FM Diagnostics in Indian Local Governments Innovations & Challenges

Decentralization - Background Panchayats have been in existence in various forms for a long time even prior to independence Panchayats have been in existence in various forms for a long time even prior to independence 73rd and 74 th constitutional amendments (1992) provided legal mandate to states to: 73rd and 74 th constitutional amendments (1992) provided legal mandate to states to: –Set up uniform three-tier structure with village, block and district levels (details left to states) –transfer functions (with powers) to local governments –Grant constitutional status to local governments –Empower disadvantaged groups (one-third reservation) –Hold free, fair and regular elections and keep terms fixed –Address the question of finances-formula for distribution by states (through State Finance Commissions)

Government Structure National States (28) Local Governments (PRIs & ULBs) RURAL (241,310) District Panchayats (537) Block Panchayats (6,097) Gram Panchayats (234,676) URBAN (4378) Mun. Corporations Municipalities Town Panchayats 72 % of the population live in rural areas and 28 % in urban areas.

Approach to Diagnostics State Financial Accountability Assessments (why state?) - Chapters on PRIs and ULBs (why? The way GOI and Bank are set up) State Financial Accountability Assessments (why state?) - Chapters on PRIs and ULBs (why? The way GOI and Bank are set up) Partnership with rural and urban sectors – Fiscal decentralization study, rural & urban projects, linkage to service delivery aspects Partnership with rural and urban sectors – Fiscal decentralization study, rural & urban projects, linkage to service delivery aspects Networking with others – research institutes, central RD and UD ministries, state government departments, professional institute (ICAI) etc. Networking with others – research institutes, central RD and UD ministries, state government departments, professional institute (ICAI) etc. Assimilation/Synthesis study with highlighted good practices (in progress) Assimilation/Synthesis study with highlighted good practices (in progress) FM practices in local governments across selected countries (in pipeline) FM practices in local governments across selected countries (in pipeline)

Size of Rural Local Bodies KarnatakaRajasthan Uttar Pradesh Tripura Village5,6739,18452, Block District Area (Sq. Kms.) 187,520337,375 Population (millions)

General Findings (1) Concept of PRIs and ULBs as local governments is still evolving Concept of PRIs and ULBs as local governments is still evolving Wide variation across states in the degree of decentralization and capacity (extremes) Wide variation across states in the degree of decentralization and capacity (extremes) Local Govts. are substantially under state control acting as extended implementing agencies with state funded staff Local Govts. are substantially under state control acting as extended implementing agencies with state funded staff Almost exclusively dependent on the state & the center funds with minimal own revenues Almost exclusively dependent on the state & the center funds with minimal own revenues

General Findings (2) Within the constraints, a sound overall framework for PFMA is existent in PRIs and ULBs – capacity and compliance vary within a state and from state to state Within the constraints, a sound overall framework for PFMA is existent in PRIs and ULBs – capacity and compliance vary within a state and from state to state Generally PRIs receive funds from 3 sources – State, Centre and grants as per CFC award Generally PRIs receive funds from 3 sources – State, Centre and grants as per CFC award Most payments are routed through State Treasuries Most payments are routed through State Treasuries Unpredictability of fund availability – allocation, availability, actual receipt, and timing of flow Unpredictability of fund availability – allocation, availability, actual receipt, and timing of flow Unreliable figures for analysis and expenditure tracking Unreliable figures for analysis and expenditure tracking

Findings (Accounts & Reporting) Accounts Accounts –basic books reasonably maintained at district level (internal reporting vs. external reporting) –severe capacity constraints at village level –mostly delayed and a huge backlog (3-4 years in some cases) –not easily understandable – not a single consolidated statement but separate for each source of funding –not fully reliable due to non-adherence to standard practices & reconciliation – no National Standard setter for local govts. –inadequate information on deductions at source (electricity charges) –require simple formats, training and hand holding

Findings (Audit) Audits Audits –varying practices – CAG audit in some states at some levels, mostly audit by Local Funds Auditor and some private auditors –multiplicity of audits depending upon the number of programs –issues relating to capacity, timeliness, coverage, quality, poor follow up –no consolidation at different tiers in most states and poor formal oversight arrangements –ULBs – Importance of reliable financial statements yet to take firm root as a way to approach financial markets

Good Practices (1) Oversight Oversight –social audit (Jamabandi in Karnataka & grama sabha in Kerala), participatory governance (Gram Sansad, Gram Unnayan Samiti, District Councils & Beneficiaries Committee in W. Bengal), and public hearing (Jan Sunwais in Rajasthan) –Right to Information Act (Rajasthan, Karnataka) –Ombudsman (Karnataka & Kerala) to review complaints against PRI functionaries –PROOF-Public Record of Operations & Finance in Karnataka –performance audit in Kerala

Good Practices (2) Funds flow – MORD’s routing of funds direct to districts instead of thru treasury (subject of debate) Funds flow – MORD’s routing of funds direct to districts instead of thru treasury (subject of debate) Internal audit structure in all the three tiers in W. Bengal Internal audit structure in all the three tiers in W. Bengal CAG’s new accounting and reporting formats & ICAI Manual for ULBs CAG’s new accounting and reporting formats & ICAI Manual for ULBs CAG’s publications on audit guidelines and training for PRIs CAG’s publications on audit guidelines and training for PRIs District Planning Committees (mandated) -view district as a whole and oversee budget preparation & execution (rural & urban) District Planning Committees (mandated) -view district as a whole and oversee budget preparation & execution (rural & urban) Orissa-PRI Accounts Monitoring software (PRIASOFT) Orissa-PRI Accounts Monitoring software (PRIASOFT) Switch to accrual accounting and computerization in municipalities Switch to accrual accounting and computerization in municipalities

Challenges and the way forward How to convince the importance of timely and reliable financial information? How to convince the importance of timely and reliable financial information? Strong state leadership and monitoring Strong state leadership and monitoring Human resource skills up gradation - cultural change Human resource skills up gradation - cultural change More participatory budgeting More participatory budgeting Accounting-getting the basics right Accounting-getting the basics right –each PRI to take responsibility for simple cash basis actg., timely & user friendly financial statements, routine reconciliation, gradual computerization –Parallel initiatives by various parties (state, CAG, ICAI, different ULBs)

Challenges and the way forward (2) Auditing Auditing –Need for systemic financial audits, timely response to audit queries and follow up, partnership with private auditors, strengthen internal audit Improving local transparency Improving local transparency –Publish information on budgets, fund releases, financial reports, development works, contracts awarded Encouraging learning from each other on innovative reforms Encouraging learning from each other on innovative reforms

Follow up on Diagnostics Karnataka Karnataka – FM capacity building in PRIs – FM capacity building in ULBs Andhra Pradesh – Urban FM component Andhra Pradesh – Urban FM component Tamilnad – improved financial reporting at ULBs following on prior computerization Tamilnad – improved financial reporting at ULBs following on prior computerization Possibility of a multi-donor regional Trust Fund to provide TA grants Possibility of a multi-donor regional Trust Fund to provide TA grants