06-01-2005, 10:52 PM
Part II
The elastic foot-ruler
Analysis
special to the express
The Centre and the Centaur, Part-II
The elastic foot-ruler
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->Â
The CAG report says that there was only a single bidder in the Centaur hotels. But the CAGâs own report notes that in regard to the privatisation of the Delhi Vidyut Board by the Congress-I Government, in each of the three circles, there was just one bidder
Â
Arun Shourie
Â
One of the many concoctions that were put out was that officials and I had called a meeting of bankers to get them to lend money to Tulip to buy the hotel. The CAGâs report lends an ear to this twaddle by saying that we facilitated the financing of the transaction. In fact, officials of the Disinvestment Ministry and I met representatives of the banks for exactly the opposite reason. With its request for a few extra days to put together the finances it needed, Tulip Hospitality had furnished a bank guarantee for almost seven times the original guarantee. We had rejected it. I had twice directed that the guarantee be encashed. Kerkar had rushed in to report that the banks were ready to lend the money. I told him that, in view of the infirm guarantee he had furnished, we could not take him at his word. But the banks are prepared to affirm directly that they have decided to lend Tulip the money, Kerkar and his team said. We work seven days a week, I told him, they can come, my colleagues and I will meet them.
23 February, 2002: It was a crowded meetingârepresentatives from eight banks, lawyers, our Advisors, my colleagues, Tulipâs personnel were all packed into a Committee Room in the Planning Commission. Kerkar reported that Tulip would be putting up Rs 44 crore, the rest would be loaned by banks. The bank representatives affirmed that they had decided to loan moneyâeach indicated the amount that his bank had decided to advance. I told them that for us to proceed, we would need what they had stated to be put down in writing, that I would be working in my room and, should they reduce what they had said to paper, they could call me back. They wrote down what they had statedâname of bank; name and designation of representative; amount the bank would lend; signature. The minutes were dictated, typed, and signed in the presence of the bank personnel. I was called back. I then said that what they had stated in writing, would have to be confirmed by the head offices in writingâwithin four days.
The confirmations came by February 27, 2002. The transaction documents were completed. Government got the amount due. And only then was the hotel handed over.
ââBut why did you not charge interest for late-payment?ââ
That is a strange comment indeed. When Government had not handed over the asset, where was the question of charging interest?
Valuation
ââBut what about valuation? Does the CAG not say that the Hotel was undervalued?ââ
The CAG report makes two observations in this regard. It says that the surcharge of two per cent on corporate tax was not taken into account; that this lowered the tax rate, and thereby raised the cost of debt in the calculation. The CAG report itself gives the reasons on account of which Advisors did not build this surcharge into the calculation. The report itself notes that this surcharge has varied from time to time from 15 to two per cent. It will be impossible for the Government to prescribe a particular figure and a particular way for calculating the cost of debt irrespective of the sector and the borrower.
The CAG raises another equally minute point. The report observes that the risk free equity used for the calculation should have been for 10 years at 9.3% instead of at 9.9% for 25 years. This kind of issue was debated time and again by experts and officers. The successive records of the Evaluation Committee of Joint Secretaries will contain reasons on which the particular figures and periods were chosen. It would not just be a feat; it would be downright wrong-headed to prescribe a uniform rate irrespective of the sector and irrespective of the uncertainty that afflicts different periods for which these calculations are made. Risk free equity for the same number of years, at the same rate? The risk factors in the metals sector are much, much less than those that afflict another sector, say hotels and tourism. Similarly, the horizon over which an investor will have to plan to recoup his investment will be vastly different in the wake of 9/11 than it was before it; the horizon over which an investor in the steel and aluminium sectors will expect to recoup his investment now that Chinese demand is absorbing all we can supply is much shorter than it was three years ago. So, it will be interesting to see if Government or the CAG himself can decree a uniform rate-across sectors and over time!
The CAG says that, while in the first round the median of the range suggested by the Advisors was taken as the reserve price, in the final round the reserve price was taken at the lower end of the band. His report sets out the reasons on pages 45-46 on account of which the Evaluation Committee (headed by the Joint Secretary and Financial Adviser, Ministry of Civil Aviation and comprising senior officers of Ministry of Disinvestment, Ministry of Finance, Department of Public Enterprises and Managing Directors of Air India and Hotel Corporation), chose the reserve price which it did.
