pfma report ipe f inal

PUBLIC FINANCIAL MANAGEMENT AND ACCOUNTABILITY IN URBAN LOCAL BODIES IN INDIA

SYNTHESIS REPORT

October 2006

Submitted to:

FINANCIAL MANAGEMENT UNIT

THE WORLD BANK, NEW DELHI

Submitted by:

INFRASTRUCTURE PROFESSIONALS ENTERPRISE (P) LTD., NEW DELHI

CURRENCY EQUIVALENTS (Exchange Rate Effective)

Currency unit = Rupees (Rs.)

Rs. 1 = US$ 0.0226

US$ 1 = Rs. 44.20 FISCAL YEAR

April 1 – March 31 ABBREVIATIONS AND ACRONYMS

ADB : Asian Development Bank APUIDF : Andhra Pradesh Urban Infrastructure Development Fund APUSP Andhra Pradesh Urban Services for the Poor ATR : Action taken report BATF : Bangalore Agenda Task Force BIDS : Budget Information Data Sheets BMC : Bangalore Municipal Corporation BMP : Bangalore Mahanagar Palike BWSSB : Bangalore Water Supply and Sanitation Board CAA : Constitutional Amendment Act C&AG : Comptroller and Auditor General of India CARE : Credit Analysis & Research Ltd CBO : Community Based Organization CCF : City Challenge Fund CDP : City Development Plan CFC : Central Finance Commission, Citizen Facilitation Centre CFO : Chief Financial Officer CRC : Citizens’ Report Card CRISIL : Credit Rating and Information Services of India Limited CRRID : Centre for Research in Rural and Industrial Development DEAS : Double Entry Accounting System DCB : Demand Collection and Balance DFID : Department for International Development DMA : Department of Municipal Administration DPR : Detailed Project Reports FBAS : Fund based accounting system FI : Financial Institution FIRE(D) : Financial Institutions and Reforms Expansion (Debt Servicing) FLC : Field Level Consultants FOP : Financial Operating Plan FRS : Financial reporting system GDP : Gross Domestic Product HOD : Head of Department ICAI : Institute of Chartered Accountants of India ICRA : Investment Information and Credit Rating Agency of India Limited JBIC : Japan Bank for International Cooperation JMC : Jaipur Municipal Corporation JNNURM : Jawaharlal Nehru National Urban Renewal Mission KEIP : Kolkata Environment Improvement Project KM : Kapra Municipality KMC : Kolkata Municipal Corporation KUIDFC : Karnataka Urban Infrastructure Development Finance Corporation KUWSDB : Karnataka Urban Water Supply and Drainage Board

LCB : Lowest competitive bid LFA : Local Fund Audit MAC : Municipal Accounts Committee MFAD : Municipal Finance and Accounts Department MIS : Management Information Systems MMA : Madurai Municipal Corporation MoA : Memorandum of Agreement MoF : Ministry of Finance MoUD : Ministry of Urban Development MoUEPA : Ministry of Urban Employment and Poverty Alleviation MPC Metropolitan Planning Committee NCU : National Commission on Urbanization NDMC : New Delhi Municipal Corporation NEGAP : National E-Governance Action Plan NGO : Non governmental organization NIPFP : National Institute of Public Finance and Policy NIUA : National Institute of Urban Affairs NMAM : National Municipal Accounting Manual O&M : Operation and maintenance PAC : Public Accounts Committee PEFA : Public Expenditure Financial Accountability PFDF : Pooled Finance Development Facility PFMA : Public Financial Management and Accountability PPP : Public private participation PROOF : Public Record of Operations and Finances QCBS : Quality and cost based system RBI : Reserve Bank of India RTI : Right to Information RWA : Residents’ Welfare Association RUIFDC : Rajasthan Urban Infrastructure Finance Development Corporation SFC : State Finance Commission SWM : Solid Waste Management TFC : Twelfth Finance Commission TGS : Technical Guidance and Supervision TNUDF : Tamil Nadu Urban Development Fund TNUDP : Tamil Nadu Urban Development Project TNUIFSL : Tamil Nadu Urban Infrastructure Financial Services Limited UDF : Urban development funds ULB : Urban Local Bodies UNDP : United Nations Development Program URIF : Urban Reform Incentive Fund USAID : United States Agency for International Development ZBB : Zero Based Budgeting

Acknowledgements and Report Team

The PFMA consultants wish to acknowledge the extensive and grateful cooperation and assistance received from various sources for carrying out this PFMA study, including officials and staff of the union and state governments, officials of ULBs met, staff of donor funding agencies, and nodal financial and research institutions. A list of people met has been appended in Annex A.

A grateful vote of thanks also goes to the Bank’s task team, led by Ms. Priya Goel. We would also like to acknowledge the other team members who have provided guidance and advice on the study including Mr. P Subramanian, Mr. Ivor Beazely, Mr. Manoj Jain, Mr. Raghu Kesavan, Mr. Joel A. Turkewitz, Mr. Vinod Sahgal, Mr. Mohan Nagarajan, Mr. Chris Heymans, and Mr. Anup Wadhawan.

We are particularly thankful to Mr. M Rajamani (MoUD, Government of India ), Mr. Aniruddha Kumar (MoUD, Government of India), Mr. Arun Mehta (MoUD, Government of India), Mr. R. N. Gosh (C&AG), Ms. Geeta Menon (C&AG), Prof. Om Mathur, Mr. Alok Shiromany and Mr. K Dharamrajan for their time and insight on the study.

This report has been prepared by Infrastructure Professionals Enterprise (IPE) Limited. The team comprised of Ashwajit Singh, Abdul Rahim, Abhijit Ray, Himanshu Sikka, Dr. Gangadhar Jha, Ashish Rao, Suresh Gupta and Anita Kapoor.

PUBLIC FINANCIAL MANAGEMENT AND ACCOUNTABILITY IN INDIAN URBAN LOCAL BODIES: SYNTHESIS REPORT

Table of Contents

Executive Summary I

1 Rationale and Overview 1 1.1 Background 1 1.2 Objectives of the Study 1 1.3 Approach and Scope 2 1.4 Organization of the Report 2

2 Urban Reforms in India (PFMA Context) 3 2.1 Urban Context 3 2.2 Mapping Urban Reforms 3

3 PFMA Framework: Strategic Areas, Objectives and Outcomes 8

4 PFMA Components: Benchmarks, Policy and Progress 10 4.1 Legislative Framework 10 4.2 Planning and Budgeting 12

4.2.1 Budget Planning 12 4.3 Implementation 15

4.3.1 Budget Execution 15 4.3.2 Accounting and MIS 17 4.3.3 Cash and Fund Flow Management 22 4.3.4 Procurement 23 4.3.5 Internal Control and Audit 26 4.3.6 Assets and Liabilities Management 27

4.4 Reporting 28 4.5 External Audit and Oversight 30

4.5.1 External Audit 30 4.5.2 External Oversight 34

5 Key Issues and Way Ahead 37 5.1 Review and Strengthening of ULB Audit 37 5.2 Strengthening ULB Budgeting 37 5.3 Staffing and Capacity Building 38 5.4 Ensuring Compliance 39 5.5 Others 39

Annexes 40 Annex A: People Met 40 Annex B: Case Study Documentation 41 Annex C: List of Functions to be devolved to ULBs under 12th Schedule 58 Annex D: List of Functions mentioned under 12th Schedule devolved in States 59 Annex E: Accounting Initiatives in Different States 60 Annex F: PFMA Reforms under JNNURM and Current Status 65 Annex G: Cost and Performance Indicators 67 Bibliography and References 70

List of Boxes Box 4.1: Autonomy to Urban Local Bodies in Kerala 10 Box 4.2: Budget as a Tool for Long Term Strategic Planning – Kapra Municipality 13 Box 4.3: Output Based Budgeting 13 Box 4.4: Budget Reforms in ULBs of Karnataka 14 Box 4.5: Budgeting Process in ULBs 14 Box 4.6: PROOF Initiative, Bangalore 16 Box 4.7: Fiscal Responsibility Act 17 Box 4.8: Merits of Accrual Based Accounting System 19 Box 4.9: Sources of Municipal Accounting Policies 19 Box 4.10: HR structure in ULBs to support strong financial management 21 Box 4.11: E-Procurement in Andhra Pradesh 25 Box 4.12: 11th Finance Commission Guidelines for Involvement of C&AG in ULB Audits 33 Box E.1: Tamil Nadu Accounting Manual 60 Box E.2: Tamil Nadu Accounting – Key to Success 60

List of Tables Table 2.1: Urban Reforms in India (in PFMA context) 3 Table 3.1: Components, Strategic Areas and Outcomes for PFMA 8 Table 4.1: Enabling Legislative Framework 10 Table 4.2: Budget Planning 12 Table 4.3: Budget Execution 15 Table 4.4 Accounting and MIS 18 Table 4.5: Situation of Conversion to DEAS based on NMAM 20 Table 4.6: Cash and Fund Flow Management 22 Table 4.7: Procurement 24 Table 4.8: Internal Control and Audit 26 Table 4.9: Asset and Liabilities Management 27 Table 4.10: Reporting 29 Table 4.11: External Audit 30 Table 4.12: External Oversight 34 Table B.1: List of Probable Case Studies Identified for Documentation 41 Table B.2: Two-Dimensional Stratification of Probable Sample Cities 42 Table E.1: Comparison of DEAS across States 62 Table F.1: Cities/States that have signed MoA for implementation of reforms under JNNURM 66 Table F.2: Status of City Development Plans (CDPs) under JNNURM 66

List of Figures Figure 3.1: PFMA Analysis Framework 9

Public Financial Management and Accountability in Indian ULBs I

Legi

slat

ive

Fram

ewor

kPlanning and Budgeting-Budget Planning and linkages with PFMA components

Implementation- Budget Execution

-Cash Management

-Procurement

-Accounting and MIS

-Internal Control and Audit

-Asset and Liabilities Management

Rep

orting

Exte

rnal

Aud

it a

nd

Ove

rsig

ht

Increased Accountability and Improved Service Delivery

Public Demand

Legi

slat

ive

Fram

ewor

kPlanning and Budgeting-Budget Planning and linkages with PFMA components


-Cash Management

-Procurement

-Accounting and MIS



Rep

orting

Exte

rnal

Aud

it a

nd

Ove

rsig

ht


Public Demand

Executive Summary INTRODUCTION

An improved Public Financial Management and Accountability (PFMA) environment has become crucial to better urban governance and performance. The Ministry of Finance (MoF), Government of India requested the World Bank to undertake a study on status of PFMA in ULBs in India. The main objectives of this study are to assess the current state of PFMA systems in ULBs in India; identify, analyze and document best practices of PFMA in select ULBs focusing on their existing context, success factors and replicability.

URBAN REFORMS IN INDIA (PFMA CONTEXT)

Streamlining of the legislative and fiscal arrangements in India across the three tiers of government is a continuous process in India. There exists a sound policy framework (74th Constitutional Amendment Act, 1992, Right To Information Act, 2005 etc.), reform led nationally sponsored initiatives (Jawaharlal Nehru National Urban Renewal Mission, National Municipal Accounting Manual etc.), instances of best practices at state/local level, and increasing demand from civil society for transparency and reforms. However, there is a need for greater institutionalization and more visible results in the areas of PFMA in ULBs.

PFMA FRAMEWORK: STRATEGIC AREAS, OBJECTIVES AND OUTCOMES

A strong PFMA system is the key to achieving development objectives and an efficient service delivery mechanism in ULBs. The PFMA framework is shown alongside bringing out the linkages between legislative, budgeting, implementation, reporting and oversight process in the ULBs. Improved functioning in these areas would lead to increased accountability and enhanced levels of service delivery. The recent impetus for reforms brings out the acceptance, need and requirement to put PFMA at the center-stage of improved governance and service delivery.

PFMA COMPONENTS: BENCHMARKS, POLICY AND PROGRESS

Legislative Framework: a strong and comprehensive legislative framework is existing leading to improved PFMA.

ULBs are governed by respective state municipal acts. While comprehensive in areas such as financial control, budgeting and audit, there are gaps in procurement, monitoring and enforcement. Since these laws were primarily directed to make ULBs accountable to the state government, they are weak on participative planning, public accountability and modern accounting, audit and management practices. Although the legislative reform environment is positive (including a Model Municipal Law issued by the Government of India in 2003), ULBs lack in implementation capacity.

Planning and Budgeting: policy direction and budget planning and preparation is realistic, comprehensive, orderly and participatory within overall government policy

Budgets are generally seen as a statutory requirement and hence limited to providing sanction for expenses and revenues. Current budgeting practices are not directly linked to a larger management or strategic planning process. The rigor of planning is replaced by incremental budgeting and the need for debates and participation is limited to the elected representatives. Alongwith JNNURM initiatives, some state efforts are on to improve budget processes, formats and systems. This should move budgeting from a stand alone process to an integrated, strategically linked planning aid.

Budget Execution: the budget is used as a tool for planning, procurement, and expenditure control

Public Financial Management and Accountability in Indian ULBs IIThere is weak monitoring and follow up of budgets with hardly any review mechanism for variations. This, alongwith unpredictability of state funding causes uncertainty in the budget execution process. Re-scheduling of budget heads during the year is a common practice. Further, any shortfall in revenues generally leads to cut in capital expenditure and O&M. The citizen interface also remains weak barring few successes like Public Record of Operations and Finances (PROOF) in Bangalore.

Accounting and MIS: accounting system and management information system are complete, accurate, timely and meaningful

ULBs in India have traditionally been following the single entry cash basis of accounting. This limits their ability to prepare meaningful performance reports and statements of financial position. Predominantly manual, the multiplicity of registers and limited capacity of staff generally results in accounts remaining in arrears for several years. Now, mandated by a Supreme Court decision to adopt double entry ‘full cost’ accounting and the release of National Municipal Accounting Manual (NMAM), many states are now moving to double entry accrual accounting system. The challenge is to build capacity for using this financial information for improved decision making in ULBs.

Cash and Fund Flow Management: cash receipts, payments and fund flows are managed efficiently

There are weak cash and treasury systems in most ULBs, primarily due to the weak accounting system currently in practice. Bank reconciliations are generally in arrears and cash management is limited to prioritization of checks issue. Some ULBs were even unable to optimally utilize funds raised through bonds. Along with their capacity, ULBs also need to improve their inter-departmental co-ordination for treasury management function to be successful.

Procurement: efficient system and management of procurement in place to ensure increased competition, value-for-money and transparency

Almost 30 to 50 percent of the ULB budget requires external procurement, usually made by the consuming department itself. Legislation governing procurement, though rudimentary, defines procedures and limits for procurement. However, there is lack of focus on quality, performance and linkages with planning. Procurement practices lack modern concepts such as ‘just in time’ inventory, scientific determination of procurement quantities etc. although some states in India have also moved to e-procurement and works based grievance redressal systems.

Internal Control and Audit: clearly defined and effective policies, systems and procedures for internal control and audit are in use

Most ULB Acts do not specify requirements for internal audit. Internal controls are generally incorporated in financial rules and focus on delegation of financial limits. Some ULBs have Standing Committee for audit and accounts with the objective of scrutinizing ULB accounts at each level and ensuring compliance with audit notings. With shift to modern Double Entry Accrual Accounting System, the need for effective internal audit has become even more necessary.

Assets and Liabilities Management: policies, procedures and database of all assets is available and used for effective decision making in capital investment and management

ULBs generally hold a significant amount of fixed assets in land, buildings and infrastructure. Few local bodies have exploited the commercial potential of these properties to generate non-tax revenues. For infrastructure assets, maintenance is poor and O&M expenditure is either not allocated in the budget or is not available due to deficits. Most ULBs do not have a proper inventory of assets nor do they update them regularly. Similarly, ULBs again do not have complete listings of creditors. As a result they are neither able to utilize their assets effectively nor deal with liabilities in a planned manner. Modern accrual accounting practices are expected to address this shortcoming.

Reporting: timely, meaningful and user-friendly reporting structures in place allowing effective engagement with various stakeholders

The reporting requirements for ULBs remain weak. The overriding focus of state Acts is to provide

Public Financial Management and Accountability in Indian ULBs IIIaccountability to the state and hence reporting is limited to compliance certificates, budgets and periodic administrative statements. There are no guidelines on disseminating financial results to the public. Some efforts have been made through the Public Disclosure Law, National E-governance Action Plan (NEGAP), Citizen facilitation Centers (CFC), etc. Karnataka has incorporated a public reporting requirement in its recent accounting rules as well. These efforts are intended to improve the accountability of ULBs to the citizens.

External Audit: clearly defined systems for timely, independent and effective external audit

Current audit mechanism continues to be the weakest link in the PFMA cycle. Audit is generally carried out by the Local Fund Auditor limited to transaction reviews and focusing on prudence and compliance. Audit objections or ‘paras’ are made where again the follow-up process is weak. There is a large backlog of audits due to limited capacity of LFA and increasing transactions of ULBs. The Comptroller & Auditor General of India has recently also been involved in ULB audits. With the adoption of double entry accounting system, audit capacity needs to be enhanced and professional independent audit commenting on the ‘truth and fairness’ of financial statements required in addition to the routine compliance audits.

External Oversight: functional independent systems for increased accountability and oversight are in place leading to improved decision making

Public involvement in ULB’s governance is prima-facie missing in the current legislative environment. Limited availability of reports in the public domain, weak community structures and lack of involvement of citizens lead to poor external oversight. In absence of properly functioning ward committees, the only oversight is taken up by NGOs and CBOs. PROOF and Citizen Report Cards in Bangalore are good examples of this. Steps for increased participation are on and these are expected to evolve into an improved accountability mechanism in due course.

KEY ISSUES AND WAY AHEAD

Review and Strengthening of ULB Audit. The area of ULB audit remains weak. MoUD may consider constituting a task force and review the existing capacity and suggest strengthening measures for audit in ULBs. It could also advise on moving towards performance and management audits, clear old audit backlogs and training of LFA auditors with reference to the changed financial reporting scenario, double entry accrual accounting and modern audit techniques.

Strengthening ULB Budgeting. Although current schemes promote bottom-up budgeting, there exists a gap in ‘operationalizing’ them. There is a need to consider a Budgeting Manual (perhaps on the lines of NMAM) for evolving budgeting into an efficient planning, review and management tool through Output budgeting; multi-year rolling plans, scientific forecasting and zero-based budgeting.

Staffing and Capacity Building. There are no benchmarks and capacity building plan in most ULBs. Most states and ULBs are using external consultants and donor support to implement PFMA reforms, although this may not be sustainable in long run. MoUD may consider a review and advisory guidance for creation of skilled positions and restructuring / abolishing obsolete and outdated positions. This could include: staffing structure of critical areas (especially PFMA related); review of current availability of staff, training requirements etc.

Ensuring Compliance. Ensuring compliance with laws is another weak link in the PFMA cycle. Various mechanisms could be explored such as linking devolution of funds to compliance with rules and regulations; tabling the status of budget and financial statements of ULBs in state assembly and fixing timelines for action taken report on audit queries.

In addition, some other areas that could be taken up include: • Promoting adoption of key PFMA requirements from Model Municipal Law; • Handholding and assistance to states for developing accounting policies and implementation of

NMAM; • Development of Procurement guidelines for independent, effective and cost efficient procurement

Public Financial Management and Accountability in Indian ULBs 1

1 Rationale and Overview

1.1 Background

1. India is undergoing a distinct shift in its demography. Since independence in 1947, its population has tripled while its urban population has grown more than five times. With liberalization of the economy in the 1990s and development of the tertiary sector, urban centers have become important generators of national wealth. Urban India, housing 27 percent of the population, today accounts for more than 50 percent of GDP and 90 percent of taxes in the country. However, this rapid urban growth has taken its toll on the civic infrastructure, widening the gap between demand and supply and leading to deteriorating environment and quality of life in many cities of India.

2. Urban Local Bodies (ULBs), as the providers of urban services face the challenge of meeting these demands through better management of resources and identifying new and innovative sources of funding. It also requires ULBs to shift their dependence for funds from the traditional central / state government grants to the citizens (for taxes), external financiers (for borrowings) and development agencies (for soft loans).

3. With this gradual increase in external stakeholders, ULBs cannot continue to function as closed dominions with their set systems. ULBs now need to demonstrate an efficient system of public financial management, an ability to provide cost effective services and an environment of accountability and transparency to their stakeholders. It is in this context that improved Public Financial Management and Accountability (PFMA) has become crucial not only for better governance but also for improved service delivery.

4. The Ministry of Finance (MoF), Government of India requested the World Bank (the Bank) to undertake a study on status of PFMA in ULBs of India. This was followed by a series of meetings between the Bank and the Ministry of Urban Development (MoUD), identifying weaknesses in current systems and showcasing some good examples of PFMA in ULBs. This report synthesizes the study and discussions, highlighting major issues which need to be addressed for developing a progressive environment for PFMA in the country’s ULBs.

1.2 Objectives of the Study

5. The main objectives of this study are:

i. To assess the current state of PFMA systems in ULBs in India against best practices, benchmarks and indicators.

ii. To identify, analyze and document best practices of PFMA in select Indian ULBs focusing on their existing context, success factors and replicability; and

iii. To identify the challenges and suggest priorities to improve PFMA in Indian ULBs.

6. The timing of this study coincides with the launch of Jawaharlal Nehru Urban Renewal Mission (JNNURM), an incentive led reform program initiated by Government of India with the objective of developing economically productive, efficient, equitable and responsive local governance1. Some of the key reform measures initiated under the Mission are introduction of modern and transparent budgeting system, double entry accrual system of accounting, e-governance, improved asset management and computerization of management information systems.2

7. This study is likely to provide an insight to key issues for improving the PFMA environment in Indian ULBs. The documented cases of PFMA would also provide replicable models of success which can be encouraged by the MoUD. Since institutional and systemic reforms in PFMA are not an

1 The JNNURM has been launched for 63 largest and important cities of India. A similar program for remaining ULBs has also been simultaneously launched under the name of Urban Infrastructure Development of Small and Medium Towns (UIDSMT). 2 Government of India (2005), JNNURM Toolkit, MoUEP and MoUD, Government of India

Public Financial Management and Accountability in Indian ULBs 2end in itself but part of the broader governance agenda, the study aims to approach the subject from both an analytical and contextual perspective.

1.3 Approach and Scope

8. This report is largely based on desk review and research, supported by consultations with some well-known experts on the subject, institutional donors, central and select state governments and representatives of the Bank. The scope of this study is largely based on available literature, select ULB case studies and discussions with a few key stakeholders.3

9. This report also documents experiences of PFMA in select Indian ULBs focusing on their existing context, success factors and replicability. Following an initial shortlisting on April 19, 2006, a detailed review of various cases was carried out based on the following principles:

• The activity should be directly related to enhancing PFMA in the ULB and should have demonstrated results;

• The selection of cases should be a representative cross-section, covering ULBs of different sizes ;

• A regional balance should be maintained (limited to one case per state); and • The cases should represent the various facets of PFMA and be capable of being replicated

across other ULBs

10. Accordingly, a list of good cases was prepared (Annex B). Although some related agencies such parastatals, development bodies etc. were also initially included, it was decided to limit this study to good PFMA practices in 6 ULBs of the country.

1.4 Organization of the Report

11. The report is divided into five sections:

i. Section 1 – Overview and Rationale - provides the overall context, objective and scope of the current study;

ii. Section 2 – Urban Reforms in India (PFMA Context) - this section briefly provides the settings of urban reforms having an impact on PFMA in India;

iii. Section 3 – PFMA: Strategic Areas, Objectives and Outcomes - this section provides the analytical framework under which this study has been conducted;

iv. Section 4 – PFMA Components: Benchmarks, Policy and Progress - this section analyses the different components of PFMA outlined in the previous section, devises a set of selective indicators and benchmarks for each PFMA areas. It then discusses the policy, progress and gaps in each against the benchmarks.

v. Section 5 – Key Issues and Way Ahead - based on major findings from the above sections, this section outlines some of the key priorities and way forward for improving PFMA in Indian ULBs.

3 National institutions include discussions with C&AG Office, ICAI, NIPFP. Donor agencies include Department for International Development (DFID), Asian Development Bank (ADB) United States Agency for International Development (USAID) apart from the Bank itself. States covered in detail include Karnataka, Tamil Nadu, Rajasthan, Andhra Pradesh, Delhi and Kolkata.


2 Urban Reforms in India (PFMA Context)

2.1 Urban Context

12. India has a parliamentary system of government which is federal in structure4. There are three tiers of government; the union or national government, various state governments and the local government bodies. Urban development, as per the Constitution, is a state subject but key functions related to urban services are delegated to ULBs (vide the 74th Constitution Amendment, 1992).

13. Local Governments in the urban context comprise of Municipal Corporations for larger urban settlements, Municipal Councils for small and medium urban settlements and Nagar Panchayats5 for transition settlements. The classification of any settlement into these three categories is based on criteria which are decided at the state level6.

14. The municipalities are created and governed by a state Act. Many states have separate Acts for each category of ULB but some (such as Tamil Nadu) have also unified their Acts into one for all categories. In some exceptional cases (as in West Bengal), separate Acts exist for each Corporation with a common Act for all other municipalities. Every state also has a ‘Department of Municipal Administration’ which is responsible for overseeing and regulating ULBs as per the State Acts.

15. Although not directly governing the ULBs, the Government of India also influences and shapes their policies and programs. The Ministry of Urban Development (MoUD) and the Ministry of Urban Employment & Poverty Alleviation (MoUEPA) are parts of union government which formulate national policies, sponsor and support programs, coordinate the activities of various State Governments and monitor programs concerning urban development in the country7. The Planning Commission and the Central Finance Commission (CFC) are other national bodies which play a key role through their policies and recommendations for the growth, development and financing of ULBs.

2.2 Mapping Urban Reforms

16. The streamlining of the legislative and fiscal arrangements in India across the three tiers of government has been a continuous process and is still on. Tracing back, the National Commission on Urbanization (NCU) Report of 1988 was perhaps the first explicit recognition of urbanization and economic growth linkage in India. Since then, there have been a series of evolving reforms for the overall development and improvement of urban governance environment in the country. Some key milestones (in PFMA context) are given below:

Table 2.1: Urban Reforms in India (in PFMA context)

Year Policy Intervention Impact on PFMA in Urban Sector 1985 7th Five Year Plan Policy recommendations for revitalization of civic bodies; reform of

municipal administration; constitution of state finance commissions; and constitutional status for local government.

1988 NCU Link between urbanization and economic growth explicitly acknowledged. Reiteration of the need for decentralized urban growth and emphasis on the role of local governments

1991-92 New Economic Policy Autonomy of local governments seen necessary for deregulation and privatization of provision and maintenance of urban infrastructure and basic services.

