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The expanded remit of the CAG audit may be a cause of worry to the private sector but it is the only credible watchdog around
Vinayak Chatterjee
Chairman, Feedback Infrastructure
“The real mischief lurks in processes leading up to the award of a concession and its interpretation over the life of the award. No statutory auditor can review that; only a body like CAG can”
Crony capitalism today finds convenient grazing grounds in infrastructure-PPP (public-private partnership) pasturelands. Such grazing is carried out as much by politicians and bureaucrats as by the much-maligned business fraternity. Surreptitiously massaging bid criteria to favour a particular bidder, or acquiescing to a “below-the-radar” condition after the bid is awarded are mere examples of the art of the possible. No businessman can hope to benefit without the connivance of the pliant bureaucrat and his political master.
So, the auditing of PPP projects by the Comptroller and Auditor General of India (CAG) would be as much about protecting the aam aadmi from the government as it would be about checking recalcitrant businessmen.
In its foreword to the well-reasoned document on Public Auditing Guidelines for PPP projects, CAG has a clear perspective on the matter. It observes: “PPPs, while bringing in private capital and experience, also involve transfer of valuable public assets as well as foregoing future revenues in the form of concessions. To ensure that such arrangements always enjoy high credibility in the public eye, due-diligence, transparency, objectivity and probity of the entire decision-making process are all paramount if these arrangements are to succeed and continue for future projects. The role of public auditors, therefore, becomes critical in assessing whether such arrangements are truly in public interest and are also fair and balanced in sharing of risks as well as rewards... The audit, while promoting accountability, should not discourage private sector involvement, investment and innovative management techniques.”
One of the arguments against CAG getting involved in PPP projects is that sector regulators oversee concession agreements. But in many areas such as roads and highways, sector regulators do not exist. In others – like the Tariff Authority for Major Ports – they have a limited mandate. Some have been recently created (like the airport regulator); or just proposed (the coal regulator in the last Union Budget).
In more mature sectors such as telecom and power, combinations of “ministerial capture” or insufficient “teeth” lead to a lack of faith in regulators. The overall feeling is that they do not have any independence or a backbone to uphold the interests of the public. It is to address these weaknesses that the Planning Commission has suggested new legislation to create truly “independent” regulatory authorities in the infrastructure space.
Then, there is the “efficiency versus accountability” argument. At the extreme, this group offers the point of view that the 5 Cs (read CBI, CVC, CJI, CIC* and CAG) are singly and collectively responsible for a “decision paralysis” at all levels. If a PPP concessionaire is assumed to be just another instrumentality of the state, on a par with a public sector unit, then such a treatment may lead to disinterest among private players and stall infrastructure growth, the argument goes.
This viewpoint errs on two counts. One, it raises serious “moral hazard” issues that, left unattended, would embezzle thousands of crores of taxpayers’ money under the garb of speedy development.
Two, it focuses on decision-making processes at the level of the operating company, or implementing special purpose vehicle. The truth is that the real mischief is unlikely to be at the operating company’s level but lurks in processes leading up to the award of the concession and its interpretation and renegotiation over the life of the award. No statutory auditor can review that; only a body like CAG can.
Critics of CAG’s functioning point out that it is a 150-year-old institution with roughly 50,000 officers, and a staff that carries out about 60,000 audits annually; that it is already overburdened and unable to make much of a difference in probity in public life. The government’s executive and legislative arms, including the Public Accounts Committee and the Committee on Public Undertakings, are notorious for slothful responses and tardy actions. Thus, critics would emphasise that adding PPPs to the list of tasks is quite meaningless.
There is no denying that the output of CAG needs to be far more visible in terms of follow-up actions. However, arguing against the CAG oversight is like asking for winding up our judicial system, because justice takes so long to get delivered.
CAG, in fact, is the only credible watchdog around in a scenario where India is poised for a $1,000-billion infrastructure spend in the 12th Plan, half of which, the prime minister hopes, will come from PPP.
*Central Bureau of Investigation, Central Vigilance Commission, Chief Justice of India, Central Information Commission
Anil K Jain
Adviser (Energy), Planning Commission
“While an audit is meant to be a confidence-building exercise, it has pitted the contractor against the government. To restore investor confidence, the government must define the scope of the audit”
The Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act empowers it to audit all receipts payable to the Consolidated Fund of India, among others. The recent CAG audits of oil and gas production-sharing contracts (PSCs) have, however, highlighted several related questions. Private oil companies are willing to submit to these audits only conditionally.
Why are they reluctant to such audits where billions of dollars of the government’s profit-share is involved? Does an unconditional (performance) audit question commercial decisions, which are considered encroachments on the operational freedom of the private sector? It is essential to address these issues, as the present face-off may be perceived to be investor-unfriendly and drive away private capital and high-end technology — the two most important objectives of the New Exploration Licensing Policy (NELP).
NELP contracts provide for the government to get its own audits done. Even before 2008 (when CAG initiated NELP audits), hundreds of millions of dollars of profit were received from PSCs of the discovered field regime, and these were audited by government-appointed chartered accountants.
A number of audit issues were routinely raised – which the government pursued – often even up to international arbitration boards, with favourable outcomes. Hence, the induction of CAG into PSC audits was not a result of the dissatisfaction with auditors. It was at the request of the government owing to the special conditions as they obtained at the time, a discussion of which is beyond the scope of this article. Now, CAG has decided to audit select PSCs on a regular basis. While the recent audit reports have not revealed significant accounting errors, they have questioned several high-value acquisition decisions and expenditures.
In many such cases, no malafide on the part of contractors has been alleged but the technical and commercial wisdom (choice of equipment/vendor and price) of such decisions has been questioned. This expanded remit of the CAG audit has the private sector worried. Several such audit observations could result in a dis-allowance of expenditures and re-calculation of respective profit-shares. Hence, these are not in the nature of a normal chartered accountant’s audit observations, to which the contractor can reply and the issue resolved, or sustained through the administrative process. Nor are the outcomes merely of an accounting nature. Now, even the contractor’s judgment on technical and commercial strategy to search and produce oil and gas is now open to question.
The second issue relates broadly to the examination of the government’s decisions in such audits. Hence, the scope of audits includes the government’s own conduct, and expands to that of a watchdog examining the bonafides of permissions/special relaxations given under the PSC framework. This is also a cause of consternation to the contractor because he is liable to be the sufferer, should the decisions be reversed.
The first set of contractors’ worry can be summarised as their objection to “performance” audit, instead of “transaction” audit. Their apprehension relates to the examination of business decisions, which in hindsight, much after the expenditure has been incurred, may be found to be unwise. Further, private companies are now expected to engage with constitutional bodies. They have a higher comfort-level interacting with chartered accountants and the administrative ministry with whom they develop familiarity owing to routine interface. Public and private enterprises work differently. There is also an impression that a CAG audit is an attempt to change the way the latter works. The bureaucracy itself views CAG’s broad scope with trepidation, and would be reticent about giving any favourable dispensation to the contractor in its normal dealings.
As is evident, the current outlook towards CAG audits in PPP contracts has been influenced by the recent NELP contract audits. While an audit is meant to be a confidence-building exercise, it has now pitted the contractor against the government. In order to restore investor confidence, the government must define the scope of this audit in consultation with CAG. The latter has much experience in auditing public accounts but a limited one in private enterprises. Even CAG audits of PPP contracts could be developed in consultation with industry, which would take into account the private sector’s commercial outlook. The government must protect its financial interests but not in a manner that scares away investments.
These views are personal
