Report No. 29750-IN India Uttar Pradesh State Financial Accountability Assessment August 31, 2004 Financial Management Unit South Asia Region Document of the World Bank ABBREVIATIONS AND ACRONYMS AB Awas Bandhu, technical wing to Departmentof Housing AC Audit Committee AG Accountant General BDO Block Development Officer BM Budget Manual BMO Block Medical Office BPE Bureau of Public Enterprises CAG Comptroller and Auditor General CAO ChiefAudit Officer, Dep't of Cooperative Societies and Panchayats CCL cashcredit limit CFAA Country Financial Accountability Assessment CGA Controller General ofAccounts CoE Committee on Estimates ofthe Legislative Assembly COPU Joint Committee on Public Undertakings CPA Commonwealth ParliamentaryAssociation CS-DRMS Commonwealth Secretariat -Debt Recording & Management System DA Development Authority DCL direct cash limit DDO Drawing and Disbursing Officer DEMIST Databasefor Employee MIS for Transparency DFID Departmentfor International Development, UK DIA Directorate of Internal Audit DM DistrictMagistrate DMO District Medical Office DPE Department of Public Enterprises DPRO District PanchayatiRaj Officer DRDA District Rural Development Agency EO Executive Officer EFC Eleventh Finance Commission FD Finance Department FD&BM Fiscal Discipline and Budget Management (law) FY financial year (FY 2003 =the year 1April 2002 to 31 March 2003) GC Government company GO Government Order Go1 Government of India GoUP Government of the State of Uttar Pradesh GSDP Gross State domestic product HIPC heavily-indebted poor country IA internal audit IAAD Indian Accounts and Audit Department IAAS Indian Accounts and Audit Service ICAI Instituteof CharteredAccountants ofIndia IFA Integrated Financial Adviser IFAC-PSC International Federation ofAccountants, Public Sector Committee IFMTR InstituteofFinancial ManagementTraining and Research IMF-GFS International Monetary Fund- GovernmentFinance Statistics INTOSAI International Organization of SupremeAudit Institutions IPAO Integrated Pay and Accounts Office I T information technology LFA Departmentof Local FundsAudit MIS managementinformation system MLA Member of the Legislative Assembly (State) MLC Member ofthe Legislative Council (State) MNLP MukhyaNagar LekhaParikshak (audit body) MP Member of Parliament (Union) MTEF Medium-term expenditure framework NIC National Information Centre NN Nagar Nigam (Municipal Corporation) NP Nagar Panchayat (Town Area Committee) NPP Nagar Palika Parishad(Metropolitan Board) OECD/DAC Organization for Economic Cooperation and Development, Development Assistance Committee PAC Public Accounts Committee PAG Principal Accountant General PE Public Enterprise PIL Public Interest Litigation PLA PersonalLedger Account (a deposit accountwithin the Public Account) PRI PanchayatiRaj Institution (rural local body) PTA Prevention of Terrorism Act PREM Poverty Reduction & Expenditure Management, World Bank network PwC PricewaterhouseCoopers PWD Public Works Department RBI ReserveBank of India SBI State Bank of India sc statutory corporation SC/ST scheduledcastes and scheduledtribes SFAA State Financial Accountability Assessment SFC State Finance Commission SIA State Internal Auditor ULB Urban Local Body UP State of Uttar Pradesh UPAEVP UP Avas Evam Vikas Parishad UPFC UP Finance Corporation UP FoC UP Forest Corporation UPRTC UP RoadTransport Corporation UPWC UP State WarehousingCorporation VDO Village Development Officer WMA Ways and means advances ZBB Zero-Base Budgeting ACKNOWLEDGEMENTS An initial assessment of the State Financial Accounting Assessment System was preparedby a core team led by Rajat Narula(SARFM). The teamworked with the help of consultants. The follow up study and finalization of the report was led by Ivor Beazley (SARFM) and Priya Goel (SARFM). The study benefited greatly from the support of V. J. Ravishankar, Mona Prasad and Salman Zaidi (SASPR). Vinaya V. Vemuri (SARFM) has assistedin the productionof the SFAA. This report also benefited immensely from comments of peer reviewers: Malcolm Holmes (PREM), Anthony Hegarty (Africa Region), Daniel Boyce (FM Anchor), BlanshardMarke (LOA) and T. N.Dhar (Nationalpeer reviewer). The report benefitedfrom discussions with stakeholders in UP includingsenior officials of the GoUP led by Mrs. Rita Sharma (Principal Secretary-Finance), Dr. B. M. Joshi (Secretary-Finance) and Mr. Nee1 Ratan Kumar (Deputy Secretary-Finance). The Accountants General (Civil and Commercial) and Departments of Panchayati Raj Institutions,Urban Local Bodies, Rural Local Bodies, Legislative Oversight and Public Sector Enterprises were extremely helpful in providing data and explanatory comments. STATEFINANCIAL ACCOUNTABILITY ASSESSMENT (SFAA) Draft SFAA for the State of Uttar Pradesh Table of Contents EXECUTIVE SUMMARY ...................................................................................... 1 A. INTRODUCTION ............................................................................................ 5 Objectivesand Scope of the SFAA ............................................................. 6 Approachand Methodology ........................................................................ 7 B INSTITUTIONAL AND LEGALFRAMEWORK . ....................................... 8 FinanceDepartment .................................................................................... 9 LineDepartments ....................................................................................... 10 Accounts andAudit .................................................................................... 11 Conclusion ................................................................................................... 12 C. GOVERNMENTBUDGET PREPARATIONAND APPROVAL ............13 BudgetStructure ........................................................................................ 13 BudgetProcess ............................................................................................ 14 Budget Comprehensiveness ....................................................................... 15 Participationand Transparency ............................................................... 16 Medium-TermExpenditureFramework ................................................. 17 Conclusion ................................................................................................... 18 D BUDGETEXECUTION, MONITORING& INTERNAL CONTROL . ...19 Release of SpendingAuthority .................................................................. 19 Cash Management ...................................................................................... 20 DebtManagement ...................................................................................... 20 Procurement ............................................................................................... 22 Asset Management ..................................................................................... 23 ExpenditureControl .................................................................................. 23 Monitoringof Expenditure ....................................................................... 24 PersonalLedger Accounts ......................................................................... 25 Revenues ..................................................................................................... 26 PerformanceManagement ........................................................................ 27 InternalAudit ............................................................................................. 28 Conclusion ................................................................................................... 29 E . GOVERNMENTACCOUNTING AND FINANCIALREPORTING .....31 Cash-Based AccountingandReporting ................................................... 31 Computerization ......................................................................................... 33 Conclusion ................................................................................................... 34 F . ACCOUNTABILITY OF RURALLOCALBODIES ................................ 36 Planningand Budgeting ............................................................................ 36 Accounting andReporting ........................................................................ 37 ExternalAudit ............................................................................................ 38 CapacityBuilding ....................................................................................... 39 Conclusion ................................................................................................... 40 G.ACCOUNTABILITY OFURBANLOCAL BODIES ................................ 41 Planningand Budgeting ............................................................................ 41 Procurement ............................................................................................... 42 Accounting and Internal Controls ............................................................ 43 ExternalReporting .................................................................................... 44 Monitoring .................................................................................................. 45 Audit........................................... ................................................................ 45 LegislativeOversight ................................................................................. 45 Conclusion ................................................................................................... 46 H ACCOUNTABILITY OFPUBLICENTERPRISES . .................................. 47 Government Companiesand Statutory Corporations ........................... 47 Accounts and Reports .................................................................. 48 InternalControl andInternalAudit .......................................... 51 ExternalAudit .............................................................................. 52 LegislativeReview ........................................................................ 52 DevelopmentAuthorities ........................................................................... 53 Budgetingand BudgetMonitoring ............................................. 53 Accountingand FinancialReporting ......................................... 53 Internal Control andInternalAuditmanagement Audit ........53 ExternalAudit .............................................................................. 54 DepartmentalCommercialUndertakings ............................................... 55 Conclusion ................................................................................................... 55 I . EXTERNAL AUDIT ...................................................................................... 57 Mandateand Objectives ............................................................................ 57 Audit Methodology .................................................................................... 58 Training andProfessionalDevelopment .................................................. 58 Audit Reports ............................................................................................. 59 FollowUp .................................................................................................... 60 Conclusions................................................................................................. 60 J . LEGISLATIVE OVERSIGHT ..................................................................... 61 PublicAccounts Committee ...................................................................... 61 Committeeon Estimates ............................................................................ 62 Conclusions................................................................................................. 63 K PUBLIC TRANSPARENCY . ......................................................................... 64 Conclusions ................................................................................................. 65 L RISKANALYSIS . ........................................................................................... 66 Other Aspects of Risk ................................................................................ 68 Annex 1 Bibliography ............................................................................................ 71 Annex 2 L i s t of Persons M e t ................................................................................. 74 Annex 3 Finance Department Functions ............................................................. 78 Annex 4 Budget Process ........................................................................................ 79 Annex 5 Payments Process .................................................................................... 81 Annex 6 Resource-Based Accounting ................................................................... 83 Annex 7 Registered Societies ................................................................................. 85 Annex 8 Public FinancialAccountability in Govt Companies in U.P . ..............86 Annex 9 Public Financial Accountability in Statutory Corporations and Development Authorities in U.P ..................................................... 99 Annex 10 Public Interest Litigation .................................................................... 108 Annex 11Action Plan ........................................................................................... 109 Box 1 Relative Size of Components of the Public Sector ................................... 9 Box 2 The Legislative Framework for FinancialAccountability and Transparency ............................................................................................ 12 Box 3 Use of Personal Ledger Accounts for SpendingAfter the Year Ends 25 . Box 4 Comparison of GoUP Accounts with IFAC Standard .......................... 31 Box 5 Profile of Rural Local Bodies .................................................................. 36 Box 6 Profile of Urban Local Bodies ................................................................. 42 Box 7 Profile of Government Companies ......................................................... 48 Box 8 Governance of Government Companies and Statutory Corporations 49 Box 9 Profile of Statutory Corporations ........................................................... 50 Box 10 Profile and Governance of Development Authorities ........................... 54 Box 11 INTOSAIReporting Standard ............................................................... 59 Box 12 Composition and Procedure of the Public Accounts Committee .........62 Box 13 Riskassessment on OECD/DAC Methodology ..................................... 66 EXECUTIVESUMMARY 1. Uttar Pradesh is India's most populous State, and one o f the poorest. Over 30% o f the population still lives below the poverty line. O f the 14 major States o f India, UP has the third lowest income per capita, ahead o f only Bihar and Orissa. In recent years, growth has slowed to 2% against a national average o f 4-4.5%. 2. Serious fiscal problems have emerged since the 1990s. The revenue deficit has increased significantly over the years to Rs. 6,289 crores (63 billion) in FY 2002 and the fiscal deficit has increased to Rs.10,179 crores. Projected debt at March 2003 was Rs.91,859 crores and interest on the debt takes about 90% o f the state's own tax revenue. These deficits have been less than budgeted, but only because the shortfalls in expenditure have been greater than the shortfalls inrevenue. 3. After years o f political instability and short-horizon management, the arrangements for accountability inthe public sector have been undermined. Procedures exist for budgeting and monitoring the use o f public resources, but there i s little incentive to follow them. The Comptroller and Auditor General o f India questions numerous departmental actions each year, but there i s no compulsion on the executive branch to provide prompt answers and to make necessary changes. 4. In response to increasingpublic impatience with corruption and inefficiency, and the severe fiscal crisis, the Government launched a fiscal and governance reform program in March 2000. Five policy papers were tabled in the State Assembly, covering Medium-Term Fiscal Reform, Governance Reform, Civil Service Reform, Public EnterpriseReform and a Financial Management and Accountability Strategy. These policy papers and a matrix o f policy actions and targets provided the framework for a planned series of adjustment credits from the World Bank. 5. Some useful progress has been made in implementing the financial management reform program over the last three years, as follows: 0 Computerization o f the Treasuries in a network system has been completed at state government level, enabling the Government to monitor cash flows and prevent excess expenditures; 0 a Directorate o f Internal Audit has been established inthe Department o f Finance to provide central leadership and guidance in the development o f departmental audit; 0 measures are beingtaken to establish better control over payrolls. The first World Bank credit was disbursed in full. However, the overall reform program i s well behind schedule and further credits were contingent on actions by GoUP. 6. At present, the main strengths and weaknesses in financial management and accountability can be summarized as follows: 1 Strengths 0 Well established (if overly complex) regulatory framework for financial management and clear assignment of control responsibilities to the Department of Finance, line departments, Treasuries and officers of the IndianAccounts and Audit Department 0 Monitoring of expenditure against budget by computerized Treasury system 0 Independenceand expertise of the external audit fbnction 0 Active Public Accounts Committee and Ombudsman 0 Public access to budgets, monthly expenditure data, contract tenders, annual accounts and audit reports, all available on official websites Weaknesses Accountability is diffuse because the public sector is very fragmented, with tens of thousands of institutions and unitshaving varying legal frameworks and codes of accountability, and there is no `big picture' for macro-fiscal control Revenues are regularly over-estimated, leading to ad hoc cut-backs during the year Poor cash and debt management leads to problems in executing the budget as planned Procurement is very loosely controlled, which creates opportunities for abuse Penalties for irregularities are delayedand uncertain Monitoring and control is focused mainly on compliance and individual financial transactions, with little attention given to outputs, outcomes or value for money; authority and responsibility are mismatched Delays in accounts and audit reports of government companies, statutory corporations, departmentalenterprisesandmany local bodies. RiskAnalysis 7. An analysis of the risk that public funds, including funds provided by the World Bank, are not used for intended purposes was made using the OECDDAC methodology. GoUP scored moderately well against most of the benchmarks but serious weaknesses in procurement, widespread irregularities and the lack of prompt and predictable corrective action, meanthat the overall level of fiduciary riskremains high. 8. Publicly funded bodies outside the state government also represent high fiduciary risks. Publicly owned enterprises are unable to account for expenditures on an accurate and timely basis. Similarly the lack of trained personnel inrural local government poses serious risks to the use of public funds. However, it should be borne inmindthat the bulk of public expenditure is in the government departments (about 83%) and public enterprises (about 12%). About three percent takes place in rural local government, and two percent in urban local bodies. The riskto public funds lies preponderantly inGoUP departments. 2 Implications 9. The analysis in this report suggests there is significant scope for the Government of UP to improve the efficiency and effectiveness of public spending through further consolidation o f the budget, better matching o f accountability with responsibility, routine enforcement o f accountability, and greater transparency. This would be fully consistent with the fiscal reform program, and would have a direct impact on GoUP's ability to provide more and better quality public services to the poor. 10. Plans for financial management reform are in place, but limited progress has been made in implementing them. Future success will depend critically on a combination o f stronger bureaucratic and political support for the reform effort. The SFAA can provide a platform for expanding the reform effort, and securing additional technical and financial support. 11. In the short term, progress can be made simply through better observance and enforcement o f existing procedures. Information technology has already proved a valuable tool for effective management o f public funds and its potential should be exploited further. Other systemic changes, such as improved use o f financial information for management purposes, are likely to bring significant benefits inthe longer term. 12. CAG reports indicate that misuse and wastage o f public funds i s increasing. Immediate steps could be taken to pursue cases o f corruption and mismanagement identified by the CAG. Leadership is needed also to make state-owned enterprises, local governments and other bodies which receive public funds properly accountable. Recommendations 13. The report contains an action plan that was formulated by GoUP based on Bank recommendations for improving financial accountability and reducing fiduciary risk (Please see Annex 11). Some o f these involve the Go1 and/or the CAG, viz. updating the Financial Handbooks, devolution o f responsibility for state accounting, simplification o f budget structure, more predictable Go1 funding, changes to urban local bodies' accounting system, improved audit techniques and reporting, and updating o f the Societies Registration and Official Secrets Acts. 14. To assist GoUP in re-planning its own financial management reform program, the following recommendations having the greatest potential impact on fiduciary risk, excluding those involving GoI/CAG:, have been selected: i. Deputeoneormoresenior officials intheFinanceDepartmenttooverseepublic financial accountability reforms ii. ReviewandupdateFinancialHandbooks, TreasuryRulesandBudgetManuals. iii. Develop and implement a Medium Term Expenditure framework in major spending departments of GoUP 3 iv. Establish a Cash and Debt Management Section in Finance Department with the task o f (a) improving the cash forecasting and monitoring system, and (b) maintaining a reliable and accurate debt database for improved debt management V. Lapse all Government personal ledger accounts at 31 March 2003 and address underlying problem of late allotments through improved budgeting and cash management vi. Strengthen accountability in Rural Local Bodies through social audits, posting o f budget information, procurement records and audited accounts on Panchayat notice boards. vii. Finalize accounts of Urban Local Bodies on the existing cash basis o f accounting. Clear outstanding bank reconciliation and institute controls to ensure timely reconciliations in hture. ... v111. Within Government Companies and Statutory Corporations bring all annual accounts up to date. Wind up non working companies and set up Audit Committees to resolve outstanding audit queries. ix. Strengthen internal controls inDevelopment Authorities with respect to fixed asset records, physical verification of assets, reconciliation o f bank accounts, personal balances, and escrow accounts. X. Strengthen internal audit withinGoUP. xi. Buildcapacity ofFinance Department officials. xii. Strengthen state government training institutions like the Financial Management Research and Training Institute (FMRTI). 4 A. INTRODUCTION A.1 Uttar Pradeshis India's most populous State andthe most dominant innational politics since Independence, producing over half of India's prime ministers. Its history includes the writing ofthe Upanishadsand the Mahabharat,the teaching of GautamBuddha, the rise and fall of successive empires - the Mauryan empire under Chandragupta and Ashoka, the Gupta and Mughal dynasties, the cultural synthesis of the reigns of Akbar and Shahjahan, the Nawabs of Avadh, the British Raj, the lives of Mahatma Gandhi and Pandit Nehru, andthe coming o f Independence in 1947. A.2 This rich history and cultural diversity contrast with the State's continuing economic deprivation. Out of Up's present population of 166 million, at least 50 million persons live below the poverty line,' despite this being a key concern of the founding fathers and all the efforts made over the last 56 years. State per capita income (Rs. 11,273, about US$ 218, in FY 2002)2 lags behind the national average, and the gap is ~idening.~The same applies to infrastructure such as electricity, roads and irrigation - the gap is widening. This has been attributed to inadequateand ineffective spending on health and education, and a decline in the quality of governance linked to political instability and ineffective management of State funds.4 A.3 The most urgent problem facing UP today is fiscal imbalance. The revenue deficit has increased significantly over the years to Rs. 6,289 crores (63 billion) in FY 2002 and the fiscal deficit to Rs.10,179 crores. Projected debt at March 2003 was Rs. 91,859 crores and interest on the debt takes about 90% of the state's own tax reven~e.~ This vicious circle is being addressed by GoUP ina medium-term fiscal reform program. A.4 UP is one of the World Bank's focus states in India, and has received wide-ranging support comprising analytical work, technical assistance, investment lending and adjustment lending. The UP Fiscal and Governance Reform Loan of $250 million was approved and disbursed in April 2000 as a single-tranche loan - the first sub-national adjustment loan in India. The Bank has also a substantial portfolio of 18 investment projects amounting to $1,830 million, spread over population, health, education, roads, agriculture, power, rural water and forestry sectors. ' World Bank (2002) Poverty in India: the Challenge of Uttar Pradesh. p. 9. The poverty line is an income of $1.08 a day at 1993 prices. 44% of the poor are from the scheduledcastes.Population is from the 2001 census (provisional figure), per Departmentof Informationand Public Relations(2002) Uttar Pradesh 2002. This is basedon MTEF data for GSDP (est) inFY 2002 (172,625 crores), population 166 million, and Rs.47.66iUS dollar in March2003. The financial year 2003 started 1April 2002 and ended 31 March 2003. GoUP Departmento f Finance (2000) Uttar Pradesh Medium Term Fiscal Reform Policy. Note that the population of the State has decreasedby about 8.5 million, becausethe 9 districts of Uttaranchal were hived off as a separate State in FY 2001. Fiscal and other data series needadjusting. World Bank (2002) op. cit. pp. 69-76, and A Policy Note on Accelerating Development and ReducingPoverty inUttar Pradesh. Though fiscal deficits have risen, they have been than budgeted, becauseexpenditure shortfalls have been more than revenue shortfalls. Over the 5 years FY97-FYO1, actual revenuehas been93.6% and actual expenditurehas been 91.2% of budget estimates. Overall fiscal deficits have been 86.9% of budget estimates (mean of annual percentage variancesper Table 1.2, in World Bank (2002) Uttar Pradesh: Trends and Patterns inPublic Spending, by FarahZahir, PREM, SouthAsia, August). Therefore, the problem hitherto appears to lie inthe lack of macro control over the initial budgetratherthan uncontrolled expenditure. 5 AS The problems of management of State funds are exacerbated by the sheer size o f the public sector in UP, its fragmentation, and the frequent moves o f officers. The number o f public employees, including teachers and health workers, i s about 1.7 million. There are over 60,000 public sector bodies. Average tenure o f senior officers is less than a year.6 Objectives and Scope of the SFAA A.6 The main objective o f the SFAA is to build upon the State's Jinancial management reform program that is already under way.7 The primary audience for the SFAA is the Government o f UP (GoUP), the Government o f India (GoI) and, with GoUP agreement, development partners, civil society and the public. It will be the platform for agreeing an action plan to meet identified gaps in its financial accountability arrangements. The SFAA will enhance the World Bank's knowledge of public financial accountability arrangements in the State and identify fiduciary risks and appropriate responses, so that the Bank can manage adjustment and investment operations relating to the State. In addition, it will provide an input to the country-level dialogue with institutions such as the Comptroller and Auditor General (CAG), Controller General o f Accounts (CGA) and Reserve Bank of India (RBI). A.7 The SFAA covers all institutions using public funds (see paragraph B.3 below for a partial inventory). The assessment does not cover some aspects o f the budget allocation process that would be included in a GoUP/World Bank Public Expenditure Review, such as State-Union fiscal relations, the role o f the public sector, revenue policy and administration, the size and coinposition of public expenditures, prioritization o f allocations, tax expenditures, quasi-fiscal activities and debt policy.8 Nor does the SFAA cover the private sector financial accounting, auditing and governance practices, as it i s planned to include these in a Review o f Standards and Codes - Accounting and Auditing Module. Non-government organizations and community-based organizations are important users o f State funds, but are excluded from this SFAA as it i s planned to include them in a separate assessment at a later date. The section on Public Sector Enterprises i s intended as a broad diagnostic rather than a case by case reform program. A deeper study into the administration and functioning of these enterprises would be requiredto provide a road map and this is outside the scope o fthis SFAA. 