1992 74th Constitutional Devolution of powers (political, administrative and fiscal) to ULBs

4 Governed by the Constitution of India which came to force on 26 January 1950. 5 These may be referred to by different names in different states; for example, in Uttar Pradesh Municipal Corporations would be referred to as Nagar Nigam, and Municipal Councils as Nagar Palika. 6 The gradation of an area into transitional, small or large is to be determined by the Governor of a state on the basis of such factors as population, area, density, revenue generated for local administration, employment in non agricultural activities, and other factors that point to the economic importance of the area [243 (Q) (2)] 7 http://urbanindia.nic.in/moud/theministry/ministryofurbandevelopment/main.htm


Year Policy Intervention Impact on PFMA in Urban Sector Amendment Act for functioning as ‘independent institutions of self government’

1992-97 Formation of SFCs To correct fiscal disabilities imbalances of local bodies and improve their financial situation and review financial position of ULBs and make recommendations regarding distribution of taxes, revenue-sharing arrangements, grant-in-aid system etc.

1998 First Municipal Bond (Ahmedabad Municipal Corporation)

Landmark initiative followed by issue of guidelines for issuing tax -free municipal bonds in Feb 2001 and increase in the limit from Rs. 2000 million in 2001-02 to Rs. 5000 million in 2002-03.

2000 11th Central Finance Commission

Recommend measures for augmentation of resources of states so that they can supplement resources of local bodies.

2002 Urban Reforms Incentive Fund

Policy initiative aimed to encourage reforms in ULBs (covered some PFMA areas like accounting, budgets etc.)

Supreme Court Judgment on SWM

Highlight the issue of accountability of executives in ULBs for service delivery. Instituted reforms in accounts for greater transparency and better management of service costs.

C&AG Task Force Took the initiative to formulate policy guidelines on municipal accounting reforms through Double Entry Accrual Based accounting.

Pooled Finance Precedence set by Tamil Nadu for smaller ULBs to raise funds from capital markets.

2003 Model Municipal Law Template for states to revise their municipal legal framework. Key focus on improving state oversight of municipal finances through SFC recommendations

2005 Right To Information Act

Government of India initiative towards transparency and accountability. Adopted by most of the states.

National Municipal Accounting Manual

Guidelines to the states/ULBs for accounting reforms on Double Entry Accrual System

Launch of JNNURM Reforms-driven, fast track mission for planned development of identified cities with focus on efficiency in urban infrastructure and services delivery, community participation, and accountability of local governments towards citizens.

2006 ULG Disclosure Bill Provide for transparency and accountability in the functioning of ULBs

17. The key features and landmark policy initiatives related to PFMA may be summarized as under:

Policy Framework

• 74th Constitutional Amendment Act. The 74th Constitutional Amendment Act (CAA) was passed in 1992 to accord formal recognition to ULBs in the Constitution and make them more autonomous and participatory. It provided powers to ULBs to function as ‘independent institutions of self-government’ and directed states to devolve specific (18) functions to ULBs under Schedule XII (Annex C). ULBs were also empowered to collect taxes and states were required to set up State Finance Commission (SFCs) to review and make recommendations regarding distribution of taxes, revenue-sharing, grant-in-aid system, issues of local autonomy between the state and ULBs. This amendment also provided for having an elected council for each ULB (with reservation for women); constitution of ward committees; creation of a district/ metropolitan planning committee and establishment of funds at the ULB level to handle receipts and disbursements.

Although most states have amended their municipal laws in accordance with the CAA; the extent of devolution / decentralization to ULBs has been uneven across the states. A comparative status of devolution / decentralization in some of the major states is appended in Annex D8.

8 Even in states where most of the functions have been devolved to ULBs, they still depend on rules and regulations specified by the State Government. Functional decentralization is also not backed by financial devolution. For example, in Karnataka ULBs are required to take State approval for hiking property tax. Interestingly, though ULBs in Tamil Nadu and Uttar Pradesh are allowed to revise property tax without State consent, ULBs generally end up asking for permission.


• Expanded scope of Central and State Finance Commissions. With enactment of the 74th CAA, the scope of Central Finance Commissions (CFC) was expanded to recommend measures for augmentation of resources for local bodies. The 11th CFC looked for the first time into local government finances including issues of

i. Separate tax domain for ULBs;

ii. Establishment of a separate framework for allocations of central grants to ULBs and

iii. Requirement for Action Taken Report by state government on SFC recommendations within six months.

The role of SFCs was also elaborated and their mandate explicitly included a review of ULB finances and recommendations on revenue sharing, financial autonomy and improving financial management practices in the ULBs of the state.

The CFC and SFC recommendations for ULB finances have only been partly put into practice. Although many states have established the SFCs, Action Taken Reports show that compliance and acceptance of the recommendations is generally weak. The earlier problems of transparency and predictability of funds for ULBs has only marginally improved.

• Model Municipal Law (2003). In order to help facilitate the implementation of 74th CAA, the Government of India developed a ‘Model Municipal Law’ in 2003 (facilitated by the Indo-USAID FIRE –D project) to serve as a template for states to revise their municipal legal framework. Key relevant provision of the Model Municipal Law include

i. Improving state oversight of municipal finances through SFC recommendations;

ii. A form of administrative receivership for cities that default in the performance of their duties;

iii. Mandatory framing of ULB debt limitation policy;

iv. Development of a state-wide municipal accounting manual;

v. Creation of a Municipal Accounts Committee at ULB level and preparation of annual Balance Sheets;

vi. Mandatory requirement for ULBs to prepare inventory of all municipal assets;

vii. Encouragement for ULBs to implement their own development plans; and

viii. Framework for private sector participation in the construction, financing and delivery of services.

All these, if and when implemented would have a major impact on improved PFMA.

The Model Municipal Law is yet to be adopted in any state till date. It has been argued that since the model remains recommendatory and not linked to any incentive, its compliance is not adequately stressed.

• The Right to Information Act, 2005. This recent Act has far reaching implication for governance and transparency in public financial management. It requires government bodies to provide any information sought on its operations within a specified time frame. It also promotes pro-active disclosure of certain information by government bodies. The Act provides for elaborate disclosure requirements, appointment of responsible officers as Central and State Information Commissioners, an independent appeal mechanism and stringent penalties for default. However, its effective implementation at the local government level remains a challenge due to poor recordkeeping and computerization practices, weak political will as well as the traditional mindset of information scarcity and reluctance to part with ‘official information’ by the government.

• Draft Urban Local Government Disclosure Bill, 2006. This proposed initiative is aimed at providing transparency and accountability in the functioning of the municipalities. As per the draft bill, every municipality shall maintain all its records in a manner and the form which facilitates the municipal authority to disclose the required information at regular intervals to the public. The manner of disclosure has been defined as through newspapers, internet, notice boards, ward offices, etc. This envisages voluntary sharing of information by the ULBs and is a step forward from the RTI Act.


Resource Mobilization and Financial Management

• Municipal Bonds and Pooled Finance. An important development in urban financing has been the access to debt market by ULBs. The pioneer in this case was Ahmedabad Municipal Corporation which floated its bonds in 1998. Thereafter, several other cities (generally large Corporations) have issued similar bonds. The Government of India supported these initiatives by exempting the interest earned on such bonds from income tax (Finance Act, 2000) and prescribing guidelines for tax -free municipal bonds (February 2001).

Smaller municipalities which could not access the capital market on their own developed pooled financing models, issuing bonds for a pool of cities (Ex. Tamil Nadu, 2002 and Karnataka, 2004). In 2006, the Government of India proposed development of a Pooled Finance Development Fund to institutionalize and support smaller ULBs in this process.

The most important outcome of issuing municipal bonds was not the amount raised by the ULB, but familiarizing them with the financial discipline and accountability requirement of the markets. These included updated accounts, credit rating and sound reporting practices; all essential components of a good PFMA environment in ULBs today. It is interesting to note that in spite of ULBs having weak finances in India, none of the 15 odd municipal bond issues have defaulted in repayment till date.

• Accrual Accounting in Municipalities. One of the landmark judgments in urban governance was by the Supreme Court in Almitra Patel vs. Union of India (2002). The case related to weak financial management and practices in solid waste management by ULBs. The Supreme Court, concerned with the weak financial reporting system in ULBs, ordered the Government to develop guidelines for moving to a full cost based accrual accounting system for ULBs. Accordingly, a Task Force was appointed in 2001 under chairmanship of the Deputy Comptroller and Auditor General of India (C&AG) to prescribe the accounting system and processes to be followed by ULBs for better financial recording and reporting.

Based on the recommendations of this Task Force, the Government of India initiated development of a National Municipal Accounting Manual (NMAM) based on double entry accrual basis of accounting, standard chart of accounts and guidance on preparation of opening balance sheet etc. The NMAM was issued in 2005 and subsequently few states such as Karnataka, Andhra Pradesh, Gujarat and West Bengal have adopted these recommendations in their manuals. In certain other states such as Orissa, Madhya Pradesh and Uttar Pradesh, the adoption of NMAM is under progress.

Incentive led reforms

• Urban Reform Incentive Fund (URIF). In order to accelerate and incentivize the process of urban reforms the Government of India decided to provide reform-linked assistance to states. The 2002-03 budget called for setting up an Urban Reform Incentive Fund (URIF) with an initial outlay of Rs. 500 crores per annum during the 10th Plan. URIF was designed to provide incentives to state governments for reforms in state and local government including repeal of Urban Land Ceiling Act; rationalization of stamp duty; reform of rent control laws; introduction of computerized registration; reform of property tax; levy of user charges; and adoption of Double Entry Accounting System (DEAS).

URIF in practice became more allocation driven then reform driven. The progress towards the envisaged reforms was extremely slow and one of the prime reasons behind this was stated to be the low levels of incentive to carry out reforms. Other donor efforts such as City Challenge Fund (CCF) also did not materialize because of similar problems of low levels of incentives. Out of the 24 states that signed Memorandum of Agreement (MoA), only 12 states remained eligible to receive the second installment.

• Jawaharlal Nehru National Urban Renewal Mission (JNNURM). The latest in the realm of urban reforms vehicles in India is the JNNURM. JNNURM is designed to be a reforms-driven, fast track mission for integrated and planned development of 63 identified cities with focus on asset creation and management, efficiency in urban infrastructure and services delivery, community participation and accountability. JNNURM has a central outlay of Rs. 50,000 crore ($11billion) for a seven year period. The key to achieving its ambitious objectives includes initiatives for better PFMA in the targeted cities. In fact, the JNNURM requires a tri-partite MoA between the ULB, the State


government and the Centre that clearly identifies reforms in areas of PFMA, among others, and a timeline for achieving the same at all levels. Some of the key reforms include: modern and transparent budgeting system; shift to DEAS; improved asset management; e-governance; updated financial management systems; enhanced property tax collection efficiency; enactment of Public Disclosure Law and Community Participation Law; levy of reasonable user charges; process re-engineering using IT; quarterly monitoring by central and state level agencies; Financial Operating Plan under CDP; credit rating etc.

However, it will be important to ensure that the fate of this mission is not similar to previous efforts with incentive led reforms. Eight states have signed MoA and 19 out of the 63 cities have already come up with their City Development Plans and some have initiated the preparation of Detailed Project Reports as well.

To summarize, there exists a sound policy framework (74th CAA, RTI), reform led nationally sponsored initiatives (JNNURM, NMAM), instances of best practices at state/local level, and increasing demand from civil society for transparency and reforms. More progress has been made in the last five years than in the last two decades. However, a lot still needs to be done. There is a need for greater institutionalization, internal reforms and more visible results especially in the areas of public financial management and accountability. It is this which the current report hopes to address.


3 PFMA Framework: Strategic Areas, Objectives and Outcomes

18. Effective institutions and systems of PFMA have a critical role to play in supporting implementation of policies for national development and poverty reduction.9 Essentially, a strong PFMA system is the key in ensuring achievements of development objectives, supporting aggregate fiscal discipline, strategic allocation of resources and efficient service delivery. Based on the understanding of the ULB system in India, critical dimensions of performance for an efficient PFMA system are identified (Refer Table 3.1).

19. The framework has been developed based on interaction at different levels (national, state and ULB) on the various components of PFMA10. Subsequently, for each of the PFMA area, outcomes and indicators were developed. The framework was shared with the World Bank11 and MoUD12 and comments and suggestions incorporated.

Table 3.1: Components, Strategic Areas and Outcomes for PFMA

20. The study analyses various linkages that exist between the legislative, budgeting, implementation, reporting and oversight process in ULBs in India. Benchmarks and indicators have been developed for each strategic area and analysis of policy, practice and progress in each of these 9 PEFA Secretariat, 2005, Public Financial Management Performance Measurement Framework, World Bank, pp.III. 10 A consultative workshop with key experts in areas of PFMA (Prof. O P Mathur, Mr. K Dharmarajan, Mr. Alok Shiromany; Mr. Vinod Sahgal) was organized on the August 9, 2006 to identify the strategic PFMA areas. 11 Presentation organized at World Bank premises on August 21, 2006 and was attended by key officials involved in the study from the Bank. Those present included Mr. P K Subramanian, Mr. Manoj Jain, Ms. Priya Goel, Mr. Chris Heymans, Mr. Raghu Kesavan, Mr. Alok Shiromany, Mr.Vinod Sahgal, Mr. Joel A. Turkewitz, Mr. Gangadhar Jha, Mr. Ashwajit Singh and others. 12 A presentation and discussion on the framework was subsequently held at the MoUD on September 7, 2006. Those present included Mr. Aniruddha Kumar, Mr. R N Ghosh, Ms. Geeta Menon, Ms. Priya Goel, Mr. Raghu Kesavan, Mr. Alok Shiromani, Mr. Ashwajit Singh and Mr. Himanshu Sikka.

Framework Component

Strategic Area Outcome

Legislative Framework

• Enabling legislative framework

• A strong and comprehensive legislative framework exists which encourages sound PFMA practices

Planning and Budgeting • Budget planning

• Policy direction, budget planning and preparation is realistic, comprehensive, orderly and participatory within overall government policy

Implementation

• Budget execution • The budget is used as a tool for planning, procurement and control, ensuring transparency

• Accounting and MIS • Accounting system and management information system are complete, accurate, timely and meaningful

• Cash and fund flow management

• Cash receipts, payments and fund flows are managed efficiently

• Procurement • Efficient system and management of procurement in

place to ensure increased competition, value-for-money and transparency

• Internal control and audit

• Clearly defined and effective policies, systems and procedures for internal control and audit are in use

• Asset and liabilities management

• Policies, procedures and database of all assets and liabilities is available and used for effective decision making in capital investment and management

Reporting • Reporting • Timely, meaningful and user-friendly reporting

structures in place allowing effective engagement with various stakeholders

External Audit and Oversight

• External audit • Clearly defined systems for timely, independent and effective external audit are in use

• Oversight • Functional independent systems for oversight are in place leading to improved decision making


areas has been conducted. The framework has been developed around broad areas defined in the handbook for Performance Measurement Framework issued by the PEFA secretariat13.

Figure 3.1: PFMA Analysis Framework

21. A sound legislative framework is the facilitative aspects for most PFMA initiatives. The study reviews the current status of legislation and how they have reflected the various aspects of functional devolution, decentralization and greater accountability in urban governance. Under planning and budgeting process, the study looks at current planning practices and reviews the various aspects of better planning, budgeting and reporting for participatory, inclusive and transparent planning by ULBs.

22. In implementation, the study looks at the areas of budget execution, cash and fund flow management, procurement, accounting and MIS, internal control and audit, and assets management. The emphasis is on analyzing the systems for their efficiency and effectiveness. In reporting, the emphasis is on assessing that the reporting mechanism, both internal and external, is timely, meaningful and user-friendly. The framework also analyses whether the reporting structures in place allow effective engagement with various stakeholders or not.

23. Finally, the analysis framework focuses on the issue of external oversight and audit. It is important to appreciate that an improved PFMA environment has to be demand led with citizens and stakeholders building pressure and requiring accountability from ULBs. This would not only require their involvement in planning but in oversight of the entire PFMA cycle. Similarly, the role of independent external audit is also a useful tool for improving the PFMA initiatives.

24. It is expected that improved functioning in PFMA areas would lead to increased accountability and improved levels of service delivery in the ULBs. The recent impetus for reforms (including JNNURM) establish the acceptance, need and requirement to put PFMA at the center stage of urban reforms and improved governance in ULBs.

13 Public financial Management, Performance measurement framework, PEFA secretariat, June 2005, USA, www.pefa.org. The PEFA PFM Performance Measurement Framework incorporates a PFM performance report, and a set of high-level indicators which draw on the HIPC expenditure tracking benchmarks, the IMF Fiscal Transparency Code and other international standards. It forms part of the Strengthened Approach to supporting PFM reform, which emphasizes country-led reform, donor harmonization and alignment around the country strategy, and a focus on monitoring and results. This approach seeks to mainstream the better practices that are already being applied in some countries.

Legi

slat

ive

Fram

ewor

k

Planning and Budgeting-Budget Planning and linkages with PFMA components


-Cash Management

-Procurement

-Accounting and MIS



Rep

orting

Exte

rnal

Aud

it a

nd

Ove

rsig

ht


Public Demand

Legi

slat

ive

Fram

ewor

k

Planning and Budgeting-Budget Planning and linkages with PFMA components


-Cash Management

-Procurement

-Accounting and MIS



Rep

orting

Exte

rnal

Aud

it a

nd

Ove

rsig

ht


Public Demand


4 PFMA Components: Benchmarks, Policy and Progress

4.1 Legislative Framework

25. Benchmark. A strong and comprehensive legislative framework is a prerequisite for effective PFMA in ULBs. The legislative framework, in effect, provides the ‘enabling environment and hence should cover all aspects of public financial management viz. budget, accounts, procurement, audit etc. However, having good laws is not an end in itself – the acid test is in its implementation. Table 4.1 presents a list of indicators for assessing the suitability of legislative framework in the context of PFMA:

Table 4.1: Enabling Legislative Framework

Outcome 1: a strong and comprehensive legislative framework is existing leading to improved PFMA

Indicator Source

1. Legislation for PFMA areas are clearly defined with timelines (accounts, budget, audit, procurement, etc.) • Detailed Govt. orders and rules in place for defining timelines,

responsibilities and action for non compliance

Municipal Act and Rules

2. Legislation provides for participation of all key stakeholders in budget preparation

Municipal Act, Rules

3. Legislation in place ensuring effective cash management Municipal Act, Rules

4. Legislation in place allowing for clear-cut and transparent procurement processes

Municipal Act, Procurement Rules, Tender Transparency Act

5. Accounting rules are in place to ensure complete, accurate and timely information through DEAS

Accounting Rules

6. Legislation in place providing for effective internal audit and control mechanisms


7. Provision for setting up of Audit Committees is available Municipal Act

8. Legislation provides for monitoring and enforcement of non-compliance/delays

Municipal Act, Rules, Regulations, GOs

9. Legislation provides for adequate public participation and oversight in PFMA areas


26. Policy and Practice. As mentioned earlier, every state has legislated one or more Municipal Act for governing the operations of ULBs in the state. These Acts are required to draw on the national policy framework (including the 74th CAA, Policy guidelines from MoUD etc.) and lay down the various aspects of urban governance, management and service delivery for ULBs in the state.

27. Although most of the states have amended their existing Acts to incorporate the 74th CAA some such as West Bengal and Tamil Nadu have enacted fresh legislations replacing the earlier Act. However, the desired effect of decentralization and effective PFMA has been, on the whole, limited, slow and uneven across states. There are however, a few exceptional states such as Kerala, which have taken efforts to ensure greater autonomy to ULBs (Box 4.1).

Box 4.1: Autonomy to Urban Local Bodies in Kerala

The Kerala Municipalities Act, 1994 transfers 165 functions (29 groups of items) to ULBs. This is among the most elaborate list of functions assigned to Municipalities in any state. The functions have been classified as mandatory, sector wise and general functions. A major function entrusted to the Municipalities in Kerala is planning and implementation of various developmental projects in the productive, infrastructure and social service sectors.


28. The State Acts usually provide for the broad aspects of PFMA such as manner of passing the budget, maintenance of accounts, maintenance and use of municipal fund, power to raise money, receive loans etc. with the state empowered to issue detailed Rules in this behalf. As a result, most states have issued a set of subordinate legislations including ‘Accounting Rules’ detailing the budget format, accounting forms, treatment of special transactions and elaborate financial procedures for transactions such as procurement, bill payments, maintenance of Demand Collection Balance (DCB) Registers etc. An important distinction in this context is that the power to make Rules is generally vested with the state for municipalities and larger Corporations are usually empowered to make their own Rules or Bye-laws.

29. A review of this legislative framework in the context of PFMA brings out the following four features:

i. The legislations are primarily directed to make ULBs accountable to the state governments rather than to citizens. Almost all the Acts mention presentation of the budget to the elected functionaries.14 However, there is generally no requirements for citizens’ involvement and / or bottom-up budgeting in the Acts;

ii. The existing legislations, since based on older laws, generally include archaic practices such as single entry accounting, use of colored pencil, carbon etc. which have long been outdated. Many modern concepts such as double entry accounting, computerization, zero based / output budgeting are conspicuous by their absence;

iii. The basic requirements for budgeting, control and audit are well laid out but there is generally no provision for participation in budgeting, long term sustainability planning, periodic disclosures etc. The focus seems to be on compliance rather than encouraging autonomy and self sustainability of the ULBs;

iv. There is weak enforcement mechanism for the various provisions. For example, although time schedules are prescribed for preparation of budget, finalization of accounts and submission of administrative reports, there is no penalty or deterrence in case of delays. It is perhaps for this reason that accounts of several ULBs (including until recently of Kolkata Municipal Corporation, the second largest ULB in the country) were outstanding for upto 10 years.

30. In some states, alongwith these Acts and Rules, specific legislations / Rules have been issued for key areas of PFMA. The Transparency in Public Procurement Act of Karnataka and Tamil Nadu and the Karnataka Local Fund Authorities Fiscal Responsibility Act, 2003 are examples of some such legislation. These Acts apply to all levels of government including local bodies and provide the necessary focus for PFMA issues to be addressed in the ULBs.

31. However, legislations are just that – statements of intention by the legislature. In effect, it is the implementation which decides the efficacy of the various amendments and improvements, especially in the areas of PFMA. It is here that the spirit and not merely the letter of law needs to be followed.

32. Progress. The progress towards legislative reforms has been positive in the recent past. Many states did, of their own, amend the Acts to incorporate features of the 74th CAA. Similarly, Accounting Rules have been amended / replaced in several states to provide for accrual based double entry accounting. Similarly, the requirements of information disclosure have also been included in the legislative requirements of ULBs.

33. The Model Municipal Law (as discussed above) did try to integrate good practices into a replicable template for adoption by states. However, till date, these serve more as guides for amendment to existing laws rather than de novo legislation. An associated aspect related to these amended laws is the volume and multiplicity of amendments. Perhaps a model such as Tamil Nadu where several different Acts were integrated into a single ‘Tamil Nadu Urban Local Bodies Act, 1998’, reducing redundancies and consequently halving the size of the legislations.

34. Key Findings and Way Ahead. The two areas where state legislations comprehensively lack 14 Kerala Act also refers to preparation of budget estimate by the Standing Committee


focus include monitoring and enforcement for non-compliance, and provision for public oversight and participation in PFMA areas. While the second issue is expected to be tackled by the enactment of the Disclosure Bill, the issue of non-compliance has still not been adequately addressed and needs to get policy priority. This should cover issues of budgeting, accounting, audit and enforcement mechanisms should be put in place for their compliance.

35. Other areas where legislative framework needs strengthening includes requirement for internal and performance audit of ULBs leading to a more efficient mechanisms for cost management. Sections in the Model Municipal Law pertaining to preparation of budgets, areas of reporting of the budget and accounts in the public domain and their respective timelines may also be disseminated and included in the respective state statutes.

4.2 Planning and Budgeting

36. Sound planning and effective use of resources is perhaps the central tool for improved PFMA in ULBs. Currently planning is limited to the annual budget which is essentially a financial balancing exercise and a sanction tool to authorize spend by the council. Poor planning poses three types of risks to a sound PFMA environment:

i. Formulation Risk in that it does not assess and provide for correct and efficient allocations;

ii. Policy Risk in that the ULB fails to execute the budget passed, and

iii. Fiduciary Risk in that funds are not spent for the purposes mentioned in the budget.

This section deals with the use of budget as a planning tool by the ULBs.

4.2.1 Budget Planning

37. Benchmark. It is desirable that the process for budget planning is realistic, comprehensive, orderly and participatory and reflects then ULB’s priorities and policies. This would imply the budget to be need based, prioritized and have a multi-year time horizon. Further, the budget process should ensure that the projections made are realistic, achievable and developed in a participatory manner. Further, the focus of budgets should be on results achieved and not merely money spent by the ULB (Table 4.2).

Table 4.2: Budget Planning

Outcome 2: policy direction and budget planning and preparation is realistic, comprehensive, orderly and participatory within overall government policy

Indicator Source

1. Policy direction, Budget preparation is need-based, prioritized with multi-year time horizon is used for budget forecasts • X no. of public discussions to discuss needs held before budget

finalization • Based on priorities of various user departments • Includes X% last years incomplete works/ works in progress • Budget linked to service delivery gaps based on a longer term

document like CDP, vision plan etc • Budget has component for O&M and capacity building • X no. of hours of debate on the budget in the council • X % of budget revised after the debate • X% budgetary transfers are untied in nature • Flexible and performance based budgeting

Budget, Department Notes, Discussions with concerned stakeholders

2. Budget is predictable, i.e., extent of devolution to ULB is known before budget preparation exercise is started • Variation in projected funds to actually received is not more than

X% • Funds are regularly received on budgeted/ expected dates

SFC Recommendations and Action Taken Report


Indicator Source

• Not more than X% variation from the SFC ATR • Activity based budgeting is done

3. Budgets are realistic and achievable, • Analysis of budget vs. actual reflect not more than X% variation • % of proposed programs completed • Mechanism of timely monitoring and review of budget in place • Level of spending outside the budget is less than X%

Accepted standards/ norms, Budget document, balance sheet/account information

4. The State maintains a database of budget information from all ULBs • Budgets are received by DMA latest within 15 days of clearance by

council as prescribed under the act • Budget made public/advertised with specific programs and benefits • Budget is used as a tool for monitoring by all stakeholders

DMA’s office or State Urban Department

38. Policy and Practice. Budgets in Indian ULBs are generally a statutory requirement and are not seen as a management tool at all. Policy based budgeting is still not heard of in ULBs and budgets are only referred to for making financial sanctions. Consequently, budgets do not display requirement of revenue and capital expenditures nor are they part of a larger strategic plan. Nonetheless, some good practices are emerging in this area with budgets being used for long term planning (Box 4.2).

