CAG audit threat looms large

The Delhi High Court judgment on Section 20 of the CAG Act may render PPP projects unattractive in infrastructure sectors without a pervasive regulatory authority.

In the recent judgment on CAG audit of Delhi distribution companies, the Delhi High Court ruled that entities which operate under the supervision of sectoral regulators should not ordinarily be subject to CAG audit since it would be a futile exercise where the regulator also examines the books and accounts of the entity. The court´s ruling to keep entities operating in regulated sectors outside the purview of CAG audit becomes a valuable early signal to gauge the possibility of CAG audit for PPP projects that are being implemented in different infrastructure sectors.

THE JUDGMENT
The Delhi High Court was called upon to decide what would constitute ¨public interest¨ under section 20 of the CAG Act. Section 20 allows CAG audit of any entity, even private entities, if the cause of public interest so demands. According to the judgment, the fact as to whether the government can take any action against an entity on the basis of the CAG report, under the laws otherwise applicable to such entity and/or under the terms of any concession granted by the government to such entity, would be a relevant consideration for determining whether it is expedient in public interest to carry out CAG audit. This would be of significant importance for PPP projects in infrastructure areas where the projects are developed under specific concessions and are sometimes subject to sector regulators.

SECTORAL REGULATORS
Testing on the above touchstone, one finds that in India only a few of the infrastructure sectors are under regulatory superintendence of any kind. There are no specialised sectoral regulators in majority of infrastructure sectors, for example, coal, railways, roads & highways, urban transport, water and sewage, etc. In some sectors, the role of sectoral regulators is constricted by law, the cases in point being airports and ports. Hence, in all such sectors where the sectoral regulator does not exist or does not possess pervasive regulatory authority, CAG audit of PPP entities can be justified on grounds of public interest since these projects involve significant amounts of public money.

PPP DILEMMA
The need and importance of accountability in the development and operations of projects which partake public character cannot be overemphasised, and PPP projects are no exception. Award of PPP projects must be fair and transparent and PPP developers have to be answerable for their conduct and operations. However, the challenge lies in defining the contours of accountability for PPP projects. One must appreciate the philosophy and purpose which underline the concept of PPP before prescribing the degree and standards of accountability for PPP projects. PPP as an instrument of infrastructure creation is brought in to tap the financial resources of the private corporations and to benefit from their business acumen and execution skills which the public sector lack. In return, the private players are guaranteed state support in development of the project and an assured return on their investment. This give-and-take between the state and private enterprise is predicated on and effectuated through an intricate risk-sharing framework which fairly balances the interests of all stakeholders. Therefore, any prescription of accountability for PPP projects has to be carefully calibrated so as to ensure that this framework is not disturbed or distorted.

An institution like CAG which is not aware of the sectoral realities and which is detached from the day-to-day working of the business cannot be possibly expected to possess the skills to preserve this framework. If every assumption which forms the basis of risk-sharing is questioned and every business decision of a PPP developer becomes subject matter of audit scrutiny, then it would certainly make PPP an unattractive proposition for the private sector.

CONCLUSION
So, while the courts have upheld the CAG audit of PPP projects in earlier decisions, the Delhi High Court decision has narrowed down the possibilities of such audit for PPP projects. PPP developers will have to choose to either opt for (and possibly push for creation of) sector regulators, where one presently does not exist, since the sector regulator would be aware and attuned to the techno-economic requirements of the business, or to be subject to CAG audit which is likely to proceed purely on considerations of accounting methods, without clear understanding of business realities and requirements. The clock is ticking.

The Delhi HC judgment regarding CAG audit of entities
1.Article 149 of the Constitution of India does not preclude audit of private companies by the CAG. The words ¨any other authority or body¨ can equally apply to private companies. However, such audit can only be carried out once law has been enacted by the Parliament for this purpose, which has been done under the CAG Act.
2.Section 20 of the CAG Act lays down the manner of initiating proceedings against authorities and bodies other than the central and state governments.
3.There is no procedural infirmity in providing two days´ notice to the discoms and it constituted sufficient notice. Further, the mere fact that CAG audit of discoms was a part of the election manifesto of the ruling party cannot be a ground to set aside the CAG audit.
4.The procedure the High Court held, suffered from infirmity to the extent that there has been no deliberation between the government and CAG, regarding the scope, terms and conditions of the CAG before issuing notice to the discoms, in order to enable the discoms to address on these issues. The other infirmity was that the audit was initiated at the instance of the Administrator in place (pending elections) without consultation with the council of ministers.
5.On the issue of public interest, the Court has held that since the tariff of discoms is subject to determination by a sectoral regulator, no useful purpose would be served by subjecting the discoms to CAG audit for the purpose of examining issues related to tariff.

This article has been authored by Sakya Singha Chaudhuri, Partner & Avijeet Lala, Associate Partner, at HSA Advocates.

Regulatory Superintendence