FM Diagnostics in Indian Local Governments Innovations & Challenges

1. FM Diagnostics inIndian Local GovernmentsInnovations & Challenges

2. Decentralization - Background • Panchayats have been in existence in various forms for a long time even prior to independence • 73rd and 74th 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)

3. Government Structure 72 % of the population live in rural areas and 28 % in urban areas.

4. Approach to Diagnostics • 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 • 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) • FM practices in local governments across selected countries (in pipeline)

5. Size of Rural Local Bodies

6. General Findings (1) • Concept of PRIs and ULBs as local governments is still evolving • 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 • Almost exclusively dependent on the state & the center funds with minimal own revenues

7. 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 • Generally PRIs receive funds from 3 sources – State, Centre and grants as per CFC award • Most payments are routed through State Treasuries • Unpredictability of fund availability – allocation, availability, actual receipt, and timing of flow • Unreliable figures for analysis and expenditure tracking

8. Findings (Accounts & Reporting) • 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

9. Findings (Audit) • 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

10. Good Practices (1) • 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

11. Good Practices (2) • 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 • CAG’s new accounting and reporting formats & ICAI Manual for ULBs • 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) • Orissa-PRI Accounts Monitoring software (PRIASOFT) • Switch to accrual accounting and computerization in municipalities

12. Challenges and the way forward • How to convince the importance of timely and reliable financial information? • Strong state leadership and monitoring • Human resource skills up gradation - cultural change • More participatory budgeting • 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)

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

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