The Committee of Secretaries headed by the Cabinet Secretary, and later the Cabinet Committee on Disinvestment found these reasons to be valid. It is important to remember that each of the judgements had to be made by officers and the Government in circumstances prevailing at a particular time. The position regarding the relaxation of the turnover levy is the same. In the first round, the bids were below par. They were rejected. The Cabinet Committee asked the Department to re-examine the terms. The Department listed three alternatives. The Committee of Secretaries recommended a reduction in the turnover levy from 6.5% to 2.5%. The Cabinet Committee approved this proposal. It is this reduction which enabled the transaction to go through.
ââRevenue loss, revenue lossââ! But for the reduction, the hotel would still be bleeding Air-India, and, therefore, the public exchequer. No ââRevenue saved, revenue savedââ?!
In any event, these are technical minutiae, and experts can revisit them to see if they can devise the sort of uniformity that the CAG is looking for. But three points are in order: a sense of proportion; the presumption that if someone makes a profit after he purchases a property or a company, that shows that the company had been undervalued; and the CAGâs own standards.
The range of expert estimates
A few examples will make clear what the actual facts regarding valuation are. IPCL has three plantsâat Vadodara, Nagathone and Gandhar. The Government had decided to disinvest the company as a whole. IOC urged that the Vadodra plant be hived off, and they be allowed to buy itâthe plant is adjacent to their refinery in Vadodra, the Chairman of IOC told me, it uses the throughput of the refinery. The Government revised its decision accordingly. The question now was what IOC should pay IPCL for the plant. Notice that both IPCL and IOC were public sector unitsâeach was functioning under its respective ministry. The plant itself was a physical fact well known to all âit had been in operation for several years. Both PSUs engaged well known experts to value the plant. IOCâs calculations put the value of the plant at Rs 300 crore. IPCLâs calculations put the value at Rs 1,300 crore. Meetings followed meetings. The matter was referred to the Committee on Dispute Resolution headed by the Cabinet Secretary. The differences could not be resolved. Each of the PSUs stuck to its valuation figure. Eventually, the Government had to revert to its original decision, and disinvest all the three plants together.
Or recall Maruti. At a time when Maruti controlled 85 per cent of the market, the Congress-I Government sold 26 per cent of the shares of Maruti to Suzuki, and then another 25 per cent. It handed them the control of the companyâwithout charging a single paisa as control premium. Even though Marutiâs share in the market had fallen to 47 per cent, and even though control had already been handed over to Suzuki, the NDA Government extracted Rs 1,000 crore from Suzuki as control premium. It secured eighteen times the price at which the Congress-I Government had handed over shares to Suzuki. As there are to be inquiries, should we begin with the sale of Maruti shares by the Congress-I Governmentâwhich would naturally have been done with the approval of the then Finance Minister, Dr Manmohan Singh.
The examples can be multiplied many times over. The point is that the value that bidders and experts will place on the same enterprise will differ by a wide margin. That is why in a pregnant observation in the BALCO judgement, the Supreme Court rightly observed that, in the ultimate analysis, the value of an enterprise is what the highest bidder is prepared to pay for it.
ââBut he sold the hotel, and made a profitââ
The next inference is that because a buyer made a profit by reselling the enterprise, the enterprise had been undervalued. This is totally divorced from reality.
The events that followed the disinvestment of IPCL nail this. In the IPCL race, Reliance eventually out-bid the others. While the reserve price was Rs 131, Reliance paid Rs 231 per share. Today the price of that share is Rs 167âhalf of what Reliance paid. Does this mean that the Government had over-valued the company? Or that the Government should compensate the successful bidder for the ââexcess priceââ that was taken from him? To say nothing of giving officers and me some credit!
Incidentally, the public sector company, IOC filed a bid for the same IPCL of only Rs 128 per share. Does the fact that its bid was so close to the reserve priceâof Rs 131âprove that the reserve price had been calculated correctly? Or does it indicate that Indian Oil deliberately filed a low bid to give credence to the bid that Reliance was filing?
Consider IOC again. A public sector company, it paid Rs 1551 per share for IBP, another public sector company. Today that share fetches just Rs 539. Should IOC officials be penalised for wasting money?
