AUDIT OF Public Private Partnership (PPP)

MODEL

Introduction

• Public Private Partnerships offer a unique and innovative method ofinvolving the private sector in the nation building activity and inaccelerating the delivery of public goods and services of high qualitythrough joint enterprises, without spreading the limited availableresources too thin.

• In order to sustain the high annual growth rate, Public PrivatePartnership (PPP) will be an attractive option in meeting thischallenge.

What are Public Private Partnerships?

United Nations defines public private partnerships as

• “innovative methods used by the public sector to contractwith the private sector who bring their capital and theirability to deliver projects on time and to budget, while thepublic sector retains the responsibility to provide theseservices to the public in a way that benefits the public anddelivers economic development and improvement in thequality of life”.

• Aim at financing, designing, implementing and operatingpublic sector facilities and services.

What Are the Types of PPPs?

• Broadly, PPPs could be categorized into Institutionalized PPPs and Contractual PPPs.

• Institutional PPPs are usually a joint venture (JV) between public and private sector stakeholders to carry out PPP projects by sharing the risks and to provide public services on a long term basis. The Noida Toll Bridge Company (NTBC) and the Bangalore International Airport Limited (BIAL) are examples of this kind.

• Contractual PPPs fall under the concession model, in which case afacility is given by the public sector unit concerned to a private sectorpartner which usually designs, constructs and operates the PPPproject for a given period of time.

MODELS OF PPP

• Build, Operate and Transfer (BOT)

• Lease, Operate and Transfer (LOT)

• Build Own, Operate (BOO)

• Build, Own, Operate and Transfer (BOOT)

• Design, Build, Finance and Operate (DBFO)

• Design, Build, Finance, Operate and Maintain (DBFOM)

• Operations Concession

• Joint Ventures

PPP models

Build,OperateandTransfer(BOT)

Under this category, the private partner is responsible todesign, build, operate (during the contracted period) andtransfer back the facility to the public sector. The privatesector partner is expected to bring the finance for theproject and take the responsibility to construct andmaintain it. The public sector will either pay a rent forusing the facility or allow it to collect revenue from theusers. The national highway projects contracted out byNHAI under PPP mode is an example.

Lease,OperateandTransfer(LOT)

As the name indicates, under this type of PPPs, a facility whichalready exists and is under operation, is entrusted to the privatesector partner for efficient operation, subject to the terms andconditions decided by mutual agreement. The contract will befor a given but sufficiently long period and the asset will betransferred back to the government at the end of the contract.Leasing a school building or a hospital to the private sector alongwith the staff and all facilities by entrusting the management andcontrol, subject to pre-determined conditions could come underthis category.

Lease,OperateandTransfer(LOT)

As the name indicates, under this type of PPPs, a facility whichalready exists and is under operation, is entrusted to the privatesector partner for efficient operation, subject to the terms andconditions decided by mutual agreement. The contract will be fora given but sufficiently long period and the asset will betransferred back to the government at the end of the contract.Leasing a school building or a hospital to the private sector alongwith the staff and all facilities by entrusting the management andcontrol, subject to pre-determined conditions could come underthis category.

Build Own,Operate(BOO)

or

Build,Own,OperateandTransfer(BOOT)

This is a variation of the BOT model, except that the ownershipof the newly built facility will rest with the private party duringthe period of contract. This will result in the transfer of most ofthe risks related to planning, design, construction andoperation of the project to the private partner. The publicsector partner will however contract to ‘purchase’ the goodsand services produced by the project on mutually agreed termsand conditions. In the latter case (BOOT), however, the facility/ project built under PPP will be transferred back to thegovernment department or agency at the end of the contractperiod, generally at the residual value and after the privatepartner recovers its investment and reasonable return agreedto as per the contract.

Design,Build,FinanceandOperate(DBFO)

or

Design,Build,Finance,OperateandMaintain

(DBFOM)

These are other variations of PPP and as the nomenclatureshighlight, the private party assumes the entire responsibilityfor the design, construct, finance, and operate or operate andmaintain the project for the period of concession. These arealso referred to as “Concessions”. The private participant tothe project will recover its investment and return oninvestments (ROI) through the concessions granted or throughannuity payments etc. It may be noted that most of theproject risks related to the design, financing and constructionwould stand transferred to the private partner. The publicsector may provide guarantees to financing agencies, help withthe acquisition of land and assist to obtain statutory andenvironmental clearances and approvals and also assure areasonable return as per established norms or industry practiceetc., throughout the period of concession.

OperationsConcession

This is a generic term, used to clarify the essential features of PPParrangements. The PPP agreements which authorize the privatepartner to recover its investments and expected returns oninvestments through concessions granted for a certain period,computed on the basis of demand projections and growth, are calledoperations concession (OC). In these cases, the public sector(department or agency) which is responsible to provide the service tothe public and collect revenue by way of user charges, toll, tariff etc.,assigns its legal or statutory right to the private partner in return forthe latter undertaking the responsibility to implement the project andmaintain the required quality. The concession may be by collectingtolls and user charges or by the public sector making periodicalpayments of annuities or monthly / quarterly/ half-yearly charges oncertain assumed basis, like shadow tolls etc.

Joint Ventures

In a PPP arrangement commonly followed in our country ( such as forairport development), the private sector body is encouraged to form ajoint venture company (JVC) along with the participating public sectoragency with the latter holding only minority shares. The private sectorbody will be responsible for the design, construction and management ofthe operations targeted for the PPP and will also bring in most of theinvestment requirements. The public sector partner’s contribution willbe by way of fixed assets at a pre-determined value, whether it is land,buildings or facilities and /or it may contribute to the shareholdingcapital. It may also provide assurances and guarantees required by theprivate partner to raise funds and to ensure smooth construction andoperation. The public service for which the joint venture is establishedwill be provided by the entity on certain pre-set conditions and subject tothe required quality parameters and specifications. Examples areinternational airports (Hyderabad and Bangalore), ports etc.

Objectives of Public Private Partnership

• Encourage private sector involvement in public infrastructure and related services where value for money for the government could be clearly demonstrated.

• Encourage innovation in the provision of infrastructure and related service delivery.

• Encourage rigorous governance over the selection of projects and competition for the award of contracts.

• Clearly articulate accountability for outcomes.

REQUIREMENT OF PPP PROJECTS

Private sector participation in PPP projects requires a framework that can enable the private sector to

• secure a reasonable return at manageable risk, • assure the user of adequate service quality at an

affordable cost, • facilitate the Government in procuring value for public

money.

These conditions are more difficult to fulfill than is commonly realized. Because of

• Multiple stakeholders pursuing conflicting interests,• Risk mitigation arrangements are usually complex. • Inadequate preparatory work in relation to the framework for PPP

projects,• Identification of projects, • Selection of private participants, • Preparation of strategic plan and project reports, • Drafting of contracts and other associated activities require

excessive transaction costs,• Years of delay in project implementation, • Inadequate quality, • large contingent liabilities to the Government.

Objectives of the PPP Audit

• The basic objective of public audit is to ‘provide unbiased, objective assessment of whether public resources are responsibly and effectively managed to achieve the intended results.

• Auditors, through their evaluation, (should) help the government organizations achieve accountability and integrity, improve operations, and instill confidence among citizens and stakeholders.

• Public auditors’ role supports the governance responsibilities of oversight, insight, and foresight.

• Oversight addresses whether government entities are doing what they are supposed to do and serves to detect and deter public corruption.

• Insight assists decision makers by providing an independent assessment of government programmes, policies, operations and results.

• Foresight identifies trends and emerging challenges

• The audit of PPP projects differ from the conventional audit of public entities in several ways.

• For instance, the very concept of PPP arrangements assumes and accepts, ab initio, the conflicting and fundamentally differing approaches of the two partners to the arrangement, namely the responsibility of the public sector partner to provide goods and services to the public at reasonable costs against the motive of the business partners to maximize profits .

• The former holds the authority and regulatory skill as against the management and technical skills of the latter.

• Even within the private sector partner different participating members may have divergent and conflicting objectives. For example the sponsors /financiers may be interested in fixed cost construction contacts whereas the latter may prefer greater flexibility in this regard.

• While vendors may like to maximize revenue the financiers / construction contractors may want to minimize such costs.

• The public auditor must remember this and appreciate that inspite of seemingly conflicting objectives the PPP is a fusion of the diverging talents and skills and that the common objective of the partnership must be to improve the value for money by combining the capabilities of both.

• Delivery the expected public facility within the desired cost, timeframe and specifications is the surest guarantee that all the involved parties stand to gain. ‘The PPP policy provides a consistent framework that enables the public and the private sectors to work together to improve public services delivery through private sector provision of public infrastructure and selected services. Value for money is the driver for adopting the PPP approach rather than capital scarcity or balance sheet requirements’ It must also be remembered that the audit should focus sufficiently well on the achievement of the contracted end products; it should not stand in the way of innovations injected into the partnerships which is one of the keys to the success of the enterprise.

