Mathematics and corruption

We could have named this article just as well “The value of thin air”. On the afternoon of December 5, 1994, in the United States, an auction like no other was about to be conducted. On the auction block as far as could be seen was only thin air. It would last until March the following year, about three months later. But at the end of it, the Government would be ecstatic on account of the proceeds – US$7 billion (Seven billion United States dollars) – as it would be seven billion more than the government got in all the years prior as the electromagnetic spectrum was given away before that!

At work in the design and execution of the auction, were CEOs of the world’s biggest communications conglomerates and an unlikely group of economic theoreticians who were advising them. On the vendor’s side, the auction was designed by young economists using tools created by John Nash, the mathematician whose story is told in the film ‘A beautiful mind’ starring Russell Crowe as John Nash.

This auction was one of the logical consequences of the realization that Adam Smith’s “Invisible Hand” orchestrating perfect competition had its limitations. It envisions so many buyers that no single buyer or seller has to worry about the reactions of others. This is  not the case with certain markets and products where there is  a handful of players, each taking into account the others’ actions, each pursuing his own best strategies and competing for limited spectrum.

transparency institute guy incYes, the spectrum is limited, and because of this, the FCC (The US Government Agency responsible for the allocation of spectrum)   plans to entice owners of licences for some kinds of spectrum  to sell back some frequencies  so they can be part of a more efficient allocation. This is referred to as the incentive auction and it is planned for 2014. In freeing up spectrum for wireless broadband, incentive auctions will drive faster speeds, greater capacity, and ubiquitous mobile coverage.

These are essential ingredients for innovation and leadership in the 21st century economy where smartphones and tablets powered by 4G LTE and Wi-Fi networks are proliferating, and the mobile Internet becomes more important every day.
On the very day of the auction, Nash was on his way to Stockholm where he would in a few days’ time be conferred with the Nobel Prize. It was Nash’s work that enabled the realization of the full potential of the work on the mathematical concepts of game theory led by von Neumann and others. It has since then become common practice to use mathematically designed auctions to allocate bands of spectrum.

The kind of monetary values that the spectrum could attract is evident from the fact that the 3G auction in 2010 had brought the government of India 66,000 crore or US$12 billion. The kinds of shenanigans that can play out are evidenced by the now famous 2G spectrum scam in that same country. This scam involves politicians and government officials in India illegally undercharging mobile telephony companies for frequency allocation licences, which the latter would then use to create 2G subscriptions for cell phones. After much speculation about what really happened, including the Prime Minister himself defending his minister by saying that he only followed the procedure, the Supreme Court declared the allotment of spectrum as “unconstitutional and arbitrary” and quashed all the 122 licences issued in 2008 during the tenure of then minister for communications & IT, the main official accused in the case. The court further said that the Minister “wanted to favour some companies at the cost of the public exchequer” and “virtually gifted away an important national asset.”

The rule that the Minister was supposed to have followed is interesting for Guyana. The original plan for awarding licences was to follow a first-come-first-served policy to applicants. The Minister manipulated the rules so that the first-come-first-served policy would kick in,– not on the basis of who applied first for a licence but who complied with the conditions. On 10 January 2008, companies were given just a few hours to provide their Letters of Intent and cheques. Those allegedly tipped off by the Minister were waiting with their cheques and other documents. Some of their executives were eventually sent to jail along with the Minister.

TIGI is not necessarily advocating auctioning the spectrum in Guyana by using such specialized technical tools. Nor are we claiming that the value of our spectrum is anywhere in the billions. The facts above are for the public to develop an appreciation of the possible value of the spectrum and the kind of practical games, rather than game theory, that could play out especially as technology advances. However, it is clear that the time for allocating spectrum in a non-transparent  manner is long past as the alternative to some form of public auction is discretionary allocation fraught with possibilities of corruption and rent-seeking.

Perhaps it would be remiss of us to skip another lesson from India. In that country it was once believed that spectrum is the property of the government. The government could therefore use it in a manner that suited it since it had exclusive rights to regulate and allocate spectrum. But a historic judgment given by the Supreme Court of India in 1995 in the case of Secretary, Ministry of Information and Broadcasting, Govt. of India v. Cricket Association of Bengal changed this. The Court decided that spectrum is actually public property. This judgment has changed the perception of ownership of spectrum in India and the way the government handles and manages spectrum in today’s scenario.
The difference between ‘public property’ and ‘government property’ in Indian law is instructive for us at this point in our history. Let us quote from the above judgment itself: The airwaves or frequencies are a public property. Their use has to be controlled and regulated by a public authority in the interests of the public and to prevent  the invasion of their rights. Since the electronic media involves the use of the airwaves, this factor creates an in- built restriction on its use as in the case of any other public property.

Recent disclosures in Guyana seem to indicate that our Broadcast Authority is just another arm of government from whom it takes instructions. This is to say that it has no authority. It is clear that we have a very long way to go.

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