Conversely, in the case of CMC, the TATAs won the bid paying Rs 177 per share. The price of the share rose to around Rs 800. Should there be an inquiry into that? In VSNL, the same TATAs paid Rs 202 per share. The price went up to a maximum of Rs 240 per share. Should there have been an inquiry for undervaluation? Then it fell to a minimum of Rs 70. Should TATAs have been compensated? Today the price is Rs 207. More significant from the point of view of the TATAs, they have had much trouble since then with the enterpriseâin part because of sharply increased competition in the sector which the policies of the NDA Government brought about. Should they be compensated? And the then Disinvestment Department rewarded for disinvesting the company in the nick of time? To the first point, thereforeânamely, that the value that is put on an enterprise will differ vastlyâone has to add a second one: some who win a bid will gain; others will lose in the subsequent months. That a bidder loses money subsequently is no evidence that the enterprise was overvalued at the time of sale. Similarly, that the bidder gains a profitâeither by holding on to the enterprise or selling itâis no evidence that the enterprise was undervalued. These are commercial decisionsâeven among those who gain, some winners will profit, others will suffer what is called ââthe winnerâs curseââ.
The one constantâallegations
But, because of the condition to which public discourse has fallen, there is one constantâthere is always an allegation. In VSNL, bids filed by the two bidders TATAs and Reliance were as close to as can beâTATAs beat Reliance by a hairâs breadth: TATAs valued the transaction at Rs 1493 crore; Reliance valued it at Rs 1,400 crore. The allegation in such cases was, ââThat proves price-fixing. Otherwise how could the two bids be so close to each other?ââ In BALCO, in IPCL, the bids were far apart. Sterlite valued BALCO at Rs 550 crore. Hindalco valued it at just about half that, that is Rs 275 crore. The allegation was, ââHindalco has given such a low bid only to make the bid by Sterlite look good.ââ
The technical minutiae on which the CAG has based his criticisms should be assessed against such vast differences in the valuations done by competent experts, as well as the vast variations of values over time. In such transactions, Advisors are chosen with the greatest care and transparencyâthrough international competitive bidding. It is their job to do the detailed calculations. These calculations are examined by two separate committees of a score of officers. The points that the CAG picks out are specifically debated at length in each transaction. The circumstances prevalent at that time, the nature of the sectorâall have to be taken into account in determining the constituents that go into valuation. To enjoin the kind of uniformity that the CAG has prescribed will cripple the process. It is the surest way to frighten officials and others involved in the valuation to just apply mechanical formulae, and not examine the condition and circumstances of the enterprise at all.
The elastic yardstick
There is another point to note. Recall the minutiae on which the CAGâs observations hangâthat a 2% surcharge was not included in one calculation; that in one case the cost of risk free equity was taken at 9.9% as it was taken to be required for 25 years and not at 9.3% for 10 years. The gravamen of his observations is that in some other transactions, the 2% surcharge was included, etc. It is indeed telling that if something differs from what was thought appropriate in other sectors, the CAG takes exception. When what is done in this instanceâfor instance, setting up a Special Purpose Vehicle for the transactionâis the same as is done in other cases, he glides over the fact!
But there is another tell-tale fact, and it is best seen by what the CAG himself has been doing in other cases.
Contrast what stance the CAGâs own report takes in regard to the privatisation of the Delhi Vidyut Board by the Congress-I Government. In each of the three circles, there was just one bidder. The CAG does not seem to think that by proceeding to hand over the circle to that single bidder, the Congress-I Government deprived itself and the country of the benefits of competition. He notes, but you would not have noticed the Congress-I note, that, after the bids of the single bidder were rejected, the Congress-I Government entered into private negotiations with the single bidder in each circle, and then gave very, very heavy concessions.
But I am on what the CAG found about valuation, and the delicacy with which he thought it fit to deal with it.
The valuation was put at Rs 3,160 crore, records the CAG. He also records that the balance sheet which the consultant prepared, and on the basis of which bids were taken had a discrepancy from the actual balance sheetâa discrepancy of Rupees 1,007 crore! With a total value of Rs 3,160 crore, a small discrepancy of Rs 1,007 crore!! But no great calamity falls on the Congress-I Government of Delhi.