Box 4.2: Budget as a Tool for Long Term Strategic Planning – Kapra Municipality15

Post 2003-04, Kapra Municipality, Hyderabad, AP, adopted a multi year perspective for the preparation of the budget. In 2004-05, a multi year Financial Operating Plan (FOP) was prepared, with assistance from APUIDFC. DFID funded APUSP program under the Comprehensive Municipal Action Plan for Poverty Reduction, stresses the need for comprehensive and long term planning (financial), to enable planning of revenue inflow and expenditure over a longer term. The FOP model has been designed to assess the impact of proposed investment over the planning horizon (20 years). This model takes into account the regular income and expenditure account of the local body as well as additional O&M expenditure due to increased service levels and proposed creation of infrastructure. FOP hence also acts as an important factor in the preparation of the annual budget

39. Information for Preparation of Budgets. Budgets are prepared by the accounts department based on estimates of revenue and expenditures of the previous financial year. Due to lack of relevant information, most revenue estimates are based on ad hoc or percentage increases over the previous year’s budget, without taking into account the actual potential or requirement. This results in large variations between budget and actuals, even in places like Bangalore where budgeting systems are comparatively better developed.

40. Expenditure estimates are also not backed by detailed workings or breakdown such as the exact projects that are planned, estimated costs etc. This leads to a focus on the ‘input’ i.e. the amount of money to be spent rather than ‘output’ i.e. the result of the spend (Box 4.3).

Box 4.3: Output Based Budgeting

Budgeting exercises have traditionally been revenue based, with almost exclusive focus on input (i.e. expenditure) and performance being judged in terms of spending. This, usually, results in poor expenditure controls, inadequate reporting and an incentive to spend the budget allocation as soon as possible; without focus on what is being actually delivered.

Recently, the concept of ‘output’ based budgeting has been adopted by several countries to establish a stronger relationship between objectives and inputs. Here the objectives are considered to be ‘outputs’ i.e. the final result expected from the expenditure (input) and planning and accountability mechanism directed towards outputs now. Further, the outputs are linked to ‘outcomes’ and the success of policy judged by them.

The principal objective of Output based budgeting is to provide:

a focus on outputs and performance; define links between outcomes and outputs; and

15 The municipality at the time was not under the APUSP program but as the municipal commissioner had worked previously with the APUSP and realized the importance of preparing an FOP, he initiated the process in Kapra, this is a good example of benefit of building capacity of the municipal officials


monitor input efficiency by the output and outcome achieved

Output based budgeting requires policy makers to define ‘outputs’. These outputs are tangible products (such as ‘x’ nos. of tubewells, ‘y’ kms of road etc.) and based on a system of elimination and prioritisation, resource allocation is made for the accepted output. These ‘outputs’ are further linked to ‘outcomes’ i.e. larger social benefit flowing from the provision of outputs.

Monitoring is not done on the basis of spending but rather on the basis of ‘outputs’ achieved. This system presumes a zero-based budgeting approach where each year’s resource allocation has to be justified on the basis of needs and priorities.

41. Basis of Budgeting. Current budgets as tools for financial discipline are prepared on cash basis. This means that only those expenses and revenues which are actually expected to be paid are included in the budget. As a result, it does not consider ‘full cost’ method of planning, excluding several items of non cash revenues and expenses (including depreciation).

42. Budget Formats. Budget formats are generally prescribed in the Municipal Act or Rules. In the absence of separate accounting formats (as in case of ULBs which are following single entry accounting), these also serve as the format for reporting actual spend. Many states have prescribed standard reporting formats for budgets. Karnataka is also working in this area (Box 4.4)

Box 4.4: Budget Reforms in ULBs of Karnataka

Karnataka has taken up budgeting reforms alongwith its DEAS implementation. Infact, the Karnataka Municipal (Accounting) Rules, 1965 have been replaced by a ‘Karnataka Municipal (Accounting & Budgeting) Rules, 2006’. According to the new Rules, the existing budgeting forms are proposed to be replaced with a summary sheet and a set of 8 schedules16 viz. Estimate of revenue receipts, revenue payments, capital receipts, capital payments, loans repayment, loans & advances, deposits & recoveries and investments made. This breakup of budget forms is expected to facilitate better planning and a more accurate estimation by the ULBs. The budgeting is now by function and within that, for each budget code. The process of budgeting has been streamlined providing for a number of Budget Information Data Sheets (BIDS) to be used by ULBs for working out detailed calculations for budgeting purpose. A system of budgetary control has been prescribed and a monthly budget variance report has been mandated.

43. Public Participation in Budget Preparation. One of the most important tenets of effective PFMA is ensuring effective participation of concerned stakeholders in the planning process. Generally in Indian ULBs, there are no public debates on the budgeting process. Ward Committees, although prescribed, have either not been formed or are not active in most states (West Bengal and Kerala being notable exceptions). However, since budgets continue to be ‘input’ based, these documents are only of limited use and understandability for the common person.

Box 4.5: Budgeting Process in ULBs

A fundamental question that needs to be addressed in the budgeting process in ULBs is – who are the users of ULB budgets? What is the purpose? Why is the budget prepared? Are additional resources allocated based on ULB priorities? What is the incentive for ULBs to prepare and analyze sound budgets? Are the budgets integrated and linked to citywide/statewide investments? Are they used as a planning and procurement tool?

The main purpose of ULB budgets is to use it as a tool for expenditure allocation and control. Additional funds are not allocated by the state based on budgets. The individual ULB budgets are neither consolidated nor analyzed against benchmarks at the state. The citizens and other stakeholders are normally not involved in the process. As a result the budget process and its importance as an effective PFMA tool has diminished over time. There is a strong case to use JNNURM and other support schemes to provide incentives and enable ULBs to make effective use of budget as PFMA tool.

44. Progress. Current efforts at standardizing and developing better participative budgets are standalone efforts. JNNURM and other related reform measures have emphasized on long term strategic planning to lead the annual planning and budgeting exercise. Accordingly, JNNURM encourages the preparation of City Development Plans (CDP) and Detailed Project Reports (DPR) for accessing funds under the mission. These require ULBs to develop a perspective planning

16 Suggested by Infrastructure Professionals Enterprise (P) Ltd as the Nodal Firm for implementation of FBAS in 43 municipalities of Karnataka


framework, long term policies, programs and strategies to meet the emerging fund requirements. It thus leads to a participatory, output based budgeting keeping in mind the concerns and interests of a wide range of stakeholders.

45. Key Findings and Way Ahead. Based on the experience of JNNURM, output based budgeting could be made a norm for ULBs. The existing budgets in ULBs are primarily used as tools to allocate and control financial expenditure. However, not enough stress is laid on the output of the expenditure in the entire budget planning and execution process. ULBs could greatly benefit by the ‘Output Budgeting’ process where the sector wise/zone wise details of assets to be created and maintained could be listed. This would also lead to increased accountability and external oversight since the ULBs would be made accountable to the actual ‘output’/ service rather than the expenditure. Further, since most of the capital projects extend beyond a single year, there is a need to consider multi-year rolling plans for ULBs. Concepts of zero based budgeting specially in areas of recurring expenses (staff, transportation etc) could also be introduced to increase value for money services in ULBs. Budgets need to consider a long term perspective and the concept of a 3-5 year rolling plan could be explored. The budget should also consider the other city wide expenditure on related services planned by other parastatal agencies and District plans. DPC and MPC should have an involvement in the budget process of larger ULBs especially in the areas of trans-municipal services. There is a need for budgets to be approved in the council after ‘due deliberation and discussion’ and not as a mere statutory formality required for resource allocation.

4.3 Implementation

46. Successful implementation of the budget prepared by the ULB involves a number of processes. It needs to be used as a tool for planning, procurement and expenditure control. Linkages with the accounting, MIS and treasury operations are also critical. It also requires strong internal control and audit, assets and liabilities management and related systems in place for effective and efficient implementation.

4.3.1 Budget Execution

47. Benchmark. To enable the budget document to be used as an effective tool for planning, procurement and expenditure control. It is essential for the budget to be linked to accounting systems and MIS. Periodic budget analysis reports need to be prepared and disseminated. Dissemination is necessary to ensure transparency in the budget execution process leading to public pressure and accountability (Table 4.3).

Table 4.3: Budget Execution

Outcome 3: the budget is used as a tool for planning, procurement, and expenditure control Indicator Source 1. Budget is used by the ULB as a tool for planning, income targets and

expenditure control • Effectively used as the central tool for planning, control and

management linked to various activities across the ULBs • Not more than X% variation in budget and actual expenditure and

receipts. • Principles of zero based budgeting for expenses are followed • Average budget deficit in last three years is less than X%

Budget, Discussions with Department heads

2. Budget is linked to the accounting system and MIS • Not more than X% variation in revised budget • Periodic (quarterly) reviews of budget with the actual are done • Revised budgets are prepared on sound analysis of reasons for

deviation

Accounting Rules, Accounts

3. Budget analysis reports are prepared and submitted to State • Budget analysis reports are sent to state on a quarterly basis –

within one month of the end of the quarter • State analysis budgets across various ULBs and para-statal

entities based on key benchmarks

Budget analysis report


Indicator Source 4. Budget analysis reports are published and available to public for

debate • Budget analysis report published in newspaper • No. of public debates organized on the budget • Follow-up on feedback/public debate

Budget analysis report, Discussion with stakeholders

48. Policy and Practice. Inadequate analysis of the budget variance vs. actual continues to be a major area of concern in ULB budgets. Further various extraneous reasons also affect the predictability and timing of funds (such as from state government) which affect the performance and achievement of budget targets.

49. Expenditure and Resource Realization. In the present system, expenditure is not conditional on resource realization. The operating departments use their allocations irrespective of revenue realized or availability of money. This further leads to the need for re-scheduling of the budget heads. Since salary expenses are already fixed, any shortfall in revenues invariably leads to cut in capital expenditure and Operation & Maintenance.

50. Budget Monitoring. Budget monitoring practices differ across States. In general, the Department of Municipal Administration is required to monitor the budgets externally while internally the responsibility of ensuring that the budgets are adhered to lies on the standing committee/council. However, internal monitoring is generally not mandated in the Rules.

51. Progress. Good practices like Public Record of Operations and Finances (PROOF) initiative in Bangalore (Box 4.6) provide a platform for review of the budget and performance by the citizens. However, sustainability and replicability of such initiatives needs to be tested. For instance, in Bangalore itself, lack of participation of Corporators17 who pass the budget in the PROOF platform has a negative impact on the accountability criteria to some extent.

Box 4.6: PROOF Initiative, Bangalore

The PROOF campaign was a collaborative effort of four non-profit independent NGOs for carrying out budget analysis/fiscal performance audit of Bangalore Mahanagara Palike (BMP). This initiative was started in 2002 with a focus on ‘disclosure, debate, dialogue, and discussion’ on the use of public funds. Efforts were made to involve citizens in performance audit.

The PROOF campaign draws from the practices in corporate governance on disclosure of financial performance.18 Despite distinct methods in performance and administrative structures, the common principle between corporate governance and local governance is the efficacy in utilization of public funds. The model adopted by PROOF was that of the Governmental Accounting Standards Board (GASB).19 The PROOF campaign focused on three aspects: (i) obtaining quarterly financial statements from the Government (now half-yearly), (ii) developing performance indicators for assessing work done by BMP largely incorporating the report card concept, and (iii) involving the public in functioning of BMC.

PROOF has also been involved in questioning budget allocations and rationale behind budget allocations; this has had positive implications for budget allocations and improved accountability of BMP, but the efforts have been very limited (school and public toilets). An analysis of expenditure incurred by BMP on schools supported by it revealed that per student expenditure was more in these schools than even in the best of private schools. PROOF used its BMP-citizens interface to bring this issue forward and since then suitable changes/actions have been taken to ensure better budget utilization.

52. Further, Indian ULB legislations fail to specify fiscal management responsibilities for ULB officials; thus, most ULB officials are unsure of their roles and responsibilities in budget execution. As a result there is no internal performance measurement within the ULBs as to the actual budget

17 While most Corporators prefer to remain absent at the PROOF meetings, some of the politically conscious and seasoned Corporators have started using PROOF as an opportunity for forwarding their political ambitions. Since number of such Corporators are very limited, there have still not been any conflict of interests. However, PROOF is wary of this trend catching on (Discussions with Swati Ramanathan, June 2006). 18 For a detailed note on the history of Corporate Disclosure & Financial Statements, see Ramesh Ramanathan, 2002, ‘Public Record of Operations and Finance: PROOF: Campaign Note, Janaagraha , Bangalore. 19 GASB was organized in 1984 by the Financial Accounting Foundation (FAF) to establish standards of financial accounting and reporting for state and local governments in United States of America.


and its execution. The recent recommendation of the 12th CFC for state enactment of fiscal responsibility legislation (Box 4.7) is likely to improve budget preparation, execution and monitoring situation in ULBs.

Box 4.7: Fiscal Responsibility Act

In 2003, the Conference of State Finance Secretaries decided that the Reserve Bank of India (RBI) would provide technical assistance to help states prepare fiscal responsibility legislation. The RBI circulated a model fiscal responsibility bill to the states. Recently, states of Karnataka, Punjab, Kerala, Tamil Nadu, Uttar Pradesh, Maharashtra, Orissa, Rajasthan, Assam, Gujarat, Himachal Pradesh, Haryana, Chhattisgarh, Madhya Pradesh Tripura and Andhra Pradesh have all enacted the Fiscal Responsibility and Budget Management Act. However, improvements in ULB budgetary systems are yet to accrue from this Act. (Source: Fitch Ratings, India Special Report, 20 March 2006)

53. There has been limited progress in area of budget execution by ULBs. Only few Acts such as in Kerala provide for verifying budgeted expenditure with resource realization. The recent Karnataka (Accounting and Budgeting) have prescribed a monthly reporting format for budget variance. The citizen interface also remains weak barring few partial successes like the PROOF initiative. With limited own revenues, the dependence on state funds is still high and their unpredictability remains a serious concern for effective budget execution.

54. Key Findings and Way Ahead. The effective use of budget in implementation can be ensured only when the budget planning is itself seen in the proper perspective. Only when the budget is seen as a development and not merely a statutory exercise, can it move into the realm of a management aid.

55. In this context, the CDP and annual Financial Operating Plan (FOPs) advocated by JNNURM could be useful. It also prescribes quarterly monitoring of these plans by central and state level agencies. However, the ULBs will need considerable support in addressing the policy and fiduciary risks of budgeting so that they are able to utilize the budgets and plans for effective monitoring and management of their operations.

56. The ULBs would benefit from a ‘Budgeting Manual’ (perhaps on the lines of NMAM) which could address the following issues:

i. Participative Budgeting – how to achieve it? ii. Reflecting policies in budgets iii. Detailed output based planning for inputs iv. Monitoring and implementing budgets – MIS and accounts integration v. Mid year corrections in budget and realignment to policy.

57. The Budgeting Manual budgeting manual would also provide the strategy to make operational increased community participation and role of area sabhas in the planning process as suggested under JNNURM.JNUNURM. Most of the MoAs signed under JNNURM have shown this as an optional reform to be taken up after 3-4 years. However, unlike, NMAM or model municipal act, there are no guidelines or manuals on how to make this a reality. This may lead to delays in implementation in the absence of a manual or guidelines.

4.3.2 Accounting and MIS

58. Benchmark. ULB accounting has three broad purposes:

i. To safeguard public money and prevent corruption; ii. To facilitate budgeting and planning of revenues, expenditures and debt management;

and iii. To help government discharge its public accountability.

59. These are progressive stages in the accounting spectrum, moving from routine ‘recording’ of transactions to ‘management decision making’ and finally as an ‘accountability’ mechanism.

60. To ensure the above three purposes, it is required that accounting and MIS are complete,


accurate, timely and meaningful at all times. The information generated should be useful to decision makers, providing relevant information in a user friendly way and should complement the budgeting process. It should be prepared in accordance with accepted policies of accrual accounting and following good practices on municipal accounting and disclosure. (Table 4.4).

Table 4.4 Accounting and MIS

Outcome 4: accounting system and management information system are complete, accurate, timely and meaningful

Indicator Source 1. Accounting and reporting system allow for accurate and timely

information input for decision making • Monthly accounts are prepared and circulated • All supporting schedules/financial statements/trial balance

are prepared monthly • Minimum variance of monthly accounts with annual

audited accounts • Year end annual accounts are prepared within prescribed

time as per Act • Integrated accounts and MIS system (same source

document) • Accounts committee is in place and functional with regular

meeting

Accounts Department and MIS

2. Statements are in accordance with accepted policies, NMAM guidelines • Opening balance sheet in place • System is robust to give dept/service wise cost and

revenues • Used as a tool for determining user charges, cost recovery

gaps and PPP framework

Accounting Rules, Reports

3. Audited balance sheet with supporting schedule for last financial year in available • Authenticated balance sheet and detailed supporting

financial statements are prepared as prescribed under the act

Balance sheet, supporting schedule

4. Action is taken in case of delays/non-compliance with Accounting Rules • No. of cases of delay/non-compliance recorded in last year • % of action taken against cased of delay/non-compliance

(State/ULB)

Government Orders, Discussions

5. Accounts department has the capacity to undertake necessary functions • No. of training/refresher programs organized for employees • At least X% of Accounts departments employees are

commerce graduates/ relevant experience • Modern accounting tools like IT etc are used and staff

equipped

Accounts Head

6. Reports/information is made available for public scrutiny • Quarterly accounts reports are made available to public

through website, newspaper or other such publicly accessible media.

• Archive for last three years is available • Query-Response ration for queries received from

councilors/public on accounts published

Accounts department, citizens, NGOs

61. Policy and Practice. The current system of accounting can be characterized in 3 dimensions:


i. Single entry system, in that records are maintained through a number of registers rather than the double entry system of Debits and Credits;

ii. Cash basis of recognition, in that transactions are recorded only when cash (or checks) are received or paid and not when benefits are received or provided. Thus, receivables, payables, non-cash items of expenditure, provisions etc. are not considered in the accounts because of which the real financial picture of the ULBs remains obscure; and

iii. Non segregation of Revenue and Capital expenditures, both being treated as payments and no separate accounting of assets created by the ULB.

62. Although some individual cities have moved to accrual accounting, the overall situation remains less than satisfactory. The relative advantages of accrual based accounting system over the current system are mentioned in Box 4.8.

Box 4.8: Merits of Accrual Based Accounting System Drawbacks of Cash Based Accounting - Full picture of assets & liabilities not available - Budgetary control based on payments, ignores commitment - Important items not recognized in cash basis reports: - Taxes billed but not yet received - Debts and loans owed by the municipality - Contracts completed, invoices received but not yet paid - Focuses on cash surplus / deficit for a period; Difficult to determine performance results Merits of Accrual Based Accounting - Revenue is recognized as and when earned - Costs are matched either against revenues or against the relevant time period to determine periodic income - Distinction is maintained between revenue and capital items - Assists in effective follow-up of receivables & ascertainment of payables - Displays the performance surplus/deficit for the year - Presents a true picture of the financial position of an ULB - Helps in better financial management and decision-making - Facilitates credit rating, one of the pre-requisites for mobilising funds through debt instruments - Better reporting leads to increased confidence in financial information by external lending agencies, consequently better access to capital markets by ULBs - Assists in policy formulation, e.g., tax rates, service charges, etc.

63. To a large extent, the absence of standard and accepted accounting policies hindered the development of a sound accounting framework for ULBs. Different ULBs used different sources for developing their accounting policies resulting in a diverse reporting environment. Although with the release of NMAM, the policies are now relatively stabilized, states are free to vary from it, if they want to. The current accounting pronouncements which are referred to and used for ULB accounting are given in Box 4.9 below:

Box 4.9: Sources of Municipal Accounting Policies

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India (ICAI) is a statutory body set up by the Government of India and specifies the national accounting standards which determine the GAAP for India. The ICAI brought out a Technical Guide on Urban Local Bodies in September 2000 which recommends the adoption of accrual accounting in ULBs and advises on the applicability of various accounting standards to ULBs. Till date, the ICAI has released 29 Accounting Standards which apply at varying levels of importance and relevance to ULBs.

Ministry of Urban Development, Government of India


The National Municipal Accounting Manual (NMAM) has been developed by the Government of India with participation of the C&AG and a number of state governments. The NMAM is based on the accrual based double entry accounting system, and also permits fund accounting, if desired. It is a template which can be used by states to adapt to their requirements. It also prescribes a structure for Chart of Accounts and recommended formats for financial books and reports.

International Public Sector Accounting Standards

International Public Sector Accounting Standards (IPSAS) are international standards for state and local governments released by the Public Sector Accounting Committee of the International Federation of Accountants (IFAC). FAC began issuing accrual-based IPSAS in May 2000 and has issued several accrual-based IPSAS. Apart from these, it has also released a standard on cash basis of accounting and has conducted research studies on moving from cash to accrual basis in government accounting.

GASB Codification, USA

The Governmental Accounting Standards Board (GASB) is the supreme authority to promulgate accounting standards and requirement for state and local governments in the USA. Its pronouncements form the Generally Accepted Accounting Policies (GAAPs) for the USA. These requirements are put together into a Codification of Governmental Accounting and Financial Reporting Standards. This code sets the standards for governmental financial reporting and accounting in USA.

64. The predominantly manual method of book-keeping, multiplicity of registers (96 registers prescribed in the West Bengal Municipal Accounting Rules, 1999) and limited capacity of staff resulted in a situation where accounts of several ULBs were not prepared and audited for years together. Further, since the registers are not linked through a system of checks and balances, their reconciliation is also a daunting task.

65. As mentioned earlier, in states where single entry system of accounting is prescribed, the only reporting mechanism is the ‘Actuals’ figure mentioned in the budget format (usually in the budget of the second year following the end of the financial period). Apart from this, the other reporting documents are the Annual Administrative Report and the Audit Report.

66. The Annual Administrative Reports in almost all states comprise function-wise information about the various activities undertaken, results achieved and other happenings. These reports include annual financial statements. While preparation of the annual administrative report is mandatory under prevalent ULB legislations; in most cases these reports are not prepared and published on time thereby reducing much of their value.

67. Progress. Apart from individual city efforts, Tamil Nadu is the only state to have implemented double entry accrual based accounting in all its ULBs. In fact this was achieved in 1999 itself much before the NMAM was developed. Currently, efforts are on for state level implementation in Karnataka, Uttar Pradesh and Rajasthan.

68. Though the NMAM today provides a good starting point for conversion to DEAS, it remains recommendatory and needs considerable state effort to adapt and use in their ULBs. The current status of accounting reforms and adoption of DEAS based on NMAM in shown in Table 4.5. Some of the State level initiatives have been discussed and compared in Annex E.

Table 4.5: Situation of Conversion to DEAS based on NMAM

JNNURM Commitment for DEAS (by year) – Signed MoA

Initiated Process of Conversion to

DEAS on their own

States still to make major progress in DEAS

Andhra Pradesh (3), Chattisgarh (3), Gujarat (3), Madhya Pradesh (3-4), Maharashtra (2) (Pre-NMAM), Rajasthan (0), Tamil Nadu (0) (Pre-NMAM), West Bengal (2-4)

Orissa, Kerala, Uttar Pradesh, Karnataka, Delhi

Punjab, Bihar, Himachal Pradesh, Jharkhand, Uttaranchal, Manipur, J&K, Arunanchal Pradesh, Assam, Tripura, Mizoram, Nagaland, Sikkim

69. Key Issues and Way Ahead. The current system of accounting, if perfectly followed, would have perhaps led to similar results as expected in the DEAS. However, certain inherent weaknesses in


the current system make it relatively difficult to provide complete, accurate and timely financial information. The major issues are:

• Since the accounts are maintained on single entry cash basis without segregating revenue and capital expenses, no Balance Sheet can be prepared to determine the financial position of the ULB.

• Records of assets (in Fixed Asset Register) are generally not available, making it difficult to exercise control and manage municipal assets;

• Only Receipts & Payments Statement can be prepared; a complete cost based performance report such as Income & Expenditure statements cannot be prepared;

• Since it lacks an internal check mechanism; this system is susceptible to error propagation, which affects the authenticity of financial statements;

• There is weak co-ordination between the revenue and accounting department resulting in mismatches and differences;

70. In these circumstances, it is perhaps appropriate for ULBs to adopt the new DEAS recommended by the NMAM to create an improved PFMA environment. Further, the requirements of credit rating would also necessitate adoption of Generally Accepted Accounting Practices (GAAP) which treats double entry accrual as a sine qua non of good financial reporting. In the context of ULBs, some key issues to be addressed are:

i. Capacity of staff to implement the new system. This is more so because of their relative unfamiliarity withy DEAS and absence of professionally qualified staff in the ULBs. Some states such as Karnataka have created a new cadre of ‘Municipal Accountants’ (with minimum qualification of B. Com and selected through competitive examination) for effective implementation of DEAS. In fact, the HR requirement for strong financial management is itself an issue to be addressed in the context of PFMA (Box 4.10)

ii. Computerization to facilitate implementation through accurate and timely recording and reporting of financial data;

iii. Opening Balance Sheet Preparation, an essential requirement for DEAS, including issues of asset and liability determination, verification and valuation;

iv. Reconciliation of financial information with various records and reports maintained by various departments;

v. Integration with Budgeting in order to synergize the planning, execution and evaluation functions of the ULB;

vi. Improved auditing by Local Fund Auditors to complement the system and ensure checks and controls are maintained;

vii. Amendment in Rules to enable the implementation of DEAS in ULBs

Box 4.10: HR structure in ULBs to support strong financial management

There is no doubt that the capacity of staff for financial management in Indian ULBs is very weak especially in medium and small sized ULBs. To start with, most ULBs don’t even have qualified accountants leave alone the possibility of having qualified Chartered Accountants or finance professionals.

According to the Companies Act, 1956 any company with a share capital in excess of Rs.2 crores ($0.4 million) is required to engage a full time Company Secretary. Most private firms with a turnover of about Rs. 5 crores ($1.1m) hire full time Chartered Accountants for their efficient functioning. However, in case of ULBs where the annual budget is much in access of the above mentioned figures; there is no provision for qualified finance and accounting professionals. For example Kolkata Municipal Corporation has a budget of over Rs.600 crores ($135m) but does not have a single chartered accountant employee. Detailed guidelines need to be developed for appropriate Human Resource structure in ULBs of different sizes.

Considering the above, it may be appropriate to suggest a tentative management structure for the Finance & Accounts function in ULBs as follows:


1. Chief Finance Officer or Financial Controller

S/he will be the Head of the accounts and finance function in the ULB. Ideally, this person should be a qualified Chartered Accountant with experience in Double Entry Accrual accounting, planning and management. He will be responsible for the overall financial management system and decision making for the ULB. For larger ULBs, the person should have sufficient years of experience in organizations of comparable size.

2. Deputy CFO / Deputy Finance Controller

S/he should be atleast a CA (Inter) or a fresh Chartered Accountant. He will be responsible for assisting the Head of the Finance and will supervise the executive functions of the department on a day to day basis.

3. Accounts Director

A CA (Inter) with experience in double entry accounts preparation, reconciliations and reporting. He will be responsible for the day to day supervision of accounting function and preparation of MIS reports, monthly accounts, periodical financial statements, accounting policies, notes and any disclosure reports thereon. He will be responsible for maintenance of all books of accounts, registers and records maintained by the ULB.

