CAG Audit Report on Air India and Indian Airlines

“Man must rise above the Earth — to the top of the atmosphere and beyond — for only thus will he fully understand the world in which he lives.” — Socrates

I was waiting for the Comptroller and Auditor General (CAG) performance audit report on the Civil Aviation Ministry, which includes operations of Air India Limited (AIL) and Indian Airlines Limited (IAL). Both the airlines, AIL on international routes and IAL on domestic routes have lost market share in the last few years. The liberalization of civil aviation sector by allowing private airlines to operate ended the monopoly of the government airlines. The market perception was that this resulted in huge operating losses. However, there is much more dirt. Give below some of the highlights of the report.

1.    Purchase of Aircrafts

The report questions the Boeing aircraft purchasing decisions made in 2004-2005 by the Civil Aviation Ministry. In December 2005, decision was made to purchase 50 aircrafts at a price of Rs.33,197 crore (USD 6871 million). The initial plan in 2004 was to purchase a lesser number of aircrafts and over the period, the order increased. CAG has questioned the decision, that the market demand was not sufficient to place such a large order. As per the report –

“The increase in numbers does not withstand audit scrutiny, considering the market requirements obtaining then or forecast for the future as also the commercial viability projected to justify the acquisition. The acquisition appears to be supply-driven.”

It further questions the sudden speed shown by the ministry in purchase decisions. It also categorically refutes the assumptions made for the project and states the costing analysis was improperly conducted. Most of the purchase money was to be funded from debt. In the report it states-

“This was a recipe for disaster ab initio and should have raised alarm signals in MoCA, PIB and the Planning Commission.”

It has concluded that Ministry of Corporate Affairs (MoCA) influenced this decision.

Lessons for private sector

From a private sector perspective, the observations apply to the purchase department. Purchase decisions made without considering organizational requirements as a favor to the supplier implies that purchase department is receiving kickbacks. Overlooking so many aspects of internal controls means collision between employees and departments (buyer, purchase and finance departments). Employees may process fake purchase orders for personal expenses. Periodic supply chain audit including purchase function and inventory management reduces probability of purchasing frauds.

2.   Merger of AIL and IAL into NACIL

The second mind-blowing statement made is about the merger of the airlines. Here is an extract-

“Based on the records, we are unable to ascertain the detailed justification for, or the background to the “in principle” approval of GOI for working towards the merger of AIL and IAL.”

The report further states that the merger made little sense after such massive aircraft acquisition plans. Besides the timing of the merger, the report mentions that financial analysis of the proposed merger was insufficient, without considering ground level realities. Human resources, maintenance of aircrafts, operations, system integration etc. were not delved into deeply for decision-making. The auditors are of the opinion, that the decision was made at the top without due consideration.

Lessons for private sector

Experience has shown that in India most of the mergers and expansion plans are ill thought. For example, some senior managers propose a location for an office, and the decision is made. A detailed analysis at operational, financial and market is not available. I had mentioned in fraud symptoms series that mergers without organizational integration and extensive geographical distribution increases fraud risks. Hence, organizations must conduct detailed reviews of business strategies while making decisions having long-term impact.

3.   Role of Ministry of Corporate Affairs

It hasn’t spared the MoCA at all. The ministry will have some answering to do. Here is a line about the Memorandum of Understandings (MOU) signed by the airlines.

“This skewed the MOU ratings of IAL and AIL to unduly represent a rosy picture of performance. The overall combination of financial and non-financial parameters devised for the MOUs were such as to ensure that the MOUs become a meaningless exercise, rarely (if ever) reflecting poor performance, and ensuring lack of accountability for all parties concerned.”

These are strong statements questioning the validity of key performance indicators, measurement criteria and performance reporting.

Lessons for private sector

The phrase “what cannot be counted, cannot be measured” holds well in respect to performance management. Private sector suffers from the same malaise. Instead of select few performance indicators management is bombarded with trivial many. With the information overload, massaging of data occurs simultaneously. Hence, the timely and accurate information about company performance is not available. Management decisions are flawed and reactive in nature. Investing in good business intelligence systems helps to surmount this problem.

Closing thoughts

The report is excellent and as usual, I am impressed with the independence of CAG reports. The one shortcoming is that the losses were not quantified as in the previous 2G Telecom and Common Wealth Games Report. CAGs viewpoint is that it was outside the scope of the current audit. I disagree with the statement. If the observation is part of the report, the impact of loss is inclusive. Nonetheless, I recommend fellow risk managers to read the report. They can learn a few good lessons.