• The main objective of the audit of PPP projects is to provide a reasonable assurance to all stakeholders about the wisdom, faithfulness, integrity, economy, efficiency and effectiveness of the PPP arrangement and to ensure that the infusion of the private sector agency into the project has resulted in improving the value for money for the government.

• The aim is to cover all aspects of the project contracting and execution, but without impacting the freedom and innovations built into the arrangement.

• Further, unlike in the case of audit of government departments and entities, the relevance of regularity and compliance audit will be limited since the focus of PPP audit will be on contract audit, validity of total project cost, economy and efficiency of operations of the entity as seen from the public participant’s point of view and most of all on achieving the objectives (results) of the partnership rather than on how the private sector partner secures goods and services for the project.

• These subtle points have to be borne in mind while planning and conducting the PPP audit.

• A question uppermost in the mind of public auditors when they plan the audit of PPPs would be the type of documents to be subjected for the scrutiny. Since the majority stakeholder in terms of financing, construction, operation and maintenance of the project would be the private sector partner, (and since these and associated risks would stand transferred to it), the question will have significant relevance. This is also closely related to the issue of “audit evidence”, which refers to data, information and documents relied upon to arrive at audit findings and conclusions

Public auditors should subject the following data and documents relating to the project for scrutiny

i) Documents regarding the project formulation, appraisal and approval, available with thenodal ministry, promoting agency.

• The most important checks to be exercised in a PPP project will include thescrutiny of the initial records in the government agency concerned so as toensure that the decision to adapt the PPP route was fair and reasonable and wastaken after considering all alternatives.

• The feasibility of the project including demand assessments and projections,the comparative benefit of executing the project departmentally or outrightcontracting (wherever relevant feasible), detailed specifications arising fromthe Detailed Project Report, total project cost and operating costs, financingalternatives, financial analysis of funding options, appraisal of the projectproposal by empowered ministries, method of determining the concession andviability gap funding, if any, payment of annuity or revenue sharingarrangements etc. would be crucial for audit scrutiny.

(ii) Data and documents relating to the contract documents and concessionaward originated by and available with the public sector partner.

These include all documents relating to the tendering procedures,award of tenders, tender conditions and processes, engagement ofIndependent Engineers and Auditors to oversee the constructionand operation management, asset transfers, valuation of assets andall related information, which would provide adequate informationregarding the execution of the project.

iii) Data and documents furnished to the public sector partner by theprivate contractor and available with the former for verification.

The third type of documents required to be scrutinized will bethose generated by the private sector partner and submitted to thepublic sector partner, usually as mandated in the contracts. Thesewill be the documents related to the financial closure, design andconstruction details, specifications and variations, if any, andrequests for completion of pre- requisites (condition precedents)to undertake the work. Another important set of documents to bechecked would be the returns relating to the volume of demand /traffic generation against projections, revenue realization, escrowaccount details, and periodical accounts statements etc. requiredto be furnished by the operating partner, after completion of theproject.

iv) Reports submitted by the Independent Engineers and Independent Auditors

• These documents will give a clear insight into the construction, operationand maintenance and the commercial aspects thereof of the project.Public auditors should verify them carefully to ascertain the complianceby the private sector partner with specified norms and specificationsrelating to the execution of the contracts.

• All documents referred to at sl.no. (i) & (ii) will be readily available withthe concerned Government department / public authority. As mentionedabove documents referred to at sl.no. (iii) & (iv) can also be substantiallyaccessed through the Government entity.

Accessing the Documents and Records of the Private Partner by Auditors

• A question which requires to be addressed in this regard is whether the auditors are required to access the documents of the private partner for the purpose of their audit. It could be assumed that the private sector partners are likely to resist the move on the plea of commercial confidentiality.

• In the normal course, all documents and data required by the public auditors are likely to be available with the government department and the public sector agency which promoted the PPP project. However, in case any additional information is essential for the purpose of verifying facts and for audit evidence, the public auditors may take recourse to Paragraph 169 of the CAG’s Regulations on Audit and Accounts 2007

MANDATE OF AUDIT AND ACCESSIBILTY TO RECORDS• Public Private Partnerships may be formed by different government

agencies and bodies usually to promote and develop infrastructure facilitiesby inviting private sector participation. Some examples are given below:

•

a) Government departments directly or in conjunction with a PSU,investing resources in a PPP project and authorizing the private sectorpartner / JVC to build the project and to provide public services on costrecovery basis while holding only minority shares in the joint venturesformed for the purpose;

•

• b)Public sector undertakings (PSUs) contracting with private entrepreneurs for development of infrastructure facilities by providing concessions / annuity and / or viability gap funding;

c) Autonomous bodies substantially funded by the Governmentjoining hands with private sector entities to develop infrastructureprojects, with the former investing in (the assets of) the project.

d) Any other combination of the above which has significant investments of a public agency and shifts the responsibility to provide public services to a private entity in the PPP mode

• Under the Comptroller & Auditor General’s (DPC) Act, 1971, and as incorporated in the Regulations of Audit and Accounts (2007), the audit mandate of the CAG of India will extend to all types of (promoting) public institutions, namely, government departments (as the sole auditor of the accounts of the Union and States), PSUs (in terms of the Companies Act), and to bodies and authorities etc. (as provided under the DPC Act). The DPC Act however does not directly contemplate the audit of PPP projects or joint ventures with only minority participation by the government agency since these are recent innovations under the development strategy

• Under the circumstances, the public auditor shall have to confine his audit to the data, records and documents in the possession of the government department, PSU or autonomous body which is the public sector partner of the PPP arrangement, and rely on it for additional information, as is required to fulfill his tasks.

International Auditing Standards and Guidelines for the Audit of PPP Projects• The need to examine the status of internal controls in the public

bodies that enter into PPPs so as to provide a reasonable confidence that public resources would be protected and institutional objectives would be met.

• Verification of the strategic plan setting out the objectives for the PPP and the possible alternatives to balance conflicting priorities.

• Whether advisers were appointed after adequate scrutiny and evaluation and objectively, and whether their compensation is linked to performance.

• Use of a portfolio of performance measures to evaluate the partnership, both financial and qualitative, including customer satisfaction levels, cash flow pattern, and other norms.

• The need to carry out audit tests to evaluate systems and procedures and management of performance indicators.

• Whether a range of vehicles have been considered and a structure which best suits the public interests has been selected after reviewing the actual cash flow and sustainability through adequate Return on Investment (ROI).

• Whether third party reviews were undertaken before finalizing the partnerships, whether cost benefit analysis was carried out carefully, and contractual payments, if any, linked to milestones.

System to receive regular information and returns on partner’sperformance and obligations.

•

Basically, the INTOSAI guidelines list out the key risks facing the Governments

and the SAIs in developing / auditing PPP projects, and these include:

State’s Risks

•Lack of clarity about partnership objectives;

•Inadequate definition of business model of the partnership

•Risks associated with negotiating an appropriate partnership;

•Risks to the State’s interests as a minority shareholder;

•Risk associated with monitoring of the State’s interests in the partnerships,

and;

•State’s exposure in the event of difficulties

• Supreme Audit Institutions’ Risks

• SAI’s risks would include;

• Insufficient domain knowledge

• Lack of expertise required to examine the process and the results;

• Failure to identifying worthwhile lessons, and;

• Absence of following up the audit work

Auditing Process and Criteria for PPP Audit

• (1) Process flow of Public Private Partnership Arrangements

• (2) Audit Methodology

• (3) Audit of Public Private Partnership Projects:

• (4) Audit of Concessions and Concession Period

• (5) Audit of Risk Allocation

• (6) Audit of Financing Risks

• (7) Audit of Viability Gap Funding (VGF)

• (8) Audit of Tariff / Toll / User charges

(9) Audit of Total Project Cost

(10) Audit of Bidding and Evaluation

(11) Audit of Construction of the Project

(12) Audit of Monitoring of the Project Construction Activities

(13) Audit of Commercial Development

(14) Audit of Operation, Maintenance & Development and the Collection of Revenue

(15) Auditing Public Private Partnerships for Value for Money Evaluation

(16) Audit of Valuation of Assets

Auditing Process and Criteria for PPP Audit

(1) Process flow of Public Private Partnership Arrangements

It is essential for public auditors to have a clear idea of the various stages through which a PPP project goes through

A chart indicating the process of the audit of PPP projects

Collection of data & information

Setting Audit Objectives

Audit Planning

Research and study by the Audit Team

Entry Conference

Audit of all PPP contracts with focus on the value of Concession,

Concession Period and various Financial aspects including. VGF,

Tariff , Toll, State Support, Risk sharing etc.

