CAG seeks power to audit SPVs

CAG seeks power to audit SPVs
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First Published: Fri, Jan 01 2010. 01 15 AM IST

Updated: Fri, Jan 01 2010. 11 41 AM IST
The government’s top auditor wants the power to examine the books of infrastructure projects being built by the private sector, such as airports and highways, to make them accountable to Parliament.
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India has been tendering projects out to private developers to supplement scarce budgetary resources as it seeks to rebuild and add to its dilapidated airports, inadequate roads, and ports that can’t handle current trade volumes.
The Comptroller and Auditor General (CAG) of India has proposed that it should be armed with powers to check the accounts of all special purpose vehicles (SPVs)—which are essentially project-specific companies—running infrastructure projects.
“This is a new kind of arrangement under which public assets or resources are being handed over to private corporates,” said a CAG official who declined to be named. “In such a situation, it is very important to assure Parliament and the people that correct declaration (of costs and revenues) is happening.”
The auditor has written to the finance ministry asking that all future contracts governing infrastructure projects financed and operated by the private sector include a clause that would allow CAG to audit the finances of the private firms that run the project.
Currently, CAG only checks the finances of government ministries and departments, besides auditing the efficacy of flagship government programmes. The auditor has no access to non-government firms, except in certain cases.
The move assumes significance considering that most projects are bid out based on the extent of revenue that developers would share with the government, leading to fears that developers would have an incentive to under-report revenues. With production-sharing contracts and public private partnerships (PPPs) becoming the norm, the auditor has found that it does not have the teeth to look into the books of private companies, CAG officials said.
PPPs are currently not covered under the CAG Act, which is clear about what the agency is allowed to examine.
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“The problem with CAG audits is that it is too mechanical. (There is) no flexibility at all,” said Siddhartha Das, a PPP expert with consulting firm Ernst and Young Pvt. Ltd. “If you don’t appreciate market conditions and finance availability at that time (of bidding), then they will come out with some flaws.”
Das added that CAG should restrict its focus to what it does now, to see if the bidding was competitive and fair.
Adding to CAG’s powers “could slow down the process (of infrastructure development)”, Das said. “And this is one programme that can ill afford to slow down.”
One developer said existing highway contracts already stipulate the appointment of statutory auditors from among those empanelled with the National Highways Authority of India (NHAI).
“There could be an additional (independent) auditor that the NHAI may choose to appoint,” said Ankineedu Maganti, a director with Soma Enterprise Ltd, which has interests in national highways. “The NHAI can always ask us for details also. It (the proposed plan) really doesn’t matter much.”
The auditor has in recent times taken an increased interest in PPPs, where private developers bid for the right to finance, build and operate infrastructure concessions in sectors like highways, ports, power projects and airports, among others.
Several marquee projects, such as the international airports in Delhi and Mumbai as well as hundreds of kilometres of highways, have in the past four years been bid out to infrastructure developers such as the GMR group and Larsen and Toubro Ltd.
The winning bidder typically sets up SPVs to execute and operate the project.
The auditor will only scrutinize the books of the project-specific entities and not the parent firms, the CAG official said.
Mint had reported in October that the auditor had completed a manual prescribing audit procedures for PPPs. But most audits have concentrated on the bidding process and the terms of the contract, as opposed to the finances of the project itself.
The CAG official quoted earlier said the audit organization has complete access to all government finances under its existing mandate. But with PPPs becoming the norm, newer measures of oversight are required, he said.
Confirming the development, a senior NHAI official said it was awaiting a decision from the finance ministry on the issue.
“It is not a bad thing,” the official said, speaking on condition of anonymity.
The official said the government and the public would need verification wherever contracts stipulated a revenue-sharing agreement with the government.
“Like in telecom, where there is revenue-sharing, whether the declaration is correct or not needs to be verified,” he said. “And for verification of these two things, we need access.”
The department of telecommunications is conducting audits of phone companies following the uncovering of discrepancies in the reporting of earnings to the telecom regulator and the stock exchanges.
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rahul.c@livemint.com
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First Published: Fri, Jan 01 2010. 01 15 AM IST