November 12, 2012

government, constitutional auditor, natural resources & corporate contractor

 In a recent editorial contribution for the newspaper I work for, I touched upon the dynamics of the role of India's Comptroller Auditor General (CAG) in the matter of the government's contracting of natural gas exploration and production to Reliance Industries in the Krishna-Godvari basin in eastern India.         

(the pic on the right has been taken from

Here is what I wrote:

Gas imbroglio

A legally-tenable solution has to be found in the KG basin gas production audit dispute

We are at a juncture in society's evolution that there is a case and a counter-case for everyone. Simultaneously, we are at that juncture in the evolution of commerce and industry where complexities multiply by the day. Given this, it is not surprising to see the conflict in the central government and the Comptroller Auditor General of India over the impending audit of the past couple of years' accounts and records of the Krishna-Godavari basin gas block which, under a government contract, is being operated by Reliance Industries. 

The government, through its petroleum and natural gas ministry, had recently approved last few years' increase in expenditure to step up production of gas from the KG basin block on the condition that CAG will carry out the audit of recent years. Interpretation of the term 'audit' is now what is causing trouble. The company interprets the word to strictly mean only a financialaudit pertaining to the KG basin contract as also covered by the production sharing contract it signed with the government. 

The CAG, on the other hand, says it has the right to sift through any and all records, going beyond the accounts, pertaining to the KG basin activities since the revenues from the KG basis gas accrues to the government's revenue account. If not under this specific audit request the CAG still has the power to comprehensively audit KG basin records when it audits the petroleum ministry. 

The natural gas produced under the joint ventures and the new exploration policy is governed by the respective production sharing contracts (PSCs) between government and private producers, unlike that produced by ONGC and Oil India which can be governed by government's administrative order. RIL is a private producer and so the PSC becomes the driving force as far it is concerned. The government could have chosen any auditor, other than CAG, when it put the condition of audit to the KG basin block production-increase. 

It was not constitutionally bound to ask CAG to do this particular audit. But CAG is not supposed to be an auditor available for hire as per the terms and conditions of the hirer, in this case the government itself.  It is answerable to the Parliament of the country and not to the government or any of its ministries. Only if the PSCs had been through a legislation cleared by the Parliament would CAG have been obliged to carry out a specific audit. But this would again have been under the terms and conditions laid down in the legislation and surely one on the natural gas production would not have been restrictive as they are now. 

Under the Constitution of our country, the CAG is required to submit its audit reports on accounts of the central government to the president who is bound to lay them before each house of the parliament. RIL's contention is under the existing PSC the audit report of the KG basin block, can only go to the petroleum ministry and not to the Parliament directly. The company is not comfortable with an auditor who it perceives is technically not clued in with the many complexities of a project such as the KG basin. 

But CAG too can not be the auditor behind such an audit report if it finds the conditions to be onerous. The company and CAG are both right in their own ways. It is for the petroleum ministry and the government to find the most legally-tenable solution instead of passing the buck to the company or the CAG.

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