Auction cannot be sole option for allocation of natural resources: Ficci

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Jun 13 2012, 07:42am hrs
Industry body Ficci has told the Supreme Court that the auction method (i.e. a market-based system) adopted in allocation of natural resources can indeed be successful in effectively distributing natural resources if conducted openly and fairly.

Ficci, in its reply to the Presidential Reference in the 2G spectrum case, said the most countries favour the auction process in allocation of scarce natural resources - mines and minerals, coal, petroleum, natural gas, land, spectrum, water, forest and forest produce - and even in India a preference over the years seems to be emerging in favour of the auction process .

However, it said that the methodology may not serve as the ideal option universally available for the distribution of all natural resources under every circumstance the precise method of distribution must be undertaken only after consideration of sector specific concerns, government policy, public interest, social and economic welfare objectives, the security and strategic interests of the country, the extent of value addition being generated by the proposed method of allocation, the nature and geological characteristics of the natural resource in question, principles such as fairness, transparency and sustainability, etc.

Ficci also requested the apex court to lay down guidelines so as to ensure a successful system of checks and balances in the process of allocation of natural resources so that each method of allocation achieved optimal utilisation of the natural resource, thereby promoting the overall public interest.

Besides, it also said there was a need to introduce a regulatory framework by the setting up of regulators for allocation of the natural resources.

Confining its submissions only to whether the only permissible method for disposal of all natural resources across all sectors and in all circumstances is by the conduct of auctions, the industry body said that since auctions can play a valuable role in the price discovery process when price discovery is the sole consideration in making such sale, they are most useful and used in situations in which the precise commodity being auctioned does not have a fixed or determinable market value, or, where the seller is uncertain about the precise market value.

Although auctions are the usual as also the preferred method for distributing and allocating the natural resources, they are by no stretch the sole method and to the altogether exclusion of other processes that may have their own share of advantages befitting a relevant factual situation concerning distributing of a particular natural resource, it added.

The affidavit filed through its secretary general Arbind Prasad, Ficci said that any underlying objective in the allocation of resources must always consider one fundamental tenet, i.e., is there enough competition in the market (assuming a true market based allocation system is being put in place)

While determining the mode of spectrum allocation, Ficci emphasised that only adequately qualified bidders should participate.

Spectrum has to be priced appropriately so as to reflect the actual value of the resource, while simultaneously maintaining a level playing field. While too low a reserve price does not reflect the true market value of the resource, on the other hand, a very high reserve price of spectrum paid by the operators would reduce the funds for roll-out of network in rural and under-served areas, while in turn affecting the level-playing field, the reply filed through Shroff & Co stated.

It also suggested that in future spectrum should be de-linked from license as spectrum is a natural resource and should be regulated separately.

Spectrum, a scarce natural resource should be subject to independent regulation, and should be amenable to separate and distinct methods of allocation. But, if auction is adopted, it must be done so, after a number of safeguards relating to the fixation of reserve price and the participation of new entrants are put in place.

Spectrum has a substantial economic value which may be redeemed through auction. But at the same time it is important the services being provided are also kept affordable. If auction is adopted as a mode of spectrum allocation, the bidding criteria should be modeled in a way mitigating the possibilities of, hoarding, bid rigging, formation of cartels and monopolies, while at the same time, creating a balance between revenue maximisation for the government and maintenance of public good, Prasad said.

The body also emphasised upon the need to have other the multi-faceted approaches to address the issue of scarce natural resources.

The affidavit said that the First Come First Serve (FCFS) alternative is attractive because it often recognises incumbent parties, who have experience in exploiting the natural resource in question.

According to Ficci, administrative processes, also known as beauty contests or beauty parades, have been adopted by many Asian countries such as Japan, Singapore, South Korea and Hong Kong. In this system, the government invites proposals from the aspirants and these are evaluated against broadly set out multiple criteria, which subsume the policy objectives of the government. This is akin to a form of barter, the reply added.

The body also emphasised on another alternative- the lottery system, where all parties have an equal chance of winning and the time taken to select a successful applicant is reduced.

On the aspect of distribution of coal, it submitted that independent mining firms be allowed to take part in a system of auctions for captive blocks of coal, with appropriately notified groups of end-user firms.

However, it said that the use of tenders as an exclusive methodology for granting mineral rights has not generated the positive impacts expected; in fact, in some cases, it has posed an obstacle to effective development: Because the Governments using the tender bid methodology could only offer areas that have known geological potential, this process slowed down exploration, and some potentially interesting areas were completely.

Both the processes auction and FCFS should not be treated as methodologies for allocation to be used in isolation, but as processes that govern the allocation of mineral rights, and must be used in conjunction.