world bank document 31, 2004 document of the world bank report no. 29750-in india uttar pradesh...
TRANSCRIPT
August 31, 2004
Document of the World Bank
Report No. 29750-IN
IndiaUttar PradeshState Financial Accountability Assessment
Financial Management UnitSouth Asia Region
Report N
o. 29750-INIndia
Uttar Pradesh
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ABBREVIATIONS AND ACRONYMS
AB AC A G BDO BM B M O BPE CAG CAO CCL CFAA CGA CoE COPU CPA CS-DRMS DA DCL DDO DEMIST DFID DIA DM D M O DPE DPRO DRDA EO EFC FD FD&BM F Y GC GO Go1 GoUP GSDP HIPC IA IAAD IAAS I C A I IFA
IFMTR
INTOSAI IPAO
IFAC-PSC
IMF-GFS
Awas Bandhu, technical wing to Department o f Housing Audit Committee Accountant General Block Development Officer Budget Manual Block Medical Office Bureau of Public Enterprises Comptroller and Auditor General Chief Audit Officer, Dep’t o f Cooperative Societies and Panchayats cash credit limit Country Financial Accountability Assessment Controller General o f Accounts Committee on Estimates o f the Legislative Assembly Joint Committee on Public Undertakings Commonwealth Parliamentary Association Commonwealth Secretariat - Debt Recording & Management System Development Authority direct cash limit Drawing and Disbursing Officer Database for Employee MIS for Transparency Department for International Development, UK Directorate o f Internal Audit District Magistrate District Medical Office Department of Public Enterprises District Panchayati Raj Officer District Rural Development Agency Executive Officer Eleventh Finance Commission Finance Department Fiscal Discipline and Budget Management (law) financial year (FY 2003 = the year 1 April 2002 to 31 March 2003) Government company Government Order Government o f India Government o f the State o f Uttar Pradesh Gross State domestic product heavily-indebted poor country internal audit Indian Accounts and Audit Department Indian Accounts and Audit Service Institute of Chartered Accountants o f India Integrated Financial Adviser International Federation o f Accountants, Public Sector Committee Institute o f Financial Management Training and Research International Monetary Fund - Government Finance Statistics International Organization o f Supreme Audit Institutions Integrated Pay and Accounts Office
I T LFA MIS MLA M L C MNLP M P MTEF NIC NN NP NPP OECD/DAC
PAC PAG PE PIL PLA
PRI PTA PREM PwC PWD RBI SBI sc SC/ST SFAA SFC SIA ULB UP UPAEVP UPFC UP FoC UPRTC UPWC VDO W M A ZBB
information technology Department o f Local Funds Audit management information system Member of the Legislative Assembly (State) Member o f the Legislative Council (State) Mukhya Nagar Lekha Parikshak (audit body) Member of Parliament (Union) Medium-term expenditure framework National Information Centre Nagar Nigam (Municipal Corporation) Nagar Panchayat (Town Area Committee) Nagar Palika Parishad (Metropolitan Board) Organization for Economic Cooperation and Development, Development Assistance Committee Public Accounts Committee Principal Accountant General Public Enterprise Public Interest Litigation Personal Ledger Account (a deposit account within the Public Account) Panchayati Raj Institution (rural local body) Prevention o f Terrorism Act Poverty Reduction & Expenditure Management, World Bank network PricewaterhouseCoopers Public Works Department Reserve Bank o f India State Bank o f India statutory corporation scheduled castes and scheduled tribes State Financial Accountability Assessment State Finance Commission State Internal Auditor Urban Local Body State of Uttar Pradesh UP Avas Evam Vikas Parishad UP Finance Corporation UP Forest Corporation UP Road Transport Corporation UP State Warehousing Corporation Village Development Officer Ways and means advances Zero-Base Budgeting
ACKNOWLEDGEMENTS
An initial assessment o f the State Financial Accounting Assessment System was prepared by a core team led by Rajat Narula (SARFM). The team worked with the help o f consultants. The follow up study and finalization o f the report was led by Ivor Beazley (SARFM) and Priya Goel (SARFM). The study benefited greatly from the support o f V. J. Ravishankar, Mona Prasad and Salman Zaidi (SASPR). Vinaya V. Vemuri (SARFM) has assisted in the production o f the SFAA.
This report also benefited immensely from comments o f peer reviewers: Malcolm Holmes (PREM), Anthony Hegarty (Africa Region), Daniel Boyce (FM Anchor), Blanshard Marke (LOA) and T. N. Dhar (National peer reviewer).
The report benefited from discussions with stakeholders in UP including senior officials o f the GoUP led by Mrs. Rita Sharma (Principal Secretary-Finance), Dr. B. M. Joshi (Secretary-Finance) and Mr. Nee1 Ratan Kumar (Deputy Secretary-Finance). The Accountants General (Civil and Commercial) and Departments of Panchayati Raj Institutions, Urban Local Bodies, Rural Local Bodies, Legislative Oversight and Public Sector Enterprises were extremely helpful in providing data and explanatory comments.
STATE FINANCIAL ACCOUNTABILITY ASSESSMENT (SFAA)
Draft SFAA for the State o f Uttar Pradesh
Table o f Contents
EXECUTIVE SUMMARY ...................................................................................... 1
A . INTRODUCTION ............................................................................................ 5
Objectives and Scope o f the SFAA ............................................................. 6
Approach and Methodology ........................................................................ 7
B . INSTITUTIONAL AND LEGAL FRAMEWORK ....................................... 8
Finance Department .................................................................................... 9
Line Departments ....................................................................................... 10
Accounts and Audit .................................................................................... 11
Conclusion ................................................................................................... 12
GOVERNMENT BUDGET PREPARATION AND APPROVAL ............ 13 C . Budget Structure ........................................................................................ 13
Budget Process ............................................................................................ 14
Budget Comprehensiveness ....................................................................... 15
Participation and Transparency ............................................................... 16
Medium-Term Expenditure Framework ................................................. 17
Conclusion ................................................................................................... 18
D . BUDGET EXECUTION, MONITORING & INTERNAL CONTROL ... 19
Release o f Spending Authority .................................................................. 19
Cash Management ...................................................................................... 20
Debt Management ...................................................................................... 20
Procurement ............................................................................................... 22
Asset Management ..................................................................................... 23
Expenditure Control .................................................................................. 23
E .
F .
G .
H .
Monitoring o f Expenditure ....................................................................... 24
Personal Ledger Accounts ......................................................................... 25
Revenues ..................................................................................................... 26
Performance Management ........................................................................ 27
Internal Audit ............................................................................................. 28
Conclusion ................................................................................................... 29
GOVERNMENT ACCOUNTING AND FINANCIAL REPORTING ..... 31
Cash-Based Accounting and Reporting ................................................... 31
Computerization ......................................................................................... 33
Conclusion ................................................................................................... 34
ACCOUNTABILITY OF RURAL LOCAL BODIES ................................ 36
Planning and Budgeting ............................................................................ 36
Accounting and Reporting ........................................................................ 37
External Audit ............................................................................................ 38
Capacity Building ....................................................................................... 39
Conclusion ................................................................................................... 40
ACCOUNTABILITY OF URBAN LOCAL BODIES ................................ 41
Planning and Budgeting ............................................................................ 41
Procurement ............................................................................................... 42
Accounting and Internal Controls ............................................................ 43
External Reporting .................................................................................... 44
Monitoring .................................................................................................. 45
Audit ........................................... ................................................................ 45
Legislative Oversight ................................................................................. 45
Conclusion ................................................................................................... 46
ACCOUNTABILITY OF PUBLIC ENTERPRISES .................................. 47
Government Companies and Statutory Corporations ........................... 47
Accounts and Reports .................................................................. 48
Internal Control and Internal Audit .......................................... 51
External Audit .............................................................................. 52
Legislative Review ........................................................................ 52
Development Authorities ........................................................................... 53
Budgeting and Budget Monitoring ............................................. 53
Accounting and Financial Reporting ......................................... 53
Internal Control and Internal Auditmanagement Audit ........ 53
External Audit .............................................................................. 54
Departmental Commercial Undertakings ............................................... 55
Conclusion ................................................................................................... 55
EXTERNAL AUDIT ...................................................................................... 57
Mandate and Objectives ............................................................................ 57
Audit Methodology .................................................................................... 58
Training and Professional Development .................................................. 58
I .
Audit Reports ............................................................................................. 59
Follow Up .................................................................................................... 60
Conclusions ................................................................................................. 60
LEGISLATIVE OVERSIGHT ..................................................................... 61
Public Accounts Committee ...................................................................... 61
Committee on Estimates ............................................................................ 62
Conclusions ................................................................................................. 63
PUBLIC TRANSPARENCY ......................................................................... 64
Conclusions ................................................................................................. 65
RISK ANALYSIS ........................................................................................... 66
Other Aspects o f Risk ................................................................................ 68
J .
K .
L .
Annex 1 Bibliography ............................................................................................ 71
Annex 2 L i s t o f Persons M e t ................................................................................. 74
Annex 3 Finance Department Functions ............................................................. 78
Annex 4 Budget Process ........................................................................................ 79
Annex 6 Resource-Based Accounting ................................................................... 83
Annex 8 Public Financial Accountability in Govt . Companies in U.P .............. 86
and Development Authorities in U.P ..................................................... 99
Annex 5 Payments Process .................................................................................... 81
Annex 7 Registered Societies ................................................................................. 85
Annex 9 Public Financial Accountability in Statutory Corporations
Annex 10 Public In terest Litigation .................................................................... 108
Annex 11 Action Plan ........................................................................................... 109
Box 1
Box 2
Box 3
Box 4
Box 5
Box 6
Box 7
Box 8
Box 9
Box 10
Box 11
Box 12
Box 13
Relative Size o f Components of the Public Sector ................................... 9
The Legislative Framework for Financial Accountability and Transparency ............................................................................................ 12
Use o f Personal Ledger Accounts for Spending After the Year Ends . 25
Comparison o f GoUP Accounts wi th I F A C Standard .......................... 31
Profile of Rura l Local Bodies .................................................................. 36
Profile of Urban Local Bodies ................................................................. 42
Profile of Government Companies ......................................................... 48
Governance o f Government Companies and Statutory Corporations 49
Profile of Statutory Corporations ........................................................... 50
Profile and Governance o f Development Authorities ........................... 54
I N T O S A I Reporting Standard ............................................................... 59
Composition and Procedure o f the Public Accounts Committee ......... 62
Risk assessment on OECD/DAC Methodology ..................................... 66
EXECUTIVE SUMMARY
1. Uttar Pradesh i s India’s most populous State, and one o f the poorest. Over 30% o f the population s t i l l lives below the poverty line. O f the 14 major States o f India, U P has the third lowest income per capita, ahead o f only Bihar and Orissa. In recent years, growth has slowed to 2% against a national average o f 4-4.5%.
2. Serious fiscal problems have emerged since the 1990s. The revenue deficit has increased significantly over the years to Rs. 6,289 crores (63 billion) in FY 2002 and the fiscal deficit has increased to Rs.10,179 crores. Projected debt at March 2003 was Rs. 91,859 crores and interest on the debt takes about 90% o f the state’s own tax revenue. These deficits have been less than budgeted, but only because the shortfalls in expenditure have been greater than the shortfalls in revenue.
3. After years o f political instability and short-horizon management, the arrangements for accountability in the public sector have been undermined. Procedures exist for budgeting and monitoring the use o f public resources, but there i s l i t t le incentive to follow them. The Comptroller and Auditor General o f India questions numerous departmental actions each year, but there i s no compulsion on the executive branch to provide prompt answers and to make necessary changes.
4. In response to increasing public impatience with corruption and inefficiency, and the severe fiscal crisis, the Government launched a fiscal and governance reform program in March 2000. Five policy papers were tabled in the State Assembly, covering Medium-Term Fiscal Reform, Governance Reform, Civ i l Service Reform, Public Enterprise Reform and a Financial Management and Accountability Strategy. These policy papers and a matrix o f policy actions and targets provided the framework for a planned series o f adjustment credits from the World Bank.
5. reform program over the last three years, as follows:
Some useful progress has been made in implementing the financial management
0 Computerization o f the Treasuries in a network system has been completed at state government level, enabling the Government to monitor cash flows and prevent excess expenditures;
a Directorate o f Internal Audit has been established in the Department o f Finance to provide central leadership and guidance in the development o f departmental audit;
measures are being taken to establish better control over payrolls.
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0
The f i rst Wor ld Bank credit was disbursed in full. However, the overall reform program i s wel l behind schedule and further credits were contingent on actions by GoUP.
6. At present, the main strengths and weaknesses in financial management and accountability can be summarized as follows:
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Strengths 0
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Weaknesses
Well established (if overly complex) regulatory framework for financial management and clear assignment o f control responsibilities to the Department o f Finance, l ine departments, Treasuries and officers o f the Indian Accounts and Audit Department
Monitoring o f expenditure against budget by computerized Treasury system
Independence and expertise of the external audit fbnction
Active Public Accounts Committee and Ombudsman
Public access to budgets, monthly expenditure data, contract tenders, annual accounts and audit reports, a l l available on official websites
Accountability i s diffuse because the public sector i s very fragmented, with tens o f thousands o f institutions and units having varying legal frameworks and codes o f accountability, and there i s no ‘big picture’ for macro-fiscal control
Revenues are regularly over-estimated, leading to ad hoc cut-backs during the year
Poor cash and debt management leads to problems in executing the budget as planned
Procurement i s very loosely controlled, which creates opportunities for abuse
Penalties for irregularities are delayed and uncertain
Monitoring and control i s focused mainly on compliance and individual financial transactions, with l i t t le attention given to outputs, outcomes or value for money; authority and responsibility are mismatched
Delays in accounts and audit reports o f government companies, statutory corporations, departmental enterprises and many local bodies.
Risk Analysis
7. An analysis o f the risk that public funds, including funds provided by the World Bank, are not used for intended purposes was made using the OECDDAC methodology. GoUP scored moderately well against most o f the benchmarks but serious weaknesses in procurement, widespread irregularities and the lack of prompt and predictable corrective action, mean that the overall level o f fiduciary risk remains high.
8. Publicly funded bodies outside the state government also represent high fiduciary risks. Publicly owned enterprises are unable to account for expenditures on an accurate and timely basis. Similarly the lack o f trained personnel in rural local government poses serious risks to the use o f public funds. However, it should be borne in mind that the bulk o f public expenditure i s in the government departments (about 83%) and public enterprises (about 12%). About three percent takes place in rural local government, and two percent in urban local bodies. The risk to public funds l ies preponderantly in GoUP departments.
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Implications
9. The analysis in this report suggests there i s significant scope for the Government o f U P to improve the efficiency and effectiveness o f public spending through further consolidation o f the budget, better matching o f accountability with responsibility, routine enforcement o f accountability, and greater transparency. This would be fully consistent with the fiscal reform program, and would have a direct impact on GoUP’s ability to provide more and better quality public services to the poor.
10. Plans for financial management reform are in place, but l imited progress has been made in implementing them. Future success wil l depend critically on a combination o f stronger bureaucratic and political support for the reform effort. The SFAA can provide a platform for expanding the reform effort, and securing additional technical and financial support.
11. In the short term, progress can be made simply through better observance and enforcement o f existing procedures. Information technology has already proved a valuable tool for effective management o f public funds and i ts potential should be exploited further. Other systemic changes, such as improved use o f financial information for management purposes, are l ikely to bring significant benefits in the longer term.
12. CAG reports indicate that misuse and wastage o f public funds i s increasing. Immediate steps could be taken to pursue cases o f corruption and mismanagement identified by the CAG. Leadership i s needed also to make state-owned enterprises, local governments and other bodies which receive public funds properly accountable.
Recommendations
13. The report contains an action plan that was formulated by GoUP based on Bank recommendations for improving financial accountability and reducing fiduciary risk (Please see Annex 11). Some o f these involve the Go1 and/or the CAG, viz. updating the Financial Handbooks, devolution o f responsibility for state accounting, simplification o f budget structure, more predictable Go1 funding, changes to urban local bodies’ accounting system, improved audit techniques and reporting, and updating o f the Societies Registration and Official Secrets Acts.
14. To assist GoUP in re-planning i t s own financial management reform program, the following recommendations having the greatest potential impact on fiduciary risk, excluding those involving GoI/CAG:, have been selected:
i. Depute one or more senior officials in the Finance Department to oversee public financial accountability reforms
ii. Review and update Financial Handbooks, Treasury Rules and Budget Manuals.
iii. Develop and implement a Medium Term Expenditure framework in major spending departments o f GoUP
3
iv.
V.
vi.
vii.
... v111.
ix.
X.
xi.
xii.
Establish a Cash and Debt Management Section in Finance Department with the task o f (a) improving the cash forecasting and monitoring system, and (b) maintaining a reliable and accurate debt database for improved debt management
Lapse al l Government personal ledger accounts at 31 March 2003 and address underlying problem o f late allotments through improved budgeting and cash management
Strengthen accountability in Rural Local Bodies through social audits, posting o f budget information, procurement records and audited accounts on Panchayat notice boards.
Finalize accounts o f Urban Local Bodies on the existing cash basis o f accounting. Clear outstanding bank reconciliation and institute controls to ensure timely reconciliations in hture.
Within Government Companies and Statutory Corporations bring al l annual accounts up to date. Wind up non working companies and set up Audit Committees to resolve outstanding audit queries.
Strengthen internal controls in Development Authorities with respect to fixed asset records, physical verification o f assets, reconciliation o f bank accounts, personal balances, and escrow accounts.
Strengthen internal audit within GoUP.
Build capacity o f Finance Department officials.
Strengthen state government training institutions like the Financial Management Research and Training Institute (FMRTI).
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A.
A. 1
A.2
A.3
A.4
INTRODUCTION
Uttar Pradesh i s India’s most populous State and the most dominant in national politics since Independence, producing over half o f India’s prime ministers. I t s history includes the writing o f the Upanishads and the Mahabharat, the teaching o f Gautam Buddha, the r ise and fal l o f successive empires - the Mauryan empire under Chandragupta and Ashoka, the Gupta and Mughal dynasties, the cultural synthesis o f the reigns o f Akbar and Shahjahan, the Nawabs o f Avadh, the British Raj, the lives o f Mahatma Gandhi and Pandit Nehru, and the coming o f Independence in 1947.
This rich history and cultural diversity contrast with the State’s continuing economic deprivation. Out o f Up’s present population o f 166 million, at least 50 million persons live below the poverty line,’ despite this being a key concern o f the founding fathers and a l l the efforts made over the last 56 years. State per capita income (Rs. 11,273, about U S $ 218, in FY 2002)2 lags behind the national average, and the gap i s ~ i d e n i n g . ~ The same applies to infrastructure such as electricity, roads and irrigation - the gap i s widening. This has been attributed to inadequate and ineffective spending on health and education, and a decline in the quality o f governance linked to political instability and ineffective management o f State funds.4
The most urgent problem facing UP today i s fiscal imbalance. The revenue deficit has increased significantly over the years to Rs. 6,289 crores (63 billion) in FY 2002 and the fiscal deficit to Rs.10,179 crores. Projected debt at March 2003 was Rs. 91,859 crores and interest on the debt takes about 90% of the state’s own tax r e v e n ~ e . ~ This vicious circle i s being addressed by GoUP in a medium-term fiscal reform program.
UP i s one o f the World Bank’s focus states in India, and has received wide-ranging support comprising analytical work, technical assistance, investment lending and adjustment lending. The UP Fiscal and Governance Reform Loan o f $250 million was approved and disbursed in April 2000 as a single-tranche loan - the f i rs t sub-national adjustment loan in India. The Bank has also a substantial portfolio o f 18 investment projects amounting to $1,830 million, spread over population, health, education, roads, agriculture, power, rural water and forestry sectors.
’ World Bank (2002) Poverty in India: the Challenge of Uttar Pradesh. p. 9. The poverty l ine i s an income o f $1.08 a day at 1993 prices. 44% o f the poor are from the scheduled castes. Population i s from the 2001 census (provisional figure), per Department of Information and Public Relations (2002) Uttar Pradesh 2002.
Rs.47.66iUS dollar in March 2003. The financial year 2003 started 1 April 2002 and ended 31 March 2003.
population o f the State has decreased by about 8.5 million, because the 9 districts o f Uttaranchal were hived of f as a separate State in FY 2001. Fiscal and other data series need adjusting.
World Bank (2002) op. cit. pp. 69-76, and A Policy Note on Accelerating Development and Reducing Poverty in Uttar Pradesh.
Though fiscal deficits have risen, they have been than budgeted, because expenditure shortfalls have been more than revenue shortfalls. Over the 5 years FY97-FYO1, actual revenue has been 93.6% and actual expenditure has been 91.2% of budget estimates. Overall fiscal deficits have been 86.9% o f budget estimates (mean of annual percentage variances per Table 1.2, in World Bank (2002) Uttar Pradesh: Trends and Patterns in Public Spending, by Farah Zahir, PREM, South Asia, August). Therefore, the problem hitherto appears to l ie in the lack o f macro control over the initial budget rather than uncontrolled expenditure.
This i s based on MTEF data for GSDP (est) in F Y 2002 (1 72,625 crores), population 166 million, and
GoUP Department o f Finance (2000) Uttar Pradesh Medium Term Fiscal Reform Policy. Note that the
5
AS The problems o f management o f State funds are exacerbated by the sheer size o f the public sector in UP, i t s fragmentation, and the frequent moves o f officers. The number o f public employees, including teachers and health workers, i s about 1.7 mill ion. There are over 60,000 public sector bodies. Average tenure o f senior officers i s less than a year. 6
Objectives and Scope of the SFAA A.6 The main objective o f the SFAA i s to build upon the State’s Jinancial management
reform program that i s already under way.7 The primary audience for the SFAA i s the Government o f UP (GoUP), the Government o f India (GoI) and, with GoUP agreement, development partners, c iv i l society and the public. It wil l be the platform for agreeing an action plan to meet identified gaps in i t s financial accountability arrangements. The SFAA will enhance the World Bank’s knowledge o f public financial accountability arrangements in the State and identify fiduciary risks and appropriate responses, so that the Bank can manage adjustment and investment operations relating to the State. In addition, it will provide an input to the country-level dialogue with institutions such as the Comptroller and Auditor General (CAG), Controller General o f Accounts (CGA) and Reserve Bank o f India (RBI).
A.7 The SFAA covers al l institutions using public funds (see paragraph B.3 below for a partial inventory). The assessment does not cover some aspects o f the budget allocation process that would be included in a GoUP/World Bank Public Expenditure Review, such as State-Union fiscal relations, the role o f the public sector, revenue policy and administration, the size and coinposition o f public expenditures, prioritization o f allocations, tax expenditures, quasi-fiscal activities and debt policy.8 Nor does the SFAA cover the private sector financial accounting, auditing and governance practices, as it i s planned to include these in a Review o f Standards and Codes - Accounting and Auditing Module. Non-government organizations and community-based organizations are important users o f State funds, but are excluded from this SFAA as it i s planned to include them in a separate assessment at a later date. The section on Public Sector Enterprises i s intended as a broad diagnostic rather than a case by case reform program. A deeper study into the administration and functioning o f these enterprises would be required to provide a road map and this i s outside the scope o f this SFAA.
World Bank (2002) op. cit, p.71. ’ This i s set out in Annex A of the Report and Recommendation on a Proposed Credit and Loan to India for the Uttar Pradesh Fiscal Reform and Public Sector Restructuring Project, March 29, 2000. World Bank report P7365-IN.
On these matters, see GoUP Department of Finance (2000) Medium Term Fiscal Reform Policy, and subsequent World Bank mission reports.
6
Approach and Methodology A.8 This SFAA follows a GoUP paper on Financial Management and Accountability
Strategy, which was presented to the Legislature and made available to the public in March 2000. The SFAA has been conducted by a World Bank team’ in close collaboration with GoUP, the State Legislature and the Office o f the Comptroller and Auditor General o f India (CAG). A Concept Note was agreed by GoUP and the central Government, and a Steering Committee was set up under the chairmanship o f the Principal Secretary, Finance. Members were mainly from GoUP but included the director o f an academic institution. N o donor agencies in UP other than the Wor ld Bank were represented. I t held i t s first meeting on 18 January 2003.
The SFAA team collected and reviewed important recent documents, such as the Compilation on the National Conference on Legislative Control over Public Purse held in U P in July 2000, the PricewaterhouseCoopers report ‘Modernization o f Financial Management and Audit Functions’, the World Bank reports ‘Poverty in India: the Challenge o f Uttar Pradesh’ and ‘State Procurement Assessment Report’, and the Report on the Credit and Loan for UP Fiscal Reform and Public Restructuring, a programmatic adjustment loan to GoUP in 2000. A complete l i s t o f sources i s given at Annex 1.
A.9
A. 10 Members o f the SFAA Team undertook research and data collection in UP January- February 2003 (see Annex 2 for a l i s t o f persons seen), analyzed their findings February-March 2003, and shared the draft at mid-March with GoUP for reality checks on the factual content and init ial reactions, with the caveat that major changes might be made after peer review. This draft incorporates changes arising from the comments o f informants and reviewers. Following GoUP response, a Steering Committee meeting/workshop will be held on the draft, and the final report should be available by mid-June 2003. Finance Department will put the final report to the Cabinet for policy decisions. On approval, an Implementation Committee, with Wor ld Bank representation, would oversee implementation o f reforms.
The Bank’s team consisted o f Rajat Narula (Team Leader), Ivor Beazley, P.K. Subramanian, Vinod Sahgal and Mohan Gopalakrishnan of SARFM, Tony Bennett (Principal Consultant), Saif A l i (Research Assistant) and local consultants Atul Mohan and Puneet Kapoor o f R.M. La11 & Co., K.G. Bansal of A. Sachdev & Co., and A.K. Sengupta of the Institute o f Development Studies, University o f Lucknow. Peer reviewers are Malcolm Holmes, Anthony Martin Hegarty, Daniel Boyce and William B. Marke o f the World Bank, and T.N. Dhar, Secretary o f the UP Branch o f the Indian Institute o f Public Administration. Substantial inputs were also made by Parminder Brar, Manuela Ferro, Stephen Howes and Rino Schiavo-Campo of the World Bank.
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B. INSTITUTIONAL AND LEGAL FRAMEWORK B.l The State o f Uttar Pradesh i s a constitutional democracy with a bicameral legislature
and a High Court. The lower house i s the Legislative Assembly (Vidhan Sabha), which i s elected on a universal adult franchise for a five-year term and has 404 members. The upper house i s the Legislative Council (Vidhan Parishad). I t has 100 members elected or appointed by various groups (Article 171), for a six-year term. The President o f India appoints the State Governor. The Governor appoints a Chief Minister, being the leader o f the party or coalition that has a majority o f members in the Legislative Assembly. The Governor appoints other Ministers on the advice o f the Chief Minister. Currently there are no less than 91 Ministers. Together they constitute the Council o f Ministers, chaired by the Chief Minister. The leader o f the largest opposition party i s the Leader o f the Opposition, who has the status o f a Minister. Though the Governor has all executive powers, he can exercise them only on the advice o f the Council o f Ministers, except in times o f crisis.
B.2 The State has 17 administrative divisions each headed by a Divisional Commissioner. These are divided into 70 districts, each headed by a District Magistrate/Collector who coordinates the work o f al l departments within his or her district, and has law and order and revenue collection responsibilities. The District Treasury i s under the general charge o f the Collector, who entrusts executive control to a Treasury Officer.
B.3 In Uttar Pradesh, the public sector i s highly fragmented and not h l l y documented. The following inventory o f public sector institutions i s not necessarily complete:
0 83 State-level departments using the Consolidated Fund, Contingencies Fund, and funds in the Public Account (in particular, the State Provident Fund)." There are some non-commercial entities at the State level using State funds, such as 21 universities and research institutions and over 400 private colleges." These are extra budgetary funds, i.e. they are part o f 'government' as defined by IMF-GFS, but their estimates are not included in the published budget document, nor their accounts in the Finance Accounts.
Rural local bodies are at three levels: District (70 Zi l la Panchayat), B lock (809 Kshetra Panchayat) and Village (52,029 Gram Panchayat). These are a l l elected bodies, and receive significant transfers from the State. They are accountable to the State level as well as to their own elected councils. In addition, there are 7,6 13 cooperative societies providing seed, fertilizer and credit to farmers, 70 District Rural Development Agencies, which are registered societies receiving Go1 and GoUP hnds for rural development schemes, and an unknown number o f other registered societies set up to receive and manage funds for particular
0
The Consolidated Fund receives all revenues and proceeds o f loans and makes all expenditure payments and loan repayments of GoUP. The Contingencies Fund i s a relatively small fund that i s used to make emergency payments, and i s then reimbursed from the Consolidated Fund. A l l receipts and payments o f GoUP that do not form part o f the Consolidated Fund or Contingencies Fund, such as deposits, advances and reserve funds, are included in the Public Account.
These are privately managed institutions for which GoUP pays the teachers' salaries. I t i s difficult to ensure accountability. See World Bank (2003) Public Expenditure Note, February, p.8. I t i s not clear whether they meet the IMF-GFS criteria for inclusion under 'government'.