The next contrast is delicious as can be. The CAG records that he asked the (Congress-I) Government for the basis of the valuation. In response, he records, ââGovernment stated (October 2003) that the details of the calculation was (sic) available only with the consultants in their computer modeling which were not available with the Government. It was added that the consultants normally did not disclose their computer modeling as they regarded it as their business secret.ââ How convenient! The Government does not know, and the consultant will not tell! But the even more important feature is that the CAG seems quite satisfiedâhe does not press for details of this wondrous thing, computer modelling! He lets the matter rest with the assertion of the (Congress-I) Governmentâthat they have not details, and the consultants âânormallyââ regard these as commercial secrets. What a twist!
In the Bofors case, the Congress-I Government refused to divulge the names of the middlemen, and maintained that the company too could not be pressed to disclose them as they were both bound by ââcustomer confidentialityââ. (And they had an Attorney General handy to give an opinionâa legal opinionâ to he effect that, given the clause on ââcustomer confidentialityââ, the company was perfectly within its right not to disclose the names of the middlemen even though the customerâthe Congress-I Governmentâwas saying in Parliament every day that it wanted the names to be disclosed!) In the Delhi Vidyut Board case, the Congress-I Government says that even it cannot find the bases of the valuation because the consultants normally regard these as a commercial secret!
ââHowever,ââ the CAG continues, ââthe Government furnished a note on the methodology adopted in asset valuation.ââ That the note was nothing but a string of empty inanities becomes clear from the next sentence: ââA scrutiny of the note indicated that while the general methodology had been explained, the basic figures adopted, the weightages given and assumptions made were not indicated and hence the basis of arriving at the final figure of Rs 3,160 crore could not be verified.ââ The only observation of the CAG is that ââThe Government had evidently relied solely on the report of the consultant.ââ In this case, the CAG is quite content at not being furnished ââthe basic figures, the weightages given and the assumptions madeââ. And in the hotelsâ2 per cent surcharge, 9.9% risk free equity instead of 9.3%.... In this case, it is evidently all right for the Government to have âârelied solely on the report of the consultant.ââ In the hotels case, the fact that that two committees of officials examined the calculations of the Advisors, and then recommended that they be accepted, and then the Cabinet Committee approved their recommendation, why that is horrible!
An elastic foot-ruler, I am afraid.
<!--QuoteEnd--><!--QuoteEEnd-->
The elastic foot-ruler
Analysis
special to the express
The Centre and the Centaur, Part-II
The elastic foot-ruler
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->Â
The CAG report says that there was only a single bidder in the Centaur hotels. But the CAGâs own report notes that in regard to the privatisation of the Delhi Vidyut Board by the Congress-I Government, in each of the three circles, there was just one bidder
Â
Arun Shourie
Â
One of the many concoctions that were put out was that officials and I had called a meeting of bankers to get them to lend money to Tulip to buy the hotel. The CAGâs report lends an ear to this twaddle by saying that we facilitated the financing of the transaction. In fact, officials of the Disinvestment Ministry and I met representatives of the banks for exactly the opposite reason. With its request for a few extra days to put together the finances it needed, Tulip Hospitality had furnished a bank guarantee for almost seven times the original guarantee. We had rejected it. I had twice directed that the guarantee be encashed. Kerkar had rushed in to report that the banks were ready to lend the money. I told him that, in view of the infirm guarantee he had furnished, we could not take him at his word. But the banks are prepared to affirm directly that they have decided to lend Tulip the money, Kerkar and his team said. We work seven days a week, I told him, they can come, my colleagues and I will meet them.
23 February, 2002: It was a crowded meetingârepresentatives from eight banks, lawyers, our Advisors, my colleagues, Tulipâs personnel were all packed into a Committee Room in the Planning Commission. Kerkar reported that Tulip would be putting up Rs 44 crore, the rest would be loaned by banks. The bank representatives affirmed that they had decided to loan moneyâeach indicated the amount that his bank had decided to advance. I told them that for us to proceed, we would need what they had stated to be put down in writing, that I would be working in my room and, should they reduce what they had said to paper, they could call me back. They wrote down what they had statedâname of bank; name and designation of representative; amount the bank would lend; signature. The minutes were dictated, typed, and signed in the presence of the bank personnel. I was called back. I then said that what they had stated in writing, would have to be confirmed by the head offices in writingâwithin four days.
The confirmations came by February 27, 2002. The transaction documents were completed. Government got the amount due. And only then was the hotel handed over.
