How to curb irrational bidding by companies?

To prevent companies from submitting unrealistic quotes to bag project contracts across industries, the government is planning to soon roll out a mechanism to curb irrational bidding.

It has been observed that such behaviour either distorts the bidding process and its price discovery function or lead to project delays when non-serious players bag contracts.

According to Tarun Kapoor, adviser to the PM, the problem is more acute in sectors like mining where cases of 1000 per cent bid premium being quoted by companies have been observed, or in areas like roads and highways where the L1 bid is irrationally low.

He said the new mechanism will strike a balance between curbing irrational bidding behaviour and ease of doing business.

“This L1 business is causing a lot of problems. For example, in areas like National Highways Authority of India (NHAI) contracts, some companies bid 30 per cent below (the base cost).

"The worst case is in the auction of iron ore mines, where people have bid 170 per cent royalty and in a few cases, people have bid even thousand per cent royalty,” Kapoor said.

He added that this system will not work and the government has options when it comes to addressing the issue.

"There is a lot of discussion currently within the government on what we can do (as a solution). For example, we can have a system of increasing bank guarantees at every stage of bidding, or we can ask for an upfront premium to be paid beyond a limit.

"A lot of ideas are there but this may create problems for the good bidder,” Kapoor said.

Clarifying that the government does not want companies to bid for projects at a loss, he said, “We just want the projects to be commissioned on time and with good quality.

"At least for larger projects, we can have the big companies, with proper ecosystem and structure in place, follow rules,” he said while speaking at an event.

Under the current mineral blocks auction framework, bidders compete by offering a percentage of revenue share, called premium, to the state, which has led to extraordinarily high bids. While auctions have ensured fair play, in recent years, very high premiums, often above 100 per cent, have raised concerns over long-term sustainability.

“In many cases, entities with limited operational capacity or without downstream integration, such as steel plants, smelters, or trading networks, participated aggressively in auctions.

"Their objective is often to block access to mineral resources for competitors or to hold mineral assets as speculative positions rather than to develop them efficiently,” said Satnam Singh, senior practice leader & director, Crisil Intelligence.

He added that since there are no stringent timelines between the issue of the Letter of Intent (LoI) and the mining lease execution, these players can hold blocks without incurring immediate costs, which further encourages speculative bidding.

For instance, out of the 556 mineral blocks successfully auctioned to date, premiums for around 151 blocks have exceeded 100 per cent.

The highest was recorded at 45,295 per cent for the Bhilapar manganese and dolomite block in Madhya Pradesh in its second auction, after initially being awarded at a 22,790 per cent premium.

Due to high competition, companies bid aggressively to secure raw materials, but unrealistically high premiums affect the financial viability of the block, making it uneconomical, leading to project delays, non-operational mines or even surrendering of the blocks.

“In Odisha, many captive and merchant players who secured iron ore mines at premiums above 100 per cent in 2020, have been struggling to operate the mines with a few cases involving surrendering of such mines.

"Further, non-serious players often hold on to blocks without developing them, leading to resource hoarding.

"This reduces the pace of mineral development and prevents serious players from accessing raw materials,” Singh said.

Experts believe that as a solution for the problem, the government should make available comprehensive exploration data on resource quantity and quality and feasibility report prior to auction to minimise uncertainty and prevent speculative overbidding.

It can also reinstate the captive criteria, especially in cases where downstream processing plays a crucial role in the mining value chain, for example, critical minerals.

“Players with processing capabilities and end-use plants may be encouraged to participate, which may prevent unnecessary bidding wars between serious and non-serious players.

"Additionally, the government may introduce intermediary milestones that need to be achieved by the winning bidder within the overall timelines of three years for obtaining the mining lease,” said Singh.

In the auction for critical mineral blocks, of the 34 blocks auctioned so far across five tranches, 15 have witnessed bid premiums of more than 50 per cent, with some going up as high as 750 per cent, according to ministry data.

Among the most striking cases, the Ponchi graphite block in Jharkhand fetched a bid premium of 752 per cent, the highest so far.

Similarly, the Pahadi Kalan-Gora Kalan phosphorite block and Barwar Phosphorite Block, both in Uttar Pradesh, attracted bid premiums of 400 and 320 per cent, respectively.