'Worldi Bank (2002) op. cit, p.71. This s set out in Annex A of the Report and Recommendationon aProposedCredit and Loanto India for the Uttar PradeshFiscal Reform and Public Sector Restructuring Project, March 29, 2000. World Bank report P7365-IN. On these matters, see GoUP Department of Finance(2000) Medium Term Fiscal Reform Policy, and subsequent World Bank mission reports. 6 Approach and Methodology A.8 This SFAA follows a GoUP paper on Financial Management and Accountability Strategy, which was presented to the Legislature and made available to the public in March 2000. The SFAA has been conducted by a World Bank team' in close collaboration with GoUP, the State Legislature and the Office o f the Comptroller and Auditor General of India (CAG). A Concept Note was agreed by GoUP and the central Government, and a Steering Committee was set up under the chairmanship of the Principal Secretary, Finance. Members were mainly from GoUP but included the director o f an academic institution. N o donor agencies in UP other than the World Bank were represented. It held its first meeting on 18 January 2003. A.9 The SFAA team collected and reviewed important recent documents, such as the Compilation on the National Conference on Legislative Control over Public Purse held in UP in July 2000, the PricewaterhouseCoopers report `Modernization o f Financial Management and Audit Functions', the World Bank reports `Poverty in India: the Challenge of Uttar Pradesh' and `State Procurement Assessment Report', and the Report on the Credit and Loan for UP Fiscal Reform and Public Restructuring, a programmatic adjustment loan to GoUP in 2000. A complete list o f sources i s given at Annex 1. A.10 Members of the SFAA Team undertook research and data collection in UP January- February 2003 (see Annex 2 for a list of persons seen), analyzed their findings February-March 2003, and shared the draft at mid-March with GoUP for reality checks on the factual content and initial reactions, with the caveat that major changes might be made after peer review. This draft incorporates changes arising from the comments o f informants and reviewers. Following GoUP response, a Steering Committee meeting/workshop will be held on the draft, and the final report should be available by mid-June 2003. Finance Department will put the final report to the Cabinet for policy decisions. On approval, an Implementation Committee, with World Bank representation, would oversee implementation o f reforms. The Bank's team consistedo f Rajat Narula (Team Leader), Ivor Beazley, P.K. Subramanian,Vinod Sahgal and Mohan Gopalakrishnanof SARFM, Tony Bennett (Principal Consultant), Saif Ali (Research Assistant) and local consultantsAtul Mohan and Puneet Kapoor of R.M. La11& Co., K.G.Bansal of A. Sachdev & Co., and A.K. Senguptaof the Institute ofDevelopment Studies, University ofLucknow. Peerreviewers are Malcolm Holmes, Anthony MartinHegarty, Daniel Boyce and William B. Marke o fthe World Bank, and T.N. Dhar, Secretaryof the UP Branch of the Indian Institute of Public Administration. Substantialinputs were also made by ParminderBrar, Manuela Ferro, Stephen Howes and Rino Schiavo-Campoofthe World Bank. 7 B. INSTITUTIONAL AND LEGALFRAMEWORK B.l The State o f Uttar Pradesh is a constitutional democracy with a bicameral legislature and a High Court. The lower house i s the Legislative Assembly (Vidhan Sabha), which is elected on a universal adult franchise for a five-year term and has 404 members. The upper house is the Legislative Council (Vidhan Parishad). It has 100 members elected or appointed by various groups (Article 171), for a six-year term. The President o f India appoints the State Governor. The Governor appoints a Chief Minister, being the leader o f the party or coalition that has a majority o f members in the Legislative Assembly. The Governor appoints other Ministers on the advice o f the Chief Minister. Currently there are no less than 91 Ministers.Together they constitute the Council o f Ministers, chaired by the Chief Minister. The leader o f the largest opposition party is the Leader o f the Opposition, who has the status o f a Minister. Though the Governor has all executive powers, he can exercise them only on the advice o fthe Council o f Ministers, except intimes o f crisis. B.2 The State has 17 administrative divisions each headed by a Divisional Commissioner. These are divided into 70 districts, each headed by a District Magistrate/Collector who coordinates the work o f all departments within his or her district, and has law and order and revenue collection responsibilities. The District Treasury i s under the general charge o f the Collector, who entrusts executive control to a Treasury Officer. B.3 InUttar Pradesh, the public sector is highly fragmentedand not hlly documented. The following inventory o f public sector institutions is not necessarily complete: 0 83 State-level departments using the Consolidated Fund, Contingencies Fund, and funds inthe Public Account (in particular, the State Provident Fund)." There are some non-commercial entities at the State level using State funds, such as 21 universities and research institutions and over 400 private colleges." These are extra budgetary funds, i.e. they are part o f 'government' as defined by IMF-GFS, but their estimates are not included inthe published budget document, nor their accounts inthe Finance Accounts. 0 Rural local bodies are at three levels: District (70 Zilla Panchayat), Block (809 Kshetra Panchayat) and Village (52,029 Gram Panchayat). These are all elected bodies, and receive significant transfers from the State. They are accountable to the State level as well as to their own elected councils. In addition, there are 7,6 13 cooperative societies providing seed, fertilizer and credit to farmers, 70 District Rural Development Agencies, which are registered societies receiving Go1and GoUP hnds for rural development schemes, and an unknown number o f other registered societies set up to receive and manage funds for particular I OThe ConsolidatedFund receives all revenues and proceeds of loans and makes all expenditure paymentsand loan repaymentsof GoUP. The ContingenciesFund is a relatively small fund that is usedto make emergency payments, and is then reimbursedfrom the ConsolidatedFund. All receiptsand paymentsof GoUP that do not form part o fthe ConsolidatedFund or ContingenciesFund, such as deposits, advances and reservefunds, are included inthe Public Account. These are privately managedinstitutions for which GoUP pays the teachers' salaries. It is difficult to ensure accountability. See World Bank (2003) Public Expenditure Note, February, p.8. It is not clear whether they meet the IMF-GFS criteria for inclusion under 'government'. 8 schemes and runby GoUP officers.12 Rural local bodies are described in Chapter F. 0 Urban local bodies are o f three kinds - municipal corporations (12 Nagar Nigams), municipal boards (194 Nagar Palika Parishads) and town area committees (422 Nagar Panchayats). These are described inchapter G. 0 Public enterprises (which in UP are all at the State level), viz. government companies and their subsidiaries (1OS), statutory corporations (7), development authorities (22), and departmental enterprises (12). Their accountability i s explained in chapter H. B.4 The box below shows the approximate size o feach o fthe above components o f the public sector. Expenditure % inFY200413in Rs.crores 1.GoUP departments 55,350 83 2. Public enterprises 8,040 12 3. Rural local bodies 2,000 3 4. Urban local bodies 1,000 2 Total 66.390 100 FinanceDepartment B.5 The Finance Department is responsible for budgeting, cash and treasury management, financial information systems, internal audit and expenditure control in State departments. The Department i s headed by the Finance Minister and a Principal Secretary, Finance. See Annex 3 on the functions o f the more important directorates for the purposes ofthis SFAA, B.6 The Department has created a new post o f Controller with the following functions: 0 oversight o f reforms in public financial accountability, presently including (a) a proposal for Treasuries to pay individual salaries directly (IPAO concept, see para D.20), (b) introduction of half-yearly State accounts, (c) progress towards l2Societiesregisteredunder the SocietiesAct are legal corporate bodies. They have beenset up so as to avoid the restrictions of normal government rules and regulations.Inparticular, as many societies are registeredto run revenue-earningschemes, they avoid havingto turn their revenues over to the ConsolidatedFund. For their legal status and accountability, see Annex 7.They operate in health, agriculture and other sectors, and at both State and District levels. 13Sources: (1) FY 2004 Budget shows total expenditureRs. 58,544 crores. Exclude transfers to sinking funds 1,819, and transfers to autonomousbodies 1,375 = Rs. 55,350 crores. (2) Governmentcompanies' investment at 3/01, Rs. 9841 assumed expiinv. ratio 0.5, with 10%p.a. growth for 3 years = Rs. 6,550 crores. Statutory * corporations' investmentat 3/01, Rs. 549 crores same expiinv and growth = Rs. 365 crores. Development * authorities' disbursementsinFY 2002, Rs. 930 crores, with 10%p.a. growth = Rs. 1125 crores (3) RLBs' budget expenditure is aroundRs. 1,000 croresiyear, but this excludes expenditureof the District Rural Development Authorities, to whom GoUP transferredRs. 1,125 crores in FY 2003. Total spendingby RLBs is therefore aroundRs. 2,000 crores. (4) ULB revenues inFY were Rs. 833 crores.Assuming budgetarybalance and growth o f 10% a year, expenditurein FY 2004 would be aroundRs. 1,000 crores. 9 resource-based accrual accounting, and (d) review and updating o f Financial Handbooks, Treasury Rules, Budget Manual, etc. 0 integrated computerization o f accounting functions, Treasury operations, and departmental financial and personnel MIS 0 consolidation of returns from Treasuries and preparation o f monthly and annual State accounts (Le. devolution o f this function by CAG to GoUP) 0 management and training o f the State's finance and accounting staff.14 B.7 We strongly support these reforms and recommend that the responsibility for these be given to or more senior officials from the state Finance department. LineDepartments B.8 In each departmental directorate (head of expenditure), Finance Department designates a Controlling OfJicer. The Controlling Officer, usually the Secretary or Director, i s the person primarily responsible to the Legislature (Public Accounts Committee) for the proper use o f funds granted. H e or she is assisted by a departmental Finance Controller, who i s immediately subordinate to the Head o f Department, and has a functional responsibility to the Department o f Finance." Authority to commit expenditures, authorize the issue of cheques and countersign cheques i s restricted to senior officers o f each Department, who are nominatedas Drawing and Disbursement OfJicers(DDOs). B.9 It i s recommended that the position and profile o f the Finance Controllers be strengthened through in service training. As the function o f training state finance service officers i s normally done by the Financial Management Research and Training Institute in the state, capacity building of this Institute and others like it would help to create a vibrant training resource inthe state. The roles, responsibilities and reporting lines o f Finance Controllers should be clearly defined while keeping in view the requirement for independence and accountability o f that position. Currently, Finance Controllers are required to submit quarterly reports to the PS Finance while they report directly to the Administrative Heads o f the concerned departments. This makes for a conflict in their functional responsibility. Moreover, Financial Controllers also have the mandate for the internal audit o f the department, a function they are often unable to perform efficiently given their reporting lines. l4Smita S. Chaudhry (2002) Conceptualization of the Role and Functions o f the `Controller', inthe IFMTR Chronicle, Issue XVI, March, pp. 31-3. See also the PwC Draft Final Report. l5 This functional responsibility should be advisory in character so that it does not conflict with the Finance Controller's lineresponsibility to the Head of Department. 10 Accounts and Audit B.10 Accounting and external audit functions are provided mainly by the Comptroller and Auditor General o f India (CAG), who is head o f the Indian Accounts and Audit Service (IAAS) and entirely independent of the State. Within his Department, the Accountant General (Accounts and Entitlements), UP is responsible for the Monthly Accounts and Annual Finance and Appropriation Accounts. The Accountant General (Audit),UP is responsible for the audit of these Accounts.16 B.11 There is also a State Finance and Accounts Service. This comprises Treasury Officers, Additional Treasury Officers, Accounts Officers, Assistant Accounts Officers, Accountants, Assistant Accountants, Auditors, Internal Auditors and Clerks. If one adds Drawing and Disbursement Officers (recently reduced from 36,000 to about 8,000) and allied officers, the total number doing financial work i s around 15,000.'7 The SFAS cadre is controlled by a Secretary, Cadres in the Department o f Finance. Vacancies are filled by direct recruitment o f graduates through a competitive examination, and new officers go through a period o f probation during which they take a foundation course that trains them in GoUP organization and procedures, and a `professional' course that exposes them to basic accounting and various tool subjects such as computers. After two promotions on the basis o f seniority, further promotions are made on merit. e The delegation of responsibility for the State accounts to GoUP, and the expanding role of accounting as the Government moves to a results orientation, matching expenditures to outputs, will require more specialized and technical management and training of the SFAS cadre. This responsibility should be with one or more senior oficials of the state Finance Department. B.12 The legal framework is given in Box 2. The enforcement framework i s based on the Indian Penal Code, 1860. The UP Panchayat Raj Act, 1947, the Prevention o f Corruption Act, 1988, and the Government Servant Conduct Manual have elaborated the expected behavior o f public servants. An important feature o f the Indian legal system, often used in UP, i s Public Interest Litigation (PIL) - the right o f any person to file an action inthe Supreme Court inthe public interest (see Annex 10). B.13 It can be seen that the framework for public financial accountability is defined almost wholly centrally, and legislated in great detail. N o changes to the existing system can be made by GoUP unilaterally. However, it is open to GoUP (as in all States) to addto the systems, e.g. for internal management needs. As the State is gearing up for greater results orientation in its management systems, this i s an important consideration to bear inmind. l6AG (Accounts and Entitlements) functions are in fact divided betweentwo officers, Iand 11, basedin Allahabad, who share responsibility for departments.The word `Entitlements' refers to their continuing responsibility for authorizing certain salaries and pensionbalances. AG (Audit) is also two officers - the Principal Accountant General (Audit), based inAllahabad, and the AG (Commercial), based in Lucknow. l7Estimateby the Director, IFMTR. 11 Conclusion B.14 Inorder for the reformprogram inUPto be successfully implemented, on or more senior officials o f the state finance department should be made responsibleto oversee it. Box 2: The Legal Framework for FinancialAccountability and Transparency The main legal framework consists of Articles 148-151, 166, 202-209, 266-267, 282-284 and 293 o f the Constitution of India. The Constitution establishes inter diu the UP Consolidated Fund, Contingencies Fundand the Public Account (see below) and states that all revenues o f the Government have to be paid into the Consolidated Fund and no money can be paid out of it except under a legal appropriation. Articles 202-207 set out the budget approval procedure. Articles 148-151 establish the post o f CAG and his duties and powers. Section 22 o f the Comptroller and Auditor General (Duties, Powers and Conditions o f Service) Act, 1971 empowers the central government to make rules for maintenance o f accounts inconsultation with the CAG. His powers include that of advising the central government (through the President of India) on `the form o f accounts'. Any rule or modification has to be placedbefore Parliament for approval. By Article 293 (3), most large borrowings at the State level are controlled by the Central Government. GoUP has issued a Financial Handbook, a set o f eight volumes, under the authority o f Article 150 and the Audit and Accounts Order of 1936 (as adapted by the India (Provisional Constitution) Order, 1947). The Handbook incorporates Treasury Rules made by the State Governor under Article 283 (2) regarding treasury receipts and payments, and directions issued by the CAG. The most relevant to this SFAA is Volume V, Part 1, also known as the Account Rules (600 pages). This includes the UP Finance and Accounts Service Rules, 1980, which cover the recruitment, pay and promotionof finance and accounts officers. A separate Budget Manual is issued by the State Governor under the authority of Article 166. It contains rules framed by the Finance Department for the preparation o f the Budget and for budgetary control. An Appendix to this Manual contains Rules on the use o f the Contingencies Fund, issued by the Governor under the UP Contingency Fund Act, 1950. The same rules apply to Go1 funds used in UP as to GoUP funds. See Finance Department website for the complete Financial Handbook and Budget Manual: http:/upgov.up.nic.idupfinance 12 C. GOVERNMENT BUDGET PREPARATIONAND APPROVAL C.1 The process of budget preparationand subsequent control against approved budgetsis laid down inthe UP BudgetManual, last revisedinJanuary 2000. Budget Structure c.2 InUP, as inother States, budgets and accounts are dividedinto development expenditure (capital expenditure and operating expenses on uncompleted schemes) and recurrent expenditure (`revenue expenditure', including general administration, operating expenses o f completed schemes, and interest). This encourages18a preference for `development' expenditures over operating and maintenance expenditures, irrespective o f their respective benefits, and hinders effective utilization o f existing assets because recurrent cost implications o f capital schemes are not generally identified at the time they are sanctioned. As a consequence too many schemes are started for which there will be insufficient funds for efficient operation. C.3 Secondly, expenditures are divided by source o f legal authority, either `voted' annually by the Assembly or `charged' against the Consolidated Fundwithout the need for annual vote. Thirdly, development and non-development categories are dividedbetween Plan (i.e. within the Five-Year Plan) and Non-Plan. Not all development expenditure i s inthe Plan. Expenditure classification as Plan and Non Plan leads to further convolution inthe linkage between policy and budgets2'. This i s a mandatory bifurcation followed by all States and can be changed only at central level. The state should encourage GoI to review the current system of budget classijkation of developmenthecurrent and Plan/Non-Plan divisions . C.4 Estimates are then divided between New Expenditure (mainly new schemes) and Standing Sanctions." This i s a useful distinction as it focuses management attention on the best use o f uncommitted resources. Finally estimates are classified by grant (department), major head (function, such as health), sub-major head (such as public health), minor head (program, such as prevention o f food adulteration), sub-head (scheme or activity, such as analysis o f samples), detail head (sub-scheme or sub-activity), and standard object (type o f input). There are 45 standard objects since FY 2000. The full expenditure code, including the two-digit grant code, has 17 digits. l8The Constitutionallows certain expendituresto be chargedagainst (i.e. drawnfrom) the ConsolidatedFund withoutbeingvotedby the Legislature. These includethe salaries ofjudges, the CAG, etc. andrepaymentsand interest on the public debt.All other expenditureshaveto be votedannually by the Legislature. 20 l9New expenditure effectivelymeans expenditure on previously uncommittedschemesiactivities,while Standing Sanctionsrefer to expenditurethat is already examined, sanctionedandcommitted. 13 C.5 For several years the Budget has been prepared on a program basis (minor head), but programs overlap with standard objects o f expenditure.*' Any change in the account structure down to minor head level needs prior approval o f the CAG. For more effective delivery o f public services, programs and sub-programs should be clearly demarcated and authority over program budgets should be matched with responsibility for outputs (see D.34onperformance management). We understand that there may be practical dfjculties in recasting all fprograms' into a limited number of functional categories, and allocating responsibility for each program to one ofJicer. However, we would strongly recommend that an analysis of existingprograms and identijkation of corefunctional responsibility for these should be undertaken in the rollout of MTEF. BudgetProcess C.6 Budgetsare compiled and reviewed on an incremental basis, taking the revised estimates of the current year as a base and adding or subtracting for known changes. Budgets are compiled mainly by district-level heads, Directorates and Finance Controllers. There does not appear to be any delegation o f budgeting (or budget control) to service delivery institutions such as hospitals and health centers.21 It may be described as `middle-up' rather than bottom-up. For details see Annex 4. The Government should aim for greater decentralization of budgeting and budget management. c.7 Many new expenditure proposals are included in the budget at the last moment and are subject to post-budget scrutiny and delays inimplementation. 0 The budget calendar needs to be advanced and cutoffdates strictly observed so that Schedules of New Demands are properly prepared and scrutinized by Finance Departmentfor inclusion in the budget. C.8 The timetable is tight as it does not leave muchtime for legislative review (21 days inthe Assembly). There is practically no legislative scrutiny o f the Budget before it is passed.22 Moreover, the budget process i s sometimes delayed for political or administrative reasons. In this case, there i s constitutional provision for continuation o f government spending on sanctioned projects and ongoing activities by means o f a `vote on account' 2o`Programs' include Land 050, Construction 051, Servicesand service fees 501, Losses and gains on exchange 791, Irrecoverable loan write-offs 792, Transfers toifrom reservefunds and deposit accounts 797, and Suspense 799. All these are objects,not programs. 21A Block Medical Office, for instance, controls only its vehicle operating costs and salaries. Other inputs are provided `free'. This illustrates the limited decentralization of financial accountability within the Government, and contrasts with the devolution of funds and accountability to the local authorities. 22Shri Keshari NathTripathi, Speaker, Legislative Assembly, UP (2000) National Conference on Legislative Control over Public Purse, 29-30 July 2000: A Compilation, p. 58. 14 advance.23 The target date of 28 February should be kept, but a system of review by Departmental Committees o fthe Legislature should be introduced and encouraged. C.9 Re-appropriations (virements) during the year are tightly controlled. Embedded in the rules i s an outdated preference for plan expenditure, capital expenditure and new proposals and a bias against recurrent expenditure. It i s now recognized that capital expenditure i s not inherently more productive than recurrent expenditure. A school may need more classrooms (capital) or it may need more teachers or supplies (recurrent). Given a more robust framework o f accountability, more flexibility could be given to managers to vire expenditures within prescribed limits. The current rules lead to heavy supplementaries which go through the same process as the main budget, and often remain grossly underutilized. C.10 In practice, the department often finds it easier to apply for a Supplementary Appropriation. This goes through the same stages as the original budget, culminating in further legislation. The amount of supplementaries is increasingeach year, indicating that budget estimates are unrealistic. The CAG has pointed out that supplementaries are grossly under-utilized. We recommend that the budget and supplementaries be carefully scrutinized to identifi the reasonsfor these and steps be taken to address the underlying reasons. C.11 If the need i s urgent, as well as unforeseen, the department may apply for an advance from the Contingencies Fund, as well as a supplementary appropriation. On approval o f the appropriation, the Contingencies Fund is reimbursed from the Consolidated Fund.24 This Fund is supposed to be used only when the Legislature is not in session (and therefore cannot pass a Supplementary Appropriation). In fact, it i s used at all times, for all purposes, and very frequently (277 times in FY 2000).25 The shape of the Budget i s routinely changed during the year. The use of Supplementary Appropriations and the Contingencies Fund should be reduced. The Contingencies Fund should be reduced to a reasonable level (say Rs.50 crores) and only used in dire emergency, as defined and approved by the Council of Ministers. BudgetComprehensiveness C.12 The term `budget' usually refers to transactions on the Consolidated Fundonly. However the budget document covers also the Contingency Fund and Public Account transactions, so it i s fairly comprehensive at this level of government. The budget does not include 23The Constitution, article 206, allows the Legislative Assembly to make a grant inadvance for `a part of any '` fmancial year'. This canbe done without discussion inthe House, andmay be resortedto when the Government is facing strong opposition. On 5 March 2003, avote on account was passedfor the first six months of FY 2004. Similarly, the FY 2003 budget was authorizedby a vote on account on 22 March2002, andthe full budgetwas not resentedtill August 2002. It stands at Rs. 600 crores, which is manytimes higher thanthe Go1Contingency Fund. 25The Times of India alleges severalmisuses of the ContingenciesFund inan article in its March 6,2003 issue. 15 some bodies such as registered societies, which are withinthe definition o f `government' as they are controlled by government officers, but are legally separate (see B.3 above). Large amounts are spent on government programs through these extra budgetary special- purpose vehicles, e.g. Rs. 1195 crores was disbursed to District Rural Development Agencies inFY 2003. Their receipts and expenditures are omitted from the State accounts also.26The result i s that budgetsand accounts give an incomplete picture. a We recommend that the draft Fiscal Discipline and Budget Management Bill include a requirement for an annual public sector consolidated budget for planning purposes only) that Budget Division prepare consolidated budgets each year accordingly, and that consolidations are included in the Budget Summary. C.13 Some external resources are not budgetednor accounted for. While all cash aid (grant and loan) i s channeled through the State Government and i s therefore brought to account, grants in kind (such as offshore payments by donors to contractors, suppliers and consultants) are not generally valued and brought into project budgets and accounts, nor the State accounts. The amount could not be estimated, but it is thought to be significant intotal. a We recommend that a study be carried out to determine the significance of the amounts involved and to make recommendations regardingfuture disclosure in the budget and accounts. Participationand Transparency C.14 Inthe preparation o f the UP budget, there is little or no systematic seeking o f inputs by non-government stakeholders such as the business community and civil society organizations, unlike the central Government and some other States.27Similarly, in the preparation o f individual schemes, grass roots participation i s not sought. In the health sector, for instance, decisions on the location, design or mode o f operation o f primary health centers and community health centers are made entirely within the Health Department. Pre-budget consultations are an important potential tool o f transparency and accountability, providing valuable inputs o f ideas, energy, realism and, in local community projects, resources. C.15 The budget becomes a public document after it is tabled inthe Legislative Assembly, at the time the Finance Ministermakes his Budget Speech. This is reported inthe media, but 26Go1has directed(13 January 2003) that releases of funds for centrally-sponsoredschemes, which are currently disburseddirectlyby Go1to the implementingagencies, shouldbe madethroughthe State Government on condition that funds are passedon to end-users within three weeks. According to PlanningDepartment,this cannot be implementeduntilthe FY 2004 budget is passed, expectedinSeptember 2003. The first six-monthinstallment of Go1funds lies unutilized. Whenthis new procedureis in operation, accountswill bemore comprehensive.The same changes shouldbe made inthe budget. 