The watchdog must bark at all times

Attempts to discredit the CAG reports by levying false accusations of incompetence are wrong and set a dangerous precedent

The Comptroller and Auditor General of India (CAG) is appointed for a six-year term and can only be removed by impeachment. His reports are sent only to the Parliament. The current head, although, wants their reports to be disseminated to the public.
(See ‘Economist’ profiling India’s CAG here.)

Many disputed the (maximum) loss figure of 1.76 lakh crores (that is about 32 billion dollars at an exchange rate of USD 1=55 Indian Rupees) that the CAG put out. But, not many would have even bothered to go through the caveats that the CAG itself admitted: “Audit reiterates that specific value of 2G spectrum could have been discovered only through an efficient market drawn process and in its absence, these are the indicators available, which give the hints towards the loss Government could have suffered. The revenue realised through auction of 3G at the rate fetched through a market process is highlighted in this report to project the benefits of resorting to an open price discovery process and the value that spectrum could command without compromising with the policy of open competition.”

The fact also remains that the Government got 1.03 lakh crore from the auction of 3G and BWA spectrum against their own estimate of  35,000 crore. (One crore equals ten million and one US dollar equals 55 Indian rupees approximately.) The above remarks are found in page 54 of the CAG report titled, “Performance Audit Report on the by the Department of Telecommunications Ministry of Communications and Information Technology”. This was for the year ended March 2010. The range of potential loss to the exchequer is given in paragraph 5.5 in page 56. The auditor was not going by one figure. There was a range of figures. That range was 57,666 crores to 176,645 crores of rupees (about 10.5 billion dollars to 32 billion dollars). The CAG report can be found here.

However, with the Government re-auctioning 2G spectrum in the wake of the Supreme Court cancelling all the 2G Telecom licenses that the Ministry of Telecommunications awarded, the reserve price it has set has vindicated the maximum loss amount that the CAG had put out (32 billion dollars). Wikipedia entry shows that India’s nominal GDP in dollars was 1676 billion dollars. That is a loss of around 2 percent of the GDP.

Photo: Sea Turtle

This is what The Hindu had to say on August 8th: “The reserve price of Rs.14,000 crore/5 MHz set by the Union Cabinet for auction of pan-India 2G spectrum in the 1800 MHz band will eventually translate into a per Megahertz price far higher than even the CAG’s evaluation in 2010, which had invited the Government’s wrath and scorn.” [Link]

Shekhar Gupta of the Indian Express conceded the same thing in his column: “… a fresh auction with new base prices that pretty much justify the CAG estimate of Rs 1.76 lakh crore loss…” Of course, all of us can concede that calculating the true loss to the exchequer is never easy. Straightforward loss calculation based on what the Government could have got minus what it actually got is one thing but the impact of setting a high reserve price on the price charged to end-users by telecom companies and the resultant opportunity loss to the economy in terms of productivity, growth and taxes is fiendishly difficult to calculate. That is why the CAG put out its range of estimated losses from the 2G non-auction of licenses done by the Telecom Minister Mr. A. Raja.

Recently, the CAG released its report on the allocation of coalmines to government and private companies and on the Public-Private Partnership that resulted in the construction of an excellent airport in Delhi. We went through the report on the “Implementation of the Public Private Partnership for the construction of the Indira Gandhi International Airport, Delhi”. The report contains several useful lessons for future Public-Private Partnerships (PPP). Whether the auditor was missing the wood for the trees as stated here is, at best, debatable and, at worst, an incorrect reading of the report.

I cannot say how many commentators in Indian media read the full 53 pages of the CAG report on Delhi International Airport Limited (DIAL) concessions. Most members of the Indian media went for the figure of Rs. 1, 63, 557 crores (Rupees 1635.57 billion). That is another 30 billion US dollars. That is what makes news. Yet again, sensational journalism buried the substantive content of the report. In fact, the audit report did not state that number in isolation nor did it fail to discount it to its present value as this newspaper report alleges.

The relevant paragraph is this paragraph in Section 2.6 (page 30): “Using DIAL’s own projection for earning potential of 681.63 crore per acre, the same amounts to 163557 crore for 240 acres of land for 58 years. 45.99 per cent of the same amounting to 75220 crore would be AAI’s share. The net present value at a discount rate of 10 per cent amounts to 3566 crore. The share of DIAL would amount to 88337 crore, net present value of which is 4187 crore.”

