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Politically motivated audits could derail India’s $2-trillion infrastructure dream

KILL BILL
The Aam Admi Patry’s decision to audit three electricity distribution companies in Delhi has ruffled many a feather. It has also sparked off a heated debate about the prerogatives of the government authorities to audit private companies offering electricity, road, telecom and port services.

It also opened the question of alleged thievery of the power companies in connivance with political bosses and bureaucracy through the time-tested means of gold-plating a project. In Delhi the suspicion is exactly that, and that is what is being looked into.

Already the reverberations are felt elsewhere too. The Maharashtra government is mulling plans to cut electricity tariff by 15 per cent for usage below 500 units. If Delhi can do it, why not Mumbai? The Congress, in power in Maharashtra, is asking itself. Call it the AAP effect on India’s financial capital.

Never mind the debate over the government’s authority, the Delhi high court has pronounced in favour of an audit by the Comptroller and Audit-General of India (CAG) of private telecom firms to check if they paid the government less than what they ought to have. This has led to speculation if roads and ports would be the next sectors to face CAG audit.

If that happens, what the audit would do to the government’s desperate endeavour to pull investments into the infrastructure and manufacturing sectors is anybody’s guess. Industry people worry that since roads, ports, telecom and power are sectors that cater to the masses, they will not be allowed to operate in silos.

Projects in these sectors may have to undergo central audit even if the government pecuniary interest in them is minimal.

A Subba Rao, a senior industry official who spent more than two decades in the infrastructure sector and is now group CFO of the RPG group, says there could be concerns within the government that established power companies getting 15-16 per cent return on equity have exaggerated their capital expenditure to get higher returns.

But, he adds, even if a company did do so, there is no way to nail it because establishing the cost of a project won through a tender process several years ago with a 20 to 25-year concession period is impossible. “If the equipment cost Rs 100 but was shown as Rs 112, it would be extremely difficult to prove it by auditing the accounts alone,” said Subba Rao.

Rather, it would be wise to change the system and look at projects on a case-to-case basis, instead of applying the one-size-fits-all principle. The majority cost of Delhi’s power distribution companies is said to be on account of power purchase and can be as high as 85 to 90 per cent.

The discoms buy power from government-owned companies like NTPC and NHPC and some from the open market or the power exchange. The cost of power in Delhi has gone up three-fold in 10 years but tariff has increased only by 70 per cent. Or so the claim goes.

“If the cost of power from NTPC and NHPC is high, how can the end-tariff be low?” asks an official of Reliance Infrastructure, two of whose group companies are among the three Delhi discoms accused of cheating the customer and being subjected to government audit. No surprise that the official does not want to be identified in this report.

His argument goes thus: if the tariff were to be cut, there would be default in payments to power generators and revenue would also go down. Surely, that appears like a threat and not reason.

So far, the Delhi Electricity Regulatory Commission (DERC), which has allowed the discoms successive tariff hikes and is planning yet another one, doesn’t want to comment. Maybe for good reason, after all, when the audit gets going, its role in granting the hikes will also come into question.

PD Sudhakar, DERC chairman, says, “We cannot speculate on our possible action before or after the audit. Based on submissions (by the discoms) we decide if we need to raise the tariff or not.”

That the audit may lead to similar scrutiny of firms in other sectors like ports and roads is a possibility being talked about. Salil Garg, director corporates at India Ratings, does not think it a good idea to audit all tariff-related services. “But an audit of regulated public utilities could help settle the present issues,” says he.

The fallout on the roads sector could be equally huge. India has a huge network of 70,000 km of highways where tolls are collected. There are allegations of huge misappropriations of toll funds along with deliberate projections of less traffic. Together, the loss they cause to the exchequer could be massive. Will these projects be subject to CAG scrutiny?

L&T Infrastructure Development operates 16 toll roads. K Venkatesh, its CEO, says the audit decision is “no issue with companies whose accounts are clean”. But if it is frivolous, it creates yet another bureaucratic hurdle for private companies.

Another argument agai­nst auditing road operators is that there is no revenue sharing with the National Highways Authority of India (NHAI), as was the norm earlier. In the new BOT system, projects are awarded on the basis of fixed premiums and the bids are already audited by CAG.

But if there is viability gap funding (VGF) or some other relief, a CAG audit could be justified.

Still, experts point out, since there is no mechanism to check traffic passing thr­ough the tollgates, there is vast scope for understating toll earnings. The fraud happens there.

Manoj Kumar, partner in Hammurabi and Solomon, law firm, among whose clients are many road companies, says underreporting traffic and toll revenue is rampant among B and C grade developers. “The premium shared with the government based on projected traffic at the time of bidding could be much lower (than is the actual case).”

