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CAG audit of telecom cos will change paradigm of scrutiny

comment Updated: Jan 07, 2014 01:55 IST

The Delhi High Court’s ruling allowing the Comptroller and Auditor General (CAG) to examine the books of private telecom companies needs to be seen in the wider context of what in economics is broadly defined as a ‘public good.’

A public good or a service, by definition, is one that is available for everybody in society for consumption and utilisation.

Pure public goods have two distinct characteristics: these are ‘non-rivalrous’ and ‘non-rejectable’ in nature. In other words, it means that one person’s ‘consumption’ does not stop or exclude another person from ‘consuming’ it.

The neighbourhood park is a perfect example of such a pure public good. Some public goods, by characterisation, are non-rejectable. People cannot choose not to consume them even if they would prefer to. Defence services are ideal cases in point.

The problem, however, gets complex when the private and public goods cross over into each others’ boundaries, blurring traditional areas. This is particularly true in the case of services. Telecommunication is a classic illustration.

Until 1994, when India began to liberalise the telecom sector, the State was the sole provider of telecommunication services, and by extension, also enjoyed exclusive rights to the use of spectrum.

The arrival of private companies, however, marked the advent of a new framework: use of a public good (spectrum) by private companies for private benefits.

The Delhi High Court’s ruling, therefore, raises a more fundamental point in the rather fuzzy area of private-public-goods.

The origins of the case lie in the CAG’s now famous report of 2010, which had said that arbitrary allocation of telecom licences and radio waves in 2008 may have cost the exchequer a potential revenue loss of Rs 1.76 lakh crore.

The CAG’s mandate for audit of books of these private firms would probably go far beyond the presumptive loss of States’ earnings. It would, in all likelihood, look into how some of these companies, allegedly, made substantial gains, multiplying their valuations by selling shares at a high premium primarily on the basis of spectrum that they received at low prices.

This could set the stage for many such appraisals of books of accounts in other areas including highways and power distribution companies that are increasingly built on the public-private-partnership model.

The ruling, at the very least, will change the paradigm of scrutiny of public projects and services involving private companies. The executive may be well advised to define a new set of rules for checks and balances that are contemporary and based on sound principles of transparency.