Auction of public resources and profit

Business Standard     30th November -0001     Save    
QEP Pocket Notes

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.

QEP Pocket Notes