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schemes and run by GoUP officers.12 Rural local bodies are described in Chapter F.
Urban local bodies are o f three kinds - municipal corporations (12 Nagar Nigams), municipal boards (1 94 Nagar Palika Parishads) and town area committees (422 Nagar Panchayats). These are described in chapter G.
Public enterprises (which in U P are al l at the State level), viz. government companies and their subsidiaries (1 OS), statutory corporations (7), development authorities (22), and departmental enterprises (1 2). Their accountability i s explained in chapter H.
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B.4 The box below shows the approximate size o f each o f the above components o f the public sector.
1. GoUP departments 2. Public enterprises 3. Rural local bodies 4. Urban local bodies Total
Expenditure % in FY 200413 in
Rs. crores 55,350 83 8,040 12 2,000 3 1,000 2
66.390 100
Finance Department
B.5
B.6
The Finance Department i s responsible for budgeting, cash and treasury management, financial information systems, internal audit and expenditure control in State departments. The Department i s headed by the Finance Minister and a Principal Secretary, Finance. See Annex 3 on the functions o f the more important directorates for the purposes o f this SFAA,
The Department has created a new post o f Controller with the following functions:
0 oversight o f reforms in public financial accountability, presently including (a) a proposal for Treasuries to pay individual salaries directly (IPAO concept, see para D.20), (b) introduction o f half-yearly State accounts, (c) progress towards
l2 Societies registered under the Societies Act are legal corporate bodies. They have been set up so as to avoid the restrictions of normal government rules and regulations. In particular, as many societies are registered to run revenue-earning schemes, they avoid having to turn their revenues over to the Consolidated Fund. For their legal status and accountability, see Annex 7. They operate in health, agriculture and other sectors, and at both State and District levels.
Sources: (1) FY 2004 Budget shows total expenditure Rs. 58,544 crores. Exclude transfers to sinking funds 1,819, and transfers to autonomous bodies 1,375 = Rs. 55,350 crores. (2) Government companies’ investment at 3/01, Rs. 9841 * assumed expiinv. ratio 0.5, with 10% p.a. growth for 3 years = Rs. 6,550 crores. Statutory corporations’ investment at 3/01, Rs. 549 crores * same expiinv and growth = Rs. 365 crores. Development authorities’ disbursements in FY 2002, Rs. 930 crores, with 10% p.a. growth = Rs. 1125 crores (3) RLBs’ budget expenditure i s around Rs. 1,000 croresiyear, but this excludes expenditure o f the District Rural Development Authorities, to whom GoUP transferred Rs. 1,125 crores in FY 2003. Total spending by RLBs i s therefore around Rs. 2,000 crores. (4) ULB revenues in FY were Rs. 833 crores. Assuming budgetary balance and growth o f 10% a year, expenditure in FY 2004 would be around Rs. 1,000 crores.
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9
resource-based accrual accounting, and (d) review and updating o f Financial Handbooks, Treasury Rules, Budget Manual, etc.
integrated computerization o f accounting functions, Treasury operations, and departmental financial and personnel MIS
consolidation o f returns from Treasuries and preparation o f monthly and annual State accounts (Le. devolution o f this function by C A G to GoUP)
management and training o f the State’s finance and accounting staff.14
0
0
0
B.7 We strongly support these reforms and recommend that the responsibility for these be given to or more senior officials from the state Finance department.
Line Departments
B .8 In each departmental directorate (head o f expenditure), Finance Department designates a Controlling OfJicer. The Controlling Officer, usually the Secretary or Director, i s the person primarily responsible to the Legislature (Public Accounts Committee) for the proper use o f funds granted. H e or she i s assisted by a departmental Finance Controller, who i s immediately subordinate to the Head o f Department, and has a functional responsibility to the Department o f Finance.” Authority to commit expenditures, authorize the issue o f cheques and countersign cheques i s restricted to senior officers o f each Department, who are nominated as Drawing and Disbursement OfJicers (DDOs).
B.9 It i s recommended that the position and profile o f the Finance Controllers be strengthened through in service training. As the function o f training state finance service officers i s normally done by the Financial Management Research and Training Institute in the state, capacity building o f this Institute and others like it would help to create a vibrant training resource in the state.
The roles, responsibilities and reporting l ines o f Finance Controllers should be clearly defined while keeping in view the requirement for independence and accountability o f that position. Currently, Finance Controllers are required to submit quarterly reports to the PS Finance while they report directly to the Administrative Heads o f the concerned departments. This makes for a conflict in their functional responsibility. Moreover, Financial Controllers also have the mandate for the internal audit o f the department, a function they are often unable to perform efficiently given their reporting lines.
l4 Smita S. Chaudhry (2002) Conceptualization o f the Role and Functions o f the ‘Controller’, in the IFMTR Chronicle, Issue XVI, March, pp. 31-3. See also the PwC Draft Final Report. l5 This functional responsibility should be advisory in character so that i t does not conflict with the Finance Controller’s line responsibility to the Head of Department.
10
Accounts and Audit
B.10
B.11
B.12
B.13
Accounting and external audit functions are provided mainly by the Comptroller and Auditor General o f India (CAG), who i s head o f the Indian Accounts and Audit Service (IAAS) and entirely independent o f the State. Within his Department, the Accountant General (Accounts and Entitlements), U P i s responsible for the Monthly Accounts and Annual Finance and Appropriation Accounts. The Accountant General (Audit), UP i s responsible for the audit o f these Accounts.16
There i s also a State Finance and Accounts Service. This comprises Treasury Officers, Additional Treasury Officers, Accounts Officers, Assistant Accounts Officers, Accountants, Assistant Accountants, Auditors, Internal Auditors and Clerks. If one adds Drawing and Disbursement Officers (recently reduced from 36,000 to about 8,000) and allied officers, the total number doing financial work i s around 15,000.’7 The SFAS cadre i s controlled by a Secretary, Cadres in the Department o f Finance. Vacancies are fi l led by direct recruitment o f graduates through a competitive examination, and new officers go through a period o f probation during which they take a foundation course that trains them in GoUP organization and procedures, and a ‘professional’ course that exposes them to basic accounting and various tool subjects such as computers. After two promotions on the basis o f seniority, further promotions are made on merit.
e The delegation of responsibility for the State accounts to GoUP, and the expanding role of accounting as the Government moves to a results orientation, matching expenditures to outputs, wi l l require more specialized and technical management and training of the SFAS cadre. This responsibility should be with one or more senior oficials of the state Finance Department.
The legal framework i s given in Box 2. The enforcement framework i s based on the Indian Penal Code, 1860. The UP Panchayat Raj Act, 1947, the Prevention o f Corruption Act, 1988, and the Government Servant Conduct Manual have elaborated the expected behavior o f public servants. An important feature o f the Indian legal system, often used in UP, i s Public Interest Litigation (PIL) - the right o f any person to fi le an action in the Supreme Court in the public interest (see Annex 10).
I t can be seen that the framework for public financial accountability i s defined almost wholly centrally, and legislated in great detail. N o changes to the existing system can be made by GoUP unilaterally. However, it i s open to GoUP (as in a l l States) to add to the systems, e.g. for internal management needs. As the State i s gearing up for greater results orientation in i t s management systems, this i s an important consideration to bear in mind.
l6 A G (Accounts and Entitlements) functions are in fact divided between two officers, I and 11, based in Allahabad, who share responsibility for departments. The word ‘Entitlements’ refers to their continuing responsibility for authorizing certain salaries and pension balances. AG (Audit) i s also two officers - the Principal Accountant General (Audit), based in Allahabad, and the AG (Commercial), based in Lucknow. l7 Estimate by the Director, IFMTR.
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Conclusion
B.14 In order for the reform program in UP to be successfully implemented, o n or more senior officials o f the state finance department should be made responsible to oversee it.
Box 2: The Legal Framework for Financial Accountability and Transparency The main legal framework consists o f Articles 148-151, 166, 202-209, 266-267, 282-284 and 293 o f the Constitution o f India. The Constitution establishes inter d i u the UP Consolidated Fund, Contingencies Fund and the Public Account (see below) and states that all revenues o f the Government have to be paid into the Consolidated Fund and no money can be paid out o f it except under a legal appropriation. Articles 202-207 set out the budget approval procedure. Articles 148-151 establish the post o f CAG and his duties and powers. Section 22 o f the Comptroller and Auditor General (Duties, Powers and Conditions o f Service) Act, 1971 empowers the central government to make rules for maintenance o f accounts in consultation with the CAG. His powers include that o f advising the central government (through the President of India) on ‘the form o f accounts’. Any rule or modification has to be placed before Parliament for approval. By Article 293 (3), most large borrowings at the State level are controlled by the Central Government.
GoUP has issued a Financial Handbook, a set o f eight volumes, under the authority o f Article 150 and the Audit and Accounts Order o f 1936 (as adapted by the India (Provisional Constitution) Order, 1947). The Handbook incorporates Treasury Rules made by the State Governor under Article 283 (2) regarding treasury receipts and payments, and directions issued by the CAG. The most relevant to this SFAA i s Volume V, Part 1, also known as the Account Rules (600 pages). This includes the UP Finance and Accounts Service Rules, 1980, which cover the recruitment, pay and promotion o f finance and accounts officers.
A separate Budget Manual i s issued by the State Governor under the authority o f Article 166. I t contains rules framed by the Finance Department for the preparation o f the Budget and for budgetary control. An Appendix to this Manual contains Rules on the use o f the Contingencies Fund, issued by the Governor under the UP Contingency Fund Act, 1950. The same rules apply to Go1 funds used in UP as to GoUP funds. See Finance Department website for the complete Financial Handbook and Budget Manual : http :/upgov.up .nic. idupfinance
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C. GOVERNMENT BUDGET PREPARATION AND APPROVAL
C. 1 The process o f budget preparation and subsequent control against approved budgets i s la id down in the UP Budget Manual, last revised in January 2000.
Budget Structure c.2 In UP, as in other States, budgets and accounts are divided into development expenditure
(capital expenditure and operating expenses on uncompleted schemes) and recurrent expenditure (‘revenue expenditure’, including general administration, operating expenses o f completed schemes, and interest). This encourages18 a preference for ‘development’ expenditures over operating and maintenance expenditures, irrespective o f their respective benefits, and hinders effective utilization o f existing assets because recurrent cost implications o f capital schemes are not generally identified at the time they are sanctioned. As a consequence too many schemes are started for which there will be insufficient funds for efficient operation.
C.3 Secondly, expenditures are divided by source o f legal authority, either ‘voted’ annually by the Assembly or ‘charged’ against the Consolidated Fund without the need for annual vote. Thirdly, development and non-development categories are divided between Plan (i.e. within the Five-Year Plan) and Non-Plan. N o t a l l development expenditure i s in the Plan. Expenditure classification as Plan and N o n Plan leads to further convolution in the linkage between policy and budgets2’. This i s a mandatory bifurcation fol lowed by al l States and can be changed only at central level.
The state should encourage GoI to review the current system of budget
Estimates are then divided between New Expenditure (mainly new schemes) and Standing Sanctions.” This i s a useful distinction as it focuses management attention on the best use o f uncommitted resources. Finally estimates are classified by grant (department), major head (function, such as health), sub-major head (such as public health), minor head (program, such as prevention o f food adulteration), sub-head (scheme or activity, such as analysis o f samples), detail head (sub-scheme or sub-activity), and standard object (type o f input). There are 45 standard objects since FY 2000. The full expenditure code, including the two-digit grant code, has 17 digits.
classijkation of developmenthecurrent and Plan/Non-Plan divisions . C.4
l8 The Constitution allows certain expenditures to be charged against (i.e. drawn from) the Consolidated Fund without being voted by the Legislature. These include the salaries of judges, the CAG, etc. and repayments and interest on the public debt. Al l other expenditures have to be voted annually by the Legislature.
l 9 New expenditure effectively means expenditure on previously uncommitted schemesiactivities, while Standing Sanctions refer to expenditure that i s already examined, sanctioned and committed.
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13
C.5 For several years the Budget has been prepared on a program basis (minor head), but programs overlap with standard objects o f expenditure.*’ Any change in the account structure down to minor head level needs prior approval o f the CAG. For more effective delivery o f public services, programs and sub-programs should be clearly demarcated and authority over program budgets should be matched with responsibility for outputs (see D.34 on performance management).
We understand that there may be practical dfjculties in recasting all fprograms’ into a limited number of functional categories, and allocating responsibility for each program to one ofJicer. However, we would strongly recommend that an analysis of existing programs and identijkation of core functional responsibility for these should be undertaken in the rollout of MTEF.
Budget Process
C.6
c .7
C.8
Budgets are compiled and reviewed on an incremental basis, taking the revised estimates o f the current year as a base and adding or subtracting for known changes. Budgets are compiled mainly by district-level heads, Directorates and Finance Controllers. There does not appear to be any delegation o f budgeting (or budget control) to service delivery institutions such as hospitals and health centers.21 I t may be described as ‘middle-up’ rather than bottom-up. For details see Annex 4.
The Government should aim for greater decentralization of budgeting and budget management.
Many new expenditure proposals are included in the budget at the last moment and are subject to post-budget scrutiny and delays in implementation.
0 The budget calendar needs to be advanced and cutoffdates strictly observed so that Schedules of New Demands are properly prepared and scrutinized by Finance Department for inclusion in the budget.
The timetable i s tight as it does not leave much time for legislative review (21 days in the Assembly). There i s practically no legislative scrutiny o f the Budget before it i s passed.22 Moreover, the budget process i s sometimes delayed for political or administrative reasons. In this case, there i s constitutional provision for continuation o f government spending on sanctioned projects and ongoing activities by means o f a ‘vote o n account’
2o ‘Programs’ include Land 050, Construction 051, Services and service fees 501, Losses and gains on exchange 791, Irrecoverable loan write-offs 792, Transfers toifrom reserve funds and deposit accounts 797, and Suspense 799. All these are objects, not programs. 21 A Block Medical Office, for instance, controls only i t s vehicle operating costs and salaries. Other inputs are provided ‘free’. This illustrates the limited decentralization o f financial accountability within the Government, and contrasts with the devolution of funds and accountability to the local authorities. 22 Shr i Keshari Nath Tripathi, Speaker, Legislative Assembly, UP (2000) National Conference on Legislative Control over Public Purse, 29-30 July 2000: A Compilation, p. 58.
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advance.23 The target date of 28 February should be kept, but a system o f review by Departmental Committees o f the Legislature should be introduced and encouraged.
C.9 Re-appropriations (virements) during the year are tightly controlled. Embedded in the rules i s an outdated preference for plan expenditure, capital expenditure and new proposals and a bias against recurrent expenditure. I t i s now recognized that capital expenditure i s not inherently more productive than recurrent expenditure. A school may need more classrooms (capital) or i t may need more teachers or supplies (recurrent). Given a more robust framework o f accountability, more flexibility could be given to managers to vire expenditures within prescribed limits. The current rules lead to heavy supplementaries which go through the same process as the main budget, and often remain grossly underutilized.
C.10 In practice, the department often finds it easier to apply for a Supplementary Appropriation. This goes through the same stages as the original budget, culminating in further legislation. The amount o f supplementaries i s increasing each year, indicating that budget estimates are unrealistic. The C A G has pointed out that supplementaries are grossly under-utilized.
We recommend that the budget and supplementaries be carefully scrutinized to identifi the reasons for these and steps be taken to address the underlying reasons.
C. 11 If the need i s urgent, as well as unforeseen, the department may apply for an advance from the Contingencies Fund, as well as a supplementary appropriation. On approval o f the appropriation, the Contingencies Fund i s reimbursed f rom the Consolidated Fund.24 This Fund i s supposed to be used only when the Legislature i s not in session (and therefore cannot pass a Supplementary Appropriation). In fact, it i s used at al l times, for al l purposes, and very frequently (277 times in FY 2000).25 The shape o f the Budget i s routinely changed during the year.
The use of Supplementary Appropriations and the Contingencies Fund should be reduced. The Contingencies Fund should be reduced to a reasonable level (say Rs.50 crores) and only used in dire emergency, as defined and approved by the Council of Ministers.
Budget Comprehensiveness
C.12 The term ‘budget’ usually refers to transactions o n the Consolidated Fund only. However the budget document covers also the Contingency Fund and Public Account transactions, so i t i s fairly comprehensive at this level o f government. The budget does not include
23 The Constitution, article 206, allows the Legislative Assembly to make a grant in advance for ‘a part of any fmancial year’. This can be done without discussion in the House, and may be resorted to when the Government i s facing strong opposition. On 5 March 2003, a vote on account was passed for the f i rs t six months o f FY 2004. Similarly, the F Y 2003 budget was authorized by a vote on account on 22 March 2002, and the full budget was not ’‘ It stands at Rs. 600 crores, which i s many times higher than the Go1 Contingency Fund. 25 The Times o f India alleges several misuses o f the Contingencies Fund in an article in i t s March 6,2003 issue.
resented t i l l August 2002.
15
some bodies such as registered societies, which are within the definition o f ‘government’ as they are controlled by government officers, but are legally separate (see B.3 above). Large amounts are spent on government programs through these extra budgetary special- purpose vehicles, e.g. Rs. 1195 crores was disbursed to District Rural Development Agencies in FY 2003. Their receipts and expenditures are omitted f rom the State accounts also.26 The result i s that budgets and accounts give an incomplete picture.
a We recommend that the draft Fiscal Discipline and Budget Management Bi l l include a requirement for an annual public sector consolidated budget for planning purposes only) that Budget Division prepare consolidated budgets each year accordingly, and that consolidations are included in the Budget Summary.
Some external resources are not budgeted nor accounted for. Whi le a l l cash aid (grant and loan) i s channeled through the State Government and i s therefore brought to account, grants in kind (such as offshore payments by donors to contractors, suppliers and consultants) are not generally valued and brought into project budgets and accounts, nor the State accounts. The amount could not be estimated, but it is thought to be significant in total.
C. 13
a We recommend that a study be carried out to determine the significance of the amounts involved and to make recommendations regarding future disclosure in the budget and accounts.
Participation and Transparency
C.14 In the preparation o f the U P budget, there is l i t t le or no systematic seeking o f inputs by non-government stakeholders such as the business community and c iv i l society organizations, unlike the central Government and some other States.27 Similarly, in the preparation o f individual schemes, grass roots participation i s not sought. In the health sector, for instance, decisions on the location, design or mode o f operation o f primary health centers and community health centers are made entirely within the Health Department. Pre-budget consultations are an important potential tool o f transparency and accountability, providing valuable inputs o f ideas, energy, realism and, in local community projects, resources.
C.15 The budget becomes a public document after i t i s tabled in the Legislative Assembly, at the time the Finance Minister makes h i s Budget Speech. This i s reported in the media, but
26 Go1 has directed (13 January 2003) that releases o f funds for centrally-sponsored schemes, which are currently disbursed directly by Go1 to the implementing agencies, should be made through the State Government on condition that funds are passed on to end-users within three weeks. According to Planning Department, this cannot be implemented until the FY 2004 budget i s passed, expected in September 2003. The first six-month installment of Go1 funds l ies unutilized. When this new procedure i s in operation, accounts will be more comprehensive. The same changes should be made in the budget. 27 As in Gujarat, for instance. See V.V. Rama Subba Rao (1999) Decentralized Budgeting and Accountability, in Budget Reform in Developing Countries, Papers o f a Workshop held in New York, December 1997. United Nations: New York
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not broadcast live. Copies o f the Budget and Budget Summary are distributed (200 copies to Universities, etc) and are available at no charge o n application to the Finance Department. More conveniently, they are posted onto the Finance Department's website. This i s well organized and shows the current year's budget down to the standard object level, and al l the voluminous budget documentation. The significance o f programs i s not always evident from their names (see recommendation at paragraph C.5). Also, the basic parameters and assumptions on which the estimates are based are not stated. The Budget cannot be called user-friendly.
C.16 It i s expected that measures like publicizing Citizens' Charters by departments having strong public interface, publishing monthly data related to the State's financial position on the finance department's website along with the downloadable database the year's budget, financial ru les etc will help create an environment conducive to making public participation in budget preparation.
Medium Term Expenditure Framework
C.17
C.18
C.19
c.20
Fol lowing preparation o f a Medium-Term Fiscal Policy Paper in 2000, a Medium-Term Expenditure Framework has been drafted by Finance Department for the period FY 2004 to FY 2007. It was submitted to GO1 in December 2002 and i s expected to be finalized and made public when it i s laid before Parliament in AugustBeptember 2003.
The MTEF would provide for a transparent planning and budget formulation process within which departments and agencies could establish expenditure norms inline with their priorities over a medium term. The MTEF process would also serve the objective o f setting departmental priorities and fiscal targets and allocating resources to strategic priorities within these targets.
The principal objective i s to reduce the burgeoning fiscal deficit whi le maintaining and enhancing the delivery o f public services, and reflecting the priorities o f the State Five- Year Plan. The main issues are the accuracy o f GSDP projections, the buoyancy o f tax revenues, expected savings, pension reform, and power sector reform. In addition, a Resources and Expenditure Commission was set up by GoUP in 2002, with a mandate that includes public expenditure review and sectoral allocations.
The MTEF has not so far impacted the budget process, but it is expected that budgets f rom FY 2005 will be based on it. I t i s intended to move to a two-phase process in which resource envelopes are f i rs t set for each department, based o n the MTEF. After approval by the Cabinet, the envelopes will become ceilings for detailed expenditure budgets by departments. This will reduce the incidence o f budget cuts by Finance Department, and enable departments to take greater ownership o f their plans, which will be more realistic and more stable. The MTEF will also protect high-priority expenditures and ensure capacity operation and adequate maintenance o f existing assets.28
28 See the detailed recommendations in the PwC Draft Final Report, Appendix 5D.
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High priority should be given to W E F development and implementation in the major spending departments like Irrigation ,Power, Energy, Education, Medical, Drinking water and Social Welfare.
Conclusion
C.21 Government budgets are prepared ‘middle-up’. However, a commitment has been made to develop a medium-term expenditure framework that will introduce a two-phase process, f i rs t setting fiscally sustainable resource envelopes for each department, then bottom-up budgeting within these limits. It will be necessary to facilitate the consolidation o f budgets at different levels, and to simplify the budget structure so as to al low greater focus on programs with well-defined activities and performance indicators. The main recommendations are:
Continued development o f the medium-term expenditure framework and i t s use in setting departmental budget envelopes
Budget Division to prepare consolidated budgets (a) for the Government and (b) for the whole public sector
0 Aboli t ion o f Plan/Non-Plan and development/recurrent distinctions, and better presentation o f expenditure by responsible head, function, program, scheme/activity and by standard object
The Contingencies Fund should be reduced, and only used in dire emergency as defined and approved by the Council o f Ministers.
0
0
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D. BUDGET EXECUTION, MONITORING AND INTERNAL CONTROL
Release o f Spending Authority D. 1 After the Appropriation Act i s passed, the Finance Department notifies each
administrative department o f the amount o f i t s grant for the year. For FY 2003, Non-Plan grants were notified in April 2002. Plan grants were not notified until June 2002.
D.2 The administrative departments divide up their sanctioned grants for the year and make ‘allotments’ to Heads o f Departments, New and Sanctioned separately. There i s no control over total allotments by Finance Department as they have no cash forecast. Heads of Departments, on the advice o f their Finance Controllers, divide their allotments and make periodic allotment orders to the DDOs. These authorize them to make commitments and to pay bills within given limits. They are cumulative through the year, i.e. unused allotments from earlier periods can s t i l l be used, but undisbursed allotments lapse on 3 1 March. The Finance Controller maintains a Budget Control Register (BM-17) that shows the status o f allotments received and allotments distributed. The Treasuries and the AG are informed o f al l allotments (see section on expenditure control).
D.3 Allotment requests for new expenditure are made for each separate transaction. They require the concurrence o f both the administrative department and the relevant Expenditure Control Section o f Finance Department (Budget Manual para. 8 8). This process takes far too long, as the chain o f review and approval involves at least 12 persons.29 Final allotments, which are supposed to be early in January, commonly arrive in March, even on 31 March. This pattern appears to be common to al l departments. The same gaps emerge in the remittance departments between budget appropriations, allotments and C C L releases (see below). The shunting o f expenditure back to the later months o f the year means that work plans cannot be followed, schemes cannot make progress, and services cannot be delivered. It has also given rise to the demand for ‘Personal Ledger Accounts’ for keeping unused allotments for spending after 3 1 March (see below). Fiduciary risk i s being reduced by preventing and delaying legitimate expenditures. The medicine may be worse than the disease it i s trying to prevent.
Go UP should move @om an individual transaction basis of allotment to a calendar basis, such as quarterly allotments within authorized budgets and cash f low limits.
In addition, where decisions on acquisition o f resources are made outside the operating unit, the accountability and sense o f responsibility o f the operating, unit i s diluted. A Chief Medical Superintendent in charge o f a hospital, for instance, cannot be held responsible for the results o f decisions that are outside his control. I t i s a principle o f financial management that responsibility for outputs and results must be t ied to responsibility for inputs and expenditure on them. This i s recognized in the post o f Departmental Secretary, since he or she i s answerable to the Legislature for both the inputs and outputs o f the
29 The Administrative Reforms Commission recommended that decision making should not involve more than three persons, such as a desk officer, review officer and approving officer, but this has not been acted on.
D.4
19
Department, but the principle i s not followed at lower levels (see recommendation at C.6).
Cash Management
D.5 The Finance Department i s responsible, but cannot manage cash in the absence o f any breakdown o f the budget over the year, or any mechanism for updating the cash forecast during the year. In particular, there are problems o f forecasting when Go1 funds will be received. Cash management i s reduced to responding to cash shortages as they occur by delaying payment o f bills other than high priority development expenditure^.^' The amount o f payment arrears at any point o f time i s not known or reported centrally. Thus, the Treasuries meet bills as they are presented, f i rs t come, first served until the money runs out, then apply cash rationing criteria to match bills with funds coming in. Payment arrears fund temporary deficits.
D.6 This i s a very unsatisfactory situation, as it makes it impossible for schemes to be completed according to any schedule, or for ongoing activities to run smoothly and efficiently. The availability o f funds to continue work appears to be the main unpredictable factor facing public managers, and stoppage o f funds i s one o f the main sources o f inefficiency, project delays and high costs.
A Cash Management Section should be established in Finance Department with the task of setting up and operating an improved cash forecasting and monitoring system
Debt Management 31
D.7 The Constitution provides that a State may borrow within India within limits la id down by an act o f the State. N o such law has been passed in UP. Finance Department has a draft Fiscal Discipline and Budget Management Bill based o n a similar bill at Union level. This will require future annual budgets to fit within a Medium-Term Expenditure Framework that will be prepared and updated each year by the Departments o f Planning and Finance. The target i s to reduce the revenue deficit (now 30% o f revenue) by 5 percentage points a year. The draft Bill has not yet been put to the Cabinet.32
30 High-priority development expenditures are: infrastructure development and maintenance, pro-poor social services, transfers to local bodies, and anti-poverty schemes. Resource-linked schemes (those centrally sponsored by GO1 and externally aided schemes), and schemes close to completion, are also given priority where funds are limited. RBI reports the Government’s cash balance daily to Finance Department (Budget Division). The Budget Division also receives daily Receipts and Payments Summaries from the Directorate o f Treasuries. When the Government i s forced to take Ways and Means Advances from RBI, the Finance Department restricts expenditure by applying these priority criteria. Its decisions are communicated to the administrative departments and Treasuries. 3 1 This section draws on a recent World Bank report, prepared as an input to the Expenditures and Resource Commission o f GoUP: Naoko C. Kojo (2002) UP Public Sector Debt and Debt Management, PFEM, South Asia Department, World Bank, May 32 Following recommendations o f Parliament’s Standing Committee on Finance, the Cabinet has approved a diluted FD&BM Bill on 4 February 2003. This does not fix limits for revenue deficits or overall fiscal deficits (Times o f India, 5 February 2003).
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D.8 However, even with a legal constraint and the will to comply, management o f State debt requires a reliable and comprehensive data system. This does not exist, neither in GoUP nor in the Union Government. Although GoUP publishes debt stock data in the Budget document every year,33 and the C A G publishes a table of public debt in his annual Audit Report, these data are not continuously maintained in a format suitable for comprehensive debt sustainability analysis or medium-term fiscal planning. In FY 2000, actual debt service was almost double what had been budgeted, an excess o f Rs. 8,222 c r o r e ~ . ~ ~ Thus, there i s no early warning system in UP. By the time GoUP realized that a crisis was imminent, the volume o f debt had already made fiscal adjustment very difficult.
A Debt Section needs to be set up in Finance Department to record and maintain reliable time-series data on debt stock, debt injlows and repayments in a disaggregated format. Al l cash resources, and donor intimations of non-cash resources, both loans and grants, should be channeled through the Finance Department to the respective administrative departments. The latter should provide monthly information to Finance Department, especially data on loans @om financial institutions, contingent liabilities and implicit l i a b i l i t i e ~ . ~ ~ Data on debt could be maintained in a single unijied CS-DRMS computerized system. Thus Finance Department and the Expenditures and Resource Commission could assess the impact of various scenarios on debt ratios and establish prudent borrowing limits. Comprehensive information on public sector liabilities should be reported in the Budget, Annual Finance Accounts, and the proposed Half-Yearly Accounts.
