Former financial services secretary Vinod Rai took over as comptroller and auditor general of India (CAG) in January. An officer of the 1972 batch of the Indian Administrative Service from the Kerala cadre, Rai, 59, has seen the functioning of government agencies from close quarters in various capacities. As the country’s chief audit officer, he promises to move away from the nit-picking that CAG has become famous for to broader issues such as looking at the efficiency of delivery channels.
In his first interview to a business daily, Rai outlines his priorities. Edited excerpts:
India’s state-owned firms or public sector undertakings (PSUs) are scared of the two Cs, CAG and CVC (Central Vigilance Commission). CAG’s focus has all along been on micro issues such as how many litres of petrol a CEO uses for his car or how many times a CFO takes a flight to a city where his son is studying...
There is a third C also that strikes fear in the hearts of PSUs—CBI (Central Bureau of Investigation). They blame the three Cs for most things but this is usually an alibi for non-performance. I have seen the public sector from both inside and outside. Many people believe that these three Cs are responsible for non-performance but there are many others who could actually perform even though they are subject to the same constraints. That’s why I say it’s actually an excuse for non- performance.
Vinod Rai, CAG
Worldwide, audit is believed to be a nit-picking, fault-finding machinery. I am part of the International Organization of Supreme Audit Institutions where discussions always centre around the same issue— how to make PSUs believe that we are on the same side of the table; how to tell them that we are not nit-picking and fault finding. We are actually helping them improve governance. There have been many instances of misuse of telephone and staff cars but today the audit institution of the country does not have the resources to go on nit-picking any more. We prioritize our work and we try to zero in on those departments and programmes that spend a lot of government money and those schemes which have drawn a lot of public attention.
But you often miss the big picture because of your focus on smaller issues.
That’s an allegation. We have been trying to ensure that audit takes issues in their entirety; looks at the macro pictures and concentrates on the principles and the delivery systems and channels and not on individuals and micro issues.
According to CAG, the government is understating its deficits. The finance minister has responded to CAG’s qualifications of government’s deficits in Parliament. You must be following this up with the government.
The finance minister in his Budget speech has very clearly stated that CAG has pointed out that bonds issued to the oil firms should be above the line and not below the line. The minister has endorsed CAG’s observation and has said over a period of time the government would try to bring them below the line. There seems to be an agreement of views but the mechanics on how it’s to be done will be decided very soon. The government has accepted CAG’s argument.
Will this strengthen CAG’s push for accrual accounting system?
Not only CAG but the government also strongly feels that ultimately we have to move away from cash accounting to accrual accounting. In fact, 20 Indian states have said yes to the move. It’s only a question of preparing the road map and laying down the guidelines. The challenge is to find human resources to help them switch from cash accounting to accrual accounting system.
Have you decided on the time frame?
We are working on that. In two-three months, we will call all states for a discussion and in consultation with them we will lay out the time line. Worldwide, the trend is to shift to accrual accounting as it has tremendous advantages.
Both CAG and the 12th Finance Commission have advised the government to move from cash to accrual system of accounting. This is also the key to the Fiscal Responsibility and Budget Management Act.
CAG is mandated by the Indian Constitution to prepare the accounts of the states and the Centre. So, first we will have to prepare the guidelines for accrual accounting system. Then, we will have to train people to switch to accrual accounting and, finally, we need to prepare the format of the new system.
For instance, in accrual accounting system all assets of the government will have to be assigned a certain value. This means we’ll have to assign a value to the Taj Mahal. Even if we assign a notional value of Re1, we have to enunciate the principle of how the valuation is done. Financial assets of banks are marked to market. So, when the market value of such assets goes down, banks need to make provisions for them. But there is no such thing as market value for the Taj Mahal. We need to find out how we assign value to such assets.
Haven’t you run a pilot project on the accrual accounting system?
We ran a pilot project for a public sector enterprise. We also ran it for a panchayat to see how it works.
How dramatic is the change in financial figures?