27As inGujarat, for instance. See V.V. Rama Subba Rao (1999) DecentralizedBudgetingandAccountability, in Budget Reform in Developing Countries, Papers o f a WorkshopheldinNew York, December 1997. UnitedNations: New York 16 not broadcast live. Copies o f the Budget and Budget Summary are distributed (200 copies to Universities, etc) and are available at no charge on application to the Finance Department. More conveniently, they are posted onto the Finance Department's website. This is well organized and shows the current year's budget down to the standard object level, and all the voluminous budget documentation. The significance o f programs i s not always evident from their names (see recommendation at paragraph C.5). Also, the basic parameters and assumptions on which the estimates are based are not stated. The Budget cannot be called user-friendly. C.16 It i s expected that measures like publicizing Citizens' Charters by departments having strong public interface, publishingmonthly data related to the State's financial position on the finance department's website along with the downloadable database the year's budget, financial rules etc will help create an environment conducive to making public participation inbudgetpreparation. MediumTermExpenditureFramework C.17 Following preparation o f a Medium-TermFiscal Policy Paper in 2000, a Medium-Term ExpenditureFramework has beendrafted by Finance Department for the period FY 2004 to FY 2007. It was submitted to GO1 in December 2002 and i s expected to be finalized and made public when it i s laid before Parliament inAugustBeptember 2003. C.18 The MTEF would provide for a transparent planning and budget formulation process within which departments and agencies could establish expenditure norms inline with their priorities over a mediumterm. The MTEF process would also serve the objective o f setting departmental priorities and fiscal targets and allocating resources to strategic priorities within these targets. C.19 The principal objective i s to reduce the burgeoning fiscal deficit while maintaining and enhancing the delivery o f public services, and reflecting the priorities o f the State Five- Year Plan. The main issues are the accuracy o f GSDP projections, the buoyancy o f tax revenues, expected savings, pension reform, and power sector reform. In addition, a Resources and Expenditure Commission was set up by GoUP in 2002, with a mandate that includes public expenditure review and sectoral allocations. c.20 The MTEF has not so far impacted the budget process, but it is expected that budgets from FY 2005 will be based on it. It i s intendedto move to a two-phase process inwhich resource envelopes are first set for each department, based on the MTEF. After approval by the Cabinet, the envelopes will become ceilings for detailed expenditure budgets by departments. This will reduce the incidence o f budget cuts by Finance Department, and enable departments to take greater ownership o f their plans, which will be more realistic and more stable. The MTEF will also protect high-priority expenditures and ensure capacity operation and adequate maintenance o f existing assets.28 28See the detailedrecommendationsinthe PwC Draft FinalReport, Appendix 5D. 17 High priority should be given to W E F development and implementation in the major spending departments like Irrigation ,Power, Energy, Education, Medical, Drinking water and Social Welfare. Conclusion C.21 Government budgets are prepared `middle-up'. However, a commitment has been made to develop a medium-term expenditure framework that will introduce a two-phase process, first setting fiscally sustainable resource envelopes for each department, then bottom-up budgeting within these limits. It will be necessary to facilitate the consolidation o f budgets at different levels, and to simplify the budget structure so as to allow greater focus on programs with well-defined activities and performance indicators. The main recommendations are: Continued development o f the medium-term expenditure framework and its use in setting departmental budget envelopes 0 Budget Division to prepare consolidated budgets (a) for the Government and (b) for the whole public sector 0 Abolition o f Plan/Non-Plan and development/recurrent distinctions, and better presentation o f expenditure by responsible head, function, program, scheme/activity and by standard object 0 The Contingencies Fund should be reduced, and only used in dire emergency as defined and approved by the Council o f Ministers. 18 D. BUDGETEXECUTION,MONITORINGAND INTERNAL CONTROL Release of Spending Authority D.1 After the Appropriation Act i s passed, the Finance Department notifies each administrative department o f the amount o f its grant for the year. For FY 2003, Non-Plan grants were notified inApril 2002. Plan grants were not notified untilJune 2002. D.2 The administrative departments divide up their sanctioned grants for the year and make `allotments' to Heads o f Departments, New and Sanctioned separately. There i s no control over total allotments by Finance Department as they have no cash forecast. Heads of Departments, on the advice o f their Finance Controllers, divide their allotments and make periodic allotment orders to the DDOs. These authorize them to make commitments and to pay bills within given limits. They are cumulative through the year, i.e. unused allotments from earlier periods can still be used, but undisbursed allotments lapse on 31 March. The Finance Controller maintains a Budget Control Register (BM-17)that shows the status of allotments received and allotments distributed. The Treasuries and the AG are informed o f all allotments (see section on expenditure control). D.3 Allotment requests for new expenditure are made for each separate transaction. They require the concurrence o f both the administrative department and the relevant Expenditure Control Section o f Finance Department (Budget Manual para. 88). This process takes far too long, as the chain o f review and approval involves at least 12 persons.29Final allotments, which are supposed to be early in January, commonly arrive inMarch, even on 31 March. This pattern appears to be common to all departments. The same gaps emerge in the remittance departments between budget appropriations, allotments and CCL releases (see below). The shunting o f expenditure back to the later months o f the year means that work plans cannot be followed, schemes cannot make progress, and services cannot be delivered. It has also given rise to the demand for `Personal Ledger Accounts' for keeping unused allotments for spending after 31 March (see below). Fiduciary risk i s being reduced by preventing and delaying legitimate expenditures. The medicine may be worse than the disease it i s trying to prevent. GoUP should move@om an individual transaction basis of allotment to a calendar basis, such as quarterly allotments within authorized budgets and cashflow limits. D.4 In addition, where decisions on acquisition o f resources are made outside the operating unit,the accountability and sense o fresponsibility ofthe operating, unitis diluted. A Chief Medical Superintendent in charge o f a hospital, for instance, cannot be held responsible for the results o f decisions that are outside his control. It i s a principle o f financial management that responsibility for outputs and results must be tied to responsibility for inputs and expenditureon them. This is recognized inthe post o f Departmental Secretary, since he or she i s answerable to the Legislature for both the inputs and outputs o f the 29The Administrative Reforms Commission recommendedthat decision makingshould not involve more than three persons, such as a desk officer, review officer and approving officer, but this has not beenacted on. 19 Department, but the principle i s not followed at lower levels (see recommendation at C.6). CashManagement D.5 The Finance Department i s responsible, but cannot manage cash in the absence o f any breakdown o f the budget over the year, or any mechanism for updating the cash forecast during the year. Inparticular, there are problems of forecasting when Go1 funds will be received. Cash management i s reduced to responding to cash shortages as they occur by delaying payment o f bills other than high priority development expenditure^.^' The amount o f payment arrears at any point o f time i s not known or reported centrally. Thus, the Treasuries meet bills as they are presented, first come, first served until the money runs out, then apply cash rationing criteria to match bills with funds coming in. Payment arrears fund temporary deficits. D.6 This is a very unsatisfactory situation, as it makes it impossible for schemes to be completed according to any schedule, or for ongoing activities to run smoothly and efficiently. The availability o f funds to continue work appears to be the main unpredictable factor facing public managers, and stoppage o f funds i s one o f the main sources o f inefficiency, project delays and highcosts. A Cash Management Section should be established in Finance Department with the task of setting up and operating an improved cash forecasting and monitoring system DebtManagement31 D.7 The Constitution provides that a State may borrow within India within limits laid down by an act of the State. No such law has been passed in UP. Finance Department has a draft Fiscal Discipline and Budget Management Bill based on a similar bill at Union level. This will require future annual budgets to fit within a Medium-Term Expenditure Framework that will be prepared and updated each year by the Departments o f Planning and Finance. The target i s to reduce the revenue deficit (now 30% o f revenue) by 5 percentage points a year. The draft Bill has not yet beenput to the Cabinet.32 30High-prioritydevelopment expendituresare: infrastructuredevelopment andmaintenance,pro-poor social services, transfersto local bodies,andanti-povertyschemes.Resource-linkedschemes (those centrally sponsoredby GO1andexternally aidedschemes), andschemes close to completion, are also givenpriority where funds are limited.RBIreportsthe Government's cash balancedailyto FinanceDepartment(Budget Division).The Budget Divisionalso receivesdailyReceiptsandPayments Summaries from the Directorateof Treasuries.Whenthe Government is forcedto take Ways andMeans Advances from RBI, the FinanceDepartmentrestricts expenditure by applyingthese priority criteria. Its decisions are communicatedto the administrativedepartmentsandTreasuries. 31This sectiondraws on a recentWorldBankreport,preparedas an inputto the ExpendituresandResource Commissionof GoUP:Naoko C. Kojo (2002) UP Public Sector Debt andDebtManagement,PFEM, SouthAsia Department,WorldBank, May 32Followingrecommendationsof Parliament's StandingCommitteeon Finance,the Cabinethas approveda diluted FD&BM Bill on 4 February2003. This does not fix limits for revenuedeficits or overallfiscal deficits(Times of India, 5 February2003). 20 D.8 However, even with a legal constraint and the will to comply, management o f State debt requires a reliable and comprehensive data system. This does not exist, neither in GoUP nor in the Union Government. Although GoUP publishes debt stock data in the Budget document every year,33 and the CAG publishes a table of public debt inhis annual Audit Report, these data are not continuously maintained ina format suitable for comprehensive debt sustainability analysis or medium-term fiscal planning. In FY 2000, actual debt service was almost double what had beenbudgeted, an excess o f Rs. 8,222 c r o r e ~Thus, . ~ ~ there i s no early warning system in UP. By the time GoUP realized that a crisis was imminent, the volume o f debt had already made fiscal adjustment very difficult. A Debt Section needs to be set up in Finance Department to record and maintain reliable time-series data on debt stock, debt injlows and repayments in a disaggregated format. All cash resources, and donor intimations of non-cash resources, both loans and grants, should be channeled through the Finance Department to the respective administrative departments. The latter should provide monthly information to Finance Department, especially data on loans@omfinancial institutions, contingent liabilities and implicit l i a b i l i t i e ~Data on debt could be . ~ ~ maintained in a single unijied CS-DRMS computerized system. Thus Finance Department and the Expenditures and Resource Commission could assess the impact of various scenarios on debt ratios and establish prudent borrowing limits. Comprehensive information on public sector liabilities should be reported in the Budget, Annual Finance Accounts, and theproposed Half-Yearly Accounts. D.9 The State Provident Fund i s a `nominal' Fund, i.e. a credit balance without segregated assets. N e t inflows to the State Provident Fund are being used to finance deficits on the Consolidated Fund. Interest i s charged on these `borrowings', currently at 9'30, which is higherthan the cost o f borrowing on the market. Moreover, as there are no assets set aside to pay future pensions, they will have to be paid out o f current revenue. Ifthe dependency ratio rises (the number of pensioners rises and the number o f civil servants falls), the point will be reached when the Provident Fundwill no longer be a net source of funding and will instead be a net drain. It should therefore be separated from the State's treasury system. All future transfers from the State Provident Fund to the Consolidated Fund should involve issuance of dated securities by the Government. The pooled contributions should be managed by professional fund managers. The Provident Fund should be taken out of the Public Account and made autonomous. 33Schedule 1 o f the 200213 Budget is a list of total borrowings showing actual balances o f debt at the start o f the budget year and projected additions, repayments and debt outstanding at the end o f the year. At 3 1March 2003, for instance, projected debt i s Rs. 91,859 crores, comprising market loans, securities issuedto the National Small Savings Fund, loans from domestic financial institutions, Go1loans and advances, and borrowings from Public Account funds such as the Provident Fund, Pension and Insurance Funds and civil deposits. Overdrafts are omitted, though these have become permanent sources o f finance to GoUP. 34C A G Report (Civil) for the Year Ended3 1March2000, p. 220. 35Contingent liabilities are liabilities of the Government that crystallize only on the default o f the borrower, such as a PE, by the operation o f a guarantee. `Implicit' contingent liabilities are PE liabilities, which are not government- guaranteed but, for social or political reasons, GoUP may still have to take over inthe event o f default by a PE. 21 D.10 Ways and means advances (WMAs) and overdrafts are short-term facilities extended by RBIto meet temporary mismatches betweenreceipts andpayments and facilitate liquidity management. The Government i s not allowed to carry outstanding WMAs over to the following financial year, and overdrafts are repayable within 12 working days. There may be a risk o f a rollover of such facilities, i.e. repayment on 31 March and renewal on 1 April. The CAG has observed that GoUP had recourse to WMAs and overdraft on 330 days during FY 1999-2000 and that they had become regular sources o f funds.36 D.11 Since FY 1995, no ceiling has been placed on PE borrowings: they are permitted to borrow as much as they can on the domestic credit markets. In recent years they have become unable to raise resources on the market without GoUP guarantees, owing to their poor financial performance. GoUP has started to charge a fee for guarantees and i s preparing to introduce a legislative ceiling on outstanding guarantees expressed as a percentage o f revenue receipts, as in the Karnataka model. This i s a positive step to contain further growth o f loan guarantees and, indirectly, aggregate debt.37 Procurement D.12 A World Bank-financed consultant carriedout anassessment ofprocurement policies and practices in the Government o f Uttar Pradesh in 20013*. The study found that controls over procurement are very loose. There i s no overall procurement law, unlike some States inthe south, and no central agency to develop policies and norms for procurement. Actual procurement practices depart significantly from international best practice and evidence from the CAG's reports and public perception surveys o f corruption in U P suggeststhat abuse o f the system is widespread. D.13 The study made 24 recommendations to modernize the system over a five-year period. Key initial steps would be to: 0 Establisha central procurement policy and oversight unit; Pass legislation and implement more detailed transparent and unified procurement procedures, including standard tender and contract documents; 0 Set up an independent tribunal to hear appeals against contract awards; 0 Restrict negotiation to exceptional circumstances; 0 Initiate systematic training and skills development; and 0 Beginusingweb-based procurement on a pilot basis. D.14 The CPAR report, which is still a final draft, has not been acted upon by the GoUP. Meanwhile there i s a highlevel o f fiduciary risk affecting all public funds usedto procure 36Report of the CAG for the year ended 31March 2000 - Civil, Uttar Pradesh, p. 16. 37The State Finance Secretaries Panel has recommended a ceiling on State guarantees, and a ceiling on interest of 20% o f State revenue. Guarantees that are inthe nature of direct liabilities shouldbe included as public debt inthe accounts, not as contingent liabilities (Economic Times 14 March 2003). 38Raghavan Srinivasan (2001) Country Procurement Assessment Report, Volume 1: Summary and Recommendations. World Bank. 22 goods, works, and services. It i s estimated that approx. Rs. 12,000 crores i s spent annually on procurement (approx. 40% by the State government and 60% by public undertakings), representingaround 18% o f total public expenditure. Asset Management D.15 The rules require that any purchase o f a physical asset be entered ina Stock Register and the register folio number entered on the bill presented to the Treasury for payment. We are informed that this i s part o f the routine check performed at all Treasuries. This i s a good way o f ensuring that all assets are brought on charge from the start. Different registers are kept for permanent items (e.g. vehicles, equipment, furniture), consumables (fuel, drugs, insecticides) and stationery. The head o f office is then responsible for verifying and certifying, at least once a year, the existence, location, officer incharge, and serviceability o f all items on the permanent register. According to C A G audit reports, this physical verification i s not properly done, nor the subsequent disposal o f unserviceable assets. The total value o f physical inventory i s not known (as records in a cash-based accounting system show only quantities), but i s certainly very high, especially in departments such as Public Works, Irrigation, Forestry and Medical Health. Physical inventory needsjust as muchcare and attention as cash, particularly small, saleable items. 0 Internal and external auditors should check that asset registers are properly maintained, that all assets are kept secure and usedfor legitimate purposes and that the responsible ofleer undertakesfull verijkation annually ExpenditureControl D.16 There i s a good basic system of Treasury control o f payments (see procedural details in Annex 5). Treasuries examine payment vouchers to see that they are in order before entering them inthe computer system. There is an automatic check that the amounts are within authorized allotments. If so, cheques are printed out and sent back to DDOs for issue. This works well for the line departments and other bodies using the Treasuries. Departmental accountants collecting cheques have to bring with them the Register in which cheques handed over are entered against the respective claims. This operates as a control on the accountant and his DDO. UP is the first State to put the Budget onto computers at the disbursement points. Inprinciple, expenditure excesses are a thing o f the past. This i s a major achievement. D.17 However, it is still possible to bypass the system. Where expenditure is urgently required that i s not within existing allocations, e.g. unpaid salaries, the D D O can apply to the District Magistrate under Treasury Rule 27 and get an order that they be paid. There is a GO that TR 27 can be usedintwo successive months, but not thereafter. The DMrequires the comments of the Chief Treasury Officer before allowing payment. The Database Manager at the Treasury then `fixes' the systemto allow a cheque to be drawn. 23 D.18 Most countries have an emergency payment procedure where the public interest i s frequently invoked in some district^,^' and it is not clear whether all such payments are evident, but it is always under strict controls against abuse.39 In UP, TR 27 is quite legal and justified. The fodder scam in Bihar i s a recent memory.41Treasuries are well placed to exercise fiscal discipline. D.19 There are some weaknesses with the big-spending `remittance departments' - public works, forestry, irrigation, etc. They issue their own cheques within a `cash credit limit' issued by the departmental Finance Controller and notified to the Treasuries and SBI. However, the CCL system i s not watertight and excess cheques may be drawn, SBI may still cash them, and the Treasury only knows o f the excess when it enters the details o f cashed cheques from SBI - only one day later by which time the money has gone. There are also problems with salaries: the cheques for deductions (tax deductions, etc) are not always paid to the respective accounts, and net salaries may be delayed or misapplied. D.20 Introduction o f the IPAO system will help to establish a manpower database and to reduce fraud and errors. The Treasury i s in the process o f testing this system in two locations after which it can be rolled out statewide. The Treasury has undertaken the task o f verifying data authenticity by comparing salary details provided by departments with employment letters thus establishing a credible database. If the IPAO software were extended to user departments, and they were encouraged to key in information at their end, GoUP would accomplish the task of creating a manpower planning and monitoring system at a relatively low cost. Monitoring o f Expenditure D.21 The Fiscal Statistics Directorate receives monthly reports o f all receipts and payments (cashed cheques) in electronic format from all 73 Treasuries, including data from 307 Sub-Treasuries, by the 5th o f the following month. The deadline i s almost always met and expenditure data appear to be reliable. This i s a high standard o f timeliness and accuracy. UP i s an example o f what can be done, not only to the other States o f India but to most countries around the world. D.22 In parallel, DDOs make monthly statements on a prescribed format (BM 8) to the departmental Finance Controller by the 1Ot" o f the following month. About 3/4 o f all DDOs meet this deadline. The Finance Controller consolidates returns onto another format (BM 13) and submits this to Finance Department by the 20'. Usually this i s submitted by the 3 9For instance,the prefaceto the Financial Regulations of the Government of Sri Lanka allows a District Secretary to override Regulationswhere (1) this is clearly inthe public interest, (2) he/she recordsthe reasonsfor doing so with copies to the Ministry of Finance, Auditor General and file, and(3) regularizesthe position as soon as possible thereafter.This power is rarely used. 40 Inone departmentTR 27 was usedanestimated40-50 times inFY 2002. Strict Treasurydiscipline can ensure that the procedure is sparingly used. 41 This has beenadmirably summarizedby P.K. Mukhopadhyay inhis paper to the National Conference on Legislative Control over Public Purse:Compendium, pp. 224-233. 24 end o f the month.42It shows expenditure for the month and progressive expenditure to date. Budget figures are for the full year, so comparisoni s difficult. Annual budgets should be divided by month at the beginning of the year, particularly for high spending departments. D.23 Thirdly, AG (Accounts) processes original vouchers from all the Treasuries, and produces a monthly statement o f expenditure, broken down by head, by the 25t" of the following month. This i s sent to the Principal Secretary, Finance and to departments for them to reconcile with their records. This i s often neglected: in FY 2000, 67 out o f 139 Controlling Officers failed to reconcile their accounts (CAG Report, p.38). D.24 PWD and other `remittance departments' are receiving direct cash transfers under a `direct cash limit' (DCL) system. These make cash available up to the amount allotted for each scheme. As with PLA (see box below), expenditure i s debited and a deposit account credited with the amount made available. This suffers from the same objections as above. Discontinue all government PLA and DCL, and reverse all lapsed amounts against expenditure Personal Ledger Accounts ~~ ~ Box 3: Use of PersonalLedgerAccounts for Spendingafter the Year Ends The practice of transferring unspent amounts at the end of the year to special deposits for later use (so-called PersonalLedger Accounts, PLA) has beenreduced, but still continues.The normalrule is that all allotments from the Consolidated Fund lapse at 31 March. Any unspent amounts have to be returned. The PLA device allows departments to treat late allotments as Consolidated Fund expenditure. Departments avoid showing low expenditure for the year andthe consequent risk of having subsequent budgets cut. There are two types of PLA: (1) PLAs are allowed for transfers to local bodies, societies and public sector undertakings. These are legally outsidethe Governmentand suchtransfers are correctly treatedas expenditures inthe Government accounts. (2) PLAs are still allowed for late allotments, i.e. where DDOs receive allotments too late inthe year for them to use the funds. ConsolidatedFund and Contingency Fund allocations may use these `lapsable PLAs'. Though the use of PLAs has tightened up recently, departments (education, for instance) are still allowed to claim as expenditure amounts that havenot been spent at 31March. At 31March 2003, outstandingPLAs for GoUP departmentsare very high (thousands of crores). Subject to end- of-year lapsing (reversal of PLA entries), this is the amount of overstatement of expenditure up to that point. Strictly speaking, treating PLAs as expenditure of government departments is unconstitutional because unspent allotments are not expenditure of the year of allotment. It i s also financially unsound, as expenditure records are incorrect (and are not retrospectively corrected), and because paymentsfrom deposits are not subject to the same controls that apply to chargeable expenditures. As the expenditurei s no longer from the Consolidated Fund, new expenditures are not subject to individual top-level sanction and vouchers are not sent to the AG (Accounts) or to AG (Audit). It would be better to ensure that final allocations and releases are made in good time, and that I allowance i s made for late releases injudging the spendingcapacity of the department for budget purposes. The CAG has requiredGoUP to close all PLAs outstandingat 31 March2003. 42Inmost departments, suchas HealthDepartment,this is an entirely manualprocedure.Computerization is planned. 25 Revenues D.25 This SFAA, in accordance with the World Bank Guidelines, does not cover issues of tax policy or tax admini~tration.~~ It covers only the promptness of revenue collection, the adequacy o f revenue monitoring (as part o f overall budget monitoring and cash management), and revenue audit. D.26 The State's revenue comes 50% from central sources (shared taxes and:grants) and 50% from its own sources (average o f FY 1997-2001). O f its own revenue, trade tax (sales tax) accounts for 46%, state excise duty 18%, stamps and registration fees 11%, and user fees for social and economic services 9%. D.27 There are no less than 12 departments administering the state's major revenues. A recent research paper found that there was limited administrative cooperation and coordination among the departments (e.g. duplication o f field enforcement activities), and recommended a single Commercial Taxes Department and appointment o f a Fiscal Commissioner inthe Finance D e ~ a r t m e n t . ~ ~ D.28 The powers granted to different tax administrations to enforce taxes under them are, by and large, adequate. Sufficient powers are available under different tax laws to examine premises or vehicles, conduct inspections and searches and make seizures where needed. There are safeguards against arbitrariness built into the law, but no channel for taxpayer complaints o f abuse o f powers. D.29 Revenue collection targets are set by the tax collecting departments in consultation with Finance Department before the start o f the fiscal year. The targets are largely driven by the requirements of revenue collection based on the total plan outlay and the expected assistance from the Central Government. Based on the past performance and potential o f sub-units in each tax collecting department, targets are set. Revenues are then monitored at monthly intervals. However, actual collections are consistently lower than the targets.45 Even though revenue collections are monitored monthly by the collecting departments, there i s no system for them to revise their targets duringthe year. This lack o f a `warning system' on collections canjeopardize cash management. The Finance Department should institute a mechanism for the revision of targets morefiequently during theyear so that targets are realistic. D.30 Tax collecting departments have internal audit units which focus on cases o f short collection and conduct checks at various collection points. External audit i s provided by 43Onthe latter, see World Bank (2002) India: Uttar PradeshPolicyNotes: UP'SOwn Revenue System: Assessment and Reform Suggestions, November. 44World Bank (2002), op. cit., p.25. 45FromFY 1998to FY 2001, actualrevenue shortfalls havebeen2.6, 15.1, 5.9, and 8.5% of budget estimates (UP Trends andPatternsof Public Spending, August 2002, p. 9). For FY 2003, the budget estimate was Rs. 15372 crores. The revised estimate was Rs. 13903 crores ,a drop of 10%. 