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| Jamal Mecklai: The CAG handicap | | Process constraints, political interference and the CAG hamper PSUs' performance |
| Jamal Mecklai / New Delhi Jan 22, 2010, 00:05 IST |
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Till about a couple of years ago, I had, like a lot of “contemporary” people in Indian business, bemoaned (and sometimes sneered at) the inefficiencies of the public sector. I was slowly educated out of the worst of this attitude by a fine gentleman who works with me who showed me how the public sector banks, at least, had performed yeoman service in terms of bringing development to the smallest outposts of the Indian economy.
Then came the global financial crisis of 2008-09, after which public ownership stopped being such a bad phrase. Regulators, in general, came out with egg (or worse) on their faces, and, while they have laboured valiantly to recover their reputations, I still haven’t seen any focus on what is an obvious critical need: Finding people who understand the ins and outs of financial markets, who are open-minded and, critically, non-parochial.
This is an extremely difficult combination, since these characteristics are most often incompatible — extremely knowledgeable people are seldom open-minded or, for that matter, non-parochial. It is by no means an impossible combination though, and I know several people — some, indeed at RBI — who fit the bill admirably, which may be part of the explanation for why RBI was so effective in protecting our market through the worst of the crisis.
Incidentally, the Monetary Authority of Singapore used to be the hands-down winner in the regulatory sweepstakes. It was actually feared by market participants, but its savvy and openness enabled the Singapore market to provide excellent support to the economy for many years, till, of course, the tsunami of “let us free, we know how to manage risk” capital upended even its applecart. It is worth noting that one of the pillars of Singapore’s strength has always been its public sector compensation policy, where pay scales matched (and sometimes beat) what the private sector was paying.
One of the real issues is that we are a far cry from that kind of parity in India, although at the highest levels in the public sector, the perks and prestige of office usually make up for the cash shortfall. Correspondingly, the strategic and business skills at these levels are also usually commensurate with those obtaining in the private sector. Unfortunately, though, in the middle and lower levels of management and operations, our public sector companies have to labour under a severe people handicap, both in terms of intrinsic quality and skills.
However, even if we were to eliminate this handicap — say, by magic the balance sheet, management team and operating staff of one of the public sector oil companies were replaced with those of Reliance Industries — the PSU would still not be able to produce comparable results.
This is because process constraints are a much bigger handicap; key among these are political interference and the Comptroller and Auditor General (CAG). While the days when the very mention of CAG unleashed hand-wringing jitters may be gone, the fact remains that many — indeed, most — PSUs worry hugely about how the CAG (and its equally disruptive cousin, the CVC) will look at decisions. As a result, good decisions are often mothballed and business opportunities are missed.
To provide just one example, we had developed an asset-liability management policy for a public sector NBFC with detailed reporting and analytics that would enable the management to take sounder risk-based decisions. We had to struggle to get the operating team’s buy-in, but, fortunately, the Director-Finance (DF) understood the value and approved the policy draft. As things happened — as they tend to in the public sector — the DF was shifted and the new DF asked us to change the policy back to a wishy-washy document, which would be impossible to breach. In other words, the new policy is no policy at all, and it certainly won’t enable the CAG to raise any flags.
What is more alarming is that the CAG is apparently looking to expand its territory to include public-private partnerships in infrastructure. Forsooth, I say.
Rather, the CAG should be revamped and given a fresh focus. It should directly audit only government expenditure — for example, where the money for the various Mayawati statues came from. PSU’s should be audited by private audit firms, under the direction and oversight of CAG. This would parallel the model that is working very well in the financial sector, where RBI selects audit firms to audit public sector banks under its direction and oversight.
Most importantly, the CAG should be mandated to audit the accounts of political parties, a reform which is on the cards and is critical if our economic growth is to accelerate sustainably.
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