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In the second of a three-part series, Business Standard explores whether auction rules could be designed in a way that serves the end-user better
In some respects it all began with a now-forgotten auction of telecom airwaves in 2001 for just one band, the 1800-Mhz one. The interesting aspect of the auction was the introduction of a staggered three-stage bidding process, to ensure those were made sensibly, patching them with obligations to roll out telecom services.
From there to the next auctions of 2010 and then to 2016, there is hardly any segment of government allocation policy which does not now depend on auctions. “Auctions are the surest way for policymakers to deflect criticism,” says former secretary, mines, Anup Kumar Pujari. The problems come thereafter but since the political executive can’t be blamed for having taken a partisan position, they don’t surface when the costs become clear. The amended Mines and Minerals (Development & Regulations) Act squarely puts auctions at the centre of future allocations. Pujari acknowledges that auctions for mines will certainly raise costs down the line “but the aura of transparency it affords makes it extremely attractive for the governments to wear”.
In other words, auctions are here to stay. And, as municipal governments move to reform operations of cities as part of the Smart Cities initiative, more sectors would come under its sway. Chandigarh has successfully auctioned vanity car number plates from September this year.
Partha Mukhopadhyay, senior fellow at the Centre for Policy Research, says the essential structure of the 2001 design has stood the test of time. “A lot of work was done then to build in deliverables in the plan for the auctions.”
Rekha Jain, professor at Indian Institute of Management -Ahmedabad, made the same point in her paper, but pointed out it was an administrative glitch which made pricing go through the roof. “The DoT (Department of Telecommunications)’s choice of circles as the bidding unit was based on administrative convenience rather than on the commercial interests of the bidders. It limited the participating bidders to large corporate entities, due to the high investments required. The high bid amounts that successful bidders paid resulted in the licensees covering the more commercial and revenue-yielding cities and towns.”
In October 2016, following the bifurcation of Andhra Pradesh, the two states got their own telecom circles. Those raise costs. In this environment, it is necessary to link auction outcomes to the quality of service or goods provided, says Soumya Kanti Ghosh, group chief economic advisor in State Bank of India.
“Just as fiscal and monetary policies are not just a target but have a linkage with their ultimate objectives like with the quality of expenditure or securing low inflation, the same could apply for auctions too,” he says.
In December 2014, Rajasthan’s capital Jaipur worked out a version of such a policy. The city municipal corporation, with the help of the state government, advertised for a contract for maintaining its street lamps. But the deliverables were not the number of lamps installed or maintained but how well they lit up the streets. The World Bank-IFC-aided project was a first of sorts for the state and certainly for cities across India.
“The project involves retrofitting the public street lamps with energy efficient lamps and their operation and maintenance. It also allowed inclusion of additional lights, if required,” noted an IFC report on the project. To make the project viable, the Jaipur Municipal Corporation agreed to share a part of the energy savings achieved with the contractor.
Nasscom President R Chandrasekhar also argues on similar lines. “There has to be a hierarchy of objectives and the pricing of the service or the natural resource has to be based on those yardsticks,” he says. According to him, this will require an imaginative set of plans, to make the auctions principle stick. In the roads sector, this was flouted as bidders quoted prices where they were to repay the Centre from their revenues, just as in the case of coal.
Ashok Chawla, chairman of the committee on allocation of natural resources, says it will be impossible for any government to rescind the auction principle. But having tasted success in its application, states and the Centre must avoid making it the means to fill up their tax shortfalls.
In the latest telecom auctions, the Centre targeted to raise Rs 5.63 lakh crore, more than a quarter of its annual expenditure, albeit over four years. The 700-Mhz band was priced at four times the price of the 1,800-Mhz one, citing its high value. As telecom analyst Parag Kar pointed out, it should have been half that rate and thus, no telecom operator bid for it. The government ended up earning only Rs 65,789.12 crore. The West Bengal government planned to auction land for its Smart Cities projects in August 2015. The high reserve price kept bidders away. Auctions, it is clear, has become an attractive option to bypass tough decisions to raise tax revenue which needs a raft of administrative measures.
But, would easing up on the price of natural resources make life difficult for the government executive? For instance, would the government be accused of weakening its defence in courts in cases like those in telecom or coal where the chief accusation against the defendants has been that they have made windfall profits at the expense of the state?
Unlikely, says Hemant Sahai, chief of his eponymous legal firm. “The key issue is auctions should be properly designed and not be a cost-plus mechanism. Within auctions, tariffs must be pre-determined and escalations linked to inflation. Anybody is free to challenge a decision but so long as these criteria are met, the legal position should hold.”
As an example of poorly designed auctions, he cites the privatisation of the Delhi and Mumbai airports or the clutch of highway projects where the bidders went to the extreme position. The end results were not specified, so the winners were encouraged to make them expensive. Auctions and end-use must meet, he adds.
Tomorrow: International experience