3. Budget Director

A finance professional with experience in planning and financial management with knowledge about budgeting. S/he will be responsible for preparation of budgets in a participative manner, comprehensive planning for activities, capital budgeting, constant evaluation and monitoring of progress and budget utilization. He will also be responsible for treasury management functions of the ULB.

4. Audit Director

S/he should be well versed in modern accounting practices, professional audit systems including internal audit, post audit, financial reporting and controls review. S/he will be the Head of Internal Audit and responsible for related activities such as compliance with statutory audit, development and review of internal checks and controls in the ULB, performance audits etc.

5. Accountants / Cashier / Executives / Clerks

These positions are generally already established in the ULBs. However, their adequacy and capacity needs to be reviewed especially in the context of modern accounting systems. Generally, except for clerical posts, all personnel should atleast have a background in commerce, preferably at the graduate level.

The above is only a suggestive list and needs to be developed for ULBs of different sizes separately.

71. Finally, however, it is necessary to remember that although very important, better accounting is only a means, not an end in itself. In order to be truly effective, accounting must be supplemented by strong MIS, good budgeting and control systems, and effective use of financial information for decision making. It is generally found that even if financial information is available, its usage is limited. Just as budget is to be seen as a planning tool, good accounting is to be developed as a sound reporting and analysis mechanism which can be used as a regular monitoring and evaluation tool for the ULB.

4.3.3 Cash and Fund Flow Management

72. Benchmark. One of the key aspects of PFMA is the efficient management of existing resources i.e. treasury management. This includes efficient management of receipts and receivables, judicious management of payments and payables, and optimal utilisation of available funds. It requires regular reporting, planning and implementation to ensure that financial management results in benefits to the ULB through smooth fund flows and returns.

Table 4.6: Cash and Fund Flow Management

Outcome 5: cash receipts, payments and fund flows are managed efficiently Indicator Source

1. Regular reconciliation of cash receipts and cash deposits • Bank reconciliation statements prepared on a monthly basis • List of debtors and creditors prepared monthly • List of tax defaulters and ageing analysis prepared

Accounts Department, Registers


Indicator Source

2. Regular reporting of cash balances done to the Council • Monthly cash balance report presented to the council

Accounts Department, Elected Reps.

3. Regular fund flow statement made for analysis, planning and cash management • Monthly Fund Flow analysis reports readily available with the

Commissioner, HODs and CFO • Contractors expenses, security deposit, etc. are paid within

specified time • Staff equipped with modern financial management skills

Accounts Department, Head of Departments

73. Policy and Practice. The Municipal Acts and Accounting Rules prescribe the cash and bank books to be maintained by the ULBs. While these formats are generally followed, the concept of treasury and fund management is generally not found in ULBs. This usually results in pending reconciliations, poor scheduling of funds and sub-optimal utilization of available balances.

74. The changing economic environment, at times, provides opportunities to proactive ULBs for managing and reducing costs through treasury management. In Madurai, for instance, the Corporation through a bond issue was able to swap its debt and have annual interest payout savings of about 3% which would result in an overall saving in excess of Rs.8 crores p.a.

75. One of the reasons for this is the single entry accounting system currently being followed. Without a clear picture of debtors and creditors, there is little which they can do to manage their finances. Further, there are substantial arrears in bank reconciliation, resulting in the inability of ULBs to know and plan their exact fund position and prioritize payments. In some smaller ULBs for instance, the bank balance appearing in the bank statement is treated as the amount available for issue of checks and consequently checks are issued even beyond the balance available in the bank account.

76. Progress. With the initiation of NMAM, conversion to DEAS in many ULBs across the country has helped in making financial information readily available. This has helped in improving cash and fund flow management in the ULBs. ULBs have now started appreciating the benefits of treasury operation and fund management.

77. A major weakness in treasury function is evident in the raising and utilization of money through bonds. Although many ULBs did raise money through bonds, not all of them could utilize the funds optimally. These idle funds cost interest which the ULBs could ill-afford. Further, since ULBs are generally not conversant with modern financial tools such as ‘escrow’, ‘structured obligations’ etc., there is a need for them to access appropriate expertise for them.

78. Key Issues and Way Ahead. Although DEAS has helped in making some treasury information readily available, the use of such information is still limited. Although largely a capacity issue, successful management of treasury functions requires a strong inter-department relationship (including between revenue, engineering and finance) for it to be successful. In the short run, ULBs should be encouraged to access external support for managing its treasury functions especially those related to receivables management, payments scheduling and structuring of projects and financing mechanisms.

79. A related issue is the restriction on ULBs for investment of funds, except in fixed deposits and in some cases, government bonds. Although ULBs cannot definitely be encouraged to undertake speculative investments, there may be a need to find a balance between risk and returns which ULBs should expect from their funds.

4.3.4 Procurement

80. Benchmark. ULB procurement needs to be efficient and managed in a way to ensure increased competition, value-for-money and transparency. The procurement systems should lead to reduced unit cost in the long run and information on the processes should be shared with all concerned stakeholders. Further, complaint redressal system for procurement should be in place and lead to quicker and transparent resolution of issues.


Table 4.7: Procurement

Outcome 6: efficient system and management of procurement in place to ensure increased competition, value-for-money and transparency Indicator Source

1. Procurement is competitive in nature leading to reduced unit cost • Average number of proposals per bid not less than X • Annual procurement with quarterly/monthly supplies

procedure in place for stores

Municipal/Procurement Rules, Manual, Tender Transparency Act (if implemented)

2. Procurement processes are transparent allowing information to all concerned stakeholders • Procurement rules and manual are in place • Separate Department/Person is in charge of all procurement • Variation in procurement (planned and actual) is less than

X% • At least X% procurement done through public bidding • X % tenders have pre-bid meetings/information for all

procurement activities is held/available publicly and records are kept

Discussions with stakeholders, Procurement manual

3. E-procurement is in place • % of contracts tendered through e-procurement

Website, discussions

4. Complaint redressal system for procurement is effectively working • % of complaints resolved regarding procurement • % reduction in number of contract disputed over last three

years (as a ratio to total no. of contract signed)

Concerned department, Bidders

81. Policy and Practice. Based on the cases studied it is estimated that 30 to 50 percent of the ULB budget requires external procurement. This figure is expected to increase manifold due to the substantial capital procurement by ULBs through JNNURM and other development schemes. In most cases all of this procurement is carried out in-house and by the user department

82. Legal Framework for Procurement. Legislation governing procurement in most cases is defined, though it is very rudimentary and mostly based on lowest cost basis (L1 basis). Most state acts prescribe ULBs to follow State/PWD rules for the purpose of procurement. In some cases where donor agencies are funding certain projects, they can insist on conducting procurement based on their guidelines. The concept of ‘value for money’ is generally missing in procurement guidelines. Procurement rules and guidelines also lack new concepts such as ‘just in time’ procurement, annual procurement, etc.

83. The guidelines for procurement prescribe the limits for which one need to go for limited tendering and above which open tendering is required. Guidelines also prescribe financial limits for which advertisement inviting tenders are to be published in local newspapers and above which invitations have to be released in national news papers. Most ULBs also maintain a roaster of contractors based on their ability to execute projects of particular size and limited tender invitations are sent to the entire list. The roaster is developed and updated annually following a process of ‘expression of interest’. Most ULBs use State/PWD schedule of rates and quality standards for execution of projects.

84. Management of Procurement. There is no central procurement department in ULBs. In most ULBs the user department carries out its own procurement. The staff involved in the technical specification is also involved in the procurement process; which is often not a prudent practice. This reduces the transparency in the process. Further, there is a lack of performance measurement in ULB procurement system. Performance measurement indicators based on which payments will be made are not mentioned at the time of advertisement/issues of request for proposal making it difficult to adjudge works/services during implementation.

85. Progress. In order to make procurement processes more transparent in ULBs, many states have implemented the Tender Transparency Act. In Tamil Nadu, pursuant to a high level committee


recommendation, the State passed The Tamil Nadu Transparency in Tenders Act 1998 (which came into effect in 2000) complimented by a unified Rules of Procedure, which inter alia mandated the open (advertised) tender system and publication of tender notices and tender decisions in a weekly bulletins, and introduced an appeal procedure. Since then, Karnataka has also enacted the Karnataka Transparency in Public Procurement Act 1999 complimented by Public Procurement Rules. These measures have enhanced transparency in procurement at the ULB level.20 Karnataka has also seen the unique involvement of PROOF in procurement issues wherein decision of BMP to give all its public toilets to Sulabh Shauchalya for O&M on a pay-and-use basis was publicly questioned. The BMP later gave tenders for different sets of public toilets (depending on geographic location) to different NGOs.

86. Procurement Process. In most ULBs there is inadequate linkage of procurement with planning. Departments need to be encouraged during the budget preparation to review and plan their tentative procurement schedules and timeframes, so that budgets can be appropriately allocated. Some of the ULBs have shown progress in this area. For instance in Madurai, each department prepares Budget Information Data Sheet (BIDS) at the beginning of the year that has details of the different procurements to be conducted. Similarly, in Bhubaneshwar bi-annual a list of capital works is drawn and advertised inviting proposals.

87. However, most states still do not have any standard documents directing procurement procedures and outlining the forms to be used at various stages of procurements. Lack of standardized procedures also results in delays in tendering processes and award. Such delays largely happen at the evaluation and approval stage since proposals are received in different formats making it difficult to evaluate. This can lead to substantial cost overruns for the tenderer and procurer.

88. Some progress is being made in this area through e-procurement, which is a relatively new concept for ULBs in India. Andhra Pradesh is one of the few states which have taken initiative of launching e-procurement for all its ULBs in the State. In other states, e-procurement initiatives are largely limited to donor-funded projects. However, Rajasthan (under ADB funding) and Kerala (under RNE and DFID funding) are now set to expand the project-based e-procurement to state wide e-procurement (Box 4.11).

Box 4.11: E-Procurement in Andhra Pradesh

The state government through an order in July 2004 has stated that all the existing rules applicable to the processing of conventional tenders are applicable to the bids to be secured through e-Procurement process. The government has also mentioned that e-Procurement should be followed by all the departments, PSUs and local bodies for procurement of works costing above Rs 10 lakhs and goods & services costing above Rs 5 lakh. Even before this order the state government had clearly defined the procedure of procurement starting from allocating funds for developmental works through budgeting. Only works up to 5% of the allocated amount for any sector/scheme were allowed to be let out on nomination basis on emergency/immediate need basis. The state has developed an e procurement website - eprocurement.gov.in which is a comprehensive e-Infrastructure that helps the government and the citizens realize the vision of fuelling growth via services like Catalog Purchase, eTendering and eAuctions. The platform provides its members with access to several trading suppliers and the Tender Management Software helps both the buyers and the suppliers to reduce the cycle time, unnecessary paper work, waiting in long queues and simultaneously maintain the transparency in the entire process.

89. Transparency and Oversight. There is marked absence of transparency in informing citizens about various bids awarded and works done. An exception is the case of Hubli-Dharward Municipal Corporation (Karnataka) which has an on-line grievance system21. Following conventional practices

20 World Bank, 2003. 21 The system allows public to see the list of short listed firms for a tender, the firm to whom tender has been awarded, the time duration within which the tender has to be implemented and the concerned nodal official from ULB in charge. After completion of works, the Corporation also puts up the bills of the contractor online for seven days inviting objections/complaints from citizens on work performance. Payments to contractors are made only if no complaints are registered or after all complaints have been addressed by the contractor.


most original bids and records are generally preserved by ULBs; these are however, not put to use during the implementation process, wherein the ULB can ask the contractor/consultant to take alternate approaches proposed in other bids which are better suited to local requirements.

90. Key Areas and Way Ahead. Given the weak systems for procurement at the ULB level, detailed guidelines need to be developed to increase the accountability and transparency in the process. The guidelines need to look at areas of setting up of separate procurement wing in larger ULBs; addressing issues of grievance redressal system; standardized documents and procedures especially spelling out conditions for negotiation and methodology for selection and disqualification of bidders. Model tender transparency acts on lines of the experience of states like Tamil Nadu and Karnataka could also be looked at.

91. In order to reduce the cost of procurement and to make the process faster, ULBs also need to look at areas of e-procurement. Certain other innovations such a ‘just in time’ procurement and ‘value for money’ procurement also need to be looked into for adoption of appropriate policies at the ULB level.

92. Another area which needs to be further explored includes Public Private Partnerships. While the Constitution (74th Amendment) Act clearly outlines the need to bring in the private sector in various areas of ULB functioning including procurement, there is lack of clear guidelines to deal with the private sector. In most cases where PPP models are being used, ULBs are unsure on how to outsource or approach the private sectors. However, some states, including Gujarat and Andhra Pradesh, have passed legislations to regulate private sector involvement in service delivery and other municipal functions. The Andhra Pradesh Infrastructure Development Enabling Act, 2001 looks at improving service delivery and attracting private sector participation in all aspects of project management of bankable projects in the State. The Act provides a comprehensive legislation for reducing administrative and procedural delays, identifying generic project risks, detailing various incentives, detailing project delivery process, etc. In general, there is a need for preparation of standard documents and for dissemination of best practice in PPP in ULBs.

4.3.5 Internal Control and Audit

93. Benchmark: Internal control and audit need to be timely and effective in ULBs. Clearly defined systems and procedures backed by policies should be in place to monitor the activities of each department and function area. It should improve the capacity of the ULB for risk management and governance. The system should generate timely reports so that corrective measures can be taken. Summaries of internal audit findings, recommendations and steps taken should be made public on a regular basis to ensure transparency in processes.

Table 4.8: Internal Control and Audit

Outcome 7: clearly defined and effective policies, systems and procedures for internal control and audit are in use Indicator Source 1. Clearly defined internal control systems, procedures and formats

are in place for improved risk management and governance • Internal controls and operations manual in use • Audit committee is in place and functional with regular

meeting • Monthly meeting of HODs for includes discussion on internal

controls • Minutes of such meetings circulated and archives available for

last three years

Rules, Government Orders

2. Internal audit function is effective and produces timely reports aimed at corrective actions • Monthly reports are prepared • Minimum time between reports and response • Minimum unresolved issues • Mechanism for pre-audit is in place

Internal Auditor, Head of Departments


Indicator Source • Performance/efficiency issues are looked at

3. Internal audit department/agency has necessary capacity to undertake functions • Separate internal audit department/function is in place

independent of the accounts department • Equipped with latest guidelines and tools for internal audit

Head of Internal Audit Department, Commissioner

4. Summaries of internal audit findings, recommendations and steps taken are made available to the public • Quarterly complied internal control reports are made available

to public through website, newspaper or other such publicly accessible media.

• Archive for last three years is available

Discussions with Commissioner, Mayor and Citizens

94. Policy and Practice: Most ULB Acts do not provide for internal audit. Many large ULBs such as Bangalore have a separate audit department with the responsibility of undertaking concurrent post-audits. These departments are manned by staff from the State Accounts Department. In Orissa, both the pre-and post-auditors are from the state government. In light of the shift to modern systems of accounting, the need for an internal auditor becomes more pronounced as necessary corrective action can be taken at the time of the transaction itself, rather than waiting till the LFA comes back with their queries.

95. Some of the ULBs also have Standing Committee for audit and accounts and their prime purpose is to scrutinize ULB accounts at each level and to make sure that audit notings are complied with. In Kolkata Municipal Corporation the Municipal Accounts Committee is entrusted to examine the annual financial accounts of the Corporation.

96. Progress: Limited work has been carried out in areas of strengthening internal control and audit. In some instances like in case of West Bengal, the opposition leader chairs the Finance Committee, and this provides certain amount of transparency in the procedures. Internal audit as a function has no specified policy guidelines, procedures or formats.

97. Key Findings and Way Ahead: ULBs need to have a separate department for Internal Audit and hire or train the necessary staff to conduct the audit functions efficiently. Also the role of the audit committee should not just be limited to finding gap areas but ensuring remedial actions are taken. There is also a need for separation of Audit Committee and Accounts & Taxation Committees, who are supposed to sign off the accounts, for independent evaluation of each of the activities.

4.3.6 Assets and Liabilities Management

98. Benchmark: Sound capital investment and revenue enhancement decisions are dependent on effective assets and liabilities management. ULB’s need to prepare upto date records of all assets and liabilities to facilitate prudent financial management. This will include list of movable and immovable assets with details like location, purchase details, name of officials responsible etc. In addition, there should also be proper guidelines in place for acquisition of new assets and management of old assets.

Table 4.9: Asset and Liabilities Management

Outcome 8: policies, procedures and database of all assets is available and used for effective decision making in capital investment and management Indicator Source 1. List of all movable and immovable asset is available and up-to-

date with details like location, purchase details, name of official responsible, etc., with unique identification number • Updated annual asset register easily accessible • Clear rules for valuation and depreciation are in place

Concerned Department, Accounts

2. Information available from asset base and liabilities is effectively used for decision making and maintenance • Used as a tool to monitor recoveries (current assets) and

Head of Concerned Departments, Commissioner


Indicator Source maintenance (of fixed assets)

• List of assets with encroachments and legal proceedings is available

• List of overdue current assets is used to initiate recoveries and legal proceedings

• Capital assets/properties are used for revenue mobilization/replacement

• List of liabilities is prepared on a monthly basis • Records for actual and contingent liabilities are maintained

3. Clear-cut guidelines are available for acquisition of new assets and management of old assets • All use of municipal assets is duly approved by council

Rules, Regulations

99. Policy and Practice: ULBs generally hold a significant amount of fixed assets in land, buildings and infrastructure. Few local bodies have exploited the commercial potential of these properties (especially land) to generate non-tax revenues. For infrastructure assets, maintenance is poor and O&M expenditure is either not allocated in the budget or is not available due to deficits.

100. Most ULBs do not have a proper inventory of assets nor do they update them regularly. Often villages on the periphery are brought into municipal limits as the city expands. Panchayat land then comes under municipal ownership which is often unrecorded in the ULB records. Similarly, there is an incomplete list of equipment and infrastructure in most ULBs.

101. On the liabilities side, ULBs again do not have complete listings of creditors. In cash based system, the expenditure gets booked only once the payment is made. Details for other liabilities, like gratuity, pensions, etc, are not available leading to the inability of the ULBs to plan these expenses in advance. In Bhubaneswar Municipal Corporation, though a gratuity and pension register is maintained, it is not used at the time of preparation of budgets. At time of budgeting a notional amount based on experience is allocated under this head, which often has to be revised during the year.

102. Progress: Proper records for assets and liabilities are not maintained in ULB’s. With the adoption of DEAS, computerization and mapping technologies it will become easier to assess and record assets. There have so far been stand alone examples of improved financial management by having proper records of assets and liabilities. Ludhiana Municipal Corporation added to its assets about 800 properties worth an estimated Rs. 190 crores as a result of a survey of its properties with the revenue records. Asset inventory in Ramanagaram identified saleable assets worth Rs. 16 crores. Indore also prepared a computer database of its properties with the assistance of the FIRE project, and is developing a strategy for optimal use of these assets.

103. Key Findings and Way Ahead: Although asset management is an area with a high potential for resource mobilization it has not been given adequate priority. Several options can be evolved to optimally exploit these assets and generate sustainable sources of revenue from the passive assets owned by the ULB. The first task is to conduct a detailed study of the revenue records and prepare a complete list of all municipal assets along with the valuation. On completion of this exercise the municipality will be in a position to take informed decisions regarding sale, lease or alternate usage of these properties. Each property will need to be handled on a case-by-case basis and optimal revenue generating options sought. Further, proper assets and liabilities records are one of the key requirements for preparation of opening balance sheets and a prerequisite for DEAS. This could be considered as a reform measure supported under JNNURM or any other central incentive scheme.

4.4 Reporting

104. Benchmark: Timely, meaningful and user friendly dissemination of financial reports of ULBs is a prerequisite for effective and transparent management. Preparation of various financial and analysis reports enables comparison and helps identify deviations. This in turn facilitates better budgeting and stakeholder participation. Indicators of a sound reporting system are listed in Table 4.9 below.


Table 4.10: Reporting

Outcome 9: timely, meaningful and user-friendly reporting structures in place allowing effective engagement with various stakeholders Indicator Source

1. Budget, certified accounts, audit reports and other statements are available in time for decision making • Key draft reports and budget analysis are available to HODs

at time of budget preparation • Current budget analysis and audit report is widely circulated

Various reports, Head of Departments

2. Reports are user-friendly (for all stakeholders) and provide necessary details and information • Reports are accompanied with abstract on key areas and

verifiable indicators

Various reports

3. Reports are widely available and disseminated (including through media, website, etc.) • Last three years reports are available on website • Last three years reports were annually published in

newspapers • Last three years reports are available with Public Relation

officer for public distribution

Discussions with stakeholders, website

4. Facilitate comparison and analysis for variations • Comparison with last two years is presented in all reports • Provides ward wise, service wise details

Various reports

5. Allows effective engagement of citizens/ concerned groups are in place (including complaint redressal) • No. of queries raised by public on published reports • No. of replies provided • Mapping of citizen satisfaction on replies is available

Website/complaint redressal mechanisms

105. Policy and Practice: Both internal and external reporting in ULBs remains weak. State ULB legislations fail to outline mechanism for compilation and dissemination of reports of ULBs. There are no guidelines on how to publish and disseminate financial results to the public at large. At most, ULBs publish their budgets and accounts in the annual reports. Only a limited number of annual reports are printed and circulated.

106. Internal reporting mechanisms are adhoc without any proper guidelines. Employees of Bhubaneswar Municipal Corporation noted that the internal reporting mechanisms changed with every Municipal Commissioner, each demanding different sets of information in different formats. They also noted that the information passed onto the council and the standing committees also varied over the years, because of the same reason.

107. Progress: There has been marginal progress in the public financial reporting by ULBs. Further to the Management Discussion & Analysis (MD&A) section recommended for financial reports under GASB (USA) requirements, some ULBs have started including such reports in their financial statements. The Karnataka Municipalities (Accounting & Budgeting) Rules, 2006 provides for an ‘Annual Performance Report’ which includes a ‘City Management Report’, Auditor’s Report, Financial Statements and ‘Cost and Performance Indicators’ (Refer Annex G). Specific timelines are provided for preparation of financial statements, conducting financial statements audit, preparation of Annual Performance Report and publicizing such report for the public.

108. The Right to Information Act, 2005 is an important legislation which should allow more access and information to citizens. The process of bringing transparency and accountability to the municipality is possible only when the information is provided to the public in understandable formants. Some efforts towards public reporting have been initiated in select ULB’s through efforts like, Public Disclosure Law, National E-governance Action Plan (NEGAP), Citizen Facilitation Centers (CFC), etc.

109. Citizen facilitation centers (CFC). National Mission Mode Project on Egovernance in


Municipalities under the National Egovernance Action Plan (NEGAP) has opted for CFC as their service delivery mode. CFCs act as a direct interface between the local government and the citizenry, thereby bridging the information gap in a shorter span of time. Generally services covered by CFC’s include: registration and issue of births/deaths certificates; payment of property tax, utility bills; grievances and suggestions; building approvals; health programs; municipal accounts and financial reports. With RTI in place, the role of CFC has assumed greater significance, but it terms of PFMA reforms the impact of CFC’s is limited as information on financial functioning of local governments is not available in most cases.

110. The Urban Local Government Disclosure Bill, 2006 can go a long way in this direction. The bill requires pro-active disclosure of information by the ULBs. The broad PFMA related areas covered include: annual budget allocations to each ward indicating particulars of the plans, proposed expenditure and major services provided; particulars of major works; the manner of execution and amounts allocated; the particulars of offices who grant concession, permits or authorization; and the details of municipal funds including taxes, duties, grants etc.

111. Key Findings and Way Ahead: While the environment for reporting is becoming stronger, there is still lack of demand for such information both internally and from citizens. There needs to be orientation of the municipal staff for use of such information. As for citizen groups, there is need for media campaigns (similar to those seen in case of RTI), to ensure that the community starts demanding relevant information and uses it to make the ULB machinery accountable. The public disclosure bill will need to be enacted in each state under JNNURM and should be able to address a number of concerns in this sector.

4.5 External Audit and Oversight

4.5.1 External Audit

112. Benchmark: Alongwith the oversight function, external audit is the only other mechanism for public accountability of the ULBs activities. Although these systems of direct accountability are not very well established in ULBs today, recent efforts at improved governance have brought these issues to the fore.

113. Although internal / pre-audit (by ULB staff) is a useful activity, it requires an independent professional auditor to review and assess its transactions, procedures and performance. The current audits being carried out by the Local Fund Auditors (LFAs) is based on the governmental model of compliance testing and does not address the major concerns of independent audit function (Table 4.11)

Table 4.11: External Audit

Outcome 10: clearly defined systems for timely, independent and effective external audit are in use

Indicator Source 1. Annual financial statements are timely, i.e., submitted within the

stipulated time frame for audit • Annual financial statement are finalized as prescribed under

the act

LFA, Accounts Department

2. External audit is independent and meaningful, i.e., timely action is taken based on recommendations • Clear guidelines on who appoints auditors, who do they report

to, where the report is tabled are in place • Clear guidelines on independent functioning and extent of

coordination between internal and external auditor are there • Audit is completed within specified time as prescribed under

the Act • ATR is available as prescribed under the act

Commissioner

3. Performance/management audit is being undertaken (instead of simply a transaction audit) • At least X% of audit queries are performance related

LFA


Indicator Source • ATR clearly defines improvement in performance post

correction 4. Summary of audited reports are available to public in general and

published • Archive for last three years is available • Query-Response ration for queries received from

councilors/public on audit published • Mapping of citizen satisfaction on replies is available

LFA, Accounts Department

5. Audit reports are discussed in the Council • Audit findings are tabled in council and council remarks are

duly incorporated in ATR. ATR is also presented to the Council

Commissioner, Mayor/Councilors

6. External auditor has the capacity to undertake necessary function in the changed environment of accounting policies • Level of involvement of office of C&AG and independent

external auditors • External audit staff has the requisite skills/experience/training

on modern audit tools in line with NMAM requirements

LFA, Discussions with other stakeholders

7. Clear provisions for action in case of delays/non-compliance in audit functions are in place • No. of cases of non-compliance registered • % cases where action taken on non-compliance is publicly

reported (website, news paper, etc.) • State department tables the status of non-compliance in the

state assembly

GO, Discussions

114. Policy and Practice: Most Municipal Acts provide for the state government to appoint the statutory auditor. Generally, the ‘Local Fund Audit’ division, an organ of the State’s Accountant General’s office and staffed with state Audit & Account officers is appointed. The scope of such audit is broadly provided in the Act itself and limited to transaction audits with the objective of identifying cases of fraud, misuse of funds, authority and / or non- compliance with rules, regulations and government orders.

115. The current system generally requires a 100 percent audit of all transactions making it a lengthy and time-consuming job. The general perspective of audit (in case of expenditure) includes

i. Audit against provision of funds – analyses the financial position of the government, and the trends and quality of receipts and expenditures;

ii. Regularity audit – audit observations on aspects such as irregularities and non-observance of rules and regulations, wasteful or unnecessary expenditures; and inefficiency and delays and non-achievement of objectives in project implementation;

iii. Propriety audit assessing the need, justification and effectiveness of any expense;

iv. Efficiency-cum-performance audit – evaluate performance of local government on various financial management and accounting issues. While there is a provision for efficiency-cum-performance audit, the comments on this area are very limited. This is primarily due to limited capacity of LFA to conduct such a review.

