APPLICABILITY OF ISSAI 5220-AUDIT OF PUBLIC PRIVATE FINANCE IN SAI INDIA Group 2 Syndicate presentation by Shri A S Sahi Shri U P S Sisodia Shri Sarin

APPLICABILITY OF ISSAI 5220-AUDIT OF PUBLIC PRIVATE FINANCE IN SAI INDIA

Group 2

Syndicate presentation by

Shri A S Sahi

Shri U P S Sisodia

Shri Sarin P

Shri Ravi Kiran Ubale and

Shri Ashok Sharma

Structure of PresentationIntroduction of ISSAI 5220PA on Hydrocarbon Production Sharing (Report No. 19 of 2011-12)IntroductionScopeImportant Mile-Stones of Performance AuditAudit ObjectivesMajor Audit findings and Recommendations

Gap analysis between ISSAI 5220 and PA Report

Introduction of ISSAI 5220

As a follow up of decision of XIV INCOSAI in Washington 1992, the INTOSAI Working Group on the Audit of Privatisation was formally established by the Governing Board in May 1993.

• The membership of the Working Group comprises representatives from the SAIs of 42 countries including India.

Introduction of ISSAI 5220 Contd.

• In recent years the emphasis was on variety of ways in which the public and private sectors can work together to get better value for money for the taxpayer in delivering public services.

• The benefits come from creating a structure in which value for money is optimized, through private sector finance, innovation and management skills; through the synergies from linking design, build and operate; through re-engineering; through the efficient allocation of risk; and through the whole-life and whole-service approach to service delivery


These guidelines were published in October 2001, and have since been used by SAIs involved in audit of such contracts.

The purpose of the guidelines was to provide a logical framework for SAIs to audit concession agreements to establish whether the public sector has got the best possible deal for the taxpayer.


The ISSAI 5220 comprises of broadly six sections and 43 specific guidelines as given below:

1. The General Approach of the SAI (4)

2. Scoping the project (10)

3. Project management (13)

4. Tendering (3)

5. The Right Contract (5)

6. The Operational Phase (8)

PA Report No. 19 of 2011-12Introduction• As a measure of reforms in Economy in 1990 to liberalize

the framework governing the Oil and Gas exploration and production (E&P) sector, Government notified (1999) New Exploration Licensing Policy (NELP) with the objective to attract private capital and technical expertise.

• In order to explore balanced and effective partnership with E&P Companies, the Production Sharing Contracts (PSCs) were structured in such a way that the exploration risk like cost incurred in searching for Oil and Natural Gas was to be born by the private contractor.

Contd…• The capital cost incurred towards discovery of

hydrocarbon was to be recovered by the contractor from the sale of Oil and Gas as first right. The balance revenue termed as ‘Profit Petroleum’ is shared between government and the contractor. The Government share of revenue become significant only when the production reaches substantial level and the contractor has recovered his capital cost.

• PA was conducted in response to a request from the Ministry of Petroleum and Natural Gas for a special audit of PSCs in the context of large Government stake in the form of ‘Profit Petroleum’ and concerns about the capital expenditure being incurred by contractors in development of blocks awarded under NELP.

Scope of Performance Audit

• Records at Ministry and Director General of Hydrocarbon in respect of 20 PSCs for the period 2003-08 were scrutinized. In addition, supplementary records of operators of four blocks/fields (Panna, Mukta, Mid and South Tapti) for the period 2006-08 was also audited.

• The audit was interrupted due difficulties in obtaining access to records of private contractor which was later on resolved with the intervention of Ministry.

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Important Mile-Stones of Performance Audit

PA of Hydrocarbon PSCs covering a sample of discovered pre-NEPL PSCs and NEPL PSCs were taken up in November 2007 by holding Entry Conference.

Draft Audit Report was issued to the Ministry in June 2011The Exit Conference with the Ministry/Director General of

Hydrocarbon and the operators of four blocks was held in July 2011.

Replies and views of the Ministry/Director General of Hydrocarbon and the operators of four blocks were incorporated in Report with suitable rebuttals.

The Report was issued to the Ministry in July 2011. The Report was placed in the Parliament in September

2011.

