Infra projects under PPP model to face CAG audit

Infra projects under PPP model to face CAG audit
The Financial Express, December 17, 2009, Page 3

Surabhi, New Delhi

Just a year after India’s largest corporate accounting fraud at Satyam Computers and Maytas Infra that eventually derailed the Rs 12,500 crore Hyderabad Metro Rail project, the Comptroller and Auditor General (CAG) of India has decided to audit infrastructure projects executed through the public private partnership (PPP) mode. The CAG will not only audit the books of account of the special purpose vehicles (SPVs) and joint venture companies executing the PPP projects, but more importantly, those of the private player as well.

The rationale is to ensure that all stakeholders get ‘value for money.’ The CAG of India Vinod Rai has said the guidelines will ‘help auditors in determining whether government and other public authorities have got the best possible deal.’ More importantly, with the private sector expected to pitch in about 30% of the $ 494-billion investments in infrastructure though the PPP route, the Planning Commission and the finance ministry have been keen to ensure that such projects do not get disrupted because of any discrepancies by the private player.

Overriding concerns of commercial confidentiality of private players, the new guidelines enable the CAG to audit all accounts, documents, bills and records relating to financial closure, design, construction and oversight maintenance. It will also scrutinise documents about the operation and maintenance of the assets including the revenue sharing arrangements and escrow accounts; quality and standards of service and end of project operations such as value of residual assets would be audited by it.

The reports of independent auditors and independent engineers as well as the minutes of the board meeting of the SPV and the agenda papers will also be examined by the CAG.

If the need arises, they can also look into books of accounts of the private company. As per its new audit guidelines, government auditors can obtain additional information from the private player forming an SPV under Regulation 169 of the CAG’s Regulations on Audit and Accounts 2007. For joint ventures, sanction by the President or Governor under Section 20 of the CAG’s Duties, Powers and Conditions of Service Act, 1971 would be required to obtain additional data.

Significantly, the new rules also enable the CAG to check whether there is a need to re-adjust the contract period if the rate of return for the project is higher than projected and also the economy of the cost of operations and whether there has been any ‘padding’ of costs.

However companies are cautious in their response. “It is a step in the right direction. But the government needs to ensure that the auditing exercise does not become a hurdle for the concessionaire,” said M Murali, director general, National Highways Builders Federation.

“It is a welcome move and issues of financial closure and bidding need to be scrutinised often. But will the CAG be able to assess the technical side of the project. Also most SPVs outsource the construction work. So how can they be held responsible for any errors on the part of the sub contractor,” an official with Gammon Infrastructure Projects Ltd said.

The country’s supreme auditor will also examine the books of the public sector partner, including data and records justifying the use of the PPP route for a project, the bid documents, the selection process and concession agreements would be a part of the audit.

PPP projects have been defined as those involving any participation from the private sector. They would be selected for audit by the CAG based on risk considerations, such as the shareholding pattern, government guarantees, nature and value of the concession and the nature of the service to be provided.

The CAG's move to enumerate clear guidelines for auditing PPP projects comes at a critical time. The Centre's statutory auditor has just begun an audit on the D6 gas exploration block in the Krishna-Godavari basin licensed to Mukesh Ambani-run Reliance Industries Ltd, for two financial years starting 2006-07. The CAG is auditing the block with respect to the Production Sharing Contract signed by the RIL-led consortium with the Centre.

The CAG has already audited a few infrastructure PPP projects, including the Delhi Metro Rail Corporation (DMRC) and the Delhi-Gurgaon Expressway, but these were largely based on the guidelines issued by the International Organization of Supreme Audit Institutions. In cases like the DMRC, the CAG had to assert its mandate repeatedly before the corporation agreed to an audit.