116. The output in such a case is audit comments or ‘paras’ which are critical for PFMA. The reports include

i. Local audit notes that are expected to be addressed at the individual section/departments audited;

ii. Inspection reports that contain more important findings to be brought to the attention of department heads; and

iii. Financial audit reports, issued annually and submitted to the state government and tabled at the legislature.


(i) and (ii) are basically intermediary steps for the financial audit reports, which are the final outputs of the audit. However, due to the limited capacity of LFA to carry out the audits, there generally exists a large backlog of audits. For instance, in Bhubaneswar Municipal Corporation, the audit for the year 2001-02 is currently in progress and financial audit reports upto 1999-2000 have been tabled in the legislature.

117. The process of follow-up on such audit ‘paras’ is also very weak. It takes the ULBs long period of time to reply to LFA remarks and takes more time for issues to get resolved. In case of Bhubaneswar again, replies for the year 1998-99 are being currently prepared. At most, if embezzlement is detected, the LFA has the power to allow the errant employee to deposit the amount to make good the loss. Minor omissions and commissions are, after process of notice result in fine or surcharge on errant employees. Serious irregularities are reported to the appropriate authorities for necessary action.

118. Though well structured and a comprehensive mechanism the Local Fund Audit system has been unable to play a proactive role in increasing accountability in ULBs. These are generally due to the following:

i. Limited Staff – With the increasing role and transactions of ULBs, the responsibility of LFA audits is increasing. Considering the limited number of staff in LFA division and requirement for complete audits in the ULBs,, there is lack of personnel which invariably causes delays in the audit process;

ii. Audit Methodology – The audit techniques and methodology are generally based on complete checks and usually without Computer Aided Audit Techniques (CAATs). Further they are geared towards verifying compliance rather than reviewing performance and hence have become a routine secluded activity, without much management involvement and utility;

iii. Lack of Training in DEA systems – With the introduction of double entry accrual accounting system in many ULBs, the LFA auditors need to be conversant with modern accounting, reporting and budgeting techniques. There appears to be a weakness in this area, although the Comptroller and Auditor General’s (C&AG) office is supporting their technical development;

119. To summarize the current audit mechanism at ULBs continues to be amongst the weakest link in the PFMA cycle. LFA lacks the teeth, capacity and clarity leading to non seriousness and delays in the audit function.

120. Progress: There has been some progress in the area of external audit by enhancing the role of C&AG to address the issues of arrears, procedural and performance audit and providing technical guidance and supervision.

121. Role of C&AG’s Office. One of the outcomes of the 74th CAA is the empowerment of C&AG’s office to undertake audit of ULBs.22 The CAG is also involved in undertaking a procedural audit of ULBs and this function is handled by the C&AG’s local offices which also look after audit of rural local bodies and other agencies such as post, telecommunications, etc. These audits are carried out under section 14 of the Comptroller and Auditor General’s (Duties, Powers and Conditions of Services) Act, 1971.

122. Further, in pursuance of the recommendations of the Eleventh Finance Commission, C&AG’s role has been expanded to providing Technical Guidance & Supervision (TGS) for ULB reforms. As of 31st March, 2005, out 18 states have fully entrusted C&AG with for TGS for its local government audits and reform.

22 However, not all states have included this provision in their reformed ULB Acts. Karnataka is one of them. Tamil Nadu and Kerala, on the other hand, have included this provision in their amended ULB Acts.


Box 4.12: 11th Finance Commission Guidelines for Involvement of C&AG in ULB Audits

The 11th Finance Commission in addressing accounts and audits of ULBs has clearly prescribed guidelines for increased involvement of C&AG in ULB Audits. It has suggested that:

• States should review existing accounting heads under which the funds are being transferred to the local bodies for each such major head/subhead; six minor heads should be created in consultation with the C& AG and the Controller General of Accounts, to ensure uniformity among the states.

• The C&AG should be entrusted with the responsibility of excising control and supervision over the proper maintenance of accounts and their audit for all tiers/levels of panchayats and urban local Bodies.

• The Director, Local fund Audit or any other agency made responsible for the audit of accounts of the local bodies should work under the technical and administrative supervision of C & AG in the same manner as the Chief Electoral officers of the state work under the supervision of Central Election commission.

• The C& AG should prescribe the format for the preparation of budgets and for keeping of accounts for local bodies.

• Local Bodies particularly village level panchayats and in some cases intermediate level panchayats that do not have trained staff, may contract out upkeep of accounts to outside agencies/persons.

• Audit of accounts of local bodies be entrusted to the C&AG who may get it done through his own staff or by engaging outside agencies on payment of remuneration fixed by him. An amount of Half-a-percent of the total expenditure incurred by the local bodies should be placed with the C&AG for this purpose.

• The report of the C&AG relating to audit of accounts of panchayats and municipalities should be placed before a committee of the state legislature constituted on the same lines as the Public Accounts Committee.

123. In some cases such as in Kolkata, separate external audit is carried out by an independent firm of Chartered Accountants to certify the ‘true and fair view’ of financial statements. This is usually insisted upon by financial institutions and development agencies that have lent money to the ULBs and would like to have an independent professional opinion of the financial position and performance.

124. On these lines, the Karnataka Municipal (Accounting & Budgeting) Rules, 2006 provides for two distinct audits – a statutory audit by the LFA, and another ‘Financial Statements Audit’ by a Chartered Accountancy firm or retired state accounts officials. The objective of this financial statements audit is to comment on the accounting and reporting aspect rather than the compliance aspect of transactions. It is proposed that the financial statements auditor will be appointed by the Director of Municipal Administration from an empanelled list of firms. This auditor will review the financial statements and accounts and report in a prescribed form of report.

125. Key Findings and Way Ahead: The key issues in improving external audit are as follows:

i. Determining audit requirements of various stakeholders – As mentioned earlier, the ULBs now have a large group of stakeholders including financial institutions, investors and development agencies. These stakeholders have varying requirements of audit and assurance from the ULBs financial statements. These should be examined and the audit function suitably amended to provide them the comfort of audit as required;

ii. Reviewing the role and mandate of Local Fund Audit – The role of LFA needs to be reviewed in the context of its growing responsibilities, statutory audit requirements and the increased transactions in ULBs. This may result in augmentation of strength and capacity or revision of their scope of work to ensure that the scope of work and available resources can be matched.

iii. Capacity Building of LFA staff – In order to be more efficient in its performance, the LFA staff needs to enhance its capacity for taking up and reviewing ULB accounts. This requires a concerted attempt at capacity building of the LFA staff on modern audit techniques, CAATs etc.


iv. Role and Scope of C&AG audit – The expanded role of C&AG audit in ULBs also needs to be reviewed and their expertise used effectively for improving audit and compliance reporting by ULBs;

v. Using Audit as an Internal Management Tool – Audits need to move away from more procedural and conventional checking to innovative cost, management, efficiency and performance audits which would prove more useful to the ULB management.

vi. Appointment of Audit Committees – In some states, there is a requirement to have audit committees chaired by the Opposition (on the lines of Public Accounts Committees) to review all audit observations and reports. This practice ensures that audit reports are followed up and action taken on them in time. This committee should be independent of the accounts function which is responsible for the preparation of accounts;

vii. Action Taken Report on Audit comments – There should be a requirement to table an ATR on the audit comments and reports submitted by the auditors. Dissemination of audit reports along with financial statements should be encouraged.

viii. Appointment of independent auditors to conduct audit, especially where backlog exists. Based on the Karnataka model, external audit firms (Chartered Accountants) may be appointed to complete backlog of audits overcoming the low capacity of LFA as well as providing a modern and independent approach to ULB auditing.

126. As a follow-up of this study, the MoUD and C&AG may jointly consider setting up a task force to examine the above issues and study the role, responsibilities and mandate of the various agencies in ULB audit. This could lead to guidelines and policy on a revised role of the audit which may be more independent, timely and meaningful. NMAM which has led to reforms in the areas of municipal accounting was also an output of such a task force.

4.5.2 External Oversight

127. Benchmark: The real test of accountability in public bodies is level of external oversight and transparency offered to the general public. It is based on the basic premise that ultimate accountability is towards the citizens who, after all, provide the funds. This acts as a key determinant of the governance environment in a ULB and encompasses feedback & grievance redressal, providing access to information in public domain, participation / involvement of citizens in municipal activities and creation of specific ULB accountability forums such as PROOF (discussed above). (Refer Table 4.12)

Table 4.12: External Oversight

Outcome 11: functional independent systems for increased accountability and oversight are in place leading to improved decision making Indicator Source

1. Major financial reports and budget are made available to public/other key stakeholders at large • Archive for last three years is available on request with ULBs • Action taken on delays and defaulters is available and

circulated

Discussions with Mayor/ Councilors, Commissioner

2. Effective engagement of citizens on major financial (formal and informal) reports is underway • No. of Public Meetings Organized • Independent reviews taken up by citizen groups/CBOs • Query-Response ration for queries received from

councilors/public on audit published

Discussions with Mayor/ Councilors, Commissioner

3. Feedback from citizens discussions used for effective decision making • Extent of feedback/responses used for next budget, corrective

action, program design, etc. • Mapping of citizen satisfaction on replies is available

Discussions with citizens, Head of Departments


128. Policy and Practice: The concept of public involvement in decision making is prima-facie missing in the Indian urban local governance environment. Limited availability for reports in the public domain, weak community structures and lack of involvement of citizens in decision making have led to weak external oversight in ULBs.

129. Ward Committees. The 74th CAA provides the legislative mandate for creation of Ward Committee in ULBs with population above 3 lakhs. The major objective of setting up these committees is to enable closer interaction between the people and their elected representatives. However, till date, only a few states (such as Kerala and West Bengal23)) have adopted the same. In other states such as Andhra Pradesh, Uttar Pradesh, Madhya Pradesh, Karnataka, Himachal Pradesh, etc. although ward committees are provided in the Act, they are yet to be operationalized. West Bengal has pioneered the concept by issuing distinct Ward Committee Rules, 2001 and providing for ward committees to be involved in tax collections, local planning and social development activities.

130. Social Auditing. In absence of properly functioning ward committees, the role of external oversight has often been taken up by NGOs and CBOs. Most NGOs have taken to social auditing, a process of understanding whether the expenditures are being made for stated social aims. It works to support accountability and being responsive to the needs of the people. There are some other bigger players who are encouraging interventionist measures of designing budgets by the locals on very topical issues (PROOF discussed in Box 4.6).

131. Citizens’ Report Card. Another good practice that has been used to promote external oversight is the ‘Citizen’s Report Card’, a transparent mechanism of user satisfaction surveys to establish how various public services are faring. This presents the ‘voice’ of the citizens, who otherwise would not have the opportunity to share their experiences. Feedback is usually gathered on aspects of services like access or availability, usage, responsiveness, effectiveness and overall satisfaction. While on one hand it helps the ULB to improve the level of services, on the other hand it also generates interest amongst the citizens on the functioning of their ULB. One of the good examples of Report Cards is in case of Bangalore, Karnataka24

132. Progress: External Oversight is one of the weakest links in PFMA reforms primarily due to lack of availability of information in public domain and limited initiative from the citizenry to know about the working of local governments. Creation of mass political awareness about ULB accounts and their audit is lacking. JNNURM aims to take a step further towards effective governance through people’s participation, but its success needs to be proved on a mass scale.

133. Key Findings and Way Ahead: For the legislative and civil society oversight, there is a need for clarity on the coverage and scope of ward committees. Guidelines will need to be established for elections in ward and zonal committees and provisions will need to be made to co-opt local knowledge. Ward committees will need to be given some sort of independence for resource management and to actively take part in bottom-up budgeting. Systems for bottom-up budgeting starting from the ward committees with widely publicized meetings to ensure maximum citizen participation have to be in place.

134. The various efforts at improving oversight must address the following concerns / issues for its successful implementation:

i. Awareness and involvement of people – This constructive and regular engagement of people is itself a challenge for ULBs. The relative ignorance towards reforms need to be removed by involving NGOs and CBOs in the process;

ii. Representative bodies– The Ward Committees, if established as a model for citizen participation, needs to have a representative character and regularly involved in various

23 In West Bengal, Wards Committees have been set up for each municipal ward. In the case of the Kolkata Municipal Corporation, in addition to the Wards Committees, the Borough Committees or in other words Zonal Committees have been in existence for a long time. 24 For details, please see: Public Affairs Centre (2005), Benchmarking India’s Public Services: A comparison across the State, Samuel Paul et.al.; and Public Affairs Centre (2006), Benchmarking Bangalore’s Public Services: What The Third Citizens Report Card Reveals, Sita Shekhar and Manisha Sharma


activities of ULB. Some degree of encouragement (through some fiscal authority / tax responsibility) may also be given to encourage the performance of Ward Committees;

iii. Availability of information –The availability and access to information is a pre-requisite for making any oversight function useful. ULBs need to establish systems for managing information and to provide it in public domain for effective monitoring. It includes using easier systems of monitoring such as ‘outputs’ in budgeting to make their involvement meaningful;

iv. Responsiveness by ULB – Finally, the continued efforts of oversight are dependent not only on people’s participation but on the continued interest and responsiveness of ULB. A good start to develop responsiveness and thereby PFMA would be to have a robust public grievance mechanism in ULBs- these provide a platform for oversight by citizens as well as response by ULBs.


5 Key Issues and Way Ahead

135. In the earlier sections, we have discusses the existing PFMA policy, practice and progress of the various components against the benchmarks. Gaps for PFMA have been identified and listed against each component. However, in this section we have summarized some of the areas which in our view merit further attention and focused intervention. We have tried to list only the major areas requiring further attention.

5.1 Review and Strengthening of ULB Audit

136. Audited financial statements are the showcase of PFMA practices in ULBs. They are the official reports which summarize the performance and management of ULBs and act as the interface with the citizens and other stakeholders like credit rating agencies, investors etc.. They act as the barometer of the ULB performance. The study and discussions have clearly demonstrated the need to strengthen the audit function in ULBs. There is a need for enabling framework to ensure timely, regular, independent and meaningful audit – internal and external (statutory). While lot of work has been carried out in the area of accounting reforms viz. NMAM, donor support, etc., the area of ULB audit remains weak and at times outdates both in internal and external audit.

137. To enable it, MoUD may consider constituting a Task Force along with C&AG. Other partners could include representatives of the World Bank, ICAI, select states/ULBs and external experts. This task force could review the existing capacity and context in depth and work towards development of guidelines for procedures, roles, responsibilities, timelines and capacity requirements for the audit function. The task force could look at:

i. Review existing status of audit in depth – roles, mandates (LFA/C&AG) constraints, capacity in light of DEAS, independence, timelines, backlog, etc.

ii. Formulate guidelines for performance audit which could be a scientifically designed sample audit. The guidelines could also work towards developing mechanisms for cost and management audit.

iii. Establish guidelines for clearing of backlog of audit in a phased manner.

iv. Consider guidelines for empanelling independent auditors to carry out meaningful and regular ULB audits. This panel could work on a rotational basis to avoid any vested interests.

v. Training of the LFA auditors with reference to the changed scenario of DEAS, computerization, etc. to carry out concurrent audit.

vi. Define clear roles, responsibilities and timelines.

5.2 Strengthening ULB Budgeting

138. ULB budgeting is another area that needs to be further strengthened. Although JNNURM aims towards making the budgeting process participatory, this is not a mandatory reform and most states have only opted for it from third year onwards. Unlike NMAM, where clear guidelines and precedents are available for successful implementation, there exists a gap in ‘operationalizing’ participatory budgeting. It may be prudent to look at support in the near future to provide the framework, guidelines and strategy to operationalize this. This could include guidelines to address issues like linkages of ULB budgets with budgets and plans of other para-statals (integrated city plans) and with those at the Metropolitan and District Planning Committee levels. The role of area sabhas and community structures in planning could also be defined.

139. A ULB Budgeting Manual providing guidelines for participatory budgeting, capital planning etc. could be developed which would also cover the following:


i. Output budgeting: The existing budgets in ULBs are primarily used as tools to allocate and control financial expenditure. However, not enough stress is laid on the output or result of the expenditure. The PFMA environment could greatly benefit by moving towards an ‘Output Budgeting’ model where the sector wise/zone wise details of assets to be created and maintained could be listed. This would also lead to increased accountability and external oversight since the ULBs would be made accountable to the actual ‘output’/ services rather than the expenditure.

ii. Five year rolling plans. Presently, ULBs are preparing annual plans and budgets. Most of the capital projects and reforms extend beyond a single year. There is a need to consider five (5) year rolling plans to enable ULBs to prepare a longer term perspective plans. This would be specially required under JNNURM and would enable regular reviews and updation. The annual plans would need to be drawn from and consistent to the rolling plan. Guidelines may need to be developed for these rolling plans.

iii. Zero base budgeting: The guidelines could also review the concept of zero-based budgeting by the ULBs. This would allow for an independent review of the entire HR structure and needs of the ULBs, as against the norms existing over the years; many of which are outdated and obsolete as on date. For instance most ULBs provide budgetary support for obsolete departments and positions which are no longer applicable. On the other hand provision for new techniques/positions (accounts, IT, etc.) are not provided.

iv. Participation: Guidelines could also be included for dissemination and external oversight on the budget execution on successful models like PROOF.

v. Budget Forecasting: Finally, guidelines need to be developed for appropriate scientific revenue-expenditure forecasting to remove as much as possible the gap between planned and actual budgets.

5.3 Staffing and Capacity Building

140. JNNURM has initiated a number of steps which would have a long term impact on the improved PFMA. However, there may be need to look at defining and strengthening the staffing function to meet the changing needs. For example, the existing freeze on recruitment in ULBs and outdated skills of accounting and budgeting staff may find it difficult to meet the complexities of DEAS and e-governance. There are no benchmarks and capacity building plan in most ULBs. This may hamper the implementation and effective use of the information/financial statements generated. While most states and ULBs are using external consultants and donor support to implement PFMA reforms, this may not be sustainable over the long rung. There is a need to internalize this process. MoUD may consider a review and advisory guidance to assist eh states/ULBs to build a case for creation of these new skilled positions and restructuring/abolishing some obsolete and outdated positions.

141. This could include:

i. Guidelines for appropriate structure of each department looking at the critical areas of ULB functioning (especially PFMA). Separate guidelines could be made for various categories of ULBs.

ii. Review the current availability of courses for PFMA related areas and accordingly develop the minimum training requirements of staff members in their respective area of functioning.

iii. Assess the capacity of various training institutions and their ability and specific courses. Such assessment should help in developing achievable timelines and targets for training.

iv. Incentive to ULBs (on the lines of JNNURM) mane be considered by making staffing and capacity building (in line with recommended guidelines) a component of JNNURM.


5.4 Ensuring Compliance

142. One of the most critical areas for PFMA is compliance with the existing legal framework. This continues to be a weak link. Municipal Acts provide a legislative framework in most cases covering preparation of budgets, accounts, audit, etc. However, there is inadequate provision for penalty/action against non-compliance. For example, if the accounts and/or audit are not updated for a number of years; what is the action to be taken? There is a need to take a conscious approach to penalize and take action against non-compliance/delays. Centrally sponsored schemes and incentive linked programs like JNNURM can look at this aspect. Various mechanisms could be explored for this and if found feasible included in the legal framework. This could include.

i. Linking devolution of funds from national and state government to compliance of rules and regulations

ii. Tabling the status of budget and financial statements of ULBs in state assembly may be made mandatory

iii. Fixing timelines for action taken report on audit queries

5.5 Others

143. In addition to the areas suggested above, some other areas that could be taken up for further intervention could include:

i. Model Municipal Law. While the Model Municipal Law may be seen to be prescriptive in some areas (in the era of decentralization), there are few areas related to PFMA that could be adopted. These specially relate to preparation of budgets, areas of reporting of the budget and accounts in the public domain and their respective timelines. This may be reviewed and considered by ULBs.

ii. NMAM: In relation to NMAM, though the manual is extensive, there is a need for development of guidelines for accounting policies. For effective Financial Reporting Systems, ICAI had brought out a technical guide for financial reporting along with the NMAM. This needs to be explored for its efficacy for addressing the issue of financial reporting in ULBs.

iii. Procurement: Detailed guidelines need to be developed in the following areas:

• Setting up of separate procurement wing in larger ULBs

• Grievance redressal system allowing citizens to lodge their complaints against a particular project activity taken up by the ULB to ensure accountability and transparency in the process.

• Standard documents directing procurement procedures and outlining the forms to be used at various stages of procurements.

• Procedures spelling out conditions for negotiation and methodology for selection and disqualification of bidders. The guidelines also need to be developed for management of records and documentation of the bidding process.

• Procedures for PPP projects including standard documents, delegation of responsibility for PPP within the ULB structure and to make available a list of areas for possible commercially viable projects.

144. The above areas and findings mentioned against each component in this report may be considered for further intervention and support for implementation, as found suitable.


Annexes

Annex A: People Met The team met the following experts and officials at different occasions for discussions in reference with the study.

S No

NAME DESIGNATION/ORGANIZATION

1 Mr. J P Gupta CRRID 2 Mr. N Bhattacharjee USAID 3 Ms. Debashree Mukherjee DFID 4 Mr. Alok Shiromany FIRE PROJECT 5 Mr. Aniruddha Kumar MoUD, Government of India 6 Mr. Jayant Gokhale ICAI 7 Ms. Aparna Das UNDP 8 Mr. Manoj RUIFDCO, Rajasthan 9 Mr. P Subramanian The World Bank

10 Ms. Priya Goel The World Bank 11 Mr. Vinod Sahgal The World Bank 12 Mr. Mohan Nagarajan The World Bank 13 Mr. Joel A. Turkewitz The World Bank 14 Mr. Ivor Beazely The World Bank 15 Mr. Raghu Kesavan, The World Bank 16 Mr. Manoj Jain The World Bank 17 Mr. Anup Wadhawan The World Bank 18 Dr. J V Nandana Kumar KUIDFC, Karnataka 19 Ms. Jyothi Krishnamoorthy ADB 20 Mr. Alex Jorgensen ADB 21 Mr. C T Abhraham ADB 22 Mr. Srinivasan ADB 23 Mr. Mam Chand WORLD BANK 24 Ms. Meenakshi Gupta NDMC 25 Mr. Andrew Kenningham DFID 26 Mr. Chris Heymans Water and Sanitation Programme, World Bank 27 Mr. B B Pandit NDMC, Delhi 28 Mrs. S Khullar NDMC, Delhi 29 Mr. K Dharmarajan Senior Policy Advisor, USAID FIRE Project 30 Mr. Harish Chandra Director(HUD) 31 Prof O P Mathur NIPFP 32 Ms. Geeta Menon C&AG 33 Mr. R N Ghosh C&AG 34 Mr. Mahesh Singh Joint Secretary, Urban Development, Government of Gujarat 35 Mr. Janardan Reddy Project Director, APUSP, SGoAP 36 Mr. P. V. Ramesh Director, APUIDFC, SGoAP 37 Mr. Sudharkar Additional Director, Department of Municipal Administration 38 Mr. Prasad Chairman, special committee for formulating the model

municipal law for the state, SGoAP39 Mr. K. Jairaj Commissioner, Bangalore Mahanagara Palike, 40 Mrs. Lakshmi Venkatachalam, Principal Secretary, Urban Development, Karnataka. 41 Dr. Samuel Paul Founder and Chairperson, PAC 42 Mr. N.V.Muniratnampa Local Fund Auditor/Controller, State Audit Department,

Karnataka. 43 Mr. Jawaid Akhtar, MD, KUIDFC 44 Mr. Krishna Rupan E-Governance foundation, Bangalore 45 Dr. Niranjan Maradi Commissioner, MAD, Tamil Nadu 46 Mr. Shashi Shekhar MD, TNUIFSL 47 Mr. Sellamuthu, Secretary –Urban Development, TN 48 Sh. D.J. Dhinakkaren, Commissioner, Madurai City Corporation


Annex B: Case Study Documentation Background

As part of the PFMA study in Indian ULBs a documentation of certain best practices in PFMA areas has been carried out. This note examines status of PFMA in six of the selected best practices viz. Kolkata Municipal Corporation (KMC), Bangalore Municipal Corporation (BMC), Madurai Municipal Corporation (MMC), Jaipur Municipal Corporation (JMC), New Delhi Municipal Council (NDMC) and Kapra Municipality (KM). The note focuses on some good initiatives undertaken by these ULBs in the recent past for improving PFMA, and thereon identifies some critical issues which need to be addressed for further improvements.

Short listing of ULBs

Following an initial brain storming session with the Bank team, advisory panel and a stakeholder’s workshop, organized at the MoUD, Government of India on April 19, 2006, a number case studies where progress has been made in PFMA areas were identified (Table B.1). Based on the suggestions, a detailed exercise was conducted by the project team to shortlist the probable case studies for documentation (Table B.2).

Table B.1: List of Probable Case Studies Identified for Documentation

Mun

icip

al B

onds

Leg

isla

tive

fram

ewor

ks

Ext

erna

l Aud

it

Rev

enue

M

obili

zatio

n A

sset

Man

agem

ent

IT &

E-

gove

rnan

ce

Cap

acity

bui

ldin

g

Acc

ount

ing

Proc

urem

ent

Bud

get

Cas

h flo

ws

Inte

rnal

aud

it

Part

icip

atio

n

Fund

ing

Age

ncy

Tot

al S

core

Ahmedabad √ USAID 1 Surat √ - 1 Agra √ √ JBIC 2 Tumkur √ √ √ ADB 3 Baroda √ √ - 2 Madurai √ √ √ √ WB 4 Kolkata √ √ √ √ √ ADB &

DFID 5

Indore √ √ √ √ ADB, DFID, USAID

4

Ludhiana √ √ √ 3 Jaipur √ √ √ ADB 3 Bangalore √ √ √ √ √ √ √ ADB &

WB 7

Chandigarh √ - 1 NDMC √ √ √ √ - 4 Barrackpore √ √ √ √ DFID 4 New Barrackpore

√ √ DFID 2

Hyderabad √ √ DFID 2+ Kapra √ √ DFID 2+ Coimbatore √ √ WB 2 Thane √ √ √ WB 3 Nagpur √ √ √ WB 3 Pune √ √ √ USAID 3 Kalyan √ √ √ - 3 Vizag √ √ DFID,

WB 2

Public Financial Management and Accountability in Indian ULBs 42The principles followed for the selection included:

• The activity should be directly related to enhancing PFMA in the ULB and should have demonstrated results;

• The selection of cases should be a representative cross-section, covering ULBs of different sizes ; • A regional balance should be maintained (limited to one case per state); and • The cases should represent the various facets of PFMA and be replicable across other ULBs

It may be noted that the number of PFMA challenges addressed by each city was derived on the basis of the collective knowledge of those present at the stakeholder’s workshop and may not be an exhaustive list. The purpose was to select a representative sample for best practices (Table B.2).

