Watchdog must bark at all times – CAG report sequel

In response to my previous post on the CAG reports (particularly on the Delhi International Airport), good friend Ajit Ranade forwarded me links to his article in Pune Mirror and the article by Swaminathan Aiyar on the CAG report. For an ordinary reader, Ajit comes across as somewhat too harsh on the CAG, given the analogy he uses: running behind a bus. vs. running behind a taxi.

The articles can be found here (Ajit Ranade) and here (Swaminathan Aiyar).

The second one – by Aiyar – can be disposed off relatively easily. The CAG, unlike the Supreme Court, is not making policy. It is only coming out with estimates of accounting losses incurred by the exchequer on account of the decisions that the Government took. In the process, it also highlights the process lacunae and deficiencies that played a role in arriving at those decisions. The CAG is not making policy. For example, in the case of the Delhi Airport, it concedes, and correctly, that the Government has the prerogative to use the Public-Private Partnership route to build public assets and infrastructure.

I am pleased that Mr. Aiyar concludes strongly and correctly:

Despite excesses, an activist CAG represents a net gain for democracy. Along with the Supreme Court, the CAG has ensured that most natural resources will be auctioned in future. That is a huge gain in fairness.

After the Election Commission and Supreme Court, the CAG has become the third institution revolting against a corrupt, callous state. We need such revolts.

Now, let us take up Ajit Ranade’s piece:

It is a valid conceptual point that what is deemed as a loss to the exchequer could have been a deliberate policy thrust. We could accept that argument had the decision been taken after due deliberation.

When public goods are given away to the private sector, one starts off with ripe conditions for process-vitiation. One is trying to remove a silk saree that has fallen on thorns. Hence, the government has to be very careful and doubly sensitive to following due processes without bias or favour.

If the abandonment of the auction process was a deliberate policy thrust on the part of the government, then the following process methods should have been in place, ex-ante:

(1) What the CAG audit has come out with ex-post, should have been done ex-ante by the government. Being armed with these estimates would give the government a clear idea of the range of the amounts of public money that it is ‘giving away’ as a deliberate national policy. It would negotiate better and effectively.

It would then be able to set and negotiate the conditions for such easy ‘giving away’ of public goods in terms of deliverables – from a public policy and welfare perspective – by the private sector.

(2) Also, if, in the process of giving up such exchequer gains for ‘national policy thrust and goals’, the private sector is enabled to generate super-normal profit (thresholds can be arrived at, even if the process is subjective), then the government should reserve the right to impose one-off or temporary super-profit taxes. This should be in the concession agreement.

(3) Due processes should be scrupulously followed since the exercise is fraught with dangers of accusations of favouritism, even before it starts off. One does not allocate spectrum to inexperienced and totally strange outfits. In the name of spreading ‘primary education’, that amounts to handing over the children to child abusers. Harsh analogy but please think about it.

(4) The fourth and the last point is related to (3) but here, I would like to go simply beyond giving away public goods (e.g, spectrum) through a due process – the point I make in (3) above. The bidding process should include criteria that would give weightage to ‘responsible’ private sector players – that is, those players with a track record of fulfilling their statutory obligations to the government and who have demonstrated that and go beyond that too.

(5) Even if the policy were deliberate in the interest of public welfare, how does the government decide on it? What is the amount of public loss that the government causes by giving up on revenues when such revenues can reduce fiscal deficit, restore confidence in government, in public finances, lower inflation and interest rates credibly and thus kickstart an investment cycle, generating business confidence and employment?

How does the government trade off this virtuous circle (sketched above) with its decision to forego revenues consciously? Can a competent and ethical government take better care of the negative consequences on productivity and costs by auctioning off public resources (vs. giving them away cheaply or freely) with revenues thus earned?

(6) I am not suggesting that these are easy to formulate and implement. But, careful and deliberate planning and consideration of wider ramifications are called for before such decisions (not following the auction process) are taken. In fact, the CAG reports should focus minds on the availability of necessary competence in the bureaucracy to advise politicians correctly.

Therefore, it is unpersuasive, at least to me, that a decision conceived and executed in bad faith can be explained away, ex-post, as a conscious national policy choice.

An auditor is thus fully entitled and in fact, that is his job, to focus on accounting losses. It is up to the government to have anticipated them and consciously trade them off for well articulated and carefully chosen public policy goals.

If the government did not do so in the past, then the CAG reports lend urgency to the adoption of such a rigorous process in future.

