SEMINAR ON “GOVERNMENT ASSETS” HELD AT NATIONAL ACADEMY OF AUDIT AND ACCOUNTS, SHIMLA
Two themes were chosen for discussion under the generic title “Government Assets”: (i) Accounting for Government Assets – Ensuring Accountability and Transparency and (ii) Asset Valuation in Public Sector Enterprises with Reference to Disinvestment.
Both
themes are relevant and important in the changing paradigm in which governments
are required to function. Both have a
common aim, which is to ensure that national resources are used efficiently in
the government sector. The concern for efficiency has arisen from the fact that
there was a tremendous expansion of the public sector in the 2nd
half of the last century. In the
industrial countries, proportion of government expenditure to GDP has gone up
from 10% to nearly 50% by 1970’s. In developing countries like India, at the
time of independence, Government expenditure as a proportion of GDP was 10%,
which went upto 30% in the late 70’s and 80’s and has come down a little
now. There has been a widespread
feeling that this huge expansion of the public sector was wasteful, and in any
case was not sustainable as it required taxation of a high order which a
democratic country cannot bear, and also borrowings which cannot go on beyond a
point. Hence, smaller and efficient
governments are the order of the day.
This led to moves for governmental reforms, by focussing on the core
functions of the government and by focussing on greater transparency and
accountability of government by bringing in proper accounting of government
expenditure, not only those of the
current or “revenue” category but also under the “capital” category, and the
assets created by such expenditures.
The
Deputy Comptroller & Auditor General (LB & AEC) welcomed the
participants of the seminar. In his welcome speech he thanked the Comptroller
& Auditor General of India for inaugurating the seminar and delivering the
keynote address, which exemplified his commitment to unravel issues of common
concern for deeper study and promoting continuing research, education and
development in the Audit and Accounts Department. The department has so far
undertaken seven such studies, some of technical importance to the department
and a few of universal interest.
Illustratively, we had seminars on Fiscal Deficit, Liberalisation and
After, Financial Sector Reforms, Accountability of Local Bodies, Voucher Level
Computerisation, State Level Public Sector Undertakings and Impact Evaluation.
The
tone of the seminar was aptly set by Comptroller and Auditor General of India.
In his keynote address, he said, valuation of disinvestment depends on how the
disinvestment is viewed and structured.
How it is viewed is important since there are many stakeholders in the
system – the Parliamentarians, the public, employees, investors and the
regulators. Valuation therefore has to be fair and above board. He also mentioned the initiative taken for
modernising accounting for government activities, for which the Government
Accounting Standards Advisory Board (GASAB) has been set up. These initiatives are expected to bring the
system of accounting in line with the current changes in the government'’ role,
and also in line with the current best practice.
The
first session took up the issue of valuation of assets, which is required for
disinvestment. There were two presentations by the consultant advisors to the
Department of Disinvestment. These concerned the approaches, alternatives,
intricacies, and shortcomings of different methods of valuation and also what
has evolved and still evolving as the best internationally accepted methods of
valuation. One consultant gave an
overview of various approaches both traditional and current trends and
techniques. He cautioned that no single approach to valuation is perfect. We
should consider the dynamics of the business in question and not rely on the
industry’s thumb rule. Since it is not
a mechanical exercise, he said auditors should be cautious in making judgements
and criticisms.
The
three alternative methods, which were discussed, are based on earnings, asset
and cash flow. It also depends on
whether the valuation is of business or equity. Earnings based methods such as
comparable market transactions, which were traditionally in use, are being
discontinued due to many pitfalls. The
main pitfall is the uncritical reliance on history. The most accepted method is discounted cash flow (DCF)
method. The three factors, which
influence the DCF method, are (I) forecasted cash flow, (ii) discounted rate
and (iii) terminal value. Valuation range is given by outcome of these three
factors. DCF method is considered best.
The forecast period should be of at least 5-7 years and it also depends
on type of business, which is being valued.
About discount rate and risk premium questions were raised regarding
their subjectively. It was clarified
that the modern advances in techniques have succeeded in limiting the area of
subjectivity. One of the issues raised during discussion was accounting of
non-core assets. It was clarified that
the non-core assets should be valued separately and either added to the DCF
valuation of business or sold separately from the main business.