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Audit Objectives

The main Audit Objectives of the PA of Hydrocarbon PSCs were to verify whether:

• The systems and procedures of Ministry and DGH to monitor and ensure compliance by the operators and contractors of the blocks with the terms of the PSCs were adequate and effective; and

• The revenue interests of the Government (including royalty and Gol share of profit petroleum) were properly protected, adequate and effective mechanisms were in position for this purpose.

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Audit findings and Recommendations

Audit indicated that there is considerable scope for improvement in the management of Hydrocarbon E&P with private sector participation.

Structure of PSC• The PSC, as it currently stands, is based on a scaled formula for

profit sharing between the Gol and the private contractors. The slabs for profit sharing are so designed that more the capital intensive the project, the lower the Gol share of "profit petroleum". Contrarily, the less capital intensive, the higher the Gol share of "profit petroleum".

In practice, however, the private contractors have inadequate incentives to reduce capital expenditure.

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Audit findings and Recommendations (Contd.)

• Operational control of E&P operations is largely with the private operators, and the Gol's oversight role is restricted essentially to its representation (through Ministry and/or DGH) in the Management Committee for the block, especially in approval of Annual Work Programmes and Budgets and Field Development Plans.

• The oversight/ control of Gol representatives on high value procurement decisions is also very limited in scope (largely restricted to prior intimation of the list of pre-qualified bidders). In fact, a comparison of the procurement procedure under PSCs in Bangladesh and India reveals that the clauses are similar, except that the Bangladesh PSCs require approval by the Management Committee (MC) for high value procurements (typically greater than US$ 500,000). This clause is, however strangely missing from the Indian PSCs in almost all PSCs.

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• Audit review also revealed that, by and large, the Ministry as also DGH, both through the Management Committee and otherwise, did not pay adequate attention to protecting Gol's financial interests. Adequate attention was not paid to specifically, how every proposal/ decision would potentially affect Gol's share of profit petroleum. In addition to their failings, the constraints of adequately skilled resources with Ministry/DGH for monitoring several hundred PSCs simultaneously cannot also be ignored. By contrast, it is inconceivable that the private contractor would fail to protect his financial interests, and assess every investment/ operational proposal to see whether it would result in incremental revenues for him both in terms of cost recovery and contractor's share of profit petroleum.

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Recommendations for Future PSCs:• For future PSCs, it is recommend that the the profit sharing formula be remolded by the GoI and profit-sharing percentage should be a single percentage. Further in order to ensure control, very high value procurement decisions above a specified limit should be subject to approval by the MC. Such a mechanism already exists in PSCs operating in Bangladesh.

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Bid Evaluation Criteria• The Bid Evaluation Criteria (BEC) currently give weightage to

technical/ financial ability and two biddable parameters - committed exploratory work and fiscal package (royalty + Gol share of profit petroleum). As regards fiscal package, the current evaluation model generally involves multiple scenarios of oil reserves and oil prices (typically high, medium and low) as well as a projected profit.

• The assumptions based on which calculations of fiscal packages of different bidder are made are completely hypothetical. These hypothetical assumptions can not only make a significant difference as to who comes out as the winning bidder, but can also convey extremely unrealistic assumptions about what Gol's share of Profit Petroleum.

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Consequently, we recommend that the bidders should be allowed to make only a single point bid, which can be compared straightaway without resorting to hypothetical assumptions.

• It is also recommended that in future, while considering the bid evaluation criteria, either no weightage be allocated for well depth, or alternatively, well commitments be categorized into two groups - wells above and below a specified depth, e.g., 1500 or 2000 and points be awarded accordingly.

Management of existing PSCs• The vast majority of blocks with high prospects for hydrocarbon

discovery have already been awarded through various pre-NELP/ NELP rounds, and Gol has no option but to work within the constraints of the existing PSC structure and clauses to the fullest extent possible.