There is no dramatic change in deficits or surpluses. The figures get well documented and make it clear whether an element of subsidy is provided. The system also makes us aware of the real value of assets. For instance, Uttarakhand has forest resources. Now, the state may want to preserve the resources for which it may provide for Rs100 crore in budget. The legislatures may not appreciate the value of the forest reserves and may find this as waste of funds. But if we assign value to the forest resources, then they know the value of such resources and it becomes easier for them to appreciate the budgetary allocations.
Do you have resources to support your ambitious plans?
CAG does not have unlimited human resources. We have about 6,000 people, spread across 30 offices and headquarters in Delhi. So, we must make up our mind in which areas we will go for an intensive audit. We have to prioritize.
We will focus on large programmes such as NREG (National Rural Employment Guarantee) scheme where Rs15,000 crore is involved.
The government took a very proactive step in this case. It invited CAG to do a performance audit of the programme and its delivery channels while the programme was in (its) second year. We were aware of the importance of it. We put on hold our audit in some other programmes, gathered our resources, and focused on it. We gave a draft to the government pointing out both sides—in some states, the programme performed very well and in some other states, the performance is not very good. The Central government consulted the state governments and we had a long discussion on our observation and their comments on our observations. They appreciated that what we have done is not only mere fault finding. We may have shut a door but, at the same time, opened a window. We merely told them don’t do certain things this way but do it that way…
We propose to do a similar audit for NRHM (National Rural Health Mission) and for the oil sector…
So, these are your priorities?
Instead of thinly spreading our resources on various schemes and merely doing something on the surface, we are going for important programmes where a large amount of money is involved, and those which have drawn public attention.
So, instead of PSUs you are focusing on government programmes?
It’s not that. The focus is on delivery channels—the public-oriented schemes and PSUs which are either conducting such schemes on a massive scale or occupy a critical position in public space.
How do you prevent leakages and wastages in public programmes?
There are two types of leakage. The cost of administrating a scheme should normally be in the range of 4-5%. If it’s between 6% and 7%, it can be tolerated and it should not in any case exceed 10%. If the administrative cost is more than 10%, than there is leakage.
The other form of leakage happens where the entire money does not reach the beneficiary. When we do the performance audit of the delivery channels, we are sitting on the same side of the table with the government machinery or PSU which is administrating the scheme. We are trying to improve their efficiency.
With so many items going off balance sheets, won’t CAG need to redefine its role?
The role of CAG is to prepare the accounts, maintain the accounts and do the audit for the Centre and the states. What we are checking is the efficiency of the mechanism to implement the government schemes and whether there is leakage in the system or the concept drawn is inefficient. That’s all.
What’s the level of corruption in the government?
Often, the government departments believe that if they follow the guidelines or the laid down procedures, there will be delays and so they try to cut corners. Cutting corners involve value judgement— which are the items where corners can be cut and where the corners cannot be cut.
There are some critical parts of a project on which there should be no compromise such as bidding process, encouraging competition, etc. For instance, the processes for procurement cannot be compromised. They must ensure that they have gone through proper process to reach the L1 (lowest bidder) figure.
If you try to restrict the universe of competition, then you have problem. There can be an act commission or omission. It’s very difficult to decide which is the act of commission or omission. I cannot say that all such actions are malafide.
Our objective is to convince the organizations that they can meet the deadline even after following all procedures.
PSUs say the L1 system kills them as often they end up compromising on quality to accommodate the lowest bidder.
No, you don’t compromise on quality. More often than not, the technical bids are invited first, followed by commercial bids. So, much before you call for the bids, you lay down the technical parameters. The commercial bids are called only from those people who meet the technical parameters. If the technical parameters are met, quality will not be compromised.
What’s CAG’s vision?
We want to ensure that all government transactions are totally transparent. We all sit in glass houses. It’s not enough for us to be seen to be doing things correctly; the stakeholders—the tax-payers whose money is being used—should derive comfort from the fact that CAG is a credible institution, a watchdog that checks how the government spends money. We will look for macro issues and not waste our resources—both human and financial—on nit-picking or mere fault finding. We are on the same side of the table and working for the betterment of the government machinery.
Please, don’t get defensive when you see a CAG observation. Try and see what’s behind the observations. If you are defensive, you’d tend to stonewall. Who loses in the bargain? The public or the government. It makes no difference to us but your efficiency suffers.