EXPERIENCE SHARING ON LOCAL PFM & CURRENT REFORM INITIATIVES Babu Ram Shrestha, MOFALD

Assessment of Nepal’s Public Financial Management System (PFM)  Nepal’s PFM at the national level.  Nepal’s PFM at the sub-national level.  Current reform initiatives in local PFM

Nepal’s PFM at the national level. The Government’s PFM Initiatives.  To address PFM issues, the government developed a Public Financial Management Reform Program (PFMRP) for

Nepal’s PFM at the sub-national level. The Government’s local government program and sub- national PFM issues  The government’s Local Government and Community Development Program (LGCDP, ) has at the forefront of local governance reforms.  In the course of LGCDP implementation, there were occasional reports of fiduciary risks and compliance issues.

FIDUCIARY RISK ANALYSIS (FRA)  ADB and its development partners conducted a Fiduciary Risk Assessment (FRA) of LGCDP.  Donors subsequently financed a Public Expenditure Tracking Survey (PETS) of LGCDP.

The FRA highlighted cases of  lack of transparency in grant allocation,  Undue interference by political parties,  Poor accounting and reporting,  Non-compliance with procurement regulations, and  Lack of internal and external audit.

Fiduciary risks were identified such as  Poor compliance with participatory processes,  Diversion of resources,  Abuse of authority in decision-making,  Poor design and budgeting,  Delays in budget releases,  Poor revenue management,  Weak procurement systems,  Poor internal controls, and weak oversight.

Categorizing the issues  Budget and fiscal management issues at the local level.  Fiduciary risk at the sub national level  Public procurement problems.  Governance problems.

The new PFM and Fiduciary Risk Reduction Action Plan (FRRAP)  In response to the above assessments of LGCDP, the Ministry of Federal Affairs and Local Development (MOFALD) in March 2012 approved a Fiduciary Risk Reduction Action Plan (FRRAP).  The plan reflects lessons learned from LGCDP implementation, notably importance of strengthening PFM systems and  Capacity building in PFM at the local level, and the value of demand-side mechanisms.

Purpose and Objectives of the Plan The purpose of the PFM & FRRAP is to identify the tasks and activities involved in addressing essential PFM reform initiatives and mitigating and minimising the fiduciary risks in LBs’ operations with the following objectives: Aggregate fiscal discipline Strategic allocation of resources Efficient use of resources for service delivery

Introduction to the Plan This PFM & Fiduciary Risk Reduction Action Plan (FRRAP) integrates the many PFM and related fiduciary risks into a comprehensive action plan. The action plan includes the tasks, priorities, timings, resource estimates, responsibilities, management controls, reporting procedures, as well as risks to the plan itself.

PFM cycle and key fiduciary risk Areas  Planning programming and budgeting  Funds flow, including budget release  Implementation, including procurement management  Internal accountability  External auditing, reporting and monitoring and evaluation, and  Revenue management

Strategies  Strengthen participatory planning process  Improve accounting and reporting systems  Promote transparency,  Enhance capacity  Mitigate perceived risks  Strengthen civic oversight PEFA FRRAP will mainly be executed through local bodies

Expected results  Improved planning programming and budgeting  Improved funds flow,  Improved implementation,  Improved internal accountability  Improved auditing and monitoring & evaluation, and  Improved revenue management

Fiduciary risk rating matrix for LBs LBs comprise all 75 DDCs, 58 Municipalities and 3,915 VDCs. This action plan categorizes risks rating into low (L), medium (M), and high (H). Low risk - Represents a situation where there is basic compliance with existing rules of LBs of Nepal, although coverage may not be 100% Medium Risk - Indicates there are some significant weaknesses in compliance or that procedures need to be changed High Risk - Indicates substantial failure to comply or that the system will require substantial upgrading to meet the standard

Classifying fiduciary risks in LBs  Fiduciary risks in local bodies have been classified into process, result and corruption related risks Process Risk Corruption Risk Fiduciary Risk Result Risk

Reform cycle Implement PFM reforms Recommend PFM reform measures Identify main PFM weaknesses Investigate underlying causes Formulate PFM reform program Identify main PFM weaknesses Recommend PFM reform measures PFM-FRRAP Local PEFA Assessment

Reform initiatives  Strengthening Public Management Program (SPMP) 2012/ /15  supported by ADB, implementation under LGCDP-II  Reform budget, fiscal and fiduciary risk management at the sub national or local government level DDCs, Municipalities and VDCs  Public procurement and  Oversight and accountability institutions

Current reform initiatives in Local PFM  Budget and fiscal management  Fiduciary Risk management at the sub- national level (FRRAP)  Public procurement reforms  Oversight and accountability capacity building

Objectives of reform initiatives  Budget and fiscal management  Objective: To promote fiscal sustainability and more predictable and timely fiscal transfers to the local governments through improved budget and expenditure management

 Fiduciary Risk management at the sub- national level  Objective – To promote transparency and accountability of public expenditures of local governments.

 Public procurement reforms  Objective: To promote economy and efficiency and reduce fiduciary risks in public spending at the national and local level.

 Oversight and accountability capacity building  Objective – To help prevent and reduce corruption in public institutions by strengthening the capacity of anti-corruption and accountability institutions.

Components of SPMP reform program supported by ADB at the National & sub national level Component 2 Fiduciary risk management at the local government level 18 MILLION $ Component 1 Local government budget and fiscal management 7 MILLION $ COMPONENTS OF SPMP 30 MILLION $ Component 3 Public procurement reform 3 MILLION $ Component 4 Oversight and accountability capacity building 2 MILLION $

Component wise activities Local government budget and fiscal management  Enforcement of blended block-grant guidelines and prescribed timelines to improve fiscal transfers;  introduction of results-based management for DDCs and municipalities;  Strengthening local accounting systems, including use of IT tools to automate transactions;  Enhancing local resource mobilization and fiscal sustainability, including the development and pilot implementation of a Municipal Administration and Revenue System (MARS); and  Support for drafting a Fiscal Responsibility Bill.

 Promotion of public auditing by Ward Citizen Forums and Citizen Awareness Centers;  Strengthening external and internal audits of local bodies, including application of risk-based internal audits of village development committees (VDCs) by DDCs;  Capacity-building on auditing and results- based reporting of local bodies; and  Follow-on subnational PEFA survey and PETS of LGCDP. Fiduciary risk management at the local government level

 Institutional, legal and regulatory reforms to strengthen public procurement;  Development and implementation of e- Government Procurement (e-GP);  improved procurement management at national and local levels, including developing local bodies’ procurement plans, drafting standard bidding documents, etc; and  Capacity development of PPMO and key staff at central and local levels. Public procurement reform

 Legal and regulatory reforms to elevate Nepal’s anti-corruption regime per its commitment to the U.N. Convention against Corruption (UNCAC);  Human resource development of the National Vigilance Center (NVC);  Implementation of Corruption Vulnerability Diagnostics of select ministries; and  Social audits of select local bodies. Oversight and accountability capacity building

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