26 the AG (Audit) and reported on annually. His audit report highlights instances o f short recovery but does not generally analyze systemic issues needing correction. D.31 The major issues affecting the tax collection departments include: (a) lack o f adequate staff and infrastructure. GoUP i s starting a computerization effort but this faces budget constraints; and (b) problem o f collection arrears, particularly on sales tax assessments. Around 20-30 percent o f arrears from revious years plus what i s booked during the year are struck down inappeals each year. 2 GoUP has issued guidelines to ensure that assessment orders are passed after adequate enquiry, and while that is commendable,some capacity building initiatives for the Sales Tax Department may be considered. PerformanceManagement D.32 Budgeting i s still only an accounting exercise in UP, unrelated to policy objectives, outputs and outcomes. Departments are heldto account for every rupee of expenditure but not for failure to perform. Performance budgeting has been recommended in India since 1954 but i s not yet a reality anywhere, even in the Union Government. InUP, the main developmental departments are directed to present their estimates o f expenditure together with organizational structure, brief description of programs and physical achievements (performance indicators and targets). Most departments show budgetedperformance data, but actual expenditures are not matchedagainst actual outputs, and accountability remains limited to financial data. There is little advantage to accrual accounting until data on outputs and progress are routinely available. Monitoring systems should be developed in the main developmental departments and in all pro-poor programs. For transparency, it would be advisable for the Government to makeperiodical statements of progress andperformance. 47 D.33 The Budget Manual and Call Letter advocate zero-based budgeting. In practice, ZBB i s only pious exhortation and admonition by the Finance Department to line departments. It i s not in the interest o f a head o f department to take this seriously, to initiate a ZBB review and risk a reduction in his budget. It i s better to build capacity for program evaluation independently o f line operations. The evaluation unit should be respected as objective and expert, and report to the Chief Minister. At present, the only independent evaluation i s that done by the CAG. Insome advanced countries, it i s a legal requirement that the continuation o f any program beyond a prescribed period depends on its passing an independent evaluation o f whether it i s achieving its aims in a cost-effective manner. This `sunset' legislation depends for its effectiveness on the feasibility in UP o f establishing expert evaluation capacity independently o f program advocates, both bureaucrats and politicians. It would also depend on clearer definition o f programs than at present. 46World Bank (2002) 0p.cit.p. 44. Arrears (all own revenues) at 31 March 2000 were Rs. 5710 crores. 47Backgroundpaper, Keshari Nath Tripathi speech and Ajay Makenpaper to the National Conference on Legislative Control over Public Purse, 2000, pp. 57, 71 and 31416, and PwC inception report, pp. 5-63. 27 D.34 Performance managementof the investmentprogram requires initial appraisal of projects to ensure that they are viable, then close monitoring of progress and expenditure against estimates. On paper, the system is good.48However, the landscape of UP is littered with uncompleted projects. According to the CAG, 96 projects have beenlying incomplete for periods ranging up to 25 years. Their original estimated cost has doubled.49 The main reasons for project delay appear to be: poor estimating, necessitating frequent upward revisions (including for inflation); lack of risk assessment inproject appraisal; and failure to release spending authority ingood time.jO D.35 Some departments issue annual reports, but inthe absence of departmental strategic plans, reports do not contain any review of performance against plan. Some departments have issued Citizen's Charters setting out the standards of service that they aspire to. This i s a welcome development, but i s at an early stage. We understand that departments are preparing their Annual Performance Report. We recommend that a time line be setfor the completion of this activity and that it be structured according to a guideline by the Department of Finance. InternalAudit D.36 Out of about 108 departments, internal audit wings exist in 57. These departments have about 230 auditors, plus a large number of accounts personnel who also do internal audit work.jl They do a post-audit of the propriety of a sample of transactions,j2 but no analytical audithisk assessments, nor performance audit. A few department^^^ do a pre- audit of transactions (which i s properly part of the accounting process). Whether pre- or post-audit, internal auditors are within the same cadre as the accounts officers they are auditing, so they are liable to be transferred and find themselves auditing the work of themselves and old colleagues, so audit independence i s limited. This matches the low organizational placement of internal audit and the low grades of staff emp10yed.j~ Internal audit tends to be used as a tool of harassment rather than a tool of good management. Internal audit should be the right hand of the Controlling Officer. 48New schemes are estimatedby the responsibledepartmentsandput upto their administrative departmentsand Planning and Finance Departmentsas early as possible, with time-phasedprojections of financial consequences and physical targets. Planning Departmentundertakescost-benefit analyses of major projects. After approval and initiation of work, the departmentssendprogressreportsto the Project Monitoring and Cost ManagementDivision of PlanningDepartmentfrom which special reports are compiled and sent to the Cabinet and Chief Secretary. 49CAG Report, Civil, for the FY 2000, p. 15. 50PwC Draft FinalReport, para. 5.2.4. World Bank PER team have recommendeda one-time Zero-Based Investment Review of all ongoing investment schemes (Public Expenditure Note, February 2003, p.24). 51PwC Inception Report, op. cit., Appendices 7A and 7B. These are actualnumbers: sanctionedposts were about 1,350. Numbersexclude the Local Funds auditors, who audit local governmentbodies. 52A Government Order from FinanceDepartment inJanuary2001 has requiredall IA wings to examine at least 10% of all transactions,and has prescribedthe format of reporting. The PwC study found examples of very low coverage, e.g. only 15% ofthe units inAgriculture Departmentwere internally audited inFY 2001 (PwC Inception Report, p. 6-7). 53Industry, Public Works, Irrigation and Rural Engineering Services. 54InHealth Department,the IntemalAudit Officer (an Assistant Accountant who has 16 officers working on intemal audit) reportsthrough the Chief Accounts Officer (not the Financial Controller) to the Director General of MedicalHealth. She takes action on these reports. 28 D.37 The need to upgrade internal audit has beenrecognized and a GO was issued in January 2003. This converted the Directorate o f Accounts into a Directorate o f Internal Audit (DIA), headed by a State Internal Auditor (SIA).55The new directorate will set audit policies and standards, prescribe standard procedures inan Internal Audit Manual, review and approve annual audit plans (which will be shared with external audit), monitor internal audit operations in the departments (by receiving their reports, following up on remedial actions, and reporting to Principal Secretary Finance), and arrange training for DIA, heads of departments and departmental internal audit officers. As a first step, a proposal for one week's training in new techniques i s under examination by the SIA.j6 We commendthis initiative. D.38 In each Department, the Finance Controller has been named as Internal Auditor also, as an interimmeasure to announce its importance. Quarterly reports are already being sent to the SIA, with some good results. For instance, Health Department was retaining health center fee revenue contrary to law (as all revenues are payable into the Consolidated Fund) and without proper accounting. It is planned to regularize the retention o f 50% of this revenue itemandto improve the accounting andinternal control procedure. Conclusion D.39 There is a good basic system o f Treasury control o f payments but no cash forecasting system. Finance Department i s unable to set spending limits based on expected quarterly cash flows. Cash i s managed only by postponing spending claims when the Government i s advised by RBI that it i s below its minimum balance. A reliable and comprehensive debt recording and monitoring system does not exist. A Cash Management Section should be established inFinance Department with the task o f setting up and operating an improved cash forecasting and monitoring system 0 A Debt Section should also be set up inFinance Department to record and maintain reliable time-series data on debt stock, debt inflows and repayments in a disaggregated format D.40 The computerization o f treasuries has facilitated timeliness and reliability in compilation o f monthly receipts and payments reports. However, inthe absence o f any machinery for revision o f revenue targets, the revenue forecasts available with the Finance Department are not always current - a situation which could be remedied by instituting quarterly revision o f targets by the revenue collection departments. A major issue i s the presence o f lapsable PLAs - large sums which cause the misstatement o f expenditure and are not subject to the same controls that apply to expenditure from the Consolidated Fund. The 55The first State Internal Auditor post had been filled at Special Secretary level by a secondment from the CAG office. This secondment ended inNovember 2003. 56The PwC study recommended this and a number of other short courses (Final Report, March 2002, section 5.2). 29 need for internal audit has been recognized and efforts are under way to strengthen the Directorate o f Internal Audit. 30 E. GOVERNMENTACCOUNTINGAND FINANCIAL REPORTING Cash-basedAccountingandReporting E.l GoUP, like other States and the Union, uses a form o f cash-based accounting. It records receipts and payments o f the Consolidated Fund, Contingencies Fundand Public Account as they occur and brings them to account annually in a Summary o f Transactions (Statement No.1 o f the Finance Accounts), in accordance with the requirements o f the C A G (Duties, Powers and Conditions o f Service) Act, 1971. E.2 In 1971, there were no generally accepted standards for government accounting or reporting. In 2003, the most widely accepted standards are those promulgated by the International Federation o f Accountants, Public Sector Committee (IFAC-PSC). It has recently issued a standard for governments keeping their accounts on a cash basis.57This applies to the general-purpose annual financial statements o f all public sector entities except government business enterprises (public enterprises) for years beginning after 1 January 2004. Financial statements may not be described as complying with the standard unless they comply with all the requirements o f Part 1. Part 2 sets out additional disclosures that IFAC encourages governments to make. It also encourages governments to progress to the accrual basis o f accounting, for which different standards apply. The box below shows the major features o f the standard and how GoUP accounts relate to them. Box 4: ComDarisonof GoUPAccounts with IFAC Standard IFAC-PSC Cash Basis Standard - GoUP Part 1 (per FinanceAccounts 1999/2000) Statement o f receipts, payments and Provided inStatement No. 1 cash balances Disclosure o f accounting policies Some explanation o f items and summaries o f results, but no statement o f accounting policies ~~ Amounts received and paid on behalf o f Not shown GoUP (such as offshore payments by donors for supplies, equipment, etc) Separate annual financial statements for No separate statements for lower level entities. each Department and other entity, and GoUP only, and some entities under consolidated statements for GoUP Government control omitted Statements understandable, relevant to Appropriation Accounts understandable, but users and presented within six months o f Finance Accounts obscure. FY 2000 accounts end o f year, reliable, and complete issued after just over six months. Accounts are believed to be reliable and complete, subject to the omission o f non-cash aid. ''IFAC Public Sector Committee (2003) CashBasis IPSAS:Financial Reporting under the CashBasis of Accounting. Available on IFAC website www.ifac.org 31 Statements to show date of issue, and Yes, inC A G certificate 1 who has authorized them for issue Information about the entity - its Not shown operations, controlling legislation, and departments and other entities included Any cash balances that are subject to Not shown restrictions on their use, and undrawn borrowing facilities Comparative information for the Shown previous year Assessment whether entity i s a going concern (in Not applicable the case o f a lower-level entity) Extraordinary items (such as disaster relief) Not identified, ifany Classification o f payments by function and/or Yes. Payments are classified by nature of payment, and receipts by type function, and by standard object within function. Receipts classified by type Proceeds from borrowing, by type and source Shown Assets and liabilities o f the entity Only financial assets and liabilities listed, no physical assets Comparison with budgets Yes, for revenue and expenditure only (inAppropriation accounts) Proportion o f ownership interest in controlled No definition o f controlled entities entities If intending to convert to accrual accounting, Notdone classification o f cash flows into operating, investmentand financing activities E.3 It can be seen that GoUP accounts, though they score well on a number o fparameters, do not meet the IFAC-PSC standard, mainly because o f a lack o f definition o f their coverage, and lack o f a statement o f accounting policies. E.4 Other than for monitoring actual expenditure against the budget, the accounts are not used actively for decision-making. E.5 The GoUP policy paper on governance reforms states its intention to seek advice on the design o f a resource-based accounting system. Our comments on this are provided at Annex 6. 32 E.6 Though the present basis o f accounting in all State departments i s cash, a few non-cash transactions creep into expenditure. A large transfer i s made each year to a Sinking Fund for Reduction or Avoidance o f Debt in the Public Account. A similar entry i s made to build up a Roads and Bridges Fund. Three departments with a lot of machinery are charged depreciation, a book entry, debiting their expenditure heads and crediting a `Depreciation Fund' in the Public Account.58All these are not true expenditures as they are internal transfers. The IMF and World Bank adjust the reported fiscal deficit to exclude these entries. E.7 Normally annual accounts are completed within three months o f the end o f the year, and certified within a further three months. However, at February 2003 the latest accounts issued were those for FY 2000. Subsequent years are held up because some loans were not allocated betweenUP and Uttaranchal. The present target i s to complete the accounts and their certification upto FY 2003 by September2003. E.8 The AG (Accounts) processes all transactions quite independently of the Treasuries from original vouchers, and requires State departments to reconcile their accounts with his, in accordance with the law. Each Finance Controller sends a reconciliation team to the AG's office each month. This duplication o f work i s very expensive but has in the past been justified on two grounds: (1) it provides a further check on the accuracy o f the accounts, and (2) the greater independence o f the AG prevents `fudging' of the Annual Accounts. E.9 The success o f the UP Treasury computerization, ahead o f other States, should prompt a review of India's age-old division o f accounting functions between state and center. In principle, accounting i s an executive function that i s intended to serve the executive. If it i s carried out in accordance with generally accepted accounting and financial reporting standards, and if there is an independent validation o f the accounts and financial reports, it is not necessary for the entire operation to be repeated. It is better that accounting be done once, and done well. E.10 There is provision in the CAG (Duties, Powers and Conditions of Service) Act for the Governor o f a State, with the approval o f the President and after consultation with the CAG, to relieve the CAG from the responsibility for compiling the State accounts. To avoid the duplication of accounting at both State and CAG level, and to continue the evolutionary growth of State responsibility and accountability, an action plan should now be made to remedy gaps in UP State accounting procedures and controls, andfor the CAG to devolve this responsibility to the State. Computerization E.11 The major success story incomputerization has beenthe treasury computerization, which i s working very efficiently. InFY 2000, FinanceDepartmentexpenditureincludedRs.929 crores to increasethe SinkingFundfor Reduction or Avoidance of Debtto Rs.4992 crores.Public Works expenditureincludedRs.102crores to buildupthe Roads andBridges Fundto Rs.245 crores. Public Works, Forestry andIrrigationwere chargeddepreciationinprevious years. 33 E.12 On departmental computerization, the progress is varied. Some departments like PWD and Irrigation have made significant progress59whereas in many other departments the progress has not been very good. Some have no computers, while others have systems that are not compatible with the Treasury system, or with each other.60GoUP has issued a GO asking all departments to provide 2 percent o f their annual outlay for computerization and this has been provided inthe budget for FY 2003. E.13 It appears that there has been a lack o f harmony inthe computerization efforts o f various departments resulting in a multiplicity o f server platforms (which sometimes don't `talk' to each other), and multiplicity o f software and consultants, resulting in a loss o f networking and economies o f scale. The State Information Technology (IT) Department has to play a more pro-active and facilitative role in computerization of line departments and should also encourage mutual learning among them. E.14 Another initiative that the GoUP is taking is to build a Database for Employee Management Information System for Transparency (DEMIST) where the entire human resource database i s being computerized.61 The system will promote transparency by providing information on transfers, placements, promotions and training needs o f the entire work force. Conclusion E.15 Accounts are kept on a cash basis and score well on a number o f parameters set in the IFAC-PSC standard but do not meet the standard as a whole mainly due to lack o f definition o f coverage and a lack o f a statement o f accounting policies. Annual financial statements are normally completed and audited in a timely manner, though they are currently in arrears due to problems arising out o f the separation o f Uttaranchal State. A major issue i s the triplication o f accounting - by departments, by Treasuries and by the AG, and the enormous amount of reconciliation that this entails (but is not always done), usinga mixture of manual systems andmutually incompatible computer systems. 59PWD is carrying out a phased implementation of a complete computerization of its operations. Inphase I, zones 3 and 33 divisions are expected to be functional on a fully computerizedbasis by September 2003. 6oThe AG's software i s not compatible with the Treasury software. Typically, monthly reconciliation involves 4 officers for 2-3 days. All mistakes have then to be corrected, whether they are due to the Department, the Treasury or the AG (Accounts). 6'Significant progress has been made. Out of a total of 1.049 million employees, a database for 0.598 million employees has been created at March 2003. 34 To avoid the duplication of accounting at both State and CAG level, and to continue the evolutionary growth o f State responsibility and accountability, an action plan should now be made to computerize the departmental accounts, remedy gaps inUP State accounting procedures and controls, and for the C A G to devolve this responsibility to the State inline with international best practice. 35 F. ACCOUNTABILITY OF RURALLOCAL BODIES~~ PlanningandBudgeting F.l Rural local bodies (panchayats - see profile in box below) have been empowered to prepare plans and implement schemes for economic development and social justice. Legislationrequires annual b ~ d g e t i n g . ~ ~ Box 5: Profile of Rural LocalBodies Rural local bodies (panchayati raj institutions, PRIs) have a history going back to the Rig-Veda and have continued to function through the centuries, though with many ups and downs. The United Provinces Panchayat Raj Act 1947 and Kshetra Samiti and Zilla Parishad Adhiniyam 1961 set up elected local bodies at three levels and empowered the State legislature to ensure their financial accountability. Following the 73rd Constitutional Amendment o f 1992, the UP State Conformity Amendment Act 1994 initiated the process o f functional and financial devolution. The legislation authorizes the panchayats to levy and collect certain tolls, fees and non-tax revenue, to receive grants-in-aid, and to create particular funds. Only the village level has some taxing power o f its own. Administrators and policy makers are still addressing the many issues relating to deregulation o f authority, deconcentration o f power and devolution o ffunds. In UP, there are 70 District (Zilla) Panchayats, 809 Block (Kshetra) Panchayats and 52,029 Village (Gram) Panchayats which together account for about 3% o f the total expenditure o f the state. Panchayats are elected every five years, and the last election was inJune 2000. The 11"' Schedule to the Constitution lists the various activities that can be transferred to the PRIs. At present, PRIs are responsible for primary education, tube wells and hand pumps, food and civil supply, health, women and child development, animal husbandry, agriculture and rural development. Staff devolution for these activities i s not complete. The financial position o f the PRIs is periodically examined by a U P State Finance Commission that i s constituted and decides intra-State allocations every five years. Grants from the State were Rs. 382 crores in FY 2002 and from Go1Rs. 233 crores. These grants are basically untied so that priorities can be decided at the local level. Most personnel continue to be paid from the GoUP budget (mainly by the Department o f Rural Development and the Department o f Panchayati Raj). The Second SFC is expected to address the complex problems o f the PRIs ranging from resource mobilization to financial accountability. The present resources at all three levels are generally held to be grossly inadequate for PRIs to meet their projected fiscal needs and perform their devolved functions. As a result, they are facing acute fiscal crisis. The total expenditure o f PRIs in U P has varied between Rs. 832 and 1025 crores a year over the last five years. This is funded by their collections o f assigned taxes, fees and user charges, shared taxes, and grants from higher levels o f government. There are also transfers to the District Rural Development Authorities - some Rs. 1195 crores in FY 2003. Village Panchayats are not effectively tapping local revenues. Thus, all levels remain very dependent on government assistance. For all levels, payments are made by the District Treasuries. G2This chapter i s basedmainly on a field survey of PRIs inJanuary-February2003. It covered one district in each of the four regions ofthe state, viz. Sultanpur, Sitapur, Bareilly and Jhansi. Ineachselecteddistrict, the District Panchayat, one Block Panchayatandtwo Village Panchayats were surveyedindetail. 63The Kshetra PanchayatandZilla Panchayat Act of 196lmandate the preparation of budgets at the Block and District level. Similarly, the UP PanchayatRaj Act o f 1947requires Village Panchayatsto prepare a statement of estimatedreceipts andpaymentsfor each financial year (1 April - 31March). F.2 District plan funds, once sanctioned by GoUP Finance Department, are released by heads o f departments to their respective heads o f office inthe district. Inmost cases, grants are not disbursedingood time. Timely release of funds with prior intimation of the quantum of funds is a pre- requisite to realistic planning and budgeting. GoIand GoUP should ensure this. F.3 The Planning and Development Committee at Village Panchayat level prepares its annual budget in open meetings of Village Panchayats. Block Panchayats and District Panchayats also prepare annual budgets, with inputs from Junior Engineers and Accountants. Generally, a PRI budget i s a simple statement o f capital expenditure on schemes for which grants are expected to become available. F.4 Village-level budgets are approved solely by Village Panchayats. Block Panchayats and District Panchayats also approve their budgets on their own. There is no submission o f budgets to higher levels or to the State Legislature. The State enforces accountability by reference to the budgets approved by the local elected bodies. This gives the PRIs autonomy o f resource allocation at least with regard to the funds they generate themselves. The Department o f Panchayat Raj collates and consolidates all PRI budget data for planning and statistical purposes. Accounting and Reporting F.5 Rules made under the legislation (UP Zilla Parishads and Kshetra Samities (Budget and General Accounts) Rules, 1965) and a Manual issued by the Panchayati Raj Department contain detailed instructions on the maintenance o f accounting records and submission o f reports. A Village Panchayat, for instance, should prepare 13 statements. However, Village Panchayats are understaffed and staff at that level are mostly unqualified and inefficient. One person, called Multipurpose Worker, looks after many functions, so there i s little control by segregation o f duties, and the information required i s still too much for one such worker using manual methods Financial organization and systems are in need of review, simplijkation and standardization. Responsibility for handling cash and cheques should, as far as possible, be segregatedj?om responsibility for accounting and reporting. It would be better if the number of forms currently prescribed could be reduced and simplijied. At District and Block Panchayats, a uniform system of computerization should be installed. F.6 Accounting staff are more qualified and competent at district and block levels. In most cases, accounting i s on a single entry system, but double entry is used in some places. Cash Book, Treasury and Bank Pass Book, Security Register, etc. are maintained regularly. F.7 Reports are mostly quarterly, in some cases monthly. They are submitted promptly as further grants are not released until past grants are accounted for. At each level, expenditure on schemes i s consolidatedonly for each source o f funds, and reported to that 37 source, together with certificates of utilization. There i s no consolidation or reporting o f expenditures funded by different sources. There i s no overall accountability o f any panchayat as an entity. F.8 Though there are many discrepancies and irregularities in the books and accounts at all levels, and records management hardly exists,64 it appears that major diversion o f funds to unauthorized uses i s rare. Unspent balances o f tied grants, for instance, are not spent on other schemes. ExternalAudit F.9 The responsibility for audit of PRIs is divided over three authorities, which overlap in their jurisdiction. The Panchayat Raj Act requires annual audit o f every Panchayat by the Chief Audit Officer (CAO), Department of Cooperative Societies and Panchayats. Infact he can cover only about half o f the Village Panchayats, a few Block Panchayats and none o f the District Panchayats. H e also audits most o f the cooperative societies.65 The U P Local Funds Audit Act, 1984, i s the authority for the Local Funds Audit Department to audit Block and District Panchayats and village-level bodies (as well as urban local bodies, universities, private colleges, registered societies and other bodies, corporate and non-corporate, as notified by GoUP for this purpose). Thirdly, the C A G has constitutional power to audit bodies that are substantially financed by loans or grants from the Consolidated Fund.H e exercises this over a three-year cycle at all levels o f PRI. F.10 GoUP has agreed to have all PRI external audit brought under the CAG. District Panchayat audits would be done by staff o f the AG (UP), and the audits at Block and Village levels would be divided between AG (UP) and Panchayati Raj Department. This should ensure coordination between the audit bodies to ensure that the whole population i s audited regularly, and that audit resources are assigned so as to achieve the greatest overall audit impact interms o f reduction o f fiduciary risk. The AG (UP) would prepare a consolidated audit report for the UP Legislative Assembly. F.11 The Local FundsAudit Department has so far undertakena transactional regularity audit, but is training staff to extend into performance audit. It issues reports to the relevant agencies and departments on completion o f each audit, and serious irregularities are notified to Finance Department. The Department produces a comprehensive audit report each year, which i s sent to GoUP for tabling inthe Legislature. Reports have been issued up to FY 2002, but only the reports up to FY 1998 have beentabled. The Department has 64All cash receipts and other financial records are not properly kept at one place for audit scrutiny. Cash vouchers are not in order. 65There are over 7,000 cooperative societies (Primary Agricultural Commodity Societies providing subsidized fertilizer, seeds, and credit to farmers, 70 District Cooperative Banks, the apex UP Cooperative Bank, and cooperatives for rural industries, cane, milk, sugar and khadi). These are all rural local bodies inreceipt o f State funds. They are governed bythe UP Cooperative Societies Act 1965 and Rules 1968. The Act requires commercial accounts. They are years pending. Most are audited by the CAO, or by a chartered accountant. It is said that societies can easily get false certificates. The cooperative banks have a major problem of non-performing assets, amounting to Rs. 1679 crores at November 2002 (Economic Times, 10 March 2003). The CAO does not issue an annual report. 