Audit of Construction phase (incl. monitoring system)

Engagement of Experts/Arrangements for Quality check

Audit of O&M Arrangements, Revenue Generation & Sharing

Tariff/Toll, Customer Satisfaction

Exit Conference

Team Selection & Deployment

Audit of documents relating to Project Formulation & approval

Findings & Conclusions & Reporting

Draft Audit Report Process &

Approval

Value for Money &

Safeguarding Public

Interest

Management letters/Draft Audit Report to

Department/Entity

(2) Audit Methodology

Audit of PPP projects requires a combination of skills and expertise; the audit methodology has also to be innovative.

(3) Audit of Public Private Partnership Projects:

A logical approach to PPP audit would be to cover the various aspects of the partnership arrangement sequentially as they occur in actual practice. . In this regard, the first stage will be to analyze the project formulation and approval process. In the following paragraphs, detailed criteria / checklists for the audit of each important stage of PPP projects have been provided.

(4) Audit of Concessions and Concession Period

One of the most important considerations during the audit of PPP projects is the review of the concession granted to the concessionaire in terms of the quantum and the period of the concession. Concession amounts to the delegation and transfer of the governmental authority for recovery of user charges / tariff to the private participant possibly under monopolistic conditions, with sharing of risks and contingent liabilities by the public sector participant.

(5) Audit of Risk AllocationA major characteristic of the PPP arrangement is the balanced and fair allocation of risks between the partners. The underlying principle of risk allocation is that they are allocated to the parties that are best suited to manage them

(6) Audit of Financing RisksAn important aspect to be verified during the audit is the transfer of financial risk. Public auditors must assess whether the entire risk was transferred to the private participant, and what was retained by the public sector partner

(7) Audit of Viability Gap Funding (VGF)

• Grants may be payable for the project either as viability gap funding (VGF) or as annuity during the construction and / or operation of the project. It is essential for the auditors to assess carefully the actual funding gap by analyzing the total capital cost, revenue generation based on projected demand, tariff / toll structure and capping (if imposed), rate of return and cash flow. The DPR will include the working of the total capital cost and the extent of shortage in financing the capital which may not be covered by the expected returns.

• The Central / State Governments provide viability gap funding up to 40 percent of the project cost in deserving cases. Under the “Financial Support to Public Private Partnerships in Infrastructure” (FSPPPI) scheme, infrastructure projects which are economically justified, but fall short of financial viability due to long gestation period, inability to raise the user charges to commercial levels etc. are granted financial support of up to 20% of the capital costs. Additionally, the sponsoring ministry or the State Government concerned could give grants of up to another 20% of the total capital cost. These are however subject to the condition that the private participant is selected on the basis of competitive bidding and would hold at least 51% of the shareholding of the PPP unit. Further, the project agreements to be signed must adhere to the “best practices” that would secure “value for public money” and safeguard user interests.

(8) Audit of Tariff / Toll / User charges

• The user charges for the facility created under the PPP arrangement may be subject to regulations by independent authorities or may be notified under the relevant statute by the state authorities concerned.

• For instance, the toll charges to be levied for a national highway may be notified by the Ministry of Road Transport & Highways or the port charges may be fixed by the Tariff Authority for Major Ports (TAMP). In the case of electricity, the State Electricity Regulatory Commission (SERC) is the empowered agency to fix the tariff.

• These features leave an element of uncertainty regarding the tariff or user charges to be levied in the future for the infrastructure facilities to be created under the PPP projects; whereas the Concession Agreements usually provide for the rate of return on investments on the basis of certain norms of tariff or formulae.

• Auditors have to carefully look for any possible ambiguities and pitfalls in the fixation of tariffs and user charges which could be recovered by the private partners as per the terms of the contracts and for this purpose, they should undertake close scrutiny of the contract conditions.

Audit of regulatory issues in a PPP project will be conducted in accordance with ‘Guidelines on Performance Audit of Regulatory Bodies’. However, the following audit points may be kept in view in the audit of tariff / user charges:

• What is the formula provided in the Concession Agreement to determine the tariff / fees / user charges? Is it reasonable and in line with the industry practice?

• Who is authorized under the Agreement to determine and levy the user charge / fees / tariff? Also, is there a cap on the user charge / tariff to be levied by the private partner?

• Are the user charge / tariff / toll (provided in the Agreement) subject to regulations by an independent authority? Will there be significant impact on the user charge / tariff provided in the Agreement in case the independent authority fixes the tariff common to (and applicable to) all providers of similar service? Does the agreement take into account such eventualities?

(9) Audit of Total Project Cost

• Total Project Cost (TPC) is a critical input and TPC determines the cost of construction, operation and management of the project, debt-equity mix, influences the user charge, viability of the project, financing pattern, financial rate of return (FRR) and economic rate of return (ERR).

• TPC could also be adversely impacted by concessionaire’s risk perceptions in terms of attitude of the government authorities and degree of absolutism in the terms and conditions incorporated in the bid documents as to those aspects which can be precisely predicted and measured upfront.

• It is therefore very important for the public auditors to closely examine the TPC to see that it includes only essential items, its composition conforms to accepted accounting standards, and is not ‘padded up’. Usually, the technical consultants for the project would have arrived at the TPC, which would be included in the DPR

• The partners to the project are expected to have carried out their due diligence to ensure the accuracy and correctness of the TPC, but the private participants may have some inclination to over-engineer the project, partly due to their apprehensions of safety and security requirements of the project.

• Moreover, since the ROI from the project and the user charge / tariff / toll will depend on the quantum of the TPC, a higher cost of construction might benefit the private partner at the cost of the user community.

• Since one of the compelling reasons for adopting the PPP route is the superior technical and management skills of the private sector, this should be demonstrated by it through innovative approaches and tight control of the TPC (and operational costs). Public auditors are well-versant with the audit criteria to analyze capital expenditures and have sufficient expertise to review TPC. In order to help them in this task, however, some guidelines are given below.

• Does the Agreement provide for verification of TPC by the public sector partner on its own or through its representatives? Has it satisfied itself of the accuracy and correctness of the TPC on its own or through the Independent Engineer / Auditor?

• What is the definition of the TPC in the Agreement? What are the components of the TPC included in the financial package? Are they clearly defined? Are they directly related to the construction of the project, appropriate, and reasonable?

• Has the lead financing agency verified and recommended the adoption of the TPC and agreed to finance the same?

• Was the construction planned to be undertaken in stages and modules? Does the TPC represent the cost of only essential items and modules?

•

(10) Audit of Bidding and Evaluation

• A major task to be carried out during the audit of PPP projects is the critical evaluation of the process followed by the government agency to select the private participant. Public auditors must verify the procedures followed in this regard from the beginning itself to provide assurance to stake holders about the integrity and transparency of the selection process. The basic postulate of PPP is that it should secure value for public money by ensuring transparency in the procedures followed and by ensuring adequate competition.

• Selection of the private participants by the government agency promoting the PPP Project may involve the following stages:

• Request for Qualification (RFQ)

• The RFP documents are invariably issued only to bidders who have requested for qualification and met all the parameters of RFQ.

• Request for proposals (RFP)

(11) Audit of Construction of the Project

• Public auditors are conversant with the audit of construction of projects since PWD audit has been a mainstay of conventional auditing. In PPPs, since the construction risk is transferred to the private participant who is usually responsible for the design, construction, specification and quality thereof, the emphasis of the audit scrutiny may not of that of compliance, but that of the end product .

•

• The concession Agreements would provide for the appointment of “Independent Engineers” (IE) and “Independent Auditors” (IA) by the public sector partners to enable them to monitor the project activities, and to act on their behalf to accord sanctions and to coordinate the construction, technical and commercial activities. The IE is responsible to ensure the timely completion of the project by watching the milestones, quality of construction and adherence to the standards and specifications of the project by the implementing partner.

• The following criteria may be applied in the audit of construction of PPP projects.

• Did the public partner fulfill all conditions precedent which as per concession agreement were necessary for the private partner to start the construction on time?

• If there was any delay in the start up of construction, what were the attributed reasons? If there was delay on account of the private partner, was the penalty clause in the Agreement invoked?

• Were the Independent Engineer /Auditor appointed on time? Were clear terms and directions issued to them for efficient monitoring of the construction activities? Is the monitoring system in practice satisfactory?

• Were the preliminary/ pre-construction lists of the site conditions carried out in the presence of the Independent Engineer?

• Were milestones for construction (stage-wise) laid down in the Agreement achieved? If there were delays, did the Independent Engineer bring them to notice in time?

•

• Was penalty as per the Agreement levied on the private partner, if there were delays?

• Did the Independent Engineer certify at every stage as to the quality of construction and adherence to specifications?

• Was there any ‘change of scope’ in the construction effected at the instance of either partner? What are the implications of such ‘change of scope’ in terms of time and capex?

• If the TPC has increased/decreased as a result of the ‘change of scope’, was necessary and consequential adjustments carried out in the TPC/VGF/Financing arrangement?