ââBut why did you not charge interest for late-payment?ââ
That is a strange comment indeed. When Government had not handed over the asset, where was the question of charging interest?
Valuation
ââBut what about valuation? Does the CAG not say that the Hotel was undervalued?ââ
The CAG report makes two observations in this regard. It says that the surcharge of two per cent on corporate tax was not taken into account; that this lowered the tax rate, and thereby raised the cost of debt in the calculation. The CAG report itself gives the reasons on account of which Advisors did not build this surcharge into the calculation. The report itself notes that this surcharge has varied from time to time from 15 to two per cent. It will be impossible for the Government to prescribe a particular figure and a particular way for calculating the cost of debt irrespective of the sector and the borrower.
The CAG raises another equally minute point. The report observes that the risk free equity used for the calculation should have been for 10 years at 9.3% instead of at 9.9% for 25 years. This kind of issue was debated time and again by experts and officers. The successive records of the Evaluation Committee of Joint Secretaries will contain reasons on which the particular figures and periods were chosen. It would not just be a feat; it would be downright wrong-headed to prescribe a uniform rate irrespective of the sector and irrespective of the uncertainty that afflicts different periods for which these calculations are made. Risk free equity for the same number of years, at the same rate? The risk factors in the metals sector are much, much less than those that afflict another sector, say hotels and tourism. Similarly, the horizon over which an investor will have to plan to recoup his investment will be vastly different in the wake of 9/11 than it was before it; the horizon over which an investor in the steel and aluminium sectors will expect to recoup his investment now that Chinese demand is absorbing all we can supply is much shorter than it was three years ago. So, it will be interesting to see if Government or the CAG himself can decree a uniform rate-across sectors and over time!
The CAG says that, while in the first round the median of the range suggested by the Advisors was taken as the reserve price, in the final round the reserve price was taken at the lower end of the band. His report sets out the reasons on pages 45-46 on account of which the Evaluation Committee (headed by the Joint Secretary and Financial Adviser, Ministry of Civil Aviation and comprising senior officers of Ministry of Disinvestment, Ministry of Finance, Department of Public Enterprises and Managing Directors of Air India and Hotel Corporation), chose the reserve price which it did.
The Committee of Secretaries headed by the Cabinet Secretary, and later the Cabinet Committee on Disinvestment found these reasons to be valid. It is important to remember that each of the judgements had to be made by officers and the Government in circumstances prevailing at a particular time. The position regarding the relaxation of the turnover levy is the same. In the first round, the bids were below par. They were rejected. The Cabinet Committee asked the Department to re-examine the terms. The Department listed three alternatives. The Committee of Secretaries recommended a reduction in the turnover levy from 6.5% to 2.5%. The Cabinet Committee approved this proposal. It is this reduction which enabled the transaction to go through.
ââRevenue loss, revenue lossââ! But for the reduction, the hotel would still be bleeding Air-India, and, therefore, the public exchequer. No ââRevenue saved, revenue savedââ?!
In any event, these are technical minutiae, and experts can revisit them to see if they can devise the sort of uniformity that the CAG is looking for. But three points are in order: a sense of proportion; the presumption that if someone makes a profit after he purchases a property or a company, that shows that the company had been undervalued; and the CAGâs own standards.
The range of expert estimates
A few examples will make clear what the actual facts regarding valuation are. IPCL has three plantsâat Vadodara, Nagathone and Gandhar. The Government had decided to disinvest the company as a whole. IOC urged that the Vadodra plant be hived off, and they be allowed to buy itâthe plant is adjacent to their refinery in Vadodra, the Chairman of IOC told me, it uses the throughput of the refinery. The Government revised its decision accordingly. The question now was what IOC should pay IPCL for the plant. Notice that both IPCL and IOC were public sector unitsâeach was functioning under its respective ministry. The plant itself was a physical fact well known to all âit had been in operation for several years. Both PSUs engaged well known experts to value the plant. IOCâs calculations put the value of the plant at Rs 300 crore. IPCLâs calculations put the value at Rs 1,300 crore. Meetings followed meetings. The matter was referred to the Committee on Dispute Resolution headed by the Cabinet Secretary. The differences could not be resolved. Each of the PSUs stuck to its valuation figure. Eventually, the Government had to revert to its original decision, and disinvest all the three plants together.