D.9 The State Provident Fund i s a ‘nominal’ Fund, i.e. a credit balance without segregated assets. N e t inflows to the State Provident Fund are being used to finance deficits on the Consolidated Fund. Interest i s charged on these ‘borrowings’, currently at 9’30, which is higher than the cost o f borrowing on the market. Moreover, as there are no assets set aside to pay future pensions, they will have to be paid out o f current revenue. If the dependency ratio rises (the number of pensioners rises and the number o f c iv i l servants falls), the point will be reached when the Provident Fund will no longer be a net source o f funding and will instead be a net drain. I t should therefore be separated from the State’s treasury system. All future transfers from the State Provident Fund to the Consolidated Fund should involve issuance of dated securities by the Government. The pooled contributions should be managed by professional fund managers.
The Provident Fund should be taken out of the Public Account and made autonomous.
Schedule 1 o f the 200213 Budget i s a l i s t of total borrowings showing actual balances o f debt at the start o f the budget year and projected additions, repayments and debt outstanding at the end o f the year. At 3 1 March 2003, for instance, projected debt i s Rs. 91,859 crores, comprising market loans, securities issued t o the National Small Savings Fund, loans f rom domestic financial institutions, Go1 loans and advances, and borrowings f rom Public Account funds such as the Provident Fund, Pension and Insurance Funds and c i v i l deposits. Overdrafts are omitted, though these have become permanent sources o f finance to GoUP.
C A G Report (Civil) for the Year Ended 3 1 March 2000, p. 220. 3 5 Contingent l iabil i t ies are l iabil i t ies of the Government that crystallize only on the default o f the borrower, such as a PE, by the operation o f a guarantee. ‘Implicit ’ contingent l iabil i t ies are PE liabilities, which are not government- guaranteed but, for social or pol i t ical reasons, GoUP may s t i l l have to take over in the event o f default by a PE.
3 3
34
21
D.10
D.11
Ways and means advances (WMAs) and overdrafts are short-term facilities extended by RBI to meet temporary mismatches between receipts and payments and facilitate liquidity management. The Government i s not allowed to carry outstanding WMAs over to the fol lowing financial year, and overdrafts are repayable within 12 working days. There may be a risk o f a rollover o f such facilities, i.e. repayment o n 31 March and renewal o n 1 April. The C A G has observed that GoUP had recourse to W M A s and overdraft on 330 days during FY 1999-2000 and that they had become regular sources o f funds.36
Since FY 1995, no ceiling has been placed on PE borrowings: they are permitted to borrow as much as they can on the domestic credit markets. In recent years they have become unable to raise resources on the market without GoUP guarantees, owing to their poor financial performance. GoUP has started to charge a fee for guarantees and i s preparing to introduce a legislative ceiling o n outstanding guarantees expressed as a percentage o f revenue receipts, as in the Karnataka model. This i s a positive step to contain further growth o f loan guarantees and, indirectly, aggregate debt.37
Procurement
D. 12 A Wor ld Bank-financed consultant carried out an assessment o f procurement policies and practices in the Government o f Uttar Pradesh in 20013*. The study found that controls over procurement are very loose. There i s no overall procurement law, unl ike some States in the south, and no central agency to develop policies and norms for procurement. Actual procurement practices depart significantly from international best practice and evidence from the CAG’s reports and public perception surveys o f corruption in U P suggests that abuse o f the system is widespread.
D.13 The study made 24 recommendations to modernize the system over a five-year period. Key init ial steps would be to:
0
0
0
0
0
Establish a central procurement policy and oversight unit; Pass legislation and implement more detailed transparent and unif ied procurement procedures, including standard tender and contract documents; Set up an independent tribunal to hear appeals against contract awards; Restrict negotiation to exceptional circumstances; Initiate systematic training and skills development; and Begin using web-based procurement on a pi lot basis.
D.14 The CPAR report, which i s s t i l l a final draft, has not been acted upon by the GoUP. Meanwhile there i s a high level o f fiduciary r isk affecting a l l public funds used to procure
36 Report o f the CAG for the year ended 3 1 March 2000 - Civil, Uttar Pradesh, p. 16. 37 The State Finance Secretaries Panel has recommended a cei l ing o n State guarantees, and a cei l ing o n interest o f 20% o f State revenue. Guarantees that are in the nature o f direct l iabil i t ies should be included as publ ic debt in the accounts, not as contingent l iabil i t ies (Economic Times 14 March 2003). 38 Raghavan Srinivasan (200 1) Country Procurement Assessment Report, Volume 1: Summary and Recommendations. Wor ld Bank.
22
goods, works, and services. I t i s estimated that approx. Rs. 12,000 crores i s spent annually on procurement (approx. 40% by the State government and 60% by public undertakings), representing around 18% o f total public expenditure.
Asset Management
D.15 The rules require that any purchase o f a physical asset be entered in a Stock Register and the register folio number entered on the bill presented to the Treasury for payment. We are informed that this i s part o f the routine check performed at a l l Treasuries. This i s a good way o f ensuring that al l assets are brought on charge f rom the start. Different registers are kept for permanent items (e.g. vehicles, equipment, furniture), consumables (fuel, drugs, insecticides) and stationery. The head o f office i s then responsible for verifying and certifying, at least once a year, the existence, location, officer in charge, and serviceability o f a l l items on the permanent register. According to C A G audit reports, this physical verification i s not properly done, nor the subsequent disposal o f unserviceable assets. The total value o f physical inventory i s not known (as records in a cash-based accounting system show only quantities), but i s certainly very high, especially in departments such as Public Works, Irrigation, Forestry and Medical Health. Physical inventory needs just as much care and attention as cash, particularly small, saleable items.
0 Internal and external auditors should check that asset registers are properly maintained, that all assets are kept secure and used for legitimate purposes and that the responsible ofleer undertakes full verijkation annually
Expenditure Control
D.16 There i s a good basic system o f Treasury control o f payments (see procedural details in Annex 5). Treasuries examine payment vouchers to see that they are in order before entering them in the computer system. There i s an automatic check that the amounts are within authorized allotments. If so, cheques are printed out and sent back to DDOs for issue. This works well for the line departments and other bodies using the Treasuries. Departmental accountants collecting cheques have to bring with them the Register in which cheques handed over are entered against the respective claims. This operates as a control on the accountant and his DDO. UP i s the f i r s t State to put the Budget onto computers at the disbursement points. In principle, expenditure excesses are a thing o f the past. This i s a major achievement.
D.17 However, it i s s t i l l possible to bypass the system. Where expenditure i s urgently required that i s not within existing allocations, e.g. unpaid salaries, the D D O can apply to the District Magistrate under Treasury Rule 27 and get an order that they be paid. There i s a GO that TR 27 can be used in two successive months, but not thereafter. The DM requires the comments o f the Chief Treasury Officer before al lowing payment. The Database Manager at the Treasury then ‘fixes’ the system to al low a cheque to be drawn.
23
D.18 Most countries have an emergency payment procedure where the public interest i s evident, but it i s always under strict controls against abuse.39 In UP, TR 27 i s quite frequently invoked in some district^,^' and it i s not clear whether al l such payments are legal and justified. The fodder scam in Bihar i s a recent memory.41 Treasuries are wel l placed to exercise fiscal discipline.
D. 19 There are some weaknesses with the big-spending ‘remittance departments’ - public works, forestry, irrigation, etc. They issue their own cheques within a ‘cash credit limit’ issued by the departmental Finance Controller and notified to the Treasuries and SBI. However, the C C L system i s not watertight and excess cheques may be drawn, SBI may s t i l l cash them, and the Treasury only knows o f the excess when it enters the details o f cashed cheques from SBI - only one day later by which time the money has gone. There are also problems with salaries: the cheques for deductions (tax deductions, etc) are not always paid to the respective accounts, and net salaries may be delayed or misapplied.
D.20 Introduction o f the IPAO system will help to establish a manpower database and to reduce fraud and errors. The Treasury i s in the process o f testing this system in two locations after which it can be rolled out statewide. The Treasury has undertaken the task o f veri fying data authenticity by comparing salary details provided by departments with employment letters thus establishing a credible database. If the IPAO software were extended to user departments, and they were encouraged to key in information at their end, GoUP would accomplish the task o f creating a manpower planning and monitoring system at a relatively l o w cost.
Monitor ing o f Expenditure D.21 The Fiscal Statistics Directorate receives monthly reports o f a l l receipts and payments
(cashed cheques) in electronic format from a l l 73 Treasuries, including data f rom 307 Sub-Treasuries, by the 5th o f the following month. The deadline i s almost always met and expenditure data appear to be reliable. This i s a high standard o f timeliness and accuracy. U P i s an example o f what can be done, not only to the other States o f India but to most countries around the world.
D.22 In parallel, DDOs make monthly statements on a prescribed format (BM 8) to the departmental Finance Controller by the 1 Ot” o f the fol lowing month. About 3/4 o f a l l DDOs meet this deadline. The Finance Controller consolidates returns onto another format (BM 13) and submits this to Finance Department by the 20’. Usually this i s submitted by the
3 9 For instance, the preface to the Financial Regulations of the Government of Sr i Lanka allows a District Secretary to override Regulations where (1) this i s clearly in the public interest, (2) he/she records the reasons for doing so with copies to the Ministry of Finance, Auditor General and file, and (3) regularizes the position as soon as possible thereafter. This power i s rarely used. 40 In one department TR 27 was used an estimated 40-50 times in FY 2002. Strict Treasury discipline can ensure that the procedure i s sparingly used. 41 This has been admirably summarized by P.K. Mukhopadhyay in his paper to the National Conference on Legislative Control over Public Purse: Compendium, pp. 224-233.
24
end o f the month.42 I t shows expenditure for the month and progressive expenditure to date. Budget figures are for the full year, so comparison i s difficult.
Annual budgets should be divided by month at the beginning of the year, particularly for high spending departments.
D.23 Thirdly, AG (Accounts) processes original vouchers from a l l the Treasuries, and produces a monthly statement o f expenditure, broken down by head, by the 25t” o f the fol lowing month. This i s sent to the Principal Secretary, Finance and to departments for them to reconcile with their records. This i s often neglected: in FY 2000, 67 out o f 139 Controlling Officers failed to reconcile their accounts (CAG Report, p.3 8).
D.24 PWD and other ‘remittance departments’ are receiving direct cash transfers under a ‘direct cash limit’ (DCL) system. These make cash available up to the amount allotted for each scheme. As with P L A (see box below), expenditure i s debited and a deposit account credited with the amount made available. This suffers f rom the same objections as above.
Discontinue all government PLA and DCL, and reverse all lapsed amounts against expenditure
Personal Ledger Accounts ~~ ~
Box 3: Use of Personal Ledger Accounts for Spending after the Year Ends
The practice of transferring unspent amounts at the end o f the year to special deposits for later use (so-called Personal Ledger Accounts, PLA) has been reduced, but s t i l l continues. The normal rule i s that all allotments from the Consolidated Fund lapse at 31 March. Any unspent amounts have to be returned. The PLA device allows departments to treat late allotments as Consolidated Fund expenditure. Departments avoid showing low expenditure for the year and the consequent risk of having subsequent budgets cut. There are two types o f PLA:
(1) PLAs are allowed for transfers to local bodies, societies and public sector undertakings. These are legally outside the Government and such transfers are correctly treated as expenditures in the Government accounts.
(2) PLAs are s t i l l allowed for late allotments, i.e. where DDOs receive allotments too late in the year for them to use the funds. Consolidated Fund and Contingency Fund allocations may use these ‘lapsable PLAs’. Though the use o f PLAs has tightened up recently, departments (education, for instance) are s t i l l allowed to claim as expenditure amounts that have not been spent at 3 1 March.
At 3 1 March 2003, outstanding PLAs for GoUP departments are very high (thousands o f crores). Subject to end- of-year lapsing (reversal of PLA entries), this i s the amount of overstatement o f expenditure up to that point. Strictly speaking, treating PLAs as expenditure o f government departments i s unconstitutional because unspent allotments are not expenditure of the year o f allotment. It i s also financially unsound, as expenditure records are incorrect (and are not retrospectively corrected), and because payments from deposits are not subject to the same controls that apply to chargeable expenditures. As the expenditure i s no longer from the Consolidated Fund, new expenditures are not subject to individual top-level sanction and vouchers are not sent to the A G (Accounts) or to AG (Audit). It would be better to ensure that final allocations and releases are made in good time, and that allowance i s made for late releases in judging the spending capacity of the department for budget purposes.
I The CAG has required GoUP to close all PLAs outstanding at 31 March 2003.
42 In most departments, such as Health Department, this i s an entirely manual procedure. Computerization i s planned.
25
Revenues
D.25
D.26
D.27
D.28
D.29
D.30
This SFAA, in accordance with the World Bank Guidelines, does not cover issues o f tax pol icy or tax a d m i n i ~ t r a t i o n . ~ ~ I t covers only the promptness o f revenue collection, the adequacy o f revenue monitoring (as part o f overall budget monitoring and cash management), and revenue audit.
The State’s revenue comes 50% from central sources (shared taxes and: grants) and 50% from i t s own sources (average o f FY 1997-2001). O f i t s own revenue, trade tax (sales tax) accounts for 46%, state excise duty 18%, stamps and registration fees 11%, and user fees for social and economic services 9%.
There are no less than 12 departments administering the state’s major revenues. A recent research paper found that there was limited administrative cooperation and coordination among the departments (e.g. duplication o f field enforcement activities), and recommended a single Commercial Taxes Department and appointment o f a Fiscal Commissioner in the Finance D e ~ a r t m e n t . ~ ~
The powers granted to different tax administrations to enforce taxes under them are, by and large, adequate. Sufficient powers are available under different tax laws to examine premises or vehicles, conduct inspections and searches and make seizures where needed. There are safeguards against arbitrariness built into the law, but no channel for taxpayer complaints o f abuse o f powers.
Revenue collection targets are set by the tax collecting departments in consultation with Finance Department before the start o f the fiscal year. The targets are largely driven by the requirements o f revenue collection based on the total plan outlay and the expected assistance from the Central Government. Based on the past performance and potential o f sub-units in each tax collecting department, targets are set. Revenues are then monitored at monthly intervals. However, actual collections are consistently lower than the targets.45 Even though revenue collections are monitored monthly by the collecting departments, there i s no system for them to revise their targets during the year. This lack o f a ‘warning system’ on collections can jeopardize cash management.
The Finance Department should institute a mechanism for the revision of targets more fiequently during the year so that targets are realistic.
Tax collecting departments have internal audit units which focus on cases o f short collection and conduct checks at various collection points. External audit i s provided by
43 On the latter, see World Bank (2002) India: Uttar Pradesh Policy Notes: UP’S Own Revenue System: Assessment and Reform Suggestions, November. 44 World Bank (2002), op. cit., p.25.
Trends and Patterns o f Public Spending, August 2002, p. 9). For F Y 2003, the budget estimate was Rs. 15372 crores. The revised estimate was Rs. 13903 crores , a drop of 10%.
26
From F Y 1998 to FY 2001, actual revenue shortfalls have been 2.6, 15.1, 5.9, and 8.5% o f budget estimates (UP 45
the AG (Audit) and reported on annually. H is audit report highlights instances o f short recovery but does not generally analyze systemic issues needing correction.
D.31 The major issues affecting the tax collection departments include: (a) lack o f adequate staff and infrastructure. GoUP i s starting a computerization effort but this faces budget constraints; and (b) problem o f collection arrears, particularly on sales tax assessments. Around 20-30 percent o f arrears f rom revious years plus what i s booked during the year are struck down in appeals each year. 2
GoUP has issued guidelines to ensure that assessment orders are passed after adequate enquiry, and while that is commendable, some capacity building initiatives for the Sales Tax Department may be considered.
Performance Management
D.32 Budgeting i s s t i l l only an accounting exercise in UP, unrelated to pol icy objectives, outputs and outcomes. Departments are held to account for every rupee o f expenditure but not for failure to perform. Performance budgeting has been recommended in India since 1954 but i s not yet a reality anywhere, even in the Union Government. In UP, the main developmental departments are directed to present their estimates o f expenditure together with organizational structure, brief description o f programs and physical achievements (performance indicators and targets). Most departments show budgeted performance data, but actual expenditures are not matched against actual outputs, and accountability remains limited to financial data. There i s little advantage to accrual accounting until data on outputs and progress are routinely available.
Monitoring systems should be developed in the main developmental departments and in all pro-poor programs. For transparency, it would be advisable for the Government to make periodical statements of progress and performance.
D.33 The Budget Manual and Call Letter advocate zero-based budgeting. In practice, ZBB i s only pious exhortation and admonition by the Finance Department to l ine departments. I t i s not in the interest o f a head o f department to take th i s seriously, to initiate a ZBB review and risk a reduction in his budget. I t i s better to build capacity for program evaluation independently o f l ine operations. The evaluation unit should be respected as objective and expert, and report to the Chief Minister. At present, the only independent evaluation i s that done by the CAG. In some advanced countries, i t i s a legal requirement that the continuation o f any program beyond a prescribed period depends o n its passing an independent evaluation o f whether it i s achieving i t s aims in a cost-effective manner. This ‘sunset’ legislation depends for its effectiveness o n the feasibility in UP o f establishing expert evaluation capacity independently o f program advocates, both bureaucrats and politicians. I t would also depend on clearer definition o f programs than at present.
47
46 World Bank (2002) 0p.cit.p. 44. Arrears (all own revenues) at 31 March 2000 were Rs. 5710 crores. 47 Background paper, Keshari Nath Tripathi speech and Ajay Maken paper to the National Conference on Legislative Control over Public Purse, 2000, pp. 57, 71 and 3 1416, and PwC inception report, pp. 5-63.
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D.34 Performance management o f the investment program requires initial appraisal o f projects to ensure that they are viable, then close monitoring o f progress and expenditure against estimates. On paper, the system i s good.48 However, the landscape o f UP i s l i ttered with uncompleted projects. According to the CAG, 96 projects have been lying incomplete for periods ranging up to 25 years. Their original estimated cost has doubled.49 The main reasons for project delay appear to be: poor estimating, necessitating frequent upward revisions (including for inflation); lack o f risk assessment in project appraisal; and failure to release spending authority in good time.jO
D.35 Some departments issue annual reports, but in the absence o f departmental strategic plans, reports do not contain any review of performance against plan. Some departments have issued Citizen's Charters setting out the standards o f service that they aspire to. This i s a welcome development, but i s at an early stage.
We understand that departments are preparing their Annual Performance Report. We recommend that a time line be set for the completion of this activity and that it be structured according to a guideline by the Department of Finance.
Internal Audit D.36 Out o f about 108 departments, internal audit wings exist in 57. These departments have
about 230 auditors, plus a large number o f accounts personnel who also do internal audit work.jl They do a post-audit o f the propriety o f a sample o f transactions,j2 but no analytical audithisk assessments, nor performance audit. A few department^^^ do a pre- audit o f transactions (which i s properly part o f the accounting process). Whether pre- or post-audit, internal auditors are within the same cadre as the accounts officers they are auditing, so they are liable to be transferred and find themselves auditing the work o f themselves and old colleagues, so audit independence i s limited. This matches the low organizational placement o f internal audit and the low grades o f staff emp10yed.j~ Internal audit tends to be used as a tool o f harassment rather than a tool o f good management. Internal audit should be the right hand o f the Controlling Officer.
48 New schemes are estimated by the responsible departments and put up to their administrative departments and Planning and Finance Departments as early as possible, with time-phased projections o f financial consequences and physical targets. Planning Department undertakes cost-benefit analyses of major projects. After approval and initiation of work, the departments send progress reports to the Project Monitoring and Cost Management Division o f Planning Department from which special reports are compiled and sent to the Cabinet and Chief Secretary. 49 CAG Report, Civil, for the F Y 2000, p. 15. 50 PwC Draft Final Report, para. 5.2.4. World Bank PER team have recommended a one-time Zero-Based Investment Review of all ongoing investment schemes (Public Expenditure Note, February 2003, p.24). 5 1 PwC Inception Report, op. cit., Appendices 7A and 7B. These are actual numbers: sanctioned posts were about 1,350. Numbers exclude the Local Funds auditors, who audit local government bodies. 52 A Government Order from Finance Department in January 2001 has required all IA wings to examine at least 10% of all transactions, and has prescribed the format of reporting. T h e PwC study found examples of very low coverage, e.g. only 15% o f the units in Agriculture Department were internally audited in FY 2001 (PwC Inception Report, p. 6-7). 53 Industry, Public Works, Irrigation and Rural Engineering Services. 54 In Health Department, the Intemal Audit Officer (an Assistant Accountant who has 16 officers working on intemal audit) reports through the Chief Accounts Officer (not the Financial Controller) to the Director General o f Medical Health. She takes action on these reports.
28
D.37 The need to upgrade internal audit has been recognized and a GO was issued in January 2003. This converted the Directorate o f Accounts into a Directorate o f Internal Audit (DIA), headed by a State Internal Auditor (SIA).55 The new directorate will set audit policies and standards, prescribe standard procedures in an Internal Audit Manual, review and approve annual audit plans (which wil l be shared with external audit), monitor internal audit operations in the departments (by receiving their reports, fol lowing up on remedial actions, and reporting to Principal Secretary Finance), and arrange training for DIA, heads o f departments and departmental internal audit officers. As a f i r s t step, a proposal for one week’s training in new techniques i s under examination by the SIA.j6 We commend this initiative.
D.38 In each Department, the Finance Controller has been named as Internal Auditor also, as an interim measure to announce i t s importance. Quarterly reports are already being sent to the SIA, with some good results. For instance, Health Department was retaining health center fee revenue contrary to l aw (as al l revenues are payable into the Consolidated Fund) and without proper accounting. I t i s planned to regularize the retention o f 50% o f this revenue item and to improve the accounting and internal control procedure.
Conclusion
D.39 There is a good basic system o f Treasury control o f payments but no cash forecasting system. Finance Department i s unable to set spending limits based o n expected quarterly cash flows. Cash i s managed only by postponing spending claims when the Government i s advised by RBI that i t i s below i t s minimum balance. A reliable and comprehensive debt recording and monitoring system does not exist.
A Cash Management Section should be established in Finance Department with the task o f setting up and operating an improved cash forecasting and monitoring system
A Debt Section should also be set up in Finance Department to record and maintain reliable time-series data on debt stock, debt inf lows and repayments in a disaggregated format
D.40 The computerization o f treasuries has facilitated timeliness and reliability in compilation o f monthly receipts and payments reports. However, in the absence o f any machinery for revision o f revenue targets, the revenue forecasts available with the Finance Department are not always current - a situation which could be remedied by instituting quarterly revision o f targets by the revenue collection departments. A major issue i s the presence o f lapsable PLAs - large sums which cause the misstatement o f expenditure and are not subject to the same controls that apply to expenditure f rom the Consolidated Fund. The
0
55 The first State Internal Audi tor post had been f i l led at Special Secretary level by a secondment f rom the CAG office. This secondment ended in November 2003. 56 The P w C study recommended this and a number o f other short courses (Final Report, M a r c h 2002, section 5.2).
29
need for internal audit has been recognized and efforts are under way to strengthen the Directorate o f Internal Audit.
30
E. GOVERNMENT ACCOUNTING AND FINANCIAL REPORTING
Cash-based Accounting and Reporting E.l GoUP, l ike other States and the Union, uses a form o f cash-based accounting. I t records
receipts and payments o f the Consolidated Fund, Contingencies Fund and Public Account as they occur and brings them to account annually in a Summary o f Transactions (Statement No.1 o f the Finance Accounts), in accordance with the requirements o f the C A G (Duties, Powers and Conditions o f Service) Act, 1971.
E.2 In 1971, there were no generally accepted standards for government accounting or reporting. In 2003, the most widely accepted standards are those promulgated by the International Federation o f Accountants, Public Sector Committee (IFAC-PSC). I t has recently issued a standard for governments keeping their accounts o n a cash basis.57 This applies to the general-purpose annual financial statements o f a l l public sector entities except government business enterprises (public enterprises) for years beginning after 1 January 2004. Financial statements may not be described as complying with the standard unless they comply with all the requirements o f Part 1. Part 2 sets out additional disclosures that I F A C encourages governments to make. It also encourages governments to progress to the accrual basis o f accounting, for which different standards apply. The box below shows the major features o f the standard and how GoUP accounts relate to them.
Box 4: ComDarison o f GoUP Accounts with IFAC Standard IFAC-PSC Cash Basis Standard - Part 1 Statement o f receipts, payments and cash balances
Disclosure o f accounting policies
~~
Amounts received and paid on behalf o f GoUP (such as offshore payments by donors for supplies, equipment, etc)
Separate annual financial statements for each Department and other entity, and consolidated statements for GoUP
Statements understandable, relevant to users and presented within six months o f end o f year, reliable, and complete
GoUP (per Finance Accounts 1999/2000) Provided in Statement No. 1
Some explanation o f items and summaries o f results, but no statement o f accounting policies
N o t shown
N o separate statements for lower leve l entities. GoUP only, and some entities under Government control omitted
Appropriation Accounts understandable, but Finance Accounts obscure. FY 2000 accounts issued after just over six months. Accounts are believed to be reliable and complete, subject to the omission o f non-cash aid.
’’ IFAC Public Sector Committee (2003) Cash Basis IPSAS: Financial Reporting under the Cash Basis of Accounting. Available on IFAC website www.ifac.org
31
Statements to show date of issue, and 1 Yes, in C A G certificate who has authorized them for issue
Information about the entity - i t s operations, controlling legislation, and departments and other entities included
Any cash balances that are subject to restrictions on their use, and undrawn borrowing facilities
Comparative information for the previous year
N o t shown
N o t shown
Shown
Assessment whether entity i s a going concern (in the case o f a lower-level entity)
Extraordinary items (such as disaster relief)
Classification o f payments by function and/or nature of payment, and receipts by type
Proceeds f rom borrowing, by type and source
Assets and liabilities o f the entity
Comparison with budgets
Proportion o f ownership interest in controlled entities
N o t applicable
N o t identified, if any
Yes. Payments are classified by function, and by standard object within function. Receipts classified
Shown
Only financial assets and liabilities listed, no physical assets
Yes, for revenue and expenditure only (in Appropriation accounts)
N o definition o f controlled entities
by type
E.3 It can be seen that GoUP accounts, though they score wel l o n a number o f parameters, do not meet the IFAC-PSC standard, mainly because o f a lack o f definition o f their coverage, and lack o f a statement o f accounting policies.
Other than for monitoring actual expenditure against the budget, the accounts are not used actively for decision-making.
E.4
If intending to convert to accrual accounting, classification o f cash flows into operating, investment and financing activities
E.5 The GoUP policy paper on governance reforms states i t s intention to seek advice on the design o f a resource-based accounting system. Our comments o n this are provided at Annex 6.
N o t done
32
E.6
E.7
E. 8
E.9
E.10
Though the present basis o f accounting in al l State departments i s cash, a few non-cash transactions creep into expenditure. A large transfer i s made each year to a Sinking Fund for Reduction or Avoidance o f Debt in the Public Account. A similar entry i s made to build up a Roads and Bridges Fund. Three departments with a lot o f machinery are charged depreciation, a book entry, debiting their expenditure heads and crediting a ‘Depreciation Fund’ in the Public Account.58 All these are not true expenditures as they are internal transfers. The IMF and World Bank adjust the reported fiscal deficit to exclude these entries.
Normally annual accounts are completed within three months o f the end o f the year, and certified within a further three months. However, at February 2003 the latest accounts issued were those for FY 2000. Subsequent years are held up because some loans were not allocated between UP and Uttaranchal. The present target i s to complete the accounts and their certification up to FY 2003 by September 2003.
The AG (Accounts) processes all transactions quite independently o f the Treasuries f rom original vouchers, and requires State departments to reconcile their accounts with his, in accordance with the law. Each Finance Controller sends a reconciliation team to the AG’s office each month. This duplication o f work i s very expensive but has in the past been justified on two grounds: (1) it provides a further check o n the accuracy o f the accounts, and (2) the greater independence o f the AG prevents ‘fudging’ o f the Annual Accounts.
The success o f the U P Treasury computerization, ahead o f other States, should prompt a review o f India’s age-old division o f accounting functions between state and center. In principle, accounting i s an executive function that i s intended to serve the executive. If it i s carried out in accordance with generally accepted accounting and financial reporting standards, and if there i s an independent validation o f the accounts and financial reports, it i s not necessary for the entire operation to be repeated. I t i s better that accounting be done once, and done well.
There i s provision in the C A G (Duties, Powers and Conditions o f Service) Ac t for the Governor o f a State, with the approval o f the President and after consultation with the CAG, to relieve the C A G from the responsibility for compiling the State accounts.
To avoid the duplication of accounting at both State and CAG level, and to continue the evolutionary growth of State responsibility and accountability, an action plan should now be made to remedy gaps in UP State accounting procedures and controls, and for the CAG to devolve this responsibility to the State.
