The truth about auctions

Indeed,while the February 2G judgment — the Presidential Reference was in response to this — also offered some leeway to move away from auctions,provided the government stated the reasons for not choosing auctions in writing,its overall import was that auctions were the preferred way to allocate natural resources. To that extent,Friday’s SC opinion restores the government’s policy-making powers but it also reiterates the February judgment in the sense that public good and benefit has to be the touchstone by which any policy is judged.

Telecom Minister Kapil Sibal chose to point out,at a press conference on Friday,that (para 116 in the majority opinion,he said) “auctions may be the best way of maximising revenue but revenue maximisation may not always be the best way to subserve public good” — this,he said,was the point he had been making all along. On the other hand,Prashant Bhushan,who filed the 2G case,chose to focus on (para 149) that part of the opinion which said “when such a policy decision is not backed by a social or welfare purpose,and precious and scarce natural resources are alienated for commercial pursuits of profit-maximising private entrepreneurs,adoption of means other than those that are competitive and maximise revenue may be arbitrary and face the wrath of Article 14 of the Constitution.”

In other words,the government is free to take any decision on how to allocate resources,but it has to ensure this meets the criterion of public good — if there is no public good,the court has opined,the government simply has to focus on revenue maximisation since the money then got can presumably be used for public good. The problem,therefore,with those who argue the SC opinion ratifies the first-come-first-served policy of allocating spectrum in 2008 at the same price paid in 2001 — or even the argument that coal mines were given free for the public good — is that the government stating a policy has public good is not enough.

If it can’t show this,the courts are likely to strike down the allocations. In 2G,while you could see the A. Raja beneficiaries diluting their equity at high premiums,there was nothing to show the consumers benefited — indeed,the telecom regulator recommended that 69 of the 122 licences issued be cancelled for not even rolling out their networks. Of the 700 million additional mobile phone subscribers added between January 2008 when the licences were issued and February 2012 when they were cancelled,less than 10 per cent belonged to the new firms who were given dirt-cheap licences by Raja.

Similarly,in the case of coal mines,there was nothing to stipulate that power producers would pass on the benefit of cheap coal to consumers in the form of lower electricity tariffs — indeed,it is only now,after the CAG-inspired public outcry,that the power ministry is coming out with a legally binding framework that will ensure those with captive mines will pass on the benefit to consumers of electricity. If the CBI is today investigating whether certain persons were favoured while giving out coal mines,surely it cannot be the government’s position that the policy was flawless while the execution was flawed?

Some in the government argue that the court opinion makes it clear there was no problem in the government’s first-come-first-served policy; what was illegal was the way Raja advanced the cut-off date to ensure that only his favoured firms’ applications were processed. Since the SC bench headed by the chief justice didn’t even examine 2G-related issues in its Friday opinion,it’s difficult to speculate on what may have happened. But based on the conditions laid out in the opinion,since the 2G allocations didn’t ensure the benefits of cheap spectrum were to be passed on to consumers,it may have been struck down by the courts even if Raja hadn’t tweaked the conditions — “if a policy or law is patently unfair to the extent that it falls foul of the fairness requirement of Article 14 of the Constitution,the court would not hesitate in striking it down,” as the court opined on Friday.

The larger issue about auctions,and missed by all concerned including those arguing in the courts,is that auctions are not,repeat not,only about maximisation of revenues. The jaundiced view of auctions is probably governed by the old neelami in Hindi movies where a person’s house is being sold,Ek crore ek,ek crore-do,the auctioneer would say… Do crore ek-do-teen!… In actual practice,however,auction designs have evolved so much,you can have auctions which have nothing to do with revenues for government and only maximise consumer welfare.

In the Ultra Mega Power Plants (UMPP),where the bid criterion was who would sell power at the lowest price,the Anil Ambani Group bid Rs 1.19 per unit and won the Sasan UMPP — it was an auction but never even mentioned revenue for government,let alone maximisation of it. You could,similarly,bid out a water project in Delhi where the auction criterion could be who would supply the most water to slums — again,that’s an auction but there is no revenue for government at all. In roads where the cost is often greater than the toll revenues to be got,the bid criterion for more than a decade has been the amount of subsidy the builder wants if he is to build the road — the company that wants the least subsidy wins the road contract.

If those defending or opposing the need to have auctions realised that auctions can be used to maximise consumer benefit,there would be no controversy. The other issue to which there is no reply is that,in the absence of auctions,how do you choose the winner in a non-discretionary manner? Chances are,no matter what government says,auctions will be the preferred mode in the years to come.

The writer is opinion editor,‘The Financial Express’

sunil.jain@expressindia.com