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Vinayak Chatterjee: CAG's ambit: A fine balance between public & private space

It is appropriate for the Comptroller and Auditor General to audit PPP procedures and processes, but the books of accounts of private companies should be left to professional audit firms

Vinayak Chatterjee 

Vinayak Chatterjee

The Supreme Court order in the "Association of Unified Telecom Service Providers and Others vs Union of India", that enables the Comptroller and Auditor General (CAG) to audit telecom companies has set the CAG cat among the public-private partnership (PPP) pigeons.

The learned judges expounded that, "We are of the considered view that when the executive deals with natural resources, like spectrum, which belongs to the people of this country, Parliament should know how the nation's wealth has been dealt with by the executive… and while dealing with a natural resource belonging to the people of this country, the court has to give a purposive interpretation to Article 149 of the Constitution." Article 149 of the Constitution deals with the duties and powers of CAG.

In all fairness, the Supreme Court has also held that CAG can examine the accounts of the service providers for the limited purpose of ascertaining whether the Union is getting its due share of the revenue. The court has clarified that CAG cannot carry out any "statutory audit" or "performance audit" of the service providers' accounts. The order was not surprising since CAG was already auditing the accounts of Delhi's discoms, and courts had not stayed the process. Further, CAG had already inspected the books of some privatised airports.

The lordships, in their wisdom, could possibly see the blurring of roles between the state and private sector. They would have been swayed by the notion that PPPs are often structured to evade accountability; and that civil society distrusts both politics and business. Moreover, both the government and Supreme Court do not think much of the veracity of audits done by private auditors, for which the audit profession has much to blame itself for - from Enron in the US to Satyam in India. So far as sector regulators are concerned, clearly, the prevailing view is that they have not yet demonstrated sufficient confidence in upholding the interests of the public.

However, most reactions from the media, the corporate sector and independent analysts have tended to converge on the point of view that the judgment is an unnecessary extension of the tentacles of the state and can even be construed as jurisdictional overreach.

The concerns are manifold.

The Supreme Court seems, for all practical purposes, to have given the green light to CAG to audit any private entity that might have any remote connection with the consolidated fund of India or any entity that remotely deals with any public good, be it toll collections from a national highway or the profit-share from a gas field or an airport. That is, all PPPs can now be audited by CAG. CAG can audit not only where the state in involved, but even its "instrumentalities". This means any parastatal entity, such as PSUs, if they enter into a joint-venture or PPP contract with a private party, could technically be inflicted with a CAG audit on the private entity. The point can be further stretched that any taxpayer entity (income, excise, customs, et al) can in future be audited by CAG since the idea is to make sure the nation gets its due share of revenues. This introduces "regulatory uncertainty", because business entities will remain clueless as to who has the final word on its accounts - its statutory auditors, special auditors under the contract, the regulator or CAG?

The private sector is rightfully worried and irritated with the many audits that a company needs to comply with - internal and external auditors, capital market regulator, sector regulator, tax audit, and maybe even for corporate social responsibility, environment and affirmative action in future. This could damage the distinctive entrepreneurial freedom of private entities and propel them to an existential dilemma where they are neither sarkari fish nor private fowl. CAG audits will add to the perception that India is a difficult country to do business in, and that there is more government than warranted.

However, it is important to understand that PPP is a process, not just an entity implementing a project. The PPP process starts with fixing the bid criteria and moves on to the selection of approved bidders, bid process management, appointment of the winning bidder, monitoring of agreed deliverables and often renegotiation of contracts. Various links of this long chain are amenable to abuse, as has been seen in recent times in sectors ranging from roads and airports to power and telecom. Crony capitalism today finds convenient grazing grounds in PPP 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.

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."

Clearly, transparency of the entire PPP process is more vital for the nation than merely one aspect of it viz. revenue share. Process-nuking does not usually happen at the level of the operating company, or implementing special purpose vehicle. The truth is that the real mischief is likely to be lurking 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. So wherever mala fide intent is suspected in PPP processes and procedures, CAG should be allowed to delve into the circumstances. 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, is hoped, will come from PPP.

However, the examination of the books of accounts of non-governmental entities should be done by appointing professional audit firms with specific briefs, and not by CAG.

Surely, that should be the right balance between public interest and private space.

The writer is the Chairman of Feedback Infra.;
Twitter: @Infra_VinayakCh

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First Published: Wed, May 14 2014. 21:47 IST