Computerization
E. 1 1 The major success story in computerization has been the treasury computerization, which i s working very efficiently.
In FY 2000, Finance Department expenditure included Rs. 929 crores to increase the Sinking Fund for Reduction or Avoidance o f Debt to Rs. 4992 crores. Public Works expenditure included Rs.102 crores to build up the Roads and Bridges Fund to Rs.245 crores. Public Works, Forestry and Irrigation were charged depreciation in previous years.
33
E.12
E.13
E. 14
O n departmental computerization, the progress i s varied. Some departments l i ke P W D and Irrigation have made significant progress59 whereas in many other departments the progress has not been very good. Some have no computers, while others have systems that are not compatible with the Treasury system, or with each other.60 GoUP has issued a G O asking al l departments to provide 2 percent o f their annual outlay for computerization and this has been provided in the budget for FY 2003.
I t appears that there has been a lack o f harmony in the computerization efforts o f various departments resulting in a multiplicity o f server platforms (which sometimes don’t ‘talk’ to each other), and multiplicity o f software and consultants, resulting in a loss o f networking and economies o f scale.
The State Information Technology (IT) Department has to play a more pro-active and facilitative role in computerization of line departments and should also encourage mutual learning among them.
Another initiative that the GoUP i s taking i s to build a Database for Employee Management Information System for Transparency (DEMIST) where the entire human resource database i s being computerized.61 The system will promote transparency by providing information on transfers, placements, promotions and training needs o f the entire work force.
Conclusion
E.15 Accounts are kept on a cash basis and score well on a number o f parameters set in the IFAC-PSC standard but do not meet the standard as a whole mainly due to lack o f definition o f coverage and a lack o f a statement o f accounting policies. Annual financial statements are normally completed and audited in a timely manner, though they are currently in arrears due to problems arising out o f the separation o f Uttaranchal State. A major issue i s the triplication o f accounting - by departments, by Treasuries and by the AG, and the enormous amount o f reconciliation that this entails (but i s not always done), using a mixture o f manual systems and mutually incompatible computer systems.
59 PWD i s carrying out a phased implementation o f a complete computerization o f i t s operations. In phase I, 3 zones and 33 divisions are expected to be functional on a fully computerized basis by September 2003. 6o The AG’s software i s not compatible wi th the Treasury software. Typically, monthly reconciliation involves 4 officers for 2-3 days. All mistakes have then to be corrected, whether they are due to the Department, the Treasury or the AG (Accounts). 6’ Significant progress has been made. Out o f a total o f 1.049 mil l ion employees, a database for 0.598 mil l ion employees has been created at March 2003.
34
To avoid the duplication o f accounting at both State and C A G level, and to continue the evolutionary growth o f State responsibility and accountability, an action plan should now be made to computerize the departmental accounts, remedy gaps in UP State accounting procedures and controls, and for the C A G to devolve this responsibility to the State in l ine with international best practice.
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F. ACCOUNTABILITY OF RURAL LOCAL BODIES~~
Planning and Budgeting F.l Rural loca l bodies (panchayats - see p ro f i l e in box below) have been empowered to
prepare plans and implement schemes f o r economic development and social justice. Leg is la t i on requires annual b ~ d g e t i n g . ~ ~
Box 5: Profile of Rural Local Bodies
Rural local bodies (panchayati raj institutions, PRIs) have a history going back to the Rig-Veda and have continued to function through the centuries, though with many ups and downs. The United Provinces Panchayat Raj Ac t 1947 and Kshetra Samiti and Zi l la Parishad Adhiniyam 1961 set up elected local bodies at three levels and empowered the State legislature to ensure their financial accountability. Fol lowing the 73rd Constitutional Amendment o f 1992, the UP State Conformity Amendment A c t 1994 initiated the process o f functional and financial devolution. The legislation authorizes the panchayats to levy and collect certain tolls, fees and non-tax revenue, to receive grants-in-aid, and to create particular funds. Only the village level has some taxing power o f i t s own. Administrators and policy makers are s t i l l addressing the many issues relating to deregulation o f authority, deconcentration o f power and devolution o f funds.
In UP, there are 70 District (Zilla) Panchayats, 809 Block (Kshetra) Panchayats and 52,029 Vil lage (Gram) Panchayats which together account for about 3% o f the total expenditure o f the state. Panchayats are elected every f ive years, and the last election was in June 2000.
The 11"' Schedule to the Constitution l is ts the various activities that can be transferred to the PRIs. At present, PRIs are responsible for primary education, tube wells and hand pumps, food and c iv i l supply, health, women and chi ld development, animal husbandry, agriculture and rural development. Staff devolution for these activities i s not complete.
The financial position o f the PRIs i s periodically examined by a U P State Finance Commission that i s constituted and decides intra-State allocations every five years. Grants f rom the State were Rs. 382 crores in FY 2002 and from Go1 Rs. 233 crores. These grants are basically untied so that priorities can be decided at the local level. Most personnel continue to be paid f rom the GoUP budget (mainly by the Department o f Rural Development and the Department o f Panchayati Raj). The Second SFC i s expected to address the complex problems o f the PRIs ranging from resource mobilization to financial accountability. The present resources at a l l three levels are generally held to be grossly inadequate for PRIs to meet their projected fiscal needs and perform their devolved functions. As a result, they are facing acute fiscal crisis.
The total expenditure o f PRIs in U P has varied between Rs. 832 and 1025 crores a year over the last f ive years. This i s funded by their collections o f assigned taxes, fees and user charges, shared taxes, and grants f rom higher levels o f government. There are also transfers to the District Rural Development Authorities - some Rs. 1195 crores in FY 2003. Vil lage Panchayats are not effectively tapping local revenues. Thus, a l l levels remain very dependent on government assistance.
For a l l levels, payments are made by the District Treasuries.
G2 This chapter i s based mainly on a field survey o f PRIs in January-February 2003. It covered one district in each o f the four regions of the state, viz. Sultanpur, Sitapur, Bareilly and Jhansi. In each selected district, the District Panchayat, one Block Panchayat and two Village Panchayats were surveyed in detail.
63 The Kshetra Panchayat and Zilla Panchayat Act of 196lmandate the preparation o f budgets at the Block and District level. Similarly, the UP Panchayat Raj Act o f 1947 requires Village Panchayats to prepare a statement of estimated receipts and payments for each financial year (1 April - 3 1 March).
F.2
F.3
F.4
District plan funds, once sanctioned by GoUP Finance Department, are released by heads o f departments to their respective heads o f office in the district. In most cases, grants are not disbursed in good time.
Timely release of funds with prior intimation of the quantum of funds is a pre- requisite to realistic planning and budgeting. GoI and GoUP should ensure this.
The Planning and Development Committee at Village Panchayat level prepares i t s annual budget in open meetings o f Village Panchayats. B lock Panchayats and District Panchayats also prepare annual budgets, with inputs f rom Junior Engineers and Accountants. Generally, a PRI budget i s a simple statement o f capital expenditure on schemes for which grants are expected to become available.
Village-level budgets are approved solely by Village Panchayats. B lock Panchayats and District Panchayats also approve their budgets on their own. There is no submission o f budgets to higher levels or to the State Legislature. The State enforces accountability by reference to the budgets approved by the local elected bodies. This gives the PRIs autonomy o f resource allocation at least with regard to the funds they generate themselves. The Department o f Panchayat Raj collates and consolidates al l PRI budget data for planning and statistical purposes.
Accounting and Reporting
F.5
F.6
F.7
Rules made under the legislation (UP Zi l la Parishads and Kshetra Samities (Budget and General Accounts) Rules, 1965) and a Manual issued by the Panchayati Raj Department contain detailed instructions on the maintenance o f accounting records and submission o f reports. A Village Panchayat, for instance, should prepare 13 statements. However, Village Panchayats are understaffed and staff at that level are mostly unqualified and inefficient. One person, called Multipurpose Worker, looks after many functions, so there i s l i t t le control by segregation o f duties, and the information required i s st i l l too much for one such worker using manual methods
Financial organization and systems are in need of review, simplijkation and standardization. Responsibility for handling cash and cheques should, as far as possible, be segregated j?om responsibility for accounting and reporting. I t would be better if the number of forms currently prescribed could be reduced and simplijied. At District and Block Panchayats, a uniform system of computerization should be installed.
Accounting staff are more qualified and competent at district and block levels. In most cases, accounting i s on a single entry system, but double entry i s used in some places. Cash Book, Treasury and Bank Pass Book, Security Register, etc. are maintained regularly.
Reports are mostly quarterly, in some cases monthly. They are submitted promptly as further grants are not released until past grants are accounted for. At each level, expenditure on schemes i s consolidated only for each source o f funds, and reported to that
37
source, together with certificates o f utilization. There i s no consolidation or reporting o f expenditures funded by different sources. There i s no overall accountability o f any panchayat as an entity.
F.8 Though there are many discrepancies and irregularities in the books and accounts at a l l levels, and records management hardly exists,64 it appears that major diversion o f funds to unauthorized uses i s rare. Unspent balances o f tied grants, for instance, are not spent on other schemes.
External Audit F.9 The responsibility for audit o f PRIs i s divided over three authorities, which overlap in
their jurisdiction. The Panchayat Raj Act requires annual audit o f every Panchayat by the Chief Audit Officer (CAO), Department of Cooperative Societies and Panchayats. In fact he can cover only about hal f o f the Village Panchayats, a few Block Panchayats and none o f the District Panchayats. H e also audits most o f the cooperative societies.65 The U P Local Funds Audit Act, 1984, i s the authority for the Local Funds Audit Department to audit Block and District Panchayats and village-level bodies (as we l l as urban local bodies, universities, private colleges, registered societies and other bodies, corporate and non-corporate, as notified by GoUP for this purpose). Thirdly, the C A G has constitutional power to audit bodies that are substantially financed by loans or grants f rom the Consolidated Fund. H e exercises this over a three-year cycle at al l levels o f PRI.
F.10 GoUP has agreed to have al l PRI external audit brought under the CAG. District Panchayat audits would be done by staff o f the AG (UP), and the audits at B lock and Village levels would be divided between AG (UP) and Panchayati Raj Department. This should ensure coordination between the audit bodies to ensure that the whole population i s audited regularly, and that audit resources are assigned so as to achieve the greatest overall audit impact in terms o f reduction o f fiduciary risk. The AG (UP) would prepare a consolidated audit report for the UP Legislative Assembly.
F. 1 1 The Local Funds Audit Department has so far undertaken a transactional regularity audit, but i s training staff to extend into performance audit. I t issues reports to the relevant agencies and departments on completion o f each audit, and serious irregularities are notified to Finance Department. The Department produces a comprehensive audit report each year, which i s sent to GoUP for tabling in the Legislature. Reports have been issued up to FY 2002, but only the reports up to FY 1998 have been tabled. The Department has
64 All cash receipts and other financial records are not properly kept at one place for audit scrutiny. Cash vouchers are not in order. 65 There are over 7,000 cooperative societies (Primary Agricultural Commodity Societies prov id ing subsidized fertilizer, seeds, and credit t o farmers, 70 Distr ict Cooperative Banks, the apex UP Cooperative Bank, and cooperatives for rural industries, cane, milk, sugar and khadi). These are a l l rura l local bodies in receipt o f State funds. They are governed by the UP Cooperative Societies A c t 1965 and Rules 1968. The A c t requires commercial accounts. They are years pending. Mos t are audited by the CAO, or by a chartered accountant. It i s said that societies can easily get false certificates. The cooperative banks have a major problem o f non-performing assets, amounting to Rs. 1679 crores at November 2002 (Economic Times, 10 March 2003). The CAO does not issue an annual report.
38
power to surcharge any person it i s satisfied has committed misconduct or gross neglect resulting in loss to the audited body. About 12 such surcharges were initiated in FY 2003, mainly in the universities, but implementation o f a surcharge i s difficult. Apart f rom appeal delays, recovery depends on the relevant agency’s cooperation, such as attaching the officer’s salary. However, the risk o f exposure has a deterrent effect.
With a view to checking defalcations, it has been suggested that a Panchayat Raj Vigilance Cell should be constituted in each district, either as a branch o f the Vigilance Department or o f the Panchayati Raj Department. The Cell would have powers and responsibilities for examining allegations. It i s doubtful, however, if another investigatory body would be any more effective than those that already exist. Another suggestion i s that ‘social audit’ should be instituted, as in Karnataka (the Jamabandhi system) and Kerala. This is a public inspection o f accounts, registers and selected works o f Gram Panchayats by a team o f Gram Sabha members and public officials, including an engineer. I t i s convened six times a year in Karnataka. The team’s report i s read out in the next Gram Sabha meeting. This participatory audit i s an exciting new development, which complements participatory planning and participatory monitoring. Accountability i s direct to the local community and beneficiaries.
Social audit should be piloted in selected villages of UP, without affecting the existing constitutional audit. If it is successful, it should be institutionalized and applied across all village panchayats, with necessary changes to the law
Elected members o f PRIs have general access to financial accounts and records. This reflects transparency. However, subject to the above recommendation on social audit, the general public has l i t t le access.
Greater effort should be made to promote transparency of records and accounts, such as by mandatory posting on the notice board of the Panchayat Bhawan, of budgets, procurement records (invitations to quotehender and amounts of successful quotedtenders), annual accounts and audit reports.
Capacity Building
F.14 Many Village Panchayats have no staff to maintain accounts and the Multipurpose Workers have no accounting background. Only seven days’ training is given to accounts staff - this i s not adequate. The need is more urgent at this level. The Eleventh Finance Commission has provided funds to GoUP (Rs. 4,000 per Panchayat per year) to maintain accounts on a contract basis.
Accounting stag particularly at the village level, need training. Elected representatives also need training on their role in public financial accountability. The numbers involved, however, are very large (65,000 regular stax plus elected representatives). A feasibility study should be made of the costs and benefits of a special training program for PRI accounts stag using the State Institute of Rural
39
Development (which has training facilities in all four regions of UP) and the IFMTR.
Conclusion
F.15 Rural local bodies are facing many issues relating to deregulation o f authority, deconcentration o f power and devolution o f funds. Financial control i s reasonably good at district and block levels but the accounts o f the village Panchayat are particularly poorly maintained.
0 The accounting procedure at the three levels o f panchayat needs streamlining. It would be better if the number o f forms currently prescribed could be reduced and simplified. At District and Block Panchayats, a uniform system o f computerization should be installed
0 Accounting staff, particularly at the village level, need training. Elected representatives also need training on their role in public financial accountability. A feasibility study should be made o f the costs and benefits o f a special training program for rural body officials and public representatives
Social audit should be piloted in selected villages o f UP, without affecting the existing constitutional audit. If it i s successful, it should be institutionalized and applied across al l village panchayats, with necessary changes to the law
0
0 Records and accounts should be opened to the public, for example, by publication in local newspapers and posting on Panchayat Bhawan notice boards o f budgets, procurement records, annual accounts and audit reports.
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G. ACCOUNTABILITY OF URBAN LOCAL BODIES
G.l Urban local bodies (ULBs) are profiled in the Box 6. The funds distributed by GoUP to the ULBs are shown in the Government budget as ‘Grants given to Urban Local Bodies’ under the heading ‘social expenditures’.
Planning and Budgeting
G.2
G.3
G.4
G.5
The law requires Municipal Commissioners/Executive Officers to prepare their budgets o f receipts and payments. NN budgets have to be passed before 31 March, or before 1 March in the case o f corporations in debt to GoUP. NPP and N P budgets are due two weeks earlier. These deadlines are not met. The Finance Committee, which i s supposed to pass the budget before putting it before the Board, i s not formed or not functional in many N N s and NPs.
The budget making process should start some months earlier so that Councilors in the finance committee and Boards have time to consider the budget before the prescribed dates.
Appropriate measures should be imposed on ULBs which fail to pass their budgets in time (such as a corresponding with holding of state grants).
Budgets should be posted in newspapers and posted on notice boards so as to be transparent and available to the public.
The annual budgets are prepared by al l ULBs from estimates o f revenue and expenditure received f rom the respective departments. The revenue estimates are based on ad hoc increases over the previous year’s budgeted figures, without taking into account the actual collections. So revenues are over-estimated. Information for analyzing revenue shortfalls i s not available in the budget document. Expenditure i s also estimated incrementally. Budgets should be based o n departmental unit costs. There appears to be no involvement o f citizens in the budgeting process.
In some NPs and NPPs, funds received from District Urban Development Authorities for performing specific works are not included in their budgets. Other than this, there are no off-budget items.
The annual budgets are passed by the boards o f ULBs and submitted to the Director, LBs. H e has powers only to suggest modifications. ULBs in debt to GoUP, on the other hand, have to obtain GoUP approval o f their budgets.
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Box 6: Profile o f Urban Local Bodies
There are three categories o f urban local body (ULB) in UP:
0 Municipal Corporations (12 N N s , or Nagar Nigams), established and governed by UP Municipal Corporations Act I959 in cities having a population more than 500,000
Municipal Boards (194 NPPs, Nagar Palika Parishads), established and governed by UP Municipalities Act 1916 in cities generally having an urban population o f less than 500,000 but more than 20,000
Town Area Committees (422 NPs, Nagar Panchayats), also established and governed by UP Municipalities Act 1916, in towns generally having population o f less than 20,000 but more than 10,000
ULBs receive revenues generated from their own sources (mainly house tax and property tax), plus grants from: State Finance Commission, the l o t ” and 1 lth Finance Commission, MPs’/MLAs’ funds and other grants, and loans. Total revenues o f ULBs in FY 2000 were Rs. 833 crores, o f which 28% was from their own revenues. Some ULBs are preparing for bond issues (hitherto not permitted).
The 74‘” amendment to the Constitution gave the ULBs more functions and autonomy in their operations, but GoUP control i s s t i l l fairly strong. Article 243 P to 243 ZG o f the Constitution describes the functions and responsibilities o f ULBs for every state. The legislation gives the ULBs a dual accountability. Primarily they are accountable to their Councilors who are representatives o f the public. They also report to the State Government (Department o f Urban Development), but not to the State Assembly. To assist the Urban Development Secretary in monitoring and administration, a Directorate o f Urban Local Bodies has been set up in Lucknow. This i s the chief controlling authority o f ULBs.
ULBs cater for a population o f around 3 5 mi l l ion and employ about 85,000 personnel.
0
0
G.6 Expenditures are controlled within budget limits through the expenditure ledgers. N o reappropriations are al lowed except with approval o f the Counci l o n the basis o f recommendations o f the Executive Committee. The ULBs are supposed to pass revised budgets, but many NPPs and NPs do no t do this.
Procurement
G.7 About 20 percent of the total budgeted expenditure goes o n procurement. The governing statutes do not prescribe any specific procurement procedures to be fol lowed. Since the ch ief executives and heads o f accounts are f r o m the UP Centralized Services, they fo l l ow the procurement procedures o f the Government.
G.8 There are generally adequate internal controls to check misprocurement in ULBs. The active involvement o f Councilors in the developmental works, wh ich invo lve a significant amount o f procurement, provides an additional check that the items purchased or works done are proper and justif ied. However, in some ULBs, the tender procedures for civil construction works are very loosely fol lowed.
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Accounting and Internal Controls
G.9
G.10
G . l l
G.12
G.13
GoUP has issued Account Rules which are applicable to al l the N N s , and an Accounts Code for NPPs and NPs. However, the accounting system and associated internal controls are extremely weak (there are no written internal control standards), so the financial reports are o f doubtful accuracy. Some controls create problems: opening a new bank account and maintaining a separate cash book for each type o f funds results in a large number o f bank accounts and accounting records.
Accounting i s on a cash basis. Accounts are maintained on the single entry system, mainly on a manual basis. The payroll functions including pensions in some o f the bigger ULBs have been computerized. There are no cross checks to ensure whether al l transactions in a period have been properly accounted and reflected in the financial statements. N o balance sheet i s prepared.
Some transactions o f the ULBs l ike electricity dues o f the local body payable to the electricity company and deducted by the Directorate f rom the SFC share are not recorded by the ULBs in their books o f accounts and accordingly these amounts are also not reflected in the budget or annual accounts o f the ULBs. Due to lack o f knowledge o f accounting for these adjustments, only the net amount o f grants received i s brought into the books.66
In NPPs and NPs, the powers o f DDO as wel l as many other executive powers have been vested with the Chairman who i s a public elected representative. Accordingly, cheques in these ULBs are signed by the chairman joint ly with the EO. However, for a l l practical purposes, only the EO i s made accountable in case o f under-performance or improper payments and there i s no responsibility o f public representatives to the state government. Similarly, the Taxation Committee has been given unfettered power to assess house tax and there i s no system to check the misuse o f these powers. This Committee o f public representatives can reduce/modify the house tax imposed by the tax inspector based o n i t s discretion. Instead o f giving only pol icy-making rights to publ ic representatives, this system gives executive rights without making them accountable for their decisions. Only the E O i s made responsible by the government authorities for shortfalls in collections o f taxes.
0 Powers of DDO and other executive powers should not be given to public representatives without appropriate accountability. The relevant rules which devolve drawing and disbursing authority to the Chairmen of Municipal Boards and Nagar Panchayats while holding the Executive Officers accountable should be revised.
Funds provided from SFC/EFC grants can only be used for the purposes specified in the GOs and are kept in separate PLA accounts. For other grants, such as those received from
" T h i s and other accounting matters are covered in the Institute o f Chartered Accountants o f India's 'Technical Guide on Accounting and Financial Reporting by Urban Local Bodies'.
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DRDA, MP/MLA quota, etc. separate bank accounts and separate books o f account are kept to ensure proper control over their utilization. Periodical utilization certificates are submitted to GoUP. DMs or other deputed officers o f GoUP have authority to inspect the physical progress o f the works carried out from these grants and approve the works.
G.14 ULBs are required to produce monthly statements. In fact, most NPPs and NPs do not prepare the required statements. Nor do ULBs prepare various reconciliation statements that are part o f standard accounting controls, such as bank and treasury reconciliations. The integrity and the correctness o f the figures disclosed in various financial statements therefore remains questionable. In many ULBs, the bank account (generally the municipal fund account) has not been reconciled for more than 20 years.
Non-reconciliation of bank accounts in most of the ULBs poses a major threat as frauds and misappropriations go undetected and unreported. As there is a huge backlog in most of the ULBs, outsourcing ofprofessionals should be used to get bank reconciliations under control
There is an urgent need to review the present bookkeeping system and introduce a computerized double entry system, initially on the existing cash basis of accounting, and initially in NNs and NPPs. This wi l l improve the reliability of the available information and ensure arithmetical accuracy. 67
Due consideration should be given to the stafJing of the ULBs. The administrative department should undertake an exercise to identiJL vacancies and capacity gaps. Once vacancies are filled, accounting staff should be adequately and regularly briefed about good practices in accounting.
External Reporting
G.15 Annual accounts indicate the actual expenditures o f the ULBs for a financial year vis-& vis the budgeted allocations made under various heads o f accounts. The annual accounts are required to be submitted to the Board as wel l as to the Directorate. Accounts for N N s and NPPs are reasonably up to date, but NPs are substantially in arrears.68
The directorate should ensure preparation and submission of annual accounts as required by law. Appropriate actions like holding backpart of the SFC funds could be considered to ensure compliance with the statutes.
67 In Lucknow Municipal Corporation, a double entry system was initiated in early 199Os, and again in 2002 there was an initiative to convert to a computerized double entry system, but nether was implemented. The reasons for this failure should be studied. Tamil Nadu has introduced a computerized double entry accrual accounting system in all i t s ULBs from FY 2001. 25 chartered accountant f i r m s were contracted to provide on-the-job training, troubleshooting and support to ULBs in preparing their new financial statements.
At April 2002, six N N s had audited accounts for FY 200 1 and audit was in progress in the remaining six. Out o f 194 NPPs, 170 had submitted audited accounts for FY 2001 and the rest were in progress. Among the 422 N P s , 245 were up to date but some were in arrears back to FY 1987.
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G.16 At present, there i s no system to prepare any consolidated financial statements for the ULBs as a whole. The Directorate prepares an annual report containing funds transferred as SFC/EFC share and development works carried out by the ULBs. Apart f rom this, there are no data about the financial position and performance o f these ULBs as a whole.
The directorate should build a database of budgets of all the ULBs to facilitate preparation of a consolidated budget and calculation of budget variances based on periodic accounting informationJi.om all ULBs.
Monitoring G.17 Reviews o f 12 N N s and 89 large NPPs are held every month at the directorate level. The
Principal Secretary and the Director, Urban Local Bodies, review the progress o f these ULBs who are represented by their executive heads.
G.18 Five officers at the directorate level regularly visit the remaining ULBs. These officers are required to visit at least 2 NPPs and 3 NPs in each month to make physical inspections and review progress, accounts, audit observations, tax collection, etc. The Divisional Commissioners/District Magistrates at the division level also monitor the performance o f NPPs and NPs on a monthly basis.
Audit G.19 Following the recommendations o f the Eleventh Finance Commission, the audit o f al l
local bodies i s to be brought under the CAG. The AG, UP will audit a l l ULBs and the GoUP audit bodies will work under his guidance. These include the Mukhya Nagar Lekha Parikshak (MNLP) and Local Funds Audit (LFA). The AG, U P will be responsible for preparing an annual consolidated audit report for submission to the State Legislature.
G.20 The Director, LFA currently prepares a consolidated audit report o f a l l the ULBs and sends it to GoUP every year for placing before the Legislative Assembly. GoUP i s several years in arrears. There i s a large number o f pending observations o f LFA and M N L P in most o f the ULBs outstanding for up to 20 years. The system o f responses to or fol low- up o n the audit observations seems to be very weak and compromises the effectiveness of audits. A monitoring system for follow-up o f audit observations through Divisional Commissioners i s in place but it concentrates mainly on reducing the number o f unanswered observations rather than taking action on serious irregularities pointed out in reports.
Non-compliance with audit observations should be met with some punitive measures like withholding release ofpart of the state devolution.
Legislative Oversight
G.21 Though the ULBs are accountable to elected representatives, they are largely managed by GoUP officers. Audit and procurement procedures are also GoUP-controlled. This makes
45
ULB ‘autonomy’ problematic. The legislative and public representative interface i s a complex issue.
G.22 The ChairmedChairmen are classed as public servants and are personally responsible for any loss, waste, or misapplication o f any money o f the ULBs to which they have been a party, or which has been caused or facilitated by their misconduct or gross neglect o f duty.
Conclusion
G.23 The 74t” amendment to the Constitution devolved more power to the 628 urban local bodies in UP. Their accounting and audit infrastructure i s not adequate for their responsibilities and there are many weaknesses, such as over-estimation o f revenues and lack o f bank account reconciliation. There i s no clear separation o f executive powers from the legislative bodies - elected representatives share in executive decision making and in many cases are not held accountable for the results.
Executive powers should not be given to public representatives without appropriate accountability. I n this regard, the GoUP may reconsider the prevalent rules regarding drawing and disbursing powers and the authority - responsibility mismatch therein.
Non-reconciliation of bank accounts in most of the urban local bodies poses a major risk of frauds and misappropriations being undetected. Reconciliations should be brought up to date and stafftrained to maintain this control
Review the present ULB bookkeeping system and introduce a computerized double entry system on the existing cash basis of accounting to improve the reliability of the available information and its arithmetical accuracy.
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H. ACCOUNTABILITY OF PUBLIC ENTERPRISES H. 1 This chapter covers government companies, statutory corporations, development
authorities and departmental commercial undertakings.
GOVERNMENT COMPANIES AND STATUTORY CORPORATIONS H.2
H.3
H.4
H.5
A ‘government company’ (GC) i s one in which not less than 5 1% o f the paid-up capital i s held by the Central Government andor a State Government, and any subsidiary company of a GC (see the box on government companies below).
GCs are governed by the Companies Act 1956, and the Memorandum and Articles o f Association under which they are registered, 69 whereas each statutory corporation i s governed by i t s own enabling act containing i t s purpose, structure, powers and functions (see box o n statutory corporations below). In UP, there are seven SCs. They have legal autonomy and can invest, raise capital and borrow within the terms o f their statutes. Bo th GCs and SCs are required to act on business principles.
GoUP has become heavily involved in not only planning and guiding investment priorities, but in actually managing these enterprises (see box o n govemance below). Effectively, they are government departments. Before liberalization, when they operated as monopolies, there was no pressure to cut costs and be efficient. The group became financially and economically unviable, and mainly remain so, though a few are profitable.
Top appointments should be made after selection JFom a wider pool, on merit, for a minimum contract tenure of three years, and more often JFom inside the management group so as to provide management incentive.
GCs and SCs prepare annual budgetdaction plans based o n targets set by the concerned administrative departments, previous year’s performance, availability o f worWexpected level o f activity, inputs received from field units and expected budgetary support. They vary in quality: the budget o f UPWC i s impressive. At the other extreme, UPFC does not prepare any budget, as i t s Ac t does not require i t ! In preparing the budget, the directions o f the Finance Department with respect to rationalization or ceiling on expenditure are considered. The budget is approved by the Board, forwarded to GoUP for informatiodfurther approval and distributed to the various regional/district units. I t i s monitored through an internal MIS that provides monthly and quarterly progress reports and annual ‘flash’ results. Expenditure in excess o f the budget may be approved by the Managing Director. Budget monitoring may be combined with cash monitoring: UPRTC , for instance, has a good cash management system. The Board approves any amendments to the budget retrospectively when the budget for the ensuing year is placed before it.
