Only Way of Allocating Natural Resources to Private Firms?

Auction: Only way of allocating natural resources to private firms?

"Is Auction the right way of allocating natural resources?" Time and again this question has come into limelight. Many scams still make us debate on this. Whether it is the 2G spectrum allocation scam or allotment of oil or Coalgate scam? Before getting into this debate lets first try to understand the rationality behind the allocation of natural resources - as on why do we need to allocate natural resources?

Government carry out the allocation of natural resources so as to mitigate the financial issues and fiscal deficit of the country. Also, the parties to whom these resources are allocated are required to utilise these for the benefit of the people dwelling there. Local people are the owner of the natural resources. While allocating natural resources government should take consent of local people. Government should respect the rights of local people or tribal communities. State just acts as a trustee for local population.

Now coming to Coalgate scam from where this debate again erupted. According to CAG, government had the authority to allocate coal blocks through competitive bidding process but it did not choose to. Chawla committee endorsed market related process for allocating the natural resources and said that auction is only one of the those process. First of all, here Chawla committee should specify the distinction that needs to be made between markets related process and auction process. Second, we need to check what government had in its defence for its actions. "Not only financial value but economic value should also be considered for taking decision in public interest. Auction lead to revenue enhancement but sole this reason cannot be kept into consideration while allocating natural resources." This is what Government has for its defence. Does this make any scintilla of sense? If this is, how can Government justify it by allotting the natural resources to private players who exploit them to maximum extent to get return out of them? Moreover, in cases where private players pay ebulliently for acquisition of any natural resource, it is made to be absorbed by volatile market rates.

Now let us see even if resources are allocated on auction basis, will it fulfil the goal? Private parties who will acquire these resources will put their price burden on to the population. Moreover, small firms in the sector won't be able to compete. Collusion of powerful players will create a monopoly type of environment where resources will be utilised by private parties for their own benefit and the local people who actually own these resources won't be benefitted. This will defeat the whole purpose of allotment of the resources.

Though auction is one of the ways for secure and transparent transaction but this is not the only way. Here are some of the ways in which allocation is done for natural resources.

1) Auction - Mechanism of buying and selling