<div>If any book on the Comptroller and Auditor General of India (CAG) is written in the future, it will probably divide the history of the institution into two distinct time periods – the pre-Vinod Rai era and the one commencing with Vinod Rai being appointed the CAG. Older readers of business news would probably remember that even in the pre-Vinod Rai era, the CAG performance and financial audits would invariably lead to angry debates in Parliament. Every report presented by the CAG would carry examples of inefficiencies, of procedures being flouted, of favouritism and of inflated expenses and misuse of funds. In many reports, the CAG pointed out how crores of rupees – and in many cases, a few hundred crores -- were lost or frittered away by central and state government institutions who flouted procedure or took erroneous decisions and often indulged in crony capitalism. These were big numbers but I do not recall any minister being sent to prison or the government being asked to change its policy by the Supreme Court because of any CAG report in the pre-Vinod Rai era.<br /><br />After Vinod Rai took charge, the CAG calculations moved into a different league. The first bombshell the CAG dropped on the hapless government was its audit of the 2G spectrum licences. In that report, the CAG tried to work out the presumptive loss to the Central government exchequer because no auctions were conducted while handing out 122 new licences. The CAG tried to calculate the money the government could have got if 2G auctions were held, by benchmarking the money it got because of the 3G auctions. The CAG worked out that the presumptive loss, based on the different assumptions, ranged from Rs 45,614 crore at the lower end and Rs 1.39 lakh crore at the upper end. The numbers were mindboggling, and most people focused only on the larger number. The furore it created resulted in A Raja being sent to prison, and the 122 licences being cancelled by the Supreme Court, which also directed the government to follow only the auction route in future for giving out any natural resource.<br /><br />Two weeks ago, Vinod Rai dropped another bomb on the UPA government. The CAG tabled a report which calculated that the coal blocks that were taken away from Coal India and allocated to different projects would result in presumptive gains to the tune of Rs 1.86 lakh crore to 57 private companies over the lifetime of the coal blocks. The resulting brouhaha has seen the Parliament unable to function as the main opposition party seeks nothing less than the prime minister’s resignation.<br /><br />There is plenty of stuff being written about the Rs 1.86 lakh crore presumptive gain figure. Opinion is divided as to whether the numbers are ridiculously high, low or just right. And for every columnist who has rubbished the figures, there is one who has defended it stoutly, and even claimed that the figures are conservative.<br /><br />I have a serious issue with the whole concept of potential gains, presumptive gains, notional losses or presumptive losses. My problem with these calculations is that they are based on so many assumptions that they can never be accurate – or even realistic. The assumptions you make will completely dictate the figures you end up with. Make a few different assumptions, and you will end up with different figures. More important, in trying to calculate down the last paisa the gain or loss based on certain assumptions, the bigger picture as well as the ground conditions are often lost, as is the policy goal that is meant to be achieved. And so much time is then spent debating the numbers that the other, and sometimes equally important, issues pointed out by the CAG are not discussed at all.<br /><br />Presumptive gains by private players and, therefore, losses that the government has supposedly suffered, can be debated endlessly without ever coming close to a conclusion. Every assumption the CAG has made can be challenged and also defended. For example, why didn’t the CAG take into account the presumptive gains by public sector undertakings which were allotted some coal blocks? The CAG report explains that the PSUs have been considered government parties and therefore not included in the calculation of benefit. The problem with that assumption is that what happens if the PSUs become part of the government’s disinvestment programme? And as corporate entities, even if though PSU is government owned, its profits would not automatically find its way to the government balance sheet. Or take the assumption of using Coal India cost and selling price figures as the basis for computing the presumptive gains to the private companies. The problem is that Coal India production costs and selling costs are no real indicator – as a monopoly, it is inefficient and its operational costs of extracting coal are probably higher than what would have been the case in a market economy with plenty of competition. At the same time, its selling costs are also lower than that of coal prices in international markets. So defenders of the CAG numbers are pointing to the fact that if international prices were taken as the benchmark, the presumptive gains to the companies would be even higher. But the coal sold by Coal India is also much inferior to the coal sold in international prices – so there is no guarantee that if the Indian coal was actually subject to market dynamics, its price would not be even lower. And of course, if the coal sector were opened up and Coal India was not a monopoly, there is also