69 Most are registered as ‘public’ limited companies, e.g. they can make public issues of shares. However, no GC has made any public offering or i s listed on a stock exchange.
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Accounts and Reports
H.6 The relevant acts al l require that books o f account are kept on the double entry system and on an accrual basis.70 Companies engaged in any o f the 43 industrial activities notified by the Go1 are additionally required to maintain cost accounts (Companies Act, s. 209). For each accounting period (being twelve months ending 31 March), a GC i s required to prepare a tme-and-fair-view balance sheet and profi t and loss account in compliance with the Act and with accounting standards issued by the ICAI.71 A Directors’ Responsibility Statement attests that the company has followed accounting standards so as to give a true and fair view o f the state o f affairs and the profit/loss and that adequate records have been maintained for safeguarding assets, preventing and detecting fraud, etc. However, audit qualifications show that reporting often does not meet the standards, particularly those relating to inventory valuation, revenue recognition, f ixed assets, depreciation and contingent liabilities7*
H.7 A GC should lay i t s audited annual accounts and the Board’s report before the company’s annual general meeting within six months o f the end o f the financial year, then f i l e them with the Registrar o f Companies within 30 days. They also have to be placed before the Legislative Assembly (and Parliament if Go1 holds shares). Despite heavy penalties for non-compliance, and monitoring at a l l levels, 41 working GCs were 1 to 15 years in arrears at September 2002 (per the AG’s audit report for 31St March 2002). SCs also prepare annual accounts, get them audited, and submit them to their boards and to their administrative departments. As o f March 31, 2002; 3 SCs had finalized accounts 01-02, one had finalized accounts for 99-00, one for 96-97 and one ( UP State Employees Welfare Corporation) had never finalized accounts.
Box 7: Profile o f Government Companies
GoUP owns and controls 84 GCs o f which only 44 are working and 40 non working as o f 31 March , 2002. They are in the following broad sectors:
Social - development o f scheduled castedtribes, backward classes, minorities, women’s welfare . Inj?astructure and utilities - power, industrial financing, construction Manufacturing and services - agriculture , sugar , electronics , chemicals , textiles , food distribution,
It i s important to note that the number o f working government companies as at 3 l S t March 2001 was 47, and the number has come down to 44 by the close of the subsequent financial year. However, the investment o f GoUP in these companies increased in the same period. The total equity investment o f the GoUP in 2001 was Rs 6723 crores, it was Rs 6730 crores in 2002. The loans outstanding to these companies were Rs 5688 crores in 2001 and Rs 6132 crores in 2002. Moreover, during the year 2001- 2002, the government guaranteed loans aggregating to Rs 1206.9 crores obtained by the working companies.
tourism, etc.)
70 Except that interest earned on loans and advances o f GCs engaged in industrial financing i s to be treated on a cash basis. Some SCs s t i l l on a cash basis such as UPAEVP are currently switching to an accrual basis. 71 The ICAI has issued 28 accounting standards, based closely on the international accounting standards. 72 UPRTC had 17,429 legal cases pending in various courts against it at March 2002. The liability i s said to be indeterminate. UPJN also does not quantify i t s contingent liabilities.
48
I Box 7: Profile of Government Companies (contd.)
It i s acknowledged that the small size o f the enterprises has rendered them incapable o f facing competition fo l lowing economic liberalization and globalization. GoUP policy i s a total ban o n creation o f new enterprises. For existing enterprises, the State Disinvestment Commission was set up in 2000 to examine options for restructuring, merger, privatization, and closure and make recommendations to a Central Committee under the Chief Secretary. If he finds them in the interests o f the State, he forwards them to the concerned administrative department who obtains the necessary Cabinet approvals. A Working Committee would then ensure execution o f any decisions taken.
27 GCs have been referred to the Disinvestment Commission, and recommendations o n some o f these have been submitted to GoUP. The process has been finalized with two industrial enterprises have been sold, three have been closed down and, in others, decisions have been taken about units being sold or leased but the process i s yet to be completed. The pace o f progress here indicates that government ownership and budgetary support i s l ikely to continue for several years and it i s therefore imperative that financial reporting and accountability in these PSEs i s strengthened.
Box 8: Governance of Government Companies and Statutory Corporations
The management o f th is sector i s divided among the Department o f Public Enterprises (DPE), the respective administrative departments, the Bureau o f Public Enterprises (BPE) and the Boards of Directors. The DPE monitors and supervises the GCs and SCs and prepares policies for their functioning. The administrative departments decide their strategic policy. Any budgetary support that i s to be extended to a G C or SC i s included in the budget o f the administrative department for approval by the State Legislature.
BPE acts as an interface between the enterprises and the respective administrative departments. B P E requires GCs and SCs to submit periodical reports on pre-defined formats. These reports are consolidated by department, analyzed, and submitted to GoUP with comments and recommendations for corrective action, with copies to the enterprises. The Director General o f BPE i s o n the board of certain GCs and/or a member o f the Audit Committee. The B P E i s also invited to meetings o f the COPU.
Apart f rom the ‘external managers’, the management o f a G C or SC vests in the Board o f Directors with executive control in the hands o f whole-time directors or a managing director. Directors are selected by GoUP and their tenure i s often short. During the last f ive years, eight persons held the post o f Managing Director in UPFoC and four in UPFC, despite a GoUP directive o f 1979 providing a minimum tenure o f three years for such high-level posts. Except in the power sector, there i s n o Selection Committee. Chairpersons and managing directors are overwhelmingly f rom the Indian Administrative Service. The chairpersons o f four government companies and one statutory corporation are Ministers. There are very few directors with commercial experience or a track record o f success in large commercial enterprises. Recent experience has shown that boards have no t been able to strategise to take into account new business developments, particularly consequent to liberalization o f the economy involving removal o f licensing, protection etc. requiring changes in production methods, marketing strategy, pricing and approach to competition. The results o f this management selection policy are clearly visible.
49
Name Governing Act Activity
JP State Road Transport Road Transport Road transport services Zorporation (UPRTC) Corporation Act, 1950
JP Financial Corporation State Financial Corporation Industrial financing UPFC) Act, 195 1
JP State Warehousing State Warehousing Warehousing 2orporation (UPWC) Corporations Act, 1962
JP Jal Nigam (UPJN)
JP Forest Corporation UP Forest Corporation Act, Preservation, supervision UPFoC) 1974 and development o f
JP State Employees Societies Registration Act, Welfare o f employees o f Welfare Corporation 1860 the state government UPEWC)
JP Avas Evam Vikas U P Avas Evam Vikas Housing ’arishad (UPAEVP) Parishad Act, 1965
U P Water Supply and Water supply and Sewerage Act, 1975 sewerage services
forests
The SCs are funded by the GoUP and other agencies. UPEWC, UPJN, UPAEVP and UPFoC do not have a share capital. GoUP can extend guarantees for loans raised by the SCs and i s empowered, under the acts, to provide financial assistance to the SCs by way o f share capital, loans or grants. The total investment o f GoUP in the SCs at March 2001 was Rs. 549 crores (equity Rs. 374 crores, long te rm debt 175 crores), including Rs.28 crores invested during FY 2001. Go1 has also invested Rs. 69 crores in equity. In terms o f size, UPRTC i s the largest SC with highest state investment and turnover o f over Rs. 600 crores. Four SCs (UPRTC, UPFC, UPEWC and UPJN) make losses. The overall return on capital employed i s negligible at about 2%- 3%. During FY 2001, no subsidies were paid to the SCs, but interest o f Rs. 35 crores due from UPAEVO was waived. Guarantees by GoUP for loans raised by the SCs aggregated Rs. 894 crores outstanding at March 2001, mostly to forestry (GoUP Budget 2002-03).
There i s presently no policy to privatize the SCs.
Administrative Department
Transport
Industrial Development
Co-operative
Urban Development
Forest
Food & Civ i l Supplies
Housing & Urban Development
H.8 It i s wor th recall ing the words o f the Mahatma: “Carefully kept accounts are a sine qua non for any organization. Without them it falls in to disrepute. Wi thout properly kept accounts it i s impossible to maintain truth in i t s pristine If the Financial Controller o f a GC fails t o produce accounts, there i s a reason, and it i s the job o f the
l3 M.K. Gandhi (1 927) An Autobiography, or the Story of my Experiments with Truth, Navajivan Publishing House: Ahmedabad. p. 140.
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Managing Director, then the Board, then BPE, DPE and the administrative department, to find out the reason and remedy it. The failure to do so i s not an accounting failure: it i s a management failure. Truth i s the victim.
0 A Task Force on accounts may be constituted in BPE to monitor the action plan to bring GC and SC accounts up to date. I t should review the problems faced by enterprises to reduce arrears, including shortage of personnel and inadequate infrastructure.
A cut off period for finalization of accounts may be considered for all functional PSEs and BPE should ensure that all accounts and audits are prepared and finalized within that cut offperiod.
Particular attention should be given to non-working GCs. In cases where the work of closure cannot be completed due to absence of regular accounts personnel, outsourcing of the accounts function may be considered. This should be taken up on priority basis.
0
0
Internal Control and Internal Audit
H.9 Internal control i s weak, particularly in the area o f physical verification o f f ixed assets and inventories, reconciliation o f accounts with banks and inter-office accounts and major debtors and creditors. Weaknesses in procurement and materials management also need to be addressed in view o f instances o f excessive inventory holdings, non-fixation o f reserve stock limits, unutilized or idle inventory, inappropriate purchase procedures, etc. These areas, if appropriately addressed, could result in substantial savings in costs and avoid unnecessary write-offs.
H.10 GCs and SCs are following their own internal audit practices. There i s no central agency monitoring the function. Generally, internal audit has been contracted out to practicing chartered accountants, though in some GCs and most SCs, in-house personnel conduct internal audit. The function i s generally under the control o f the Financial Controller but in some GCs the internal auditor reports directly to the Managing Director. In some GCs and most SCs no audit manual has been prepared or set o f instructions issued. Internal audit i s properly a continuous function, but in some GCs, the audit has been conducted after the close o f the year, making it indistinguishable f rom external audit. The internal audit findings may not be reported to the Board for their review.
0 Establish internal audit wing in Finance Dept. Internal audit wing to undertake audits in departments targeting:
0 compliance with key fiduciary controls (e.g. A U D C bills, cash,
0 reasons for excess expenditure or savings @om budget and revised
0
reconciliations, responses to audit observations)
estimates proper monitoring and timely surrender of unutilized amounts
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Reports of internal auditors should be copied to HOD of administrative Department Al l internal auditors should work under standardized Terms of reference prepared in accordance with international best practices
(Please refer to the Annexures on GCs and SCs for more details)
External Audit
H.ll The Companies Act requires that a GC be audited by a chartered accountant. This ‘statutory audit’ i s under the control o f the CAG. H e recommends and Go1 appoints the auditor each year (normally for not more than 3-5 years running); the C A G lays down the terms o f reference, and AG Commercial-UP conducts supplementary audits. The most serious unsettled audit findings go into the CAG’s report to the Legislature. The same arrangement i s made for two SCs, viz. UPFC and UPWC. Other SCs have the CAG as sole auditor, except UPFoC which i s audited by Local Funds Audit.
H. 12 An amendment to the Companies Act in 2000 requires every large company to set up an Audit Committee (AC) o f the Board. About 25 GCs are covered by this section. Not all have yet set up ACs. The recommendations o f the AC on matters relating to financial management are binding on the Board. Penal provisions, including imprisonment, have been provided for non-compliance. I t i s too early to say what impact this has had.
ACs to be set up and motivated in all GCs and SCs, with the first objective being to resolve outstanding audit paragraphs. I n this context an exercise should be undertaken to see how many GCs and SCs have functional ACs and an action plan should be prepared to enhance the eficiency of the ACs.
Legislative Review
H.13 A Joint Committee on Public Undertakings and Corporations (CoPU) has been constituted for examining the working o f GCs and statutory corporations. It consists o f 35 members o f whom 25 are from the Legislative Assembly and 10 from the Legislative Council. The Chairman i s appointed from amongst i t s members. I t has been provided that no Minister shall be a member o f the CoPU. I t submits i t s report to both the Houses.
H.14 Though the scope o f the CoPU has been restricted to matters relating to major government policy as distinct from the business functions o f the GC and day-to-day administration (which are covered by the PAC), it acts mainly upon receipt o f the audited accounts and CAG report. At September 200 1, 430 paragraphs o f the CAG reports were awaiting discussion. It i s therefore way behind events and has l i t t le impact on accountability.
CoPU should play a more pro-active role, similar to the CoPU of the Union Government, and adopt a plan to study particular functions across several GCs, such as procurement
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DEVELOPMENT AUTHORITIES
H.15 Development authorities (DAs) have been established under the UP Urban Planning and Development Act, 1973 for the purpose o f planned urban development in important towns in UP. There are 22 DAs ( Box 10).
Budgeting and Budget Monitoring
H.16 Each DA i s required to prepare an annual budget in the form prescribed and have it approved by i t s Board. It submits regular reports on revenue receipts, expenditures, cash flows, and physical progress to the Department through AB. Cash f l ow data i s consolidated by AB.
Accounting and Financial Reporting
H.17 At present accounting i s on a cash basis. The new manual requires conversion to an accrual basis. Each DA i s required to submit i t s annual report to GoUP, which tables it in the Legislative Assembly. The form o f the annual report i s prescribed by Rules issued in 1982. There i s no consolidation o f accounts.
a Awas Bandhu should set up a system for the consolidation offinancial reports @om the DAs and UPAEVP
Internal Control and Internal AuditiManagement Audit
H.18 DAs are required to set up a sinking fund (escrow account) for the repayment o f loans taken for each scheme. A portion o f a l l collections should be deposited in this account. However, some DAs have not opened escrow accounts or do not operate them, resulting in some defaults in loan repayments.
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Box 10: Profile and Governance of Development Authorities
DAs have been set up for Kanpur, Lucknow, Ghaziabad, Agra, Allahabad, Meerut, Moradabad, Varanasi, Gorakhpur, Mathura-Brindavan, Bareilly, Aligarh, Raibareilly, Banda, Unnao-Shuklaganj, Jhansi, Ayodhya-Faizabad, Bhulandshar-Kurja, Firozabad-Shikohabad, Saharanpur, Hapur-Pilkhua and Mazaffarnagar.
There i s also the UPAEVP, a statutory corporation under i t s own Act, and Awas Bandhu (literally Housing Ally)(AB). AB i s a registered society set up in 1997 as a technical wing to the Department, to advise on pricing, private sector participation, building regulation, finance and accounts, training, etc. I t s Executive Committee i s chaired by the Minister o f Housing. The DAs contribute to the running expenses o f AB in proportion to their budgets.
AB data show that revenue receipts o f the DAs and UPAEVP amounted to Rs 1105 crores in FY 2002, while disbursements, including loan repayments, were Rs 930 crores. However, there are no consolidated income and expenditure statements or balance sheets. The GoUP budget for FY 2003 shows no grants or loans to DAs, but guarantees outstanding at March 2001 amounted to Rs 170 crores.
DAs are legal corporate bodies falling under the Department o f Housing and Urban Planning which decides housing policy and issues guidelines. The Department has prepared a Finance and Accounts Manual that lays down standard procedures and formats. This i s mandatory for all DAs and UPAEVP from FY 2003. A performance rating system has also been introduced to rate and rank the performance o f all DAs according to 11 parameters. The results are discussed at monthly meetings o f the CEOs with AB.
The management o f each DA i s by a Board, comprising a Chairman and other key officers appointed by GoUP, ex officio GoUP officers, and four members elected by the municipalities.
H. 19 The Manual provides for the establishment o f an Internal Audit Wing in each DA under an Audit Officer reporting directly to the Vice Chairman. AB i s initiating a system o f ‘management audit’ in the DAs through chartered accountants. Another C A has been appointed in AB to receive and summarize their reports. At present, however, executive summaries simply l i s t the findings f rom each DA, without analysis o f common weaknesses and recommendations.
Internal controls need to be strengthened with respect to f ixed asset records, physical verijication of assets, reconciliation of bank accounts and personal balances and escrow accounts.
A B to prepare a basic Management Audit Manual for application in all DAs, and use internal/management audit reports to address common systemic issues
External Audit
H.20 All DAs are audited by the Local Funds Audit Department. The audit report does not include an opinion on the accounts (as i s done for GCs and SCs). The audited accounts
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and auditor’s report are sent to the DA and to the Department o f Housing with a summary o f serious irregularities. The Department can then issue directions. The audit report i s also included in the annual report that i s published and tabled in the State Legislature. However, the last year published i s for FY 1998. There are many unsettled audit findings and the system o f fo l low up i s inadequate.
0 Local Funds Auditor should include an explicit opinion on the accounts of each DA in accordance with generally accepted audit standards, and audit findings should be followed up by the Department of Urban Planning
DEPARTMENTAL COMMERCIAL UNDERTAKINGS
H.2 1 There are 12 departmentally managed commercial and quasi-commercial undertakings. These include the Grain Supply Scheme (run by the Food and C iv i l Supply Department), livestock and agriculture farms (Agriculture Department) and several workshops (Irrigation Department). They are required to prepare proforma accounts to assess their profitability and send them to the AG (Audit) by 30 June each year. The last C A G report (for FY 2000) shows that they have not rendered accounts for periods ranging f rom two to 20 years despite several reminders. Three workshops have never submitted accounts. The Grain Supply Scheme, which involves crores o f rupees spent o n purchase and release o f food grains, was 10 years in arrears.
Government should take strong measures to restore public faith in these undertakings. The preparation and submission to audit of regular annual accounts should be encouraged. GoUP should decide a cut off date for preparation of accounts and ensure that all 12 departmentally managed undertakings complete their accounts subsequent to that date.
Conclusion
H.22 The 46 government companies (including the big power companies) and seven statutory corporations are al l primarily commercial enterprises and need commercial acumen and experience at the top to chart their paths in the new global environment. Their governance involves various l ine departments, the Department o f Public Enterprises, the Bureau o f Public Enterprises and Boards o f Directors, who usually have more government and political background than commercial and managerial know-how. Chief executives have l i t t le real autonomy or tenure. Moreover, every PE i s in arrears with i t s annual accounts, some by as long as 15 years. Departmental undertakings similarly continue f rom year to year without any concern for accountability. The Joint Committee o n Public Undertakings i s also in arrears in its reviews o f accounts and audit reports.
I n government companies (GCs) and statutory corporations (SCs), appointments of chairpersons and chief executives should be made after selection >om a broader base, on merit, and for a minimum contract tenure of three years
55
0 An action plan should be made to bring all GC and SC annual accounts up to date, using contracted accountants as necessary. A Task Force on Accounts may be constituted in the Bureau of Public Enterprises to monitor the action plan. Particular attention should be given to non-working GCs, where the work cannot be completed due to absence of regular accounts personnel
It is recommended that the Legislative Committee on Public Undertakings play a more pro-active role, similar to the CoPU of the Union Government, and adopt a plan to study particular functions across several GCs, such as procurement
Strengthen internal controls in Development Authorities (DAs) with respect to fixed assets records, physical verification of assets, reconciliation of bank accounts, personal balances, and escrow accounts.
0
0
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I. EXTERNAL AUDIT74
Mandate and Objectives I. 1
I. 2
I. 3
I. 4
The external auditor o f GoUP i s the Comptroller and Auditor General (CAG) o f India, who heads the Indian Audit and Accounts Department (IAAD). Under him, a Principal Accountant General (PAG-Audit) i s directly responsible for the audit o f the whole o f the public sector in UP, comprising State departments, departmental enterprises, government companies in which GoUP holds over 51% o f the equity,75 statutory corporations, development authorities, universities, and urban and rural local bodies - in fact, al l bodies and authorities substantially financed by Government. The PAG- Audit signs annual audit reports and the C A G countersigns.
The C A G i s required inter alia to lay down general principles o f government accounting, prepare the Accounts o f the States, and submit reports relating to these accounts to the respective Governors for laying in the State Legislatures. As both accountants and auditors are members o f the same cadre (IAAS), the external perception i s that there i s a risk o f conflict o f interest. However, there i s a clear division between accounts and audit divisions o f the department, and we are informed that there i s no interchange o f personnel between the two (even though this loses the benefits o f accounting experience for auditors). I t would be better in the long run for an organizational as wel l as operational separation, as has occurred with regard to the Union accounts and in other South Asian c~untr ies, ’~ but to continue common basic training o f accountants and auditors. In chapter F above, it was argued that responsibility for UP’S accounts should be devolved to the State. This would effect a clear separation between the executive function o f preparing accounts, and the oversight function o f auditing them.
The C A G derives his position f rom Articles 148-151 o f the Constitution. H is duties, powers and conditions o f service are laid down in the C A G (Duties, Powers and Conditions o f Service) Act, 1971. H e i s appointed for a f ixed term o f six years or until reaching the age o f 65. These powers and tenure are appropriate and his independence i s unquestioned.
As in other Commonwealth countries, the audit body has no powers to penalize officers for irregularities. Only departmental heads have disciplinary powers, but it i s often dif f icult for them to penalize their colleagues. Even in criminal cases, government permission i s necessary before a public servant i s prosecuted in respect o f any offence
74 This chapter draws on a recent report: National Audit Office, UK (2003) Modernization and Capacity Building o f the Office o f the Comptroller and Auditor General o f India, under IDF grant TF050110 (Bumett Report), January 75 Under the 1956 Companies Act, where the Government has a stake o f 5 1% or more o f the equity in a company, the companies are audited by chartered accountants appointed by the Union Government on the advice o f the CAG. The CAG gives direction to the chartered accountants on the manner in which the audit should be conducted and may comment on or supplement the audit reports which result. 76 See World Bank (2002) Bangladesh: Financial Accountability for Good Governance, World Bank Country Study, section 6.1.
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alleged to have been committed while acting or purporting to act in the discharge o f his official Departments may fail to take action for various reasons.
Irregularities would be deterred if charges made by the AG (Audit) against an officer in an Inspection Report were mandatorily $led in the ofJicer 's Conjdential Report. These would be removed on successful appeal.
Audit Methodology
I. 5
I. 6
I. 7
Audit o f UP accounts i s conducted by the PAG-Audit and AG (Audit) office in Allahabad from the vouchers and accounts provided by the AG (Accounts), and by local inspections carried out by Resident Audit Offices and visiting inspection teams.78
Detailed guidance on audit methodology for the different types o f audit i s set out in a series o f manuals and auditing standards that closely follow the INTOSAI standards. The CAG's Manual o f Standing Orders (Audit) (2002) provides an overview o f the general principles to be followed during different audit procedures: the certification o f accounts; the audit o f expenditure and receipts; the audit o f PES; systems audit; manpower audit; value-for-money audit, etc. I t sets out the mandate, scope, objectives and key areas for examination for each category o f audit and guidelines on specific methodologies to be adopted. In UP, an increasing proportion o f audit work i s on value-for-money audits.
The basis o f selection o f un i t s for audit i s judgmental and has no statistical validity. The CAG cannot come to any statistically valid conclusions about the whole population subject to audit.
Greater use of risk-based and statistical sampling techniques would enable valid conclusions to be reached, as well as provide more audit value for the rupees spent.
Training and Professional Development
I. 8 There are about 2,000 audit staff for UP (and 2,800 accounts staff). The CAG invests heavily in training for all grades o f staff using the National Academy o f Audit and Accounts at Shimla and nine Regional Training Institutes. On entry, IAAS staff receives 104 weeks o f training in auditing and accounting skil ls, managerial and leadership skills, and a wider awareness o f current socio-economic developments and politics in the country. Additional training courses are provided for the continuing professional development o f staff. This i s admirable, as it enables the Department to continuously renew i t se l f and keep Indian audit in a lead position.
I. 9 Recruitment, promotion and staff evaluation procedures, however, remain subject to the general civil service rules and regulations. As employment i s virtually guaranteed for l i fe,
77 Ajay Maken, quoting the Criminal Procedure Code, 1973, op. cit., pp. 33314. 78 Visiting inspections include asset verifications. The A G (Audit) performs stores verifications, while the A G (Accounts) does Treasury inspections and cash verifications.
58
and superior performance i s not recognized and rewarded, there i s a widespread lack of motivation. This wider problem i s outside the scope o f the SFAA, but until it i s addressed, it i s unlikely that corporate plans will have much impact.
Audit Reports
I. 10
I. 11
I. 12
I. 13
The PAG (Audit) and AG (Audit) conduct a continuous audit o f transactions in each audited organization and a financial statement audit o f their annual accounts. From these, separate reports are issued on the appropriation accounts o f the State Government (called Civil), revenue (Revenue Receipts) and public enterprises ( C ~ m m e r c i a l ) . ~ ~ These reports, together with the certified Finance and Appropriation Accounts are submitted to the Governor o f U P for tabling in the State Legislature. Special audits may also be undertaken at Government or Court request.
The latest audit reports are for FY 2000, issued on 29 M a y 2001. This i s later than usual because o f delays in finalizing the accounts due to the separation o f Uttaranchal f rom UP. At March 2003, the audit reports for FY 2001 are being printed and for FY 2002 are being finalized.
Though the audit reports are professionally produced, their content i s less useful than it could be because o f a preoccupation with departures f rom the law without examination o f underlying systemic causes and positive recommendations. Audit i s a developmental function, primarily concerned with the achievement o f departmental goals.
Auditors should understand the context and place their findings in that context, prioritize them department-wise for their impact on developmental goals, consider realistically what options are open to management, and offer constructive and practical recommendations for improvement. This would be a useful input to the PAC examination (see below).
The C A G gives a certificate on the annual accounts to the effect that, according to the best o f his information, the accounts, read together with his observations, are correct statements o f
Box 11: INTOSAI Reporting Standard
At the end o f each regularity audit the auditor should write a report containing a statement of positive assurance on those items tested for compliance and negative assurance on those items not tested. The standards cover the form, content and timeliness o f reports. The auditor may give a qualified opinion if s h e disagrees with or i s uncertain about one or more material items in the financial statements, which are not so fundamental as to give an adverse opinion, viz. that the financial statements are not fairly stated. If the auditor i s unable to give an opinion on the financial statements due to uncertainty or to a restriction placed on the scope o f audit, she gives a disclaimer o f opinion. i.e., a statement that s h e cannot give an opinion, together with the reasons.
79 T h i s study does not cover revenue administration. Audit reports on commercial bodies are commented on in chapter J.
59
receipts and outgoings. This does not meet INTOSAI reporting standards.
We recommend that the CAG include his opinion on the accounts in future reports in line with INTOSAI standards.
Follow-up I. 14 There i s a standard procedure for following up observations made at the time o f audit o f
an agency. If they are not adequately answered in the course o f audit, they are included in the Inspection Report sent to the agency head. If not dealt with within a fortnight, and the objection i s serious (large amount, significant or high risk), a draft paragraph i s formulated and sent to the administrative secretary o f the concerned department, with a copy to the head o f department. If it i s s t i l l not dealt with at the time the AG (Audit) prepares the annual audit report, it i s included in the draft report which, after clearance by CAG, i s submitted to Parliament and the PAC. The state o f observations i s closely monitored.
I. 15 There has been a swift progress on responses to audit paras due to a proactive role played by the State Internal Auditor (SIA) in taking up this issue with the line departments. At 31 August 2002, for all the audit reports issued up to 1999-2000, 3,708 out o f a total o f 4,200 paras have been responded to.
Conclusions
I. 16 The Comptroller and Auditor General provides an expert and independent audit o f the transactions and annual statements o f all agencies in the public sector o f UP, as in other States. While INTOSAI standards are mostly followed, the CAG does not provide a certificate on the annual accounts stating his opinion on them and on the underlying control systems. CAG also does not prioritize i t s findings. The reader has to make hidher own assessment o f the materiality and risk implicit in his observations. The Department of Finance i s recently following up audit observations more actively and i s reducing the number outstanding.
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J. LEGISLATIVE OVERSIGHT J.1 Legislative oversight o f public finances is provided by special committees o f the
Legislative Assembly. The key committees are the Committee o n Estimates, the Public Accounts Committee (PAC) and the Committee on Public Undertakings (see chapter H above). Departmental committees for each ministry, such as a Finance Committee under the Minister o f Finance, review the activities o f each department. Another form o f accountability i s direct questions put to Ministers in the Legislative Assembly.
Public Accounts Committee 5.2 The P A C i s constituted by the Legislative Assembly" to examine the GoUP Accounts
and Reports o f the C A G and to report back to the Assembly. It covers public enterprises as wel l as State departments. Reports are made on individual departments for individual years.