38 power to surcharge any person it i s satisfied has committed misconduct or gross neglect resultingin loss to the audited body. About 12 such surcharges were initiated inFY 2003, mainly in the universities, but implementation o f a surcharge i s difficult. Apart from appeal delays, recovery depends on the relevant agency's cooperation, such as attaching the officer's salary. However, the risk o f exposure has a deterrent effect. With a view to checking defalcations, it has been suggested that a Panchayat Raj Vigilance Cell should be constituted in each district, either as a branch o f the Vigilance Department or o f the Panchayati Raj Department. The Cell would have powers and responsibilities for examining allegations. It i s doubtful, however, if another investigatory body would be any more effective than those that already exist. Another suggestion i s that `social audit' should be instituted, as in Karnataka (the Jamabandhi system) and Kerala. This is a public inspection o f accounts, registers and selected works o f Gram Panchayats by a team o f Gram Sabha members and public officials, including an engineer. It is convened six times a year in Karnataka. The team's report i s read out in the next Gram Sabha meeting. This participatory audit i s an exciting new development, which complements participatory planning and participatory monitoring. Accountability i s direct to the local community and beneficiaries. Social audit should be piloted in selected villages of UP, without affecting the existing constitutional audit. If it is successful, it should be institutionalized and applied across all villagepanchayats, with necessary changes to the law Elected members o f PRIs have general access to financial accounts and records. This reflects transparency. However, subject to the above recommendation on social audit, the general public has little access. Greater effort should be made to promote transparency of records and accounts, such as by mandatory posting on the notice board of the Panchayat Bhawan, of budgets,procurement records (invitations to quotehender and amounts of successful quotedtenders), annual accounts and audit reports. CapacityBuilding F.14 Many Village Panchayats have no staff to maintain accounts and the Multipurpose Workers have no accounting background. Only seven days' training is given to accounts staff - this i s not adequate. The need is more urgent at this level. The Eleventh Finance Commission has provided funds to GoUP (Rs. 4,000 per Panchayat per year) to maintain accounts on a contract basis. Accounting stag particularly at the village level, need training. Elected representatives also need training on their role in public financial accountability. The numbers involved, however, are very large (65,000 regular stax plus elected representatives). A feasibility study should be made of the costs and benefits of a special training program for PRI accounts stag using the State Institute of Rural 39 Development (which has training facilities in all four regions of UP) and the IFMTR. Conclusion F.15 Rural local bodies are facing many issues relating to deregulation o f authority, deconcentration o f power and devolution o f funds. Financial control i s reasonably good at district and block levels but the accounts o f the village Panchayat are particularly poorly maintained. 0 The accounting procedure at the three levels of panchayat needs streamlining. It would be better if the number o f forms currently prescribed could be reduced and simplified. At District and Block Panchayats, a uniform system of computerization should be installed 0 Accounting staff, particularly at the village level, need training. Elected representatives also need training on their role in public financial accountability. A feasibility study should be made o f the costs and benefits o f a special training program for rural body officials and public representatives 0 Social audit should be piloted in selected villages of UP, without affecting the existing constitutional audit. If it is successful, it should be institutionalized and applied across all village panchayats, with necessary changes to the law 0 Records and accounts should be opened to the public, for example, by publication in local newspapers and posting on Panchayat Bhawan notice boards o f budgets, procurement records, annual accounts and audit reports. 40 G. ACCOUNTABILITY OFURBANLOCALBODIES G.l Urbanlocal bodies (ULBs) are profiled inthe Box 6. The funds distributedby GoUP to the ULBs are shown in the Government budget as `Grants given to Urban Local Bodies' under the heading`social expenditures'. PlanningandBudgeting G.2 The law requires Municipal Commissioners/Executive Officers to prepare their budgets of receipts and payments. NN budgets have to be passed before 31 March, or before 1 March in the case o f corporations in debt to GoUP. NPP and N P budgets are due two weeks earlier. These deadlines are not met. The Finance Committee, which i s supposed to pass the budget before puttingit before the Board, i s not formed or not functional inmany N N s andNPs. The budget making process should start some months earlier so that Councilors in the finance committee and Boards have time to consider the budget before the prescribed dates. Appropriate measures should be imposed on ULBs whichfail to pass their budgets in time (such as a corresponding with holding of state grants). Budgets should be posted in newspapers and posted on notice boards so as to be transparent and available to thepublic. G.3 The annual budgets are preparedby all ULBs from estimates o f revenue and expenditure received from the respective departments. The revenue estimates are based on ad hoc increases over the previous year's budgeted figures, without taking into account the actual collections. So revenues are over-estimated. Information for analyzing revenue shortfalls i s not available in the budget document. Expenditure i s also estimated incrementally. Budgets should be based on departmental unit costs. There appears to be no involvement of citizens inthe budgetingprocess. G.4 Insome NPs andNPPs, funds receivedfrom District UrbanDevelopment Authorities for performing specific works are not included intheir budgets. Other than this, there are no off-budgetitems. G.5 The annual budgetsare passed by the boards o f ULBs and submittedto the Director, LBs. He has powers only to suggest modifications. ULBs in debt to GoUP, on the other hand, have to obtain GoUP approval o f their budgets. 41 Box 6: Profile of Urban Local Bodies There are three categories o f urban local body (ULB) in UP: 0 Municipal Corporations (12 N N s , or Nagar Nigams), established and governed by UP Municipal CorporationsAct I959 in cities having a population more than 500,000 0 Municipal Boards (194 NPPs, Nagar Palika Parishads), established and governed by UP Municipalities Act 1916 in cities generally having an urban population o f less than 500,000 but more than 20,000 0 Town Area Committees (422 NPs, Nagar Panchayats), also established and governed by UP Municipalities Act 1916, in towns generally having population o f less than 20,000 but more than 10,000 ULBs receive revenues generated from their own sources (mainly house tax and property tax), plus grants from: State Finance Commission, the lot" and 1lth Commission, MPs'/MLAs' funds Finance and other grants, and loans. Total revenues o f ULBs in FY 2000 were Rs. 833 crores, o f which 28% was from their own revenues. Some ULBs are preparing for bond issues (hitherto not permitted). The 74`" amendment to the Constitution gave the ULBs more functions and autonomy in their operations, but GoUP control is still fairly strong. Article 243 P to 243 ZG o f the Constitution describes the functions and responsibilities o f ULBs for every state. The legislation gives the ULBs a dual accountability. Primarily they are accountable to their Councilors who are representatives of the public. They also report to the State Government (Department of Urban Development), but not to the State Assembly. To assist the Urban Development Secretary in monitoring and administration, a Directorate o f Urban Local Bodies has been set up in Lucknow. This i s the chief controlling authority o f ULBs. ULBs cater for a population of around 35 million and employ about 85,000 personnel. G.6 Expenditures are controlled within budget limits through the expenditure ledgers. No reappropriations are allowed except with approval of the Council on the basis o f recommendations o f the Executive Committee. The ULBs are supposed to pass revised budgets, but manyNPPs and NPs do not do this. Procurement G.7 About 20 percent of the total budgeted expenditure goes on procurement. The governing statutes do not prescribe any specific procurement procedures to be followed. Since the chief executives and heads o f accounts are from the UP Centralized Services, they follow the procurement procedures of the Government. G.8 There are generally adequate internal controls to check misprocurement in ULBs. The active involvement o f Councilors inthe developmental works, which involve a significant amount of procurement, provides an additional check that the items purchased or works done are proper and justified. However, in some ULBs, the tender procedures for civil construction works are very loosely followed. 42 AccountingandInternalControls G.9 GoUP has issued Account Rules which are applicable to all the NNs, and an Accounts Code for NPPs andNPs. However, the accounting system and associated internal controls are extremely weak (there are no written internal control standards), so the financial reports are o f doubtful accuracy. Some controls create problems: opening a new bank account and maintaining a separate cash book for each type o f funds results in a large number ofbank accounts and accountingrecords. G.10 Accounting i s on a cash basis. Accounts are maintained on the single entry system, mainly on a manual basis. The payroll functions including pensions in some o f the bigger ULBs have been computerized. There are no cross checks to ensure whether all transactions in a period have been properly accounted and reflected in the financial statements. N o balance sheet i s prepared. G.ll Some transactions of the ULBs like electricity dues o f the local body payable to the electricity company and deducted by the Directorate from the SFC share are not recorded by the ULBs in their books o f accounts and accordingly these amounts are also not reflected in the budget or annual accounts o f the ULBs. Due to lack o f knowledge o f accounting for these adjustments, only the net amount o f grants received i s brought into the books.66 G.12 InNPPs and NPs, the powers o f DDO as well as many other executive powers have been vested with the Chairman who i s a public elected representative. Accordingly, cheques in these ULBs are signed by the chairman jointly with the EO. However, for all practical purposes, only the EO i s made accountable in case o f under-performance or improper payments and there i s no responsibility o f public representatives to the state government. Similarly, the Taxation Committee has been given unfettered power to assess house tax and there i s no system to check the misuse o f these powers. This Committee o f public representatives can reduce/modify the house tax imposed by the tax inspector based on its discretion. Instead o f giving only policy-making rights to public representatives, this system gives executive rights without making them accountable for their decisions. Only the EO i s made responsible by the government authorities for shortfalls in collections o f taxes. 0 Powers of DDO and other executive powers should not be given to public representatives without appropriate accountability. The relevant rules which devolve drawing and disbursing authority to the Chairmen of Municipal Boards and Nagar Panchayats while holding the Executive Officers accountable should be revised. G.13 Funds provided from SFC/EFC grants can only be used for the purposes specified inthe GOs and are kept in separate PLA accounts. For other grants, such as those received from "ThisandotheraccountingmattersarecoveredintheInstituteofCharteredAccountants ofIndia's'Technical Guide on Accounting and Financial Reporting by Urban Local Bodies'. 43 DRDA, MP/MLA quota, etc. separate bank accounts and separate books o f account are kept to ensure proper control over their utilization. Periodical utilization certificates are submitted to GoUP. DMs or other deputedofficers o f GoUP have authority to inspect the physical progress o f the works carried out from these grants and approve the works. G.14 ULBs are required to produce monthly statements. In fact, most NPPs and NPs do not prepare the required statements. Nor do ULBs prepare various reconciliation statements that are part o f standard accounting controls, such as bank and treasury reconciliations. The integrity and the correctness of the figures disclosed in various financial statements therefore remains questionable. Inmany ULBs, the bank account (generally the municipal fundaccount) has not beenreconciledfor more than 20 years. Non-reconciliation of bank accounts in most of the ULBsposes a major threat as frauds and misappropriations go undetected and unreported. As there is a huge backlog in most of the ULBs, outsourcing ofprofessionals should be used to get bank reconciliations under control There is an urgent need to review the present bookkeeping system and introduce a computerized double entry system, initially on the existing cash basis of accounting, and initially in NNs and NPPs. This will improve the reliability of the available information and ensure arithmetical accuracy.67 Due consideration should be given to the stafJing of the ULBs. The administrative department should undertake an exercise to identiJL vacancies and capacity gaps. Once vacancies are filled, accounting staff should be adequately and regularly briefed about goodpractices in accounting. External Reporting G.15 Annual accounts indicate the actual expenditures o f the ULBs for a financial year vis-& vis the budgeted allocations made under various heads o f accounts. The annual accounts are requiredto be submittedto the Board as well as to the Directorate. Accounts for N N s and NPPs are reasonably up to date, butNPs are substantially inarrears.68 The directorate should ensure preparation and submission of annual accounts as required by law. Appropriate actions like holding backpart of the SFCfunds could be considered to ensure compliance with the statutes. 67 InLucknow Municipal Corporation, adoubleentry systemwas initiatedinearly 199Os, andagainin2002 there was an initiative to convert to a computerized double entry system, but netherwas implemented.The reasons for this failure shouldbe studied. Tamil Naduhas introduced a computerized double entry accrual accounting systeminall its ULBs from FY 2001. 25 charteredaccountant f i r m s were contractedto provide on-the-job training, troubleshooting and supportto ULBs inpreparing their new financial statements. At April 2002, six N N s had auditedaccounts for FY 2001andaudit was inprogress inthe remaining six. Out of 194NPPs, 170had submittedauditedaccountsfor FY 2001 andthe rest were inprogress. Among the 422 NPs, 245 were upto date but some were inarrears back to FY 1987. 44 G.16 At present, there i s no system to prepare any consolidated financial statements for the ULBs as a whole. The Directorate prepares an annual report containing funds transferred as SFC/EFC share and development works carried out by the ULBs. Apart from this, there are no data about the financial position and performance o f these ULBs as a whole. The directorate should build a database of budgets of all the ULBs to facilitate preparation of a consolidated budget and calculation of budget variances based on periodic accounting informationJi.om all ULBs. Monitoring G.17 Reviews o f 12 N N s and 89 large NPPs are held every month at the directorate level. The Principal Secretary and the Director, Urban Local Bodies, review the progress o f these ULBswho are representedbytheir executive heads. G.18 Five officers at the directorate level regularly visit the remaining ULBs. These officers are required to visit at least 2 NPPs and 3 NPs ineach month to make physical inspections and review progress, accounts, audit observations, tax collection, etc. The Divisional Commissioners/District Magistrates at the division level also monitor the performance o f NPPs andNPs on a monthly basis. Audit G.19 Following the recommendations o f the Eleventh Finance Commission, the audit o f all local bodies i s to be brought under the CAG. The AG, UP will audit all ULBs and the GoUP audit bodies will work under his guidance. These include the Mukhya Nagar Lekha Parikshak (MNLP) and Local Funds Audit (LFA). The AG, U P will be responsible for preparingan annual consolidated audit report for submissionto the State Legislature. G.20 The Director, LFA currently prepares a consolidated audit report o f all the ULBs and sends it to GoUP every year for placing before the Legislative Assembly. GoUP is several years in arrears. There i s a large number o f pending observations o f LFA and M N L P in most of the ULBs outstanding for up to 20 years. The system of responses to or follow- up on the audit observations seems to be very weak and compromises the effectiveness of audits. A monitoring system for follow-up o f audit observations through Divisional Commissioners i s in place but it concentrates mainly on reducing the number of unanswered observations rather than taking action on serious irregularities pointed out in reports. Non-compliance with audit observations should be met with somepunitive measures like withholding release ofpart of the state devolution. Legislative Oversight G.21 Though the ULBs are accountable to elected representatives, they are largely managed by GoUP officers. Audit and procurement procedures are also GoUP-controlled. This makes 45 ULB `autonomy' problematic. The legislative and public representative interface is a complex issue. G.22 The ChairmedChairmen are classed as public servants and are personally responsible for any loss, waste, or misapplication o f any money o f the ULBs to which they have been a party, or which has been caused or facilitated by their misconduct or gross neglect o f duty. Conclusion G.23 The 74t" amendment to the Constitution devolved more power to the 628 urban local bodies in UP. Their accounting and audit infrastructure i s not adequate for their responsibilities and there are many weaknesses, such as over-estimation of revenues and lack o f bank account reconciliation. There i s no clear separation o f executive powers from the legislative bodies - elected representatives share in executive decision making and in many cases are not heldaccountable for the results. Executive powers should not be given to public representatives without appropriate accountability. In this regard, the GoUP may reconsider the prevalent rules regarding drawing and disbursing powers and the authority - responsibility mismatch therein. Non-reconciliation of bank accounts in most of the urban local bodies poses a major risk of frauds and misappropriations being undetected. Reconciliations should be brought up to date and stafftrained to maintain this control Review the present ULB bookkeeping system and introduce a computerized double entry system on the existing cash basis of accounting to improve the reliability of the available information and its arithmetical accuracy. 46 H. ACCOUNTABILITY OFPUBLIC ENTERPRISES H.1 This chapter covers government companies, statutory corporations, development authorities and departmental commercial undertakings. GOVERNMENT COMPANIES AND STATUTORY CORPORATIONS H.2 A `government company' (GC) is one inwhich not less than 51%o fthe paid-up capital is heldby the Central Government andor a State Government, and any subsidiary company of a GC (see the box on government companies below). H.3 GCs are governed by the Companies Act 1956, and the Memorandum and Articles of Association under which they are registered, 69 whereas each statutory corporation i s governed by its own enabling act containing its purpose, structure, powers and functions (see box on statutory corporations below). In UP, there are seven SCs. They have legal autonomy and can invest, raise capital and borrow within the terms o f their statutes. Both GCs and SCs are requiredto act on business principles. H.4 GoUP has become heavily involved in not only planning and guiding investment priorities, but in actually managing these enterprises (see box on govemance below). Effectively, they are government departments. Before liberalization, when they operated as monopolies, there was no pressure to cut costs and be efficient. The group became financially and economically unviable, and mainly remain so, though a few are profitable. Top appointments should be made after selectionJFom a wider pool, on merit,for a minimum contract tenure of three years, and more often JFom inside the management group so as toprovide management incentive. H.5 GCs and SCs prepare annual budgetdaction plans based on targets set by the concerned administrative departments, previous year's performance, availability o f worWexpected level o f activity, inputs received from field units and expected budgetary support. They vary in quality: the budget o f UPWC i s impressive. At the other extreme, UPFC does not prepare any budget, as its Act does not require it! Inpreparing the budget, the directions o f the Finance Department with respect to rationalization or ceiling on expenditure are considered. The budget is approved by the Board, forwarded to GoUP for informatiodfurther approval and distributed to the various regional/district units. It i s monitored through an internal MIS that provides monthly and quarterly progress reports and annual `flash' results. Expenditure in excess o f the budget may be approved by the Managing Director. Budget monitoring may be combined with cash monitoring: UPRTC, for instance, has a good cash management system. The Board approves any amendments to the budget retrospectively whenthe budgetfor the ensuing year is placedbefore it. 69Most are registeredas `public' limitedcompanies,e.g.they can makepublic issues of shares. However,no GC has madeany public offering or i s listedon a stock exchange. 47 Accounts and Reports H.6 The relevant acts all require that books of account are kept on the double entry system and on an accrual basis.70 Companies engaged in any o f the 43 industrial activities notified by the Go1are additionally required to maintain cost accounts (Companies Act, s. 209). For each accounting period (being twelve months ending 31 March), a GC i s required to prepare a tme-and-fair-view balance sheet and profit and loss account in compliance with the Act and with accounting standards issued by the ICAI.71A Directors' Responsibility Statement attests that the company has followed accounting standards so as to give a true and fair view o f the state o f affairs and the profit/loss and that adequate records have been maintained for safeguarding assets, preventing and detecting fraud, etc. However, audit qualifications show that reporting often does not meet the standards, particularly those relating to inventory valuation, revenue recognition, fixed assets, depreciation and contingent liabilities7* H.7 A GC should lay its audited annual accounts andthe Board's report before the company's annual general meeting within six months o f the end o f the financial year, then file them with the Registrar of Companies within 30 days. They also have to be placed before the Legislative Assembly (and Parliament if Go1 holds shares). Despite heavy penalties for non-compliance, and monitoring at all levels, 41 working GCs were 1 to 15 years in arrears at September 2002 (per the AG's audit report for 31StMarch 2002). SCs also prepare annual accounts, get them audited, and submit them to their boards and to their administrative departments. As o f March 31, 2002; 3 SCs had finalized accounts 01-02, one had finalized accounts for 99-00, one for 96-97 and one ( UP State Employees Welfare Corporation) had never finalized accounts. Box 7: Profileof Government Companies GoUP owns and controls 84 GCs of which only 44 are working and 40 non working as of 31 March , 2002. They are inthe following broad sectors: Social - development of scheduledcastedtribes, backward classes, minorities, women's welfare . Inj?astructure and utilities -power, industrial financing, construction Manufacturing and services- agriculture ,sugar ,electronics,chemicals ,textiles ,food distribution, tourism, etc.) It is important to note that the number of working government companies as at 3lStMarch 2001 was 47, and the number has come down to 44 by the close of the subsequent financial year. However, the investment of GoUP in these companies increased in the same period. The total equity investment of the GoUP in 2001 was Rs 6723 crores, it was Rs 6730 crores in 2002. The loans outstanding to these companies were Rs 5688 crores in 2001 and Rs 6132 crores in 2002. Moreover, during the year 2001- 2002, the government guaranteed loans aggregating to Rs 1206.9 crores obtained by the working companies. 70Exceptthat interest earnedon loans andadvances of GCs engagedinindustrialfinancingis to be treated on a cash basis. Some SCs still on a cashbasis such as UPAEVPare currently switchingto an accrual basis. 71 The ICAIhas issued28 accountingstandards, basedclosely onthe international accounting standards. 72UPRTChad 17,429 legal cases pendinginvarious courts againstit at March2002. The liability is saidto be indeterminate.UPJNalso does not quantifyits contingent liabilities. 48 I Box 7: Profileof Government Companies (contd.) Itis acknowledged that the small size o fthe enterprises has rendered them incapable o f facing competition following economic liberalization and globalization. GoUP policy is a total ban on creation o f new enterprises. For existing enterprises, the State Disinvestment Commission was set up in 2000 to examine options for restructuring, merger, privatization, and closure and make recommendations to a Central Committee under the Chief Secretary. Ifhe finds them in the interests o f the State, he forwards them to the concerned administrative department who obtains the necessary Cabinet approvals. A Working Committee would then ensure execution o f any decisions taken. 27 GCs have been referred to the Disinvestment Commission, and recommendations on some o f these have been submitted to GoUP. The process has been finalized with two industrial enterprises have been sold, three have been closed down and, in others, decisions have been taken about units being sold or leased but the process i s yet to be completed. The pace o f progress here indicates that government ownership and budgetary support is likely to continue for several years and it is therefore imperative that financial reporting and accountability inthese PSEs i s strengthened. Box 8: Governance of Government Companiesand StatutoryCorporations The management o f this sector is divided among the Department o f Public Enterprises (DPE), the respective administrative departments, the Bureau o f Public Enterprises (BPE) and the Boards of Directors. The DPE monitors and supervises the GCs and SCs and prepares policies for their functioning. The administrative departments decide their strategic policy. Any budgetary support that is to be extended to a GC or SC is included in the budget o f the administrative department for approval by the State Legislature. BPE acts as an interface between the enterprises and the respective administrative departments. BPE requires GCs and SCs to submit periodical reports on pre-defined formats. These reports are consolidated by department, analyzed, and submitted to GoUP with comments and recommendations for corrective action, with copies to the enterprises. The Director General of BPE is on the board of certain GCs and/or a member o f the Audit Committee. The BPE is also invited to meetings of the COPU. Apart from the `external managers', the management o f a GC or SC vests in the Board o f Directors with executive control in the hands o f whole-time directors or a managing director. Directors are selected by GoUP and their tenure is often short. Duringthe last five years, eight persons held the post o f Managing Director in UPFoC and four in UPFC, despite a GoUP directive o f 1979 providing a minimum tenure o f three years for such high-level posts. Except in the power sector, there is no Selection Committee. Chairpersons and managing directors are overwhelmingly from the Indian Administrative Service. The chairpersons o f four government companies and one statutory corporation are Ministers. There are very few directors with commercial experience or a track record o f success in large commercial enterprises. Recent experience has shown that boards have not been able to strategise to take into account new business developments, particularly consequent to liberalization o f the economy involving removal o f licensing, protection etc. requiring changes in production methods, marketing strategy, pricing and approach to competition. The results o f this management selection policy are clearly visible. 