PFM, Governance and Financial Accountability

Governance, Accountability and Public Financial Management Centre for Good Governance

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What is governance? What is Public Financial Management? How are the two related? Why are sound PFM systems important?

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Governance Based on the recent analytical research, we define governance as the process and institutions by which authority in a country is exercised. Specifically, governance is: (i) the process by which governments are selected, held accountable, monitored, and ag e r e s o u r c e s replaced; (ii) the capacity of governments to m a n ag efficiently  e , i m p l em em e n t , a n d e n f o r c e s o u n d , and to f o r m u l a t e, policies and regulations  ; and (iii) the respect for the institutions that govern economic and social interactions among them.

Kaufmann, Recanatini and Biletsky World Bank Centre for Good Governance

Principles of good governance        

Participation Rule of Law Effectiveness and Efficiency  Accountability  Accountability Transparency Responsiveness Equity Inclusiveness

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Concept of accountability  is the notion that an individual or body,  Accountability   Accountability  is acting on behalf of another person or group, should report back on their actions. Accountability is needed wherever there are hierarchical relationships, or where delegation of duties or responsibilities takes place. This is to ensure that those with delegated authority act in ways that their ultimate overseers would wish.

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Core Features of Good PFM practice            

Legal and institutional framework Budget formulation Budget execution Accounting Monitoring and reporting Asset management Debt management Contingent liabilities Internal Controls External auditing Legislative scrutiny Public access to information on public finance

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Role of PFM in development 

effective public financial management systems are critical for making progress in reducing poverty

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good financial management system helps by ensuring use of available resources effectively

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problems in sectors such as health, education, and agriculture can have common origins in weak financial management systems

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Public Financial Management i s a b o u t ef f ec t i v e s t ew ar d s h i p o f p u b l i c r es o u r c es f o r e ff ic i en t p r o v i s i o n o f s e r v i c es  

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Public Financial Management   

What are the benchmarks? What is the diagnosis? What reforms are required?

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PFM : Legal Framework - Benchmarks Codes, Rules, Manuals, etc. 

 Are prepared the first time with due care and are reviewed from time to time and updated periodically through an established procedure;

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Clearly establish accountability framework over the institutions and individuals; and

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 Are accessible to all staff working in / supervising PFM function both in terms of their physical availability and more importantly their availability in a language and format that is easily understood.

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PFM - Legal Framework Constitution of India Determines budgeting, accounting, auditing arrangements Government Business Rules and Secretariat Instructions Assigns PFM responsibilities to Finance Department Budget Manual Treasury Code Financial Rules Accounts Code Volumes 1 to 3

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PFM : Legal Framework - Diagnosis   

Legal framework as laid down in the Constitution An all India framework Key controls well defined at DDO level, but there is scope for improving accountability at the level of HoD, CO and CCO

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PFM : Legal Framework - Reforms  

Codes require to be revised / modernized Procedure manuals need to be developed for individual departments

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PFM - Institutional Framework Benchmarks It is expected that the responsibility for PFM rests unambiguously at one a) point in the organization say, in the Finance Department and the roles of different players are clearly defined and b) understood

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PFM - Institutional Framework Political Executive / Minister

Legislative Committees Accountant General

Departments of Government / Principal Secretary Finance Department Heads of Department

Director Treasuries

District Officer

District Treasury

DDO Centre for Good Governance

STO

PFM - Institutional Framework Legislative Committees

Political Executive / Minister

Accountant General Departments of Government / Principal Secretary Finance Department Budget Execution, Asset Custody, Monitoring & Reporting

Heads of Department District Officer

Director Treasuries

District Treasury Accounting

DDO Centre for Good Governance

External Audit

STO Legislative Oversight

Budget Formulation, Debt, Contingent Liabilities, Internal Oversight

PFM – Institutional & Legal Framework Political Executive / Minister

Legislative Committees Accountant General

Departments of Government / Principal Secretary Finance Department

Financial Rules Centre for Good Governance

Heads of Department

Director Treasuries

District Officer

District Treasury

DDO

STO Budget Manual

Treasury Code

Account Codes

PFM - Institutional Framework Diagnosis Poor PFM Capacity CEO

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CFO / Director Finance

Chief Controller of Accounts

Financial Advisor

Secretary

PFM – Accounting and Financial Advise Political Executive / Minister Accountant General Departments of Government / Principal Secretary Finance Department Heads of Department

Director Treasuries

District Officer

District Treasury

DDO Centre for Good Governance

Financial Advice

Accounting STO

Civil Account R3

Chief Controlling Officer

Data

Data Entry

RBI

Accountant General

Finance Department

R4 Hard Copy of account

Controlling Officer

State HQ

Hard Copies

Soft Copy

Hard Copy of account R2 DDO

Bank R1

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Treasury

Data Entry

PFM: Budget Formulation - Benchmarks    

Budget realism Participation of the spending departments Comprehensiveness and transparency Accessibility and timely presentation.