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Development Plans and Annual Work Programmes and Budgets

• It is inconceivable that a private operator/ contractor will make investments in absolute as well as incremental terms, in petroleum operations under the PSC without assessing whether such investments would result in increased revenues for him in terms of cost recovery and contractor's share of profit petroleum. It is necessary for Ministry and DGH to function in a similar manner, with regard to Gol's financial interests. Consequently Audit recommended the following:

• While reviewing and approving development plans, Gol representatives on the MC as well as DGH and Ministry should ensure that detailed and appropriately validated estimates of Gol take and contractor take are included as an integral part of these plans at the approval stage.

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• Approval by Ministry of such development plans should be on the clear stipulation that any changes in capital and operating expenditure, expenditure commitments, production quantities and other factors, which have the impact of reducing the Gol share of profit petroleum beyond the stipulated range must be submitted for prior approval by Gol representatives on the MC, with detailed justification.

• Annual Work Programmes and Budgets should be strictly in line with the approved development plans. Any deviations or changes vis-a-vis the development plan which have the impact of reducing the Gol share of profit petroleum beyond the stipulated range must be submitted for prior approval of the MC. Similarly, any significant variations from the approved Work Programme and Budgets with similar impact beyond the stipulated range must also be subject to prior approval.

• Incurring of any costs which vary from the Development Plans and Annual Work Programmes & Budgets on an overall basis, as well as in terms of significant line items with significant adverse impact on Gol share of profit petroleum - beyond the stipulated range without prior approval of Gol representatives on MC should automatically be ineligible for cost recovery.

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Procurement ActivitiesThe provisions relating to procurement procedures in the PSCs do not provide for adequate oversight/control by Gol representatives on procurement processes. However, given the existing provisions, we recommend the following measures for protecting Gol's financial interest:

• When high value contracts are awarded on the basis of single 'responsive' financial bids, in our opinion, these are awarded without competition, effectively on nomination basis. In all such cases, prior approval of the MC should be necessary for such awards. Post facto approval, with appropriate justification, for emergent procurement decisions may also be considered. Similar provisions would also apply to all procurement decisions involving post-priced bid opening changes to scope, quantities, work, prices, conditions etc.

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• Also the practice of repeated extensions, subsequent substantial variations in scope etc. of existing contracts is also not in line with the existing PSC procurement provisions, which incidentally makes no mention of extensions. Extensions or scope variations for high value contracts, beyond the contractually stipulated extensions, should also be subject to prior MC approval, with provisions for post facto approval in emergent cases.

Relinquishment of area

The entire PSC process is designed to ensure that the private contractors fully explore the contract area within designated timelines, relinquish areas where hydrocarbon prospects appear poor in a phased manner, and retain only those areas where hydrocarbon discoveries are made, relinquishing the remaining area for re-allocation - through a competitive bidding process- to other potential bidders, whose hopes/ views in terms of hydrocarbon prospectively differ from the contract holders who have relinquished such area. The audit, therefore, recommend the following:

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• The stipulated time lines and processes in the PSC for relinquishment of contract area should, under no circumstances, be relaxed, and compliance with these provisions should be invariably ensured. Further, the discovery and development areas should be rigorously delineated, keeping strictly to the discoveries made through exploratory and appraisal well drilling and proper delineation of reservoir boundaries.

Ministry has assured that conclusion and recommendations drawn by CAG would be considered for appropriate action.

Gap analysis between ISSAI 5220 and PA Report

Section 1

Guideline 1 SAI Responsibilities• SAI should identify its audit responsibilities in relation to

public/private finance projects and concessions and decide how to carry these out.

• The SAI must therefore be clear about what access rights it has to a private company associated with a public private project.

• PSCs had provisions to audit the records of private concessionaire since the contracts were entered after NELP (1999). However, SAI raised issues for audit of these blocks only in 2007 after a special audit request was received from Secretary of the Ministry in November 2007. Moreover, regular audit was already carried out upto 2003-04/2004-05. This shows that prior to 2007, SAI was not clear about its right to access records of concessionaire despite huge government

interest involved in these PSCs.

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Gap analysis between ISSAI 5220 and PA Report (Contd..)

Guideline 2

Acquiring the necessary skills

Guideline• SAI should identify and secure the core in-house skills to carry out

authoritative studies of public/private finance projects and concessions, and supplement these skills with expert external support as necessary.