Or recall Maruti. At a time when Maruti controlled 85 per cent of the market, the Congress-I Government sold 26 per cent of the shares of Maruti to Suzuki, and then another 25 per cent. It handed them the control of the companyâwithout charging a single paisa as control premium. Even though Marutiâs share in the market had fallen to 47 per cent, and even though control had already been handed over to Suzuki, the NDA Government extracted Rs 1,000 crore from Suzuki as control premium. It secured eighteen times the price at which the Congress-I Government had handed over shares to Suzuki. As there are to be inquiries, should we begin with the sale of Maruti shares by the Congress-I Governmentâwhich would naturally have been done with the approval of the then Finance Minister, Dr Manmohan Singh.
The examples can be multiplied many times over. The point is that the value that bidders and experts will place on the same enterprise will differ by a wide margin. That is why in a pregnant observation in the BALCO judgement, the Supreme Court rightly observed that, in the ultimate analysis, the value of an enterprise is what the highest bidder is prepared to pay for it.
ââBut he sold the hotel, and made a profitââ
The next inference is that because a buyer made a profit by reselling the enterprise, the enterprise had been undervalued. This is totally divorced from reality.
The events that followed the disinvestment of IPCL nail this. In the IPCL race, Reliance eventually out-bid the others. While the reserve price was Rs 131, Reliance paid Rs 231 per share. Today the price of that share is Rs 167âhalf of what Reliance paid. Does this mean that the Government had over-valued the company? Or that the Government should compensate the successful bidder for the ââexcess priceââ that was taken from him? To say nothing of giving officers and me some credit!
Incidentally, the public sector company, IOC filed a bid for the same IPCL of only Rs 128 per share. Does the fact that its bid was so close to the reserve priceâof Rs 131âprove that the reserve price had been calculated correctly? Or does it indicate that Indian Oil deliberately filed a low bid to give credence to the bid that Reliance was filing?
Consider IOC again. A public sector company, it paid Rs 1551 per share for IBP, another public sector company. Today that share fetches just Rs 539. Should IOC officials be penalised for wasting money?
Conversely, in the case of CMC, the TATAs won the bid paying Rs 177 per share. The price of the share rose to around Rs 800. Should there be an inquiry into that? In VSNL, the same TATAs paid Rs 202 per share. The price went up to a maximum of Rs 240 per share. Should there have been an inquiry for undervaluation? Then it fell to a minimum of Rs 70. Should TATAs have been compensated? Today the price is Rs 207. More significant from the point of view of the TATAs, they have had much trouble since then with the enterpriseâin part because of sharply increased competition in the sector which the policies of the NDA Government brought about. Should they be compensated? And the then Disinvestment Department rewarded for disinvesting the company in the nick of time? To the first point, thereforeânamely, that the value that is put on an enterprise will differ vastlyâone has to add a second one: some who win a bid will gain; others will lose in the subsequent months. That a bidder loses money subsequently is no evidence that the enterprise was overvalued at the time of sale. Similarly, that the bidder gains a profitâeither by holding on to the enterprise or selling itâis no evidence that the enterprise was undervalued. These are commercial decisionsâeven among those who gain, some winners will profit, others will suffer what is called ââthe winnerâs curseââ.
The one constantâallegations
But, because of the condition to which public discourse has fallen, there is one constantâthere is always an allegation. In VSNL, bids filed by the two bidders TATAs and Reliance were as close to as can beâTATAs beat Reliance by a hairâs breadth: TATAs valued the transaction at Rs 1493 crore; Reliance valued it at Rs 1,400 crore. The allegation in such cases was, ââThat proves price-fixing. Otherwise how could the two bids be so close to each other?ââ In BALCO, in IPCL, the bids were far apart. Sterlite valued BALCO at Rs 550 crore. Hindalco valued it at just about half that, that is Rs 275 crore. The allegation was, ââHindalco has given such a low bid only to make the bid by Sterlite look good.ââ
The technical minutiae on which the CAG has based his criticisms should be assessed against such vast differences in the valuations done by competent experts, as well as the vast variations of values over time. In such transactions, Advisors are chosen with the greatest care and transparencyâthrough international competitive bidding. It is their job to do the detailed calculations. These calculations are examined by two separate committees of a score of officers. The points that the CAG picks out are specifically debated at length in each transaction. The circumstances prevalent at that time, the nature of the sectorâall have to be taken into account in determining the constituents that go into valuation. To enjoin the kind of uniformity that the CAG has prescribed will cripple the process. It is the surest way to frighten officials and others involved in the valuation to just apply mechanical formulae, and not examine the condition and circumstances of the enterprise at all.