The cash-strapped government wants private companies to double their share of the cost of building roads and bridges by 2017; for the past five years they have been footing just a fifth of the cost. Eight of every 10 road projects, however, miss their revenue targets in the first year itself. The shortfall can be as high as 45 per cent due to the slowing economy and higher forecasts assumed at the time of bidding, according to a Fitch report.

Revenue can fall short for other reasons also. A road company official points to instances of political goondas forcibly seizing toll booths at night and collecting up to Rs 750 to let each truck or trailer through. They do not charge the official toll amount. So, the trucker is happy, so is the goon. It is the road operator who loses out.

He does not, however, mention that the road operator himself could be indulging in such illegal collections. But he agrees that an audit of accounts based on traffic flow will give a clear picture of what goes on at the toll booths and road companies.

According to Vishwas Udgirkar, senior director of infrastructure at Deloitte India, in the road sector where revenue sharing is not direct and tariffs are not based on costs, an omnibus CAG audit is not the best answer. “It should be on a case-to-case basis, where discrepancies have been identified.”

CAG audit puts a question mark on the role of the power regulator. The regulatory work is as follows: first the discoms submit their tariff plans, then the regulator looks at the plans and scrutinises all the submissions from all stakeholders; thereafter there is public hearing. Udgirkar is not sure what purpose a CAG audit will serve.

Venkatesh of L&T Infrastructure Development, which also runs the Dhamara and Kattupalli ports, claims their books are clean; anyone can come and check at any time. But he also opposes a CAG audit on the ground that various audits are already done as part of the concession agreements.

“Even if there is no revenue sharing, projects of mass use have a section on audits. Else, the law ministry would not have cleared the projects,” says Venkatesh.

The port sector is also in a revenue-sharing mechanism and faces problems similar to the roads sector. Where a project is based on the PPP model, private terminal operators at a port are forced to share as much as 40-50 per cent of their revenue with landlord ports. Concealing true revenue will be a natural tendency there.

But JNPT chairman NN Kumar says fudging tonnage and terminal operators’ accounts is not so easy. There are mechanisms to check these.

Since the port sector does not directly service the masses, it may be a while before the terminal operators are bought under the CAG scanner. In telecom, roads or power, the companies service customers directly and are, therefore, more vulnerable to demands for government audit.

Public perception is that CAG’s role is confined to the auditing of accounts of the Union government and its many organisations that receive direct government funding. Private terminal operators at ports argue BOT projects in their sector do not receive any direct funding from a port trust, an auditable entity. They only get infrastructure facilities like harbour and marine setups and roads and rail connectivity to a port. They like to believe CAG cannot come sniffing around.

S Kulkarni, secretary-general of the Indian Private Port Terminal Operators, says BOT companies are already subject to statutory audits and provisions of the Companies Act. As per the licence agreement with a port trust, a BOT project is subject to stringent rules and regulations of the trusts and also the government. “Additional audit by CAG will not only be superfluous… but also detrimental to the private operators at ports.”

As a lobbyist for the operators he is defending them as he is required to do. But here’s a reality check: a CAG audit has brought to light that the Odisha and Andhra Pradesh governments have violated the port policy and awarded port sites to private developers by signing MoUs instead of going for international competitive bidding. The motives could be suspect.

The states began awarding PPP port projects in 1997 when they had neither effective modalities nor any port/ PPP policy. Projects were largely awarded through MoU route based on a single suo motu offer from the developer. It was done in an entirely arbitrary manner.

In some cases, the promoters just abandoned the projects. In Odisha the key partners of a consortium working on a port were allowed to exit during the lock-in period, despite clauses that specifically forbade that.

At Subarnarekha port, SREI, one of the major partners, just got up and left. At Gopalpur the Noble group was not so noble: it too left mid-way. CAG also objected to the long concession period of 34 years. Besides, the developers were allowed to delay work execution. But CAG could not audit the private companies.

These instances call the bluff of the likes of Kulkarni who seem to believe that no matter how fraudulent a private company involved in public projects is, the government should keep its nose off.

Generally, almost everyone Financial Chronicle spoke to opposed politically motivated audit, but did not specifically say the audit of Delhi discoms and telecom firms is so motivated. Nothing could harm the cause of India’s infrastructure and manufacturing sectors — which need investments worth $2 trillion — more than politically motivated audits.

The Delhi discom audit has been caused by perceived high tariffs. So, it all boils down to pricing. Independent analyst AK Prabhakar advocates market-driven pricing. Unless this is so, the supply side cannot be properly managed. He argues that competition has a fine way of pressing down prices. “Look at the telecom sector, where competition brought prices to one of the lowest in the world,” he says.

vikassrivastav@mydigitalfc.com

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