Bid For The Light

Outlook, November 26, 2012

    The Case For Auctions

    Whatever you term the process, auctions can meet multiple objectives…

  • They don’t have to be ‘open’: Sealed auctions—where bids are not known to others—is used for selling office discards to award of infrastructure projects.
  • They can work to maximise public good: In ultra mega power projects, lowest tariff is deciding factor. Even hydro and solar power sites are being auctioned.
  • They can, of course, maximise revenues: Whether it’s 3G spectrum, or lease of a village pond, allocation is on basis of maximum revenue promised.
  • It doesn’t always benefit highest bidder: In e-auction of coal, not just the top bidder but others also also get supplies without having to match highest price.
  • They can have multiple stages: Various yardsticks lead to final decision. Besides infrastructure projects, it is used in award of oil & gas blocks under NELP.
  • They can allow reverse bidding: Banking on future earnings, firms willing to offer government upfront revenues to get projects in roads, ports sector.
  • Auction Wars
  • SC says auction can’t be the only constitutional way for allocation of natural resources
  • In another case, the SC reprimands Orissa govt for favouring Posco “blindly” in grant of captive iron ore mine
  • In the past, the govt has defended its policy of ‘first come, first serve’
  • But in India, auction route has yielded dividends for commercial and public good
  • Activists say the govt is playing with words like ‘tendering’, ‘competitive bidding’ and ‘auction’ to confuse matters
  • Oil exploration experience shows the government argument that auction will add to costs and risk is flawed

The UPA government’s ambitious target of earning Rs 40,000 crore through the auction of 2G spectrum to telecom operators has been a dismal flop. There are many reasons as to why telecom operators stuck to this well-orchestrated plan to junk the auction (see box). The concern now is how the industry scepticism will be used in the debate raging within government about the efficacy of auctions. It doesn’t help matters that the same government is facing charges of promoting crony capitalism in the allocation of natural resources. But that’s precisely why auctions should (and do) matter. Because in their absence, discretionary powers to allocate natural resources lie vested in the hands of the state—and that, most will agree, is not an ideal situation.

Earlier this year, the government had argued in the Supreme Court that auctions cannot be the sole mode in the case of natural resources. It was presenting its case with reference to the 2G spectrum allocation. Throughout the case, the government defended its act of not opting for the auction route, including in the allocation of coal blocks for power generation and other industrial use.

An SC observation in September, seemingly in adherence with the government stand, has been taken by the political leadership as an endorsement that it has the right to decide policy, and that “revenue maximisation cannot be the only way to serve the common good”. This is when the government has been facing flak for Coalgate—its non-transparent allocation of coal and other mineral blocks for captive use.

At the same time, the government cannot overlook a more recent SC stricture reprimanding the Orissa government for “blindly” favouring South Korean steelmaker Posco in the grant of a captive iron ore mine in the state. Orissa is not alone in this practice. It’s widely prevalent across the country, often leading to crony capitalism and corruption.

“Auction has to be the preferred route unless there are special circumstances that necessitate a departure.”T.S.R. Subramanian, Former cabinet secretary

Why then is the government fighting shy of promoting a more transparent mode of allocating natural resources? Particularly when in several specific instances—allocation of coal blocks, oil and gas exploration, mining of other minerals, and even utilisation of water and sunlight for generation of power—the state is already harnessing the auction mode, and to good effect.

“The government argued contrary to its own laws, rules and policies and put up selective material before the court, leading to this kind of opinion,” says lawyer Sudiep Shrivastava, who has been closely following the debate on auctions. Shrivastava points out that contrary to the government defence, the nomenclatures ‘tender’, ‘auction’ and ‘competitive bidding’ are routinely used to signify the same action. A closer look reveals that an auction is not merely a revenue maximising tool. On the contrary, a well-designed auction process can be a tool to achieve the objective of ‘common good’.

Consider, for instance, a new amendment made in the Mines and Minerals Development and Regulation (MMDR) Act for auction of coal and lignite blocks. It has adopted the mode of tariff bidding for the auction of coal blocks to producers at ultra mega power projects (UMPP) in Sasan, MP, and Tillayaa, Jharkhand. These UMPPs were awarded to bidders on the basis of the lowest electricity price they would charge state utilities.

In short, when the government is the procurer it goes for the lowest price, but when it is the seller then it goes for the highest price. “It is lazy thinking to say that auctions will increase the price because UMPP has shown that auction can minimise price but maximise public good,” says Shailesh Pathak, president of Srei Infrastructure Finance Ltd. “Even otherwise, the government should look more at public good rather than revenue maximisation,” he adds.

Here, the revenue stream can be direct or indirect, through services or better facilities to people. For instance, hydel power project sites are often auctioned by Chhattisgarh after ensuring that it gets a minimum of 12 per cent of power produced free of cost and part of the remainder at the lowest possible tariff for its development plans.

The problem comes when the government pursues half-baked policies or tweaks them to suit private sector demands. Thus you have cases where the government starts off by inviting a tender for best price discovery—be it for leasing out land for infrastructure projects or if it opts for indirect returns like cheaper power or accessible and affordable health services—but ends up arbitrarily awarding the contract to a company of its choice. This is often accomplished by setting conditions that qualify one particular entity.

While dealing with the oil and gas block allocation mechanism, the Ashok Chawla Committee report has observed that the competitive bidding process adopted under the New Exploration Licensing Policy (NELP) is a benchmark in terms of natural resources allocation as it balances common good with other criteria, including work programme and revenue and royalty returns to the government. Similarly, under the rules notified for the ‘auction’ of coal and lignite blocks on February 2, 2012, ‘auction’ and ‘competitive bidding’ have been treated as the same. Yet, the government chose to argue—contrary to a straightforward interpretation—that competitive bidding under NELP was different from the auction process.

“There are very many modes of competitive bidding. Auction is one of them, as is tendering,” says Abhijit Bhaumik, director at Opus Advisory Finance. He says the government plea that auctions can only be used for revenue maximisation is flawed just as “MoU cannot be the mechanism of giving out natural resources particularly in cases where it is not controlling the price of the end use of the product from natural resources”.

Experts cite the case of coal blocks allocated for captive use of steel and cement industries without the government having any say in the price of the final product, including in its own projects. While the central government has been shying away from adopting the auction route for allocating natural resources, several states like Madhya Pradesh have gone beyond coal to auction off even solar power sites.

“Clearly, auction has to be the preferred route unless special circumstances necessitate departure from the routine. But you have to spell out the circumstances for the exception; ensure that the beneficiary uses the resources well; and create a mechanism to ensure that benefits reach the preferred targets,” says former cabinet secretary T.S.R. Subramanian. The argument that auctions are an expensive process is complete hogwash, adds Subramanian.

Pradeep S. Mehta, secretary general of CUTS International, argues that while auctions may not always be necessary, they are “certainly a good option”. The question then remains: why is the government clouding over the issue, forgetting public good when allocating natural resources? Why can’t India have a policy similar to NELP for all extractive industries (of course with greater accountability)? The poor showing in the 2G auction only increases the need to find some answers.

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