5.3 The major problem i s the backlog o f C A G reports awaiting examination. The present PAC i s very active and has tabled reports on departments for years up to FY 1995.'l The practice i s to await replies on C A G report paragraphs f rom the relevant Controlling Officers before calling them for examination (see box below). This seems unnecessary as the Controlling Officers have al l been made aware o f the relevant paragraphs during the months leading up to and after the issue o f the CAG's report.
Rather than call for written responses, the PAC could issue the paragraphs and call for the Controlling OfJicer to answer in person.
The delay reduces the deterrent and corrective influence o n the executive. By the time particular paragraphs are examined, those responsible have been transferred, retired or died, and escape having to appear before the PAC. This i s made worse by the frequency o f transfers in GoUP. Accountability delayed i s accountability eroded. I t should be recognized that al l responsibility and accountability i s ultimately personal and can only be enforced against persons. I t i s not the Secretary o f X Department in 2003 who is responsible for the defaults o f his predecessor in 2000: it i s the Secretary in 2000.
J.4
0 Ways need to be found of holding individuals to account, rather than positions and post titles. Names should be named, and responsible individuals followed up and forced to account.
Under rules 230 and 23 1 of the Rules o f Procedure and Conduct o f Business o f the UP Legislative Assembly, 1958. *' Tabled in the session for FY 2001. Subsequent reports have been placed on the House agenda, but no t presented for polit ical reasons.
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Box 12: Composition and Procedure of the PAC Members are elected by the House according to the proportional representation o f parties. The term o f office i s only one year, so there i s little continuity. The current PAC was set up in 2000 and has 25 members, o f whom 20 are f rom the Assembly and 5 are associate (non- voting) members from the Council. The chairman i s elected by the House and by convention since 1948 i s a senior member o f the opposition. Ministers are not eligible for membership. The present PAC has been meeting about 12 days a month, mainly when the House i s not in session. I t has at present one sub-committee, which was set up to review accountability in the irrigation sector. Members receive Rs 250 a day for attending.
When the CAG’s report i s presented in the House, it i s immediately referred to the PAC. Paragraphs o f the report are sent to the relevant Departments, requiring a response within 90 days. Controlling Officers (e.g. Secretaries) are then required to attend personally and be questioned. They bring staff officers to assist them, such as the Finance Controller. The P A C i s assisted by the AG (Audit) or h i s deputy, and the Finance Secretary or his representative. Outside experts can be called, but this i s not done at present. The Committee may make suggestions for remedial action and require Controlling Officers to report back within a given time. All proceedings o f the P A C are secret and confidential until i t s report i s presented in the House (Rules o f Procedure, 1958). The Parliament Secretariat sends copies o f the P A C Report to the administrative departments, with copies to Finance Department, AG-UP, C A G and GoI, and follows up on the recommendations.
Greater interaction among State and Union PACs and with international bodies such as the Commonwealth Parliamentary Association (CPA) would strengthen the system and enable it to function more effectively as a check on the executive. The CPA has formed a Study Group and started a program to examine Parliament- Executive relationships and draw up standards. India is a member. Regular inter- State conferences of PAC chairpersons and members, and participation in CPA activities, should be supported.
Committee on Estimates
J.5 The Legislative Assembly has constituted a Committee on Estimates (CoE) to examine the Estimates and make recommendations on possible economies, alternative policies, improvements in organization, etc. I t consists o f 25 members f rom the Legislative Assembly, chaired by a senior person from the ruling party. Like the PAC, it i s reconstituted each year. It i s quite active: out o f 11 departments selected for examination in FY 2003, a report on the f i rs t seven has been finalized over a period o f seven months. The CoE also prepares thematic reports, such as a recent report o n PLA. There i s no voting, the Committee works by consensus. The CoE gets assistance f rom the Finance Department, but not the CAG. It shares secretarial assistance with other legislative committees and, l i ke the PAC, it meets in camera.
J.6 In contrast to the PAC that does an ex post examination based o n C A G reports, the Committee on Estimates starts i t s examination as soon as the budget i s passed. Examination even before expenditure i s incurred gives it an opportunity to intervene in operations. The Committee can draw on the P W D Technical Audit Cel l for technical opinions.
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Another form o f legislative oversight i s the widespread practice o f members o f the legislature intervening in the administration in response to grievances o f their constituents. This i s said to be an important check, particularly over local authorities. However, it i s a practice that tends to favor one person or group over another. “Active and vigilant representatives can get a substantial share o f development for their constituencies”. 82 I t may therefore serve as a means o f getting preferential treatment rather than a channel o f accountability.
The Public Accounts Committee, chaired by a senior member o f the opposition has been rejuvenated and i s reducing a backlog o f C A G reports. The P A C has adequate secretarial support, but i t s technical support i s limited to inputs by C A G and DOF officers at i t s meetings. I t s members also need more interaction with P A C members in other States and countries.
Conclusions
J.9 Continuity o f tenure o f senior officials i s essential for accountability. Greater interaction among State and Union PACs and with international bodies such as the Commonwealth Parliamentary Association (CPA) would strengthen legislative review and enable it to function more effectively as a check on the executive.
’* See Ajay Maken (2000) Accountability o f Public Servants, in National Conference Compilation, p. 31 112.
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K. K. 1
K.2
K. 3
K.4
PUBLIC TRANSPARENCY Under the Constitution Article 19 (1) a, it i s a fundamental right o f citizens to obtain f rom their government information about the policies they have adopted o n their behalf, the programs they plan to implement, the contracts given, the operations carried out, and the results obtained from using the authority and resources entrusted to them. In fact, it i s also a democratic duty that they inform themselves and exercise their franchise responsibly. In UP, a Freedom o f Information Act has been drafted, and over 16 l ine departments have developed citizen’s charters on standards o f delivery. These are good examples o f the opening up o f government.
The GoUP has an active Department o f Information and Public Relations which issues printed material, films, etc and feeds the media with press releases o n GoUP policies and activities throughout the year. Teleprinters have been installed in many districts to get news to small newspapers. The C A G issues attractive annual brochures - ‘What do the Reports o f the C A G Say?’ which highlights some o f his main findings for the year, and ‘UP Accounts at a Glance’, which summarizes the State accounts. Press conferences are sometimes held to increase media attention. The Budget Department issues an annual ‘Budget at a Glance’.
However, citizens can seldom get the particular information they want. The Freedom o f Information legislation has not yet been passed, and in any case, there i s a culture o f secrecy which would inhibit i t s operation. The Off icial Secrets Act, 1926 governs access to information held by the Government. At present, the Ac t tends to protect officials and keep them from being accountable.
The Oficial Secrets Act needs to be revised in line with new thinking about transparency.
Citizens are largely dependent on the media for information that the executive would rather not reveal but i s nevertheless essential for democratic discussion. Good professional training in journalism i s available in UP. The media are allowed to publish without official censorship, but are s t i l l subject to intimidation and legal h a r a ~ s m e n t . ~ ~ They are very free in their reporting, though not always impartial or accurate. The Press Council o f India has issued ‘Norms o f Journalistic Conduct’ and tries to enforce them. Allegations o f corruption are frequently reported in the newspapers, while reporting o f the budget and other financial events i s naturally less f r e q ~ e n t . ~ ’ Judicial corruption,
83
Ajay Maken, op. cit., p. 333. 83
84 I t i s said that the GoUP i s the biggest source of advertising revenue for UP newspapers, so they often succumb to government pressure (Pioneer, 17 July 2002). 85 A count of press clippings (in Hindi, Urdu and English) in the Secretariat library indicated that in the average month there are about 25 reports on bureaucratic corruption, 7 on allegations against politicians, and 4 on budgets and budget policy. There are 292 daily newspapers, 1,560 weeklies and fortnightlies and 96 monthlies (Uttar Pradesh 2002, op. cit. p.295). Literacy, however, i s only 57.4%. Radio and TV have wider influence.
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however, is protected by the Contempt o f Court Act: an editor can be punished if a report, though true, brings courts into disrepute.86
K.5 Though the annual Budget speech i s telecast, no other legislative proceedin s are open to public view, unlike the Union Parliament which i s far more tran~parent!~ Legislative committee meetings are also private.
Changing House Rules and allowing media access would add to the transparency of publ ic sector operations.
The Parliamentary Secretariat publishes the verbatim proceedings o f both Houses. The Library is large and well organized but i s open only to Secretariat officers and accredited researchers.
K.6
K.7 GoUP has made major steps towards transparent and efficient e-government through i t s off icial websites. The current GoUP budget, other fiscal data and the complete text o f financial regulations are accessible to al l on the Internet (http:/upgov.up.nic.in/ upfinance). Procurement tender notices are also shown in full. They are entered about a month after issue, a period that should be shortened. Monthly reports o f capital and recurrent expenditure, as reported through the Treasuries, are also entered, currently three months in arrears. The annual state accounts are posted on the CAG’s website http://cagindia.org/states/uttar_pradesh/ The latest year’s accounts are those for FY 1999. It i s expected that the accounts up to FY 2002 will soon be available.
a GoUP websites should be kept up to date andpostedpromptly
Conclusions
K. 8 Government websites have made great strides. Freedom o f Information legislation has been drafted but not yet enacted, and the prevalent administrative culture i s s t i l l one o f secrecy.Key legislation i s long out o f date. The Off icial Secrets A c t o f 1926 needs to be revised in l ine with new thinking about transparency. The Societies Registration A c t o f 1860 should be amended to require submission o f annual financial statements, including balance sheets, in the same manner as District Rural Development Agencies.
86 The Week (2003) Attention, your honour, issue of 9 March 2003, p. 20. See also P.B. Sawant (2000) Media and Judiciary, in Mainstream, issue of 23 December 2000, pp. 3 1-36, which argues that the judiciary has more internal controls and accountability than the media. *’ P.K. Mukhopadhyay (2000) Parliamentary Control over Public Purse in India, in National Conference on Legislative Control over Public Purse: A Compilation, Lucknow, 29-30 July, p. 101. The cost o f telecasting proceedings could be met by those interested in the promotion o f public understanding o f how democracy works.
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L. L. 1
L.2
L.3
L.4
RISK ANALYSIS A number o f donors are considering moving from project-tied support to direct budget support (sector-widelprogram budget support, general budget support and debt relief). UP has already received general budget support in the form o f the Wor ld Bank structural adjustment loan and credit (a single tranche disbursement). Program budget support and general budget support funds enter a pool o f public funds, so that individual uses o f funds can no longer be identified with individual sources.
These new modalities mean that donors’ principal source o f fiduciary assurance (that public funds are used legitimately) i s effective operation o f the government’s own financial management and reporting systems, together with the independent oversight and review functions performed by the C A G and the legislature. The risk to donor funds i s essentially the same as the risk to Government funds. Fiduciary risk to public funds in U P can be defined as the expected value o f the loss o f developmental benefits arising out of gaps between present financial management arrangements and generally accepted international standards.
This analysis i s made according to the DFID and OECD/DAC guidelines8’ on managing fiduciary risk when providing direct budget support. These build o n the IMF Code o f Good Practices on Fiscal Transparency, the IMF/World Bank reviews o f 25 HIPC countries, and IFAC/PSC International Public Sector Accounting Standards. In the DFID and OECD/DAC guidelines, developmental benefits are defined (by implication) in terms o f pro-poor expenditure^.'^ The methodology has been used in pi lo t assessments in African and Caribbean countries.
The box below sets out nine Good Practice Principles and the relevant benchmarks, and comments on the degree o f compliance in UP.
~~
Box 13: Risk Assessment on OECDK Good Practice Principles and Benchmarks 1.
1.1 A budget law specifying fiscal
A clear set o f rules governs the budget process
management responsibilities i s in operation
2.2 Accounting policies and account code classifications are published and applied
I C Methodology Comments
There i s a well-established legal framework, a recently updated Budget Manual, a uniform accounting code, and fiscal management responsibilities are specified. Rules are often avoided, however, by hiving of f government activities to entities outside the budget, or rules are misapplied altogether.
DFID (2002) and OECDIDAC (2002). These two sets o f guidelines are very similar. *’ T h i s implication i s drawn from two of the Good Practice Principles, viz. that the budget supports pro-poor strategies, and that the budget i s a reliable guide to actual expenditure.
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2. The budget i s comprehensive
2.1 Al l general government activities are included in the budget
2.2 Extra-budgetary expenditure i s not material
3. The budget supports pro-poor activities
3.1 Budget allocations are broadly consistent with any medium t e r m expenditure plans for the sector or for the overall budget The budget i s a reliable guide 4. to actual expenditure
4.1 Budget outtum shows a high level of consistency with the budget
5. Expenditure within the year i s controlled
5.1 In-year reporting of actual expenditure
2.2 Systems operating to control virement, commitments and arrears
6. Government carries out procurement in line with principles o f value for money and transparency
6.1 Appropriate use o f competitive
6.2 Decision making i s recorded and
6.3 Effective action taken to identify
tendering rules
auditable
and eliminate corruption
The GoUP budget comprehensively includes transactions on the Consolidated Fund, Contingencies Fund and Public Account, but omits significant aid revenues and expenditures. There i s no ‘general government’ consolidation of GoUP budget with the budgets of GoUP-controlled entities such as local bodies, universities and societies.
I‘here i s no MTEF but the consistency o f budget allocations i s xoadly in line with the plan.
The budget i s subject to constant variation through the year, but social sector and infrastructure programs that are identified as pro-poor are tagged as high priority and protected in budget cut-backs
Expenditure i s reported promptly each month and kept within budget by the fully computerized Treasury system. Virement (reappropriations) and commitments are closely controlled, but arrears of payments are unknown and uncontrolled.
According to a recent asse~sment,’~ UP suffers from extensive corruption in all public bodies and their suppliersicontractors: despite all the institutions set up to address the problem and all the regulatory and procedural framework. Tendering rules are not applied in a non-discriminatory way, records a r e defective and action i s rarely taken to eliminate corruption.
Raghavan Srinivasan (200 1) Country Procurement Assessment Report, Volume 1 : Summary and Recommendations, World Bank. In a survey of perception o f corruption in UP, 80% o f the respondents believed that the level of corruption i s very high, that i t i s worse than in other States o f India, that it has increased significantly in the recent past, and that it wi l l continue to increase in the future (Asian Information Marketing and Social Research (Pvt) Ltd (2000) Perceptions and Experience of Corruption in Uttar Pradesh, a study carried out for UP Academy o f Administration, June). Perception of political corruption i s heightened by apparent electoral disregard o f criminal behavior of candidates for public office. Several MLAs are in jail, pending determination of charges. The reports of the CAG are full of cases o f losses of development benefits resulting from gross negligence or corruption. CAG findings do not distinguish the two causes, but the impacts are the same.
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7. Reporting o f expenditure i s timely and accurate
7,lReconciliation o f fiscal and bank records i s carried out on a routine basis
submitted to parliament within the statutory period
7.2 Audited annual accounts are
Good Practice Principles and Benchmarks
8. There i s effective independent scrutiny o f government expenditure
8.1 Government accounts are independently audited
8.2 Government agencies are held to account for mismanagement and criticisms and recommendations by the auditors are followed up.
9. The budget process i s transparent
9.1 Information on the fiscal activities o f government i s available in the public domain
9.2 Information presented in a way that facilitates policy analysis and promotes accountability
Reporting o f the GoUP departments and local bodies i s timely and reasonably accurate, and reconciliation wi th bank accounts i s carried out daily. Audited annual accounts o f the GoUP are submitted to parliament but are currently in arrears for temporary reasons. Public enterprises, however, are in serious arrears.
Comments
Audit i s independent o f GoUP. Government agencies are held to account, but parliamentary reviews are considerably in arrears. Follow up i s weak.
Budgets and accounts are published in hard copy and on the GoUP and C A G websites. The budget, however, i s not user-friendly and the public accounts are obscure. There i s very little information on the activities and results.
Other Aspects o f Risk L.5 The latest C A G report shows an escalation in wastage and diversion o f funds detected in
test audits.” However, there i s far more exposure o f irregularities than corrective action to strengthen systems, recover losses o f public funds and penalize the officers responsible. The fixing o f responsibility i s made dif f icult by the diffusion o f responsibility for decisions. Prosecution i s also made difficult by deficiencies in the law o f tort and criminal law. “At present, there are statutory provisions which shield public functionaries f rom legal action. The Criminal Procedure Code, 1973, for instance, requires permission from the appropriate government, central or state, necessary before a public servant in i t s employment i s prosecuted in respect o f any allegations relating to the
91 From Rs. 169 crores in FY 1996 to Rs. 651 crores in FY 1999 (CAG Report, Civil, for the Year Ended 3 1 March 2000, p. 14).
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discharge o f their official duty”.92 Further, criminal court congestion i s particularly bad in UP and delays are interminable.93
L.6 The Lokayukta (Ombudsman) produces a comprehensive annual report that i s supposed to be tabled annually in the Assembly, but because o f successive governments’ short tenure, the Government has not commented on it and the report has not been made public since 1995. Though the present Ombudsman claims 90% success in redressing grievances against the administration, i t is more difficult to secure action against corruption. Allegations against public officers and politicians are investigated and he reports his findings and recommendations to the Chief Minister or Chief Secretary. If no action i s taken within three months, he may make a special report to the Governor, which i s laid before Parliament. Nevertheless, l i t t l e action results and the corrupt go free.94
L.7 GoUP scores moderately well on most o f the nine principles above, but weaknesses in critical areas are likely to have a significant impact, keeping the overall level o f fiduciary risk high, in particular:
Lack o f realistic budgeting, lack o f comprehensiveness and weaknesses in cash and debt management and late release o f spending authority mean that it i s dif f icult for government to deliver the budget as planned.
Procurement weaknesses affect a large part o f government expenditure. Precise figures are not available but the best estimate i s that around Rs. 12,000 crores per annum, or approximately 18% o f the state’s budget, is at risk.
Publicly owned enterprises are unable to provide accounts o n a timely basis. There i s poor fo l low up o f the many serious issues raised in audit reports and a significant build up o f arrears.
Rural local government suffers f rom l o w capacity to carry out effective financial management and there i s insufficient segregation o f duties at this level to ensure proper use o f funds.
92 Ajay Maken, op. cit., pp. 33314. 93 Poverty in India, op. cit, p. 78. 94 In FY 2002, 1,493 complaints were accepted (of which about 90% were grievances and 10% were allegations), and 1,433 disposed o f (relief provided). At the end of the year, 973 were pending. Recently f ive Ministers were investigated, and three were charged. Criminal proceedings have been init iated against t w o o f them, and a f ine o f Rs.2.87 crores instituted against the other. See website http:/l lokawktup.nic.in for the mission and procedures o f this office, and Shukla and others (2003) for statistics. See also a study o f corruption in revenue administration, in particular in the Trade Tax Department: Chaturvedi and others (2001).
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Many non-government bodies are in receipt o f public funds - registered societies, development authorities and other such bodies have unclear accountability requirements and l o w capacity.
The recommendations in the action plan identify the actions which would have the highest impact in terms o f risk mitigation. Some o f these are internal to the administration. However the most important single factor in reducing risk will be political determination to apply existing laws without fear or favor.
L.8
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Annex 1 Bibliography
Asian Information Marketing and Social Research (Pvt) Ltd (2000) Perceptions and Experience o f Corruption in Uttar Pradesh, a study carried out for UP Academy o f Administration, June
Ashok Bajpai (2000) Responsibility of Public Servants, in National Conference on Legislative Control over Public Purse: A Compilation, Lucknow, 29-30 July
Smita S. Chaudhry (2002) Conceptualization o f the Role and Functions o f the ‘Controller’, in the IFMTR Chronicle, Issue XVI, March
Abha Chaturvedi, D.S. Sengar and P. Rameshan (2001) Improvement in Corporate Culture: Improving Human Resource and Preparing a Vulnerability to Corruption Analysis, Lucknow: Indian Institute o f Management
Comptroller and Auditor General: Report for the year ended 31 March 2000 - Civil, Uttar Pradesh
Comptroller and Auditor General (undated) What do the Reports of the CAG say?: A bird’s eye view of the Audit Reports of the CAG (GoUP) for the year ended 31 March 2000 Department for International Development, Government o f UK (2002) Managing Risk when Providing Direct Budget Support, March
Jack Diamond (2002) Performance Budgeting - I s Accrual Accounting Required? Working Paper WP/02/240. IMF: Washington
Economic and Political Weekly (1 999) UP Finances: Budgetary I l lusion and Reality, April 17-24
Economic and Political Weekly (2001) UP on the Financial Brink: State Government’s Budget 2001-2002, May 19
M.K. Gandhi (1927) An Autobiography, or the Story of my Experiments with Truth, Navajivan Publishing House: Ahmedabad Government o f India, Ministry o f Rural Development (200 1) Accounting Procedure for District Rural Development AgenciedSocieties
GoUP Department o f Finance (2000) Uttar Pradesh Medium Term Fiscal Reform Policy
GoUP Department o f Finance (2000) Uttar Pradesh Budget Manual, 6* edition
GoUP (2001) Societies Registration Act, 1860, as applicable to UP, together with Uttar Pradesh Societies Registration Rules, 1976, 1 7t” edition, Eastern Book Company
GoUP, Department o f Local Fund Audit (2002) Audit Report for 1997-98 (in Hindi)
IFAC Public Sector Committee (2003) Cash Basis IPSAS: Financial Reporting under the Cash Basis of Accounting
IMF (2001) Government Finance Statistics Manual, IMF: Washington
Jagran Research Center (2002) Uttaranchal and Uttar Pradesh: At a Glance 2003
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Naoko C. Kojo (2002) UP Public Sector Debt and Debt Management, PREM, South Asia Department, World Bank, May
Aj ay Maken (2000) Accountability o f Public Servants, in National Conference Compilation
P.K. Mukhopadhyay (2000) Parliamentary Control over Public Purse in India, in National Conference on Legislative Control over Public Purse: A Compilation, Lucknow, 29-3 0 July
National Audit Office, UK (2003) Modernization and Capacity Building o f the Office o f the Comptroller and Auditor General o f India, under IDF grant TF050 1 10 (Burnett Report), January
OECD/DAC Task Force on Donor Practices, Sub-Group on Financial Management and Accountability (2002) Development Performance Measures for Public Financial Management, Paris, March.
A. Premchand, B. Potter and M. Woolley (1997) India: Public Expenditure Management
PricewaterhouseCoopers (2001) Modernization o f Financial Management and Audit Functions, in association with R.M. La11 & Co., Inception Report October 2001, Draft Final Report, December 2001, Final Report, March 2002
Prosix Softron Pvt.Ltd (200 1) Department o f Medical Health. Computerized Financial Management System. Draft System Report, 24 November
O.P. Rai (2001) Account Rules: Financial Hand-Book, ‘Vol. V, (Part I), Allahabad: Pustak Sadan Prakashan
V.V. Rama Subba Rao (1999) Decentralized Budgeting and Accountability, in Budget Reform in Developing Countries, Papers o f a Workshop held in New York, December 1997. United Nations: New York
V.J. Ravishankar and Priya Mathur (2003) Facts from Figures on Public Investment in Infrastructure, in World Bank (2003) India Infrastructure Report
A.M. Sehgal (2000) Budget and Public Expenditure Accounts, in National Conference on Legislative Control over Public Purse, 29-30 July 2000: A Compilation
Archana Shukla, R. Srinivasan and Tarun Churvedi (2003) The Uttar Pradesh Lokayukta: A Case in Efficiency, Effectiveness and Responsiveness. Indian Institute o f Management, Lucknow. Case series: 2003:09
O.P. Singh and LA. Siddiqui (2001) Financial Handbook, Volume V I [Public Works Account Rules], Pustak Sadan Prakarshan: Allahabad
Shr i Keshari Nath Tripathi, Speaker, Legislative Assembly, UP (2000) National Conference on Legislative Control over Public Purse, 29-30 July 2000: A Compilation
Raghavan Srinivasan (200 1) Country Procurement Assessment Report, Volume 1 : Summary and Recommendations, World Bank
World Bank (1998) Uttar Pradesh: From Fiscal Crisis to Renewed Growth, PREM Unit, South Asia Region
World Bank (1998) Public Expenditure Management Handbook, World Bank: Washington
World Bank (2000) Uttar Pradesh Medium Term Fiscal Reform Policy
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World Bank (2000) Report and Recommendation . . .on a Proposed Credit and Loan to India for the Uttar Pradesh Fiscal Reform and Public Sector Restructuring Project, March 29. World Bank report P7365-IN.
World Bank (undated) A Policy Note on Accelerating Development and Reducing Poverty in Uttar Pradesh
World Bank (2002) Bangladesh: Financial Accountability for Good Governance, World Bank Country Study
World Bank (2002) Poverty in India: the Challenge of Uttar Pradesh
World Bank (2002) Uttar Pradesh: Trends and Patterns in Public Spending, by Farah Zahir, PREM, South Asia, August
World Bank (2002) India: UP Policy Notes - UP’S Own Revenue System: Assessment and Reform Suggestions, November World Bank (2003) India: UP Policy Notes - Public Expenditure Note, February
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Annex 2 List o f Persons Met
Department Name Post Additional Deputy CAG
Indian Accounts and Audit Department
S. Sathyamoorthy
Principal Accountant General, UP
Shailendra Pandey
Parag Prakash Accountant General (Accounts & Entitlements), UP
Accountant General (Commercial), UP
Senior Deputy Accountant General
Sunil Chandra
C.H. Kharshing
Accountant General (Commercial)
Birendra Kumar
Legislative Assembly, UP Hon. Speaker Keshari Nath Tripathi
Principal Secretary
Assistant Secretary
Chief Librarian
R.P. Pandey
Public Accounts Committee Chairman Ashok Vajpayee
Member
Chairman
Principal Secretary
Mata Parasad Pandey
Estimates Committee
Department o f Finance
Secretary (Budget) Dr Joshi
Smita C. Choudhury Special Secretary
Director
Chief Treasury Officer, Lucknow
Directorate o f Treasury Om Narayan
Rajiv Shivasta
Chief Treasury Officer, Allahabad
Rakesh Chaube
Directorate o f Financial Statistics Director Vijay Bahadur Singh
Director Directorate o f Fiscal Planning and Re sources
Directorate o f Departmental Director
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I Accounts
Budget Division Deputy Secretary Nee1 Ratan
Lahiri Yadav
Dr. R.C. Srivastava
Budget Officer
Secretary Department o f Externally Aided Projects
S.K. Khare Research Officer
Department o f Local Funds Audit
Department o f Cooperatives
Director D.B. Singh
Bhagwati Prasad Mishra
S. Chaudhuri
Registrar
Deputy Chief Audit Officer, Panchayat and Cooperative Societies
Institute o f Financial Management, Training and Research
Krishna Gopal Director
Lucknow District Chief Development Officer
Ani1 Kumar Sagar
~~
Department o f IT Secretary
Coordinator DEMIST
G.Patnaik
Arun Arya
Department o f Panchayati Raj Under Secretary Prakash Narain
Deepak Singh
O.P. Tripathi
Department o f Rural Development Principal Secretary
Add’l Commissioner o f Rural Development
Department o f Urban Development, Urban Employment and Poverty Alleviation
Secretary Rakesh Garg
Principal Secretary
Special Secretary
Director, Urban Local Bodies
Mr. Meena
Manoj Kumar Singh
G.K. Tandon / K. K. Upadhyaya
Department o f Housing Secretary J.S. Mishra
Department o f Medical, Health & Family Welfare
Principal Secretary Rakesh Kumar Mittal
G.C. Chatturvedi Secretary, Family Welfare
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Lalj i Financial Controller
Internal Audit Officer Ram Bharosa
Dr. S.K. Srivastava Chief Medical Officer, B arabanki
Accountant, Barabanki
Block Medical Officer, Dewa
Block Medical Officer & i/c Public Health Center, Fatehpur
Amar Saxena
Dr. Ashok Srivastava
Dr. Rajendra Prasad
Accountant, Fatehpur Sunder La1
Registrar o f Societies Registrar
Joint Director
Finance Controller
Executive Engineer (Computers) Project Director, UP State Roads Project Finance Manager, UP State Roads Project
Arvind Misra
Neeraja Krishna
B.R. Singh
Sudhir Kumar
Sarvajanik Udyam Bureau
Public Works Department
N.L.Sharma
Subhash Gupta
Lokayukta Justice S.C. Verma Office o f Lokayukta (Ombudsman)
Indian Institute o f Public Administration (UP Branch)
Secretary T.N. Dhar
Giri Institute o f Development Studies
Professor Ajit Kumar Singh
University o f Lucknow Vice Chancellor
Head, Department o f Public Administration
Dr. S.B. Singh
Dr. C.P. Bhartwal
Director Professor A.K. Sengupta Institute o f Development Studies, University o f Lucknow
Faculty Member Dr Awadhesh Kr. Singh
Senior Lecturer Vinod Singh
Aurnob Roy Faculty Coordinator
Partner R. M. La11 & Co. Chartered Accountants
Partner Punee t Kap o or
76
A. Sachdev & Co. Chartered Accountants
Partner V.K. Tewari
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Partner
Partner
K.G. Bansal
Dinesh Singh
Annex 3 Finance Department Functions
The department has not been fully charted, but it includes three Secretaries, 11 Special Secretaries, and 14 Directorates. This annex l ists the functions o f the Directorates o f Finance Department that are most relevant to the SFAA. I t i s not comprehensive.
