Dictating policy?

Dictating policy?

Whether the constitutional division of powers is being violated by the courts opinion is for the legal luminaries to decide.

The Supreme Court has now cancelled all 122 telecom licenses allotted by A Raja.

In the court’s opinion, the first-come-first-served rule is fundamentally flawed and open to manipulation. Hence, it ruled that the government “is duty-bound to adopt the method of auction” in all future allocation of scarce natural resources. 

This has opened up a number of issues. The first is a pure constitutional one. No doubt, the courts have the right to cancel allocations made if the first-come-first-served rule (or whatever rule) has been manipulated in a discriminatory manner. But the question is: Can the courts (including the highest judiciary) pass an opinion on what is the (best) policy or rule to be followed in future? This is for the elected government (executive branch) to decide, on the basis of opinions of experts and discussions in Parliament (legislative branch). The courts do not have this expertise or even the powers. Whether the constitutional division of powers is being violated by the court’s opinion is for the legal luminaries to decide.

The second is a legal issue of compensation, if any, to be paid to those companies whose licences get cancelled and who have already incurred heavy investment expenses. All the companies who won bids are not necessarily guilty of wrongdoing. Some of them are sure to move the court.

Leaving legal issues aside, let us focus on whether auction is really the best option for allocating all scarce natural resources. Here again, opinions may differ. The basic question is: what is the objective of the government? If the sole objective is the maximisation of government revenue, then the case for allocating all scarce natural resources to the highest bidder is quite strong.

But the problem is that the government may have multiple objectives. For example, for allocating telecom spectrum or radio frequencies, the government may want to keep the price of telephone calls low, specially in rural areas, in order to increase tele-connectivity and promote economic development. In fact, if the growth in telecom traffic goes up very significantly as a result of low price, even the long-run revenue of the government (by sharing  the rapidly rising revenues of telecom companies in future) may be higher compared to allocating to the highest bidder (maximising short-run revenue) which keeps price of calls high.

The supporters of auctioning may, of course, argue, that the auction can be properly designed to take care of multiple objectives. For example, it can be stipulated in the auction that the price of a 30-second call (generally or from specified backward areas) can not exceed a specified maximum and the competitors will bid with this clear understanding. Alternatively, the government may first maximise the revenue through the auction and then use part of the revenue to subsidise a specific class of users in national interest.

Increasingly scarce

The problem is more complicated in the case of an essential good like, say, water. Water is a natural resource which is becoming increasingly scarce. Does the Supreme Court ruling mean that water, too, should be auctioned to the highest bidder? This may mean, in turn, that the highest bidder, after winning the bid, will only supply water  to the affluent users at a relatively high price and the poor will be priced out of this essential good. Again, in principle, the auction can be designed to rule out this possibility.

The government may specify in the auction contract the maximum price of water or the quantum of water that must be supplied to different classes of users at  specified maximum prices. A balance can thus be established between the government’s revenue maximisation objective and the protection of the vulnerable users, even while using the auction method.

Similar (and sometimes more intractable) problems will arise if the auction principle is used to allocate scarce public resources like beds in a government hospital or seats in IITs/IIMs. Though, in theory, some appropriately designed auction contract with various kinds of safeguards built into it  to pursue multiple objectives (like different maximum prices for different classes of claimants who again would be subject to various eligibility criteria), can be thought of, these will become highly complicated.

In such cases, the number of competitors bidding for such complicated auction contracts will be small which may end up with a low revenue for the government due to collusion among the players. In addition, the enforcement of all the provisions of the complicated contract would be very difficult, leading to non-enforcement, corruption and litigation. 

To conclude, for some cases like allocation of spectrum or minerals, a properly designed auction may well be the best option, to principally guard against diversion of potential government revenue to corrupt officials. But the same principle or rule may not the appropriate one for allocating all scarce natural and public resources. A simple-minded one-size-fits-all approach, apparently suggested by the Supreme Court, is not the ideal solution.

Rules should be simple, transparent and enforceable to minimise the scope of manipulation. We need technical experts and independent regulators to design and implement the appropriate allocation mechanisms in specific cases. We must not forget that any rule – however sound in principle – is subject to manipulation, unless overseen by truly independent regulatory bodies with power of enforcement.  

(The writer is a former professor of economics at IIM, Calcutta)