Are auctions the only method for allocating natural resources was a question that was hanging fire since the Supreme Court’s verdict on the 2G scam was issued. The government, through a presidential reference, requested the Supreme Court to give its opinion on this issue, and a few other issues related to the 2G judgement. The SC’s opinion was critical, as it would set to rest any doubts about interpreting the judgement.
In the SC’s opinion, the 2G judgement does not actually say that auction should be the only way of allocating all scarce natural resources, while it holds good for allocating spectrum.
The SC clarifies that the government is free to make policy for allocating natural resources. The Court will not interfere with this, and not even compare one policy with the other. But where it can be proven that a policy is unfair and does not conform to constitutional principles, it can be struck down.
That is enough of a warning but here’s a twist. The opinion says that where natural resources are not being allocated for a social or welfare purpose, and are being allocated to private entrepreneurs who have profit as a motive, if the means for allocation are not competitive or they do not maximise revenue for the State, they can be deemed arbitrary and can be struck down.
A holistic view of the judgement does not occasion the response one hears from the government, and industry, and even in the media. Their interpretation seems to suggest that the government is free to allocate natural resources by means other than by auction. Which is true, but it comes with a caveat that appears very critical, but is not being considered.
If one were to take an example, if the government has to allocate the exclusive right to a lake’s water to a municipal authority for supplying water to a city, the government need not auction this resource, or call for competing bids from various municipalities, or in any way maximise revenue from this exercise.
But what about when it allocates coal blocks to power companies, limestone mines to cement companies, bauxite mines to aluminium companies, iron ore to steel and merchant mining companies? After all, these are private companies and their objective is to generate profit for their shareholders.
The production of power would fall within the definition of a public good. But what happens if a power utility that has captive coal blocks makes super-normal profits, because it has negotiated beneficial terms with the government? Will that be considered an activity that is social or welfare-oriented?
What if the power utility sells part of its production—legally but using the same coal allocated to it by the government—as merchant power and earns super-normal profits on that as well? The question could well be: at what point does generating and supplying power stop being a public good or a social/welfare-oriented activity and become a profit-making activity?
What if a steel plant, that has a captive power plant, has been allocated a captive thermal coal block, but this plant sells steel at market-determined rates and makes higher than industry-average profits?
What about metal or mineral-ore based products? Can they qualify as social or welfare-driven activities, even if are important for the country’s economic development?
The SC’s opinion very clearly says that where there is a private party that can benefit personally from the allocation of a natural resource, the state should do it in a fashion that is competitive and maximises revenue for the state. And, if the court feels that the government has not done enough on this ground, it can be struck down.
The SC’s opinion makes it easy for the government to justify allocation of natural resources in any manner, where it can show clearly that it was done for social or welfare reasons. But the position can change when private parties are involved, who have profited from these allocations. If somebody challenges such allocations in a court, the government may not be able to successfully claim that it has the freedom to allocate natural resources in any manner it deems fit. At least, the SC’s opinion does not give it that right.
Read the Supreme Court’s Opinion on the presidential reference here.
Read the presidential reference here, as part of a government reply to parliament.