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CAG report indicts civil aviation and hydrocarbons sectors

CAG report indicts civil aviation and hydrocarbons sectors

The recent CAG reports on the civil aviation and hydrocarbons sectors reflect that dubious decisions plague India's governance. The auditor general has brought to notice that the country is shackled by an archaic superstructure that is not in sync with an economy on the threshold of crossing $2 trillion.

On December 30, 2005, the United Progressive Alliance government moved uncharacteristically fast. Prime Minister Manmohan Singh concurred with a note sent by a select group of ministers on a commercial contract on the very day it reached his office. Soon after, the aviation ministry under then minister Praful Patel informed the national carrier Air India about Singh's decision. Air India promptly acted on it - all on the same day.

This contract was a Rs 33,197-crore deal Air India , signed with Boeing and General Electric to buy 50 planes. The sequence of events on that winter day is marked in red in a recent audit report of the aviation sector by the Comptroller and Auditor General, or CAG.

The CAG, which audits the government's income and expenses, however, does not think it was a red-letter day in governance. The deal "seemed to be supply driven", rather than demand pushed, says the note accompanying the report signed by the high-profile CAG Vinod Rai. It was the CAG which had blown the lid off the 2G spectrum scam last year that ultimately led to the resignation and arrest of former telecom minister A. Raja.


  • The CAG's audits are rigorous. They are one of the chief means by which Parliament keeps an eye on the government's functioning
  • There are five levels of scrutiny at CAG to corroborate every number and do away with subjectivity
  • The team that carried out hydrocarbons audit was picked from among officials who had for 25 years worked on ONGC's Bombay High audit
  • Next, Parliament's Public Accounts Committee will debate the CAG reports
As it turned out, the plane acquisition deal triggered Air India's nosedive. At the time of the deal, the airline was still in the black, with a net profit of Rs 96.3 crore on an income of Rs 7,630 crore in 2004/05. The airline had a Rs 1,801 crore balance sheet, of which debt was Rs 1,262 crore. Five years later in 2009/10, it would report a loss of Rs 5,552 crore - about twice the size of Sikkim's economy - on an income of Rs 13,402 crore, along with a staggering debt of Rs 38,423 crore.

The single-day clearance is one of a number of dubious government decisions highlighted by the report. Similar revelations have also been made in another CAG report on the hydrocarbons sector. Both strongly criticise the government's functioning, pointing out failures and systemic flaws in its processes.

The common thread running through them is that the country is shackled by an archaic superstructure that is not in sync with an economy on the threshold of crossing $2 trillion.

Reliance in the dock

The adverse comments in the CAG's hydrocarbons report on Reliance Industries, India's largest private company - which is engaged in oil and gas exploration and production in the KG D6 gas fields of the Krishna-Godavari basin in Andhra Pradesh - may have been highlighted by the media, but there is much more to the report than this single company.

Indeed, the CAG's observations about Reliance are comparatively benign, since the report restricts itself to the financial years 2006/07 and 2007/08. It was only from 2008/09 that KG D6 began yielding revenue for Reliance. The CAG's audit of the post-2007/08 period, which will assess if the government lost revenue due to violations, has begun. A Reliance spokesperson declined to comment on it.

The current report primarily focuses on the shortcomings of the Production Sharing Contract, or PSC, the government has formulated for sharing profits when a private company carries out exploration. Is blaming the government justified when private players are the mainstay of India's hydrocarbon explorations? Aruna Kumar Vundavalli, a Lok Sabha Congress member from Rajahmundry in Andhra Pradesh, who heads the Parliamentary Standing Committee on petroleum, believes it is. "The state has the main stake in oil," says Vundavalli. "Private players are only contractors." Being national resources, oil and gas are ultimately the state's responsibility.

The PSC was formulated in the 1990s, after the sector was opened up for the private sector, with the aim of drawing global oil majors to India to take a shot at exploration. The CAG report maintains the flaws in the PSC's design are responsible for the subsequent problems the sector faces. A key one is the suspicion that the PSC leaves scope for oil explorers to inflate costs and conceal revenue that should be shared with the government, which in turn inhibits some oil majors from entering the fray, fearing a witchhunt sometime. The CAG report adds that even neighbouring Bangladesh has done a better job of protecting the state's interests. It also calls upon the government to ensure that rules and goals spelt out in the PSC are not arbitrarily changed.