• Was the ‘change of scope’ due to faulty planning and avoidable? Has responsibility been fixed on the consultants (of DPR) or others concerned for the omission?

• In case the private partner has made innovations in design, construction and management with substantial savings in project cost or project schedule, analyze the same and impact on TPC and revenue.

• Was the project completed on schedule? If there was delay, analyze impact on cost, revenue and public interest.

• Was any penalty levied for the delay as per the provisions in the Agreement?

• Did the Independent Engineer carry out the required quality tests before giving the ‘completion certificate’? Were the test results satisfactory?

• If outside experts have been engaged to test the quality and specifications of the project construction, analyze their findings and convey the same to the partners to the PPP arrangement for their responses and comments.

(12) Audit of Monitoring of the Project Construction Activities

• The IA will verify all financing arrangements on behalf of the public sector partner, certify the expenditures where required, utilization of the VGF / annuity, and compliance of the private partner with the terms and conditions of the Agreements. He will also ensure that the items of expenditures reported are proper and reasonable, and admissible in terms of the contracts, and not ‘loaded’. Further, during the O&M stage, the IA will have to certify the legality and reasonableness of revenue expenditures, verify the revenue, and audit the escrow account and report to the public sector partner to the contract.

• During the audit of the PPP, the public auditors must check the process adopted for the appointment of the IE and IA, and ensure that the required procedures have been complied with. For instance, the Secretariat of the Committee on Infrastructure, Planning Commission maintains separate panels of qualified firms for engagement as IE and IA and the PPPs are required to source these experts from them. It must also be ensured that the selected representatives have the requisite expertise and qualifications.

(13) Audit of Commercial Development

• Advertising through hoardings on the highways or at the site of the project (ports, air ports etc.), land development (in the vacant lands allotted for the project or in their vicinity), gas and service stations, duty-free shops, wayside restaurants and recreation Centre's etc.

• The Concession Agreements usually allow the JVC or the private participant to exploit these commercial openings and raise revenue which must go to abate the TPC and to reduce the burden of toll / user charges on the consumers. In public audit, care must be taken to list out the commercial facilities granted to the consortium and to examine the cost incurred for such developments vis-à-vis their earning capacity and comment on any hidden benefits to the partners concerned.

(14) Audit of Operation, Maintenance & Development and the Collection of Revenue

• In PPP projects, the Operation, Maintenance and Development (OMD) risk is transferred to the private partner since it would be best suited to manage the task efficiently. The Model Concession Agreement (MCA) includes the terms and conditions for the OMD which are binding on the concessionaire.

• There could also be yet another type of PPP where the concessionaire is given an OMD contract to maintain and operate an already built or existing infrastructure facility (highways constructed by the NHAI / State Government, or an existing air port constructed by the Air Port Authority of India) and collect toll or user charge etc. to meet the cost.

• Private sector participation in the operation and maintenance of infrastructure ‘would require a framework that enables the private operators to secure a reasonable return at manageable levels of risk, assure the user of adequate service quality at an affordable cost, and facilitate the government in procuring value for public money’

• The selection of the concessionaire has to be based on competitive bidding, with all project parameters clearly stated upfront. The usual criteria for such concessions may be followed in the public audit, including the following:

• Is the bidding process (if the PPP arrangement is for the O&M) transparent and as per established practice? Was the bidder who offered the maximum concession fee selected for the contract? Has the successful bidder provided the required performance security / guarantee in acceptable form?

• In case the contract is awarded on upfront payment basis, was the reserve price fixed correctly and by including reliable data on traffic demands, likely increases in demand, associated income, cash flow analysis, etc.? Were these verified by independent consultants? Was the NPV of the realizable revenue worked out correctly?

• Is the concession fee subject to annual increase in proportion with the increasing traffic?

• Was action taken to notify the toll / user charge promptly and without delay? If delays occurred with impact on revenue, analyze the reasons and make appropriate comments in the audit findings.

• Are toll plazas / toll booths constructed at requisite entry and exit points to avoid leakage of revenue?

• Have electronic and computerized vehicle counting machines (VCM) been installed at the toll plazas or at other places to monitor the traffic?

• Is the categorization of vehicles and toll rates fixed correctly and as per rules? Are weigh bridges / platforms in working condition and put to effective use?

• What is the formula for indexing the user charges in line with inflation? Is it appropriate

(15) Auditing Public Private Partnerships for Value for Money Evaluation

• Public auditors should look at the PPP projects not only from the angle of safeguarding the interests of the public sector partners, but also from the user’s viewpoint;

• besides, they must enquire whether the contract ensures profit sharing on equitable basis and whether there is a system to obtain regular information on the performance and in the discharge of the partner’s obligations to the public participant, as also to the users at large.

• At the end of the day, what is of utmost concern is the customer satisfaction level; the public auditors’ enquiries must be tuned to extract information on this crucial issue.

• The risk analysis should also include whether the public authority has planned to secure the best possible advice and analysis for the construction of viable solutions in the event of difficulties such as dismal performance of the partner, inability to finance the operations at some point etc., so as to avoid disruption of services to the public.

• The following questions, among others discussed elsewhere, would apply in a VFM examination of the public private partnerships.

• Has the PPP arrangement resulted in creating an efficient and economical facility/ asset for use by the public without forcing the government to commit heavy investments and avoidable borrowings?

• Has the PPP brought in technological excellence and innovation in construction and management which would reduce the cost, increase economy and efficiency and lead to better customer satisfaction?

• On the other hand, has it only led to a private sector monopoly in place of the public sector, without tangible benefits and visible advantages, to the detriment of the public?

• Has it placed a heavy future burden on the public sector by way of contingent liabilities and guarantees to be discharged at a future time? Has the agency/ government assessed and made provisions to meet the same?

• Would it have been feasible and affordable to create a project of similar quality and magnitude at a lesser cost by deploying state funds instead of depending on private sector funding and facilities? Was such an alternative feasible and affordable?

(16) Audit of Valuation of Assets

• As part of their scrutiny, auditors must verify the valuation of the assets and infrastructure facilities which exist(ed) at the time of handing over the site / facilities to the successful bidder for the construction of the project and operation and maintenance.

• An important aspect to be verified in this regard will relate to the extent and value of the land made available for the project.

• Land usually forms a major part of the asset value, especially in urban areas where the land cost is not only very high, but will keep increasing over time. It is therefore important that for the public auditors to verify that the land acquired and handed over to the private partner is not more than what is really essential for the project.

• The value of the land handed over and brought into account is to be verified carefully since in many PPP arrangements, the value of the land and facilities transferred would become the government’s share capital in the JVC to be formed. The tendency to acquire large stretches of land in the name of the project and to use it for unassociated or stand-alone commercial development by the private partner needs to be commented in audit.

Flow Chart for Establishment of a Public Private Partnership Projects (PPPP)

Strategic Plan

Feasibility

Study

In principle approval

of PPPAC

Detailed Project Report / MCA / Shareholders’

Agreement / State Support Agreement / OMD

Agreement

Request for Approval

Approval of PPPAC

Bid Document

Shortlist of Bidders

RFQ/ Bidding Process

Identify Private Participants

Financial Closure Independent Engineers

Independent Auditor

Project

Construction

Operation

Maintenance &

Development

Monitoring of

Service to

customersTermination at end of

concession period

Concession Agreement/Share holders Agreement

ROI,

Revenue Sharing etc.

REPORTING AUDIT FINDINGS AND RECOMMENDATIONS• The major findings arising from the audit should be, as is the usual

practice, presented at the Exit Conference. Care must be taken to support all audit findings with sufficient and relevant audit evidence. The findings must be carefully drafted to bring out full facts, evidence supporting the findings and conclusions and the arguments leading to the findings so that the public sector partner could provide its response without seeking further clarifications

• Further, the SAI’s audit examinations should not focus on narrow considerations on what went wrong; but must disseminate the good practices noted during the audit scrutiny for the information of all concerned.

• Besides, multiple audits and evaluations should not give cause to discouraging the private partner. It is also important that the auditors do not focus only on technical issues at the risk of neglecting the social and economical effects of PPPs; they should also verify whether the project has met with those objectives

• in letter and spirit. Adequate opportunities must be provided to the partners of the PPP to respond to the audit findings, and their responses should find place in the reports in case those observations are retained in the reports.

• It will be a good approach to dovetail the audit findings in line with the established objectives of the audit.

• The fact that PPP aims at innovations through technological and managerial excellence should be kept in view.

• The audit observations should not be worded in a manner as would discourage innovations and risk takings. Since the main feature of PPP is the sharing of risks in a balanced way, public auditors should not give the impression that they are against reasonable and calculated risk taking by the public sector partner.

• Though there may be no occasion to comment on the PPP policy as such, the impact of the policy on the project development and management and on the user community may be highlighted in appropriate cases, with supporting evidence.

Audit Recommendations

• Substantial care must be taken in framing the audit recommendations to be included in PPP audit reports. Recommendations, if included in the report, should be specific and precise and to the point.