It is the duty of a watchdog to bark. Sometimes, the barking turns out to be a false alarm. But, many a time, the dog gets it right.

By dismissing the reports – focusing on losses that the auditor did not focus on (in the DIAL case, specifically), the media and other commentators create the serious risk that due care, deliberation and conscious decision-making remain elusive in Indian public policy space.

Has CAG DIAL-led wrongly?

The Comptroller and Auditor General of India (CAG) is appointed for a six-year term and can only be removed by impeachment. His reports are sent only to Parliament. The current head, although, wants their reports to be disseminated to the public. See ‘Economist’ profiling India’s CAG here.

Many disputed the (maximum) loss figure of 1.76  lakh crores (that is about 32 billion dollars at an exchange rate of USD1=55 Indian Rupees) that the CAG put out. But, not many would have even bothered to go through the caveats that the CAG itself admitted:

Audit reiterates that specific value of 2G spectrum could have been discovered only through an efficient market drawn process and in its absence, these are the indicators available which give the hints towards the loss Government could have suffered. The revenue realised through auction of 3G at the rate fetched through a market process is highlighted in this report to project the benefits of resorting to an open price discovery process and the value that spectrum could command without compromising with the policy of open competition.

The fact also remains that the Government got 1.03 lakh crore from the auction of 3G and BWA spectrum against their own estimate of  35,000 crore.

(One crore = ten million and one US dollar = 55 Indian rupees appx.). The above remarks are found in page 54 of the CAG report titled, “Performance Audit Report on the by the Department of Telecommunications Ministry of Communications and Information Technology”. This was for the year ended March 2010. The range of potential loss to the exchequer is given in paragraph 5.5 in page 56. The auditor was not going by one figure. There was a range of figures. That range was 57,666 crores to 176,645 crores of rupees (about 10.5 billion dollars to 32 billion dollars). The CAG report can be found here.

But, what is interesting is that with the government re-auctioning 2G spectrum in the wake of the Supreme Court cancelling all the 2G Telecom licenses that the Ministry of Telecommunications awarded, the reserve price it has set has vindicated the maximum loss amount that the CAG had put out (32 billion dollars). Wikipedia entry shows that India’s nominal GDP in dollars was 1676 billion dollars. That is a loss of around 2% of GDP.

This is what THE HINDU had to say on August 8th:

The reserve price of Rs.14,000 crore/5 MHz set by the Union Cabinet for auction of pan-India 2G spectrum in the 1800 MHz band will eventually translate into a per Megahertz price far higher than even the CAG’s evaluation in 2010, which had invited the government’s wrath and scorn. [Link]

Shekhar Gupta of ‘Indian Express’ conceded the same thing today in his column:

… a fresh auction with new base prices that pretty much justify the CAG estimate of a Rs 1.76 lakh crore loss …

Of course, all of us can concede that calculating the true loss to the exchequer is never easy. Straightforward loss calculation based on what the government could have got minus what it actually got is one thing but the impact of setting a high reserve price on the price charged to end-users by telecom companies and the resultant opportunity loss to the economy in terms of productivity, growth and taxes is fiendishly difficult to calculate. That is why the CAG put out its range of estimated losses from the 2G non-auction of licenses done by the Telecom Minister Mr. A. Raja.

The CAG has released its report on the allocation of coal mines to government and private companies and also on the public-private partnership that resulted in the construction of a world-class airport in Delhi.

I am yet to go through the report on coal mine allocation but I went through the report on the concession rights granted to DIAL to operate the Delhi airport.  Whether the auditor was missing the wood for the trees as stated here is, at best, debatable and, at worst, an incorrect reading of the report.

I cannot say how many commentators in Indian media read the full 53 pages of the CAG report on DIAL concessions. They straight went for the figure of Rs. 1, 63, 557 crores (Rupees 1635.57 billion rupees). That is another 30 billion US dollars. That is what makes news. Yet again, sensational journalism buried the substantive content of the report.  But, the audit report did not state that number in isolation nor did it fail to discount it to its present value as this newspaper report alleges.

The relevant paragraph is this paragraph in Section 2.6 (page 30):

Using DIAL’s own projection for earning potential of 681.63 crore per acre, the same amounts to 163557 crore for 240 acres of land for 58 years. 45.99 per cent of the same amounting to 75220 crore would be AAI’s share. The net present value at a discount rate of 10 per cent amounts to 3566 crore. The share of DIAL would amount to 88337 crore, net present value of which is 4187 crore.