Table B.2: Two-Dimensional Stratification of Probable Sample Cities

Size

of

the

City

Lar

ge

(2)

Hyderabad (S,D) Kolkata (E,D) Bangalore (S,D)

Med

ium

(2)

Jaipur (C,D) Surat (W, ND) Baroda (W,ND) Ahemdabad (W,D) Agra (N,D) Ludhiana (N,ND) Chandigarh (N,ND) Coimbatore (S,D) Thane (W,D) Nagpur (C,D) Pune (W,D) Vizag (S,D)

Madurai (S,D) Indore (C,D)

Smal

l (2

)

Kapra (S, ND) Tumkur (S,D) New Barackpore (E,D) Kalyan (W,ND)

NDMC (N,ND) Barackpore (E,D)

0-3 (2) 4-6 (3) >7 (1) Number of PFMA Areas Addressed (Out of 13)

Note: N- North; E-East; W-West; S-South; C-Central D- Donor Initiative; ND – Non Donor

The selected sample represents a good geographical coverage with NDMC from the north, KMC from the east, JMC from Central and BMC, MMC and KM from the south. In terms of donor and non-donor initiatives, NDMC and KM were selected for being non-donor initiatives for reforms in PFMA areas. In terms of size, BMC and KMC were chosen from large cities; JMC and MMC from medium cities; and KM and NDMC to represent small ULBs. Finally, out of the sample BMC was reported to have addressed over 7 PFMA areas; KMC, MMC and NDMC were reported to have addressed 4-6 PFMA areas; while KM and JMC were reported to have addressed about 3 PFMA areas.

Methodology for Documentation

Information for documentation was collected primarily through literature review followed by site visit to each of the selected ULBs. Initial study was carried out through literature review wherein information on legal provisions for PFMA and existing literature contributing to PFMA in ULBs were assessed. In addition, literature review of key state documents such as the guiding Acts and legislations, recommendations of State Finance Commission, Action Taken Reports, Procurement Manuals, reports prepared by the Commissioner of Municipal Administration, etc., was also undertaken. The site visit served three key objectives, namely (i) assess the present status of PFMA in the Corporation; (ii) gather details on key initiatives for improving PFMA and assessing their present-day status; and (iii) identify key issues faced by the Corporation in improving PFMA. List of people met has been appended in Annex A. The note presents major findings of the six case studies and presents the areas where the efforts of the ULB can be considered a best practice.

Public Financial Management and Accountability in Indian ULBs 43CASE STUDY 1: KOLKATA MUNICIPAL CORPORATION (KMC)

KMC is the largest ULB in West Bengal, looking after a jurisdiction of 185 sq. km. The city is divided into 141 administrative wards that are grouped into 15 boroughs. Each of these wards elects a councilor to the KMC. For decentralized administration, each borough has a committee consisting of the councilors elected from the respective wards of the borough. KMC has formulated a vision, backed by a detailed strategy outlining reforms and improvements through a transparent and participative manner under DFID funded Capacity Building Component for Kolkata Environment Improvement Project (KEIP).

PFMA REFORM AREAS

KMC has been working towards reforming its PFMA for a long time now. Essentially, it has taken great strides in areas of legal and institutional framework, budget preparation, cash and fund management and internal and external audit. Some of the efforts that can be considered best practices have been in the areas of (i) legal and institutional framework; (ii) budget planning; (iii) cash and fund management; (iv) accounting and asset inventory; and (v) internal audit and external audit.

Legal and Institutional Framework

External Oversight. As early as 1980 and much before the 74th CAA, The Calcutta Municipal Act 1980, ushered a new culture of political management on the lines of the cabinet form of government with the idea of democratizing municipal governance and bring political management on top. The formation of Borough Committee introduced a kind of municipal federation, as powers and functions were divided between the headquarter and the Borough Committees. West Bengal was the first state in India to draft and implement Ward Committee Rules in 2001. In totality, the Borough Committee and the Ward Committee were designed to introduce and sustain a participatory mode of civic administration and external oversight. Both the devices are expected to bring about a deepening of democracy and efficient and effective PFMA with active citizen support and assistance in budget formulation, execution and monitoring.

Municipal Accounts Committee. In addition the Act under Section 10 also laid down the provisions for creating a Municipal Accounts Committee (MAC) in line with the Public Accounts Committee (PAC) as found in the State Administration and the Central Administration. The MAC is entrusted to examine the accounts of the Corporation showing the appropriation of sums granted by the Corporation for its expenditure and the annual financial accounts of the Corporation. They are also supposed to examine and scrutinize the report on the accounts of the Corporation by the auditors appointed under Section 160. Therefore they perform the functions of the Audit Committee, as found in corporate setup. They also look after issues of corporate governance. They also analyze the report of the Auditors and, in cases where it is required, they order for a Special Audit of any receipt or expenditure of the Corporation. This is much in line with the Special Audit provision of the Companies Act, 1956. This makes the legislative framework of KMC as one of the best where PFMA concerns regarding internal controls and external oversight have been addressed sufficiently.

Fund Based Budgeting. As for the legal provisions, The KMC Act provides for fund based budgeting. It specifies that budget should be prepared in such a manner as to separately state the income and expenditure of the Corporation to be received and incurred in terms of the six accounts they are maintaining – Water Supply, Sewerage & Drainage; Road Development & Maintenance; Bustee Services; Commercial Projects; Solid Waste Management and the General Head. It is noteworthy that the Act way back in 1980 had envisaged a system of Fund Based Budgeting.

Budget Planning

Budgeting Process. Every year Municipal Finance and Accounts Department (MFAD) initiates the budget process by holding discussions with various department heads to understand the extent of work they are going to execute in the forthcoming year. Deliberations are held where the officers of the MFAD brainstorm on the extent of work successfully completed in the last year. Using this information they come up with the most logical and rational budget estimate of expenditure. More stress is put on capital expenditures and their rationale and future financial impact on the KMC. In some cases the techniques of doing a zero based budgeting are also taken up. The budget is then discussed between the Mayor-in-Council, and the Mayor and the Deputy Mayor take an active role in

Public Financial Management and Accountability in Indian ULBs 44formalizing the budget. The budget is then placed before the full house of Councilors for necessary adoption

Rolling Plan. KMC is considering adopting a rolling budget technique with 5 year vision plans to come out of the short sighted approach of budgeting on yearly basis. Along with this, Government of India and many donor agencies are pressing for performance based outcome/output budgeting. KMC is also analyzing this side so as to adopt the outcome measures in the fold of budgeting. Also under serious consideration is the integration of budgeting with economic analysis and integration of the budgeting with accounting function.

Reporting. Already, the KMC has started publicizing the projects it intends to undertake, so that the citizens can scrutinize the performance of the KMC. KMC is doing this under the banner of “Guard the Guardians” where it has through newspaper advertisements published the proposed capital spending in each ward for the year. Hereby, the KMC is paving the way for social audit by the citizens themselves. This is a positive step even though it could be improved in the future by mentioning the expected benefits and outcomes (kms of roads constructed, level of increase in water connections etc). This would allow better social audit and monitoring against clearly defined and visible benchmarks.

Cash and Fund Management

Another best practice followed by KMC is in the area of cash and fund management. In 2000 -01 and 2002-03 KMC was suffering from a severe cash crunch and had to resort to overdraft facilities from the bank. To avail the overdraft facility the KMC gave fixed deposits worth crores of rupees as lien. This led to KMC paying more interest on overdrafts and earning less interest on fixed deposits due to differential rate of interests. Poor cash and fund management turned out to be a heavy cost for KMC. A bold step was taken by the management and they repaid all the overdrafts by swapping with the fixed deposits held as lien. This allowed KMC to have a substantial savings in the interest burden. KMC also took steps to securitize its house building loan portfolio. KMC gives house building loan / advances to employees at attractive terms. KMC had lent this money from its own sources but due to limited funds the list of applications was increasing everyday. To ease this KMC entered into contracts with a bank, which purchased the entire existing portfolio, unlocking funds blocked by KMC. KMC has facilitated a direct scheme with the bank for future loans which are routed through KMC’s disbursing channel.

The closing balance of cash increased by 256.64% in 2004-05 from the base of 2000-01 (figure 4.4). In absolute terms the cash position in 2000-01 was Rs. (130.44) crores i.e. they had overdraft to the extent. This position is now reversed to Rs. 195.68 crores in 2004-05. Over that today KMC has been able to build its reserves also by having fixed deposits to the tune of Rs. 375 crores addition to the cash balance. The figures clearly show that KMC has taken all steps to improve its cash and fund position. At the same time funding in capital investments and O&M has increased. From a cash starved ULB; KMC has emerged as a cash rich ULB – A good practice of PFMA.

Even though KMC, is amongst the only ULBs in India to have got a general (as opposed to structured obligation) credit rating of A+, it is not in a rush to raise resources through a municipal bond issue. It would like to do so only when there is a sound project formulated which cannot be sourced from the existing reserves.

Accounting and Asset Inventory

KMC is practicing double entry based accounting since 1978. However, the accounting was partially accrual and steps are being taken to make the accounting fully accrual. KMC had been preparing its annual accounts since 1972 and the current Act makes it mandatory to prepare monthly accounts and adopt it by the Mayor-in-council. The annual accounts are prepared and to be adopted by the Corporation. In fact the Act specifies a fund based accounting system. However, it is pertinent to mention that during the period 1990-91 to 2002-03 nobody took up the effort to prepare the accounts. No annual accounts for KMC were prepared for 12 years during this period, as was required under the Act. What is more alarming is that even though there was a clear non compliance of the KMC Act, which was brought to the attention of the various authorities, no corrective action was taken till very recently before external consultants were appointed to update the accounts. Now KMC is ready to

Public Financial Management and Accountability in Indian ULBs 45prepare the 2005-06 accounts within the prescribed time. The Financial Statements of KMC for the year 2003-04 have been audited by the Office of the C&AG Local Bodies Audit and have been certified to be “True & Fair”. For the first time, KMC prepared a complete list of inventory of assets owned by it. This was done through external consultants and assets were compiled and valued at thousand of crores. This has come up as a good example for PFMA where large backlogs have been cleared with help of external consultants.

Internal Audit and External Audit

In KMC the internal audit or the local fund audit is done by visiting internal auditors from the State Government and the external audit is done by the Office of the C&AG. The local fund audit is primarily a transaction audit and does not look at management and systemic issues. The local fund auditors are also not too skilled to audit in the changing environment and transition to computerized and double entry accounting.

External Audit. The Act provides that the external auditor would be one appointed by the State Government. In regard to the KMC, the State Government has appointed the C&AG – Local Bodies to do the external audit of the KMC. The report of the external auditors are discussed at the municipal accounts committee for examination and reporting thereof. This is something very akin to the discussion of audit reports in the Audit Committee of corporate houses. Also if, no report is received from the MAC, then the Corporation would be held competent to discuss the Audit Report.

Internal Audit. Section 156 to 159 of the Act covers the provision of the internal audit in KMC, to be done under the guidance of the CMA who should conduct monthly audit of the accounts of the corporation and shall report to the MC who then would take an abstract of the receipts and payments and place before the Mayor-in-Council. Of late, the KMC thought it is very important to improve the capacity of the internal audit department to consider the changes in the present accounting methodology of the KMC. For this they have taken in 3 firms of Chartered Accountants to help in the capacity building of the Internal Audit department.

While there is immense potential to further improve, KMC has demonstrated a serious commitment to face challenges and come out of adverse situations. KMC came out of a situation when only overdrafts were there and no cash to a situation where they have cash surplus. They have shown that backlog of 12 year accounts is not a dithering factor of not doing accounts forever. They have shown an increase in revenues without better cash management.

CASE STUDY 2: BANGALORE MUNICIPAL CORPORATION (BMC)

Bangalore Mahanagara Palike (BMP) is the largest of the six city corporations in Karnataka with a population of 42 lakhs. The Council includes 100 elected representatives and five State nominated personnel. Each Councilor represents a ward and 28 Wards committees have been set up to undertake functions devolved to them. On the whole, BMP is charged with 55 obligatory and discretionary functions, which it gets done through its human resource base of 13,000 employees.25 BMP has four Standing Committees namely, (i) taxation and finance, (ii) public health, (iii) town planning and (iv) accounts.

PFMA REFORM AREAS

Three innovative practices undertaken by BMC were found to be good practices, and have been discussed in details; these include (i) budget procedures with focus on external oversight through Public Report on Operations and Finance (PROOF) campaign, (ii) computerized fund based accounting system, and (iii) external oversight.

Budget Procedures with Focus on External Oversight

Budget Information Data Sheet (BIDS). Preparation of BIDS is an innovative process where various departments prepare their individual budgets using certain broad criteria. These include management and performance levels and quality of service delivery, their capabilities, range, requirements, geographical reach and field realities. These are expressed quantitatively using a BIDS. 25 BMP, 2004.

Public Financial Management and Accountability in Indian ULBs 46There is sufficient scope in this exercise for the officials to plan responsive schemes. BIDS prepared by individual departments is reviewed by the Revenue Officer or the Zonal DC in charge of the department. Suggestions for review or changes are made if required, following which BIDS is finalized and a summary of this is prepared.

The Budget Committee, under coordination of the Chief Accounts Officer, reviews BIDS of each department. A final budget of the individual departments is drawn up, based on the discussions and consensus of the Budget Committee. The budget is also used to plan the levels of procurement for the year for various departments. The approach allows linkage between the need based budgeting, procurement planning & resource allocation for BMP. Following this a consolidation of the final budget statements of individual departments is carried out. Budget notes explaining new items, any departure from earlier years, are prepared in details. The budget document has a standardized format indicating vision, goals, functional objectives, and critical issues. Finally, the budget is passed on to the Taxation and Finance Committee, which passes the budget and forwards it to the Council. Upon clearance by the Council, it is sent to the State for approval. External oversight and accountability of the budget are credited through the PROOF Platform (discussed below). This process has now been in operation for 6 years and has provided a sound rationale to the entire budget making exercise. This also allows spending within the available budget lines.

Proof Initiative. The PROOF campaign26 was a collaborative effort of four non-profit independent organizations in Bangalore27, in carrying out budget analysis/fiscal performance audit of BMP, and started in 2002.28 The focus of the campaign was ‘disclosure, debate, dialogue, and discussion’ on the use of public funds. The framework of performance assessment is done in three areas:

(i) Analysis of the financial statements of BMP: this includes comparison of revenue and expenditure statement with original budget figures, scrutiny of current and long-term assets, and short-term and long-term liabilities.

(ii) Performance indicators: five sectors were selected for performance analysis, which include, health, education, road works, slum development, and revenue. Indicators were developed on a broad framework of input, output and effectiveness.

(iii) Management discussion and analysis: focuses on management discussions and analyses of overall performance of BMP, and discussions of selected activities.

The fiscal performance audit of the BMP by the PROOF was started with the financial year 2002-03. The initial focus was to assess implementation of the various programs approved in the budget. The first step was to engage BMP in the process, to disclose their quarterly financial performance and later to respond to the queries on the analysis of the financial statement. A format was created on information pertaining to revenue and expenditure, assets and liabilities, for a management discussion and for analysis of the past quarter. Prior to the launching of the campaign, the BMP budget and the bi-monthly review were not available to the public. The budget statement of the BMP had 800 items, making it difficult to comprehend. The PROOF format simplified the budget statement into four categories for revenue, capital, and fiduciary receipts and expenditures and a few selected major items. The model adopted for disclosure was that of the Governmental Accounting Standards Board (GASB).29

PROOF has been conceived of as a continuous effort, with quarterly assessments. Each year the campaign has a ten-month time framework, ending with review of performance of the financial year. 26 While PROOF was launched as a campaign, there is also an opinion among some of the partners that it is more of a platform for citizens’ engagement. Janaagraha, one of the partners, however, has worked out criteria for its activities to qualify as a campaign, which includes mass impact, sustainable solutions, scalability, possibility of replication, and leveraging of existing platforms. Since PROOF is considered as fulfilling these criteria, it is referred to as a campaign. 27 These included Janagraha, Public Affairs Centre, Voices and Centre for Budget and Policy Studies. During the second year of the campaign, there was a change in the partnership, with CBPS and PAC opting out, and new partners such as Akshara and CRISIL joining in. 28 The entire campaign consists of two groups – the core group (of PROOF Energy Centre which was set up for this purpose) comprising of a select member of middle class men, who were retired officials and the campaign partners including Janaagraha and Voices. 29 GASB was organized in 1984 by the Financial Accounting Foundation (FAF) to establish standards of financial accounting and reporting for state and local governments in United States of America.

Public Financial Management and Accountability in Indian ULBs 47In the first year, there were quarterly public hearings. From the second year onwards, while quarterly assessments were made, public hearings were held half-yearly, as the BMP felt there was no substantial content for a quarterly public hearing. The quarterly discussions have been well planned, highly structured interactions and were coordinated by PROOF organizers, between officials and PROOF coordinators. Citizens’ interaction with the BMP officials is now done half-yearly based largely on a five-point questions list developed by PROOF and given to BMP to provide information.

Clearly, as an initiative to increase transparency and accountability in Municipal Corporation spending, the example of PROOF is probably one of the best in Indian scenario; other NGOs and city governments have the studied possibility of its replication across their cities quite actively, thus, highlighting its success. Although the PROOF campaign kicked off soundly and augured well for ensuring improved accountability in BMP spending, there are a multitude of issues which need to be sorted out before it can be taken to its logical end. Key issues include low levels of involvement of councilors; lack of capacity building of citizens; selective representations from areas where the NGO is more active; limited role in budget preparation; lack of information on impact of each PROOF campaign on expenditure allocations in BMP, thus, blotting the extent of accountability of BMP spending; lack of public involvement in major decisions; etc. On the whole, PROOF is a very positive initiative in PFMA involving a public debate on the budgetary performance. Some of the limitations mentioned above need to be addressed in due course. However, the process has still not been fully institutionalized. There is a need to refocus and re-launch PROOF, aimed at increased participation, convergence with broader issues and impact evaluation.

Computerized Fund Based Accounting System

Bangalore became the first city in India to shift to FBAS in 2002. The initiative was taken up by the Bangalore Agenda Task Force (BATF), which provided funding support to implementation of FBAS in BMP. Consultants were identified and brought in by BATF to respectively facilitate design and implementation of FBAS in the Corporation.

Some of the key steps undertaken during this exercise included (i) preparation of a detailed budget exercise and creating focus on financial accounting and creation of financial information flow aspects; (ii) collection of information on BMP assets and distributing the same to various departments for verification and updating; (iii) physical verification of all assets listed; (iv) collection of information on all works in the pipeline; (v) reconciliation of over 300 bank accounts; (v) development of the BMP Accounts Regulation; (vi) signing of a Memorandum of Understanding with the State Government (2001); (vii) development of a tailor-made software; (viii) computerization of all data available at BMP; (ix) test run of the software, and (x) parallel run of old and new system (from April 1, 2001) and shifting to FBAS in 2002. To support initiative of FBAS and other financial reforms, a position of Additional Commissioner (Finance) was created in BMP with three Assistant Controllers (Finance) position created under him for the three zones.

FBAS and Public Oversight : Conversion of accounting system to FBAS has also played a major role in ensuring public oversight. Half-yearly balance sheets are now published in all national newspapers and given to the PROOF for quarterly assessments as indicated earlier.

Some of the positive spin-offs of introducing FBAS in Bangalore include improved budgeting, better management information system; no arrears; centralized system. Shifting to FBAS has facilitated BMP in improved asset management. Asset registers are generally upto date and there are not much arrears, a stark difference from pre-FBAS days when BMP was not even sure of its assets. Formats for opening balance sheets and fixed assets have been designed and cumulated for updation. Given these achievements, there are still some areas which need to be addressed. These include high dependence on consultants/low capacity in BMP; Incorporation of National Municipal Accounting Manual (NMAM) recommendations; software issues; neglect of internal control and audit functions. Another area is induction of new skilled staff and capacity building of existing staff to ensure sustainability of the reform action. The FBAS itself needs to be re-aligned in accordance to prescriptions of the NMAM. On similar lines, the current software package needs to be re-aligned; BMP may look at adopting the same software which the State Government has developed for all its non-Corporation ULBs. Use of data generated by FBAS is still very limited and capacity enhancement, especially at senior level needs to be done to allow for better perspective planning and

Public Financial Management and Accountability in Indian ULBs 48budget preparation in future.

External Oversight

External oversight and citizens participation is largely brought in by the PROOF campaign. This apart, external oversight and transparency is also ensured through development of Citizens Report Cards (CRC), an initiative of PAC Bangalore. PAC has been developing CRCs for various service providers in Bangalore including BMP. Efforts of PAC in developing CRCs have been well documented in the past. This section focuses on impact of CRC in improved governance and service provision in Bangalore.30 There was a general consensus on applicability of CRC as a constructive instrument of ensuring transparency and accountability among civic service providers.

Some of the major achievements of PAC included (i) providing relevant and timely feedback with potential for promoting staff motivation and resulting in higher performance levels in civic service providing agencies, (ii) involvement of service providers along with citizens in rating provides a sound platform for external oversight, (iii) strengthening links between service providers and citizens, (iv) providing better platform for external assessment than even C&AG’s performance audit, (v) ensuring reduced organizational lapses from service providers, (vi) reducing service monopolization at BMP, and (vii) positive use of the Right to Information Act ensuring that BMP is more transparent in sharing information and becoming more alert to citizens needs. Some of the major critiques included (i) increasing level of dissemination among the citizens to capture their minds, (ii) creating awareness among the service providers of CRC so that they are better tuned and provide higher commitment levels, (iii) should be made an annual feature as it otherwise loses its sharpness, and (iv) inability to directly relate improvements in past performance to previous CRCs.

Bangalore has undertaken a number of exercises to improve financial accountability and transparency, especially in areas of budgeting, revenue generation, accounting and external oversight. Sadly, other key areas of BMP like procurement are lacking in their initiatives to ensure better PFMA. Even in the two of the most well known oversight and social audit measures ongoing in Bangalore i.e. PROOF campaign and the CRC are certainly good, it is losing its sheen due to a host of reasons mentioned. There is a need to create an awareness of this at BMP itself, as well as with the Corporators who have been left out in the overall process. Better dissemination and awareness among the local masses is necessary. CRC also need to be disseminated, not only among the citizens, but also among the civic service providers to ensure better response from both quarters.

CASE STUDY 3: MADURAI MUNICIPAL CORPORATION (MMC)

Famous world over as a temple town, Madurai is the second largest city in the State. Spread over an area of 51.96 square kilometers, Madurai Corporation serves a population of 14.44 lakh.31 The Madurai Council consists of 72 wards, and subsequently 72 Councilors, of which 22 are women and four belong to Scheduled Castes/Tribes.32 This city is governed under the The Tamil Nadu Municipal Corporation Laws (Amendment and Special Provision) Act, 1994

PFMA REFORM AREAS

Madurai Corporation has undertaken a number of initiatives in improving transparency and accountability in their operations. It must be considered, however, that Tamil Nadu as a State is probably one of the most progressive in terms of initiatives undertaken for improving PFMA in ULBs and Madurai has greatly benefited from this. Some key PFMA initiatives/efforts of the Corporation in the following areas are listed below: (i) budgeting; (ii) debt swap for better cash management; (iii) accounting system; and (iv) e-governance.

Budgeting

Madurai Corporation has been using the concept of Zero-Based Budget (ZBB) for budget preparation. Budgets are prepared by the Accounts Department based on consolidation of budgets prepared by all 30 Based on discussions undertaken by World Bank (through Mr.Vinod Sehgal) with Mr.Ajay Kumar Singh, Commissioner of Police, Mr.Upendra Tripathy, MD of Bangalore Metropolitan Transport Corporation, and Mr. M.K. Shankarlingegowda, Commissioner, Bangalore Development Authority. 31 Census of India, 2001, Population Table – Final. 32 Government of Tamil Nadu, Performance Budget 2004-2005, Administration of Urban Local Bodies Corporation and Municipalities, Demand No.33, 2004-2005, Department of Municipal Administration and Water Supply.

Public Financial Management and Accountability in Indian ULBs 49departments. The budget is placed before the Standing Committee on Taxation and Finance for approval. Once this is approved, the draft budget is placed for public feedback (Box B.2). The budget is then placed before the Council for approval. Once approved, it is then submitted to the State Government for approval. The governing Act provides detailed guidelines for preparation and presentation of ULB budgets. Although ZBB allowed for improved financial and perspective planning, budget prepared till date have generally been very rigid and fail to provide enough information for decision makers to allow for effective policy and resources linkages, and more importantly review trade-offs. Till the last financial year (2005-06), budgets were prepared with a single-year perspective; resultantly, these were largely short sighted.

Box B.2 Public Participation in Budget Preparation

Based on recommendations of the Second SFC, Madurai Corporation has made attempts for participatory budget preparation based on the Brazilian model. Draft budgets are circulated free of cost to Ward Committees and put up on Notice Board of the Corporation for feedback. However, public participation is still not as forthcoming as envisaged and the Corporation needs to take additional steps in ensuring citizens’ inputs.

New Concepts in Perspective Budgeting. For the current financial year (2006-2007) Madurai Corporation, as required by recent State directives, has prepared a biennial budget to allow for long-term perspective planning and ensuring that ongoing major projects do not get stuck mid-way. The revised budget for 2006-07, along with modifications, if any, would be presented during the next budget session. Tamil Nadu is the first state in the country to bring in the concept of biennial budgeting system. The biennial budgeting concept is a novel means of ensuring continuity of reform action, as well as perspective planning, though only mid-term and not long-term.

Madurai Corporation, on the whole, has taken steps towards perspective budgeting, but is lacking in its ability to use budget analysis as a tool for effective decision making inspite of using the ZBB. Lack of post-analysis of budget is also hindering use of the document as a PFMA tool. While norms for public participation in budget preparation do exist, these need to be reviewed in context of its failure to generate enough public response.

Debt Swap for Better Cash Management

The Corporation of Madurai embarked on construction of a 27.2 km two lane inner city ring road project which was jointly funded by a loan of Rs.29 crores from Tamil Nadu Urban Development Fund (TNUDF) and grant of Rs.14 crores from the State. Tolls accruing from usage of road were allocated to service the debt33, and State agreed to bridge any deficiency in toll revenues. The loan was obtained from TNUDF at an interest of 15.5%. Looking at the strong performance of toll collections after a year of operation, the Corporation decided to enter the market with bond issue of Rs.30 crores at a rate of 12.25% payable semi annually. This debt swap to repay the high proposed cost TNUDF loan with the cheaper option bond market issue would have saved the Corporation an annual interest payout of about 3% which would result in an overall saving in excess of Rs.8 crores.

The Madurai bond issue thus is without doubt one of the better practices of cash and liabilities management in India wherein risks were reduced due to TNUDF absorbing the initial development risk of potential time and cost overruns. In addition, creation of a no-lien escrow account and the States collateralizations on toll collection helped reduce the risks as well.