The CAG knows how to discount future cash flows. It is unfair to blame the media fixation with 163,557 crores of rupees on the CAG. The auditor was neither fixated on that nor did he fail to discount that number to the present value.

The burden of the auditor’s song was whether 5 percent of the total land area should be allowed to be classified as non-transfer asset, revenues from which would not be taken into consideration at all in setting tariffs for various aeronautical services that are borne by passengers and airlines. Revenues from non-aeronautical services would be reckoned at 30 percent towards the “targeted revenue” for the purposes of cross-subsidisation of passengers.  However, revenue from non-transfer assets is not even part of the non-aeronautical services. It does not matter here whether Airports Authority of India (AAI) gets a 45.99 percent share of revenues. The question is whether 5 percent of the total demised land (240 acres) should be allowed for commercial exploitation by the airport operator.

Of course, it is logical to counter-argue that the Government did so because the counter-party offered the maximum revenue share to the Government. At the same time, it is appropriate on the part of an auditor to point out that so that there is scope for reflection on whether future concessions could be different.

In fact, the CAG has made other serious claims that need to be taken into consideration. Unfortunately, in this media and public obsession with the wrong set of figures, those salient points that have to be borne in mind for future PPP agreements were lost. These key points are:

(1) Services such as ground handling and cargo handling were deemed aeronautical by the Airports Economic Authority of India (AERA) but they were deemed non-aeronautical for the purposes of the concession agreement for the Delhi airport. Although AERA was established in 2008-09 while the agreement with DIAL was signed in 2006, no effort was made during the negotiation of the agreement to make these provisions subject to the future approval of AERA. In other words, no re-negotiation/review was provided for.

(2) Worse is the automatic renewal of the concession agreement for another 30 years, after the original 30 year period (too long compared to several other projects in India and elsewhere) on the same terms and conditions

(3) The right of first refusal given to DIAL to bid for any airport that comes up within 150 kilometres of the Delhi airport in future, without basing it on any specific triggers/parameters such as revenue, traffic, freight volumes, etc.

(4) DIAL being allowed to form Joint Ventures (JVs) for provision of all kinds of services and no appropriate scrutiny of whether revenues from such JVs flow to DIAL as per its shareholding because only then can AAI can get its 45.99 percent share. The audit reports of these JVs were not made available to CAG. The Ministry of Civil Aviation has referred to the Ministry of Law as to whether the revenues from these JVs should be added to the revenue of DIAL. To many of us, the answer is elementary and hence, can be quick. As of the publication of the CAG report, the Ministry of Law had not yet opined on that.

(5) No physical estimation of the total land transferred/leased out under the concession agreement was undertaken, prior to the signing of the agreement. No records were available.  Hence, no one really knows how much land was actually leased out to the airport operator.

To reiterate, in the CAG report, the issue was not one of Rupees 163,557 crores at all. That is completely wrong, misleading and off the mark. Many issues on the manner of negotiating future PPAs in the interests of the exchequer and the public have been highlighted and they are, unfortunately, lost in the media focus on sensational numbers.

Hence, the attempts to discredit the CAG reports by levying false accusations of incompetence are wrong and set a dangerous precedent. Our politicians would lap it up and might even undermine its constitutional position as the watchdog. Media and outside analysts are ignoring this very real danger in the current corrupt, dysfunctional climate.

Unsurprisingly, Pratap Bhanu Mehta had a more balanced article on the CAG reports last week.  It is worth reading. This is his concluding paragraph: “You can contest the CAG’s numbers. But, the reports, even if they do not say it, leave us in no doubt that the Government is a rotting ancient regime. It is a deep morass of evasions, dereliction of duty, and outright fraud on the taxpayers. The responsibility for this runs to the highest levels, including the prime minister. He is, doubtless, an honourable and honest man. But, will he admit that the Government is at least guilty of a sin even worse than corruption: gross incompetence of the kind that has put the country’s future at risk?”

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This part deals with the question of whether revenue considerations are the appropriate criterion to examine Government decisions in putting public assets in the hands of the private sector.

One of the points that many commentators make is that the Government has the right to choose not to auction public assets such as spectrum and coal mines to the highest bidder because it might come in the way of efficient and cheap provision of services to the public. After all, a high bid would entail significant upfront capital costs to the bid winner, which he/she will have to recover through product pricing. In the case of coalmines, it could be the cost of power supplied to industrial units, to households and in the case of spectrum, it could be the cost of making a telephone call or for an efficient internet connection.

