Saturday, April 20, 2013

Another CAG gaffe: Not explaining that cost over-runs don’t mean corruption….

The CAG first messed up the telecom industry by bringing out its bizarre report alleging that the exchequer lost Rs 1.76 lac crores (dubbed the biggest scam of independent India) because the government decided to dole out cheap spectrum. It failed to count the “downstream” benefits that the public received in the form of cheap mobile tariffs. Later, the CAG brought out an even more bizarre S-band report, equating much lower-value S-band spectrum with much higher-value 3G spectrum and alleging it to be a Rs 2 lac crore scam. It soon had to scoot with its tail between its legs. As if this much of “creative accounting” (or should we call it “notional” accounting, since the CAG loves the concept of notional!) wasn’t enough, the CAG has now started a new chapter. By bringing out “cost over-runs” in the Maharashtra irrigation department without explaining how that should be read and understood.

The CAG’s political partners, the BJP can now be expected to take this bizarre report to levels of utter absurdity. In the case of 2G, I cannot quite understand how a “notional loss” to the exchequer became a case of “mota maal” for the Congress as the BJP dubbed it. Is it the BJP’s point that the Congress pocketed so much money? Because if it indeed did, then the Congress should have no worries about returning to power in 2014, for power can always be “bought” with money, right?! The Congress did not make any such sum. And the BJP knows it. But these kinds of allegations are par for the course in politics. Truth be damned!

In much the same way, cost over-runs are being projected as corruption. The TOI calls it a “Rs 70000 crore irrigation scam”. If one were to analyze this number, much of it comes from cost over-runs, not from someone pocketing money. The DNA writes “In its audit report on state finances for the year ended March 31, 2012, submitted to the legislature on Thursday, the CAG said that in the 426 incomplete projects with an expenditure of Rs 43,270.01 crore pertaining to the water resource department and the five irrigation development corporations, the time overruns were up to 40 years. In respect of 242 out of 426 incomplete irrigation projects, the initial budgeted cost increased from Rs 7,215.03 crore to Rs 33,832.29 crore, resulting in significant cost overrun totaling Rs 26,617.26 crore,". To the lay public, that anyways believes that politicians are corrupt, this Rs 26,617 crores of cost over-runs represents corruption of that much amount. But is that the truth?

Cost over-runs are NEVER a case of corruption. They are ALWAYS a case of bad governance. To understand this, we have to understand the concept of “time value of money”. Essentially, the same item that costs Rs 100 today costs Rs 110 the next year and Rs 121 the year after that (assuming 10% inflation). This increase in costs is in fact the very definition of inflation. That is why economists always “deflate” “future value” by the inflation factor to arrive at “present value”. In the above example, the Rs 21 increase in costs over 2 years does not mean corruption, but merely the time value of money. When something gets pushed behind by as much as 20-40 years, inflation ensures that the actual figure is several times more than the original. However, this does not mean corruption.

One easy way to understand why this is not corruption is to look at the impact of time value of money on the opposite of costs – i.e income, or salaries. It’s a common refrain amongst people that “even a driver earns Rs 10000 a month today. Back then, an engineer used to get just Rs 2000”. Again, this does not mean that drivers have started “extorting” money. It only reflects that today’s Rs 10000 is perhaps worth no more than Rs 500 twenty years back. To the common man, this is extortion; just like cost over-runs are corruption.

Here’s another way to look at the issue. Rs 100 not spent in the year it was meant to be spent in means that that Rs 100 was either saved, or spent on something else more important. Either ways, that Rs 100 provided the bang that it was capable of in that year. Its not as if that Rs 100 was pocketed by some politician, and then a further Rs 121 had to be coughed up two years later. In fact, if that Rs 100 had just been parked in some decent security, it would have become Rs 121 in two years, and it would have made no difference to the cost. But it would still be a case of cost over-run and like I said earlier be called corruption.

So the Rs 70000 crore irrigation scam is hardly a scam of such magnitude. It may still be a scam, and in all probability, there is bound to be some corruption, but it’s nothing close to the amount publicized. Most of it reflects cost over-runs and not corruption. Likewise, the Rs 26000 crores that the CAG brought out is not corruption at all. A small fraction of it may well be though.

What the 20 or 40 year delay reflects however is poor governance. When a project is conceived to be executed in year 1, it should be completed in that year. If it is pushed behind because of administrative failure, then the benefits of that project are also pushed behind by that much time. Those benefits would always be worth much more (that’s why the project was conceived in the first place). For example, the delays in irrigation projects could have led to thousands of farmer suicides, or lacs of crores of “genuine loss” (just taunting the CAG here!) in agricultural food-grain production and export. The CAG as usual, has failed to go beyond its dirty nose, and estimate the end effect of delays. Just like it failed to estimate the end benefits of cheap 2G spectrum. The CAG’s credibility stands completely eroded because of such sub-moronic practices.

There is of course another reason why cost over-runs are shown as corruption and not as merely bad governance. As a bunch of people, we Indians love conspiracy theories….and the corruption angle has far more intrigue than some esoteric concept like bad governance! We also love big numbers….so showing what could potentially be a Rs 200 crore case of corruption (Raja in 2G) as a Rs 1.76 lac crore scam is what works in India!

The real truth is that an audit body like the CAG should do a lot more to inform the public. It should indeed bring out cases of cost and time over-runs but it should also explain what they mean. If the CAG has to do media briefings (and we know the present CAG loves to do that!), then it should be to educate the public how not to misread such numbers. But then again….why should the present CAG do that? He has his post-retirement life to take care of….

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