This article was written by Partner Sakya Singha Chaudhuri and Associate Partner Avijeet Lala. It has appeared on The Firm.

Public Private Partnership (PPP) has become the preferred model of infrastructure development in the country in the last few years. It allows the State to meet its responsibility of providing goods and services to the public at affordable rates and at the same time permits the private sector to dedicate its resource and expertise in nation building without having to compromise the profit motive. Ideally, this is a win-win model for all. However, one fault line which runs through this model is the issue of accountability. PPP project developers have shown overt reluctance in subjecting themselves to be audited by the government auditor, the Comptroller & Auditor General of India (CAG).

CAG had taken up the audit of a few PPP projects implemented by the National Highway Authority of India as also a few projects undertaken by State Governments and Railways. The courts have also in-principle upheld the CAG audit of PPP projects. Some notable decisions are Pathan Mohammed Suleman Rehmatkhan vs. State of Gujarat (2013) which concerned the International Financial Services City being developed in Gujarat, and the Association of Unified Tele Services Providers vs. Union of India (2014) which related to audit of telecom licensees. However, there has been a lack of clarity on the ambit, scope and nature of such audit.

The recent judgment of Delhi High Court on CAG audit of Delhi distribution companies is of significant importance in this respect as it has laid down clear contours of CAG audit in relation to PPP projects and lists out justiciable criterion for judging as to whether and when a private entity implementing a PPP project can be audited by CAG.

The High Court while holding that the powers of CAG enshrined under Article 149 of the Constitution extends to a private body or authority, laid down the following ground rules for its audit under section 20 of the CAG Act :

  • Accounts of only such body or authority become amenable to audit by CAG which are directed to be so audited by the President / Governor / Administrator
  • Exercise of power to direct audit by the President / Governor / Administrator has to be on the aid and advice of the Council of Ministers
  • Direction for audit has to be issued only in consultation with CAG
  • Extent and terms & conditions of audit have to be settled between the concerned government and the CAG by way of ‘proposal for audit’ which must also contain the reasons which make the proposed audit necessary in public interest
  • Audit can be initiated only if it is expedient in public interest and after giving opportunity to the entity proposed to be audited to represent against the ‘proposal for audit’ so agreed between the government and CAG

The court also ruled that the decision to direct audit under section 20 on the ground of public interest would be subject to judicial review. Actual public interest to be subserved by such audit must be established and is subject to judicial scrutiny. The court observed that if under the applicable law or agreement, the government is unable to take any action against the entity of which audit is sought to be directed, then the audit cannot be said to be expedient in public interest. In this context the court very significantly held that entities which operate under the supervision of sectoral regulators should not attract CAG audit because that would be a futile exercise and not be in public interest.

This decision has, thus, paved way for the CAG audit of PPP projects as long as such audit is conducted in accordance with the prerequisites and principles outlined by the court and subject to government making out a credible case on public interest.

In conclusion, a very interesting point that has been raised by the court and left open for consideration in an appropriate case is whether the words “any other authority or body” used in section 20 of the CAG Act is applicable to any entity or only to those entities that would even otherwise be covered under sections 14 to 16 of the CAG Act. The court has also left open the question on constitutional fitness of section 20 which vests CAG with the jurisdiction over accounts of private companies as the issue was not raised before the court.

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