Policies to allocate natural resources should be dynamic and transparent

Economic Times, November 26, 2012

By Pradeep S Mehta

The Supreme Court is rightly peeved that the government did not auction the entire spectrum vacated as a consequence of the cancellation of the dirty licences in February, and so are the people of India. But even if the government had done so, the heroic recommendations on a high reserve price might have had the same result.

The 122 licences allocated on a distorted first-come-first-served (FCFS) policy in 2008 was a case of undervaluation with mischievous intentions, while now the pendulum has swung to overvaluation, ignoring sluggish consumer demand. An FCFS policy on its own can be a good way, so as to avoid overvaluation, but then, it has to be done transparently and equitably.

Today, we are no better off in seeking an acceptable solution to the growing malaise in allocation of natural resources that is not limited to airwaves. After the furore following the arrest of former telecom minister and the Supreme Court’s February 2012 verdict cancelling all the 122 telecom licences, the Telecom Regulatory Authority of India (Trai) was asked to make fresh recommendations for grant of licences.

Later, in September 2012, in response to a Presidential reference, the SC clarified that the Constitution does not mandate an auction-only policy in allocation of natural resources. It added that the 2G case order of an auction-alone policy cannot be applied to other natural resources, and that revenue maximisation is not the object of the policy of allocation of natural resources.

The apex court also emphasised that it respects the mandate and wisdom of the executive in such matters, but all such allocations have to be guided by common good and that courts will not hesitate in striking down any arbitrary allocation. The process of evolution of a policy has taken too long to crystallise. Surely, there are lessons to be learnt. In the wake of disclosures highlighting crony capitalism aided by the prevailing opaque processes, dubious pricing, suboptimal utilisation of such resources and corrupt practices, the Ashok Chawla Committee on Allocation of Natural Resources submitted its report back in May 2011.

The objective was to help the government allocate natural resources in a more transparent, efficient and sustainable manner. However, the report has not been made public though its contents have been widely discussed across ministries, businesses, experts, economists, etc. This seminal work should not only be placed in the public domain for a more informed debate, but the government must also proactively inform of its status of acceptance and implementation.

The panel’s recommendations reiterate merits of transparency, public disclosure, consultation, capacity building, competitive bidding and expeditious clearances. As can be seen, some of these factors resonate in the recent decisions of the Supreme Court on the issue and worthy of being incorporated in relevant policies.

It is absolutely essential to first review and revise policies on a regular basis and to build therein the changing market scenarios. In telecom, for instance, the regulator could look at a hybrid bidding parameter with a one-time payment and a periodic payment of usage linked with earnings and spectrum-usage charges. Such an innovative approach would have also neutralised the ‘winner’s curse’ potential that may apply to the two new successful bidders, Telenor and Videocon.

In the case of new oil block auctions, review of policy has already been initiated for the better. The government plans to initiate the 10th round of auction under the new exploration licensing policy (Nelp). Production-sharing contracts to attract more domestic and foreign investors will be the lodestar. Such an approach needs to be taken by all ministries responsible for allocation of natural resource concerned, and on a dynamic basis.

The recent lacklustre response to the 2G auction indicates the necessity of capacity building within the government to organise, design and implement auctions. Frankly, retired bureaucrats are not the best resource pool for economic regulators, but that is another story. Spectrum allocation and pricing are complex issues, given the nature of the telecom industry in India, and it needs far better capability than what exists.

The design of the auction was such that it had been widely predicted in the media to fail. Unless the intention was for the auction to fail, to justify the 2008 policy of FCFS and to discredit findings of the CAG, trained and skilled personnel might not have made such heuristic recommendations of a high reserve price merely on the basis of the 3G auction. Determination of the market conditions may have revealed sluggish consumer demand. That would have necessitated recalibration of the reserve price and making it more relevant.

As we reform our resource allocation systems, it may be worthwhile to look at the experiences of other resource-rich countries. A recent study by Lisa Sachs, Jacky Mandelbaum and Perrine Toledano that surveyed 29 predominantly mineral rich developing countries found existence of the sensible process of competitive bidding in over half of the countries.

On the other hand, Chile has a strict FCFS system that is highly regulated and legally enshrined that constrains discretion of officials along with reducing opportunities for allocations based on cronyism and bribes. Our own reforms, while learning from such examples, have to be India-specific.

The author is Secretary General of CUTS International.

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