The Reasonability of Auction

The infra sectors cannot breathe easy until the right systems in competition through auctioning is introduced wherever resources are involved

The 2G spectrum verdict on the astonishing day of 2 February pronounced a cancellation of all 121 permits given after 10 January 2008 by the then Telecom Minister A Raja. There is a fundamental flaw in the principle of first-come-first-served in the distribution of state-owned natural resources, the verdict said, citing Article 14 of the Constitution. Nothing could be closer to the philosophy of a vibrant, post-liberalisation democracy. No one should have been shocked by this course correction. Yet the verdict seems to have sent everyone into a tizzy, mainly because the impending rectification of the 2008 action to skip auctioning will send financial institutions into a bit of a spiral. It will also have widespread ramifications for other sectors, notably infrastructure.

Ratings company Fitch has quickly turned on its calculator to estimate that profits will suffer a 10 per cent for the banks that lent to the telecom sector, spinning off a whole new can of worms in the securitisation and credit profile of the banks. Although the verdict may not have a direct “material” bearing on banks’ credit profile, it exposes the vulnerability of infrastructure financing and project implementation to policy, regulatory and structural uncertainties—by far, ironically, the biggest of the default reasons as of date. Bank after bank will tell you that cost and time overruns are mainly caused because of vacillating government policies and weak implementation of existing regulations on land acquisition and environmental clearances.

So what are the implications of the 2G verdict on the infrastructure sectors? The government will not financially support the losing companies, and this may be a trend for future cases. The lessons are essentially in transparency and fairness. Let us start with mining. While both land acquisition and other clearances are the bane of this sector, the coal industry will heave a sigh of relief only when the Damocles’ sword that has hung over it is removed to a certain extent. Although auctioning of coal blocks has been mandated already, it has been selective. Auctioning of coal blocks was supposed to be a reality by last year-end, and yet the government continues to hum and haw over the processes. The first big decision was announced—perhaps to escape a swinging deadline bat—in early December when the Coal Ministry announced that it would auction 54 blocks on upfront payment basis. But the caveat was that it might not offer mines to power companies directly but to allot blocks to states who would, in turn, open them up for bidding. So the coal mine owners had better hope a retrospective order is not issued for this sector, resulting in cancellation, as in the case of telecom licences.

Although resources are involved in every infrastructure sector, the idea of transparency and fairness should transcend that factor. NHAI has had the foresight—and good guidance from the Planning Commission—and has already introduced price-and-quality-based bidding. Other mining sectors—iron and manganese, notably—would do well to get their act together quickly just to escape the horror of legal decisions. So would water, renewable energy and oil and gas. The philosophy behind competitive bidding—lower prices and a fair system—defeats the purpose of first-come-first-served. However, there is enough cause to add a rider in the system—that of “reasonable exception”. For example, if a builder chose a certain tract of land to develop a township, should the government convert the land and then open it up for bidding? That, clearly, would defeat one of the main concepts of this decision—fair competitiveness. Therefore, while concretising this decision into law, the government should realise its boundaries.