Shouldn’t CAG audit all projects in public-private partnership? PAC now joins the debate
Himanshu Upadhyaya | October 3, 2016
Public-private partnerships (PPPs), the preferred way these days to develop infrastructure like highways and airports, is a curious thing: it is both public and private. Thus, the Delhi airport is on public land, but developed and maintained by a private party. Should the comptroller and auditor general (CAG) check its finances, the way it does for all departments and schemes involving public money?
To CAG officials, this question is a non-starter. As the ‘Guidelines for Compliance Audit of PPP arrangements’, issued on August 24, state, “Since these PPP arrangements/structures along with the governmental organisational hierarchies implement government policies, receive, collect or expend public money, these collectively comprise our audit universe.”
However, this old debate has an update. On September 21, the public accounts committee (PAC) of parliament took a rare step of calling CAG Shashi Kant Sharma to discuss the issue. Audit officials of CAG argued with the MPs for close to three hours on the relevance of public auditing of PPPs. At the end of the meet, PAC decided to form a sub-group to “suggest ways to empower the CAG to audit PPP model projects”, according to a report in the Indian Express.
The development raises a few questions from the perspective of public finance and accountability. First and foremost of these is, do parliamentarians indeed share the concern of CAG officials about legal constraints that arise from considerable ambiguity in the CAG (Duties, Powers and Conditions of Services) Act, 1973? The track record of the legislative wing on strengthening public auditing function by CAG has not been very shining and in the past there have been attempts (in 1997, 2001, 2003 and 2005) to clip CAG’s mandate. Assuming that PAC indeed wishes to strengthen and widen the ambit of CAG’s public audit function, who shall decide on the issues such as ‘audit methodology’ and ‘audit scope’ when it comes to auditing PPPs: CAG or PAC? Since PAC happens to be the parliamentary institution mandated to take up CAG audit reports for discussions, wouldn’t it do well to also focus on the thorough follow-up and course correction based on CAG audit findings on PPP projects?
On September 25, 2005, news reports said the government was planning to take away from the CAG the powers and mandate to audit PSUs, while moving amendments to the Companies Act. While the government of the day was proposing such a move, what was the stand of the major opposition party (BJP)? Its deputy whip MAK Swain wrote in the Economic Times on December 2, 2005: “True, the CAG is the auditor of the government. But it should not be a captive audit. CAG should compete with other international bidders for auditing the PSUs.”
Even as that debate raged in print media, the supreme audit institutions (SAIs) in various nations were debating how to safeguard public interest by asserting their role in auditing PPPs. The International Organisation of Supreme Audit Institution (INTOSAI) had in the 1990s constituted a working group on privatisation to build capacity of SAIs on PPPs. In 1998, this working group published the ‘Guidance on Best Practices for the Audit of Privatisations’ and in 2001, INTOSAI issued PPP audit guidelines. Three years later, INTOSAI published ‘Guidelines on the Best Practices for the audit of Risk in PPP’, followed by certain comprehensive recommendations based on the findings of a workshop on PPP audit in 2007.
Among Indian audit and accounts department (IAAD) officials, the discourse around asserting the relevance of public auditing function in the realm of PSU disinvestment, utilities privatisation and PPP arrangements in infrastructure started in 2008. In a discussion paper, ‘Auditing for Good Governance: Facilitating Foresight’, prepared for a biannual accountants general conference, AK Awasthi and Vani Sriram suggested that “a key greenfield area for audit would be PPPs”. They argued that “audit of PPP ventures would have to go beyond the current forms of auditing to address issues like revenue and risk sharing, choice of the PPP model, scope for innovation, tariff sharing, accounting treatment and project/contract management”. They informed the audit fraternity about the steps initiated in the direction of capacity building and peer learning by sharing the news that “CAG has already constituted a committee under the chairmanship of ADAI (RC) and ADAI (RS-II)”. Speaking at the conference, the then prime minister Manmohan Singh endorsed these steps and said, “PPP projects are becoming increasingly common in key infrastructure sectors of transport, power, urban infrastructure, tourism and railways. Audit needs new skills to evaluate these complex arrangements.”
Even as CAG officials were gearing up to perform their constitutional mandate to safeguard public interest, they viewed the law which shapes its auditing mandate as somewhat archaic. They proposed that it be amended so that public auditing function can be expanded to audit PPP arrangements. The October 2008 AG conference would also be remembered as a sign of CAG opening up for deepening its interactions with citizens. The conference website could be accessed by interested citizens and discussion papers could be downloaded. It would have helped if that culture of subjecting itself to public engagement had continued and the draft amendment bill was put in public domain. Alas, the draft amendment bill still remains locked away and a common citizen only knows that such proposed amendment bill still awaits the cabinet consideration.
A year later, in October 2009 CAG published public auditing guidelines on PPP in infrastructure projects. In his foreword, the then CAG Vinod Rai stated, “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 in the entire decision making process are all paramount if these arrangements are to succeed and continue for the 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. Audit of such entities poses a huge challenge and requires a change in audit methodology as also the approach of public auditors.”
Even as the PPP auditing guidelines entered public domain, it wasn’t the case that PPP arrangements were not audited. These guidelines were followed by CAG issuing “protocols for accessing the records of the private entities” in July 2014. In August 2016, the professional practices group within CAG issued ‘guidelines for compliance audit of PPP arrangements’ and circulated them to all field audit offices. This guideline comprised (i) a factsheet for maintaining database of PPP arrangements, (ii) indicative risk parameters and (iii) indicative checklist for audit of PPP arrangements.
Let’s hope that PAC starts looking up for the evidence on PPP arrangements that CAG audits have presented so far, since even a cursory search on CAG website for the word ‘PPP’ shows up 529 records. While a sustained dialogue between professional practices group of CAG and PAC members (or the proposed sub-committee) may have potential to help IAAD’s plans to strengthen the compliance audit of PPP arrangements, it remains to be seen what ways would be proposed by the sub-committee and how would the ruling government respond to its recommendations.
Upadhyaya is assistant professor at School of Development, Azim Premji. University, Bengaluru.
(The article appears in the October 1-15, 2016 issue of Governance Now)
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