By Nageshwar Patnaik in Bhubaneswar, October 25, 2020: The Nobel Prize in Economics this year has been rightly awarded jointly to Paul Milgrom and Robert Wilson of Stanford University for creative inventions of new auction formats for the sale of state owned natural resources. Most nations in the country have opted for auction mode to share these invaluable resources for a considered amount.

It is needless to say that natural resources are the natural capital out of which other forms of capital are made funding towards fiscal revenue, income, and poverty reduction of all countries. Effective and productive management of these non-renewable and renewable resources on a sustainable basis is the real challenge before any government.

While selling or sharing these resources, the government has to ensure proper pricing and selection of the private parties who receive permission to use such resources national development.

The countries by and large had followed two common processes for allocating rights: bilateral negotiations and competitive tenders. In bilateral negotiations, the government and a corporate bidder, come together without an open competition and sign the agreement on the terms and conditions of the company’s right to explore and/or exploit the resources on certain payment.

The second one is competitive tenders including auctions in which the government makes a public call for companies to submit bids, opening the opportunity to bid to more than one party. Often the government sets out criteria that bidders need to meet in order to be allowed to participate. The process of deciding whether companies meet the criteria to bid is called pre-qualification.

During the pre-qualification stage, governments determine whether the interested parties meet the relevant criteria. The government then invites qualified parties to bid. After receiving the bids and comparing the benefits, the government issues a license and/or sign a contract with the winner.

In countries that use contracts in contrast to licenses, the goal of both open door and competitive licensing processes is a contract. The provisions in the agreement, or the terms, may vary from project to project but generally includes information about the timelines and processes for project implementation; fiscal terms for sharing revenues between the company and the state; local area development; health and safety standards for labor, social and environmental responsibilities and the obligations of the government.

In auctions, however, the bidding terms may vary. Some terms may be fixed, which means they are prescribed either by law or the terms of the auction. Other terms are variable, and the Planning Promotion / Calls for interest Prequalification Calls for bids.

Auctions are indeed an excellent means of price discovery of a product or resource – the most effective option when there are a number of potential buyers and revenue maximisation is the key objective. It reduces the discretionary powers of the powers that be, thus virtually eliminating corruption to a large extent.

The Nobel laureates Milgrom and Wilson, both American economists are credited with formulation of formats for auctioning which can be used for selling critical assets owned by the State to private or even public sector companies for commercial exploitation.

India is a classic case which belatedly has opted for auction mode for trading off natural resources for national development that too after the historic order of the Supreme Court.

The Apex Court in 2012 ordered the cancellation of telecom licences granted by the then UPA government, setting the tone for transparent and effective auction mode for trading off natural resources for national development.

“Natural resources belong to the people but the State legally owns them on behalf of its people and from that point of view natural resources are considered as national assets…. However, as they constitute public property/national asset, while distributing natural resources, the State is bound to act in consonance with the principles of equality and public trust and ensure that no action is taken which may be detrimental to public interest,” the order said.

The Apex Court categorically observed that auction was the best way to allocate natural resources, be it oil and gas, spectrum, minerals and coal. However, there are two contradictory aspects of this exercise.

First is that since most natural resources are primarily owned by the Government, it has to ensure that these rare resources are utilised for greatest common benefit. That is, the price paid by those who are given right to use must be adequate and reflect the value of the resources handed over. This mode paves the way for maximisation of revenues on sale of these resources. .

Secondly, at the same time, the sale price should not be so exorbitant as to stunt their development. Inflated price can prove to be unviable commercially and therefore stunt growth. Users burdened with steep prices fixed by Government could impede their wider use.

This clearly indicates that awarding of such contracts for commercial use to private or public entities could be a very complex process inherently. Besides, the system must also ensure no scope or political interference and discretionary powers for undue gain to those who are in a position to control.

For decades the country has been watching all these adverse consequences in the award of natural resources in this country. Saddled with a spate of political controversies and huge scandals pertaining to the union government’s award of licences for commercialization of state owned resources, the Narendra Modi government has taken up the auction route to sell the natural resources.

This year’s Nobel Laureates have worked to develop market mechanisms for achieving these conflicting goals and achieving maximum societal benefit. The Modi government must take cue from this and design auctioning of resources for the holistic development of the country and its people.