Directorate of Fiscal Planning and Resource: controls the expenditure o f the tax revenue departments; provides data every five years to Go1 Finance Commission and State Finance Commission on which sub-national allocations are based.
Directorate of Treasury: examines claims (payment vouchers), enters them into the Treasury System and issues cheques on behalf of departmental DDOs (budget-holding officers); maintains database containing budget allocations and payments; issues monthly reports o n a l l public funds at State level; submits original vouchers to AG (Accounts) twice a month.
Directorate of Budget: consolidates annual departmental expenditure budgets and reconciles expenditure budgets with projected cash inflows; prepares Annual Finance Estimates and the Budget Outline.
Directorate of Financial Statistics: receives monthly summaries o f receipts and payments from al l Treasuries o n electronic tapes; receives monthly statements o n self-accounting departments (based on paid cheques sent to the Treasuries); consolidates a l l above and reports monthly to Finance Department
Directorate of Internal Audit: monitors internal audit in the departments; undertakes special investigations; reconciles Provident Fund accounts f rom the Treasury system with the AG. This Directorate was established in January 2003, replacing the former Directorate o f (Departmental) Accounts. I t i s headed by the State Internal Auditor.
Expenditure Control Sections (1 1): review and approve individual Plan expenditure transactions; receive internal and external audit reports, make recommendations for corrective actions and sanctions to the Principal Secretary, fo l low up directions, and assist at P A C hearings. Each Section comprises a Secretary and/or Special Secretary, Deputy Secretary, Section Officer, Review Officer and Assistant.
There are also Directorates o f Group Insurance, Pensions, and National Savings.
Institute of Financial Management Training and Research: the training arm o f the Finance Division. The Director reports to the Principal Secretary, Finance. The Institute i s responsible for the training o f al l accounts and audit cadres in the GoUP (this excludes accountants and auditors who fal l under the O A G and are separately managed and trained). These comprise Treasury Officers, Assistant Accounting Officers, Accountants, Treasurers, Auditors, Internal Auditors, Drawing and Disbursement Officers (recently reduced from 36,000 to about S,OOO), and allied officers who do financial work. The total trainee population i s around 15,000.
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Annex 4 Budget Process
1. The budget process starts with a ‘call letter’ in September or October o f the previous year, requiring administrative departments to submit their estimates o n prescribed formats. Guidance i s given on the filling o f vacant posts, calculation o f allowances, telephone and vehicle usage, etc. There is no guidance on inflation: departments are expected to prepare their estimates at present prices. Budgets are compiled mainly by district-level heads, Directorates and Finance Controllers. There does not appear to be any delegation o f budgeting or budget control to service delivery institutions such as hospitals and health centers.95 Budgets are compiled and reviewed on an incremental basis, i.e. taking the revised estimates o f the current year as a base, and adding (and occasionally subtracting) for known changes.
2. Heads o f Departments send estimates to their administrative departments in the Secretariat (by 15 October), where they are scrutinized and may be amended. They are also sent to the UP Accountant General (AG-A&E) for h i s comments. They then pass to the Budget Division o f Finance Department (by 5 December). This Divis ion examines a l l new expenditure proposals in detail. I t does not concern i t se l f too much with other departmental estimates, but considers the comments and recommendations o f the AG and administrative departments, then consolidates the Estimates and compares the total expenditure requirements with resources available. If cuts are required, they are made by Budget Division according to the priority criteria mentioned above, until the fiscal parameters are al l met (January).
3. The budget i s sent up for approval by the Council o f Min is ters (mid-January), then presented in the Legislative Assembly by the Minister o f Finance (in February/March). I t has to pass both the Assembly and the Council, and be assented to by the Governor as an Appropriation Act, ideally by 3 1 March.
4. This timetable i s tight as it does not leave much time for legislative review (21 days in the Assembly). It is said that there i s practically no legislative scrutiny o f the Budget before it i s passed.96 Moreover, the budget process i s sometimes delayed for political or administrative reasons. In this case, there i s constitutional provision for continuation o f government spendin on sanctioned projects and ongoing activities by means o f a ‘vote on account’ advance. According to the OECD fiscal transparency guidelines, the budget should be presented to the legislature three months ahead, Le. by 3 1 December. As this would require far earlier preparation o f estimates in an unstable environment, the target date o f 28 February should be kept, but more thorough review by Departmental Committees o f the Legislature should be encouraged.
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95 A Block Medical Office, for instance, controls only i t s vehicle operating costs and salaries. Other inputs are provided ‘free’. T h i s illustrates the limited decentralization of financial accountability within the Government, and contrasts with the devolution of funds and accountability to the local authorities. 96 Hon. Shr i Keshari Nath Tripathi, Speaker, Legislative Assembly, UP (2000) National Conference on Legislative Control over Public Purse, 29-30 July 2000: A Compilation, p. 58. 97 The Constitution, article 206, allows the Legislative Assembly to make a grant in advance for ‘a part of any financial year’. This can be done without discussion in the House, and may be resorted to when the Government i s facing strong opposition. On 5 March 2003, a vote on account was passed for the f i s t six months o f FY 2004. Similarly, the FY 2003 budget was authorized by a vote on account on 22 March 2002, and the fill budget was not presented t i l l August 2002.
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5. Finance Department compiles a revised budget after the f i rs t six months o f the year. This includes the actual revenues and expenditures o f the f i rs t six months, and an estimate for the remaining six months including the first supplementary estimates.
6. If a department wishes to spend more than i t s budget on an item, it should f i rs t examine the rest o f i t s budget for possible savings. If savings are anticipated, they may be re-appropriated to the i tem on which expenditure i s to be made, subject to various restrictions. Up to the leve l o f sub-head (scheme), re-appropriations can be made by the Minister o f the relevant department o n the recommendation o f the administrative department, subject to various restriction^.^^ Above that level, Finance Department must also approve (and usually does).
7. Embedded in the rules i s an outdated preference for plan expenditure, capital expenditure and new proposals and a bias against recurrent expenditure. I t i s now recognized that capital expenditure i s not inherently more productive than recurrent expenditure. A school district may need more classrooms (capital) or it may need more teachers or supplies (recurrent). Such allocation decisions should be made according to the merits o f alternative expenditures, and not be straitjacketed by rules that prevent reappropriations f rom one category to another. Generally, the reappropriation rules are too detailed and cumbersome in operation.
8. In practice, the department often finds it easier to apply for a Supplementary Appropriation. This goes through the same stages as the original budget, culminating in further legislation. The C A G has pointed out that the amount o f supplementaries i s very high, and that they are grossly under-utilized. Substantial savings could be used to reduce supplementary demands. Two Supplementary Appropriations are usually processed each year. If the department i s too late for the second, it enters the amount required in a Schedule o f New Demands for inclusion in the next year's Budget.
9. If the need i s urgent, as wel l as unforeseen, the department may apply for an advance from the Contingencies Fund, as well as a supplementary appropriation. O n a roval o f the appropriation, the Contingencies Fund i s reimbursed f rom the Consolidated Fund!'This Fund i s supposed to be used only when the Legislature i s not in session (and therefore cannot pass a Supplementary Appropriation). In fact, it i s used at a l l times, for al l purposes, and very frequently (277 times in FY 2000).'00 The shape o f the Budget i s routinely changed during the year.
[See text o f report for recommendations].
Budget Manual paras. 15 1, 154- 156. It stands at Rs. 600 crores, which i s about 1.5% o f annual expenditure, and several times higher than the GO1
Contingency Fund. loo The Times o f Ind ia alleges several misuses o f the Contingencies Fund in an article in i t s M a r c h 6, 2003 issue.
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98
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Annex 5 Payments Process
1. O n receipt of invoices, DDOs raise bills (payment vouchers) and present them to the District Treasury. The Treasury checks the bills and, if they appear to be in order and are within cumulative allotments, draw cheques in favor o f the persons to whom payment i s due. Cheques are sent back to the DDOs for signature and issue. Cheques are val id for one month f rom the date o f issue. If not cashed after one month, they lapse and the entries in the books are reversed (expenditure i s reduced).
2. Salaries are paid by a single monthly cheque to each D D O in respect o f a l l staff under each head o f expenditure. As personnel data are kept at D D O level, there are ‘information gaps’, and it i s suspected that controls are insufficient to prevent abuse. There are frequent complaints o f delay in receipt o f salaries. This issue will be addressed by the move to convert Treasuries into ‘Integrated Pay and Accounts Offices’. In U P this means that Treasuries will maintain al l payrolls and make salary payments directly into officers’ bank accounts. All public officers will be required to open bank accounts. This change should remove a major fiduciary weakness.
3. Since the number o f DDOs has been substantially reduced (from over 35,000 to about 6,000), virtually a l l payments are now made by 73 Treasuries”’ at District level: most o f the 307 Sub-Treasuries at Block level are only receivers o f revenue. Sub-treasuries keep manual records and send daily statements o f their receipts and any payments to their District Treasuries, which enter them in the Treasury system. lo2
4. The State Bank o f India (SBI) handles GoUP transactions as an agent o f RBI. SBI sends daily scrolls ( l ists o f cashed cheques, prepared manually) to the Treasuries that issued the cheques.
5. End-users (departmental DDOs) have no direct access to the system: they are sent monthly statements for reconciliation with their own records o f cheques issued.
6. A separate procedure applies to the non-salary expenditures o f a few high-spending department^."^ These ‘remittance departments’ are controlled by a cash credit limit (CCL) system. In each such department, the Finance Controller, o n behalf o f the head o f department, releases ‘budget allotments’ through the year to each D D O (such as a Divisional Engineer). These authorize the D D O to commit funds. Authority to issue cheques i s separate. This i s based on cash needs assessed at monthly departmental management meetings and given by means o f ‘CCL letters’ to DDOs. Total C C L must be within total budget allotments, which must be within the annual budget. The Finance Controller copies CCLs to the Treasuries, and the Treasuries instruct the State Bank o f India o f the limits. DDOs prepare bi l ls and issue their o w n cheques. The SBI meets the cheques within the CCL. Any cheque that will take expenditure over the CCL, it refuses and informs the Treasury accordingly. The SBI returns paid cheques with daily scrolls to the Treasury for incorporation in the Treasury system. The Treasury sends a monthly
lo’ There are 73 Treasuries for 70 Districts, as 3 Districts have a second Treasury. lo2 The system was developed by NIC for the Directorate o f Treasury on an Oracle platform, using Linux (rel. 5.2) operating system and an in-house network o f 12 terminals. The system has four uses - expenditure control, cheque preparation, reporting, and reconciliation with daily scrolls from the bank. lo3 Public Works, Forest, Irrigation, Minor Irrigation, Rural Engineering Services and Ground Water.
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Statement o f Drawn Cheques to each DDO to reconcile with his accounts. Reconciliation must be completed by the 1St1’, otherwise the next CCL letter may be cut. The departments send monthly statements o f cheques issued to the AG (Accounts).
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Annex 6 Resource-based Accounting
The GoUP policy paper on governance reforms states i t s intention to seek advice on the design o f a resource-based accounting system. This i s commendable, as India should be a leader in public sector accounting in the emerging countries. Around the world, the movement towards the measurement and management o f outputs and outcomes in government bodies has necessitated a parallel movement towards measures o f expenditure which faithfully reflect the cost o f input resources used in the production o f outputs. Cash accounting i s now thought o f as incomplete accounting. Resource-based accounting (more often called ‘accrual accounting’) adjusts cash data so as to show the true resource cost o f programs, projects and activities. This information i s needed for four purposes: (1) comparing the cost o f government production with contracting out; (2) comparing alternative methods o f production and the impact o f possible changes (i.e. cost control); (3) setting userfees where cost recovery i s government policy, and (4) comparing the cost o f resources with outputs so as to improve expenditure allocations. I t should be added that accrual accounting s t i l l provides al l the traditional cash data, which are s t i l l needed so long as the basis o f legislative appropriations and accountability continues to be cash. Also accrual accounting assists cash projections and better liquidity management by providing data o n financial assets and liabilities.
This i s not a small technical change that non-financial managers can afford to ignore. It implies a new mindset, one that treats expenditure as related to performance, rather than to the previous year’s revised estimates. The introduction o f resource-based accounting requires a heavy investment, not only in new information systems and the regulatory framework, but also in training technical staff and managers.
New standards o f government accounting and reporting, such as those o f IFAC-PSC and the IMF-GFSlo4, have recently switched to an accrual basis, though it i s not realistically expected that the conversion can be made overnight, or even in the medium term. At the end o f 2002, only New Zealand, Australia and Iceland had fully converted their budgets and accounts to an accrual base, and a few more countries (all advanced economies with strong public sector accounting skil ls) had converted their accounts a10ne.l’~
In Uttar Pradesh at present, there i s no fe l t need for accrual accounting as there are few measures o f output to which expenditures could be attached. N o r is there any general pol icy to contract out government services, while the few user fees are not based on costs. Cost control, at present, i s simply a matter o f economizing and reducing outlays, irrespective o f outputs, so a cash measure i s just as effective. Resource allocations are based o n criteria that do not depend o n the measurement o f outputs or their costs. As mentioned above, there i s a major ongoing program o f accounting and financial management improvement. More urgent issues than the building o f
lo4 The International Federation of Accountants, Public Sector Committee, has issued a series of international public sector accounting standards (IPSAS), based closely on the recognized international standards for commercial accounting and reporting (IFRS, formerly called IAS), see www.ifac.org See also IMF (2001) Government Finance Statistics Manual, IMF: Washington. lo’ Jack Diamond (2002) Performance Budgeting - I s Accrual Accounting Required? Working Paper WPf021240. IMF: Washington, p. 2 1.
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resource-based management systems include (1) introduction o f cash forecasting and management, (2) tightening up the payroll system, and (3) better debt management.
A recent IMF working paper recommends that an emerging economy should recognize the new standards as a goal, and introduce accrual accounting in phases in the context o f a wider public sector management restructuring program. lo6 We support this phased approach. GoUP, in consultation with the CAG, should make a policy commitment to move toward full accrual accounting. However, the f i rs t priority should be to strengthen the existing cash-based system to get a better handle on the cash costs o f programs and to progress to the point that accounting responsibilities could be taken over from the CAG.
Progress towards accrual accounting should be made in ways that will not overload GoUP reform capacity. In computerization o f accounts, for instance, the software should include modules for the various elements o f a full accrual system, such as current liabilities, advances, revenue receivables, public debt, pensions, fixed assets and depreciation, which may be implemented one at a time in accordance with government priorities and capacities. Cash and modified cash bases can move by stages through forms o f partial accrual to full accrual.
Given the current overwhelming importance o f the fiscal crisis, priori ty should be given to aspects o f accrual accounting which would provide better information for cash management, such as the amount and timing o f liabilities. At present, GoUP has no aggregate information on i t s liabilities and when they are due for payment. Current liabilities may be captured by adapting the existing Liabi l i ty Register (form BM 7) and requiring Heads o f Departments and DDOs to report outstanding amounts monthly to Finance Department. The system should also capture liabilities originating from other sources, such as debt service (see above) and transfers between GoUP and the Union and with other States.
The PwC report recommends a phased introduction o f accrual accounting, starting with the introduction o f end-of-year accruals f rom memorandum records, then moving to continuous accrual accounting at the transaction level. lo7 We support this recommendation. Implementation should be guided by a Steering Committee in consultation with the CAG office.’08 However, the f i rs t phase needs to be broken into distinct sub-phases, as recommended in the IMF paper. The most difficult sub-phase i s the inventorisation and valuation o f government physical assets and introduction o f procedures for their accounting and depreciation, which should be l e f t to last.
lo6 Jack Diamond (2002), op. cit. p. 2718. The Fiscal Reform and Public Sector Restructuring Project includes the implementation o f computerized performance recording and monitoring systems, but this has not progressed. The Department o f Administrative Reform was not able t o demonstrate any substantive reform program. Financial reform i s left entirely t o the Department o f Finance. lo7 PricewaterhouseCoopers (2001) Draf t Final Report, section 6. The report refers t o this as a move f r o m ‘single- entry cash basis’ t o ‘single-entry accrual basis’, then f rom ‘single-entry accrual basis’ t o ‘double-entry accrual basis’. These terms are not used in I F A C standards and may mislead. ‘Double entry’ applies as soon as a general ledger i s opened, containing debit and credit balances that cancel out in total. This i s not diff icult, and should be done even in the first stage while accounts continue t o be kept on a cash basis, with end-of-year accrual adjustments. The general ledger wil l then be the basis for statements o f financial position (balance sheets), f inancial performance (revenue, expenses and surplusideficit) and changes in net assetslequity (cash flow). log The Steering Committee might eventually be transformed into an Accounting Standards Board, having a continuing responsibility for establishing and improv ing standards o f government accounting in India. See PwC recommendation in their Draf t F ina l Report, Appendix 6B.
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Annex 7 Registered Societies
These are legal corporate bodies, registered under the Societies Registration Act, 1860. This ancient piece o f legislation has been extensively used since the 1980s to give legal ‘cover’ for channeling funds through Go1 or GoUP to UP social sector programs and projects without passing through the Consolidated Fund, thus bypassing al l the myriad rules that apply to payments f rom the Consolidated Fund, and avoiding the r isk o f diversion to some unintended use. Donor agencies, including the World Bank, have freely used this device with GoUP agreement as a means o f protecting agreed projects.
According to the Registrar o f Societies, about 750,000 societies have been registered, o f which perhaps 150,000 are functioning at present. O f these, about 75,000 run schools, for which the GoUP pays teachers’ salaries. Another 40,000-75,000 run other programs with external assistance, mainly in the social sector, and up to 35,000 have cultural programs and receive private grants. The Registrar i s planning to computerize his files and build up an ongoing database, but lacks funds. The Act gives corporate status to any seven persons who subscribe their names to a memorandum o f association, f i l e it with the Registrar and be registered. This i s val id for five years and must then be renewed. Societies are required to f i le an annual l i s t o f members o f i t s governing body, but do not generally comply. The Registrar can refuse to renew registration after five years until a l l requirements are met.
The Act does not require annual accounts or an audit report. The C A G has constitutional authority to audit any body in receipt o f public funds and does audit some societies. Others are audited by the Department o f Local Funds Audit, but there i s no complete l ist and it i s unclear if al l societies receiving public funds are regularly audited. Any routine accountability requirements are l e f t to donors to the society. The Registrar has the power to cal l for accounts ‘duly audited by a chartered accountant’, to have the affairs o f a society investigated and, thereafter, to give directions to the society (sections 23 and 24). Failure to provide accounts or information i s punishable with a fine o f Rs.2,000 - hardly a disincentive today.
Administrative departments and auditors complain o f misuse o f funds by societies. A lot o f their expenditure ‘can be curtailed’. Since November 2002, the Registrar has required an affidavit from any society in receipt o f public funds as to the amount received and the assets created. This may not be enough to make the societies accountable. The Ac t should be amended to require annual financial statements, including balance sheets, in the same manner as District Rural Development Agencies.”’ If the Registrar were notified o f grants to societies at the time they were made, he would be able to compare these amounts with annual financial statements or, in their absence, with the assets reported every five years in support o f applications to renew registration.
,
log A new Act has been drafted and i s being reviewed by the Department o f Finance.
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Annex 8 Public Financial Accountability in Government Companies in Uttar Pradesh
I. Definition of Government Companies
Government Companies are defined as companies in which 5 1% or more o f the paid up capital i s held by Central or State Governments, singly or jointly, and includes companies that are subsidiaries o f a government companies. GCs are governed by the Act, Memorandum & Articles o f Association with which they are registered.
11. Rationale for creating Government Companies
GCs were created as a part o f the public sector out o f the necessity to promote self-reliance in strategic sectors o f the economy. In UP, some Public Enterprises were established"' for taking over old and sick units o f the private sector with a view to protecting workers' interest and reviving these units while some enterprises were created to fulfill the requirements o f the Government o f India (GoI) and external agencies.
Prior to the 1970s, UP had 9 GCs. Almost 70 GCs were created in the 1970s. 16 GCs were set up in the 1980s and 4 in the 1990s.A~ at 31.03.2001, there were 98 GCs in the state o f which 14were transferred to Uttaranchal under the U P Re-organization Act, 2000. Out o f the 84 GCs, 44 are working while 40 are non working"'. Though the government corporate sector has expanded rapidly in terms o f physical output and financial investments, productivity and profitability have declined. The reasons attributed include political interference, selection o f less than optimal technology or location, inefficient use o f resources, overstaffing and bureaucracy. The government became heavily involved in not only planning and guiding investment priorities, but in actually managing these enterprises. Since most o f these enterprises operated as monopolies, there was no financial accountability or pressure to generate profits. The government became the sole provider o f funds and the sole arbiter o f allocation o f resources. Ultimately, the sector became financially and economically unviable.
111. Profile of Government Companies in Uttar Pradesh
Most GCs are incorporated as public limited companies. None o f them have made any public offerings and are not listed on the stock exchanges. Majori ty shareholding in the GCs is with the GoUP. GCs in U P function in the fol lowing sectors :
0
0
Social - development o f scheduled castedtribes, backward classes, minorities, women welfare etc. Infrastructure & Ut i l i t ies - power, industrial development, financing, construction etc. Manufacturing & Services - sugar, textiles, cement, agri - implements etc.
'lo UP Public EnterprisesiCorporations Reform Policy 2000 (Policy 2000) '11 From AG Audit report for 2002
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IV. GoUP Investment in GCs:
Over 86% o f GoUP’s investment i s in the following five GCs :
Power Corporation Rajya Vidyut Utpadan Jal Vidyut Sugar Corporation PICUP
A bulk o f the state’s investment i s in the power sector followed by the sugar, textiles and financing sectors. The entire investment in the cement (Rs. 193 crores) and mining (Rs. 76 crores) sectors i s in non working companies. This i s also true o f the bulk o f investment in industry, texti les and area development.
According to latest accounts1l2, only 9 GCs earned profits and o f these only two declared dividends. 35 GCs made losses and in 22 o f these the accumulated losses were Rs 2192 crores which exceeded the aggregate paid up o f Rs 913 crores. Despite the poor performance o f the GCs, there has been continuing budgetary support to them, details o f which are given below.
For 2001 -200; Particulars
Equity : Capital outgo I fromBudnet I Loans given from budget Grants/Subsidy for : (i) Proj ects/programmes and schemes (ii) Other subsidies
I Total
+ Amount in
374.66
1176.15
6.68 1 2460.45
V. Strategy of GoUP for GCs
GoUP’s Policy 2000 acknowledges that the small size o f these enterprises renders them incapable o f facing competition following economic liberalization and globalization. Consequently, measures such as restructuring, disinvestment, privatization and closure have been considered to sustain viable enterprises and eliminate unviable ones. GoUP has set up the State Disinvestment Commission in January 2000 to examine the existing Public enterprises and recommend privatization, restructuring, mergers, amalgamations or closure depending on the situation o f each PSE. The state has mandated a ban on the creation o f new enterprises.
The Disinvestment Commission i s required to make recommendations to a Central Committee under the Chief Secretary, who has to examine these and then forward them to the concerned
‘12 Per CAG audit report for 2002
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Administrative Department which has to obtain Cabinet approval. Thereafter, a Working Committee has to ensure execution o f the decision taken.
T i l l date, 45 GCs have been referred to the Disinvestment Commission, o f which recommendations on 25 GCs have been submitted to the GoUP. The major initiatives taken by GoUP under the above policy are :
Auto Tractors Limited was sold to the private sector Sipani group. The unit could not be revived and i s lying closed. Units o f Cement Corporation was initially sold to the private sector Dalmia groups. However, due to employee resistance, the sale was annulled. Recently, the units have been sold to the Birla group. Mineral Corporation, Chalchitra Nigam, UPTRON (an enterprise once having a national presence) and some other GCs have been closed. Tourism Corporation has initiated the process o f selling/leasing some o f i t s hotels and Sugar Corporation has advertised for the sale o f some o f i t s units.
Given the pace o f progress thus far, government ownership in GCs and budgetary support i s likely to continue for several years to come and therefore attention must be paid to the processes that strengthen accountability.
VI. Public Financial Accountability Framework
i) Introduction
There i s an elaborate institutional and legal framework for ensuring financial accountability o f GCs. The institutions involved in the administration o f GCs include the National Company Law Tribunal and Registrar o f Companies (ROC) under which these companies are incorporated at the central level. At the state level, the Committee on Public Undertakings and Corporations (CoPU), Department o f Public Enterprises (DPE), the respective Administrative Departments and Bureau o f Public Enterprises (BPE) administer the functioning o f these GCs. Each GC has i ts own Board o f Directors and Chief Executive Officer (CEO) for the administration and management.
The legal framework for governance o f GCs includes provisions on financial reporting and accounting, auditing, roles and responsibilities o f managements and i s generally set out in the relevant Act governing the GCs.
ii) Institutional Framework
The constituents o f the institutional framework and their roles and responsibilities are set out in the sections that follow:
The National Company Law Tribunal (CLB) i s an independent quasi judicial body vested with the powers to inspect the books and records, call general meetings o f shareholders
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initiate investigations into the affairs o f companies and take decisions relating to revival, rehabilitation and winding up o f sick industrial companies.
0 The Registrar o f Companies (ROC) i s vested with the responsibility o f registering companies and ensuring that they comply with the statutory requirements under the Act. The ROC also serves as a registry o f records which are available for inspection by the public o n payment o f prescribed fee.
0 A Committee on Public Undertakings and Corporations (CoPU) o f the Legislature has been constituted for examining the working o f GCs113.CoPU has the mandate to examine the accounts o f the GCs, AG audit reports and to comment o n the efficiency vis-a-vis management o f affairs in accordance with sound business principles and commercial practices. CoPU submits i t s report to both the Houses.
0 The Department o f Public Enterprises (DPE) has the mandate to monitor and supervise GCs and prepare policies for their functioning.
0 Administrative Departments within GoUP have the overall responsibility for supervision o f the GCs under them. The departments decide the strategic policies for the GCs under them. Budgetary support to be extended to GCs i s included in the budget o f the Administrative Departments.
0 The Bureau o f Public Enterprises i s a wing o f the DPE with the mandate to act as a link between the GCs and the different administrative departments and advise the DPE in formulating government policy with respect to GCs.
0 The BPE has prescribed submission o f periodical reports o n prescribed formats by the GCs. These reports are consolidated (department - wise) at the BPE, analysed and submitted to the government along with comments and recommendations for corrective action. These are also sent to the CEOs o f the concerned GC. The Director General BPE i s on the Board o f certain GCs and/or a member o f the Audit Committee. The BPE i s also an invitee in the meetings o f the PUC.
0 The Boards o f Directors o f GCs are responsible for day to day management o f the company.
iii) Legal Framework
0 Every GC i s required to maintain books o f account giving details o f a l l sums o f money received and spent, sales and purchases and assets and liabilities. For each accounting period ending 3 lSt March, GCs are required to prepare Balance Sheets and Profi t and Loss accounts to reflect a true and fair picture o f the state o f affairs as at the year-end. These financial statements should comply with the Indian Accounting Standards and should be
'13 Also Statutory Corporations
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prepared in accordance with Schedule V I o f the Companies Act. The Balance Sheets o f holding companies are required to include particulars o f subsidiaries.
0 The annual accounts should contain statutory disclosures by the Board on the state o f the company’s affairs, material changes in the business during the year, qualifications o f auditors, Secretarial Certification Report, management’s responses to auditors’ observations and a statement o f Directors’ Responsibility. Annual Accounts should be approved by the Board, signed by at least two Directors, including the Managing Director and be placed before the AGM within six months o f the end o f the financial year. Within thirty days o f the date o f the AGM, the accounts must be f i led with the ROC. Stringent penalties are supposed to be imposed for non compliance o f the above provisions’ 14,
0 The accounts o f GCs are to be audited annually. The statutory auditors o f GCs are appointed by the Go1 on the recommendation o f the C A G f rom amongst the CAG’s approved panel o f Chartered Accountants.
The C A G has the power to conduct a supplementary or test audit o f GCs. Currently, such an audit i s conducted every year after the conclusion o f the statutory audit and a detailed review i s conducted once every five years.
Audit findings are communicated to the head o f the GC and the concerned Administrative Department, who are required to respond to the findings within six weeks. Subsequently, findings that are not settled are forwarded to the Principal SecretaryEecretary o f the Administrative Department seeking their comments within six weeks. Audit findings which are material in nature and those which indicate systemic weaknesses are included in the yearly Commercial Report issued by the CAG.
0 There i s a mandatory requirement on public companies with paid up capital o f more than Rs. 5 crores to constitute an Audit Committee which also applies to GCs. ACs are required to discuss matters such as internal controls, audit observations and financial statements with the auditors. They are given the authority to investigate any o f these matters.
0 An annual report on the working and affairs o f a GC are required to be placed before both Houses o f Parliament (in case the Go1 i s a member) and/ or before the Legislature.
0 GCs are to report to their Board, the concerned Administrative Department and the BPE.
0 Monthly and Quarterly Progress Reports and Annual Flash Results are put up to the CEO and submitted to the Administrative Department and the BPE.
iv) Working o f the Public Financial Accountability System in GCs
‘14 In practise this does not happen in UP.