The CAG knows how to discount future cashflows! It is unfair to blame the media fixation with 163,557 crores of rupees on the CAG. The auditor was neither fixated on that nor did he fail to discount that number to the present value.

The burden of the auditor’s song was whether 5% of the total land area should be allowed to be classified as non-transfer asset, revenues from which would not be taken into consideration at all in setting tariffs that are borne by passengers. Revenues from non-aeronautical services would be reckoned at 30% towards the ‘targeted revenue’ for the purposes of cross-subsidisation of passengers. But, the revenue from non-transfer assets are not even part of the non-aeronautical services. It does not matter here whether Airports Authority of India (AAI) gets a 45.99% share of revenues. The question is whether 5% of the total demised land (240 acres) should be allowed for commercial exploitation by the airport operator.

Of course, it is not illogical to counter-argue that the Government did so because the counterparty offered the maximum revenue share to the government. But, it is equally appropriate on the part of an auditor to point out that so that there is scope for reflection on whether future concessions could be different.

In fact, more serious claims are made by the CAG that need to be taken into consideration. Unfortunately, in this media and public obsession with the wrong set of figures, those salient points that have to be borne in mind for future Public-Private Partnerships (PPP) were lost. These key points are:

(1) Services such as ground handling and cargo handling were deemed aeronautical by the Airports Economic Authority of India (AERA) but they were deemed non-aeronautical for the purposes of the concession agreement for the Delhi airport. Although AERA was established in 2008-09 while the agreement with DIAL was signed in 2006, no effort was made during the negotiation of the agreement to make these provisions subject to the future approval of AERA. In other words, no re-negotiation/review was provided for.

(2) Worse is the automatic renewal of the concession agreement for another 30 years, after the original 30 year period (too long compared to several other projects in India and elsewhere) on the same terms and conditions

(3) The right of first refusal given to DIAL to bid for any airport that comes up within 150 kms of the Delhi airport in future, without basing it on any specific triggers/parameters such as revenue, traffic, freight volumes, etc.

(4) DIAL being allowed to form JVs for provision of all kinds of services and no appropriate scrutiny of whether revenues from such JVs flow to DIAL as per its shareholding because only then can AAI can get its 45.99% share. The audit reports of these JVs were not made available to CAG. The Ministry of Civil Aviation has referred to the Ministry of Law as to whether the revenues from these JVs should be added to the revenue of DIAL. To many of us, the answer is elementary and hence, can be quick. But, as of the publication of the CAG report, the Ministry of Law had not yet opined on that!

(5) No physical estimation of the total land transferred/leased out under the concession agreement was undertaken, prior to the signing of the agreement. No records were available. So, no one really knows how much land was actually leased out to the airport operator.

To reiterate, in the CAG report, the issue was not one of Rupees 163,557 crores at all. That is completely wrong, misleading and off the mark. Many issues on the manner of negotiating future PPAs in the interests of the exchequer and the public have been highlighted and they are, unfortunately, lost in the media focus on sensational numbers.

Hence, the attempts to discredit the CAG reports by levying false accusations of incompetence are wrong and set a dangerous precedent. Our politicians would lap it up and might even undermine its constitutional position as the watchdog. Media and outside analysts are ignoring this very real danger in the current corrupt, dysfunctional climate.

Unsurprisingly, Pratap Bhanu Mehta had a more balanced article on the CAG reports last week.  Worth reading. This is his concluding paragraph:

You can contest the CAG’s numbers. But the reports, even if they do not say it, leave us in no doubt that the government is a rotting ancient regime. It is a deep morass of evasions, dereliction of duty, and outright fraud on the taxpayers. The responsibility for this runs to the highest levels, including the prime minister. He is, doubtless, an honourable and honest man. But will he admit that the government is at least guilty of a sin even worse than corruption: gross incompetence of the kind that has put the country’s future at risk?

[p.s: All CAG reports can be found here]

A year early

Peter Tasker has written this piece a year too early, perhaps. He wants us to cash out of gold. Or, he should have read this piece by Gideon Rachman. The world is on the cusp of a social upheaveal. Gideon Rachman got it right. Or, this one by Bill Gross before writing his. Bill Gross of PIMCO warns investors on falling for European policy moves or money printing. He is correct.

In an interview to ‘Financial Express’ in India, Jahangir Aziz, India economist for JP Morgan, said the following in response to a question on whether there would be QE3:

Do you see a QE3?