49 Name GoverningAct Activity Administrative Department JP State Road Transport RoadTransport Roadtransport services Transport Zorporation (UPRTC) CorporationAct, 1950 JP Financial Corporation State Financial Corporation Industrial financing Industrial UPFC) Act, 1951 Development JP State Warehousing State Warehousing Warehousing Co-operative 2orporation (UPWC) Corporations Act, 1962 JP Jal Nigam (UPJN) UP Water Supply and Water supply and Urban SewerageAct, 1975 sewerage services Development JP Forest Corporation UP Forest CorporationAct, Preservation, supervision Forest UPFoC) 1974 and development of forests JP State Employees Societies Registration Act, Welfare o f employees o f Food & Civil Welfare Corporation 1860 the state government Supplies UPEWC) JP Avas Evam Vikas UP Avas Evam Vikas Housing Housing & Urban 'arishad (UPAEVP) Parishad Act, 1965 Development The SCs are funded by the GoUP and other agencies. UPEWC, UPJN, UPAEVP and UPFoC do not have a share capital. GoUP can extend guarantees for loans raised by the SCs and is empowered, under the acts, to provide financial assistance to the SCs by way of share capital, loans or grants. The total investment of GoUP in the SCs at March 2001 was Rs. 549 crores (equity Rs.374 crores, long term debt 175 crores), including Rs.28 crores invested during FY 2001. Go1 has also invested Rs. 69 crores in equity. In terms o f size, UPRTC is the largest SC with highest state investment and turnover of over Rs. 600 crores. Four SCs (UPRTC, UPFC, UPEWC and UPJN) make losses. The overall return on capital employed is negligible at about 2%- 3%. During FY 2001, no subsidies were paid to the SCs, but interest of Rs. 35 crores due from UPAEVO was waived. Guarantees by GoUP for loans raised by the SCs aggregatedRs. 894 crores outstanding at March 2001, mostly to forestry (GoUP Budget 2002-03). There is presentlyno policy to privatize the SCs. H.8 It is worth recalling the words of the Mahatma: "Carefully kept accounts are a sine qua non for any organization. Without them it falls into disrepute. Without properly kept accounts it i s impossible to maintain truth in its pristine If the Financial Controller o f a GC fails to produce accounts, there i s a reason, and it i s the job o f the l3M.K.Gandhi(1927)AnAutobiography, or theStory of my Experimentswith Truth,NavajivanPublishingHouse: Ahmedabad.p. 140. 50 Managing Director, then the Board, then BPE, DPE and the administrative department, to find out the reason and remedy it. The failure to do so is not an accounting failure: it is a management failure. Truth i s the victim. 0 A Task Force on accounts may be constituted in BPE to monitor the action plan to bring GC and SC accounts up to date. It should review the problems faced by enterprises to reduce arrears, including shortage of personnel and inadequate infrastructure. 0 A cut off period for finalization of accounts may be considered for all functional PSEs and BPE should ensure that all accounts and audits are prepared and finalized within that cut offperiod. 0 Particular attention should be given to non-working GCs. In cases where the work of closure cannot be completed due to absence of regular accounts personnel, outsourcing of the accountsfunction may be considered. This should be taken up on priority basis. InternalControlandInternalAudit H.9 Internal control is weak, particularly inthe area of physical verification of fixed assets and inventories, reconciliation o f accounts with banks and inter-office accounts and major debtors and creditors. Weaknesses inprocurement and materials management also needto be addressed inview o f instances of excessive inventory holdings, non-fixation o f reserve stock limits, unutilized or idle inventory, inappropriate purchase procedures, etc. These areas, if appropriately addressed, could result in substantial savings in costs and avoid unnecessary write-offs. H.10 GCs and SCs are following their own internal audit practices. There is no central agency monitoring the function. Generally, internal audit has been contracted out to practicing chartered accountants, though in some GCs and most SCs, in-house personnel conduct internal audit. The function i s generally under the control of the Financial Controller but insome GCs the internal auditor reports directly to the Managing Director. Insome GCs and most SCs no audit manual has been prepared or set o f instructions issued. Internal audit i s properly a continuous function, but in some GCs, the audit has been conducted after the close o f the year, making it indistinguishable from external audit. The internal audit findings may not be reportedto the Board for their review. 0 Establish internal audit wing in Finance Dept. Internal audit wing to undertake audits in departments targeting: 0 compliance with key fiduciary controls (e.g. A U D C bills, cash, reconciliations, responses to audit observations) 0 reasons for excess expenditure or savings @om budget and revised estimates 0 proper monitoring and timely surrender of unutilized amounts 51 Reports of internal auditors should be copied to HODof administrative Department All internal auditors should work under standardized Terms of reference prepared in accordance with international bestpractices (Please refer to the Annexures on GCs and SCsfor more details) ExternalAudit H.ll The Companies Act requires that a GC be audited by a chartered accountant. This `statutory audit' i s under the control of the CAG. He recommends and Go1 appoints the auditor eachyear (normally for not more than 3-5 years running); the CAG lays down the terms of reference, and AG Commercial-UP conducts supplementary audits. The most serious unsettled audit findings go into the CAG's report to the Legislature. The same arrangement i s made for two SCs, viz. UPFC and UPWC. Other SCs have the CAG as sole auditor, except UPFoCwhich is audited by Local FundsAudit. H.12 An amendmentto the CompaniesAct in2000 requires every large company to set up an Audit Committee (AC) of the Board. About 25 GCs are covered by this section. Not all have yet set up ACs. The recommendations of the AC on matters relating to financial management are binding on the Board. Penal provisions, including imprisonment, have beenprovidedfor non-compliance. Itis too early to say what impact this has had. ACs to be set up and motivated in all GCs and SCs, with thefirst objective being to resolve outstanding audit paragraphs. In this context an exercise should be undertaken to see how many GCs and SCs havefunctional ACs and an actionplan should beprepared to enhance the eficiency of the ACs. Legislative Review H.13 A Joint Committee on Public Undertakings and Corporations (CoPU) has been constituted for examining the working of GCs and statutory corporations. It consists of 35 members of whom 25 are from the Legislative Assembly and 10 from the Legislative Council. The Chairman is appointed from amongst its members. It has been provided that no Minister shall be a member of the CoPU. It submitsits report to boththe Houses. H.14 Though the scope of the CoPU has been restricted to matters relating to major government policy as distinct from the business functions of the GC and day-to-day administration (which are covered by the PAC), it acts mainly upon receipt of the audited accounts and CAG report. At September 2001, 430 paragraphs o f the CAG reports were awaiting discussion. It i s therefore way behind events and has little impact on accountability. CoPU should play a more pro-active role, similar to the CoPU of the Union Government, and adopt a plan to study particular functions across several GCs, such asprocurement 52 DEVELOPMENTAUTHORITIES H.15 Development authorities (DAs) have been established under the UP Urban Planning and Development Act, 1973 for the purpose o f planned urban development inimportant towns inUP. There are 22 DAs( Box 10). BudgetingandBudgetMonitoring H.16 Each DA i s required to prepare an annual budget in the form prescribed and have it approved by its Board. It submits regular reports on revenue receipts, expenditures, cash flows, and physical progress to the Department through AB. Cash flow data i s consolidated by AB. AccountingandFinancialReporting H.17 At present accounting i s on a cash basis. The new manual requires conversion to an accrual basis. Each DA i s requiredto submit its annual report to GoUP, which tables it in the Legislative Assembly. The form o f the annual report i s prescribed by Rules issued in 1982. There i s no consolidation o f accounts. a Awas Bandhu should set up a systemfor the consolidation offinancial reports @om the DAs and UPAEVP InternalControlandInternalAuditiManagementAudit H.18 DAs are required to set up a sinking fund (escrow account) for the repayment o f loans taken for each scheme. A portion o f all collections should be deposited in this account. However, some DAs have not opened escrow accounts or do not operate them, resulting insome defaults inloanrepayments. 53 Box 10: Profile and Governance of Development Authorities DAs have been set up for Kanpur, Lucknow, Ghaziabad, Agra, Allahabad, Meerut, Moradabad, Varanasi, Gorakhpur, Mathura-Brindavan, Bareilly, Aligarh, Raibareilly, Banda, Unnao-Shuklaganj, Jhansi, Ayodhya-Faizabad, Bhulandshar-Kurja, Firozabad-Shikohabad, Saharanpur, Hapur-Pilkhuaand Mazaffarnagar. There is also the UPAEVP, a statutory corporation under its own Act, and Awas Bandhu (literally Housing Ally)(AB). AB is a registered society set up in 1997 as a technical wing to the Department, to advise on pricing, private sector participation, buildingregulation, finance and accounts, training, etc. Its Executive Committee i s chaired by the Minister of Housing. The DAs contribute to the runningexpenses o fAB inproportionto their budgets. AB data show that revenuereceipts of the DAs and UPAEVP amounted to Rs 1105 crores in FY 2002, while disbursements, including loan repayments, were Rs 930 crores. However, there are no consolidated income and expenditure statements or balance sheets. The GoUP budget for FY 2003 shows no grants or loans to DAs, but guarantees outstanding at March 2001 amounted to Rs 170 crores. DAsare legal corporate bodies falling underthe Department of Housing and Urban Planning which decides housing policy and issues guidelines. The Department has prepared a Finance and Accounts Manual that lays down standardprocedures and formats. This is mandatory for all DAs and UPAEVP from FY 2003. A performance rating system has also been introduced to rate and rank the performance of all DAs according to 11 parameters. The results are discussed at monthly meetings of the CEOs with AB. The management of each DA is by a Board, comprising a Chairman and other key officers appointed by GoUP, ex officio GoUP officers, and four members elected by the municipalities. H.19 The Manual provides for the establishment of an Internal Audit Wing ineach DA under an Audit Officer reporting directly to the Vice Chairman. AB i s initiating a system o f `management audit' in the DAs through chartered accountants. Another C A has been appointed in AB to receive and summarize their reports. At present, however, executive summaries simply list the findings from each DA, without analysis o f common weaknesses and recommendations. Internal controls need to be strengthened with respect to fixed asset records, physical verijication of assets, reconciliation of bank accounts and personal balances and escrow accounts. AB to prepare a basic Management Audit Manual for application in all DAs, and use internal/management audit reports to address common systemic issues ExternalAudit H.20 All DAs are audited by the Local Funds Audit Department. The audit report does not include an opinion on the accounts (as i s done for GCs and SCs). The audited accounts 54 and auditor's report are sent to the DA and to the Department o f Housing with a summary o f serious irregularities. The Department can then issue directions. The audit report i s also included in the annual report that i s published and tabled in the State Legislature. However, the last year published i s for FY 1998. There are many unsettled audit findings andthe systemo f follow up i s inadequate. 0 Local Funds Auditor should include an explicit opinion on the accounts of each DA in accordance with generally acceptedaudit standards, and auditfindings should be followed up by the Department of Urban Planning DEPARTMENTAL COMMERCIAL UNDERTAKINGS H.21 There are 12 departmentally managed commercial and quasi-commercial undertakings. These include the Grain Supply Scheme (run by the Food and Civil Supply Department), livestock and agriculture farms (Agriculture Department) and several workshops (Irrigation Department). They are required to prepare proforma accounts to assess their profitability and send them to the AG (Audit) by 30 June each year. The last C A G report (for FY 2000) shows that they have not rendered accounts for periods ranging from two to 20 years despite several reminders. Three workshops have never submitted accounts. The Grain Supply Scheme, which involves crores o f rupees spent on purchase and release o f food grains, was 10 years inarrears. Government should take strong measures to restore public faith in these undertakings. The preparation and submission to audit of regular annual accounts should be encouraged. GoUP should decide a cut off date for preparation of accounts and ensure that all 12 departmentally managed undertakings complete their accounts subsequent to that date. Conclusion H.22 The 46 government companies (including the big power companies) and seven statutory corporations are all primarily commercial enterprises and need commercial acumen and experience at the top to chart their paths inthe new global environment. Their governance involves various line departments, the Department o f Public Enterprises, the Bureau o f Public Enterprises and Boards o f Directors, who usually have more government and political background than commercial and managerial know-how. Chief executives have little real autonomy or tenure. Moreover, every PE i s in arrears with its annual accounts, some by as long as 15 years. Departmental undertakings similarly continue from year to year without any concern for accountability. The Joint Committee on Public Undertakings i s also inarrears in its reviews o f accounts and audit reports. In government companies (GCs) and statutory corporations (SCs), appointments of chairpersons and chief executives should be made after selection >om a broader base, on merit, andfor a minimum contract tenure of three years 55 0 An action plan should be made to bring all GC and SC annual accounts up to date, using contracted accountants as necessary. A Task Force on Accounts may be constituted in the Bureau of Public Enterprises to monitor the action plan. Particular attention should be given to non-working GCs, where the work cannot be completed due to absence of regular accountspersonnel 0 It is recommended that the Legislative Committee on Public Undertakings play a more pro-active role, similar to the CoPU of the Union Government, and adopt a plan to studyparticular functions across several GCs, such asprocurement 0 Strengthen internal controls in Development Authorities (DAs) with respect tofixed assets records, physical verification of assets, reconciliation of bank accounts, personal balances, and escrow accounts. 56 I. EXTERNALAUDIT74 Mandateand Objectives I.1 The external auditor o f GoUP is the Comptroller and Auditor General (CAG) o f India, who heads the Indian Audit and Accounts Department (IAAD). Under him, a Principal Accountant General (PAG-Audit) i s directly responsible for the audit o f the whole o f the public sector inUP, comprising State departments, departmental enterprises, government companies in which GoUP holds over 51% o f the equity,75statutory corporations, development authorities, universities, and urban and rural local bodies - infact, all bodies and authorities substantially financed by Government. The PAG- Audit signs annual audit reports and the CAG countersigns. I. TheCAGisrequiredinteraliatolaydowngeneralprinciplesofgovernmentaccounting, 2 prepare the Accounts o f the States, and submit reports relating to these accounts to the respective Governors for laying in the State Legislatures. As both accountants and auditors are members o f the same cadre (IAAS), the external perception i s that there i s a risk o f conflict of interest. However, there is a clear division between accounts and audit divisions o f the department, and we are informed that there i s no interchange o f personnel between the two (even though this loses the benefits o f accounting experience for auditors). It would be better in the long run for an organizational as well as operational separation, as has occurred with regard to the Union accounts and in other South Asian c~untries,'~ butto continue common basic training of accountants and auditors. Inchapter F above, it was argued that responsibility for UP'S accounts should be devolved to the State. This would effect a clear separation between the executive function o f preparing accounts, andthe oversight function o f auditing them. I. TheCAGderiveshispositionfromArticles 148-151oftheConstitution. Hisduties, 3 powers and conditions o f service are laid down in the C A G (Duties, Powers and Conditions o f Service) Act, 1971. He i s appointed for a fixed term o f six years or until reaching the age o f 65. These powers and tenure are appropriate and his independence i s unquestioned. I. AsinotherCommonwealthcountries,theauditbodyhasnopowerstopenalizeofficers 4 for irregularities. Only departmental heads have disciplinary powers, but it i s often difficult for them to penalize their colleagues. Even in criminal cases, government permission i s necessary before a public servant i s prosecuted in respect o f any offence 74This chapter draws on a recentreport: NationalAudit Office,UK(2003) Modernization andCapacity Buildingof the Office of the Comptroller andAuditor Generalof India, under IDFgrant TF050110(Bumett Report), January 75Underthe 1956 Companies Act, where the Governmenthas a stake of 51%or more ofthe equity ina company, the companies are auditedby charteredaccountantsappointedby the Union Governmentonthe advice of the CAG. The CAG gives directionto the charteredaccountantson the manner inwhichthe audit shouldbe conductedand maycommenton or supplementthe auditreports whichresult. 76See WorldBank (2002) Bangladesh: Financial Accountability for Good Governance, World Bank Country Study, section 6.1. 57 alleged to have been committed while acting or purporting to act in the discharge of his official Departmentsmay fail to take action for various reasons. Irregularities would be deterred if charges made by the AG (Audit) against an officer in an Inspection Report were mandatorily $led in the ofJicer's Conjdential Report. These would be removed on successful appeal. Audit Methodology I.5 Audit of UP accounts is conductedby the PAG-Audit and AG (Audit) office inAllahabad from the vouchers and accounts provided by the AG (Accounts), and by local inspections carried out by ResidentAudit Offices and visiting inspectionteams.78 I. Detailedguidanceonauditmethodologyforthedifferenttypesofauditissetoutina 6 series of manuals and auditing standards that closely follow the INTOSAI standards. The CAG's Manual of Standing Orders (Audit) (2002) provides an overview of the general principles to be followed during different audit procedures: the certification of accounts; the audit of expenditure and receipts; the audit of PES; systems audit; manpower audit; value-for-money audit, etc. It sets out the mandate, scope, objectives and key areas for examination for each category of audit and guidelines on specific methodologies to be adopted. InUP, an increasingproportionof audit work i s on value-for-money audits. I.7 The basis of selection of units for audit is judgmental and has no statistical validity. The CAG cannot come to any statistically valid conclusions about the whole population subject to audit. Greater use of risk-based and statistical sampling techniques would enable valid conclusions to be reached, as well asprovide more audit valuefor the rupees spent. Training and Professional Development I.8 There are about 2,000 audit staff for UP (and 2,800 accounts staff). The CAG invests heavily in training for all grades of staff using the National Academy of Audit and Accounts at Shimla and nine Regional Training Institutes. On entry, IAAS staff receives 104 weeks of training in auditing and accounting skills, managerial and leadership skills, and a wider awareness of current socio-economic developments and politics in the country. Additional training courses are provided for the continuing professional development of staff. This i s admirable, as it enables the Department to continuously renewitself andkeep Indianaudit ina leadposition. I. Recruitment,promotionandstaffevaluationprocedures,however,remainsubjecttothe 9 general civil service rules and regulations. As employment is virtually guaranteed for life, 77Ajay Maken, quoting the Criminal Procedure Code, 1973, op. cit., pp. 33314. 78Visiting inspections include asset verifications. The A G (Audit) performs stores verifications, while the A G (Accounts) does Treasury inspections and cash verifications. 58 and superior performance i s not recognized and rewarded, there i s a widespread lack of motivation. This wider problem i s outside the scope o f the SFAA, but until it i s addressed, it i s unlikely that corporate plans will have much impact. Audit Reports I.10 ThePAG(Audit)andAG(Audit)conductacontinuousauditoftransactionsineach audited organization and a financial statement audit o f their annual accounts. From these, separate reports are issuedon the appropriation accounts o f the State Government (called Civil), revenue (Revenue Receipts) and public enterprises (C~mmercial).~~These reports, together with the certified Finance and Appropriation Accounts are submitted to the Governor o f UP for tabling in the State Legislature. Special audits may also be undertaken at Government or Court request. I.11 ThelatestauditreportsareforFY2000,issuedon29May2001.Thisislaterthanusual because o f delays infinalizing the accounts due to the separation o f Uttaranchal from UP. At March 2003, the audit reports for FY 2001 are being printed and for FY 2002 are beingfinalized. I.12 Thoughtheauditreportsareprofessionallyproduced,theircontentislessusefulthanit could be because o f a preoccupationwith departures from the law without examination o f underlying systemic causes and positive recommendations. Audit i s a developmental function, primarily concerned with the achievement o f departmental goals. Auditors should understand the context and place their findings in that context, prioritize them department-wise for their impact on developmental Box 11:INTOSAIReporting Standard goals, consider realistically what options are open to management, At the end of each regularity audit the auditor and offer constructive and should write a report containing a statement of practical recommendations for positive assurance on those items tested for improvement. This would be a compliance and negative assurance on those items useful input to the PAC not tested. The standards cover the form, content examination (see below). and timeliness o f reports. The auditor may give a qualified opinion if s h e disagrees with or is uncertain about one or more material items in the financial statements, which are not so fundamental I.13 The CAG gives a certificate on the as to give an adverse opinion, viz. that the annual accounts to the effect that, financial statements are not fairly stated. If the according to the best of his information, auditor is unable to give an opinion on the the accounts, read together with his financial statements due to uncertainty or to a observations, are correct statements o f restriction placed on the scope o f audit, she gives a disclaimer o f opinion. i.e., a statement that s h e cannot give an opinion, together with the reasons. 79T h i s study does not cover revenue administration.Audit reports on commercialbodies are commented on in chapter J. 59 receipts and outgoings. This does not meet INTOSAI reporting standards. We recommend that the CAG include his opinion on the accounts infuture reports in line with INTOSAIstandards. Follow-up I.14 Thereisastandardprocedureforfollowingupobservationsmadeatthetimeofauditof an agency. Ifthey are not adequately answeredinthe course o f audit, they are includedin the Inspection Report sent to the agency head. Ifnot dealt with within a fortnight, and the objection is serious (large amount, significant or high risk), a draft paragraph i s formulated and sent to the administrative secretary of the concerned department, with a copy to the head of department. If it i s still not dealt with at the time the AG (Audit) preparesthe annual audit report, it i s included inthe draft report which, after clearance by CAG, is submitted to Parliament and the PAC. The state of observations i s closely monitored. I.15 There has beena swift progress on responsesto audit paras due to a proactive role played by the State Internal Auditor (SIA) in taking up this issue with the line departments. At 31 August 2002, for all the audit reports issued up to 1999-2000, 3,708 out of a total of 4,200 paras have beenrespondedto. Conclusions I.16 TheComptrollerandAuditorGeneralprovidesanexpertandindependentauditofthe transactions and annual statements of all agencies inthe public sector of UP, as in other States. While INTOSAI standards are mostly followed, the CAG does not provide a certificate on the annual accounts stating his opinion on them and on the underlying control systems. CAG also does not prioritize its findings. The reader has to make hidher own assessment of the materiality and risk implicit in his observations. The Department of Finance is recently following up audit observations more actively and is reducing the numberoutstanding. 60 J. LEGISLATIVEOVERSIGHT J.1 Legislative oversight o f public finances is provided by special committees o f the Legislative Assembly. The key committees are the Committee on Estimates, the Public Accounts Committee (PAC) and the Committee on Public Undertakings (see chapter H above). Departmental committees for each ministry, such as a Finance Committee under the Minister of Finance, review the activities of each department. Another form o f accountability i s direct questions put to Ministers inthe Legislative Assembly. PublicAccounts Committee 5.2 The PAC i s constituted by the Legislative Assembly" to examine the GoUP Accounts and Reports o f the C A G and to report back to the Assembly. It covers public enterprises as well as State departments. Reports are made on individual departments for individual years. 5.3 The major problem is the backlog of CAG reports awaiting examination. The present PAC i s very active and has tabled reports on departments for years up to FY 1995.'l The practice i s to await replies on C A G report paragraphs from the relevant Controlling Officers before calling them for examination (see box below). This seems unnecessary as the Controlling Officers have all been made aware o f the relevant paragraphs during the months leading up to and after the issue o f the CAG's report. Rather than callfor written responses, the PAC could issue the paragraphs and call for the Controlling OfJicer to answer inperson. J.4 The delay reduces the deterrent and corrective influence on the executive. By the time particular paragraphs are examined, those responsible have been transferred, retired or died, and escape having to appear before the PAC. This is made worse by the frequency o f transfers in GoUP. Accountability delayed i s accountability eroded. It should be recognizedthat all responsibility and accountability i s ultimately personal and can only be enforced against persons. It i s not the Secretary o f X Department in 2003 who is responsible for the defaults o f his predecessor in2000: it i s the Secretary in2000. 0 Ways need to befound of holding individuals to account, rather than positions and post titles. Names should be named, and responsible individuals followed up and forced to account. Under rules230 and 23 1 of the Rules of Procedure and Conduct o f Business o f the UP Legislative Assembly, *'1958. Tabled inthe session for FY 2001. Subsequent reports have been placed on the House agenda, but not presented for political reasons. 61 Box 12: Composition and Procedure of the PAC Members are elected by the House according to the proportional representation o f parties. The term o f office is only one year, so there is little continuity. The current PAC was set up in 2000 and has 25 members, o f whom 20 are from the Assembly and 5 are associate (non- voting) members from the Council. The chairman i s elected by the House and by convention since 1948 is a senior member of the opposition. Ministers are not eligible for membership. The present PAC has been meeting about 12 days a month, mainly when the House i s not in session. It has at present one sub-committee, which was set up to review accountability in the irrigation sector. Members receive Rs 250 a day for attending. When the CAG's report is presented in the House, it is immediately referred to the PAC. Paragraphs o f the report are sent to the relevant Departments, requiring a response within 90 days. Controlling Officers (e.g. Secretaries) are then required to attend personally and be questioned. They bringstaff officers to assist them, such as the Finance Controller. The PAC is assisted by the AG (Audit) or his deputy, and the Finance Secretary or his representative. Outside experts can be called, but this is not done at present. The Committee may make suggestions for remedial action and require Controlling Officers to report back within a given time. All proceedings o f the PAC are secret and confidential until its report is presented in the House (Rules o f Procedure, 1958). The Parliament Secretariat sends copies o f the PAC Report to the administrative departments, with copies to Finance Department, AG-UP, CAG and GoI, and follows up on the recommendations. Greater interaction among State and Union PACs and with international bodies such as the Commonwealth Parliamentary Association (CPA) would strengthen the system and enable it to function more effectively as a check on the executive. The CPA has formed a Study Group and started a program to examine Parliament- Executive relationships and draw up standards. India is a member. Regular inter- State conferences of PAC chairpersons and members, and participation in CPA activities, should be supported. Committee on Estimates J.5 The Legislative Assembly has constituted a Committee on Estimates (CoE) to examine the Estimates and make recommendations on possible economies, alternative policies, improvements in organization, etc. It consists o f 25 members from the Legislative Assembly, chaired by a senior person from the ruling party. Like the PAC, it is reconstituted each year. It i s quite active: out o f 11 departments selected for examination inFY 2003, a report on the first seven has been finalized over a period o f seven months. The CoE also prepares thematic reports, such as a recent report on PLA. There i s no voting, the Committee works by consensus. The CoE gets assistance from the Finance Department, but not the CAG. It shares secretarial assistance with other legislative committees and, like the PAC, it meets in camera. J.6 In contrast to the PAC that does an ex post examination based on CAG reports, the Committee on Estimates starts its examination as soon as the budget i s passed. Examination even before expenditure i s incurred gives it an opportunity to intervene in operations. The Committee can draw on the PWD Technical Audit Cell for technical opinions. 