a chance that Indian coal would sell at even lower prices. <br /><br />Meanwhile, one big argument against presumptive gains is that this coal is not meant to be sold in the open market – many of the coal blocks have been allotted against power projects, and these power companies are in turn expected to sell their power to state electricity distribution companies at low costs, and often with long credit periods. Similarly, the problems of getting environment and other clearances are not taken into account. Finally, future gains and losses cannot be calculated with any great efficiency because conditions in the future will be very different. If vast amounts of coal are discovered internationally and in India, and coal prices crash, the presumptive gains for private companies will be lower. If coal prices go through the roof, the gains will be much higher.<br /><br />Any sale or allotment at a particular time has to be judged in context of the time and the reasons for which the decision was taken. Otherwise, any decision in hindsight will appear flawed. Even in the case of PSU disinvestments – it could be argued that in many cases, the government sold at far lower prices than it could have got, and therefore suffered presumptive losses. In other cases, prices also dropped after the government sold – and therefore, the investors who bought suffered real losses. If presumptive losses in coal are to be calculated, there would be every incentive for the government to sit on all coal blocks and not extract anything, given that coal prices will inevitably rise over time, and therefore selling later will be more profitable than selling early, even if it means problems in other areas such as power production.<br /><br />Initially, when the government worked out the policy for allotting coal blocks – and it was taken at a time when the NDA government was in power – there was sound logic behind the decision. Coal India was inefficient and it was not planning to use many of the coal blocks that were given to it. Given the fact that the country was short of power, and most of the power projects were based on coal as the fuel, it made sense to give some of the coal blocks that Coal India was not planning to use for the next 15 or 20 years, to power projects that would find use for it. No one can argue with the original basis for the decision. However, as it often happens, in both the NDA and the UPA regimes, the coal blocks were allotted without following proper procedure or scrutiny or even calculations to see if the amount of extractable coal of a block was matched to the actual requirements of the power plant. Also, for whatever reason, even steel and cement plants, which operate in a market economy, were allotted some coal blocks when there was no justification for allotting coal blocks to these sectors. There was also no serious effort made to make Coal India itself more efficient or productive. There was no effort made to monitor that the end use of the coal blocks was as per the original commitment. There was no debate on whether the coal sector needed a monopoly at all – or whether opening up the sector would lead to better efficiencies, as had happened in the case of telecom and others.<br /><br />I suspect that given the controversy about the presumptive gain and loss, those debates will not happen in the near future – and the chance of reforming the coal sector in the country will get lost. More importantly, even the other actionable points made by the CAG – about the problems faced by Coal India, the mismatch between coal mined in certain places and transportation facilities, the failure to monitor operations of private sector, the fact that no due diligence was followed by the screening committee and that there are serious discrepancies in the firms the screening committee examined and those which got the allotments, will get missed out. The huge number the CAG report touts makes sure that the report comes into limelight – but it also ensures that few people actually end up debating the whole report and its findings. And that is ultimately why the benefits of the coal calculations are debatable.<br /><br />Finally, because of the over focus on numbers, the point that all policy decisions might not necessarily be for revenue maximization often gets overlooked. Older readers will recall that when mobile telephony first came into the country, the government auctioned the licences. The result was that a few companies – Himachal Futuristic was one of the prominent ones – bid so high that they could not roll out their operations. More importantly, the mobile telephony became the service that only the super rich could afford. It was when the policy was changed and revenue share – instead of one time gain through auctions – was allowed that mobile charges dropped because of sheer competition. The process of granting the licences by the government had many problems – and some decidedly dodgy companies applied and won licences, possibly by bribing authorities. But that was a procedure issue, not a broad policy problem. Auctions are a great process for revenue maximization – but they may not work well if the policy objective is to ensure about better telecom penetration or more power production.<br /><br /><strong>Post script: </strong>While all the attention has focused on Vinod Rai, people who read the whole report will realise that A K Patnaik, the deputy comptroller and auditor general and chairman, Audit Board, was the main author of the report.<br /> <br /> </div>