PA was taken in November 2007 on the request of Secretary and concerns voiced in some quarters about the capital expenditure being incurred by some contractors in the development projects awarded under NELP. Though SAI had been regularly conducting audit of PSCs and issuing Inspection Reports but the officials engaged in audit had never raised concern on Profit Sharing between government and concessionaire. This shows that the officials did not have adequate skills to raise issues which otherwise raised by the Ministry and others in Public.


Guideline 3

Involvement of the SAI

Guideline• The SAI should examine the procurement of a public/private

finance and concession deal as soon as is practical after the contract is awarded and should then consider examining the project again when it is in the operational phase and the concessionaire / contractor is delivering the contracted services.

Though the PSCs were entered into after NELP, however, audit of concessionaire was taken up only in November 2007 that too on the request of Secretary. This shows that the officials could take up audit of concessionaire at a delayed stage.

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Guideline 4

Planning the Audit

Guideline• In planning the audit of a public/private finance and concessions

contract, the SAI should plan to cover all major aspects of the deal that have a bearing on value for money, as set out in the following guidelines, to identify the key parties to the deal and, where possible, to take evidence from them, and to be alert to identifying lessons for the future.

Although the Exit Conference was held with the concessionaire, no entry conference was held with concessionaire. Scope of audit was modified as in the original sample of 22 PSCs were reduced to 20 PSCs. SAI also subsumed a Performance Audit of Hydrocarbon PSCs, covering a sample of discovered/ pre-NELP PSCs and NELP PSCs 22 (for which an entry conference had been held in November 2007 with the then Secretary) into Ministry's special audit request.

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Section 2 Scoping the Projects

Guideline 5

Selection of the project

Guideline• The SAI should examine how the audited body

prioritized potential projects and whether it implemented projects in that priority order.

Objectives and scope of PA do not specifically mentioned about this aspect. Further in the absence of any findings in the PA, it is not feasible to analyze gap between ISSAI 5220 and PA Report.

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Guideline 6

Definition of project requirements

Guideline• SAI should examine whether the audited body stated its

requirements clearly from the start and expressed these in output terms making clear any particular constraints.


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Guideline 7

Private sector capabilities

Guideline• The SAI should review whether the audited body

made a preliminary assessment of the private sector’s capabilities for delivering the requirements



Guideline 8

Evaluation of potential benefits

Guideline• The SAI should identify whether the audited body made a preliminary evaluation of the benefits it sought.

There is no GAP because SAI has pointed out deficiency in Profit sharing formula in the PA report.

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Guideline 9

Wider policy objectives

Guideline• The SAI should review how the audited body

assessed the impact any wider policy objectives might have on the project



Guideline 10

Selection of the most suitable forms of partnership

Guideline• The SAI should examine whether the audited body

examined a range of alternative ways of meeting its needs, such as public sector traditional procurement or privatization, before choosing the public/private finance and concessions option.


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Guideline 11

Innovation


identified the room for innovation in advance in areas such as design and construction, operation and project financing.


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Guideline 12

Risk Assessment

Guideline• The SAI should review whether the audited body investigated

in advance the appropriate allocation of project risks between the public sector and private sector parties affected by the project.

No gap was found because this aspect has been taken care in the agreement. It is seen that the private contractors incur capital expenditure towards discoveries, irrespective of the fact whether oil or gas is discovered or not. It is only when hydrocarbons are discovered and assessed to be commercially viable, that the contractor has the first rights on the revenue streams accruing from sales of oil and gas till his costs are recovered.

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Guideline 13Affordability and likely value for moneyGuideline

• The SAI should examine the extent to which the audited body considered, before starting the procurement process, whether the project was likely to be affordable and offer value for money.

No gap was found because this aspect has been taken care in the agreement. It is seen that the government will not spent any money and private contractors only incur capital expenditure irrespective of the fact whether oil or gas is discovered or not.

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Guideline 14

Outline Business Case


prepared a proper business case to support the decision to begin the project’s procurement.


