PPP IN INDIA & GOVERNMENT AUDIT OF PRIVATE COMPANIES

GROUP COMPOSITION

BRIG PANKAJ KAUSHIK

BRIG NAVNEET KUMAR

RAKESH GUPTA

A K CHAUDHARY

JITENDRA JOSHI

R A BABU

PREVIEW OBJECTIVE

PPP – MEANING, MODELS & FRAMEWORK IN INDIA

KEY LESSONS FROM PPPs & CHALLENGES

GOVT AUDIT AND PRESENT STATUS

SC JUDGEMENT ON CAG AUDIT

AUDIT FINDINGS REGARDING PPPs

CAG RECOMMENDATIONS REGARDING PPPs

CONCLUSION

OBJECTIVE

PPP – WAY TO BRIDGE GAP BETWEEN GOVT

FINANCES & DEVELOPMENT OF INFRASTRUCTURE.

PPP MODEL BEING FOLLOWED THE WORLD OVER.

GOVT STAKE IN THESE VENTURES PROMPTED

DEMAND FOR GOVT AUDIT OF PVT COMPANIES

INVOLVED IN VARIOUS PPPs.

COUNTER VIEW - INVESTOR APPREHENSIONS &

CONSEQUENT DECLINE OF PVT PARTERNERS.

AIM

AN OVERVIEW OF THE CONCEPT, ADVENT &

CURRENT STATUS OF PPPs IN INDIA AS ALSO TO

HIGHLIGHT KEY LESSONS FROM INDIA’S

EXPERIENCE IN PPPs.

PRESENT LEGAL STATUS & TO HIGHLIGHT VIEWS

AND COUNTER VIEWS ABOUT THE NEED TO CARRY

OUT AUDIT OF PRIVATE COMPANIES BY THE GOVT.

PART – IPPP IN INDIA

PPP - GEN

A GOVT SERVICE OR PVT VENTURE FUNDED & OPERATED THROUGH A PARTNERSHIP OF GOVT & PVT SECT COMPANY (S).

A CONTRACT BETWEEN A PUBLIC SECTOR AUTHORITY & A PVT PARTY- PVT PARTY PROVIDES A PUBLIC SERVICE OR PROJECT & ASSUMES SUBSTANTIAL FINANCIAL, TECH & OP RISK.

IN SOME PPPs THE COST OF USING THE SERVICE IS BORNE EXCLUSIVELY BY THE USERS & NOT BY THE TAXPAYER.

IN OTHERS CAPITAL - BY THE PVT SECTOR & COST OF THE SERVICES IS BORNE WHOLLY OR IN PART BY THE GOVT.

GOVT CONTRIBUTIONS - IN KIND – TFR OF ASSETS OR CAPITAL SUBSIDY (GRANT) OR REVENUE SUBSIDY / TAX BREAKS OR BY REMOVING GUARANTEED ANNUAL REVENUES FOR A FIXED PERIOD OF TIME TO MAKE IT ATTRACTIVE TO INVESTORS.

DRIVERS

CONCEPT OF PPP AROSE DUE TO RAPID GROWTH OF PUB DEBT

IN 70s & 80s & GOVTS SOUGHT TO INVOLVE PVT SECT FOR

INVESTMENTS IN INFRA DEVELOPMENT.

PUB SECT BODY DOES NOT INCUR ANY BORROWINGS – “OFF

BALANCE SHEET” METHOD OF FINANCING THE DELIVERY OF

NEW OR REFURBISHED PUB SECT ASSETS.

TO ENABLE PUB SECT TO HARNESS THE EXPERTISE &

EFFICIENCIES TO DELIVER FACILITIES THAT ARE PROVIDED BY

PUB SECT.

CURRENT STATUS

THE IDEA THAT PVT PROVN OF INFRA REPRESENTED

A WAY OF PROVIDING INFRA AT NO COST TO PUBLIC –

ABANDONED.

ENHANCED ROLE FOR THE PVT SECT TAKING RESP

FOR A GIVEN PROJECT - MAINT PUB ACCOUNTABILITY

FOR ESSENTIAL ASPECTS FOR SERVICE PROVN - IN

VOGUE.

