For nearly two decades, Indian policy-makers, judiciary, media, Civil Society and experts have loudly claimed that auctions are the best way to lease natural resources, which are public property and can be used in public interest. The policy-makers, despite several caveats voiced by the judiciary, forced them across sectors, be it telecom, mining, and oil and gas exploration. Among different forms of auctions, such as English, Dutch, Swiss Challenge and Vickrey, or the ascending, descending and reverse bids, reverse-bids and Swiss Challenge emerged as the best, most transparent, and most lucrative in terms of Government revenues. Over the years, Governments gloated about suctions’ successes.
During the same period, businesses suffered, companies went bust, and sectors were disrupted. But the corporate concerns remained muted. No one wanted to challenge the Swiss challenge, or make a bid to reverse the reverse-bids. In telecom, most firms went out of business, and there are clear hints of an emerging and dangerous duopoly. In mining, the successful bidders were unable to adhere to their promises. In oil and gas, exploration was slow. In insolvency processes, where Swiss Challenge was adopted several times, there were controversies, and the individual cases went to the courts, not once but several times. Despite the problems, auctions, in some form or another, remained in vogue.
Recent media reports indicate that although the Government loves auctions, it wishes to improve the mode to make it more efficient and purposeful. In iron ore mining, it wishes to lease reserves via straight-forward auctions or Swiss Challenge, rather than reverse-bids. According to one report, at least “three-line ministries are likely to be taken on board, and form an inter-ministerial committee.” A Government official told a newspaper, “If that (auction procedure) has to change, it needs consultation with stakeholders, legal experts and a ministerial level.” Obviously, the officials have hit huge roadblocks in the past minerals’ auctions via reverse-bids, which created problems for businesses, and impacted the revenue-generation for the Exchequer.
A reverse bid is an auction, where the Government sets a reserve price, and the bidders indicate an annual premium over it that they will pay to the Government over the lease period. The one who offers the highest premium wins. In the past, reserve prices for iron ore mines were high, and premiums went haywire, 100-200 per cent in some cases. “The result was that in some cases, the amount offered to the Government was not just over the reserve price, but more than the value of the iron ore. Thus, the bidder incurred a loss from Day 1. There was no scope to make any money unless market prices shot through the roof. It was a foolish way to bid for a mine,” explains a miner.
A few years ago, a newspaper analysed more than 100 mining auctions since 2015, and concluded that many cases, “particularly iron ore mines, have had high bids, even higher than the estimated value of resources. On average, the estimated auction premium cumulated over 50 years amounts to 86 per cent of the value of the estimated resources. Additional (official) payment commitments on royalties, District Mineral Foundation funds, and National Mineral Exploration Trust funds are about 17 per cent of the value of the estimated resources. Hence, there is a total commitment of 103 per cent (by the bidder) … which does not include corporate taxes, forest and wildlife protection payments, and stamp duties.” Most mines were dud cases.
Last year, Anil Agarwal, the chairman of the global mining giant, Vedanta Resources, which has had its own problems related to corporate governance and operations, alleged in a tweet that the iron ore industry was dying, partially due to the high premium bids during auctions. He questioned if a business could run successfully if it shared more than 100 per cent of the revenue with another party (Government). He answered it, saying a big no, and contended that this was the reality in India. The mining ministry “issued a sharp rebuttal, also on X, calling Agarwal’s remarks ‘completely misleading’ and ‘incorrect.’” Clearly, reverse bids were not in top gear.
In a straight-forward auction, where the potential owners submit bids, and the highest one wins. In a Swiss Challenge, a potential bidder offers a price initially, competitors up it, the original bidder hikes it again, and the process continues, until there is no challenge to a price. The one who offers it, wins. Both are fraught with different problems. Straight auctions result in controversies due to disputes over technical parameters, financial considerations, and ranking systems. There are occasions when the technicalities and financials favour certain parties, which result in allegations of crony-capitalism. In some cases, they are changed abruptly to force some bidders to exit.
Supreme Court precedents have found fault in Swiss Challenge. In one of the judgments, while the apex court ruled that the auction mode did not violate Article 14 of the Constitution, and was a “permissible” method to award tenders, it urged the States to formulate clear guidelines. In 2015, a State-appointed committee wanted it to be discouraged due to concerns related to information asymmetries,” lack of transparency, and absence of “fair and equal treatment” between the original bidder and other competitors. In 2021, the Central Vigilance Commission wanted a “reasonable timeframe for completing the (Swiss Challenge) bidding process,” as it can go on for dozens of rounds.
In comparison to these two modes, and reverse-bids, English auctions are ascending ones, where bids start low, and keep on increasing till there is no one else to hike it. “The auction ends when no one wants to increase the bid, and the highest bidder wins…. This is a common, open-cry format where bidders can observe competitors, and adjust their strategies,” states a Google-search summary. Dutch auctions are descending ones, where the bids start at unusually high prices, which are lowered gradually in phases. The first bidder to accept a specific price, wins. “A fast-paced, efficient format where bidders have less information about competitors’ valuations,” states the same summary.
But these two have their disadvantages. Many experts feel that undue reliance on auctions may not be good. If the policy-makers decide to pursue them due to public protests, or judicial interventions, they need to be vigilant about the loopholes and lacunae. Non-auction formats may not be a bad idea, if the mechanics are fair and transparent. Either way, openness, integrity and honesty of the process, clear-cut official guidelines, and strong political will are crucial.