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Section 3 : Project Management

Guideline 15

Project Team

Guideline• The SAI should examine whether the audited body assessed

the skills it would need to deliver the project successfully and where it could obtain these, for example from in-house staff or from external advisers, and whether the body then assembled its project team in good time.

No gap was found because SAI has examined this aspect and commented that Ministry as well as DGH is not having adequate skilled staff to take care of all aspect affecting profitability of Govt. share in respect of hundreds of PSCs.

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Guideline 16

Market Investigation

Guideline• The SAI should examine how the audited body

investigated the market prior to beginning the formal procurement, to establish that there were suppliers who were willing to tender for the project.

There is no gap because SAI has pointed out deficiency in concessionaire agreement regarding control of Government in high value procurement decision taken by the concessionaire

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Guideline 17

Contractual matters


identified the contractual issues that were likely to arise during the procurement and drew up a draft contract, setting out initial proposals on each issue.


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Guideline 18

Tender Strategy

Guideline• The SAI should identify whether the audited body prepared

a tendering strategy, covering the number of tender rounds to be held, the number of bids to be invited at each tender stage, the body’s approach to communicating with bidders, and a realistic timetable for the tender process.

There is no gap since SAI has examined this issue and observed that the provisions relating to procurement procedures in the PSCs do not provide for adequate oversight I control by Gol representatives on procurement processes.

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Guideline 19

Project timetable

Guideline• The SAI should identify whether the audited body

prepared a credible project timetable which identified milestones against which progress could be measured, and points within the process at which the body was to review the project’s continued viability.

No analysis in the PA report of timeline of the projects has been made. It is seen that status of most of the blocks/fields (awarded during 2001 to 2004) have been shown ‘under exploration’ without indicating their time line for completion.

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Guideline 20

Cost and benefit comparison


assessed costs and benefits of the public/private finance option against an alternative procurement option.

There is no gap because the concessionaire agreement was entered into after competitive bidding and there was no other alternative option available with the government.

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Guideline 21

Tender List


succeeded in creating a good tender list.


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Guideline 22

Specification of requirements

Guideline• The SAI should consider whether the audited body

set out a clear specification of the requirements.


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Guideline 23

Maintaining competition


succeeded in maintaining competitive tension to contract award and managed the negotiations with the preferred bidder well.


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Guideline 24

Regular Reviews

Guideline• The SAI should identify whether during the

procurement the audited body regularly assessed that the project continued to offer value for money


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Guideline 25

Budgets for project costs

Guideline• The SAI should examine whether the audited body set and

controlled realistic budgets for all project costs, including internal and external resources.

There is no gap as SAI has examined this issue and observed that Annual Work Programmes and Budgets should be strictly in line with the approved development plans. Any significant variations from the approved Work Programme and Budgets with similar impact beyond the stipulated range must also be subject to prior approval. Incurring of any costs which vary from the Development Plans and Annual Work Programmes and Budgets on an overall basis without prior approval of Government representatives on Management Committee should automatically be ineligible for cost recovery.

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Guideline 26

Appointment of advisers

Guideline• The SAI should check that the audited body

appointed good quality external advisers after competition.


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Guideline 27

Cost management


monitored and managed its project costs, including internal and external resources.

There is no gap as SAI has examined this issue and recommended that any cost which vary from development plan, etc without prior approval of government representatives should automatically be ineligible for cost recovery.

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Section 4 Tendering

Guideline 28

Bidders’ Proposals

Guideline• The SAI should examine whether a good range of

solutions was proposed by bidders

Objectives and scope of PA do not specifically mentioned that good range of solutions regarding exploration of Oil and Gas was proposed by bidders. Further in the absence of any findings in the PA, it is not feasible to analyze gap between ISSAI 5220 and PA Report.

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Guideline 29

Bid Assessment


carried out a broad ranging assessment of the bids


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Guideline 30

Choice of Bidder


assessed the results of the evaluations so as to select the bid offering the best value


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Section 5 The Right Contract

Guideline 31

Changes during negotiation with winning bidder

Guideline• The SAI should review whether there were any changes

and, if so, how the audited body minimised changes to the terms of the deal during negotiations with the winning bidder.