PART –IIMODELS & FRAMEWORK OF

PPPs IN INDIA

MODELS OF PPP IN INDIA

USER-FEE BASED BOT MODEL

ANNUITY BASED BOT MODEL

PERFORMANCE BASED MANAGEMENT/ MAINTENANCE

CONTRACTS

MODIFIED DESIGN-BUILD (TURNKEY) CONTRACTS

FRAMEWORKS OF PPP IN INDIA

WELL DEFINED INSTITUTIONAL STRUCTURE IS

CORNERSTONE FOR DEVELOPMENT OF A SUSTAINABLE

PPP PROGRAMME

IT NURTURES AND ENCOURAGES NEW MODELS AND

INNOVATION

DEVELOPS CAPACITIES TO SUCCESSFULLY DISCHARGE

CHANGING ROLES AND RESPONSIBILITIES

THE PPP CELLS EST AT STATE OR SECTOR LEVEL

DECISION MAKING PROCESS

PPP APPRAISAL COMMITEE SECRETARY, DEPARTMENT OF ECONOMIC AFFAIRS (CHAIRMAN) SECRETARY, PLANNING COMMISSION SECRETARY, DEPARTMENT OF EXPENDITURE; SECRETARY, DEPARTMENT OF LEGAL AFFAIRS SECRETARY OF THE DEPARTMENT SPONSORING THE PROJECT

PART –IIIKey lessons from India’s

experience in PPPs & Challenges pertaining to PPP

in India

Learning across the PPP Process

Robust Market Assessments

Realistic and robust traffic / market assessment studies are an important step in the project preparation stage for a PPP project

Clarity in Determination of Tariff

1. The tariff is a key determinant of returns for the private entity.

2. It is important to have a clear understanding of the tariff determination process

3. It should be fair to enable the private operator to earn a reasonable return.

4. Lack of clarity can result in potential disputes between the private and public entity

Learning across the PPP Process

Robust and Simple Bid Criteria:

1. Bid evaluation criteria need to be simple and robust so that capable entities are identified for the project.

2. Bid should not be speculative and we should have capability to identify speculative bid.

3. Speculative bids have the potential to derail a project during the operations stage if the private entity is unable to sustain its overstated commitments.

4. Ambiguities in the bid criteria, can lead to disputes between the private and public entity during the operations stage.

Learning across the PPP Process

Handling of Land Acquisition

1. The land acquisition process for PPP projects is no doubt the most challenging predevelopment activity in India.

2. In most cases, the government commits provision of land free from encumbrances for the project before actually completing the necessary formalities.

3. This lead to inordinate delay in completion of Project.

Learning across the PPP Process

Well Defined Scope of Work1. It is essential that the concessionaire’s scope of work is

well defined, prior to the launch of the bid process.

2. Scope of work should not be modified except in the case of unavoidable and unforeseen circumstances.

3. Changes in scope of work, result in time and cost overruns and have the potential to derail PPP projects.

Challenges pertaining to PPP in India

There are very few private investments in Social infrastructure sector such as Healthcare, Education & water Supply.

Infrastructure financing i.e ability of domestic financial system to feed the sector with enough financial capital.

FDI is allowed in most infrastructure sectors, but foreign equity participation is about one per cent of total investments on PPP projects. It is a challenge is to make PPP projects attractive to foreign investors.

A more robust regulatory environment, with an independent regulator is essential.

Lack of comprehensive data base.

PART –IVGovernment Audit and present status of Government Audit of

Private Companies in India

Government Audit

The Comptroller and Auditor General (CAG) of India:Established by the Constitution of India Audits all receipts and expenditure of the Government of India and the state governments.The external auditor of Government-owned corporations.Conducts supplementary audit of government companies .

Present Status - CAG audit of Private Companies

The existing mandate of CAG The Comptroller and Auditor-General's (Duties, Powers and

Conditions of Service) Act, 1971  Only provides for audit of receipt and expenditure of Government

entities, autonomous bodies and public sector undertakings. Audit of the PPP arrangements PPP arrangements cannot comprehensively be audited under

the existing framework of audit provided in the Act. In most of the PPP agreements already signed by the

Government, there is no clear and specific provision made to provide for audit by the CAG.

Present Status - CAG audit of Private Companies

Present status of CAG Audit The Act does not provide any access to records of private

players or power to assess and comment on the performance of a private entity.  

So far the CAG has given its audit findings in respect of PPP projects by auditing the accounts of Government departments/ companies only.

Following the recent Supreme Court judgment clearing the way for audit of private telecom companies by the CAG, it is expected that first audit report will be ready before the year-end.