Accounting System

Tamil Nadu has clearly proved that conversion to accrual based DEAS can be achieved by take a step-by-step approach. This shift has greatly facilitated the Corporation in increasing transparency in its transactions, and has made available information key to perspective planning and budgeting. It is almost half a decade since Tamil Nadu has shifted to DEAS and it now needs to do a reassessment,

33 Toll rates were notified by the State. The State mandated an annual increase of 8% for first five years, with subsequent increases to be determined at end of this period. At end of this period, the Council passed a resolution (no.213 dated 01.08.2005) to increase tolls by 8% annually for the next five years.

Public Financial Management and Accountability in Indian ULBs 50particularly in context of NMAM, to see where its ULB accounting system stands presently, and take necessary action in improving the same.

E-governance

The Corporation has introduced a number of e-governance reforms to improve its functioning by providing better services to citizens. Allowing a number of its functions to become online has facilitated the Corporation in taking their services to a larger group of citizens in a decentralized manner. Introducing transparency in property tax through self assessment scheme, online billing and payments, and online grievance redressal system have also facilitated the Corporation in improving its accountability and public image, as well as strengthening its revenue base. An online grievance redressal system has also been introduced. Under this, citizens can ‘file’ their grievances online. Each task has been allocated a fixed time duration within which the Corporation has to respond. Action taken on the grievances can also be seen online. Twenty-six kiosks/centers have been developed across the city to allow to greater accessibility to citizens.

Apart from providing services to its citizens, Madurai Corporation has also used information technology (IT) for increasing their efficiency. All staff members are required to ‘sign in’ in the morning and ‘sign out’ in the evening using a fingerprint enable IT system. This system allows easy and quick calculation of the time any employee has been away from the Corporation. This ‘idle’ time is calculated on Department basis. Each Department has been allocated a fixed ‘idle time’; in case this benchmark is crossed, the Department Head has to provide an explanation to the Commissioner. According to many citizens, this system has vastly improved efficiency of Corporation employees, especially those working in Group C and Group D levels.

Madurai has been quite progressive in areas of PFMA reforms, however, over time some of the initiaties have slowed down. Specially in areas such as DEAS, there is need for reassessment in light of NMAM guidelines. Also in other areas like budgeting, the concept of zero based budgeting has not been able to give the requisite results. None the less, Madurai has set a precedent in many areas such as Debt Swap and now is working towards a biennial budgeting system, impact of which remains to be seen.

CASE STUDY 4: NEW DELHI MUNICIPAL COUNCIL (NDMC)

In May 1994, the NDMC Act, 1994, replaced the Punjab Municipal Act, 1911, and the committee was renamed as "New Delhi Municipal Council". NDMC is responsible for an area of 42.74 square kilometers that includes the seat of Central Government, Rashtrapati Bhawan, the Prime Minister's office and residence, Central Government office, Foreign Missions, residences of Ministers, Members of Parliament, Diplomats and Central Government employees. The static population of the NDMC area, according to the 2001 census is 2.94 lacs34, but the floating population is, however estimated to be more than 10 lacs on account of commercial complexes and government offices35. The New Delhi Municipal Council is constituted as a corporate body; all the members of the council are nominated members. Its constitution and composition itself is unique, comprising of a nominated body. It provides an interesting variation and model of ULB management as compared to other decentralized elected local bodies in India.

PFMA REFORM AREAS

During the study, various components of PFMA in NDMC were reviewed. In this section we have presented the initiatives that have been identified as best practices viz. (i) planning and budgeting; (ii) internal audit and control; (iii) assets and liabilities management; (iv) accounting and financial reporting; (v) procurement; and (vi) external oversight and public participation.

Planning and Budgeting

In the past few years, the NDMC has taken a number of initiatives for making their budgets more rational and user friendly. The budget document is now compiled in two parts and six statements. For

34 www.delhigovt.nic.in 35 www.ndmc.gov.in

Public Financial Management and Accountability in Indian ULBs 51the list of original works, under the detailed statement of expenditures, names of user departments and executing departments are also reflected. This is done because, often, the amount is sanctioned to one department for use but the actual execution of the work or part of work is done by another department, and listing that down at the budget stage itself clears a lot of doubts. Also under the detailed statement of expenditures, below one activity head all the components required for that activity of work are listed with allocations so as to reduce any confusion and allow for easy monitoring on the share of total allocation to be utilized for each sub-activity.

Around 84 heads of account that were considered redundant were removed or merged with the existing heads and few new heads as per the present requirements like the consultants/evaluation studies, commercial buildings/markets development funds have been added. Following the complete computerization of accounts, switchover to accrual based accounting system and following the national accounting manual, the council further plans to rationalize the budget procedures(accrual based budgeting). A conscious decision has been taken to peg outlays to the currently anticipated levels of performance for various projects based on a compilation of critical processes. The attempt focuses on making realistic budgeting rather than intent budgeting. Token budget amounts can be reviewed and raised appropriately by proposing additional outlays (out of savings or special funds) to meet such requirements. Proper budgetary control is dependent on timely computation of accounts. The council has updated monthly accounts to the month of May 2006. Till two years back NDMC’s accounts were constantly in arrears and ensuring budgetary control was difficult. At present though, regular monthly accounts are submitted to the council for review. Recently the NDMC has started preparing a bi-annual variance report that is submitted to the council.

Internal Audits and Controls

Internal audit and control at NDMC is a well structured process that offers audits and checks at multiple levels. Such a rigorous process ensures transparency. To begin with, the accounts department at NDMC must submit monthly statements of income and expenditure to the financial advisor, who utilizes the accounts to keep a check on budget compliance. Along with this, the council can require the chairperson to submit any record, plan, estimate, statement account under his /her control. The council, in turn, is answerable to the chief auditor, who conducts a monthly audit of accounts of the council and reports it to the chairperson to have him publish a monthly abstract of income and expenditure. Along with these checks, two audit reports are generated throughout the year: local audit report and annual audit report. The local audit report includes audit of various departments undertaken during the year by field audit parties. Once the local audit report is prepared it is sent to the chief auditor who can then highlight material /systematic impropriety and hold the concerned department responsible. If satisfactory replies are not received from the departments concerned then the observations by the field audit parties are included in the annual audit report, which is submitted to the chairperson to be presented to the council. A Unique feature in NDMC is that the Chief Auditor is normally a deputation from the office of the CAG. This gives a lot of seriousness and focus to the internal audit function.

Assets and liabilities management

NDMC at present does not have a complete list of assets and liabilities owned by it. The opening balance sheet has not been fully reconciled, and subsidiary ledgers including fixed asset registers are not complete and updated. The council is planning to prepare GIS based property mapping for its areas, which is a difficult task due to the presence of many high security properties in its areas.

In 2004-2005 NDMC became, perhaps the first and only municipal body in the country that was free from all debt liabilities. NDMC had been taking loans from the Government of Delhi till the year 2000 at varying rates of interest under the Annual Plans for undertaking capital works. The interest rates on these past debts had risen to 13.5 percent per annum. NDMC is now able to generate enough financial resources to fund all of their capital works but are also in a position to retire the entire amount of outstanding loan together with interest. The council has liquidated entire liability on account of all borrowed funds and by paying Rs. 33.90 cores to the Government of Delhi.

Accounting and Financial Reporting

The NDMC is in the process of shifting over to the accrual based double entry system of accounting.

Public Financial Management and Accountability in Indian ULBs 52The council is in an advanced stage of implementing the system, it has made significant headway in developing a proper chart of accounts, collection of details of fixed assets and liabilities and determination of opening balances as on April 01 04. The complete shift over is expected by the end of 2006-07. Also based on the recommendation by the second state finance commission report, the New Delhi Municipal Council (NDMC) has recently signed agreements with a non-profit organization set up by Infosys, e-Government Foundation-Bangalore, for computerization of its financial accounts. This project is meant to implement the e-Government Financial, a double entry fund-based financial accounting system, in the Council and provide an efficient and transparent service to the public. Depending on the experience and success of the implementation, other relevant application would be adopted by the Council.

Procurement

Procurement is conducted in the municipality based on the rules outlined under the procurement of goods and services rules in the General Financial Rules 2005. These rules are applicable to all departments and ministries regarding procurement of goods and services for use in the public service. The recently reworked rules also have rules for procuring consultancy services and outsourcing of services. Rule 160, defines clear sections on transparency, competition, fairness and elimination of arbitrariness in the procurement process. This rule mainly covers areas on selecting a suitable bidder. Similarly rule 161 defines clear sections on efficiency, economy and accountability in public procurement system. The rules specifically mention the provision of rate contract system for goods required on a regular basis for normal functioning of the department. There are specific rules for reducing risks in goods/services procured. For the goods procured there is a provision of retaining performance security till a decided period of use (Rule 158). Similarly there is a provision of ensuring constant monitoring of services that may be outsourced (Rule 185) or consultants hired (Rule 177).

External Oversight and Public Participation

The NDMC has appointed zonal offices (the zones are not clearly defined). The zonal officers, who are also senior department executives, regularly contact the citizens and RWA’s, Citizen groups etc to understand the people’s requirements in their zones. Even though this is not a formal or clearly defined arrangement, the system increases public participation in the business of the corporation. Currently the Information and facilitation center under public relations department acts as a public face of the council and attends to public interface responsibilities by providing facilities like: receiving and computerization of all the grievances registered at Central Control Room, which has now been modernized by adopting IVRS; preparation of statement of grievances and to send the same to the Chairperson, Secretary & Concerned HODs for taking appropriate action and their monitoring; supply of Citizen's Charter & Information Brochures to various organizations/individuals; centralized sale of Tender Documents of various departments; access to information pertaining to NDMC as a whole; supply of information to general public under Delhi Right to Information Act-2001 for which Director (PR) is a nominated competent authority to be approached. The information is supplied by applying on specific prescribed forms on payment of charges prescribed under different rules of this Act.

Continuing ownership and financial reforms in the NDMC may be largely attributed to the directives of the Central and the State Government and the senior officials at the audit and finance departments of the organization. However, it is important to remember and realize that NDMC has a special position as a municipality enjoying a lot of autonomy. A major step forward will be building the capacity of the officials across levels to use these reforms not only to generate basic information, but use it as a tool for decision making and increasing transparency in the ULB’s functioning.


CASE STUDY 5: KAPRA MUNICIPALITY (KM) Kapra Municipality is located in the Ranga Reddy District of Andhra Pradesh and is one of the ten municipalities on the periphery of the twin cities of Hyderabad and Secundrabad. Kapra is primarily a peri-urban industrial town that was given the municipality status by merging six gram panchayats in February 1987. It is divided into 37 municipal wards. A government order (G.O.Ms.No. 184, MA&UD), dated April 20, 1999, recommends the abolition of Kapra municipality and inclusion of its areas in the limits of municipal corporation of Hyderabad as a part of the Greater Hyderabad Development Area. High court’s decision is currently pending on the same. The Elected Council, presided by the Chairperson is a policy-making and oversight body of the ULB and has an authoritative control over the municipalities. The Executive/Management, of each ULB, is headed by a Commissioner, appointed by the state who manages the various activities of the ULB.

PFMA REFORM AREAS

During the study, various components of PFMA in Kapra were reviewed. In this report we have presented initiatives in the following areas have been identified as best practices viz. (i) budget process; (ii) e-procurement; and (iii) citizen’s interface.

Planning and Budgeting

Before financial year 2003-04 the budgeting practices of Kapra municipality involved planning and budget estimates preparation for the next year only, which was a short sighted approach, however this has now changed. Post 2003-04 multi year perspective was adopted for the preparation of the budget. In 2004-05, a multi year Financial Operating Plan (FOP) was prepared, with assistance from APUIDFC. The DFID funded APUSP program under the Comprehensive Municipal Action Plan for Poverty Reduction, stresses the need for a comprehensive and long term planning (financial). This would enable planning revenue inflow and expenditure over a longer term. The FOP model has been designed to assess the impact of proposed investment over the planning horizon (20 years). This model takes into account the regular income and expenditure account of the local body as well as additional O&M expenditure due to increased service levels and proposed creation of infrastructure. The FOP hence also acts as an important factor in the preparation of the annual budget. The municipality at the time was not under the APUSP program but as the municipal commissioner had worked previously with the APUSP and realized the importance of preparing an FOP, he initiated the process in Kapra, this is a good example of benefit of building capacity of the municipal officials.

The Budget prepared since 2004-05 is based on the logical assumptions and general annual increase, and planning is done on the need-based capital expenditure. It is based on actual receipts of the previous years, making rational provision for expenditure on establishment, maintenance, repayment of dues and annuities to government and other agencies, funds required for completing ongoing schemes under execution, providing matching contributions for schemes sanctioned on sharing basis. Approach adopted towards preparation of budget is that major revenue sources are examined with respect to the total resource base, their contribution to the overall income and the collection performance. The revenues income is projected for planed period assuming average increase in revenue sources arising from the added properties and water connections and revised rents as may be applicable.

The existing service levels are analyzed and the need for additional infrastructure is identified based on future population, cost of provision of that service is worked out and divided into the total plan period. Participation of all the key stakeholders’ including department representatives is sought for carrying out this exercise. Each department is requested to submit on priority bases- realistic plans for expenditure, which is compiled to prepare the budget estimate. A series of consultation meetings with various department heads (including director of public instruction, medical and health, chief engineer, town planning department, and the revenue department and others) are held to finalize the budget estimate which is forwarded to the special officer appointed by the government (in place of the elected municipal council) for approval.

Till the current year, citizen participation in preparation and implementation of the annual budget

Public Financial Management and Accountability in Indian ULBs 54was non-existent but Kapra municipality has now taken steps to share the annual budget aiming at generating interest and involvement of the citizen groups towards the budget process. The municipality has prepared a Budget Capsule for 2006-07 for the public or the citizens to aid dissemination of financial status and financial projections. The capsule is a four page - reader friendly colorful leaflet fro distribution to the citizens (through the citizen center). Based on the response and feedback the management plans to increase citizen partnership in budget making processes for future.

E-Procurement

The state government through an order in July 2004 has stated that all existing rules applicable to the processing of conventional tenders will be applicable to the bids to be secured through e-Procurement process. The government has also mentioned that e-Procurement should be followed by all the departments, PSUs and local bodies for procurement of works costing above Rs 10 lakh and goods & services costing above Rs 5 lakh. Even before this order the state government had clearly defined the procedure of procurement starting from allocating funds for developmental works through budgeting. Only works up to 5% of the allocated amount for any sector/scheme were allowed to be let out on nomination basis on emergency/immediate need basis.

The state has developed an e procurement website - eprocurement.gov.in which is a comprehensive e-Infrastructure that helps the government and the citizens realize the vision of fuelling growth via services like catalog purchase, e-tendering and e-auctions. The platform provides its members with access to several trading suppliers and the tender management software helps both the buyers and the suppliers to reduce the cycle time, unnecessary paper work, waiting in long queues and simultaneously maintaining the transparency in the entire process.

Advertisements are put on the e-procurement website and simultaneously notice inviting tenders are published in newspapers and tender samachar patrika, the applicant has to register with the website to obtain the tender document, which does not cost the applicant anything. Standard formats for submitting bids can be downloaded, completed and uploaded with scanned copies of required documents, and scanned copy of the DD equal to the required earnest money deposit. Original copies of the same or attested copies need to be submitted in print to the concerned department. The outcome (evaluation) of the technical and the financial bids are displayed on the website accessible to all bidders. The evaluation is done by the concerned superintendent engineer, for the circle or the tender committee depending on the contract value, based on pre-decided criteria for selection.

The state government has through a recent order (G.O.Rt. No. 1172, M.A.) ensured the quality of works by introducing third party quality control (through inspection and certification) for all works and procurement of supplies/spares costing above rupees one lakh. The expenditure towards charges of third party control is met by duly making suitable provision in the sanctioned estimate, the engineer in chief, Public Health, Hyderabad reviews the third party quality control system but the final responsibility lies with the respective department heads.

At a later stage the government should look at making available to the public a comparative purchase statement (comparatives statement of tenders) that will make the selection process public and the beneficiaries will be better aware. Also an annual MIS could be prepared and shared with the people on the amount of work tendered and costs.

External oversight transparency and public participation

The Kapra Municipality follows a quality policy which quotes: “the kapra Municipality is committed to provide and continually improve consistent, responsive and community centric urban municipal services.” With the quality objectives reading as “improving citizen satisfaction by 10% in one year; reduction in number of visits made by the citizen to avail a service more than 2 times from 11% to 5% in one year. Adhering to the citizen charter and disposing the files within the time frame mentioned.” These messages are publicly displayed at prominent locations in the municipality, which ensures that all are aware of it. Municipal officials and staff work towards it, while the citizens are free to demand better services.

To achieve these objectives the executive group of municipality analyzed the existing internal processes by involving the staff from various levels of the municipality. They mainly focused on

Public Financial Management and Accountability in Indian ULBs 55processes that involved citizen interface and nine processes/services were identified for implementation. Based on a series of brainstorming sessions, held with all the staff to identify loopholes of the existing system, suggestions were invited from the staff on possible ways of improvement. Commissioner as a leader and guide has been the torch bearer utilizing his APUSP experience, with support from the executive staff. Brainstorming sessions revealed that following steps need to be taken (i)information needs to be provided to citizens for adequately addressing their problems; (ii)simplification and standardization of application forms; (iii)simplification of note files, standardization and making them traceable; (iv)removing non value adding steps in daily procedures; (v)citizen feedback needs to be collected and analyzed to take action; (vi)third party citizen center to tackle citizen interface; and (vii)most importantly to train/orient the existing staff adequately.

Based on the above findings Kapra Municipality recently opened a citizen center for improving service provision and complaint redress-al. Though the state government is also operating the ‘e-sewa’ facility since august 2001, officials at Kapra made this center operational in November 2005 to locally address the citizens concerns. The center presently addresses nine main functions including (i)Birth and death certificate issues; (ii)Sanitation certificate issues; (iii)Dangerous and offensive trade license issue; (iv)Water connection; (v)Assessment of property tax; (vi)Transfer of property title; (vii)Building permission certificate; (viii)Advertisement tax; (ix)Complaint redressal etc. The municipality plans to extend its operations to other services soon based on the response and feedback from the citizens.

The standard operating procedure manual also explains the procedures for internal quality audit, the management representative appointed by the commissioner acts as the audit manager. The audit manager has an annual plan for audits department wise. The audit team including an internally/externally trained auditor, management representative and commissioner visit the department or section as pre decided (based on the annual plan) – conduct an opening meeting detailing the procedure and purpose of the audit. The audit consists of reviewing and analyzing the documents/files/records and interviewing the officers and relevant members of the department. The audit observations are noted and compiled as a report, which is then shared with audited team, and discussions are held about the findings and mutually acceptable action to taken for improvements. It has been three months since operation and till date no audits have been conducted.

The municipality has published a citizen charter to educate the citizens on the standard procedures for the identified nine services that describes step by step, the eligibility, documents to be submitted, processing steps, conditions, possible delays or bottlenecks; duration and the fine that the municipality is liable to pay in case of delays, concessions for various specific cases.

Kapra is also currently implementing a state level citizen contact program called the Prajapatham, that involves visits by the municipal officials on foot to the different areas of municipality for meeting the people and understanding from them their needs and requirements. This is a good and very straight forward way to get a feed back from the people about their needs and requirements. (The Prajapatham is a good initiative to identify the needs to the people as a community while for addressing the peoples needs on other levels the municipality receives the complaints and feedback through the citizen center).

Kapra seems to have the foundation and basic framework for a sound PFMA system that is working well on transaction-based controls. Continuing ownership and leadership reforms in Kapra may be largely attributed the initiatives of the new commissioner who was able to introduce some best practices from his earlier experience at APUSP. He was able to motivate the citizens and employees to present a more citizen friendly environment. Kapra also introduced tools like the financial operating plan, budget capsule, citizen charter and the citizen center based on his experience with the APUSP. This clearly demonstrates the advantages of capacity building, fresh ideas, and rotation of staff. Kapra has been successfully able to replicate and internalize some of APUSP initiatives without any project support. Other advantages of Kapra include the presence of a dedicated team of officials at senior and executive levels and built environment of the municipality especially the impressive and modern building that is a major contributing factor as catalyst for change.


CASE STUDY 6: JAIPUR MUNICIPAL CORPORATION (JMC) Jaipur City is the 11th largest city in the country and is capital of the state of Rajasthan. The city has an area about 1,464 sq. km and a population of 2.32 million. It comprises three parts: the walled city (area 6.7 sq. km, 0.62 million), the Jaipur Municipal Corporation (288.38 sq. km, 2.32 million), and the Jaipur Development Authority (1464 sq.km, 2.68 million). The JDA’s jurisdiction covers the entire city, the JMC comes within the JDA and the Walled city comes within the JMC. The tourism industry, tourism service sector, trade and commerce in building materials, textiles, wood products and metal works, and small-scale industry basically drive the economy of the city. The Jaipur Nagar Nigam functions under the “the Rajasthan Municipalities Act, 1959” and further amendments to it. The municipality functions under the “Rajasthan Municipalities Act 1959”, which is quite old and needs to be updated/ improved to meet the challenges of Urban Development and Municipal Management. The act makes the corporation highly dependent on the state for approvals and resources and does not empower it enough to act as the third tier of the government.

PFMA REFORM AREAS

Urban reforms in Rajasthan started with the 74th CAA. The 74th CAA aimed at strengthening local governments by clearly defining the powers and responsibilities of such bodies. The Government of Rajasthan has constituted the 3rd State Finance Commission to review the financial position of ULBs, all over the state. In 1999, the Government of Rajasthan, with the assistance of the ADB, initiated Rajasthan Urban Infrastructure Development Project (RUIDP). Capacity building of JMC for delivery of services was one of the project components. It included provision of equipment and materials, training to officers, e-governance scheme etc.

The government has also prepared an action plan for urban renewal of Jaipur. The plan is implemented through various agencies, like the Jaipur Development Authority, the JMC, the RHB, the Tourism Department, etc. Jaipur Action Agenda Group (JAAG) has been created to implement Jaipur Action Agenda for Jaipur. This group reviews the progress made on the projects identified for the implementation. So far 11 Public – Private partnership programs have been identified under JAAG.

Some of the PFMA related initiatives by JMC include: (i) e-governance and e-procurement; (ii) oversight; (iii) financial reporting; and (iv) assets and liabilities management.

E-Governance and e-Procurement

The Government has also started the e-Mitra project, which is being implemented through district administration. The project offer services like deposit of electric, telephone, water bills, Birth – Death certificate, payment of house tax, etc, through its 70 kiosks installed through out the Jaipur city. JMC has signed MoU with e- Mitra Society for delivery of services like house tax and birth and death certificates. JMC is setting up a state of the art Citizen Helpline Centre providing an array of services. The Centre will be located in the JMC campus on the main Tonk Road, and will be open from 8am to 8pm.

Some of the measures being undertaken through the E- governance project include:

• e-procurement: Government of Rajasthan has initiated e-procurement system under e-Governance plan of the State. The concept of e-tendering in Rajasthan has been introduced through the prestigious Rajasthan Urban Infrastructure Development Project (RUIDP). The new system offers advantages of catalogue based procurement, electronic processing, facility of auctions and electronic payment. This will benefit in the reduced time cycle of tendering, reduced communication cost, ability to negotiate better prices and improve transparency. The online tendering will provide all information at one place to the bidders on all government procurements and will reduce transaction cost, reduction in marketing & sales promotion related costs & will provide a level playing field for all bidders. It will be easy for the bidders as they will submit online at its place. Under the new system, a bidder can access the bid document from anywhere in the world, through the Internet. The applicants are given digital signatures to take part in the online tendering process. The Bidders attest the tenders using their Digital Signatures, which will

Public Financial Management and Accountability in Indian ULBs 57be provided by NIC/ TCS/ etc. Their Digital signatures will be valid for 1 year for all e-procurement works all over the India.

• creation of database for housing tax through field survey - this reform measure will make tax collection more effective and transparent in Jaipur;

• Implementation of DEAS – the switch from cash based single entry system to accrual based double entry system will yield many benefits for the municipal corporation. One major benefit of the double entry accounting system is that it will reflect the financial position of the corporation more accurately. This is because expenditure will be listed as they are incurred and not as cash outlays are made.

• Grievance Redressal System – JMC has already started work on a state of the art, computerized, citizen helpline center. This center will function provide information to citizens regarding JMC business. It will also act as an effective Grievance Redressal System. The functions of this helpline center are discussed in the next section.

Some of the other, less important, measures JMC plans to implement under its E-Project initiative are Computerizing House Tax, Lease, Property rentals; Interconnecting all zone offices with the head office; and Keeping a record of Death and Birth Certificates

Oversight

In order to ensure effective public participation, the JMC has issued detailed guidelines on the functioning of RWAs (Resident Welfare Organization). The RWAs are expected to undertake works such as plantation, maintenance of gardens /circles /community halls /dividers /footpaths /community spaces /arranging of door to door collection of garbage (by engaging Swachchata Mitra), prevention of encroachment /illegal construction /posters banners, control over stray animals etc. The RWAs will work in cohesion with JMC for the betterment of the concerned area with inculcation of best civic sense in true spirit of Public – Private Participation.

Financial Reporting

Annual administration report – After the end of the financial year (March end) every year, within a period of three months, the municipality submits to the State Government a report on the administration during the preceding official year in such form and with such details as the State Government may direct. The Chief Municipal Officer, or in his absence, the Chairman, prepares the report and places it before the municipality for consideration and forwards it to the State Government with the resolution of the municipality. The Rajasthan Municipalities act states that the Corporation is duty bound to transmit the annual accounts to the State, as soon as they have been prepared. Along with annual reporting of accounts, the corporation must, from time to time, furnish information whenever the state government places a demand for it.

Assets and Liabilities management

Till now the assets and liabilities records in the municipal corporation were poorly maintained, but under the e-governance initiative there is an attempt to record and list the assets and liabilities. The double entry based system of accounting will ensure proper recording. Recently a physical survey and documentation of the properties in the JMC limits has been carried out, the JMC has also introduced the self assessment of property tax procedure in Jaipur and is expecting a major increase in the tax collection with the introduction of the new procedure.

The State of Rajasthan is a forward looking, reform oriented state that is very much interested in improving the PFMA of its ULBs. It has proven its commitment to improvements in PFMA by launching the RUIDP, which aims to improve the overall system of ULB Governance in Rajasthan. However, the state of ULBs currently presents a mixed picture. While the current state of ULB functioning in Rajasthan is not very efficient, The State has announced many reform measures that would significantly improve the efficiency, transparency, effectiveness, etc of the ULBs. The Rajasthan Municipalities Bill has been introduced to the legislature for consideration. After the passage of the bill, ULBs in Rajasthan will be able to function within a modern framework based on the 74th constitutional amendment. The passage of this bill will help in decreasing ULB dependence on the Rajasthan State Government, and will create a true third tier of government.