62 Another form o f legislative oversight i s the widespread practice o f members o f the legislature intervening in the administration in response to grievances o f their constituents. This i s said to be an important check, particularly over local authorities. However, it i s a practice that tends to favor one person or group over another. "Active and vigilant representatives can get a substantial share o f development for their constituencies". 82 It may therefore serve as a means o f getting preferential treatment rather than a channel o f accountability. The Public Accounts Committee, chaired by a senior member o f the opposition has been rejuvenated and i s reducing a backlog o f C A G reports. The PAC has adequate secretarial support, but its technical support i s limited to inputs by C A G and DOF officers at its meetings. Its members also needmore interactionwith PAC members in other States and countries. Conclusions J.9 Continuity o f tenure o f senior officials i s essential for accountability. Greater interaction among State and Union PACs and with international bodies such as the Commonwealth Parliamentary Association (CPA) would strengthen legislative review and enable it to function more effectively as a check on the executive. '*SeeAjay Maken (2000) Accountability of Public Servants, inNational Conference Compilation, p. 31112. 63 K. PUBLIC TRANSPARENCY K.1 Under the Constitution Article 19 (1) a, it i s a fundamental right o f citizens to obtain from their government information about the policies they have adopted on their behalf, the programs they plan to implement, the contracts given, the operations carried out, and the results obtained from using the authority and resources entrusted to them. Infact, it i s also a democratic duty that they inform themselvesand exercise their franchise responsibly. In UP, a Freedom o f Information Act has been drafted, and over 16 line departments have developed citizen's charters on standards o f delivery. These are good examples o f the opening up o f government. K.2 The GoUP has an active Department of Information and Public Relations which issues printedmaterial, films, etc and feeds the media with press releases on GoUP policies and activities throughout the year. Teleprinters have been installed in many districts to get news to small newspapers. The CAG issues attractive annual brochures - `What do the Reports o f the C A G Say?' which highlights some o f his main findings for the year, and `UP Accounts at a Glance', which summarizes the State accounts. Press conferences are sometimes held to increase media attention. The Budget Department issues an annual `Budget at a Glance'. K.3 However, citizens can seldom get the particular information they want. The Freedom o f Information legislation has not yet been passed, and in any case, there i s a culture o f secrecy which would inhibit its operation. The Official Secrets Act, 1926 governs access to information held by the Government. At present, the Act tends to protect officials and keep them from beingaccountable. The Oficial Secrets Act needs to be revised in line with new thinking about transparency.83 K.4 Citizens are largely dependent on the media for information that the executive would rather not reveal but i s nevertheless essential for democratic discussion. Good professional training injournalism i s available in UP. The media are allowed to publish without official censorship, but are still subject to intimidation and legal hara~sment.~~ They are very free intheir reporting, though not always impartial or accurate. The Press Council o f India has issued `Norms o f Journalistic Conduct' and tries to enforce them. Allegations o f corruption are frequently reported inthe newspapers, while reporting o f the budget and other financial events i s naturally less freq~ent.~'Judicial corruption, 83Ajay Maken, op. cit., p. 333. 84It is saidthat the GoUP is the biggest source of advertisingrevenuefor UP newspapers, so they often succumb to governmentpressure(Pioneer, 17 July 2002). 85A count of press clippings (inHindi, Urdu and English) inthe Secretariat library indicatedthat inthe average monththere are about 25 reports on bureaucratic corruption, 7 on allegations againstpoliticians, and 4 on budgets and budget policy. There are 292 daily newspapers, 1,560 weeklies andfortnightlies and 96 monthlies (Uttar Pradesh2002, op. cit. p.295). Literacy, however, is only 57.4%.Radio and TV have wider influence. 64 however, is protected by the Contempt o f Court Act: an editor can be punished if a report, though true, brings courts into disrepute.86 K.5 Though the annual Budget speech is telecast, no other legislative proceedin s are opento public view, unlike the Union Parliament which i s far more tran~parent!~ Legislative committee meetings are also private. Changing House Rules and allowing media access would add to the transparency of public sector operations. K.6 The Parliamentary Secretariat publishes the verbatim proceedings of both Houses. The Library is large and well organized but i s open only to Secretariat officers and accredited researchers. K.7 GoUP has made major steps towards transparent and efficient e-government through its official websites. The current GoUP budget, other fiscal data and the complete text of financial regulations are accessible to all on the Internet (http:/upgov.up.nic.in/ upfinance). Procurement tender notices are also shown in full. They are entered about a month after issue, a period that should be shortened. Monthly reports o f capital and recurrent expenditure, as reportedthrough the Treasuries, are also entered, currently three months in arrears. The annual state accounts are posted on the CAG's website http://cagindia.org/states/uttar_pradesh/ The latest year's accounts are those for FY 1999. Itis expectedthat the accounts upto FY2002 will soonbe available. a GoUP websites should be kept up to date andpostedpromptly Conclusions K.8 Government websites have made great strides. Freedom o f Information legislation has been drafted but not yet enacted, and the prevalent administrative culture i s still one of secrecy.Key legislation i s long out o f date. The Official Secrets Act o f 1926 needs to be revised in line with new thinking about transparency. The Societies Registration Act o f 1860 should be amended to require submission o f annual financial statements, including balance sheets, inthe same manner as District Rural Development Agencies. 86The Week (2003) Attention, your honour, issue of 9 March 2003, p. 20. See also P.B. Sawant (2000) Media and Judiciary, inMainstream, issue of 23 December2000, pp. 31-36, which argues that thejudiciary has more internal controls and accountability than the media. *'P.K. Mukhopadhyay (2000) ParliamentaryControl over Public Purse inIndia, inNational Conference on Legislative Control over Public Purse: A Compilation, Lucknow, 29-30 July, p. 101. The cost of telecasting proceedingscouldbe met by those interestedinthe promotion of public understandingof how democracy works. 65 L. RISKANALYSIS L.1 A number of donors are considering moving from project-tied support to direct budget support (sector-widelprogram budget support, general budget support and debt relief). UP has already received general budget support inthe form o f the World Bank structural adjustment loan and credit (a single tranche disbursement). Program budget support and general budget support funds enter a pool o f public funds, so that individual uses o f funds can no longer be identifiedwith individual sources. L.2 These new modalities mean that donors' principal source of fiduciary assurance (that public funds are used legitimately) i s effective operation of the government's own financial management and reporting systems, together with the independent oversight and review functions performed by the CAG and the legislature. The risk to donor funds i s essentially the same as the risk to Government funds. Fiduciary risk to public funds in U P can be defined as the expected value o f the loss o f developmental benefits arising out of gaps between present financial management arrangements and generally accepted international standards. L.3 This analysis i s made according to the DFID and OECD/DAC guidelines8' on managing fiduciary risk when providing direct budget support. These build on the IMF Code of Good Practices on Fiscal Transparency, the IMF/World Bank reviews o f 25 HIPC countries, and IFAC/PSC International Public Sector Accounting Standards. Inthe DFID and OECD/DAC guidelines, developmental benefits are defined (by implication) interms of pro-poor expenditure^.'^ The methodology has been used in pilot assessments in African and Caribbean countries. L.4 The box below sets out nine Good Practice Principles and the relevant benchmarks, and comments on the degree o f compliance inUP. ~~Box 13: RiskAssessment on OECDK I C Methodology Good Practice Principles and Comments Benchmarks 1. A clear set of rules governsthe budget process 1.1A budget law specifying fiscal There is a well-established legal framework, a recently management responsibilities is in updated Budget Manual, a uniform accounting code, and operation fiscal management responsibilities are specified. Rules are 2.2 Accounting policies and account often avoided, however, by hiving off government activities code classifications are published to entities outside the budget, or rules are misapplied and applied altogether. *'DFIDimplicationi (2002) and OECDIDAC (2002). These two sets of guidelines are very similar. This s drawn from two of the Good Practice Principles, viz. that the budget supports pro-poor strategies, andthat the budget i s a reliable guide to actual expenditure. 66 2. The budget is comprehensive The GoUP budget comprehensively includes transactions on the Consolidated Fund, Contingencies Fund and Public 2.1All generalgovernment activities Account, but omits significant aid revenues and expenditures. are included inthe budget There is no `general government' consolidation of GoUP 2.2 Extra-budgetary expenditureis not budget with the budgets of GoUP-controlled entities such as material local bodies, universities and societies. 3. The budget supports pro-poor activities 3.1Budget allocations are broadly I`here is no MTEF but the consistencyof budget allocations is consistent with any medium term xoadly inline with the plan. expenditureplans for the sector or for the overall budget 4. The budget is a reliable guide to actual expenditure 4.1 Budget outtum shows a high level The budget is subject to constant variation through the year, of consistency with the budget but social sector and infrastructure programs that are identified as pro-poor are tagged as high priority and protectedinbudget cut-backs 5. Expenditurewithin the year is controlled 5.1 In-year reporting of actual Expenditure is reported promptly each month and kept within expenditure budget by the fully computerized Treasury system. Virement 2.2 Systems operatingto control (reappropriations) and commitments are closely controlled, virement, commitments and but arrears of paymentsare unknown anduncontrolled. arrears 6. Government carries out procurement in line with principles of value for money and transparency 6.1 Appropriate use of competitive According to arecent asse~sment,'~UP suffers from extensive tendering rules corruption in all public bodies and their suppliersicontractors: 6.2 Decision making i s recordedand despite all the institutions set up to address the problem and auditable all the regulatory and procedural framework. Tendering rules 6.3 Effective action takento identify are not applied in a non-discriminatory way, records are and eliminate corruption defective andaction is rarely taken to eliminate corruption. RaghavanSrinivasan(2001) Country ProcurementAssessment Report, Volume 1: Summary and Recommendations,World Bank. Ina survey of perception of corruption inUP, 80% ofthe respondentsbelieved that the level of corruption i s very high, that it is worse than in other States of India, that it has increasedsignificantly in the recent past, andthat it will continueto increaseinthe future (Asian InformationMarketing and Social Research (Pvt) Ltd(2000) Perceptionsand Experienceof Corruption inUttar Pradesh, a study carried out for UP Academy of Administration, June). Perception of political corruption is heightenedby apparent electoral disregard of criminal behavior of candidates for public office. SeveralMLAs are injail, pending determination of charges. The reports of the CAG are full of cases of losses of developmentbenefits resulting from gross negligence or corruption. CAG findings do not distinguish the two causes, butthe impacts are the same. 67 7. Reporting of expenditure is timely and accurate 7,lReconciliation of fiscal and bank Reporting o f the GoUP departments and local bodies i s records i s carried out on a routine timely and reasonably accurate, and reconciliation with basis bank accounts i s carried out daily. Audited annual accounts 7.2 Audited annual accounts are of the GoUP are submitted to parliament but are currently submitted to parliament within the in arrears for temporary reasons. Public enterprises, statutory period however, are inserious arrears. Good PracticePrinciplesand Comments Benchmarks 8. There is effective independent scrutiny of government expenditure 8.1 Government accounts are Audit is independent of GoUP. Government agencies are independently audited heldto account, butparliamentary reviews are considerably 8.2 Government agencies are heldto inarrears.Follow up is weak. account for mismanagement and criticisms and recommendations by the auditors are followed up. 9. The budget process is transparent 9.1 Information on the fiscal activities Budgets and accounts are publishedinhard copy and on the of government i s available inthe GoUP and CAG websites. The budget, however, i s not public domain user-friendlyandthe public accounts are obscure. There is 9.2 Information presented ina way that very little information on the activities and results. facilitates policy analysis and promotes accountability Other Aspects of Risk L.5 The latest C A G report shows an escalation inwastage and diversion o f funds detected in test audits." However, there i s far more exposure o f irregularities than corrective action to strengthen systems, recover losses o f public funds and penalize the officers responsible. The fixing o f responsibility i s made difficult by the diffusion o f responsibility for decisions. Prosecution i s also made difficult by deficiencies in the law o f tort and criminal law. "At present, there are statutory provisions which shield public functionaries from legal action. The Criminal Procedure Code, 1973, for instance, requires permission from the appropriate government, central or state, necessary before a public servant inits employment i s prosecuted inrespect o f any allegations relating to the 91From Rs. 169 crores inFY 1996 to Rs. 651 crores inFY 1999 (CAG Report, Civil, for the Year Ended 3 1March 2000, p. 14). 68 discharge o f their official duty".92Further, criminal court congestion i s particularly bad in UP and delays are interminable.93 L.6 The Lokayukta (Ombudsman) produces a comprehensive annual report that i s supposed to be tabled annually in the Assembly, but because o f successive governments' short tenure, the Government has not commented on it and the report has not been made public since 1995. Though the present Ombudsman claims 90% success inredressing grievances against the administration, it is more difficult to secure action against corruption. Allegations against public officers and politicians are investigated and he reports his findings and recommendations to the Chief Minister or Chief Secretary. If no action is taken within three months, he may make a special report to the Governor, which i s laid before Parliament. Nevertheless, little action results and the corrupt go free.94 L.7 GoUP scores moderately well on most o f the nine principles above, but weaknesses in critical areas are likely to have a significant impact, keeping the overall level o f fiduciary risk high, inparticular: Lack o f realistic budgeting, lack o f comprehensiveness and weaknesses in cash and debt management and late release o f spending authority mean that it i s difficult for government to deliver the budget as planned. Procurement weaknesses affect a large part o f government expenditure. Precise figures are not available but the best estimate is that around Rs. 12,000 crores per annum, or approximately 18% o f the state's budget, is at risk. Publicly owned enterprises are unable to provide accounts on a timely basis. There i s poor follow up o f the many serious issues raised in audit reports and a significant buildup of arrears. Rural local government suffers from low capacity to carry out effective financial management and there i s insufficient segregation o f duties at this level to ensure proper use o f funds. 92Ajay Maken, op. cit., pp. 33314. 93Poverty in India, op. cit, p. 78. 94InFY2002, 1,493 complaints were accepted (of which about 90% were grievances and 10% were allegations), and 1,433 disposed of (relief provided). At the end of the year, 973 were pending. Recently five Ministers were investigated, and three were charged. Criminal proceedings have been initiated against two of them, and a fine of Rs.2.87 crores institutedagainst the other. See website http:/llokawktup.nic.in for the mission and procedures o f this office, and Shukla and others (2003) for statistics. See also a study o f corruption inrevenue administration, in particular inthe Trade Tax Department: Chaturvedi and others (2001). 69 Many non-government bodies are in receipt o f public funds - registered societies, development authorities and other such bodies have unclear accountability requirements and low capacity. L.8 The recommendations in the action plan identify the actions which would have the highest impact in terms o f risk mitigation. Some o f these are internal to the administration. However the most important single factor inreducing risk will be political determination to apply existing laws without fear or favor. 70 Annex 1 Bibliography Asian Information Marketing and Social Research (Pvt) Ltd (2000) Perceptions and Experience of CorruptioninUttar Pradesh, a study carried out for UP Academy of Administration, June Ashok Bajpai (2000) Responsibility of Public Servants, in National Conference on Legislative Control over Public Purse:A Compilation, Lucknow, 29-30 July Smita S. Chaudhry (2002) Conceptualization of the Role and Functions of the `Controller', inthe IFMTR Chronicle,Issue XVI, March Abha Chaturvedi, D.S. Sengar and P. Rameshan (2001) Improvement in Corporate Culture: Improving Human Resource and Preparing a Vulnerability to Corruption Analysis, Lucknow: IndianInstitute of Management Comptroller and Auditor General: Report for the year ended 31 March 2000 - Civil, Uttar Pradesh Comptroller and Auditor General (undated) What do the Reports of the CAG say?: A bird's eye view of the Audit Reports of the CAG (GoUP)for theyear ended 31 March 2000 Department for International Development, Government of UK (2002) Managing Risk when ProvidingDirect Budget Support, March Jack Diamond (2002) Performance Budgeting - Is Accrual Accounting Required? Working Paper WP/02/240. IMF: Washington Economic and Political Weekly (1999) UP Finances: Budgetary IllusionandReality, April 17-24 Economic and Political Weekly (2001) UP on the Financial Brink: State Government's Budget 2001-2002, May 19 M.K.Gandhi (1927) An Autobiography, or the Story of my Experiments with Truth, Navajivan Publishing House: Ahmedabad Government of India, Ministry of Rural Development (2001) Accounting Procedure for District RuralDevelopmentAgenciedSocieties GoUP Departmentof Finance (2000) Uttar PradeshMediumTerm Fiscal ReformPolicy GoUP Departmentof Finance (2000) Uttar Pradesh Budget Manual, 6* edition GoUP (2001) SocietiesRegistration Act, 1860, as applicable to UP, together with Uttar Pradesh SocietiesRegistration Rules, 1976, 17t" edition, Eastern Book Company GoUP, Department of Local FundAudit (2002) Audit Report for 1997-98 (inHindi) IFAC Public Sector Committee (2003) Cash Basis IPSAS: Financial Reporting under the Cash Basis of Accounting IMF (2001) GovernmentFinance Statistics Manual, IMF:Washington JagranResearchCenter (2002) Uttaranchal and Uttar Pradesh:At a Glance 2003 71 Naoko C. Kojo (2002) UP Public Sector Debt and Debt Management, PREM, South Asia Department,World Bank, May Ajay Maken(2000) Accountability of Public Servants, inNationalConference Compilation P.K. Mukhopadhyay (2000) Parliamentary Control over Public Purse in India, in National Conference on Legislative Control over Public Purse: A Compilation, Lucknow, 29-30 July National Audit Office, UK (2003) Modernization and Capacity Building of the Office of the Comptroller and Auditor General of India, under IDF grant TF050110 (Burnett Report), January OECD/DAC Task Force on Donor Practices, Sub-Group on Financial Management and Accountability (2002) Development Performance Measures for Public Financial Management, Paris, March. A. Premchand, B.Potter andM.Woolley (1997) India: Public Expenditure Management PricewaterhouseCoopers (2001) Modernization of Financial Management and Audit Functions, in association with R.M. La11 & Co., Inception Report October 2001, Draft Final Report, December 2001, FinalReport, March2002 Prosix Softron Pvt.Ltd (2001) Department of Medical Health. Computerized Financial Management System.Draft System Report, 24 November O.P. Rai (2001) Account Rules: Financial Hand-Book, `Vol. V, (Part I),Allahabad: Pustak Sadan Prakashan V.V. Rama SubbaRao (1999) DecentralizedBudgeting and Accountability, inBudget Reform in Developing Countries, Papers of a Workshop held in New York, December 1997. United Nations: New York V.J. Ravishankar and Priya Mathur (2003) Facts from Figures on Public Investment in Infrastructure, inWorld Bank (2003) India Infrastructure Report A.M. Sehgal (2000) Budget and Public Expenditure Accounts, in National Conference on Legislative Control over Public Purse, 29-30 July 2000: A Compilation Archana Shukla, R. Srinivasan and Tarun Churvedi (2003) The Uttar Pradesh Lokayukta: A Case in Efficiency, Effectiveness and Responsiveness. Indian Institute of Management, Lucknow.Case series: 2003:09 O.P. Singh and LA. Siddiqui (2001) Financial Handbook, Volume VI [Public Works Account Rules], Pustak SadanPrakarshan:Allahabad Shri Keshari Nath Tripathi, Speaker, Legislative Assembly, UP (2000) National Conference on Legislative Control over Public Purse, 29-30 July 2000: A Compilation Raghavan Srinivasan (2001) Country Procurement Assessment Report, Volume 1: Summary and Recommendations, World Bank World Bank (1998) Uttar Pradesh: From Fiscal Crisis to Renewed Growth, PREM Unit, South Asia Region World Bank (1998) Public Expenditure Management Handbook, World Bank:Washington World Bank (2000) Uttar PradeshMediumTerm Fiscal ReformPolicy 72 World Bank (2000) Report and Recommendation ...on a Proposed Credit and Loan to India for the Uttar PradeshFiscal Reform andPublic Sector Restructuring Project, March29. World Bank report P7365-IN. World Bank (undated) A Policy Note on Accelerating Development and Reducing Poverty in Uttar Pradesh World Bank (2002) Bangladesh: Financial Accountability for Good Governance, World Bank Country Study World Bank (2002) Poverty in India: the Challenge of Uttar Pradesh World Bank (2002) Uttar Pradesh: Trends and Patterns in Public Spending, by Farah Zahir, PREM, SouthAsia, August World Bank (2002) India: UP Policy Notes - UP'S Own Revenue System: Assessment and Reform Suggestions,November World Bank (2003) India:UP Policy Notes -Public Expenditure Note, February 73 Annex 2 Listof PersonsMet Department Post Name IndianAccounts and Audit Additional Deputy S. Sathyamoorthy Department CAG Principal Accountant Shailendra Pandey General, UP Accountant General ParagPrakash (Accounts & Entitlements),UP Accountant General SunilChandra (Commercial), UP Senior Deputy C.H. Kharshing Accountant General Accountant General Birendra Kumar (Commercial) Legislative Assembly, UP Hon. Speaker Keshari NathTripathi Principal Secretary R.P. Pandey Assistant Secretary Chief Librarian Public Accounts Committee Chairman Ashok Vajpayee Member Mata ParasadPandey Estimates Committee Chairman Department of Finance Principal Secretary Secretary (Budget) DrJoshi Special Secretary Smita C. Choudhury Directorate of Treasury Director OmNarayan Chief Treasury Rajiv Shivasta Officer, Lucknow Chief Treasury RakeshChaube Officer, Allahabad Directorate of Financial Statistics Director Vijay Bahadur Singh Directorate of Fiscal Planning and Director Resources Directorate of Departmental Director 74 IAccounts Budget Division Deputy Secretary Nee1Ratan Budget Officer Lahiri Yadav Departmentof Externally Aided Secretary Dr.R.C. Srivastava Projects ResearchOfficer S.K.Khare Departmentof Local FundsAudit Director D.B.Singh Department of Cooperatives Registrar Bhagwati PrasadMishra DeputyChiefAudit S. Chaudhuri Officer, Panchayatand Cooperative Societies Institute of Financial Management, Director Krishna Gopal Training andResearch Lucknow District Chief Development Ani1Kumar Sagar Officer G.Patnaik ~~ Department of IT Secretary Coordinator DEMIST ArunArya Department of PanchayatiRaj Under Secretary PrakashNarain Department of Rural Development Principal Secretary Deepak Singh Add'l Commissioner O.P. Tripathi of RuralDevelopment Departmentof UrbanDevelopment, Secretary RakeshGarg UrbanEmployment and Poverty Alleviation Principal Secretary Mr.Meena Special Secretary Manoj Kumar Singh Director, UrbanLocal G.K. Tandon / K.K. Bodies Upadhyaya Departmentof Housing Secretary J.S. Mishra Department of Medical, Health& Principal Secretary Rakesh Kumar Mittal Family Welfare Secretary, Family G.C. Chatturvedi Welfare 75 Financial Controller Lalji InternalAudit Officer Ram Bharosa Chief Medical Officer, Dr. S.K. Srivastava Barabanki Accountant, Barabanki Amar Saxena Block Medical Officer, Dr.Ashok Srivastava Dewa Block Medical Officer Dr.Rajendra Prasad & i/c Public Health Center, Fatehpur Accountant, Fatehpur Sunder La1 Registrar of Societies Registrar Arvind Misra Sarvajanik Udyam Bureau Joint Director Neeraja Krishna Public Works Department Finance Controller B.R.Singh Executive Engineer Sudhir Kumar (Computers) Project Director, UP State Roads Project N.L.Sharma Finance Manager, UP State RoadsProject SubhashGupta Office of Lokayukta (Ombudsman) Lokayukta Justice S.C. Verma IndianInstitute of Public Secretary T.N. Dhar Administration (UP Branch) Giri Instituteof Development Professor Ajit Kumar Singh Studies University of Lucknow Vice Chancellor Dr. S.B. Singh Head, Departmentof Dr.C.P. Bhartwal Public Administration Institute of Development Studies, Director Professor A.K. Sengupta University of Lucknow Faculty Member DrAwadhesh Kr.Singh Senior Lecturer Vinod Singh Faculty Coordinator Aurnob Roy R.M.La11& Co. Chartered Partner Accountants Partner Puneet Kapoor 76 A. Sachdev & Co. Chartered Partner V.K. Tewari Accountants Partner K.G.Bansal Partner DineshSingh 77 Annex 3 FinanceDepartmentFunctions The department has not been fully charted, but it includes three Secretaries, 11 Special Secretaries, and 14 Directorates. This annex lists the functions o f the Directorates o f Finance Department that are most relevant to the SFAA.It i s not comprehensive. Directorate of Fiscal Planning and Resource: controls the expenditure o f the tax revenue departments; provides data every five years to Go1 Finance Commission and State Finance Commission on which sub-national allocations are based. Directorate of Treasury: examines claims (payment vouchers), enters them into the Treasury System and issues cheques on behalf of departmental DDOs (budget-holding officers); maintains database containing budget allocations and payments; issues monthly reports on all public funds at State level; submits original vouchers to AG (Accounts) twice a month. Directorate of Budget: consolidates annual departmental expenditure budgets and reconciles expenditure budgets with projected cash inflows; prepares Annual Finance Estimates and the BudgetOutline. Directorate of Financial Statistics: receives monthly summaries o f receipts and payments from all Treasuries on electronic tapes; receives monthly statements on self-accounting departments (based on paid cheques sent to the Treasuries); consolidates all above and reports monthly to Finance Department Directorate of Internal Audit: monitors internal audit in the departments; undertakes special investigations; reconciles Provident Fund accounts from the Treasury system with the AG. This Directorate was established in January 2003, replacing the former Directorate o f (Departmental) Accounts. It i s headed by the State Internal Auditor. Expenditure Control Sections (11): review and approve individual Plan expenditure transactions; receive internal and external audit reports, make recommendations for corrective actions and sanctions to the Principal Secretary, follow up directions, and assist at PAC hearings. Each Section comprises a Secretary and/or Special Secretary, Deputy Secretary, Section Officer, Review Officer and Assistant. There are also Directorates o f Group Insurance, Pensions, and National Savings. Institute of Financial Management Training and Research: the training arm o f the Finance Division. The Director reports to the Principal Secretary, Finance. The Institute i s responsible for the training o f all accounts and audit cadres inthe GoUP (this excludes accountants and auditors who fall under the OAG and are separately managed and trained). These comprise Treasury Officers, Assistant Accounting Officers, Accountants, Treasurers, Auditors, Internal Auditors, Drawing and Disbursement Officers (recently reduced from 36,000 to about S,OOO), and allied officers who do financial work. The total trainee population i s around 15,000. 