CAG role should be redefined

In the course of the judgment in Kingston Cotton Mills Co Ltd, Lord Justice Ropes gave utterance to the phrase “The auditor is a watchdog and not a bloodhound”. The Comptroller and Auditor General of India (CAG) seems to be reversing this statement, considering that its reports seem to be causing as much damage to the tainted image of the Government as other events. The 2G report would top the list of sensationalist reports issued by the CAG.

A recent one on auctioning of coal blocks seems to be competing for that spot. Everyone seemed to be focusing on the astronomical sum that the CAG had mentioned in the report — Rs 10 lakh crore — rather than on the fact that the report itself was at a draft stage and was leaked, proving that the walls of the CAG itself are not impenetrable.

The notional loss to the exchequer forced both the CAG and the Government to issue clarificatory statements saying that the report was leaked at the draft stage and many of the observations had since been clarified. A view is being taken in some quarters that these are an extension of the attempts to keep black-facing the Government.

There can be no two arguments that the furore has arisen mainly due to the notional amount involved. The colossal amount mentioned by the CAG, in its report on the 2G fiasco, may have been hypothetical, but it did trigger inquisitiveness and suspicion. Both the Government and Vodafone are taking on each other in an eclectic variety of ways due to the amounts involved in the marquee tax case. If one ignores for a moment the amounts involved, what remains in the report are the lackadaisical ways of the Government — reporting of which is the end-object of any proprietary audit.

Coal economics

According to the June 2004 report, the Coal Ministry decided to auction coal blocks, but some sort of a decision was taken only in 2010. In stark resemblance to the 2G episode, the Coal Ministry had pegged June 28, 2004 as the cut-off date, whereas the bulk of the allocations appear to have happened after this date, and even after, as late as 2008. Somehow 155 coal blocks were allotted between 2004 and 2009 through a process that was not transparent. The economics justify why companies would do anything to secure a coal-block — they only need to pay a royalty of Rs 100-odd per tonne as against the market prices.

Coal India's market prices range from Rs 1,000 per tonne for its lowest grade to Rs 4,000 per tonne for coal sourced from abroad. The minimal input costs and the resultant profits are retained in the financial statements of the companies that have these captive coal blocks as they are not invariably passed on to the consumer. Section 3.3 (a) (i) of the Coal Mines Nationalisation Act, 1973, protects public utilities from the competitive bidding process to buy coal, where their end-use products' tariff has been set through a bid process. This is to ensure that the cost of power does not go up for the citizen.

Pre-audit contracts

CAG reports over the years have been consistently harping on the fact that it is in allotments, auctions, purchases, awarding of contracts and tenders that processes are given a go-by, and access to the men who matter invariably overrides governance norms. If the Government were to convert the notional losses calculated by the CAG into revenue sources, it could well add a few decimal points to the GDP.

Even the CAG audit is a post-mortem and, hence, beneficiaries of the government's largesse would tend to brush off these reports as occupational hazards. As the CAG has developed an expertise in proprietary audits, it would probably be worth exploring the idea of asking them to pre-audit large contracts.

In addition, the Government should think in terms of mandating a fool-proof e-auction system for all contracts. The system should be made public and attempts to circumvent it should be reported in the public domain. Adroit management of these would enable the Government to salvage some brownie points and, in the bargain, get some much-needed money into the system. Some attempts at e-auctions have been made quite successfully in the past. They would only need to be made all-encompassing.

(The author is a Bangalore-based chartered accountant.)

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