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The government might find auctioning or bidding as the fairest and most transparent way of giving out an asset or a natural resource to a private entity, but revenue maximisation has prompted newer methods of bidding. Almost all segments of the economy, where the government transacts business with the private sector, have, therefore, seen different rules of the game evolving over the past five years.
A lot of these changes were the fallout of controversies surrounding the allocation of 2G spectrum and captive coal blocks, but much before these controversies broke out, oil & gas and even telecom sectors saw bidding.
In oil and gas sector, for instance, the New Exploration and Licensing Policy (NELP), introduced in 1998, devised a method wherein bidding was to be conducted with the primary motive of exploring the Indian sedimentary basin. The winning bid was, therefore, decided on two grounds - one which committed the highest minimum work programme translating into maximum exploration; and the other that promised highest share to the government after costs in a particular year have been recovered. Till then, first-come-first-served was the method of allocation for natural resources. Oil and gas were the only natural resources which were bid out though a host of government contracts, both for purchases and projects were being given out through a system where L1 or the lowest bidder was declared the winner. "Probably, first-come-first-served basis made sense then since the government felt that there was not enough economic value for natural resources since the economy was smaller," says Gokul Chaudhri, partner, BMR & Associates. Besides, as Kameswara Rao, leader, energy, utilities, and mining, at PricewaterhouseCoppers, puts it, revenue generation was not a primary objective in a resource consuming country like India. "The governments are conscious of its inflationary impact. The aim is simply to extract surplus value so that all market participants using that commodity, whether they own its production or buy it, are largely on a level-playing field."
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Chaudhri says the value of natural resources and the perception of rights over them have undergone a phenomenal change in the past decade or more. Auctioning, as against bidding, where the highest offer can be outbid by an even higher bid, ensures highest returns for the seller. Auctioning of 3G telecom spectrum by the United Progressive Alliance government in 2010, therefore, for the first time made revenue maximisation as the primary goal. "When you do auctioning in its purest form, revenue maximisation is the outcome," says Chaudhri.
An electronic platform, where competing companies put in aggressive bids, was used for giving out air waves. The government earned Rs 67,710 crore. Using this as the benchmark, the Comptroller and Auditor General later said the figure of unrealised revenue from 2G telecom spectrum and unified access service (UAS) licences during the period 2007-10 ranged from Rs 57,600 crore to Rs 1.76 lakh crore. This not only unleashed a mammoth controversy but forced a change in the policy of giving out resources. "Revenue maximisation became a pointed public policy. It is now seen as correct because it is felt that somewhere this revenue is redeployed for the society," says Chaudhri.
Since captive coal mining allocation also became controversial and eventually led to Supreme Court cancelling allotment of blocks over two decades, the National Democratic Alliance government decided to adopt e-auctioning for coal, too. At the same time, it could not overlook the fact that if coal was priced higher, cost of power would increase though it did tom-tom the fact over Rs 2 lakh crore will be earned by the state governments 25 years.
Higher coal price would not only have burdened the power consumers but would also have put the distribution companies, who were to buy under power purchase agreements (PPA) signed with the block allottees, under pressure. Two different methods were, therefore, adopted. The reverse bidding option was adopted for blocks meant for the power sector, and forward bidding was adopted for the remaining captive users of coal. The first meant whoever valued coal the lowest, translating into lower power tariff, bagged a block. In the second method, one valuing the coal highest got a block. The bids were as low as minus Rs 1,110 a tonne in a reverse bidding, while it was as high as Rs 3,502 in a forward bidding.
The coal bidding underscored the point that there cannot be a one-size-fit-all way of giving rights over an asset. "The evolution of individual industry and sectors such as port, roads, power, telecom, etc., (and growth of these sectors) require public policy to evolve in a way which is relevant to each sector, and the bidding or allocation is aligned to the wider policy framework for the given sector," says Chaudhri.
The Railways, for instance, now plan to use the Swiss Challenge method for development of stations. Any qualified entity will be submitting a development proposal to the government. That proposal will be made public and any other entity can beat the earlier offer. The original proposer will get the chance to match the second offer. In case it is not able to match the more attractive counter proposal, the project will be awarded to the second bidder.
The Swiss Challenge method has been used by state governments of Karnataka, Andhra Pradesh, Rajasthan, Madhya Pradesh, Bihar, Punjab and Gujarat for roads and housing projects. After facing some legal issues, it was upheld by the Supreme Court in 2009.
In the oil sector, too, something similar is being planned for almost a decade now. The open acreage policy, like the Swiss Challenge method, is being conceived to allow companies to identify area for oil and gas exploration, make an offer to the government which then can be bettered by someone else. Unlike NELP where blocks are identified and put on offer, it is the companies which identify the acreage. The government, however, has not introduced the policy because of lack of a depository holding the geological data.
As in the case of railways, so for oil, these newer methods will be tried out to get in investment especially in low interest areas. Chaudhri says depending on where an industry is in its lifecycle, the methods of bidding can evolve, though there should be some amount of stability.
Aggressive bidding might not allow a nascent industry to grow and will keep smaller players out since their risk-taking ability may be lower, or they may not have enough investment capital. A fine balance has to be drawn for the long-term viability of the sector even if transparency, equity and revenue maximisation are the driving motives behind bidding.
