Allocating natural resources remains a challenge

Allocation of natural resources or disinvestment of government ownership of companies is a tricky business for any government. As was the case in India, under the second term of the United Progressive Alliance (UPA) government, ministers and bureaucrats in many other countries, too, have been shamed in the process of disposal of natural resources and sale of ownership of public sector enterprises. Two botched cases of resource allocations during the UPA regime remained etched in public memory. The Supreme Court quashed all the 122 licences for 2G telecom spectrum issued by UPA government in 2008 on a first-come-first-served basis and ordered auction for grant of fresh licences. Similarly, "arbitrariness" and "inefficiency" in allocation of coal blocks to private and public sector companies, which led to revenue losses for the government, put the UPA in the dock.

The shocking setback for the UPA in Lok Sabha elections has much to do with public disapproval of corruption associated with the 2G telecom spectrum and coal block allocations.

Similarly, governments will invite criticism if due to poor commercial judgement, shares in public enterprises are sold at low rates, causing loss to the exchequer. The UK government has been pulled up by a parliamentary committee for failure to secure "adequate and appropriate" return on assets of Royal Mail in the course of the most significant privatisation in years. In a strong indictment, the committee says, "The government cannot blithely dismiss as 'froth' our...concern that the low issue price of this prime public asset (Royal Mail) has cost taxpayers about £1 billion (about Rs 10,000 crore)." The committee arrived at the disinvestment loss through two counts: First, it believes the government, in its concern about the likely investor response, set the opening share price of Royal Mail too low, at 330 pence (p). In support, it says subsequent to the share sale, the price rose to a high of 618 p. This is now down to 450 p, as competition from rivals threatens to take the shine off its paying parcel business. Second, sale organisers have been pulled up for valuing three Royal Mail-owned sites in London at a knock-down price of £200 million when these could be worth up to £830 million. The committee is disappointed with the government's financial advisor, Lazard, and global coordinators UBS and Goldman Sachs for their collective failure to anticipate demand for Royal Mail shares at much higher than the offer price.

The Economist says, "Picking the price at which to sell a public asset is a daunting task...the right price is hard to find, because privatisations are often one-offs." The challenge is to tease out the best price for assets by governments, employing means that will leave no room for doubting the integrity of those involved in the exercise. In most countries, the auction route for selling resources and disinvestment of government ownership in companies is preferred to other methods. This is because, as The Economist says, auctions will reveal "true valuation" of items on sale by bidders. This will ensure "best possible" prices for assets to come under the hammer. Apparently, auction is seen as a guarantee against corruption in public asset sales. The Economist says, "New research shows how collusion can corrupt auctions of public assets, so that the state is still short-changed." Collusion could be among parties participating in auctions or, worse, between bidders and government officials.

There is suspicion in the case of disinvestment of majority government stake in a non-ferrous metal company in India some years ago, one of the two bidders went through the motion reluctantly, at the behest of powers that be. Shenanigans suspected in that bidding made taxpayers the losers. Controversies surrounding the UK's Royal Mail sale should be a wake-up call for our government, which is planning to raise Rs 58,425 crore by offloading portions of its holdings in about a dozen companies, including Steel Authority of India and Coal India this financial year. In every disinvestment, New Delhi will have to ensure the share offer price represents true value of the enterprise, leaving no scope for controversy. Discovery of that price is too serious an exercise to be left entirely with external financial advisors. Their recommendations should be subject to close review by finance ministry officials.

The timing of a disinvestment is no less important. Ideally, the government should consider share sale when the market is resilient, as is the case now. With the new government settling down, there will be pressure for allocation of natural resources from coal and iron ore to bauxite. How does the government carry out resource allocation in a fair and transparent manner that will leave no room for controversy?

In a judgment, the Supreme Court has said it is the executive's prerogative to choose the means for distribution of natural resources. The court will not interfere unless any allocation is found to fail the twin tests of "fairness and non-arbitrariness" in the context of Article 14 of the Constitution. Because of the storms in the past over resource allocation by methods other than auction, the government will be shy of using procedures other than open bidding.