It was a change in goal posts in Reliance's case that really got the CAG fuming. The PSC mandated that an operator should relinquish part of the block it had already worked on when it moved to another part in search of oil or gas. In July 2004, the Directorate General of Hydrocarbons, the upstream petroleum regulator, asked Reliance to relinquish area.

Different strokes
 Two views on whether the CAG's criticism of Air India's 2005 decision to buy 50 Boeing-made jets is justified

Ashok Chawla
Ashok Chawla, Former aviation and finance secretary
Ashok Chawla,
Former aviation and fi nance secretary

"As regards number of aircraft, any airline with global ambitions should have a fairly large fleet. Else, there is no point in being in business. At the same time, it must have credible plans on how to deploy the capital equipment and put it to good commercial use. While revenue projections were made, they have proved to be unrealistic. Hence, a large acquisition programme based on debt raised on the back of government guarantee is not a sustainable arrangement"

Jitender Bhargava, Former ED, Communications, Air India
Jitender Bhargava, Former ED, Communications, Air India
Jitender Bhargava,
Former ED, Communications, Air India

"In the 10 years prior to the acquisition plan, Air India's profit averaged Rs 750 crore. The acquisition was worth Rs 33,800 crore. Add interest of four to five per cent, you are talking of a repayment of Rs 40,000-odd crore over 15 years. Which means you must make a profit every year of Rs 2,500 crore. Even the best of airlines do not make a profit of more than three per cent of total revenue. Your revenue in the year we placed the order was just Rs 7,500 crore"

Reliance did not. After a mountain of correspondence, in 2008, oil minister Murli Deora backed Reliance. The company on its web site, says the CAG's interpretation is incorrect. Deora, who was oil minister from mid-2006 to January this year, told Business Today he did not want to discuss the CAG's conclusions.

Despite the CAG's misgivings, the current PSC template has its supporters. R.S. Sharma, whose tenure as Chairman of the public sector Oil and Natural Gas Corporation roughly coincided with that of Deora as minister, defends the PSC strongly. "I was a part of the process when we developed a model PSC. We studied global practices," he says. "The idea was to devise a contract that would bring in capital and technology." What does he think of the CAG report? "It harms the country's image."

Facing turbulence

Like Deora, Patel, who was civil aviation minister during the period examined by the CAG in its report, refused to discuss the Boeing purchase. No rules were violated by the deal. But the CAG has questioned the commercial sense of the decision, maintaining that the project appraisals on whose basis it was taken were shoddy and made unrealistic assumptions.

Ashok Chawla, who was civil aviation secretary under Patel, defends the need for such a deal. "Revenue projections were made but they have proved to be unrealistic," he says, adding that speedy decision taking should be commended, not faulted. Chawla took over as secretary after the deal was finalised.

The CAG says internal warnings about the deal's commercial viability were ignored, flagging governance issues in the aviation ministry on Patel's watch. "I attended the board meeting where Air India suggested the number of aircraft to be acquired must be increased," says retired bureaucrat V. Subramanian, who was the aviation ministry's financial advisor then. "I opposed it and asked how such a proposal could be made without a business plan. A week later, I was transferred out of the ministry."

Key accusations in the CAG's reports

  • Reliance overstayed in 50 per cent of its contract area in KG D6. The oil ministry did not enforce the contract
  • Commercial assumptions underpinning Air India's aircraft purchase were unrealistic
  • The government's aviation policy has undermined the national carrier

Jitender Bhargava, Air India's former executive director of communications, also says the deal was struck based on implausible assumptions and forecasts. He also criticises the atmosphere of sycophancy that pervaded the ministry and allowed such deals to go through without too many questions. "Most people in the organisation are looking to please the chairman or minister," he says.

The CAG's report on civil aviation also brings out another anomaly. It is the conflict of interests the minister faces from wearing two hats: that of policy maker and competitor with private airlines. Even as Patel shepherded the massive purchase by Air India, he liberalised the sector with the goal of benefiting consumers. The enhanced competition from private airlines, however, reduced Air India's market share and made it more difficult for the airline to pay off its debts, more so after it was pushed into a merger with Indian Airlines in August 2007.

The upshot of the conflict of interest? An erosion of faith in the minister's objectivity, typified by a union leader's allegations. "After the merger, the two airlines had to share (route) entitlements while the balance was given away to private carriers. It was a clever move to gift the market away," says George Abraham, General Secretary, Aviation Industry Employees Guild.