A transparent auction reinforces a public belief that the Government they have elected to serve them is committed to a rule-based regime.

Lately, doubts have been raised over the desirability of auctions as a method of distributing natural resources for exploitation by private parties. These criticisms have mounted especially after the Supreme Court’s 2G spectrum ruling in February and the Comptroller & Auditor General of India’s recent report on allocation of captive coal blocks. The most commonly voiced concern revolves around bidders quoting huge sums for acquiring rights for usage of such resources, which they may, then, load on to the final consumers. It is, for instance, believed that while the awarding of 2G spectrum on a so-called first-come-first-served basis in 2008 may have caused massive losses to the exchequer, the consumers, nevertheless, benefited from call rates dropping due to the entry of new mobile operators. The exchequer’s loss from spectrum being made available cheap was more than made up by mobile phone services becoming affordable to even ordinary daily wage earners – thereby ensuring no conflict with public policy objectives.

The above argument, howsoever compelling, is flawed. It betrays a poor understanding of the basic purpose that auctions serve – or, rather, ought to serve. Auctions are only a means to allocate a common resource – which is scarce and has intrinsic utility – in a transparent manner, while reinforcing a belief among the public that the Government they have elected is committed to a rule-based policy regime. The only way it can be done is by giving equal opportunity to all to bid for the resource on offer, subject to their meeting certain minimum eligibility criteria. This process may yield revenues to the Government, but that is – or should be – only incidental. If auctions are viewed primarily as a revenue-raising instrument, the blame lies with the Government. The latter should be making money more through the royalties and excise levied on the ore that is extracted, or by taxing the services launched on the spectrum. The Government can, over and above these, tax any windfall profits earned by the miner or the telecom firm. But that requires the resource to be exploited in the first place.

Once the principle that the Government is better off seeking to earn more from the output (whether physical or intangible) – as opposed to allocation – of a natural resource is accepted, there can be no real question marks over the desirability of auctions. There is no other transparent and non-arbitrary method for the Government to allocate resources vested with it, for which there are multiple parties seeking to acquire and exploit. The only issue that remains is how auctions are designed, so as to prevent collusion among bidders and attract genuine players capable of optimally exploiting the resource for the benefit of end-consumers. Fixing high base prices, as the Government has done for the upcoming auction of 2G airwaves, is certainly not the way to do it. Auctions are needed for transparency, not for maximising exchequer revenues.

(This article was published on August 21, 2012)
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