The landmark judgment of the Supreme Court on 2G spectrum allocation has made it clear that natural resources may not be distributed by the State in a capricious manner.
The judgment is expected to bring about greater transparency in the distribution of these resources.
Further, telecom licences awarded to the respondents have been cancelled, thus sending a message to those who bid for natural resources that if they participate in blatantly arbitrary processes adopted by the State in the allocation of resources, they run the risk of the allocation being struck down.
The 2G judgment may have far-reaching implications for non-major seaport concessions (or exclusive licences to provide services within ports) in India, especially build-operate-transfer (BOT) licences. (Major ports are those that are administered by the Central government. Ports administrated by State governments are referred to as non-major ports.)
Waterfront and land, which are allotted through seaport concessions, are, without doubt, natural resources.
Though some State governments follow transparent and fair processes in awarding these concessions, others award concessions and fix prices (usually a share of revenue) arbitrarily.
There are several instances where concessionaires are alleged to have sought to deploy land allotted for purposes unrelated to port activity.
Constitutionalism
The Court has held that “Natural resources belong to the people but the State legally owns them on behalf of its people and from that point of view natural resources are considered as national assets, more so because the State benefits immensely from their value.
The State is empowered to distribute natural resources. However, as they constitute public property/national asset, while distributing natural resources, the State is bound to act in consonance with the principles of equality and public trust and ensure that no action is taken which may be detrimental to public interest.
Like any other State action, constitutionalism must be reflected at every stage of the distribution of natural resources.”
Public trust doctrine
The Doctrine of Public Trust prevents the State from acting whimsically in distributing natural resources.
The State also has a duty not to impair these resources even if private interests are involved.
Applying the doctrine of public trust, the court held in the M.C. Mehta case: “What needs to be emphasised is that the State and/or its agencies/instrumentalities cannot give largesse to any person according to the sweet will and whims of the political entities and/or officers of the State.”
On 2G allocation, the Court held “In our view, a duly publicised auction conducted fairly and impartially is perhaps the best method for discharging this burden and the methods like first-come-first-served when used for alienation of natural resources/public property are likely to be misused by unscrupulous people…”
In a previous judgment (Fomento Resorts and Hotels), the Court had said that the public interest doctrine “puts an implicit embargo on the right of the State to transfer public properties to private party if such transfer affects public interest.” “.. resources .. in which the public has a special interest (i.e. public lands, waters, etc.) are held (by the State) subject to the duty of the State not to impair such resources .. even if private interests are involved.”
In the 2G matter, the Court has found the 2001 pricing of spectrum to be unrealistic in the vibrant economy of 2007: “We also consider it necessary to observe that in today's dynamism and unprecedented growth of telecom sector, the entry fee determined in 2001 ought to have been treated by the TRAI as wholly unrealistic for grant of licence along with start-up spectrum.”
The Court has pointed out that arbitrary distribution of spectrum led to a situation where “soon after obtaining the licences, some of the beneficiaries offloaded their stakes to others, in the name of transfer of equity or infusion of fresh capital by foreign companies and thereby made huge profits.”
The Court has also expressed its displeasure over companies without any experience in telecom services being awarded licences and has observed that arbitrary distribution has “actually benefited some of the real-estate companies who did not have any experience in dealing with telecom services”.
2G ruling and seaports
What implications does the 2G judgment have for seaports?
Concessions at major ports are usually awarded through a transparent bid process with an objective bid parameter, namely revenue share payable by the concessionaire to the port authority. This is the equivalent of an auction.
Stringent conditions are imposed by major ports on the eligibility of bidders and only those who either have the requisite experience in the industry, or those who can establish that others with such experience will partner them are allowed to bid.
Alas, such fairness and prudence are often not reflected in the award of non-major port concessions.
Instances where concessions have been awarded without a transparent process are only too common. The revenue share payable by the concessionaire is not determined by auction and remains the same today at under 5 per cent as it was at the turn of the century before India's economy started growing rapidly, even though terminals at major ports have attracted revenue shares even in excess of 50 per cent.
It is true that the viability of some projects may be such that only a low revenue share is warranted, but that is for the bidders to decide.
Persons who have had no prior experience whatsoever in ports or related industries have been granted concessions.
Finally, some of these concessionaires have been allowed to subsequently sell their stakes for windfall gains without having taken any steps to fulfil their contractual obligations.
End opacity
Admittedly, we cannot tar all non-major port concessions with the same brush.
Several States have adopted transparent bid processes, refrained from fixing price at unrealistically low levels, screened applicants on the basis of exhaustive eligibility criteria and imposed restrictions on bidders transferring their stake soon after award of the concession.
Sadly, far too many non-major port concessions do not live up to these standards.
The Supreme Court has cancelled telecom licences whose award had been vitiated by arbitrariness.
It remains to be seen if port concessions similarly awarded will suffer the same fate.
The author is Sr. Partner, Hauer Associates, Maritime and Port Consultants