Asset
based methods include market price and market shares, the new developments
centre around intellectual capital. The Economic Value Addition (EVA) method
mentioned will give same result as discounted cash flow. Another Department of Disinvestment
consultant spoke about valuation of strategic sale. The strategic sale value is nearly 20%-25% higher than Cash
Flow. Whether this is the same for all
industries and enterprises is debatable and the reliability of this figure is
also doubtful. It was acknowledged that the subjective element in valuation
cannot be eliminated completely but can be minimised. There was a suggestion that the results of the three methods
should be taken into account and with suitable weights assigned. The kind of weights attached will also have
subjectivity and valuers should throw more light on this issue. The element of
arbitrariness in valuation arises because of discount rate, risk premium and
also weightages attached to different values.
The
issue of justification of the sale of profit making companies was raised. Secretary Disinvestment clarified that the
policy of government is that except for three sectors namely, Railways, Atomic
Energy and Defence, the remaining
Public Enterprises are open for disinvestment. It is generally accepted
that the government should withdraw from the areas where it should not be a
player. Also government has moved away from minority sale of shares to parting
with controlling interest. The returns generated out of sale of the public
sector enterprises to finance deficit, was raised by some participants, since
it is a temporary arrangement and does not help long term viability.
A
question was raised about having a peer review of the valuation process. Also it was suggested there should be
guidelines for disinvestment which will be utilised by auditors. An issue was
raised about whether the C&AG be involved in prior agreement. An example of privatisation of Sydney
airport was mentioned where Auditor General of Australia was part of prior
agreement, which led to criticism in Parliament. It was also mentioned that prior agreement is perhaps more risky
than subsequent objection. It was generally agreed that prior involvement of
C&AG is not desirable and he should have the prerogative to comment on
disinvestment after it takes place.
Pre-empting C&AG’s comments by taking him into confidence before
disinvestment process is not desirable.
An
issue was raised about bringing out white papers on disinvestment process to be
placed in Parliament. Participants felt that this was a good suggestion. A white paper consisting of valuation
methodology and techniques used in the process would enable an informed
debate. One of the problems faced by
audit while scrutinizing disinvestment process is lack of proper documentation
of the process. Participants felt that it should be made mandatory for the
Department of Disinvestment to have proper documentation incorporating all
assets conforming to “Valuation Accounting Disclosure Standards”.
There
was an issue raised on preparation of accounts on the basis of international accounting standards. The need for it was questioned. It was clarified that in case the shares of
the enterprise are to be listed in the international market it is mandatory
that accounts have to be prepared on the basis of appropriate international
accounting standards. Arising from
this, a suggestion was made for having an index of conservatism using Indian
Standards as base. The President ICAI
mentioned that they are looking into it.
The
seminar then moved on to discuss the topic on “Accounting for Government Assets
– Ensuring Accountability and Transparency.” The definition of government
assets was recognised to be an issue.
Accounting for government assets consist of recording, classifying and
summarising in all transactions with respect to past events leading to the
creation of the assets, maintenance and control of the assets and net benefits
from commencement of use of these assets.
These are essential for transparency and accountability. Efficiency in
use of national resources cannot be achieved without proper accounting of the
assets. It was also held that the
utility of valuation of government assets would include infrastructure
assets. There was also a suggestion for
setting up an Asset Information Management System later. Asset accounting in government is desirable
for better asset management that ties up with the basic objective of efficient
use of resources in the public sector. It was also agreed that the fiscal
responsibility management bill enacted now was designed to make the budget more
transparent and that it also requires asset accounting. There was a lot of debate on the issue of
whether accrual accounting is desirable and feasible, and whether we can
separate asset accounting from accrual accounting. Certain conceptual issues were mentioned such as future benefits
and costs, maintenance and market value of assets, which are necessary for
pricing for government services. The
various reasons given clearly established the need for accounting government
assets. Certain other types of assets
were discussed namely Depletable Assets, Hazardous Material and Heritage Assets
which are most neglected.
An
action plan was discussed for introducing asset accounting. The asset accounts would have to form a part
of the finance accounts, for which detailed procedures would be needed. The seminar unanimously recommended that a
working group consisting of selected participants of this seminar to be
constituted to consider various issues relating to accounting of government
assets.
The
seminar concluded with the Director General of the Academy thanking the
Comptroller & Auditor General of India for selecting the Academy as the
venue for the seminar and also for taking time off from his busy schedule to
inaugurate the seminar and attend a significant portion of it. He also thanked eminent academicians, senior
officers from Government of India, and colleagues from Ministry of
Disinvestments, Pr. Finance Secretaries of different States and senior officers
from IA&AD for actively participating in the discussions.