Present Status - CAG audit of Private Companies

Demand for CAG audit of Private Companies

Electricity Distribution There are three private Electricity Distribution Companies

(Discoms) in Delhi. Demand has been raised by various political outfits for their

Government Audit as it has been alleged that they are falsifying their accounts to charge high tariffs from consumers.  

The companies should not fear such audit if they have nothing to hide.

On the flip side concern has been expressed by some experts that CAG's staff does not have the specialized knowledge necessary to audit a wide range of companies.

PART –V Supreme Court Judgment on

CAG audit and its impact

Supreme Court Judgment on CAG Audit

After the 2G spectrum allocation scam, the CAG was asked to audit the accounts of Private telecom companies. The Telecom Operators had challenged a Delhi High Court decision upholding the validity of laws, empowering the CAG to conduct revenue audits of private telecom firms.

On April 17, 2014 the Supreme Court upheld that the CAG can audit the accounts of private telecom service providing companies.

Supreme Court Judgment

The Supreme Court noted that

“…CAG’s function is only to ascertain whether the Union of India is getting its due share, while parting with the right to deal with its exclusive privilege to the Service Providers, who are dealing with a national wealth … but the service providers are bound to make available all the books of accounts and other documents maintained by them … so as to ascertain whether the Union of India is getting its full share of revenue.”

Supreme Court Judgment

Impact of Supreme Court Judgment

1. The Supreme Court order, while technically limited to telecom companies that share revenue with the government, raises the possibility that the same logic could be extended for enabling the Government Audit of the books of power, oil, mining and other companies with similar arrangements.

2. On the business environment front, this ruling would add to the perception that India is a difficult country to do business in and there is more government than warranted.

3. On the political front it can be said that the decision strengthens oversight of companies that do business with the government.

4. On the social front, the order is likely to have far reaching impact as the order could help reduce corruption in government contracts with private companies.

Impact of Supreme Court Judgment

Audit findings regarding PPP projects

Railways1. The CAG in its report on PPP in Indian Railways found

inconsistencies in the execution of eight public private partnership (PPP) projects undertaken by the railways, ranging from loopholes in the contractual agreements and irregularities in estimating the rate of return and traffic numbers to a weak monitoring mechanism.

2. In its recommendations, the CAG said the railways needs to frame a model concession agreement for execution of its projects within a stipulated time frame, adopting a uniform approach to all railway PPP projects. Other recommendations include streamlining the approval process to avoid delays, setting definite timelines for achieving financial closure and strengthening monitoring mechanisms

Airport (Mumbai International Airport Pvt. Ltd.)

The CAG in its report on implementation of PPP at Chhatrapati Shivaji International Airport Mumbai has asked the government to review the operator’s performance because when project cost had doubled, the gap was filled by asking passengers to shell out a development fee though such levy was not provided in the Operation, Management, Development Agreement (OMDA).

CAG has pointed out that absence of review clause and re-negotiation appears to virtually allow MIAL the right to operate the airport for a period of 60 years with the terms and conditions frozen in OMDA. CAG has recommended that MOCA may continuously and critically review the financing pattern of MIAL and ensure that finance risk for the project as allocated in the agreement to private partners is duly observed.

 

PART –VICAG Recommendations

on Public-Private Partnership

CAG Recommendations

The Comptroller and Auditor General of India (CAG)

wants the government to insert relevant clauses

in PPP contracts for comprehensive audit of public-

private partnership projects (PPP) by it.

The CAG has asserted that limiting the scope of

CAG's audit in projects implemented by PPPs would

amount to restricting the scope of oversight by

Parliament over such projects, which is neither

desirable nor intended by the government.

The CAG noted that there are risks in estimation of

revenue streams of projects under the PPP

arrangement, which could significantly impact the

exchequer or the public at large.

CAG has also suggested that action should be

initiated against the persons responsible for the

irregularities and deficiencies caused intentionally as

pointed out in audit scrutiny.

CAG Recommendations

CONCLUSION

International experience suggests that the success of PPP

projects requires a single objective of better services for the

public at a reasonable cost.

Easy availability of long-term private capital is an essential

requirement.

Selection of right PPP model for a right project at a right time

through realistic planning would go a long way in providing

meaningful and hassle free infrastructure development.

Conclusions

Principle of accountability and parliamentary control

cannot be ignored on account of the objections and

opposition by the private stake holders.

The need for Government Audit of private

companies cannot be overemphasized.

At the same time this does not mean that CAG

should take up audit of PPP projects routinely.

Conclusions

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