• The effort should be to report on the lessons learnt rather than fault findings. The fact is that there is very little scope for amendments to the contract once they are signed and are in operation, even if the auditors point out omissions and deficiencies, unless they are patent violations to the terms of the agreements or erroneous interpretations or management failures.

• Nevertheless, the audit findings will bring out the deficiencies for future guidance as “lessons learnt”, apart from helping to make the officials who processed the agreements accountable.

• They may also be helpful for the public sector partners to negotiate for better terms in implementation of the agreements depending on the nature of such findings. Hence, sufficient care must be taken in drafting the recommendations for inclusion in the audit reports; they should not be routine and must help the government department / public sector agency concerned to implement the project in the best public interest

• It will be advisable to carry out a review of the audit findings and recommendations by comparing with the audit objectives established at the beginning as part of the audit plans, to ensure that these have been adequately met. Peer reviews of the draft reports would lend credibility to the reports.

Coverage of the aspects of the project .

o The data, records, analysis and the decision process of the government department / public sector agency to prefer the PPP route to execute the project instead of undertaking it directly.

oDocuments and files leading to the formulation, appraisal and approval of the project.

o The process of identifying the private sector partner, requests for proposals, bidding and tendering process of the contract with due diligence to fairness, transparency and objectivity.

o In-depth analysis of the project documents including the shareholders’ agreement, concession agreement, operation and maintenance agreement etc. , total project cost, financing arrangements (including cash flow, ROI / ERR / DCF), justification for the viability gap funding, contract period etc.

oAccounts documents, bills, records and schedules relating to the construction, and oversight arrangements.

oValue for money considerations and safeguarding the public interest.

oOperation and maintenance of the assets, tariff / toll / user-charges collection and accounting and revenue sharing arrangements, escrow accounts.

oQuality and standards of the service, customer protection, dispute resolutionand asset transfer arrangements etc.

o End of the project operations including valuation of residual assets, decommissioning, dispute resolution mechanism, etc.

1

DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH

Public Private Partnership for setting up ‘The Centre for Genomic Application’ by

Institute of Genomics and Integrative Biology

Institute of Genomics and Integrative Biology (IGIB) signed an agreement with

the Institute of Molecular Medicine (IMM), a private partner for setting up ‘The

Centre for Genomic Application’ (TCGA). IGIB did not follow due diligence

before selecting the private partner. The agreement with IMM did not have

adequate provisions for safeguarding interests of Government. TCGA could not

achieve self-sufficiency, as envisaged. The pricing policy for its services was

uneconomical. The financial practices of TCGA leaned in favour of the private

partner, as apparent from undercharging of services rendered, booking of

expenditure unrelated to TCGA in its accounts and not charging the partner for

use of equipment belonging to IGIB. The monitoring mechanism established for

TCGA was lax. Advisory Council of TCGA did not issue the policy framework

and guidelines for operation of TCGA by the private partner. The objective of

TCGA becoming a national research facility as a shared resource for use by

universities, industries and laboratory groups remained largely unachieved. The

activities of TCGA were suspended in August 2011.

1. Introduction

The Institute of Genomics and Integrative Biology, New Delhi (IGIB), a constituent

laboratory of Council of Scientific and Industrial Research (CSIR), New Delhi under the

Department of Scientific and Industrial Research (DSIR) focuses on biological research

and development especially in the areas like genomics1and proteomics2.

The Institute entered into a Public-Private Partnership (PPP) agreement in April 2003,

with a private company, Chatterjee Management Services (CMS), to establish The Centre

for Genomic Application (TCGA). Later (July 2004), at the request of CMS, the institute

replaced said agreement by entering into another agreement with Institute of Molecular

Medicine (IMM), a sister company of CMS, on the same terms and conditions.

The stated objectives of this facility were to:

1Genomics is a discipline in genetics concerning the study of the genomes of organisms. 2Proteomics is the large-scale study of proteins, particularly their structures and functions.

2

Create infrastructure at par with the best international research facilities to provide

support to R&D institutions, Universities (small laboratories) and industry to promote

easily affordable genome & proteome research in the country;

Develop and operate the facility as a national facility and as a shared resource for

use by universities, industry and laboratory groups;

Provide incubation laboratory facilities to start up entrepreneurs in biological

sciences with minimum capital investment thereby enabling development and transfer

of technologies through R&D partnership with industry, universities and CSIR/IGIB;

Develop human resource and provide hands on training to scientists/technical

personnel in genome & proteome research;

Operate TCGA on charge for service basis.

TCGA began its operations from 11 May 2004 and after operating for about seven years,

its activities were temporarily suspended on 31 August 2011 citing administrative

reasons. The PPP arrangement of TCGA is depicted as below:

The audit of this facility was conducted with a view to evaluate and assess the

performance of the PPP arrangement of TCGA including process of selection of partner,

financial arrangements, activities and extent to which its objectives as envisaged were

The Public Private Partnership arrangement

Council of Scientific and

Industrial Research

(CSIR)

(Public Partner) (Private Partner)

Institute of Genomics

and Integrative Biology

(IGIB)

Chatterjee

Management

Services (CMS)

Institute of Molecular

Medicine (IMM (Section 25 Company of

Chatterjee Group)

Agreement in April 2003

Same agreement was done with IMM in July 2004

The Centre for Genomic Application

(TCGA)

----- Agreement with CMS was replaced with second agreement with IMM

3

fulfilled for 2004-05 to 2011-12. Audit examined records relating to TCGA maintained

by IGIB as well as the private partner IMM.

Chronology of events leading to setting up of TCGA

Date Event

December 2000 The Chatterjee Group expressed its interest to the Minister of

Science & Technology in setting up a world class research

facility in Genomics and Proteomics in joint collaboration with

Department of Bio-technology.

March 2001 The Chatterjee Group again expressed its interest to the

Secretary, Department of Biotechnology and IGIB in setting up

the facility in collaboration with Department of Bio-technology.

February 2003 IGIB commissioned an industry analysis of custom laboratory

products and services in the area of genomics and proteomics

through a Consultant (M/s Ernst and Young).

April 2003 CSIR approved the proposal for setting up of proposed Core

Shared Research Facility with the Chatterjee Group.

April 2003 IGIB entered into an agreement with Chatterjee Management

Services for setting up of Core Shared Research Facility called

The Centre for Genomic Application.

June 2003 M/s Ernst and Young submitted its report, which identified 12

companies both multinational and Indian, which were operating

in the same field in the market. Market size was estimated to be

worth ` 80 to 100 crore and was expected to grow by 400 per

cent within a period of seven years i.e. from 2001 to 2007.

July 2003 IGIB submitted a proposal to Department of Science and

Technology for funding of its share in the PPP.

January 2004 Pending construction of TCGA building on land provided by

CSIR, private partner hired a space of 6600 sq.ft. at Okhla for

operation of TCGA activities.

February 2004 The Government share of `11.30 crore was approved by

Department of Science and Technology.

May 2004 Operations of TCGA begin.

July 2004 IGIB, on the request of Chatterjee Management Services,

signed an agreement with Institute of Molecular Medicine, a

Section 25 company of the Chatterjee Group, replacing the

4

2. Selection of partner

As stated earlier, The Chatterjee Group, a private group having investments in Indian and

international companies in the bio-technology sector, approached (March 2001)

Department of Bio-technology (DBT) and IGIB for setting up a world class research

facility in Genomics and Proteomics in collaboration with Department of Bio-technology.

CSIR approved (April 2003) the proposal following which IGIB entered (April 2003)

into an agreement with Chatterjee Management Services3 (CMS) for setting up of Core

Shared Research Facility to be called as The Centre for Genomic Application (TCGA).

Earlier (February 2003) IGIB had commissioned a consultant (M/s Ernst and Young) to

conduct an industry analysis of custom laboratory products and services in the area of

genomics and proteomics. The Consultant submitted its report (June 2003) and identified

12 companies4 both multinational and Indian, which were operating in the same field in

the market. Market size was estimated to be worth ` 80 to 100 crore and was expected to

grow by 400 per cent within a period of seven years i.e. from 2001 to 2007. It was

observed that IGIB selected the partner in April 2003, without waiting for the

Consultant’s report.

Thus while selecting the partner for the national level facility, due diligence process for

identification of the project, conducting a feasibility study to determine the market size

3 A company of The Chatterjee Group 4 Messrs.Hysel India Ltd., Labmate (Asia) Ltd., Sigma Aldrich, Qiagen, Genetix, Microsynth, Stratagene,

Invitrogen, Promega, Amersham plc.,Bangalore Genei Pvt. Ltd. and BioServe Biotechnologies Ltd.

earlier agreement with Chatterjee Management Services for

undertaking the project on the same terms and conditions.

May 2006 The Government share was subsequently revised to `13.55

crore due to increase in cost of equipments because of foreign

exchange fluctuations.