The elastic yardstick
There is another point to note. Recall the minutiae on which the CAGâs observations hangâthat a 2% surcharge was not included in one calculation; that in one case the cost of risk free equity was taken at 9.9% as it was taken to be required for 25 years and not at 9.3% for 10 years. The gravamen of his observations is that in some other transactions, the 2% surcharge was included, etc. It is indeed telling that if something differs from what was thought appropriate in other sectors, the CAG takes exception. When what is done in this instanceâfor instance, setting up a Special Purpose Vehicle for the transactionâis the same as is done in other cases, he glides over the fact!
But there is another tell-tale fact, and it is best seen by what the CAG himself has been doing in other cases.
Contrast what stance the CAGâs own report takes in regard to the privatisation of the Delhi Vidyut Board by the Congress-I Government. In each of the three circles, there was just one bidder. The CAG does not seem to think that by proceeding to hand over the circle to that single bidder, the Congress-I Government deprived itself and the country of the benefits of competition. He notes, but you would not have noticed the Congress-I note, that, after the bids of the single bidder were rejected, the Congress-I Government entered into private negotiations with the single bidder in each circle, and then gave very, very heavy concessions.
But I am on what the CAG found about valuation, and the delicacy with which he thought it fit to deal with it.
The valuation was put at Rs 3,160 crore, records the CAG. He also records that the balance sheet which the consultant prepared, and on the basis of which bids were taken had a discrepancy from the actual balance sheetâa discrepancy of Rupees 1,007 crore! With a total value of Rs 3,160 crore, a small discrepancy of Rs 1,007 crore!! But no great calamity falls on the Congress-I Government of Delhi.
The next contrast is delicious as can be. The CAG records that he asked the (Congress-I) Government for the basis of the valuation. In response, he records, ââGovernment stated (October 2003) that the details of the calculation was (sic) available only with the consultants in their computer modeling which were not available with the Government. It was added that the consultants normally did not disclose their computer modeling as they regarded it as their business secret.ââ How convenient! The Government does not know, and the consultant will not tell! But the even more important feature is that the CAG seems quite satisfiedâhe does not press for details of this wondrous thing, computer modelling! He lets the matter rest with the assertion of the (Congress-I) Governmentâthat they have not details, and the consultants âânormallyââ regard these as commercial secrets. What a twist!
In the Bofors case, the Congress-I Government refused to divulge the names of the middlemen, and maintained that the company too could not be pressed to disclose them as they were both bound by ââcustomer confidentialityââ. (And they had an Attorney General handy to give an opinionâa legal opinionâ to he effect that, given the clause on ââcustomer confidentialityââ, the company was perfectly within its right not to disclose the names of the middlemen even though the customerâthe Congress-I Governmentâwas saying in Parliament every day that it wanted the names to be disclosed!) In the Delhi Vidyut Board case, the Congress-I Government says that even it cannot find the bases of the valuation because the consultants normally regard these as a commercial secret!
ââHowever,ââ the CAG continues, ââthe Government furnished a note on the methodology adopted in asset valuation.ââ That the note was nothing but a string of empty inanities becomes clear from the next sentence: ââA scrutiny of the note indicated that while the general methodology had been explained, the basic figures adopted, the weightages given and assumptions made were not indicated and hence the basis of arriving at the final figure of Rs 3,160 crore could not be verified.ââ The only observation of the CAG is that ââThe Government had evidently relied solely on the report of the consultant.ââ In this case, the CAG is quite content at not being furnished ââthe basic figures, the weightages given and the assumptions madeââ. And in the hotelsâ2 per cent surcharge, 9.9% risk free equity instead of 9.3%.... In this case, it is evidently all right for the Government to have âârelied solely on the report of the consultant.ââ In the hotels case, the fact that that two committees of officials examined the calculations of the Advisors, and then recommended that they be accepted, and then the Cabinet Committee approved their recommendation, why that is horrible!
An elastic foot-ruler, I am afraid.
<!--QuoteEnd--><!--QuoteEEnd-->