This is the point that Ajit Ranade makes in his column in Pune Mirror. That is what we will take up in this second part of the article on the role of CAG in public policy formulation in India. Before doing so, we shall look at the article that Swaminathan Aiyar wrote in the Economic Times.

The article by Aiyar can be dealt with relatively easily. The CAG, unlike the Supreme Court, is not making policy. It is only coming out with estimates of accounting losses incurred by the exchequer on account of the decisions that the Government takes. In doing so, it also highlights the process lacunae and deficiencies that play a role in arriving at those decisions. The CAG is not making policy. For example, in the case of the Delhi Airport, it concedes, and correctly, that the Government has the prerogative to use the Public-Private Partnership route to build public assets and infrastructure.

Mr. Aiyar concludes strongly and correctly: “Despite excesses, an activist CAG represents a net gain for democracy. Along with the Supreme Court, the CAG has ensured that most natural resources will be auctioned in future. That is a huge gain in fairness. After the Election Commission and Supreme Court, the CAG has become the third institution revolting against a corrupt, callous state. We need such revolts.”

Now, let us take up Ajit Ranade’s piece because it raises the substantive point of whether the Government can forego revenues in the larger national interest. The corollary of that is whether revenue considerations are too narrow in judging public policy decisions.

It is a valid conceptual point that what is deemed as a loss to the exchequer could have been a deliberate policy thrust. We could accept that argument had the decision been taken after due deliberation.

When public goods are transferred to the private sector, the low credibility that Governments in India have enjoyed for probity and integrity raises suspicions of foul play even before the process commences. A government sincerely committed to public welfare would be acutely aware of this burden and be doubly careful.

If the abandonment of auctions was a deliberate policy thrust on the part of the Government, then the following procedures should have been in place, ex-ante:

(1) What the CAG audit has come out with ex-post should have been done ex-ante by the Government. Being armed with these estimates would give the Government a clear idea of the range of the amounts of public money that it is “giving away” as a deliberate national policy. It would then be able to set and negotiate the conditions for such easy “giving away” of public goods in terms of deliverables – from a public policy and welfare perspective – by the private sector.

(2) Also, if, the giving up of such gains for “national policy thrust and goals” enables the private sector to generate super-normal profit (thresholds can be arrived at, even if the process is subjective), then the Government should reserve the right to impose one-off or temporary super-profit taxes. This should be in the concession agreement.

(3) Due processes should be scrupulously followed since the exercise is fraught with dangers of accusations of favouritism, even before it commences. For example, one does not allocate spectrum to inexperienced and very strange outfits. In the name of spreading “primary education”, that amounts to handing over the children to child abusers.

(4) The fourth and the last point is related to (3) but here, one should go beyond giving away public goods (e.g., spectrum) through a due process – the point made in (3) above. The bidding process should include criteria that would give weightage to ‘responsible’ private sector players – that is, those players with a demonstrated record of fulfilling their statutory obligations (and beyond) to the Government.

(5) Even if the decision to give away public assets cheaply were taken deliberately in public interest, how does the Government decide on it? What is the amount of public loss that the Government causes by giving up on revenues when such revenues can reduce fiscal deficit, restore confidence in Government, in public finances, lower inflation and interest rates credibly and thus kickstart an investment cycle, generating business confidence and employment?

How does the Government trade off this virtuous circle (sketched above) with its decision to forego revenues consciously? Can a competent and ethical government take better care of the negative consequences on productivity and costs by auctioning off public resources (vs. giving them away cheaply or freely) with revenues thus earned?

(6) Admittedly, these are not easy to formulate and implement. Even more reason that careful and deliberate planning and consideration of wider ramifications are called for before such decisions (e.g., not following the auction process) are taken.

If anything, the CAG reports should focus minds on the availability of necessary competence in the bureaucracy to advice politicians correctly.

An auditor is thus fully entitled and in fact, that is his job, to focus on accounting losses. It is up to the Government to have anticipated them and consciously trade them off for well-articulated and carefully chosen public policy goals, in a transparent manner. If the Government did not do so in the past, then the CAG reports lend urgency to the adoption of such a rigorous process in future.

It is the duty of a watchdog to bark. Sometimes, the barking turns out to be a false alarm. But, many a time, the dog gets it right.

By dismissing the reports – focusing on huge loss figures that the auditor did not focus on (in the DIAL case, specifically), the media and other commentators create the serious risk that due care, deliberation and conscious decision-making remain elusive in Indian public policy space.