CAG cannot be auditing private firms
While the standoff between the new Delhi government and the three private sector power distribution companies (discoms) hardens with the discoms writing to the power ministry in the state explaining why a CAG audit is not possible and the chief minister ordering a CAG audit—“from tomorrow the audit will begin”, chief minister Arvind Kejriwal has said—it is important to understand the consequences. For one, given that the case is pending before the Delhi High Court, it is not clear whether the Delhi government can order an audit until the Court rules on the case.
More important, since the discoms are not public sector companies, auditing them opens up any PPP project to CAG audit. While the audit in itself may not throw up discrepancies in accounts—the discoms are, in any case, being audited by qualified auditors in exactly the same manner other companies are—a CAG audit, by its very nature, goes beyond mere accounts. A standard question, for instance, is why L1 tendering was not done for purchase of some equipment or some contract. Since L1 bidding focuses on the lowest bid and not so much on the quality of the supplier, it is almost certain most PPP projects will be found wanting on this count. Most private sector firms look at issues beyond just prices while awarding contracts—this could be the life-cycle cost of a project or the technological superiority of a vendor, among others. In other words, there is a very real danger of CAG audits spilling over to other sectors which, in turn, can have serious consequences. Though the faceoff is a purely Delhi-centred one, the central government also needs to study the consequences.
There is also the issue of what the audit does to the known dues of not just Delhi’s discoms, but of discoms in the rest of the country. While the Delhi electricity regulator has accepted the discoms are owed R11,000 crore till FY12—accounts for FY13 will be finalised over the next month or two—the total of such ‘regulatory assets’ across the country add up to around R70,000 crore. Are these regulatory assets, finalised by various regulatory commissions in different states, now to be opened up? There is a real danger the situation in Delhi may spiral out of control.