August 2011 Activities of TCGA were suspended reportedly due to delays in

completion of TCGA building and to save the huge cost of

rental on hiring premises,

5

and growth, detailed project report, parameters for selection of partner, list of possible

partners and transparent procedure for selecting the partner was not done.

CSIR stated (April 2010) that selection of the partner was on the basis of their credentials

world-wide in the field of Genomics and no bidding system could have brought out such

a partner willing to invest in scientific infrastructure in the country.

CSIR’s reply is not acceptable as it was seen from the Consultant’s report (June 2003),

that there were at least a dozen companies of equal repute in this field. IGIB did not

invite offers from these entities before signing the agreement with CMS and selected the

private partner for the project without following a transparent and competitive process.

3. Agreement with Private Partner

Although IGIB had entered into an agreement with Chatterjee Management Services

(CMS) in April 2003 for setting up of TCGA, but at request of CMS the same was

replaced (July 2004) with another agreement with Institute of Molecular Medicine

(IMM), a Section 25 Company5 of the Chatterjee Group for undertaking the project on

the same terms and conditions.

The salient features of agreement with the private partner were as follows:

IGIB would provide land for TCGA building and install 10 major equipment/

facilities

IMM would provide `12.50 crore including capital of `10.00 crore (`9.00 crore for

building and `1.00 crore for equipment) and recurring cost of `2.50 crore.

TCGA would provide services on a fee basis and generate adequate resources to

become self-sustaining from the second year onwards.

With regard to facility management, IMM would have full rights in all matters

relating to finance, legal and appointment of manpower of TCGA.

Two bodies i.e. Advisory Council and Monitoring Group with members of CSIR,

IGIB and IMM would be constituted to oversee activities of TCGA.

5Section 25 companies are non-profit oriented companies, formed for the sole purpose of promoting

commerce, art, science, religion, charity or any other useful object. Such companies are required to apply

their profits, if any, or other income only in promoting their objects and are also prohibited from payment

of dividends to their members.

6

In case of premature termination of the project, ownership of equipment/ facilities

procured out of CSIR/ IGIB funds would remain with CSIR/ IGIB and the equipment

procured from the income of TCGA would remain as joint property of IMM and

CSIR/ IGIB. The building of TCGA would be transferred to CSIR/IGIB on payment

of its book value to IMM.

Audit found following deficiencies in the agreement:

Proper structure of TCGA in the form of a separate legal entity such as Partnership

firm / Company under Companies Act or Society under Society Act or any other form

of special purpose vehicle was neither defined nor formed.

The clauses in the agreement were not framed in a manner whereby the risk involved

in the PPP arrangement to both parties would be identified or shared in a balanced

manner. As per the agreement, liability of IMM if any, due to operation of TCGA

were to be restricted to a total of ` 3.50 crore over the project duration, however no

such limit was kept for IGIB. Further, though the facility was planned to be

established in New Delhi, cost of land provided by IGIB was not included in the

project outlay.

There were no terms and conditions in the agreement compelling IMM to reinvest the

income generated from operation of TCGA for its financial growth, thus leaving scope

for diversion of income earned from TCGA by IMM to its other projects.

The agreement had no penalty clauses in case of deficiencies in fulfilling the

conditions agreed in the PPP agreement by the private partner.

The agreement did not provide for an alternative plan to meet requirement of resources

in case TCGA did not become self-sufficient.

No provision was made for preparation of separate books of accounts of TCGA to

depict its operational results and financial position. Provisions for adequate oversight

and audit were also not incorporated in the agreement.

IGIB, while accepting the lacunae in the agreement, stated (November 2009) that the

agreement would be amended by defining the role and responsibilities of the two parties

in more clear terms, particularly with respect to financial liabilities/ obligations/

responsibilities. However, the stated amendments in the agreement were not made

(March 2012). TCGA’s activities were suspended with effect from 31August 2011.

7

Regarding reinvestment of income into TCGA, it stated that IMM, being a Section 25

company, could not have taken out the revenue from the system. All the revenue

generated under the activity after meeting its costs of operation was expected to be

reinvested.

The reply of CSIR is not acceptable since TCGA was not a Section 25 company; it was

only a project of IMM. Hence, the possibility of diversion of TCGA’s income by IMM to

its other projects could not be ruled out. As the accounts of TCGA were merged in the

accounts of IMM and not compiled separately, this could not be conclusively verified.

4. Funding Arrangements

As per the agreement IMM committed ` 12.50 crore (` 9.00 crore on building

construction, `1.00 crore on equipment and ` 2.50 crore on recurring expenditure) and

CSIR/ IGIB was to bring in all major equipment necessary for the facility. The estimated

value of the equipment to be provided by IGIB was not specified in the agreement.

IGIB submitted a proposal to the Department of Science and Technology (DST) in July

2003 for funding the government share in the PPP. IGIB however, did not intimate DST

about the agreed share of private partner in the project. The government share was

approved by DST in February 2004 as `11.30 crore6 with scheduled completion in

February 2005, which was subsequently revised to `13.55 crore by increasing the DST’s

contribution by `2.25 crore7 (May 2006) with scheduled completion of the facility by

March 2007.

Thus, the total outlay was `26.05 crore as below:

Table-1: Distribution of government and private share in setting up of TCGA

(` in crore)

Government share Private share Total

Capital Building 0.00* 9.00 9.00

Equipment 13.00** 1.00 14.00

Recurring 0.55 2.50 3.05

Total 13.55 12.50 26.05

6 Share of DST, CSIR and IGIB were`6.00 crore, `2.72 crore and `2.58 crore (including recurring cost of

`0.55 crore) respectively. 7 Citing reasons of foreign exchange fluctuation in the cost of the equipment

8

*Land for proposed building was to be provided by IGIB, cost of which was excluded.

**Financial value of equipment was not defined in the agreement.

5. Financial performance and working results

IMM was fully responsible for operating TCGA, yet it did not maintain separate accounts

for TCGA and instead, merged the transactions pertaining to TCGA in its own accounts.

Audit was provided extracts of accounts relating to TCGA for 2004-05 to 2010-11.

After commencement of audit of PPP project of TCGA by the CAG of India, IGIB got

the extracted accounts of TCGA audited for the years 2009-10 & 2010-11.The auditors

had submitted their audit report which was not accepted by IMM till March 2012. The

audit report was not made available to Audit.

The working results of TCGA during 2004-05 to 2010-11, as seen from the extract of

TCGA accounts were as under:

Table-2: Financial performance of TCGA during 2004-11

(` in crore)

Year Turnover

Expenditure

Profit /

(Loss)

Percentage

Profit/

(Loss)

2004-05 1.12 2.25 (1.13) (100.89)

2005-06 3.65 3.91 (0.26) (7.12)

2006-07 6.62 6.23 0.39 5.89

2007-08 8.35 8.45 (0.10) (1.20)

2008-09 8.93 8.50 0.43 4.82

2009-10 6.97 9.96 (2.98) (42.75)

2010-11 4.80 7.71 (2.91) (60.63)

40.43 47.00 (6.57)

As seen from the above table -

In five years out of seven, TCGA suffered losses ranging from 1 to 101 per cent

of its annual turnover.

The performance of TCGA peaked during 2006-07 and 2008-09 but declined

steadily thereafter during 2009-10 and 2010-11.

9

Thus, TCGA could not become self-sufficient even after seven years of operation, though

as per the agreement it was expected to become self sustaining from the second year

onwards.

6. Implementation of the project

The following deficiencies and irregularities in implementation of the project were

noticed.

6.1 Irregular booking of expenditure on building

In terms of the agreement, IMM was required to construct TCGA building at a cost of `

9.00 crore from its own resources. IMM borrowed loans from banks for meeting this

commitment and booked interest and loan-processing fees of `4.98 crore accrued on the

borrowed funds as part of its contribution, which was incorrect. This was included in the

total expenditure of ` 16.11 crore stated to have been incurred by TCGA upto 31 March

2011.

TCGA replied (December 2009) that all the interest and processing fee charged in

construction would be adjusted. However, reversal of such booking was not done (March

2012).

6.2 Excess payment of Project Management fee

For developing the concept, designing and construction management of TCGA building,

IMM engaged the services of its sister concern TCG Developments India Pvt. Ltd.

(TCGD). A Development Management Agreement was signed between IMM and TCGD

in February 2004 (even before agreement with IGIB for setting up TCGA was made),

which stipulated that TCGA building was to be completed within time schedule of 18

months8, for which a total fee of ` 83.00 lakh9 was to be payable to TCGD. The

agreement further stated that if the project was delayed beyond the stipulated period of 18

8 From 01 February 2004 to 31 July 2005 9 ` 47.00 lakh for designing and ` 36.00 lakh as monthly fee at `2.00 lakh per month for 18 months

10

months due to failure on the part of IMM, then monthly fee at the rate of 75 per cent of

normal monthly fees (i.e. ` 1.50 lakh per month) would be payable to TCGD for such

period of delay.

