CAG is not the answer

Tougher regulators should deal with revenue-sharing questions

The Supreme Court's verdict that the Comptroller and Auditor General (CAG) can audit the books of private telecommunications companies in order to determine whether the government is getting its due share of revenue - by way of licence and spectrum fees - has caused considerable concern. It does not appear to be a gratifying precedent; is India headed for a situation in which private companies in many sectors will gradually come under government audit? That could reduce the ease of doing business and affect the flow of foreign direct investment and overall growth. Particularly vulnerable are public-private partnership projects, especially in the infrastructure sector, such as roads, ports and airports. As it is, these sectors are short of players; now, even fewer might want to enter. Sectors like oil, gas and power are already on the CAG's radar. Telecom companies have pointed out that their members are already under the scrutiny of the relevant ministry and regulatory authority, and also the capital market regulator.

The Supreme Court's order reflects deep and widespread resentment of the manner in which telecom spectrum allocation has played out, and the continuing impression that telecom companies are willing to abuse the system for private gains. The government has not been able to satisfactorily address this impression, which no doubt energised the court to step in. Naturally, few will dispute the Supreme Court's view that if private companies are to pay the government for the use of public resources like spectrum and minerals as a share of revenue, then the government is duty-bound to ensure that all that is revenue in the normal course of business has in fact been included to calculate what is payable as licence and spectrum fees. And, of course, the Supreme Court's latest decision comes in a particular historical context, that of numerous entities facing criminal action over the way in which they secured access to public resources. It also reflects a worrying doubt about the reliability of all the big audit firms.

Still, are there other options if the government is being misled by its private partners? One clear alternative is the investigation of possible fraud by criminal authorities rather than by the CAG, since the former does not set a bad precedent. The larger systemic problem can be solved by better incentives - in the case of mobile phone companies, by equalising tariffs - or by more sensible design of contracts for such public-private partnerships. The ideal agency to oversee any deviations in a sector is not the government auditor, which may lack the requisite capacity or competence, but the sector regulator. Whatever the CAG's expertise, the more it tackles well-funded private players, the greater its chances of failure. Also, its auditing philosophy is influenced by the idea of whether a policy in operation is meeting government-mandated goals. This philosophy cannot always be applied to private telecom players. The CAG's audits would also mean a multiplicity of regulatory audits for companies in these sectors. How many audits does a company need? And how efficient or costly will this exercise be for the telecom sector?

There is certainly no question that a more cost-effective and simpler way of ensuring proper audits of telecom companies should ideally have been found. The issue of regulatory overload is serious and needs addressing. The new government that comes to power soon should, if it thinks fit, go to the Supreme Court outlining the nature of regulatory overload and present a plan as to how it can be restricted. The basic point remains that, in such cases, it is better to have an empowered regulator doing the job of supervising a sector, rather than an overworked CAG with limited capacity.