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Guideline 32

Achievement of objectives

Guideline• The SAI should examine whether the deal meets the

project’s original objectives or the latest circumstances if these objectives changed during the procurement. In the latter case, the SAI should examine the significance of any such changes.


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Guideline 33

Evaluation of alternatives


confirmed that the proposed deal offered best value for money, compared to reasonable alternatives, before awarding the contract.

There is no gap as SAI has examined this issue and found that there were number of hypothetical assumptions based on which calculation of fiscal package has been made and recommended that the bidder should be allowed to make only single point bid which can be compared straight way without hypothetical assumptions.

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Guideline 34

Ensuring service delivery

Guideline• The SAI should review whether the contract’s

provisions on matters such as performance measurement and supplier remuneration will be likely to ensure delivery of the service required.

Objectives and scope of PA do not specifically mentioned anything about the quality of service delivery. Further in the absence of any findings in the PA, it is not feasible to analyze gap between ISSAI 5220 and PA Report.

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Guideline 35

Confirmation of affordability

Guideline• The SAI should identify whether there are sources for

any capital funds required to implement the project and for the ongoing payments payable under the contract.

Objectives and scope of PA do not specifically mentioned any matter this kind. Further in the absence of any findings in the PA, it is not feasible to analyze gap between ISSAI 5220 and PA Report.

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Section 6 The Operational Phase

Guideline 36

Is the asset fit for purpose?


assessed whether any assets required as part of the deal were delivered to the appropriate quality standard and subsequently remain fit for the audited body’s business purposes.

There is no gap as SAI has examined implementation of the PSCs and raised number of observations. However, there is no specific finding on fitness of the assets.

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Guideline 37

Service provision meets business requirements

Guideline• The SAI should review whether the services required

as part of the contract are being delivered to the appropriate quality standards and remain aligned with the audited body’s business needs.

There is no gap as SAI has examined implementation of the PSCs and raised number of observations. However, there is no specific on delivery of service of appropriate quality.

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Guideline 38

The deal continues to be value for money


periodically reviews the progress of the public/private finance deal and assesses whether it continues to provide value for money.

• There is no gap as SAI has examined implementation of the PSCs and raised number of observations. However, there is no specific on delivery of service of appropriate quality.

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Guideline 39

The right governance and relationship structures are maintained

Guideline • The SAI should examine whether the audited body has the

right governance structures for the project and maintains a good relationship with the contractor(s).

Objectives and scope of PA do not specifically mentioned anything about concessionaire maintaining right governance structures for the project and maintaining good relationship with the contractor(s). Further in the absence of any findings in the PA, it is not feasible to analyze gap between ISSAI 5220 and PA Report.

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Guideline 40 A good contract management team is maintainedGuideline

• The SAI should examine whether the audited body maintains a skilled and knowledgeable team to manage the public/private finance contract.

Objectives and scope of PA do not specifically mentioned anything about concessionaire maintaining skilled and knowledgeable team to manage the public/private finance contract. Further in the absence of any findings in the PA, it is not feasible to analyze gap between ISSAI 5220 and PA Report.

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Guideline 41Proper allocation of risk is maintained

Guideline• The SAI should examine whether the allocation of risk

between the public and private parties remains optimal throughout the project lifetime.

Objectives and scope of PA do not specifically mentioned about examination in audit regarding allocation of risk between the public and private parties remains optimal throughout the project lifetime. Further in the absence of any findings in the PA, it is not feasible to analyze gap between ISSAI 5220 and PA Report.

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Guideline 42

Accounting treatment is appropriate

Guideline• The SAI should review the accounting treatment for

the asset delivered under the public/private finance deal and assess whether it abides by current accounting regulations and guidance.


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Guideline 43

Management of the contract’s expiry

Guideline• The SAI should examine whether the audited body planned and managed effectively its exit from the contract on its expiry.


Thank You

Documents

APPLICABILITY OF ISSAI 5220-AUDIT OF PUBLIC PRIVATE FINANCE IN SAI INDIA Group 2 Syndicate presentation by Shri A S Sahi Shri U P S Sisodia Shri Sarin