Audit observed that due to delay in receiving the statutory approvals, construction work

of TCGA building was hampered. The project management fee which was required to be

paid to TCGD at reduced rate of `1.50 lakh per month beyond July 2005 was instead,

enhanced by IMM to `3.00 lakh and `4.00 lakh per month in December 2005 and

February 2007 respectively, without any justification and assessment of work.

Between August 2005 and September 2010, a total payment of project management fees

of ` 1.77 crore10 was made to TCGD at enhanced rates, which was in excess of

admissible amount by `85.50 lakh.

Audit further noted that IGIB did not see any conflict of interest in allotment of work of

design and construction management of TCGA building by IMM to its sister concern.

The rates and terms were disproportionately advantageous to TCGD as the exit clause of

agreement signed between IGIB and IMM permitted reimbursement by IGIB of all such

charges as discussed above, as a part of book value of the building, in the event that it is

taken over by IGIB due to winding up of the project. The total payment/debits of ` 3.25

crore made up to 31 March 2011 towards design & construction management etc. of

TCGA building worked out to more than 36 per cent of original estimated cost of

building. The building still remained under construction (March 2012).

TCGA accepted (March 2012) the audit observation and assured that necessary

adjustments would be made in due course of time.

6.3 Avoidable expenditure due to excess payment of rent

Pending construction of TCGA building, IMM hired a space of 6600 sq.ft. at Okhla in

January 2004. In this regard, IMM signed three separate agreements11 with the owner on

a total monthly rental of ` 3.17 lakh for three years with condition that each agreement

10 excluding Service Tax of `20.01 lakh 11 (i) Hiring of premises, (ii) Hiring of facilities viz. air conditioning for the occupied leased space, diesel

generator set, fire fightingequipments etc. and (iii) Maintenance of hired facilities on monthly rental of

`1.80 lakh, `0.83 lakh and `0.54 lakhrespectively

11

would be renewed for next two terms of three years each on the same terms and

conditions, subject to payment of escalation @ 15 per cent on the last paid monthly

rentals.

Audit observed that after expiry of first term of agreements, IMM renewed the agreement

(March 2007) with the owner, merging all three previous agreements into one. As per

new agreement, a monthly rental of `5.61 lakh was fixed for hiring of premises, facilities

and maintenance of hired facilities, which was 77.53 per cent higher than the last

monthly rental paid by TCGA. As a result, TCGA incurred an expenditure of ` 3.18

crore during March 2007 to August 2011 on account of rental charges, of which ` 1.15

crore was paid in excess, due to its failure to invoke the clause of renewing the earlier

agreements instead of entering into a fresh agreement.

CSIR stated that the landlord refused to renew the agreement unless the enhanced rates

were paid and IMM did not have unilateral rights to enforce its renewal. The reply was

not acceptable as IMM did not invoke the relevant clause of the agreement which

provided that the rent would be escalated upto only15 per cent of the last paid monthly

rentals.

Thus, TCGA incurred an avoidable expenditure of `1.15 crore which had a negative

impact on its financial position.

6.4 Irregular allocation of government space to private partner

As stated in para 6.3, IMM hired (January 2004) a space of 6600 sq.ft. on the ground and

first floor of a building at Okhla to run TCGA activities. Later (March 2005), IMM

assessed additional requirement of 1000 sq.ft. for TCGA and hired (May 2005) space of

4300 sq.ft on third floor of the same building. As this space was in excess of TCGA’s

requirement, IGIB on the request of IMM, hired (May 2005) the extra space of 3800

sq.ft for installing its super computer.

Although CSIR had instructed (March/ May 2005) IGIB to seek approval of the

Governing Body of CSIR for hiring the space, but IGIB did not obtain the required

approval. The rent of `46.21 lakh paid upto July 2007 was therefore irregular.

12

In the meantime CSIR allocated (May 2006) a space of 14000 sq. ft. to IGIB at its

Naraina campus. IGIB, however, did not vacate the rented space and instead, allotted

(July 2007) 3500 sq.ft of its allotted space at Naraina to IMM without obtaining the

approval of CSIR.

CSIR stated (April 2010) that if the space was not hired for the super computer,

Government would have to bear the depreciation on the equipment without its utilisation.

It further added that on getting allocation of space at Naraina, IGIB stopped payment of

rent to IMM.

The reply is not acceptable, as IGIB did not have power to allocate government space to

private party without approval of CSIR.

6.5 Installation of equipment in excess of sanction

As per sanction of DST (May 2006), Government share in TCGA project was `13.00

crore for equipment. Out of this amount, DST, CSIR and IGIB were to share `8.25 crore,

`2.72 crore and `2.03 crore respectively. DST released `8.10 crore against its share of

`8.25 crore while CSIR and IGIB released their full share of `2.72 crore and `2.03 crore

respectively. Against the available funds of `12.85 crore, IGIB installed equipment

worth `12.44 lakh at TCGA.

In addition to the above, IGIB installed equipment worth `2.68 crore procured for its

other projects, for commercial use of TCGA. Another set of equipment worth `1.16 crore

were also placed at the disposal of TCGA for training purposes. Thus, against the

sanctioned cost of `13.00 crore for procurement of equipment, IGIB placed equipment

worth `16.28 crore at TCGA.

CSIR stated in April 2010 that the excess equipment installed at TCGA were in terms of

the agreement. The reply of CSIR did not address the issue of additional expenditure of

`3.28 crore incurred on the equipment.

13

6.6 Irregular booking of expenditure not related to TCGA activities

6.6.1 To promote its own business activities, IMM allocated (October 2008) a built-up

space of 500 sq.ft at third floor of the Okhla premises (same premises as discussed in

para 6.3) to its Genomic Discovery Project Group and charged the expenditure

amounting to `15.76 lakh12 relating to rent and electricity for the period October 2008 to

August 2011 to TCGA.

6.6.2 During 2006-07, manpower and chemicals of TCGA worth `41.52 lakh were

utilised by IMM for its own projects, but TCGA did not recover the same from IMM.

TCGA, while accepting (March 2011) the above audit observations, assured that the

expenditure not related to TCGA activities would be reversed, but as of March 2012, no

action was taken.

Thus, an expenditure of `57.28 lakh was irregularly spent by IMM from TCGA funds.

6.7 Undercharging of service charges

IMM undertook a project titled Cholera-Typhoid Vaccine Research (CTVR) in 2005-06

in collaboration with Research Triangle Institute, USA (RTI) and carried out genotyping,

sequencing and oligo nucleotide synthesis services under the project through TCGA.

The rates for genotyping service as fixed by the Monitoring Committee (MC) of TCGA

for 2004-05 to 2008-09 was `35.00 to `50.00 per sample for IMM. However, IMM

credited TCGA at `23.00 per sample for 21.97 lakh samples during the years 2006-07

and 2007-08, which resulted in loss of income of `88.36 lakh and `1.75 crore

respectively to TCGA.

CSIR stated (April 2010) that the price realized from CTVR project was higher than the

average price realized from all other customers. The reply is not acceptable as TCGA did

not charge IMM according to the rates fixed by its MC. Further the average price realised

from other customers included IGIB and CSIR institutions, which were being charged at

cost price and reduced rates respectively.

12 `14.16 lakh as rent and `1.60 lakh as electricity charges

14

6.8 Uneconomic pricing of services resulting in loss of revenue

During the period 2006-12, TCGA rendered 58 services under six major categories13.

Audit observed that in two out of the six categories of services, costing was not done

economically. The actual cost of chemicals and consumables used in the services were

higher than the charges fixed for the services. The uneconomic pricing resulted in loss of

revenue, as discussed below:

(a) Affymetrix genotyping services: As per the sales registers, TCGA rendered

affymetrix genotyping services for testing 130 samples during 2006-09 and earned

revenue of `34.01 lakh (No such service was provided during 2004-06). However, it was

seen from the consumption vouchers that the expenditure incurred on account of the

chemicals and consumables used in these services during the two years (2007-08 and

2008-09) was `34.34 lakh.

Further, scrutiny of the sales register for the years 2009-11 revealed that no affymetrix

services were provided by TCGA during these years, however, the consumption register

of chemicals and consumables disclosed `3.71 lakh as expenditure incurred on affymetrix

services.

(b) Microarray services: TCGA provided microarray services of 17 types at a price

ranging widely from `280 to `29,400. Costing was done for the said service in 2006-07

considering total direct cost14 as 50 per cent of total sale. Audit however observed from

the sales registers of TCGA for 2006-09 that microarray services provided for testing

of 484 samples earned revenue of `40.90 lakh whereas direct expenditure on chemicals

and consumables was `34.24 lakh.

Thus, direct expenditure was actually 84 per cent against estimated direct cost of 50 per

cent, making the service unviable.

