministry to reverse its earlier stance.