Auction of public resources and profit

Business Standard     30th November -0001     Save    

Context:  With the 2020 Nobel Prize in economics awarded to Paul Milgrom and Robert Wilson for their contribution to auction theory, there is a renewed focus on of such auctions to serve common good and not to maximise the revenues.

Type of Auctions

  • Open auctions: There are 2 modes in this type
  • Ascending mode:  All except one bidder drop out and the winner pays only what he bids to top the second highest bidder
  • Descending mode:  The winner pays what the item is worth to him
  • Sealed bid auctions: There are 2 modes in this type
  • Highest bidder wins at the price he quoted
  • Highest bidder wins at the second highest price.
  • Simultaneous Multiple Round Auction (SMRA): as the approach devised by Nobel winners.
  • Interdependent items are put for simultaneous bidding by eligible bidders and bidding takes place over several rounds and continues  till there are no new bids for any item on offer
  • Bidding remains open on all items till the end and there are provisions to prevent bidders from using a wait-and-watch strategy.

Failed Instances of auctions in India

  • Failure of SMRA: While India for the first time employed SMRA method during 3G auctions in 2010, the subsequent auction from 2012-2016 were less successful.
  • Failure of Sealed bid auction: for resources like oil and gas, the recent auction of coal blocks on the basis of revenue-sharing did not receive sufficient number of bids.
  • Failure of open bid auctions: While open bids promote a fair, transparent, unbiased and equitable treatment, it is more focus over revenue maximization rather than serving common good.

Determinants of Auction feasibility

  • Should serve the common good: The goal of revenue maximisation should not be attained at the cost of common good.
  • Constitutional Provision: Common good is the sole guiding factor and a norm under Art. 39(b) for distribution of natural resources. 
  • Define a common good metric: that is measurable and verifiable and relevant for the resource that is to be transferred to private companies or individuals. 
  • Alternative to revenue maximizing auctions: must be rules based and have no scope for discretionary decisions, so as to rule out corruption and crony capitalism.
  • Can be based on social ends: for e.g. the bidding for auction of urban land could be on the basis of offers of low-cost houses guaranteed by the bidder in return for getting the land at a fixed reserve price.

Conclusion: The auctioning of publicly held resources is welcome as it ensures transparency and reduces the scope for corruption. But auctions must also be designed to serve the common good.