Public Financial Management and Accountability in Indian ULBs 58Annex C: List of Functions to be devolved to ULBs under 12th Schedule

Functions mentioned under the 12th Schedule include:

(i) urban planning including town planning;

(ii) regulation of land-use and construction of buildings;

(iii) planning for economic and social development;

(iv) roads and bridges;

(v) water supply for domestic, industrial and commercial purposes;

(vi) public health, sanitation conservancy and solid waste management;

(vii) fire services;

(viii) urban forestry, protection of the environment and promotion of ecological aspects;

(ix) safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded;

(x) slum improvement and upgrading;

(xi) urban poverty alleviation;

(xii) provision of urban amenities and facilities such as parks, gardens, and playgrounds;

(xiii) promotion of cultural educational and aesthetic aspects;

(xiv) burials and burial grounds: cremations, cremation grounds and electric crematoriums;

(xv) cattle pounds; prevention of cruelty to animals;

(xvi) vital statistics including registration of births and deaths;

(xvii) public amenities including street lighting parking lots, bus stops and public conveniences; and

(xviii) Regulation of slaughterhouses and tanneries.


Annex D: List of Functions mentioned under 12th Schedule devolved in States Functions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Andhra Pradesh

x x x √ x √ x √ √ x x √ x √ x √ x √

Delhi x x √ x x √ x x x x x √ x √ √ √ √ √ Gujarat x x x √ √ √ √ √ √ x x √ √ √ √ √ √ √ Haryana x x x √ √ √ √ x x √ x √ x √ √ √ √ √ Himachal Pr. x x x √ √ √ √ x x x x √ x √ √ x √ x Karnataka √ √ x √ √ √ x √ √ √ √ √ √ √ √ √ √ √ Kerala √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ Madhya Pr. √ √ √ √ √ √ √ √ √ x √ √ x √ √ √ √ √ Maharashtra x x x √ √ √ √ x x x √ x √ √ √ √ √ √ Rajasthan x x x √ √ √ √ x x x x x √ √ √ √ √ √ Tamil Nadu √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ Uttar Pradesh √ x x x √ √ x √ √ √ √ √ √ √ √ √ √ √ West Bengal √ √ x √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Legend: “x” refers to functions not devolved by the state government to ULBs; “√ “ refers to functions which have been devolved.

Function codes are as follows:

1. Urban planning including town planning; 2. Regulation of land-use and construction of buildings; 3. Planning for economic and social development; 4. Roads and bridges; 5. Water supply for domestic, industrial and commercial purposes; 6. Public health, sanitation conservancy and solid waste management; 7. Fire services; 8. Urban forestry, protection of the environment and promotion of ecological aspects; 9. Safeguarding interests of weaker sections of society, including the handicapped and mentally

retarded; 10. Slum improvement and upgrading; 11. Urban poverty alleviation; 12. Provision of urban amenities and facilities such as parks, gardens, and playgrounds; 13. Promotion of cultural educational and aesthetic aspects; 14. Burials and burial grounds: cremations, cremation grounds and electric crematoriums; 15. Cattle pounds; prevention of cruelty to animals; 16. Vital statistics including registration of births and deaths; 17. Public amenities including street lighting parking lots, bus stops and public conveniences; and 18. Regulation of slaughterhouses and tanneries. Source: National Commission to Review the Working of the Constitution: Decentralization and Municipalities


Annex E: Accounting Initiatives in Different States Tamil Nadu Municipal Accounting Initiative36. The chief reason for the State Government desiring for the conversion of ULB accounting system to double entry accrual was to enable it to be able to present acceptable information to funding agencies for their support to the investments of municipal bodies in the state. The accounting reforms process formally started in January 1998 with the appointment of a three-member committee. The committee prepared an accounting manual for introducing the double entry accrual accounting system in the municipal bodies within six months and submitted its first draft to the State in June 1998 (Box F.1).

Box E.1: Tamil Nadu Accounting Manual

The Tamil Nadu accounting manual is divided into three parts. The first part of the accounting manual deals with accounting procedures, the second provides the chart of accounts and the third part presents the forms and formats to be used in the new accounting system. Every procedure, account and form was specifically designed for the state’s municipal bodies. The committee developed separate procedures for key municipal functions, including taxes and fees, accounting, water supply and drainage fund accounting, suppliers/material accounting, contractors accounting, loans and grants accounting, etc.

Government clearance was received in January 1999 and TNUDF was entrusted responsibility for smooth implementation of this reform action. TNUDF then undertook a series of training of concerned officials in the accounting and auditing departments to build capacity at the local level. All records were also computerized so as to facilitate implementation of the new system by developing tailor made software.37 This reform action was taken over by World Bank funded Tamil Nadu Urban Development Project (TNUDP)-II in November 1999 and the first phase of reforms was finished by successfully converting 12 ULBs to the new system of accounting. By April 2001, all ULBs were converted to the new system. The implementation process was undertaken by hiring 25 local chartered accountant firms which provided hand holding support to ULBs during the shift from single entry case based to double entry accrual based system (Box F.2).

Box E.2: Tamil Nadu Accounting – Key to Success

Continuous updating and improvement of the accounting manual and the system in the light of the experiences gained from the implementation process, was integral to the implementation program. For speedy and efficient implementation of the accounting reforms, TNUDP II also announced an award scheme in association with USAID FIRE(D) Project. Other key reasons for its success included (i) strong support from the State Government, (ii) state-wide unified accounting system approach, (iii) series of training and opinion building workshops for technical officials and elected representatives, (iv) involvement of experienced government officials (retired) who ensured contextualization to local requirements, (v) appropriate implementation methodology, (vi) commitment, motivation and ownership at the ULB level.

Tamil Nadu has adopted the modified accrual-based double entry accounting system but with the consolidated fund format. In light of the requirements of the NMAM, they need to upgrade it. Some of the key issues include (i) accounting system provides for co-relation between budget code and account code at a very broad level, (ii) detailed accounting code is co-related with broad budget heads and not with individual budget item; this needs to be changed as detailing and ‘wed locking’ (one to one matching) of the budget or object code with accounting code items will facilitate cost analysis and control at the micro level and will also avoid maintenance of separate accounting and budgeting database, (iii) the accounting software also needs various improvements in light of the above and NMAM requirements.

In spite of these issues, the Tamil Nadu experience clearly demonstrates how municipal accounting reforms, until now considered difficult, can be taken forward and completed within a relatively short period of time (in Gujarat it took 8 years). Successful introduction on a state-wide scale is possible if there is effective political and administrative will and if various other factors like pragmatic leadership, recognition, respect and involvement of in-house talent, besides right design, are there.

36 R.Joshi, 2003, Succeeding in Municipal Accounting Reforms, Paper Written for IIR 2003. 37 The Electronic Corporation of India, Hyderabad, developed the software.

Public Financial Management and Accountability in Indian ULBs 61The Gujarat Accounting Initiative. While Tamil Nadu is the best known and cited example of accounting reforms initiative, there are a few other city level initiatives as well. In 1990, as part of its financial assistance to Gujarat Urban Development Project in 1985, World Bank had insisted on the introduction of accrual-based accounting in the recipient municipal corporations (six in number) and also in Anand, which had the status of a municipality. The process began in 1990 with the design of a financial accounting system for the municipal bodies by consultants, paid for by the World Bank. Later, after 1994, the same continued, with the municipalities paying. Finally, from 1998 onwards, the new system was operationalized. However, due to a number of reasons this effort could not be sustained. Chief among these were lack of involvement of consultants in the implementation stage, lack of interest of the State Government to carry forward the work after World Bank assistance got over, lack of insistence on part of the Bank, inadequate scope of reforms which completely overlooked reforms in audit areas, lack of contextualization of the system to local requirements, among others.

Karnataka Municipal Accounting Initiative. Karnataka is presently in the process of implementing fund based accounting system (FBAS) in all ULBs, the first state to do so in accordance to requirements of the NMAM. The grounds for shifting to fund based accounting was set by the Bangalore Agenda Task Force (BATF) which initially implemented this system in Tumkur (budget of around Rs.20 crores) and Bangalore (budget of around Rs.1000 crores). Both these ULBs shifted to FBAS in 2002. In 2003, based on learning’s from this exercise BATF advised shifting of all ULBs to FBAS; this was undertaken by KUIDFC through ADB support.

Karnataka has prepared uniform accounting and budget manual based on NMAM for implementation across 43 ULBs in the state in the first phase. Uniform software and training manuals have also been developed. Fresh commerce graduates have been recruited in most ULBs who are also being trained. Local firms of Chartered Accountants are being appointed as Field Level Consultants (FLCs) to prepare the opening balance sheer and implement the system. The entire initiative is being run under the Additional Secretary (Reforms), a special senior level position created to implement this. He is being assisted by a nodal firm (IPE) responsible for drafting the manual, budget rules, training and providing handholding support for implementation. The reports and MIS would also have the provision to be integrated and analyzed at the state level. This would allow benchmarks and detailed analysis through the software (developed by eGovernments foundation). This is being implemented from 2005-06.

Other Accounting Initiatives at City Level – Importance of State Role. Apart from Tamil Nadu, Gujarat and Karnataka, there have been incidences where individual cities have wanted to shift to double entry accounting. Ludhiana is the best example which undertook all necessary groundwork to shift to double entry accrual system of accounting under dynamic leadership. However, once the leadership changed this initiative was given a cold treatment since the State Laws did not require ULBs to move to the more complex form of accounting. Agra is another such example which also undertook necessary ground work to shift to double entry accrual system of accounting but was thwarted in this initiative as they received no support from the State Government. Apart from these, metros like Chennai and Mumbai also shifted to double entry accounting system of accounting, but these reforms were not reflected at the state level till much later.

Public Financial Management and Accountability in Indian ULBs

62

Table E.1: Comparison of DEAS across States

Accounting Aspect

Maharashtra Tamil Nadu Hyderabad Delhi Kolkata Karnataka

Accounting Method

Method of Accounting adopted

Double entry accrual based accounting system


Double entry, modified accrual based accounting. .


Double entry cash based accounting. The accrual accounting adjustments are separately added to the cash based account at the year end. This is done while compilation of financial statements and is not part of the accounting system / software.

Double entry accrual based fund accounting system.

Governing legislation for accounting

Mumbai Corporation Act. City of Nagpur Corporation Act Mumbai Provincial Municipal Corporations Act,1949 & Maharashtra Municipal Councils, Nagar Panchayats and Industrial Townships Act, 1965

Tamil Nadu Urban Local Bodies Act,1998 & Tamil Nadu Urban Local Bodies Rules, 2000

Hyderabad Municipal Corporation Act,1955

Delhi Municipal Corporation Act, 1957(Amended 1993).

Conventional format. According to the statute, the State Government is to notify the format of accounts, which it has not yet done.

Karnataka Municipalities Act, 1964 and Karnataka Municipal (Accounting & Budgeting) Rules, 2006. Separate Regulations based on Rules for Corporations.

Level of Computerization

Currently manual. Supported by an accounting manual containing all the

Computerized accounting. Supported by an accounting manual,

Computerized accounting. Supported by an

Computerized accounting (Tally)

Computerized accounting No accounting manual in place yet.

Web-enabled customized software under implementation.


63

Accounting Aspect


details. To be computerized.

and also a User Manual.

accounting manual. Will run in parallel.

Books of Accounts / Financial Statements

Accounts maintenance

There is provision for getting overall picture and utilization of funds from each special fund and reserve. |Can generate separate groupings of funds.

Separate accounts are maintained for : a) Revenue Fund b) Capital Fund c) Water Supply and Drainage Fund d) Elementary Education Fund.

No separate fund-wise accounts are maintained

Fund accounting is done for various funds such as General Fund, Capital Projects Fund, Debt Management Fund, Special Revenue Funds, Trust & Agency Funds, and Proprietary Fund.

The Municipal fund is supposed to be maintained in 6 different accounts viz. i) Solid Waste Management Account ii) Sewerage & Drainage Account etc. The accounts are supposed to be maintained separately for each of the accounts and presented in a consolidated as well as separate accounts in the financial statements

Separate accounts maintained for 3 funds: (i) General Fund (ii) Water Supply & Sewerage Fund & (iii) Enterprise Fund

Frequency of financial statements

Annual & Quarterly Annual. Financial Statements – Annual. Comparison with budget, and review - Annual.

Annual Financial statements - Annual Comparison and annual review with budget / previous period is carried out monthly.

Required to prepare half yearly accounts.

Annual Financial Statements

Overall Income & Expenditure Account, and Balance Sheet prepared

Separate Income & Expenditure Account and Balance Sheet are prepared for Revenue Fund, Capital Fund, Water Supply and

Income & Expenditure Account, and Balance Sheet are prepared. Apart from these, fund-wise financial statements are prepared in

Statements of Revenue, Expenditures, and Fund Balances’, and Balance Sheet are prepared for the different funds. In

Income & Expenditure Account, Receipts & Payment Account and Balance Sheet are prepared. Apart from these, separate accounts of the municipal fund are prepared such as

Consolidated and Fund-wise Income & Expenditure Statement, Receipts and Payment Account, Balance Sheet,


64

Accounting Aspect


Drainage Fund, and Elementary Education Fund. Consolidated financial statements are not prepared.

columnar form, for General Fund, City Development Fund, Community Development Fund, Debt-Service Fund (grouped under Municipal Fund), and Salary & Pension Fund (grouped under Fiduciary Fund).

addition, combined financial statements for all the funds, grouped under Governmental Fund and Fiduciary Fund are also prepared.

Solid waste, sewerage etc. as well as details of revenue and expenditure for each market etc.

Notes to accounts and performance indicators.

Bank Reconciliation Statement

Done, but tends to be in arrears.

On monthly basis Done manually, on monthly basis.

Done periodically. Done periodically. Even at present, some accounts have not been reconciled for several years.

Required to be done monthly.

Fixed Assets Register

The assets are treated individually and the track of each asset item is kept in the Fixed Asset Register. In the accounts, assets are treated as a block.

As per the Accounting Manual, Fixed Assets Register has to be maintained category-wise, and all assets created on and from 1-4-99 have to be entered in the Register.

Separate Fixed Assets Register has to be maintained for grant/scheme funded assets and other fixed assets.

Fixed Assets Register has been collated and updated. However, this process is continuing, and is likely to continue for the next one or two years.

Fixed Assets Register is maintained.

Prescribed in formats. Separate register for Land, immovable Properties and Movable Properties.


65

Annex F: PFMA Reforms under JNNURM and Current Status

JNNURM is a mission for reforms driven, fast track, planned development of identified cities with focus on efficiency in urban infrastructure/services delivery mechanism, community participation and accountability of Urban Local Bodies (ULBs)/Parastatals towards citizens. The mission objective is integrated development of infrastructural services in the cities covered under the mission; secure effective linkages between asset creation and asset management; ensure adequate investment of funds to fulfill deficiencies in the urban infrastructural services; planned development of identified cities including peri-urban areas, out growths, urban corridors, so that urbanization takes place in a dispersed manner; scale up delivery of civic amenities and provision of utilities with emphasis on universal access to urban poor; and take up urban renewal program, i.e., re-development of inner (old) cities area to reduce congestion. Some of the mandatory and optional reforms that relate to PFMA areas have been discussed below. Legislative framework for PFMA: JNNURM has made efforts in bringing about various progressive changes in the legislative framework. Its core aim is to strengthen the implementation of 74th CAA by giving the rein of public funds to local governments and making them responsible and accountable for its efficient utilization. Further, it makes it mandatory for state governments to ensure community participation and public disclosure at ULB level. These legislative changes will have a ripple effect on the other PFMA areas, hence having far reaching impact on the overall functioning of ULB’s.

• The enactment of Urban Local Government Disclosure Bill, 2006 will ensure preparation of medium term fiscal plan and release of quarterly performance information to all stakeholders.

• Similarly enactment of Community Participation Law will institutionalize citizen participation and introduce the concept of Area Sabhas with “city planning function” in order to enable need based allocation of funds external oversight over them.

Planning and Budgeting: The mission, through its reform agenda, tries to make the planning and budgeting exercise more comprehensive, realistic and participatory. It incorporates a multi year perspective in budget preparation with timelines for implementation. Own source component in financing mix has been limited to 10% considering the current fiscal constraints of ULBs. Issues related to unavailability of accurate information, timeliness and uniformity of formats will be addressed by adoption of DEAS and introduction of computerized systems, MIS, GIS etc. As mentioned above, public disclosure and community participation will help in bottom-up planning which is demand driven. Structural and administrative reforms will further streamline the planning process and help in preparing effective and achievable budgets. Implementation: JNNURM takes a leap forward in ensuring better implementation of planned projects with financial control and outcome achievement. Strategic PFMA areas like accounting and MIS, cash and fund flow management, procurement, internal control and audit, assets and liabilities management have been addressed with specific reform agendas mentioned below:

• Introduction of DEAS • Introduction of e-governance using IT applications like GIS and MIS • Internal earmarking within local bodies. Budgets for basic services to the urban poor. • Levy of user charges with the objective that full cost of O&M is collected within next 7 yrs • Reform of Property Tax with GIS for revenue enhancement with arrangements for its

effective implementation to achieve at least 85% collection efficiency within next 7 years. • Revolving fund for meeting operations and maintenance costs of assets • Linkage between asset creation and asset management to make them self sustaining over time • Introduction of computerized process of registration of land and property (optional) • Public Private Partnership will ensure maximum asset utilization and minimum liabilities


66

(optional38). There is a proposal to require credit rating for all cities for accessing funds under JNNURM. This should motivate cities to improve creditworthiness and financial discipline. This would have a positive impact on PFMA systems in ULBs Reporting: Reporting structures under JNNURM have been clearly delineated at all levels with proper institutional set ups. It also ensures that ULB’s internal and external reporting systems are improved by the end of seven years. Release of funds has been linked to its utilization and achievement of milestones agreed for implementation of mandatory and optional reforms at the state and ULB level. Public reporting will be ensured through the Urban Local Government Disclosure Bill. External Audit and Oversight: State level nodal agency will maintain audited accounts of funds released to ULB’s, conduct techno economic appraisal of projects and monitor implementation of reforms. Public oversight will be an integral with the passing of Community Participation and Public Disclosure laws.

PROGRESS TILL DATE

So far twelve states have signed the Memorandum of Association with Government of India and City Development Plans of 43 out of the 63 cities have submitted and approved for 26 cities.

Table F.1: Cities/States that have signed MoA for implementation of reforms under JNNURM

Table F.2: Status of City Development Plans (CDPs) under JNNURM (as on 22.09.06)

CDPs Approved CDPs Under Appraisal CDPs Not Submitted

Agartala, Ahmedabad, Amritsar, Asansol, Bhopal, Bhubaneshwar, Chandigarh, Coimbatore, Greater Mumbai, Guwahati, Hyderabad, Indore, Jabalpur, Jaipur, Kohima,

Kolkata, Madurai, Nagpur, Nanded, Pune, Raipur, Rajkot, Surat, Vadodara, Vijayawada,

Vishakhapatnam

Agra, Ajmer-Pushkar, Allahabad, Bodhgaya, Chennai, Faridabad, Kanpur, Lucknow, Ludhiana,

Mathura, Meerut, Mysore, Nashik, Patna, Srinagar, Ujjain,

Varanasi

Itanagar, Delhi, Panaji, Shimla, Jammu, Dhanbad, Jamshedpur,

Ranchi, Bangalore, Cochin, Thiruvananthapuram, Imphal,

Shillong, Aizwal, Puri, Pondicherry,

Gangtok, Dehradun, Haridwar, Nainital

38 However, it has been clearly stated in JNNURM documents that projects with private partnership will be given preference over self financed projects for greater efficiency and lesser financial dependence.

(As on 22.09.06) S.No State City

1 Gujarat Ahmedabad 2 West Bengal Asansol 3 Madhya Pradesh Bhopal, Indore , Jabalpur 4 Tamil Nadu Coimbatore 5 Andhra Pradesh Hyderabad 6 Rajasthan Jaipur 7 West Bengal Kolkata 8 Tamil Nadu Madurai 9 Maharashtra Nagpur, Nanded, Pune 10 Chattisgarh Raipur 11 Gujarat Rajkot, Surat, Vadodra 12 Andhra Pradesh Vijayawada, Vishakhapatnam


67

Annex G: Cost and Performance Indicators39

S. No. Particulars Current Year Previous Year

BASIC CITY STATISTICS

1. Area of City (sq. km)

2. Population (year)

Estimated No. of Households

3. SC / ST Population (year)

BPL Population

Slum Population

4. Literacy rate % (Men, Women)

5. No. of properties in the city (as per property tax records)

COUNCIL DETAILS

6. Year of establishment of Municipality

7. No. of Wards

8. Council Members

Men

Women

TOTAL

SC / ST Council Members

9. No. of employees of the Municipality

SERVICES STATUS

10. Water Supply (LPCD)

Normal Season

Summer Season

TARGET ACTUAL

ACTUAL

11. Water Connections (as per municipal records)

12. No. of days of water supply per week (Normal season)

13. No. of hours of water supply in a day (Normal season)

14. Service coverage in slums

15. % of surface water treated

39 Schedule VIII to the Draft Karnataka Municipalities (Accounting & Budgeting) Rules, 2006


68


16. Treated water quality

17. % of waste water treated

18. Length of Roads (km)

Metalled

Asphalt

Others

19. % of road side drains to road length

20. % of pucca drains to road side drains

21. Streetlights (No.)

Sodium Vapour

Tube lights

Others

22. Solid Waste Management (MT per day)

Generated

Collected

Treated / Disposed in Landfills

23. % Households under door to door collection

24. Road length cleaned per day

25. Sewerage / Drainage (km)

Surface drains

Underground Sewerage / Drainage

Others

26. Sewerage Connections (as per CMC records)

27. No. of vector borne disease cases per 1000 population

28. No. of water borne disease cases per 1000 population

29. % of areas of parks maintained

30. % amount spent on SC/ST Development Fund vs. amount to be spent on 18%

COST OF SERVICES

31. Supply of Water (Rs. per million litres)

32. Maintenance of Roads (Rs. Per km)


69


33. Maintenance of streetlight (Rs. per unit)

34. Solid Waste Management (Rs. per MT)

RECOVERY OF COSTS

35. Recovery of water cost (Rs.per million litres)

FINANCIAL INDICATORS

Performance Ratios

36. Surplus / (Deficit) <after depreciation> to Total Income Ratio… (%)

37. Income per Citizen… (Rs.)

38. Expense per Citizen… (Rs.)

39. Per capita tax receipts

40. Per capita non tax receipts

Efficiency Ratios

41. Current Year Property Tax Collection Ratio … (%)

42. Arrears Property Tax Collection Ratio … (%)

43. Maintenance costs to Net Fixed Assets ratio … (%)

44. Current year water tax collection Ratio … (%)

45. Arrears water tax collection Ratio … (%)

Leverage Ratios

46. Loans to Reserves Ratio … (times)

47. Debt Service Coverage Ratio… (times)

Asset Ratio

48. Fixed Assets to Total Assets Ratio… (%)


70

Bibliography and References 1. A.Lalwri and S.Fardaust, 2000, Indian States: The Road to Reforms. www.statesforum.org

2. A.Norton and D.Elson, 2000, What’s Behind the Budget? Politics, Rights and Accountability in the Budget Process, Overseas Development Institute.

3. Asian Development Bank, 2002, Diagnostic Study of Accounting and Auditing Practices, India, Asian Development Bank, Manila.

4. C.Vaidya, 2000, Property Tax Reforms in India: Some Issues, paper presented at ‘Local Governance for Millennium with special reference to Financial Reforms’, RCUES, AIILSG, Mumbai, September 21 and 22, 2000.

5. George Matthew and Anand Matthew, 2003, India: Decentralisation and Local Governance: How Clientilism and Accountability Works, New Delhi.

6. http:/www.bgse.uni-bonn.de/papers/

7. Manual of Tamil Nadu Acts and Rules, Volume 3, 1995.

8. Nagarpalika Network, 2002, Issues in Governance of Urban Local Bodies, All India Institute of Local Self Governance, New Delhi.

9. National Commission to Review the Working of the Constitution, A Consultation Paper on Efficacy of Public Audit System in India: C&AG Office-Reforming the Institution, New Delhi, Jan 2001

10. NCRCL, July 2002, Public Financial Accountability in Urban Local Bodies in Karnataka,

11. O.P.Mathur and Sandeep Thakur, 2004, India’s Municipal Sector: A Study for the Twelfth Finance Commission (TFC), NIPFP, New Delhi.

12. PEFA Secretariat, June 2005, Public Financial Management Performance Measurement Framework, World Bank, Washington D.C.

13. Reserve Bank of India, 2002, State Finances: A Study of Budgets of 2002-03, Mumbai.

14. Richard Bird, 1976, Charging for Public Services: A New Look at the New Idea, Canadian Tax Foundation, Toronto.

15. S Sekhar and M Shah, 2006, Benchmarking Bangalore’s Public Services, What the Third Citizen Report Card Reveals, Public Affairs Centre, Bangalore.

16. S.J.Burki and G.Perry (eds.), 2000, Decentralisation and Accountability of the Public Sector, World Bank

17. S.L.Athukorala and B.Reid, 2003, Accrual Budgeting and Accounting in Government and its Relevance for Developing Country Members, Asian Development Bank, Manila.

18. S.Paul, S.Balakrishnan, G.K.Thampi, S.Sekhar and M.Vivekananda, 2006, Who Benefits from India’s Public Service? A People’s Audit of Five Basic Services, Academic Foundation, New Delhi.

19. Sebastian Morris (ed.), India Infrastructure Report 2003: Public Expenditure Allocation and Accountability, 3iNetwork, Oxford University Press, New Delhi and New York.

20. Stabilisation and Fiscal Empowerment: The Twin Challenge Facing India’s States.

21. Tapas K.Sen(2003), Fiscal and Procurement Processes in India Infrastructure Report , Oxford University Press, New Delhi

22. The Andhra Pradesh Infrastructure Development Enabling Act, 2001 (Act No.36 of 2001).

23. The Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1991


71

24. The Karnataka Municipal Corporation Rules, 1977

25. The Karnataka Municipal Corporations Act, 1976

26. The Tamil Nadu Transparency in Tender Rules, 2000.

27. The Tamil Nadu Transparency in Tenders Act, 1998.

28. World Bank, 2004a, India – Orissa State Financial Accountability Assessment, Financial Management Unit South Asia Region, World Bank, New Delhi.

29. World Bank, 2004b, India – Uttar Pradesh State Financial Accountability Assessment, Financial Management Unit South Asia Region, World Bank, New Delhi.

30. World Bank, 2004c, India: Urban Finance and Governance Review, Volume I (Executive Summary and Main Report), Energy and Infrastructure Unit South Asia Region, World Bank, New Delhi.

31. www.upgov.up.nic.in/upfinance

pfma report ipe f inal

Documents

municipal finance

public financial management

financial institutions

financial management

ministry of urban employment

urban local bodies

national commission

karnataka urban water