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0 Although the PSEs in U P have a vast and elaborate institutional and legal framework for assuring stakeholders, public perception o f accountability i s very poor . It i s widely believed that the exercise o f control by public representatives l ike politicians, ministers and c iv i l servants handicaps accountability and results in the decline o f the GCs. There i s also a general bel ief that Board members are nominated on the basis o f factors l i ke affiliations to ruling parties rather than competence or experience.
Minister I A S IPS
The term of CEOs o f GCs has either been short or the CEOs have been appointed on a temporary basis. This has eroded stability. Moreover, the Boards o f GCs including the Chairman and CEO are appointed by the government.
GCs of GCs 4 Defence Services 1
1 27 Engineers 1
0 The Tables below present statistics regarding the key positions in GCs:
Profile Number o f
I AS 19 I P s 1 Defence Services 1
GCs
Profile o f Chairman in 34 working GCs:
Profile Number
Provincial C iv i l Services 7
Others 1
o f GCs
Engineers 5
I Profile I Number of I ProJile I Number I
0 As is evident form the Table above, most GCs are headed by bureaucrats. This has undermined accountability o f these organizations as the officer heading the G C i s often times related to the Administrative Department in some way. In other cases there are issues o f seniority and cadre between the head o f the GC and the Head o f the Administrative Department.
0 Recent experience in U P has shown that Boards o f GCs have not been able to keep pace with changing business environment. Board meetings are poorly attended and managements are apathetic to the survival o f these enterprises.
0 Corporate Governance can only be effective if the Board takes responsibility, demonstrates leadership and encourage integrity as an important element o f organizational culture.
0 Since GCs are not purely commercial undertaking, bottom l ines and profi t margins have traditionally not been considered barometers o f their performance. In the absence o f other comprehensive performance measures, GCs have not been able to do justice either to their
91
commercial or social objectives. In order to be perceived as effective undertakings, GCs have to be evaluated against some criteria which take into account both their commercial and development goals. I t i s imperative that such criteria be evolved so as to facilitate the accountability o f GCs.
N o n - working GCs are those that are under liquidation or defunct or non - operating. There are 37 non - working GCs (excluding GCs transferred to Uttaranchal), o f which 9 are under liquidation and one has been sold. Accounts in these GCs have not been finalised for the last several years, with the majority o f them not having submitted accounts for ten years or more.
0 One important instrument o f accountability i s the budget which sets out expected levels o f expenditure and monitors against those. In some GCs, the budget i s placed before the Board for i t s approval only after the state budget has been passed by the Legislature or substantially after the commencement o f the financial year. The manner o f presentation o f budgets varies inter GC and also GCs within a sector. Some GCs, though actually incurring losses, prepare budgets showing net surplus o f income over expenditure. This presents grave fiduciary concerns and points to flawed accounting practices.
0 The level o f assurance derived from accountability instruments l ike Audit Committees (AC) i s not forthcoming. Although statutorily about 25 working GCs are required to have ACs, not al l have these. Where ACs exist, they are not efficient. GoUP should take measures to ensure that ACs are functional, vibrant entities that serve to strengthen transparency and accountability.
I t i s seen that most o f the GCs are unable to finalise their financial statements within the stipulated time frame or within reasonable time thereafter. As o f 30.09.2001, in 53 working GCs the arrears ranged from one year to 15 years, despite the C A G and BPE monitoring the position and appraising the concerned Administrative Ministries periodically. Coupled with the above situation, in some GCs even the accounts have not been written. Consequently, audit cannot be conducted timely (for the year ended 31.03.2001, only one GC submitted accounts for the year to the CAG for audit), information for strategic planning i s not available and the use o f public funds remains un- assessed. In cases where accounts are available after a considerable period o f time, the delayed results find limited purpose and the audit findings may not be capable o f resolution or may not result in the desired outcome. Consequently, in some GCs, no accounts have been placed before the AGM in the last three years or were placed at adjourned AGMs.
Another accountability tool : internal audit has not achieved the desired results. In house internal audit skills are not commensurate with requirements. In most GCs, neither does an internal audit manual exist nor has one been developed. Audit instructions and internal audit findings are not consolidated and put up before the CEO or the Board. Often there i s no independent authority for review o f the adequacy and independence o f internal audit and the status o f fo l low - up and compliance o f audit findings. Since GCs have recently
92
constituted Audit Committees (ACs) in accordance with Section 292A o f the A c t but the mandate o f these ACs i s ill defined.
v. Potential Improvement Agenda
Adverse public perception should be addressed by disseminating the achievements made by the GCs, the problems faced by them and the measures taken by GoUP for improvement in their working, including accountability aspects. The public should be made aware o f the policies in these areas through wide publicity. These should be followed up through information on actual achievements.
N o n working GCs should be shut down formally. The primary reason that closure cannot be effected i s that most non working GCs have not finalized accounts for several years. This situation has assumed grave proportions and continuing budgetary support f rom GoUP i s going to these entities each year without any accountability o f the use o f that money. The closure o f non working GCs should be considered a priority and a cut o f f date for finalization o f accounts may be agreed by GoUP and within that date, accounts should be prepared if necessary by contracted staff and closure formalities completed.
0 The administrative ministry interacts with the GC only through i t s representative o n the Board. I t should be mandatory for this representative attend Board meetings and AGMs. An independent evaluation o f the relationships between Administrative Departments and their respective reporting GCs should be carried out.
There should be continuity and stability in CEO appointments. Higher level appointments should be made on merit alone and should not be influenced by political considerations.
0 A high powered body may be set up for advising GoUP o n sound managerial policies and appointment o f top management posts. This practice exists in Go1 which has evolved a selection policy and PESB has taken initiatives to improve the selection process.
0 Appointment o f professionals on the Board should be encouraged, so that they bring in a new perspective to the entity. Experience o f persons employed at a senior level in central GCs engaged in similar activities can be gained by appointing them on the Board as non Executive Directors.
In several GCs , proposals pertaining to substantial capital expenditure, disposal and procurement are screened by committees before being recommended to the Board. Such a system needs to be encouraged and strengthened. GCs should establish functional working groups with knowledge o f subject matter which can vet proposals before they are accepted.
0 Performance measurement indicators should be evolved to cover both commercial and non commercial aspects o f performance. Criterion such as extent o f achievement o f organisational objectives, effective funds management and reduced dependence on budgetary assistance should be made a part o f performance measurement.
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CoPU should initiate studies on subjects like procurement systems, levels o f adherence to Public Sector Accounting Standards and prevalent internal control mechanisms.
0 The capacity o f the BPE should be strengthened so that it is able to effectively monitor areas like finalization o f accounts, implementation o f effective internal audit system and follow up o f audit reports among other things. BPE should prepare time bound action plans for monitoring areas that require improvement and deficiencies. The monitoring system o f BPE should be strengthened specifically in the fol lowing areas :
*:* Audit backlog and action taken to cover settle audit findings *:* Revenue realization *:* Repayment o f principal and payment o f interest to Government *:* Status o f guarantees issued by GoUP
0 Independence o f ACs should be given priority and induction o f non executive professionals as members could be considered to strengthen the functional capabilities o f these bodies. I t should be ensured that al l GCs which are required to have ACs have formed them and these bodies are functional.
0 There i s a need for adequate and expeditious resolution o f the CAG’s audit findings. Each GC should fix clear lines o f responsibilities at a l l levels for timely and effective resolution o f audit findings and the position o f compliance should form part o f the agenda at each Board meeting.
0 A Task Force on Accounts may be constituted at the level o f BPE to monitor the position of preparation and finalisation o f accounts. The information in this respect i s presently included in the financial reports submitted by GCs to the BPE. This Task Force should review the problems faced by GCs to cover up arrears, including shortage o f personnel or inadequate infrastructure. If required, the task o f data entry and collation could be outsourced, so that the work i s expeditiously completed.
0 Internal audit should be made visible. Clear instructions to internal audit staff should be issued and a mechanism for presenting the unresolved issues o f internal audit to the parent administrative department, BPE and top management o f the GC should be devised. The function should be adequately resourced and skill sets o f the staff should be commensurate with the size and nature o f the activity.
0 Budgets and Action Plans should be prepared and placed befQre the Board prior to the commencement o f the year or soon thereafter. These budgets should be realistically prepared and used to monitor financial performance during the year.
0 Training for al l echelons o f management should be carried out as a continuing activity. The responsibility for arranging training programs could be vested with BPE through state level institutions.
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Government Companies in Uttar Pradesh
Handloom & Handicrafts U. P. State Handloom Corm Ltd.
A. Working Government Companies (other than subsidiaries)
Miscellaneous U.P. Chalchitra Nieam Ltd.
-
B. Non - Working Government Companies (other than subsidiaries)
Agriculture & Allied
Processine Corn. Ltd. " I p. P. Bhumi Sudhar Nigam 11 Area Develop
I U. P. Matsya Vikas Nigam Ltd. 1 U. P. (Paschim) Ganna Beei Evam Vikas Nirzam Ltd.
11 U.P. Bundelkhand I_ Vikas Nigam Ltd. 11 U.P. Poorvanchal Vikas Nieam Ltd.
Y Y I__
U. P. Poultry and Livestock Specialities Ltd. U. P. (Rohelkhand-Tarai) Ganna Beej Evam Vikas
Allahabad Mandal Vikas Nigam Ltd. Bareilly Mandal Vikas Nigam Ltd.
// Nieam Ltd. II I U. P. (Poorva) Ganna Beej Evam Vikas Nigam Ltd. I U. P. (Madhva) Ganna Beei Evam Vikas Nigam Ltd.
/I Lucknow Mandaliya Vikas - Nigam Ltd. I/ Aera Mandal Vikas Nieam Ltd.
Gorakhpur Mandal Vikas Nigam Ltd.
11 Corpn. Ltd. !I
~
U. P. Samaj Kalyan Nirman Nigam Ltd. Drugs, Chemicals & Pharmaceuticals The Indian Turpentine and Rosin Company Ltd. Electronics I Industrv U. P. Electronics Corpn. Ltd. Financing The Pradeshiya Industrial and Investment Corpn. o f U. I U.P. State Brassware Corp. Ltd. P. Ltd. U. P. Alpsankhyak Vittya Avam Vikas Nigam Ltd.
U. P. State Industrial Development Corpn. Ltd.
95
I U. P. Export Corpn. Ltd.
U. P. Development Systems Corpn. Ltd. U. P. Mahila Kalyan Nigam Ltd. U. P. Bhutpoorva Sainik Kalyan Nigam Ltd. Power
I U. P. Rajya Vidyut Utpadan Nigam Ltd. I/ U.P. Power Coruoration Ltd.
I
11 U. P. State Tourism Develooment C o r m Ltd. I
Financing Handloom & Handicrafts
Industry 7
U. P. Digitals Ltd. UPSIC Potteries Ltd. Power
Kanpur Electric Supply
1 E. Government Companies under 1 F. Government Companies transferred to liquidation
Indian Bobbin Company Ltd. Gandak Smadesh Kshetriya Vikas Nigam
~
Uttaranchal Trans Cables Limited UP Hill Electronics Corp. Limited
Ltd. Bhadohi Woollens Ltd. The Turpentine Subsidiary Industries Ltd.
97
Kumaon Mandal Vikas Nigam Limited Garhwal Mandal Vikas Nigam Limited
Name
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Annex 9
Name o f the SC
U P State Road Transport Corporation (UPRTC) U P Financial Corporation (UPFC) U P State Warehousing Corporation (UPWC) U P Jal Nigam (UPJL)
U P Forest Corporation (UPFoC)
U P State Employees Welfare Comoration
Public Financial Accountability in Statutory Corporations and Development Authorities in Uttar Pradesh
Governing Act Activity Administrative
Road Transport Road Transport Transport Corporation Act, 1950 Services
Department
State Financial Industrial Financing Industrial Corporation Act, 195 1 Development State Warehousing Warehousing Co-operative Corporations Act, 1962
U P Water Supply and Water Supply & Urban Sewerage Act, 1975 Sewerage Services Development U P Forest Corporation Preservation, Forest Act, 1974 Supervision &
Development o f Forests
Societies Registration Welfare o f employees Food & C iv i l Act. 1860 o f the state I Suvvlies
I. Introduction
In this Annex we assess the current institutional and legal framework o f public financial accountability in Statutory Corporations (SCs) and Development Authorities (DAs) in Uttar Pradesh (UP) and highlight the key issues which have an impact on sound financial accountability principles.
SCs are enterprises that are established under a specific legislation containing their purpose, structure, powers and functions. They are body corporates having perpetual succession, a common seal and power to hold and dispose o f property and can sue and be sued. They have autonomy and can invest, raise capital and borrow within the terms o f their statutes. SCs are required to act on business principles.
11. Overview o f Statutory Corporations in Uttar Pradesh
In UP, there are seven SCs, o f which, UPRTC, UPWC and UPFC have been established under central omnibus statutes and UPJN, UPFoC and UPAEVP under specific state enactments. UPEWC i s a society registered under the Societies Registration Act, 1860. The table below gives the profiles o f a l l the SCs in the state.
111. Profile o f SCs
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I Name of the SC I Governing Act 1 Activity I AdministratGq
Parishad (UPAEVP) Parishad Act, 1965 Urban Development
All seven SCs are working corporations, but none o f them had finalized their accounts for 2001- 2002 till September 2002'15. Out o f the four working SCs which finalized their accounts for previous years by Sept 2002, there were only two : U P State Warehousing Corporation and U P Avas Evam Vikas Parishad, which had earned profits for two or more successive years'I6.
Particulars
Grants / Subsidy for : Proj ects/Programmes/Schemes Other subsidy Total outno
Despite poor performance and complete erosion o f paid up capital, the state government continued to provide financial support to these corporations in the form o f contributions towards equity, further loans, conversion o f loans into equity and subsidies. Statistics regarding budgetary support provided by GoUP is summarized in the table below ' 17:
Year 200 1-2002 (Rupees crores)
376.52 2.05
378.57
The accounts o f most o f the SCs were in arrears for many years , the status o f which is presented in the table below"*:
Number o f Statutory Corporations for which accounts are pending 2 4 1 3
Year since which they are pending
1997-98 1999-00 2000-0 1 200 1-02
'I5 As per the audit report of the CAG for March 2002 'I6 As per the audit report of the CAG for March 2002 'I7 CAG Audit Report for March 2002, Chapter 1, page 4 "* CAG Audit Report for March 2002
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IV. Public Financial Accountability Framework & Arrangements
Name o f the sc
The institutional framework for ensuring accountability i s set out below:
Profile o f Chairman Profile o f CEO
i) Introduction
SCs are govemed by the Acts under which they were constituted. The Acts governing SCs set out the purpose, constitution o f the Board, functions, powers and duties o f the management, sources o f funds and other matters o f financial management, such as accounts, audits, and budgets. SCs are required to prepare annual budgets, maintain proper accounts and records and prepare an annual statement o f accounts, to have these accounts audited, prepare an annual report o f their activities and furnish returns, statistics and other information, in the manner prescribed. They are required to provide audited accounts and annual report to the GoUP to be la id before the State Legislature. Management
The and management of SCs i s vested with their Board which consists o f a Chairman and Directors, i s appointed in the manner prescribed and includes exofficio directors and elected representatives. The Board has to hold meetings during such tenure and in such manner as prescribed. Each SC has a Managing (or Executive) Director as the CEO and some have a Finance Director appointed by the state government. The roles and responsibilities o f the Management are contained in the governing statute and GoUP’s directives. The Board has the power to carry on functions o f the SC through Committees and delegate its powers to the CEO or other officers. The table below gives the profile o f the Chairman and CEO o f the SCs in UP:
Present profile o f Chairman and CEO in SCs
Indian Administrative Services
Indian Administrative
I UPFoC I Minister I Indian Forest Services
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ii) Budgeting
Budgets are prepared by SCs (with the exception o f UPFC) every year based o n factors l ike level o f activity, previous year performance, expected budgetary support and inputs received f rom the field units. Budgets include planned capital expenditure, receipts, expenditures and expected profits or losses. Budget estimates for previous completed year and actuals for that year are also included for comparison. In some SCs, estimates for the ongoing year and actual achievement up to the initiation o f the budget for the ensuing year are also given.
The budget i s approved by the CEO and the Board and forwarded to the GoUP for information and approval. Any shortfall in resources i s covered through provision o f demand for additional funds from GoUP and other stakeholders. Status o f implementation o f the budget i s periodically put up before the Board and the top management. Re-appropriation and re-estimation can be done subject to certain conditions and approval o f the competent authority.
One good practise example i s the budget prepared by U P W C which contains detailed write ups, i s supported by tables based on estimations o f capital outlays, recurring and non recurring expenditure, expected revenue generation and receipts f rom the state treasury.
iii) Accounting
Accounts are normally prepared on double entry system using the accrual basis o f accounting (although some SCs l i ke UPAEVP are in the process o f adopting such as a system). Mos t SCs have a decentralised system o f accounting wherein accounts are kept at the divisional level where accounts staff have been deployed. The f ield units periodically send accounting statements o n prescribed formats to the head office for final consolidation. Although computers are used at head offices accounting at the divisional level i s generally manual.
iv) Financial Reporting
SCs prepare annual accounts in the manner prescribed in their respective Acts. These accounts along with the auditors’ report are put up to the Board for their consideration and thereafter forwarded to GoUP. SCs also prepare an Annual Report on the performance o f their duties under respective statutes. The Annual Accounts and Report are placed before the State Legislature. SCs also submit statements and returns to GoUP. These include monthly or quarterly Progress Reports and Annual Flash Reports to the BPE.
v) Statutory Audit
The statutory audit arrangements o f SCs are contained in their governing statutes. A summary o f the audit arrangements in the different SCs i s presented in the Table below:
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Statutory Audit arrangements in SCs
Name o f the sc
UPRTC
I UPAEVP
Audit arrangements
Sole audit by CAG.
Name o f the SC
UPFC
UPWC
UPFoC
Audit arrangements
By Chartered Accountants appointed by GoUP in consultation with CAG. Supplementary audit by CAG on own motion or on request by GoUP, and if state government i s required to make payment o f amounts guaranteed. By Chartered Accountants and supplementary audit by CAG. By Examiner, Local Funds Accounts and C A G at the reauest o f the Governor.
The auditors are required to give their opinion on whether the accounts present a true and fair picture.
vi) Internal Audit
Most SCs have established Internal Audit sections where audit i s carried out on annual basis by Audit Officers. There i s an absence o f Audit Committees (although UPRTC has established an audit sub committee o f the Board) and separate internal audit manuals. Instructions for internal audit are contained either in the Accounts Manuals or are issued separately by the heads o f internal audit. Audit reports are made available to the audited units for their comments and based on the compliance are put up to top management for action.
Efficient internal audit departments exist in UPRTC where 22 internal audit cells have been established: 1 each o f the 18 regions, 2 at the workshops and 2 at the Head office. There are 10 Audit Officers who conduct audit o f the units allotted to them on a quarterly basis, by rotation. Audit checklists containing about 30 points are prepared and included in the Accounts Manual. Audit Officers at the regions are also generally members o f the Regional Purchase Committee. A sub committee o f the Board has been formed for considering the position o f outstanding internal audit observations and conducting quarterly reviews o f these before presenting them to the Board.
The function o f internal audit i s working very well in UPJN also where the internal audit wing consists o f 11 auditors. These officers carry out the audit o f 188 divisions, 10 zones and the head
* As per the rules, audit i s to be done by a firm o f practicing Chartered Accountants
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office. Internal audit instructions are contained in the Accounts Manual. Audit programs are decided by the Auditors and then recorded in a Circle Register. Each audit team consists o f about 3 persons. Audited units are given a time frame o f 6 months for compliance.
vii) Oversight Arrangements
The Annual Accounts o f SCs are to be placed before the State Legislature. CoPU i s empowered to examine these documents. SCs are required to follow the policy directives o f the GoUP. Some statutes o f SCs empower GoUP to make enquiries into the workings o f SCs and in the circumstances where they are found not to be following the instructions GoUP can supersede the Board and appoint a new Board (as has been done in UPFC) or takeover the administration o f the company (as has been done in UPRTC).
V. Working o f the Public Financial Accountability System
Principal financial management issues emerging in the existing framework and arrangements in SCs are set out in the sections that follow:
i) Management
There have been frequent changes in the top management o f the SCs and especially in the high level posts o f Chairman and Managing Director. This affects the working o f the SCs and also contravenes the directive o f GoUP which requires that the minimum tenure o f three years be kept for these high level posts. An example o f these frequent changes i s the fact that during the last five years, eight persons have held the post o f Managing Director in UPFoC and four in UPFC.
ii) Annual Accounts
Annual Accounts are prepared by SCs in the manner as prescribed by GoUP. A review o f the accounting policies i s required to align them with the accounting standards issued by the ICAI. There have been delays in finalization o f accounts. For the year ended 3 1.03.2001, none o f the SCs could provide accounts for that year to CAG for audit. UPRTC, UPFC and UPWC provided accounts for 1999-2000, UPFoC and UPJN for 1998-99 and UPAEP for 1994-95. UPEWC has not provided any accounts to CAG since 1997-98, when audit was entrusted to the CAG.
There i s no Accounting Manual in UPWC and UPEWC and that in UPJN was prepared in the late seventies. Disclosure o f contingent liabilities and guarantees provided by GoUP i s inadequate in some SCs. In UPRTC, as at 31.03.2002, there are 17429 (16510 as at 31.03.2001) legal cases pending in various courts against it. However, the liability on account o f such cases i s stated as indeterminate. UPJN does not quantify i t s contingent liability for disclosure in the annual accounts.
iii) Budget
Budgeting practices in GCs are lacking. In some GCs, the budget i s placed before the Board for i t s approval only after the state budget has been passed by the Legislature or after the commencement o f the financial year (UPEWC, UPWC and UPFoC). UPFC does not prepare a
104
budget and in UPEWC the budget for 2002-03 shows an expected loss o f Rs. 88.00 lacs without a provision for meeting this loss.
iv) Internal Audit
The system o f internal audit in SCs needs to be formalised. There i s currently no internal audit manual and no formal reporting to top management i s done. In most SCs, the function i s inadequately resourced in terms o f available capacity and number o f auditable units. As a consequence not al l units are covered every year and fol low up o f audit findings i s weak. Audit i s generally i s transaction based and does not focus on underlying systems weaknesses. The ski l ls level o f the auditors are not adequate to carry out specialised tasks such as Works Audit. Functions o f auditors are subject to change and auditors are sometimes placed in accounts. Audit findings are not placed before the Board in SCs such as UPWC, UPEWC and UPJN.
As an example o f the status o f this function, the case o f UPRTC may be considered where the, internal audit cell consists o f 10 Audit Officers who are expected to conduct the internal audit at the 1 18 depots, 18 regions, 2 workshops and the head office. 6397 audit paras are outstanding so far in UPRTC. In UPJN, internal audit staff consists o f 9 Auditors and 2 Audit Officers placed at the head office for conduct o f audit at 1 18 divisions, 10 zones, other offices and head office. An auditable unit i s covered once in 2 or 3 years and even then a test audit i s conducted.
v) Budgetary Support
GoUP i s extending budgetary support by way o f grants to the SCs. However, improvements in accountability are not set as pre conditions for support. Given the fact that there are arrears in finalisation o f accounts and serious observations o f the statutory auditors/CAG, support should be predicated on performance .
vi) Internal Control System
Internal control systems with respect to adjustment o f personal balances, inventory management, physical verification o f assets and reconciliation o f inter office accounts need to be streamlined. As an example, in UPRTC, there was a debit balance o f Rs. 506.94 crores and a credit balance o f Rs. 501.17 crores on 31.03.02.
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VI. Potential Improvement Agenda
A broad framework o f recommendations has been developed to address these issues. These are set out in the section that follows:
i) Management
The tenure o f the Chairman and CEO should be long enough to ensure stability and continuity in decision making and in implementing key decisions.
ii) Accounts
All accounts pending finalization should be expeditiously finalized. A Task Force o n Accounts may be constituted in SCs to monitor the position o f preparation and finalisation o f accounts and to cover up arrears. The Task Force may also study the manner o f presentation and disclosure in similar entities in other states and recommend for their adoption to GoUP. The Task Force may include an accounting professional for expert advice. Placing C A G audit reports in the Legislature
All audit reports issued by the C A G have to be placed in the Legislature, but in the case o f most SCs, audit reports o f many years are pending placement. GoUP should take steps to place a l l AG reports before the Legislature to ensure accountability' 19.
iii) Budget
SCs should be encouraged to prepare budgets on time and place them before the Board prior to the commencement o f the concerned year or soon thereafter. The use o f budgets as a mechanism o f control should be recognised and amendments and re-appropriation should be put up before the Board for approval.
iv) Audit Committee
Audit Committees should be constituted in the SCs under a written charter as an independent body to oversee internal audit arrangement, status o f audit fo l low up and finalisation o f accounts. Independence o f the Audit Committee should be given due priority and induction o f non - executive professionals as members may be considered. GoUP may consider setting up an apex Audit Committee (jointly for GCs and SCs) headed by the Director General, BPE and including the Secretaries o f Administrative Department by rotation, a representative o f the AG (Commercial) and an audit professional.
v) Internal Audit
Internal audit should be real and visible and be well placed in the organizational hierarchy. The internal audit function should be adequately resourced and the skill sets o f the staff should be commensurate with the size and nature o f the activity. I t should also be ensured that internal
CAG Audit Report for 2002
106
auditors periodically upgrade their ski l ls to adapt newer audit methods and procedures so as to improve audit coverage. In SCs which have technical functions (like UPJN and UPFoC), technical audit may be considered.
vi) Internal Control Systems
Internal Control systems should be reviewed and revamped in the areas o f reconciliation o f inter office, personal accounts and physical verification. Special reviews could be initiated in these areas through experts.
vii) Role o f CoPU
CoPU should initiate studies on horizontal subjects such as procurement systems, financial management and internal control systems.
viii) Role o f BPE
The capacity o f the BPE should be strengthened so that it i s able to effectively monitor various areas o f financial management l ike finalization o f accounts, effective internal audit systems and follow up o f audit reports. The monitoring system o f the BPE should be further strengthened to include the status o f :
Revenue realization Audit backlog and action taken to cover up arrears
Repayment o f principal and payment o f interest to Government Status o f guarantees issued by GoUP
ix) Training
Regular training o f accounts and audit staff should be carried out o n a regular basis and should be made compulsory.
x) Conclusion
While the accountability framework for SCs i s vast and adequate, there need for the rules to be implemented. There i s no dearth o f legal provisions on financial accountability in the respective Acts o f the SCs. Regular financial reporting, finalization o f accounts, effective internal controls, prudent fund management, efficient internal audit and regular and long serving staff are al l components o f accountability. The onus o f ensuring that these systems are applied and find users rest with GoUP and SCs themselves. Imperative to engendering strong accountability are incentives for performance and penalties for non performance.
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Annex 10 Public Interest Litigation Public interest litigation began to emerge in India around the late 1970s and early 1980s when the Indian judiciary responded in a sympathetic way to the initiatives o f Indian social action groups, journalists and scholars. I t became possible for any member o f the public, not only public interest groups, to initiate litigation by merely addressing a letter to a judge. In this way a number o f public interest issues affecting prisoners, workers and children were brought to the attention o f the court. Three features came to characterize this litigation in India:
An expansion o f the doctrine o f standing (locus standi) which permitted any bona fide petitioner to bring matters o f public interest before the court. The petitioner was not required to show that he or she was personally affected
Dispensing with formal court procedures for the commencement o f such actions. Actions could be initiated by writing a letter to the court, and this would be converted into a formal petition and notice issued on the respondent
The use o f novel methods to gather facts. Often the court appointed a socio-legal commission o f inquiry to investigate the disputed facts and submit a report to the court.
This litigation has been referred to as public interest litigation (PIL) or social action litigation. In developing this litigation the Supreme Court o f India has argued that court procedures must be deformalized to enable al l segments o f society to have access to the courts. Most disadvantaged and economically underprivileged groups lack the capacity to approach the courts on their own, thus the court should permit non-governmental organizations and public interest groups to litigate on their behalf.
The use o f P I L has expanded. A dynamic relationship has developed between investigative journalism and PIL, where both P I L petitioners and the court have drawn o n newspaper reports in their identification o f issues. Expenditures from the Contingencies Fund are the subject o f a P I L in March 2003. The Allahabad H igh Court ordered a special audit by the CAG. Another example i s the enforcement o f environmental regulations. After a prolonged legal battle, the court ordered the U P Pollution Control Board to monitor Ganges river water quality monthly, and set up a special audit to investigate how money had been spent under the Ganga Act ion Plan Phase I. Several firms that did not have primary effluent treatment plants were closed. The results have been dramatic: biochemical oxygen demand (BOD) has fallen f rom 9 mg/l to 4 mg/l.
0
0
Sources: International Environmental Law Research Center (www,ierlc.org,), Rakesh Jaiswal (www.aubum.edu) and Times o f India, 14 March 2003.
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