CSIR did not offer any comments on audit observation on costing of affymetrix

genotyping services. Regarding microarray services, it stated that the price of the

13Oligo synthesis, Proteomics, Genotyping, Micro array, Sequencing and Custom services 14including chemicals and consumables, manpower and cost of equipment

15

services was fixed at a lower rate to make it competitive with other cost-effective

technologies to promote the technology. The reply of CSIR was not convincing as it

overlooks the fact that the services even at competitive rates need to be sustainable in

terms of pricing.

6.9 Benefits derived from the use of IGIB equipment

In terms of guidelines 15 of CSIR, for allowing use of any CSIR equipment/ facility to

any private party, each institute should enter into an agreement with the private party

after obtaining approval of the Director General, CSIR. The user charges should be

worked out and maximum percentage of the same obtained as advance on or before

signing the agreement.

6.9.1 IGIB procured a bench-top system for genetic analysis applications (Illumina) in

September 2006 at cost of `2.48 crore. Audit observed that TCGA used the Illumina

equipment for 39 days during 2008-09 without making any payment towards usage

charge. When this was pointed out by Audit, the Monitoring Committee of IGIB fixed

(February 2010) the rate of `0.53 lakh per day for utilizing the equipment and amount of

`20.67 lakh was paid to IGIB in two installments by TCGA.

6.9.2 IGIB procured a High Performance Bio-computing Facility (Super computer) in

September 2005 at a cost of `10.71 crore. It was installed in December 2005 at TCGA's

premises at Okhla (as discussed in para 6.4).

Audit scrutiny revealed that out of the total 228-node cluster available in the super

computer, IGIB issued authorization for 61 ID numbers. One ID was also issued to

TCGA, which could be logged in by many users. However, while issuing the said ID to

TCGA, IGIB did not realize any user charges.

CSIR stated (April 2010) that TCGA did not carry out any commercial activity by using

ID number for super computer. The reply of CSIR is not acceptable as allowing

15 Office Memorandum (March 2002) regarding scheme for permitting use of CSIR equipment/ facilities/

Lab space and manpower by industry.

16

utilisation of supercomputing facility to TCGA without any user charges was in violation

of CSIR’s guidelines.

7. Poor business practices leading to bad debts

`52.88 lakh were written off from TCGA accounts during 2006-07, 2009-10 and 2010-

11. This write-off was carried out without the approval of Advisory Committee/

Monitoring Group of TCGA. Analysis of reasons for these write off revealed that these

services were provided without obtaining purchase orders or due to supply of incomplete

data/ results to the client, non-availability of relevant records with TCGA, etc.

For instance, TCGA provided services for a project of the Defence Institute of

Physiology and Allied Sciences (DIPAS), New Delhi received from National Facility for

Biochemicals & Genomic Resources (NFBGR)16 during 2010-11. Work on the project

was completed in March 2011 at a total charge of `37.85 lakh and the result data was

delivered. However, it was observed that no purchase order was available for the work

undertaken and the value had not been realized by TCGA till March 2012.

8. Lack of adequate monitoring

Monitoring of activities during operation and execution is necessary for successful

implementation of any project. In terms of agreement, an Advisory Council (AC)

consisting of a committee of seven members headed by Director, IGIB or an eminent

scientist was to be constituted for TCGA to guide its mission and future vision, goals,

targets, direction, etc. IMM was to run and operate TCGA as per the policy framework

and guidelines laid down by the AC. AC was to be assisted by a Monitoring Group (MG)

consisting of scientific, technical and commercial advisors and chaired by CEO, TCGA.

MG was to review all operational issues of TCGA. Audit observed that:

No frequency was fixed for holding of meetings of AC and MG. The meeting of AC

was held only once in January 2006 during 2004-11. In January 2007, IMM

approached IGIB for holding further meeting, but the same was not held. The reasons

16 a resource center for biological and genomic resources under IGIB

17

for not holding the meeting were not on record. The meeting of MG was held only

once during 2004-11.

In July 2007, MG constituted a Project Monitoring Committee (PMC) with members

drawn from diverse expertise and knowledgebase for providing scientific inputs and

directions, but said committee did not meet even once during July 2007 to March

2009.

During 2009-11, five meetings of PMC were held. The action taken report in respect

of the decisions taken in the previous meetings were not prepared and placed before

the successive meetings. In the absence of action taken reports of earlier decisions,

holding of subsequent PMC meetings was ineffective.

No guidelines were issued by AC to IMM for operating TCGA. Further, no physical

or financial targets were fixed by AC for TCGA.

AC/MG failed to monitor decisions taken for operation of TCGA, which adversely

affected its financial position, such as appointment of TCGD as project manager for

the TCGA building (para 6.2), irregular renewal of rent agreement (para 6.3),

uneconomic pricing of services of TCGA (para 6.8), etc.

Thus, the monitoring and evaluation of TCGA was inadequate.

Accepting the audit observation, CSIR stated (April 2010) that MG of TCGA had been

expanded to include financial experts of IMM as well as CSIR/IGIB. It further stated that

the first meeting of the MG was held in February 2010 and competent authority was

being approached to recreate the AC under chairmanship of Director IGIB.

9. Failure of TCGA as a leading national facility

As stated in para 1, the TCGA was created with the objective of enabling large number of

small laboratories to take advantage of its innovative facilities, making new discoveries

in the post-genomic sequencing era and operating it as a national facility and as a shared

resource for use by universities, industry and laboratory groups. Audit observed that

TCGA failed to achieve the said objective. The detailed audit observations in this regard

are as under:-

9.1 TCGA reassessed the biotechnological products/ services market in 2005-06 at

`100.00 crore and estimated TCGA’s share to be 25 per cent i.e `25.00 crore. However,

18

TCGA could provide services ranging from `3.65 crore to `8.93 crore only during 2005-

06 to 2011-12 (i.e. upto February 2012) as compared to the estimated target of `25.00

crore per year.

The average market share of TCGA was only 6 per cent as against the envisaged 25 per

cent during the period of review. Further, there was continuously decreasing trend in the

sale /services from `8.93 crore in 2008-09 to `4.80 crore in 2010-11, which further

reduced to `2.72 crore during 2011-12.

9.2 In terms of the number of samples analyzed, it was observed that the share of users

other than IGIB/ CSIR institutions and IMM was significantly low at 2.85 per cent during

2004-09, which further decreased to 1.64 per cent during 2010-11. During 2009-11,

IGIB’s share alone was 92.39 per cent of the total samples analyzed.

Thus, the major portion of services of TCGA was confined to IGIB only and the

objective to develop and operate the facility as national facility with large number of

laboratories using the facilities remained largely unachieved.

CSIR admitted (April 2010) that profitability of TCGA could have increased if it was

used as a national resource.

Sales during 2005-06 to 2011-12

3.65

6.62

8.35

8.93

6.97

4.80

2.72

0

1

2

3

4

5

6

7

8

9

10

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Y E A R

Sa

les

(R

up

ee

s i

n c

rore

)

19

10. Conclusion

IGIB did not undertake due diligence in the process of selecting the partner for engaging

in the public-private partnership for setting up TCGA. It selected the partner without

waiting for the assessment report of the consultant hired by it to conduct industry analysis

of laboratory products and services in the area of genomics and proteomics. The

agreement drawn up with Institute of Molecular Medicine (IMM), the private partner

favoured the latter and did not have adequate provisions for safeguarding interests of the

Government.

IGIB extended benefits to the private partner by allotting government space to IMM

without obtaining CSIR’s approval and failing to realize user charges from the private

partner for use of equipment belonging to IGIB.

Although equipment costing `16.71crore were installed, TCGA could not achieve self-

sufficiency, as envisaged. Its average market share remained at 6 per cent as against the

projected 25 per cent of market share, with limited clientele mainly comprising of CSIR,

IGIB and IMM and not many private players as envisioned. The pricing policy for its

services was uneconomical and services to IMM were given below the prescribed rates.

Poor business practices and extending undue benefits to the private partner by booking

expenditure not relating to TCGA activities in its accounts also impacted the financial

position of TCGA.

The construction of building for TCGA was delayed by more than six years. As a result

TCGA incurred expenditure on payment of rent for hired accommodation. In addition,

TCGA incurred avoidable expenditure due to payment of excess project management fee,

injudicious revision of lease agreement and irregular booking of expenditure on building

by IMM.

The monitoring mechanism established for TCGA was lax. No periodicity of meetings of

the Advisory Council and Monitoring Group was prescribed. As a result, both the

committees met only once during the entire duration of operation of TCGA (2004-11).

Advisory Council, which was to lay the policy framework and guidelines for operation of

TCGA by the private partner, did not issue the same.

20

Thus due to poor planning, imprudent project management and failure to safeguard the

interest of government the objective of TCGA in becoming a national research facility as

a shared resource for use by universities, industries and laboratory groups remained

largely unachieved.