Yes, and, almost surely, the money will flow into commodities. My guess is that you will see an LTRO soon in the eurozone and the Fed may have to do another round of QE because growth is trending down. So, I think you will see a wall of money coming in to emerging markets and commodities [Full interview here]

TGS shares this view and that is why Peter Tasker is a year too early, in my view.

Talk is free

The Indian government is excelling itself by the day. The Prime Minister is expected to announce a scheme for giving free mobile phones with 200 minutes of free talk-time every month for ‘Below Poverty Line’ families. It is such a hare-brained scheme. Most poor families in India have a phone if not a toilet. To provide a toilet for every household or for every street in every village in India would make a lot more sense than this. Some reports put the cost at Rs. 7000 crores or 70,000 million or 70 billion (1.3 – 1.4 billion dollars).

Just some days ago, the ‘new’ Finance Minister warned that all Indians must do their ‘fair share’ of the burden of bringing about fiscal consolidation. In most countries, it means higher taxes for middle and upper income tiers and the rich. Two days later, comes the news of the distribution of free mobile phones.

Also, a sheer ‘coincidence’ that the ‘Expenditure Finance Committee’ of the Ministry of Finance approves the issuance of ‘Resident Identity Cards’ (RIC) after Mr. Chidambaram became the Finance Minister. The RIC was favoured by the Home Ministry which was headed by Mr. Chidambaram until recently. This approval is being given despite objections from the UIDAI and the Dept. of Electronics and Information Technology. RIC will work with addresses. Addresses are notoriously difficult to verify in India. People move and corporations keep re-numbering. Unique number and finger-printing were expected to overcome this vexing problem in India. Now, the MoF under Mr. Chidambaram has approved what the Home Ministry under Mr. Chidambaram had been asking for. What is the cost of issuing plastic cards? Rupees 5500 crores or 55,000 million or 1 billion US dollars.

Here we go. Fiscal consolidation by Government of India has ‘commenced’ with 2.4 billion dollars of new spending approved or to be announced.

Just appropriately, Niranjan Rajadhyaksha wrote in MINT about the great sinkhole that Indian subsidies have become.

Rohini Malkani of Citigroup India has lowered her growth forecast for 2012-13 to 5.4% and for 2013-14 to 6.2%. With these policies – tax the rich and spend in the name of the poor – will see more inflation and less growth.

The fiscal deficit is expected to come in at 5.9% of GDP for 2012-13. This does not include the un-estimated amount required for re-capitalising public sector banks in India.

The Indian economic story is no longer just a tragedy. It is a farce and a tragedy.

Knight Capital – links

FT;s Tracy Alloway notes that more than 50% of stock market trading in the US is driven by algorithms.

Joe Nocera calls it a Frankenstein Monster. Algorithmic trading is not about investing for the long-term, for the long-term financing needs by providing capital to soundly run companies. I agree.

Bloomberg should have written a more stinging editorial than this.

There is good news in this: The resort to speed and algorithmic trading is a reflection of Wall Street desperation. They are facing extinction and hence their desperation. Their extinction can only be good news. The more mistakes they commit, the faster will be the inevitable final outcome.

Yours Truly wrote an Op.Ed. on this in August 2011 in MINT. I refer to Andrew Haldane’s ‘The Race to Zero’, a speech delivered in Beijing in July 2011. Here is the link to the speech. He noted that some grit in the wheels of stock trading would forestall the next market crash. Since it is apparent that no grit has been thrown under the wheels, all that we need to do is to await the next big stock market crash.

Mostly messy with minor balms

Some choice reading links that, when linked, provide a good snapshot of the (mostly, sorry) state of affairs in India:

The quality of engineering colleges, graduates and the stifling controls of AICTE. A disaster is unfolding before our very eyes. [Link]

S. L. Rao on the need for privatisation of all electricity assets in India [Link]. S. L. Rao on how the Prime Minister’s office stopped automatic mechanisms in the power grids kicking in and shutting out the overdrawing States.

“Corruption, inefficiency and treachery disgraced all branches of the public service. In the midst of this decay and confusion, our literature, art and even true religion had perished.” The 86-year-old scholar concluded that our condition is the result of “the rottenness at the core of the Indian society”. [Link]

On the level of non-performing assets in Indian public sector banks [Link]

On the drought situation in India [Link]

Minor palliatives:

How ‘Activity based learning’ is improving learning outcomes markedly in primary schools in Tamil Nadu [Link]

Reserve Bank of India slowly breathes life into the Indian microfinance sector [Link]. Also, check out this interview of Vijay Mahajan by India Knowledge@Wharton.