CAG's audit of PPP projects

It is ironic that despite billions of rupees of public investment, there is the absence of any constitutional audit of the PPP projects.

Honouring its election promise, the Aam Admi Party's Delhi government ordered Comptroller and Auditor's General’s (CAG) audit of power distribution companies of Delhi.

With this, the big question is whether CAG can now audit accounts of Private Public Partnership (PPP) projects. PPP projects are those where the private sector and government are partners, projects in which government has invested funds and where there is an agreement with regard to sharing of revenue, the collection rights of which rests with the private company. 

Meanwhile, in another development, the Supreme Court has decided against the telecom companies who had appealed against the government to get their accounts audited from by CAG. The Public Accounts Committee of the Parliament had favoured CAG's audit of telecom companies; as they are sharing their revenue with the government.

The government ordered the same. The telecom companies approached the court against this decision of the government. After the court's decision against the telecom companies, they have come under the CAG's scanner. 

In the past decade, a large number of projects are being run under private-public partnership. National and State highways; a number of airports, including Delhi & Mumbai Airports; Delhi Metro and metros in many other cities and even ports are being built under PPP arrangements.

As the private sector has been investing on a large scale in these projects, the private companies have been allowed to collect user charges. For carrying out the work for every project, a new company or Special Purpose Vehicle (SPV) is created. This company undertakes work ranging from erection of the project to operation of the services and collection of user charges.

Government also invests a huge amount of money in these projects. It is notable that all the projects which involve public (government) funds are subject to audit by CAG; however these private public partnership projects of the present day had so far been below the radar of CAG. 

The apex court has ordered that CAG can audit the account of any company collecting user charges which is subject to sharing with the government. For instance, the Delhi International Airport Limited (DIAL) and Mumbai International Airport Limited (MIAL), who have been authorised to collect user charges that must be shared with the government should also be subject to audit by CAG.

Similarly, the revenues of Delhi Metro and other metros are also shared with the government. It is no secret that these projects could not have seen the light of the day without the support of government. These projects were conveniently carried out because of easy approvals from public authorities.

Unfortunate situation

It is unfortunate that despite heavy public investment and provision of sharing of revenue with the government, CAG is not empowered to audit accounts of the public private partnership company. Many years back, an agreement with a power company Enron had to be cancelled after the same was found to be not complying with the terms of agreement and the lending agencies ultimately faced the brunt. Later, that company was found to be involved in fraud and ultimately went bankrupt.

However, CAG could not do anything abut the fraud. A couple of years ago, another company, Satyam, whose CEO conceded having committed a fraud of more than Rs 7000 crores, was involved in a number of infrastructure projects. These projects have come under severe stress.

The CAG's demand that companies running all these public private partnership projects and subject to revenue sharing with the government, be subject to its audit is legitimate. It is notable that CAG can audit these projects; however that is limited only to the stage till the memorandum of understanding (MOU) with private companies about various conditions of the project.

CAG can examine the issues such as whether the agreement is based on competitive bidding or a due process of law has been followed. However, CAG has legitimate right to audit these projects even at construction stage and operational level, due to the fact that there is provision of revenue sharing with the government. 

On the other hand, companies, whose interests are linked with these projects, oppose any such audit. Their argument is that since these projects are run under the supervision of government officials, there is no need for further supervision by CAG. They also argue that in these projects, availability of finance is a major issue and government auditors do not understand these compulsions. The major argument against CAG audit is that this process may delay projects which may escalate costs. 

However, because of the objections and opposition by the private stakeholders, the principle of accountability and parliamentary control cannot be ignored as a huge amount of public funds has been invested in these projects and government also receives revenue from them. In whichever field the private sector has been allowed to participate, regulatory institutions have also been created alongside.

Telecom Regulatory Authority of India, Insurance Regulatory and Development Authority, Central Electricity Commission are some such examples. Apart from these regulators, banks are regulated by Reserve Bank of India (RBI) and the stock market by Security Exchange Board of India (SEBI). 

It is ironic that despite billions of rupees of public investment and expectation of big revenue, there is the absence of any constitutional audit of these PPP projects. The need of the hour is for all public private partnership projects to be compulsorily subject to audit by CAG and that while making any MOU, this condition be made an integral part of the agreement.

(The writer is an Associate Professor, Dept of Economics, PGDAV College, University of Delhi)