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PFM: Budget Formulation - Diagnosis   

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Revenue forecasting is unscientific Receipts from GoI are uncertain Seventy percent of plan budget is dictated by GoI and 80 percent of the non-plan by committed costs Fixed commitments (salaries, pensions and debt servicing) limit flexibility in formulating budget Lack of medium term perspective

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PFM: Budget Formulation - Reforms 

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Prepare medium term expenditure framework (MTEF) and policy and budget linkage for important departments Prioritizing on-going projects and emphasizing asset maintenance Disclose Tax expenditures Bring in multi-year budgets Outcome budgeting

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PFM: Budget Execution - Benchmarks 

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A high correlation between budget and actual expenditure achieved through predictability in expenditure allocation Ensure funds are spent on authorized and intended purposes Transparent and clear process for within year expenditure changes Departmental controls over approval and recording of transactions submitted for payment Clear processes for moneys granted or advanced to be promptly and accurately recorded, vouched and recovered by departments; and Control commitments and arrears.

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PFM: Budget Execution - Diagnosis 

‘Savings’ due to delays in release of funds (CSS and budget release orders)

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‘Excess expenditures’ are generally well controlled but the supplementary estimates are taken invariably post facto

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Diversion of funds is a concern Controls in Treasury system adequate; those in respect of AC/DC bills, PD accounts, UC, etc. need improvement

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PFM: Budget Execution - Reforms 

Reforms in budget execution are linked to computerization of budgetary transfers and accounts

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PFM: Accounting - Benchmarks 

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Robust accounting system reduces FR by enabling financial monitoring and reporting Clearly defined accounting concepts, policies and procedures. Accounting policies support the needs of the user of the accounts Timely rendering, compilation and production of accounts Systems and Controls support relevant and reliable accounting Complete and reliable accounting for funds held outside the Consolidated Fund

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PFM: Accounting - Diagnosis  

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Minimal role of departments and GoAP in accounting Reconciliation of expenditure and control over Public Account need strengthening Central funds received in kind not accounted Cost of services difficult to compute Need for moving to accrual based accounting A large amount of un-reconciled balances pose risk Suspense and remittance accounts lack transparency and can hide misappropriations

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PFM: Accounting - Reforms 

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Computerization of Accounting Function in government has been fragmented. There is a need for a ERP solution for Government Accounting There is need to switchover to modified accrual based accounting system which would entail revising accounting classification

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PFM: Monitoring and Reporting - Benchmarks 

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Timely, relevant and reliable monitoring of budget execution enables line departments, finance department and other stake holders to exercise financial control and undertake corrective action as necessary; and Timely, relevant understandable and comparable financial reporting enables prompt scrutiny at the year end and highlighting the extent to which funds were used for the intended and authorized purposes .

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PFM: Monitoring and Reporting - Diagnosis  

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Format of reports not useful, nor user-friendly No correlation between expenditure and physical performance Year end Financial Statements also lack user-friendly formats

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PFM: Monitoring and Reporting - Reforms 

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Number of Drawing and Disbursing Officers is  just too unmanageable; this need urgent rationalization. The major expenditure in government is the establishment expenditure (pay and entitlements). Aggregation and computerization of payroll is urgently needed.

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GOI

GOAP

DOMH&FW

CFW District Employe es' Master Data

DHS

Dist. Medical & Health Officer

Dist. Treasury

Payroll Monthly event statement

Utility Bills

Salaries and other budget allocations transferred By EFS

PRIMARY HEALTH CENTRES Centre for Good Governance

Bank Employee a/cs

PFM: Asset Management      

Poor control over assets leads to their theft and misuse Asset management in government is weak No reporting on assets (cash basis of accounting) Maintenance of stock and asset registers is poor Physical verification ranges from weak to non-existent Investments not valued at lower of cost or market price

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PFM: Debt Management 

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Debt management is critical to developing realistic budgets Major portion of debt is to GoI as Plan expenditure is financed by borrowings from GoI GoAP has set out a medium term fiscal framework – aims stabilize debt at around 31 percent of GSDP Debt to be applied for capex Transparency in debt reporting improved with inclusion of off-budget borrowings into the budget and accounts

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PFM: Contingent Liabilities  

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Contingent liabilities pose significant fiduciary risk Guarantees are the most important of contingent liability (Guarantee Redemption Fund) Pensions are the other major non-debt liability (pay-asyou-go and actuarial) Disclosure of contingent liability Assurances and comfort letters in respect of contractual services of PSUs not provided for

