Are auctions really the answer? | The Financial Express

Are auctions really the answer?

The aftermath of the 2008 2G auctions leave little room for methods other than telecom auctions. However, such a decision could practically establish auctions as a de-facto norm to distribute national resources, which can have serious public policy drawbacks

Are auctions really the answer?
This can have serious public policy drawbacks.

By Dinker Vashisht

The draft telecom Bill has proposed to make auctions the only path for telecom spectrum allocation. Prima facie, the government’s faith in auction appears reasonable. With three strong private players (Jio, Bharti, Vi), one public sector operator (BSNL), and a newbie (Adani), the Indian telecom sector fits the description of a mature competitive market, which features 3-4 dominant players and a few niche specialists. The aftermath of the controversial 2008 2G auctions leaves very little political space for the use of any other method. While the draft talks only about spectrum, given the political scenario, such a decision could practically establish auctions as a de facto norm to distribute national resources. This can have serious public policy drawbacks.

The judiciary has been conscious of this and therefore has consistently refused to give auction a constitutional mandate. Article 39(B) of the Constitution enjoins government to ensure that ownership and control of the community are so distributed as to subserve the common good. In the Presidential reference case in the 2G matter, it was argued that since revenue maximisation is the only way to achieve common good, auctions should automatically become a constitutional principle. Dismissing the argument, the Supreme Court refused to acknowledge it as the only way. In its various judgments, the apex court has held that it is erroneous to construe auctions as the only way to ensure equality. This means that for the disbursal of natural resources, the government should not take arbitrary and unfair actions, but the judiciary cannot command that to ensure equality of opportunity under Article 14, the government should only resort to auctions.

One could argue that times of vicious political diatribes and the shadow that the figure of Rs 1.76 trillion (the presumptive loss described by CAG in 2008 2G spectrum allocation) continues to cast over our minds leaves the government with no options. But in the 2008 allocations, the rot was not restricted to the alleged presumptive loss. The bigger problem was the arbitrary and opaque process adapted to issue the licenses. Subsequent developments, especially when companies that had won the licenses issued equity to their investors at a huge premium, gave credence to suspicions that 2G was allotted at throwaway prices. It was in this context that the Supreme Court, while cancelling these allocations, described auctions as the best way to transfer natural resources, but subsequently held that this judgment was case-specific and was not to be read as a statute. The apex court held that it is not the potential of abuse but the actual abuse which is problematic and should be brought before the court, and it was not the judiciary’s business to assign auctions or any other economic policy as a constitutional mandate.

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These judgments are in consonance with the evolving jurisprudence, where the theory of Eminent Domain (giving absolute powers to government on property) is considered at odds with Doctrine of Public Trust, which imposes a positive obligation on government with regard to the environment and rights of indigenous communities. For instance, during a mining allocation, the highest bidder may not necessarily be the best option, and societal interest may warrant consideration of factors such as a past record in environmental sensitivity, employing locals, etc. Similarly, instead of auctions, a local government may ask for a share in profits so that the surplus can be channeled back towards community betterment and replenishment.

The methodology used by the Indian government for spectrum allocation since 2010 is Simultaneous Multi-Round Auction, as devised by economists Robert Wilson and Paul Milgrom. Known to remove the deficiencies of the traditional English and Dutch auctions, as well the Vickrey Auction that was in vogue in 1970s and 80s, this method is today renowned for its ability to maximise revenue. Milgrom and Wilson winning the Economics Nobel Prize in 2020 has added to its credibility.

While the efficacy in terms of revenue garnering has been proven in developed markets, there are concerns about whether such a method is always suitable in underdeveloped markets. The lackadaisical response in some of earlier spectrum auctions in 3G and 4G rounds in India, the failure of telecom auctions in several African nations, are cited as instances of imperfections in this system. There are doubts about the right price discovery, as evidenced in the case of high prices paid by certain telecom operators for some frequencies— these expensive winning bids are often correlated to financial distress in Indian telecom. Also, there are apprehensions that in the absence of strong antitrust regulatory mechanisms, auctions are detrimental to competition, can promote oligopsony setups, where a small number of large, powerful buyers collude to keep fresh competition away and affect prices to their advantage.

A deficit-ridden government may have found it convenient to exalt revenue-maximising auctions as the mandated way for disbursal of spectrum, but in doing so, they may have set up a restrictive precedent for other sectors and governments that may not always be in the best interest of competition and citizenry.

The author is Vice-president, regulatory and corporate affairs, Games24x7

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