Time for states to move beyond vanilla model of auction

In the third and concluding part of a 3-part series, Business Standard attempts to connect the Indian auction scene with the world.

Baghmara gold mine in Chhattisgarh was the first non-coal mine to go under the hammer in February this year. Vedanta Resources won the bid. The bidders were interested and the state had it easy, as there was no need to insert clauses, stating for what use the gold should be put to. 

Chhattisgarh has not been so lucky with mining blocks for other minerals. It is not the only one. In this financial year only, one block has got auctioned in the country. There is instead an identified pipeline of 80 blocks waiting to be auctioned but despite the best efforts of the governments, there is little prospect of them being sold. The heady days of auction raising good money like Baghmara already seem distant. It was one of the six mining blocks auctioned in 2015-16.

For the past one year, Maharashtra has been trying to auction nine blocks for all sorts of minerals. Those on offer include bauxite, tungsten, iron ore, copper and manganese. Even as the state is keen to maximise revenue, the end-use restrictions put in dissuade investors. Those restrictions are meant to prevent political hassles from future auditors. So, Maharashtra has put in conditions that the mining companies must quarry limestone only for cement plants. Often, there are other tough conditions. Miners are responsible for clearing the sites from encroachers. The state will step in only if there is a law and order problem. It has driven away bidders. 

Gujarat, Rajasthan and Odisha are among the 12 states where mines have been identified for auction but there have been no buyers. A central government release from the mines ministry notes, “states informed (the Centre) that the key issues have been identified viz. the quantity and grade of ore, quality of the mineralisation studies, land ownership pattern, general dull market scenario and restrictive-end use conditions imposed by the states”. What is left unsaid is the high reserve price the states fixed for the asset. 

Pulin Nayak, professor of Economics at the Delhi School of Economics, points out that with all states facing high expenditure demands, “revenue maximisation from auctions will of course be a priority”. 

It is the same set of issues that has plagued the auctions for coal mines at the Centre, too. Auctions encourage efficiency, as companies source cheap capital and the best technology, writes Tim Worstall, fellow at the Adam Smith Institute, London, in Forbes magazine. He praises India’s drive for auctions. But, what he leaves untraced is the government’s inability to let specialised miners from India or abroad to bid for the mines. The inability raises the cost of capital and lowers the technology available to the second best. Sub-optimal results occur despite using auctions.

As legal expert Hemant Sahai puts it, auction rules have to be aligned with proper end-use for projects to take off. “Maximum extraction cannot be the goal of an auction for a mine, it will lead to problems,” he says.

Nayak says it is time that states experiment with different methods of auction for use of public goods than plain vanilla methods that only expand the revenue. “One of the options is to use Vickrey auction (Bidders bid blind). The highest bidder wins but pays the price offered by the second highest bidder. It can uncover the true value of the asset being bid for,” he says. States obviously need to explore more of such issues. Maybe it is time for the Finance Commissions to examine these, too.  

How about the possible formation of cartels among bidders, despite auctions? Coal has been notorious in the European history for encouraging the formation of cartels. One of the key reasons for the formation of the European Coal and Steel Community after the Second World War was to prevent recurrence of cartels; it was not quite effective. Opinion on cartels in India is divided among the experts.

After the 2015 auctions for coal mines in India, there were allegations of bidding through cartels. The coal ministry cancelled bids for four coal blocks on charges of collusion. The case ended up in courts but the charges have proved difficult to establish. Earlier in 2013, the telecom ministry accused companies in the sector of having formed a cartel— none of them had bid for spectrum in 2013. But again, the charges did not stick. 

The Competition Commission of India is supposed to examine formation of cartels. It found evidence of collusive behaviour in price setting by the case of cement companies and penalised them but so far no one has been able to convince the competition regulator that bidding in auctions has been influenced by cartels. Anup Pujari, former mines secretary, says the weak interest in many of the auctions is an indication that cartels are not in vogue now. 

Four years since a five-judge constitution Bench of the Supreme Court had held auctions of natural resources could not be “an absolute or blanket statement applicable across all natural resources”, the Indian state has, however, maintained this is the model that best serves the “common good”. The challenge for the state is how to best harness the new instrument for deriving the maximum benefit for citizens and not just for the government. 

Series concluded