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PFM: Internal Controls 

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Effective internal controls are a prerequisite for containing fiduciary risk Computerization poses new challenges in internal controls Understanding and appreciation of internal controls low among many field level staff Attitude of higher officials towards internal controls could be more positive Effectiveness of internal audit can be improved

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PFM: External Audit and Legislative Scrutiny 

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CAG audit should include physical verification of assets, increasing risk based audit CAG opinion on accounts should extend to opinion on accounts and PFM Responsiveness to audit should improve Timeliness of PAC scrutiny

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Diagnostic Studies

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Fiduciary Risk Assessment

Fiduciary risk is defined as the risk that funds:  Are not used for the intended purpose;  Do not achieve value for money; and/or  Are not properly accounted for .

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Methodology 

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DFID Guidance Note – 8 good practice Parameters Prescribed with 15 related bench Marks For assessment of PFM system and Non treasury systems. Field Visits to different districts with wide spread and reach. Controls Testing Questionnaire based Interviews, stake holder work shops Key document desk review

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DFID’s good practice principles and related benchmarks

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GPP: A clear set of rules governs the budget process BM.1.A budget law specifying fiscal management responsibilities is in operation BM.2. Accounting policies and account codes classifications are published and applied.

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GPP.2. The budget is comprehensive 

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BM.3. All general government activities are included in the budget BM.4. Extra budgetary expenditure is not material

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GPP.3.The budget supports pro-poor strategies 

BM.5.Budget allocations are broadly consistent with any medium term expenditure plans for the sector or for overall budget

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GPP.4.The budget is reliable guide to actual expenditure BM.6.Budget outturn shows a high level of consistency with the budget

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GPP.5.Expenditure within the year is controlled  

BM.7.In year reporting of expenditure BM.8.Systems operating to control virement , commitments and arrears

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GPP.6.Government carries out procurement in line with principles of value for money and transparency BM.9.Appropriate use of competitive tendering rules and decision making is recorded and auditable BM.10.Effective action taken to identify and eliminate corruption

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GPP.7.Reporting of expenditure is timely and accurate 

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BM.11.Reconciliation of fiscal and bank records is carried out on a routine basis BM.12.Audited annual accounts are submitted to parliament/legislature within the statutory period.

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GPP.8.There is effective independent scrutiny of government expenditure BM.13.Government accounts are independently audited BM.14.Government agencies are held to account for mismanagement BM.15.Criticisms and recommendations made by the auditors are followed up.

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Rating Snapshot     

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Overall assessment indicates medium risk Department is ready to take up reforms and Proactive to suggestions. Sector strategy draft is finalized Financial Capacity Building for department staff is being developed NRHM/ State mission / District mission would help to improve situation. PFM reform initiatives to start from Finance Dept. for line departments.

Key Observations 

Ineffective Departmental structure - over centralized, unaccountable, managed through vertical programmes without horizontal communication among sub depts.

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No strategic perspective in fiscal planning, expenditure policy making, budgeting, expenditure policy review, etc.

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Proliferation of Societies and autonomous bodies with multiple accounting mechanisms

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Complex, Convoluted, Fragmented, Multiple district administrative structure

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Revamping necessary with proper role clarity in view of transfer of public services to local bodies.

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Key Observations- Procurement   

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Standardize Procurement Operations Prepare Procurement Manual Upgrade Inventory Management system with focus on drug indenting planning. Demand Forecasting Mechanism needed Develop dedicated core staff cadre for procurement Incorporate international best practices Set-up dynamic market intelligence E-Procurement to be standardized

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Corruption Prone Processes     

Incentive Payments Local Emergency Drug Purchases Non-Maintenance of Patient / drug issue registers Irregular Distribution of Free Drugs. Need to Speed Up Enforcement Process

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Risk Mitigation 

Ensure financial management capacity building in department as well as parastatals.

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Improve budgeting and performance framework.

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Exclusive Financial Advisor for the Dept to assist Head of the Department and to act as nodal officer for PFM reform

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Develop Internal Audit wing at Head Quarters as well as sub department level.

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Increase comprehensiveness and transparency of financial reporting for all central sector schemes.

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Risk Mitigation 

Procurement capacity building with process standardization in line with international best practices.

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e-enablement for on line processing of budgets, accounts, cash management, internal control and Audit recommendations follow up

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Systems based audit for procurement and civil works in APHMHIDC.

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Undertake study of corruption prone processes

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Risk Mitigation 

To reduce speed money, develop Citizen Charters with clear definition of services

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Employ RTI Act as a tool to enhance citizen’s capacity to fight corruption

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Internal Vigilance System to be made fully functional

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Introduce whistle blower protection legislation

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