78 Annex 4 BudgetProcess 1. The budget process starts with a `call letter' in September or October o f the previous year, requiring administrative departments to submit their estimates on prescribed formats. Guidance i s given on the filling o f vacant posts, calculation o f allowances, telephone and vehicle usage, etc. There is no guidance on inflation: departments are expected to prepare their estimates at present prices. Budgets are compiled mainly by district-level heads, Directorates and Finance Controllers. There does not appear to be any delegation o f budgetingor budget control to service delivery institutions such as hospitals and health centers.95 Budgets are compiled and reviewed on an incremental basis, i.e. taking the revisedestimates o f the current year as a base, and adding (and occasionally subtracting) for known changes. 2. Heads o f Departments send estimates to their administrative departments in the Secretariat (by 15 October), where they are scrutinized and may be amended. They are also sent to the UP Accountant General (AG-A&E) for his comments. They then pass to the Budget Division o f Finance Department (by 5 December). This Division examines all new expenditure proposals in detail. It does not concern itself too much with other departmental estimates, but considers the comments and recommendations o f the AG and administrative departments, then consolidates the Estimates and compares the total expenditure requirements with resources available. Ifcuts are required, they are made by Budget Division according to the priority criteria mentioned above, untilthe fiscal parameters are all met (January). 3. The budget i s sent up for approval by the Council o f Ministers (mid-January), then presented inthe Legislative Assembly by the Minister o f Finance (inFebruary/March). It has to pass both the Assembly and the Council, and be assentedto by the Governor as an Appropriation Act, ideally by 3 1 March. 4. This timetable is tight as it does not leave much time for legislative review (21 days in the Assembly). It is said that there i s practically no legislative scrutiny o f the Budget before it i s passed.96Moreover, the budget process i s sometimes delayed for political or administrative reasons. In this case, there i s constitutional provision for continuation o f government spendin on sanctioned projects and ongoing activities by means o f a `vote on account' advance.99 According to the OECD fiscal transparency guidelines, the budget should be presented to the legislature three months ahead, Le. by 31December. As this would require far earlier preparation o f estimates inan unstable environment, the target date o f 28 February should be kept, but more thorough review by Departmental Committees o f the Legislature should be encouraged. 95A Block Medical Office, for instance, controls only its vehicle operating costs and salaries.Other inputs are provided `free'. This illustrates the limiteddecentralization of financial accountability within the Government, and contrasts with the devolution of funds and accountability to the local authorities. 96Hon. Shri Keshari Nath Tripathi, Speaker, Legislative Assembly, UP (2000) National Conference on Legislative Control over Public Purse, 29-30 July 2000: A Compilation, p. 58. 97The Constitution, article 206, allows the Legislative Assembly to make a grant inadvance for `a part of any financial year'. This canbe done without discussioninthe House, andmay be resortedto when the Government is facing strong opposition. On 5 March 2003, a vote on account was passedfor the f i s t six months of FY 2004. Similarly, the FY 2003 budget was authorized by a vote on account on 22 March2002, andthe fillbudget was not presentedtill August 2002. 79 5. Finance Department compiles a revised budget after the first six months o f the year. This includes the actual revenues and expenditures o f the first six months, and an estimate for the remaining six months including the first supplementary estimates. 6. Ifa department wishes to spendmore than its budget on an item, it should first examine the rest of its budgetfor possible savings. Ifsavings are anticipated, they may be re-appropriated to the item on which expenditurei s to be made, subject to various restrictions. Up to the level o f sub-head (scheme), re-appropriations can be made by the Minister o f the relevant department on the recommendation o f the administrative department, subject to various restriction^.^^ Above that level, Finance Department must also approve (and usually does). 7. Embeddedinthe rules is an outdated preference for plan expenditure, capital expenditure and new proposals and a bias against recurrent expenditure. It i s now recognized that capital expenditure i s not inherently more productive than recurrent expenditure. A school district may need more classrooms (capital) or it may need more teachers or supplies (recurrent). Such allocation decisions should be made according to the merits o f alternative expenditures, and not be straitjacketed by rules that prevent reappropriations from one category to another. Generally, the reappropriation rules are too detailed and cumbersome inoperation. 8. In practice, the department often finds it easier to apply for a Supplementary Appropriation. This goes through the same stages as the original budget, culminating in further legislation. The C A G has pointed out that the amount o f supplementaries is very high, and that they are grossly under-utilized. Substantial savings could be used to reduce supplementary demands. Two Supplementary Appropriations are usually processed each year. Ifthe department i s too late for the second, it enters the amount required in a Schedule o f New Demands for inclusion inthe next year's Budget. 9. If the need is urgent, as well as unforeseen, the department may apply for an advance from the Contingencies Fund, as well as a supplementary appropriation. O n a roval of the appropriation, the Contingencies Fundi s reimbursedfrom the Consolidated Fund!'This Fundis supposed to be used only when the Legislature i s not in session (and therefore cannot pass a Supplementary Appropriation). In fact, it i s used at all times, for all purposes, and very frequently (277 times in FY 2000).'00 The shape o f the Budget i s routinely changed during the year. [See text o f report for recommendations]. 98Budget Manualparas. 151, 154-156. 99It stands at Rs.600 crores, which is about 1.5% of annual expenditure, and several times higher than the GO1 Contingency Fund. looThe Times of India alleges several misuses of the Contingencies Fundinan article in its March 6, 2003 issue. 80 Annex 5 PaymentsProcess 1. O n receipt of invoices, DDOs raise bills (payment vouchers) and present them to the District Treasury. The Treasury checks the bills and, if they appear to be in order and are within cumulative allotments, draw cheques in favor o f the persons to whom payment is due. Cheques are sent back to the DDOs for signature and issue. Cheques are valid for one month from the date o f issue. If not cashed after one month, they lapse and the entries in the books are reversed (expenditure i s reduced). 2. Salaries are paid by a single monthly cheque to each D D O inrespect o f all staff under each head o f expenditure. As personnel data are kept at D D O level, there are `information gaps', and it i s suspected that controls are insufficient to prevent abuse. There are frequent complaints o f delay inreceipt o f salaries. This issue will be addressed by the move to convert Treasuries into `Integrated Pay and Accounts Offices'. In U P this means that Treasuries will maintain all payrolls and make salary payments directly into officers' bank accounts. All public officers will be requiredto open bank accounts. This change should remove a major fiduciary weakness. 3. Since the number o f DDOs has been substantially reduced (from over 35,000 to about 6,000), virtually all payments are now made by 73 Treasuries"' at District level: most o f the 307 Sub-Treasuries at Block level are only receivers o f revenue. Sub-treasuries keep manual records and send daily statements o f their receipts and any payments to their District Treasuries, which enter them inthe Treasury system.lo2 4. The State Bank of India (SBI) handles GoUP transactions as an agent o f RBI. SBI sends daily scrolls (lists o f cashed cheques, prepared manually) to the Treasuries that issued the cheques. 5. End-users (departmental DDOs) have no direct access to the system: they are sent monthly statements for reconciliation with their own records o f cheques issued. 6. A separate procedure applies to the non-salary expenditures o f a few high-spending department^."^ These `remittance departments' are controlled by a cash credit limit (CCL) system. In each such department, the Finance Controller, on behalf o f the head o f department, releases `budget allotments' through the year to each D D O (such as a Divisional Engineer). These authorize the DDO to commit funds. Authority to issue cheques i s separate. This i s based on cash needs assessed at monthly departmental management meetings and given by means o f `CCL letters' to DDOs. Total CCL must be within total budget allotments, which must be within the annual budget. The Finance Controller copies CCLs to the Treasuries, and the Treasuries instruct the State Bank o f India o f the limits. DDOs prepare bills and issue their own cheques. The SBI meets the cheques within the CCL. Any cheque that will take expenditure over the CCL, it refuses and informs the Treasury accordingly. The SBI returns paid cheques with daily scrolls to the Treasury for incorporation in the Treasury system. The Treasury sends a monthly lo' There are 73 Treasuries for 70 Districts, as 3 Districts have a second Treasury. lo2 The system was developedby NIC for the Directorate of Treasury on an Oracle platform, usingLinux (rel. 5.2) operating system andan in-house network of 12terminals. The systemhas four uses -expenditure control, cheque preparation,reporting, andreconciliation with daily scrolls from the bank. lo3 Public Works, Forest, Irrigation, Minor Irrigation, Rural Engineering Services and Ground Water. 81 Statement of Drawn Cheques to each DDO to reconcile with his accounts. Reconciliation must be completed by the 1St1', otherwise the next CCL letter may be cut. The departments send monthly statements o f cheques issued to the AG (Accounts). 82 Annex 6 Resource-basedAccounting The GoUP policy paper on governance reforms states its intention to seek advice on the design o f a resource-based accounting system. This i s commendable, as India should be a leader in public sector accounting inthe emerging countries. Around the world, the movement towards the measurement and management o f outputs and outcomes in government bodies has necessitated a parallel movement towards measures o f expenditure which faithfully reflect the cost o f input resources used in the production o f outputs. Cash accounting i s now thought o f as incomplete accounting. Resource-based accounting (more often called `accrual accounting') adjusts cash data so as to show the true resource cost o f programs, projects and activities. This information i s needed for four purposes: (1) comparing the cost o f government production with contracting out; (2) comparing alternative methods o f production and the impact of possible changes (i.e. cost control); (3) setting userfees where cost recovery is government policy, and (4) comparing the cost o f resources with outputs so as to improve expenditure allocations. It should be added that accrual accounting still provides all the traditional cash data, which are still needed so long as the basis o f legislative appropriations and accountability continues to be cash. Also accrual accounting assists cash projections and better liquidity management by providing data on financial assets and liabilities. This is not a small technical change that non-financial managers can afford to ignore. Itimplies a new mindset, one that treats expenditure as related to performance, rather than to the previous year's revised estimates. The introduction o f resource-based accounting requires a heavy investment, not only in new information systems and the regulatory framework, but also in training technical staff and managers. New standards of government accounting and reporting, such as those o f IFAC-PSC and the IMF-GFSlo4,have recently switched to an accrual basis, though it is not realistically expected that the conversion can be made overnight, or even inthe medium term. At the end o f 2002, only New Zealand, Australia and Iceland had fully convertedtheir budgets and accounts to an accrual base, and a few more countries (all advanced economies with strong public sector accounting skills) had converted their accounts a10ne.l'~ InUttar Pradesh at present, there is no felt needfor accrual accounting as there are few measures o f output to which expenditures could be attached. Nor is there any general policy to contract out government services, while the few user fees are not based on costs. Cost control, at present, i s simply a matter of economizing and reducing outlays, irrespective of outputs, so a cash measure i s just as effective. Resource allocations are based on criteria that do not depend on the measurement o f outputs or their costs. As mentioned above, there i s a major ongoing program o f accounting and financial management improvement. More urgent issues than the building o f lo4The International Federation of Accountants, Public Sector Committee, has issueda series of international public sector accounting standards (IPSAS), based closely on the recognized international standards for commercial accounting and reporting (IFRS, formerly called IAS), see www.ifac.org See also IMF (2001) Government Finance Statistics Manual, IMF:Washington. lo'Jack Diamond (2002) Performance Budgeting Is Accrual Accounting Required? Working Paper WPf021240. - IMF: Washington, p.21. 83 resource-based management systems include (1) introduction o f cash forecasting and management, (2) tightening upthe payroll system, and (3) better debt management. A recent IMF working paper recommends that an emergingeconomy should recognize the new standards as a goal, and introduce accrual accounting inphases in the context o f a wider public sector management restructuring program.lo6 support this phased approach. GoUP, in We consultation with the CAG, should make a policy commitment to move toward full accrual accounting. However, the first priority should be to strengthen the existing cash-based system to get a better handle on the cash costs o f programs and to progress to the point that accounting responsibilities could be taken over from the CAG. Progress towards accrual accounting should be made in ways that will not overload GoUP reform capacity. In computerization o f accounts, for instance, the software should include modules for the various elements o f a full accrual system, such as current liabilities, advances, revenue receivables, public debt, pensions, fixed assets and depreciation, which may be implemented one at a time in accordance with government priorities and capacities. Cash and modified cash bases can move by stages through forms o f partial accrual to full accrual. Given the current overwhelming importance of the fiscal crisis, priority should be given to aspects o f accrual accounting which would provide better information for cash management, such as the amount and timing o f liabilities. At present, GoUP has no aggregate information on its liabilities and when they are due for payment. Current liabilities may be captured by adapting the existing Liability Register (form BM 7) and requiring Heads o f Departments and DDOs to report outstanding amounts monthly to Finance Department. The system should also capture liabilities originating from other sources, such as debt service (see above) and transfers between GoUP and the Union and with other States. The PwC report recommends a phased introduction of accrual accounting, starting with the introduction o f end-of-year accruals from memorandum records, then moving to continuous accrual accounting at the transaction level.lo7 We support this recommendation. Implementation should be guided by a Steering Committee inconsultation with the CAG office.'08 However, the first phase needs to be broken into distinct sub-phases, as recommended in the IMF paper. The most difficult sub-phase i s the inventorisation and valuation o f government physical assets and introduction o f procedures for their accounting and depreciation, which should be left to last. lo6Jack Diamond (2002), op. cit. p. 2718. The Fiscal Reform and Public Sector RestructuringProject includes the implementation o f computerized performance recording and monitoring systems, but this has not progressed. The Department o f Administrative Reform was not able to demonstrate any substantive reform program. Financial reform is left entirely to the Department o f Finance. lo7PricewaterhouseCoopers (2001) Draft Final Report, section 6. The report refers to this as a move from `single- entry cash basis' to `single-entry accrual basis', then from `single-entry accrual basis' to `double-entry accrual basis'. These terms are not usedin IFAC standards and may mislead. `Double entry' applies as soon as a general ledger i s opened, containing debit and credit balances that cancel out intotal. This i s not difficult, and should be done even inthe first stage while accounts continue to be kept on a cash basis, with end-of-year accrual adjustments. The general ledger will then be the basis for statements o f financial position (balance sheets), financial performance (revenue, expenses and surplusideficit) and changes in net assetslequity (cash flow). logThe Steering Committee might eventually be transformed into an Accounting Standards Board, having a continuing responsibility for establishing and improving standards o f government accounting inIndia. See PwC recommendation intheir Draft Final Report, Appendix 6B. 84 Annex 7 Registered Societies These are legal corporate bodies, registered under the Societies Registration Act, 1860. This ancient piece o f legislation has been extensively used since the 1980s to give legal `cover' for channeling funds through Go1 or GoUP to UP social sector programs and projects without passing through the Consolidated Fund, thus bypassing all the myriad rules that apply to payments from the Consolidated Fund, and avoiding the risk o f diversion to some unintended use. Donor agencies, including the World Bank, have freely used this device with GoUP agreement as a means o f protecting agreed projects. According to the Registrar o f Societies, about 750,000 societies have been registered, o f which perhaps 150,000 are functioning at present. O f these, about 75,000 run schools, for which the , GoUP pays teachers' salaries. Another 40,000-75,000 run other programs with external assistance, mainly in the social sector, and up to 35,000 have cultural programs and receive private grants. The Registrar i s planning to computerize his files and build up an ongoing database, but lacks funds. The Act gives corporate status to any seven persons who subscribe their names to a memorandum of association, file it with the Registrar and be registered. This i s valid for five years and must then be renewed. Societies are required to file an annual list o f members o f its governing body, but do not generally comply. The Registrar can refuse to renew registration after five years untilall requirements are met. The Act does not require annual accounts or an audit report. The C A G has constitutional authority to audit any body in receipt o f public funds and does audit some societies. Others are audited by the Department o f Local Funds Audit, but there i s no complete list and it i s unclear if all societies receiving public funds are regularly audited. Any routine accountability requirements are left to donors to the society. The Registrar has the power to call for accounts `duly audited by a chartered accountant', to have the affairs o f a society investigated and, thereafter, to give directions to the society (sections 23 and 24). Failure to provide accounts or information i s punishable with a fine o f Rs.2,000 - hardly a disincentive today. Administrative departments and auditors complain o f misuse o f funds by societies. A lot of their expenditure `can be curtailed'. Since November 2002, the Registrar has required an affidavit from any society inreceipt o f public funds as to the amount received and the assets created. This may not be enough to make the societies accountable. The Act should be amended to require annual financial statements, including balance sheets, in the same manner as District Rural Development Agencies."' Ifthe Registrar were notified of grants to societies at the time they were made, he would be able to compare these amounts with annual financial statements or, in their absence, with the assets reported every five years in support o f applications to renew registration. log A new Act has been drafted andis beingreviewedby the Departmentof Finance. 85 Annex 8 PublicFinancialAccountabilityin GovernmentCompaniesinUttar Pradesh I. DefinitionofGovernmentCompanies Government Companies are definedas companies inwhich 5 1% or more o f the paid up capital i s held by Central or State Governments, singly or jointly, and includes companies that are subsidiaries o f a government companies. GCs are governed by the Act, Memorandum & Articles o f Association with which they are registered. 11. Rationalefor creatingGovernmentCompanies GCs were created as a part o f the public sector out o f the necessity to promote self-reliance in strategic sectors o f the economy. In UP, some Public Enterprises were established"' for taking over old and sick units o f the private sector with a view to protecting workers' interest and reviving these units while some enterprises were created to fulfill the requirements o f the Government o f India (GoI) and external agencies. Prior to the 1970s, UPhad 9 GCs. Almost 70 GCs were created inthe 1970s. 16 GCs were set up in the 1980s and 4 in the 1990s.A~at 31.03.2001, there were 98 GCs in the state o f which 14were transferred to Uttaranchal under the UP Re-organization Act, 2000. Out o f the 84 GCs, 44 are working while 40 are non working"'. Though the government corporate sector has expanded rapidly in terms of physical output and financial investments, productivity and profitability have declined. The reasons attributed include political interference, selection o f less than optimal technology or location, inefficient use o f resources, overstaffing and bureaucracy. The government became heavily involved innot only planning and guidinginvestment priorities, but in actually managing these enterprises. Since most of these enterprises operated as monopolies, there was no financial accountability or pressure to generate profits. The government became the sole provider o f funds and the sole arbiter o f allocation o f resources. Ultimately, the sector became financially and economically unviable. 111. Profileof GovernmentCompaniesinUttar Pradesh Most GCs are incorporated as public limited companies. None o f them have made any public offerings and are not listed on the stock exchanges. Majority shareholding inthe GCs is with the GoUP. GCs inU P function inthe following sectors : Social - development o f scheduled castedtribes, backward classes, minorities, women welfare etc. 0 Infrastructure & Utilities - power, industrial development, financing, construction etc. 0 Manufacturing & Services - sugar, textiles, cement, agri -implements etc. 'loUP Public EnterprisesiCorporations Reform Policy 2000 (Policy 2000) '11FromAG Audit report for 2002 86 IV. GoUP InvestmentinGCs: Over 86% of GoUP's investment is inthe following five GCs : Power Corporation Rajya Vidyut Utpadan Jal Vidyut Sugar Corporation PICUP A bulk of the state's investment is in the power sector followed by the sugar, textiles and financing sectors. The entire investment in the cement (Rs. 193 crores) and mining (Rs. 76 crores) sectors i s in non working companies. This i s also true o f the bulk o f investment in industry, textiles and area development. According to latest accounts1l2, only 9 GCs earned profits and of these only two declared dividends. 35 GCs made losses and in 22 o f these the accumulated losses were Rs 2192 crores + which exceeded the aggregate paid up o f Rs 913 crores. Despite the poor performance of the GCs, there has been continuingbudgetary support to them, details of which are given below. For 2001-200; Particulars Amount in Equity : Capital outgo I fromBudnet 1 I Loans given from budget 374.66 Grants/Subsidyfor : (i) Projects/programmes 1176.15 and schemes (ii) subsidies Other 6.68 I Total 2460.45 V. Strategyof GoUP for GCs GoUP's Policy 2000 acknowledges that the small size o f these enterprises renders them incapable o f facing competition following economic liberalization and globalization. Consequently, measures such as restructuring, disinvestment, privatization and closure have been considered to sustain viable enterprises and eliminate unviable ones. GoUP has set up the State Disinvestment Commission in January 2000 to examine the existing Public enterprises and recommend privatization, restructuring, mergers, amalgamations or closure depending on the situation of each PSE. The state has mandateda banon the creation o f new enterprises. The Disinvestment Commission is required to make recommendations to a Central Committee under the Chief Secretary, who has to examine these and then forward them to the concerned `12Per CAG audit report for 2002 87 Administrative Department which has to obtain Cabinet approval. Thereafter, a Working Committee has to ensure execution of the decision taken. Till date, 45 GCs have been referred to the Disinvestment Commission, of which recommendations on 25 GCs have been submittedto the GoUP. The major initiatives taken by GoUP under the above policy are : Auto Tractors Limitedwas sold to the private sector Sipani group. The unit could not be revivedand is lying closed. Units of Cement Corporation was initially sold to the private sector Dalmia groups. However, due to employee resistance, the sale was annulled. Recently, the units have beensold to the Birla group. Mineral Corporation, Chalchitra Nigam, UPTRON (an enterprise once having a national presence) and some other GCs have beenclosed. Tourism Corporation has initiated the process of selling/leasing some of its hotels and Sugar Corporation has advertisedfor the sale of some of its units. Given the pace of progress thus far, government ownership in GCs and budgetary support is likely to continue for several years to come and therefore attention must be paidto the processes that strengthen accountability. VI. PublicFinancialAccountability Framework i) Introduction There is an elaborate institutional and legal framework for ensuring financial accountability of GCs. The institutions involved inthe administration of GCs include the National Company Law Tribunal and Registrar of Companies (ROC)under which these companies are incorporated at the central level. At the state level, the Committee on Public Undertakings and Corporations (CoPU), Department of Public Enterprises (DPE), the respective Administrative Departments and Bureau of Public Enterprises (BPE) administer the functioning of these GCs. Each GC has its own Board of Directors and Chief Executive Officer (CEO) for the administration and management. The legal framework for governance of GCs includes provisions on financial reporting and accounting, auditing, roles and responsibilities of managements and i s generally set out in the relevant Act governing the GCs. ii) InstitutionalFramework The constituents of the institutional framework and their roles and responsibilities are set out in the sectionsthat follow: The National Company Law Tribunal (CLB) i s an independentquasijudicial body vested with the powers to inspect the books and records, call general meetings of shareholders 88 initiate investigations into the affairs o f companies and take decisions relating to revival, rehabilitation and winding up o f sick industrial companies. 0 The Registrar o f Companies (ROC) is vested with the responsibility o f registering companies and ensuring that they comply with the statutory requirements under the Act. The ROCalso serves as a registry o f records which are available for inspection by the public on payment o f prescribed fee. 0 A Committee on Public Undertakings and Corporations (CoPU) o f the Legislature has been constituted for examining the working o f GCs113.CoPUhas the mandate to examine the accounts o f the GCs, AG audit reports and to comment on the efficiency vis-a-vis management o f affairs in accordance with sound business principles and commercial practices. CoPU submits its report to both the Houses. 0 The Department of Public Enterprises (DPE) has the mandate to monitor and supervise GCs and prepare policies for their functioning. 0 Administrative Departments within GoUP have the overall responsibility for supervision o f the GCs under them. The departments decide the strategic policies for the GCs under them. Budgetary support to be extended to GCs is included in the budget o f the Administrative Departments. 0 The Bureau of Public Enterprises is a wing of the DPE with the mandate to act as a link between the GCs and the different administrative departments and advise the DPE in formulating government policy with respect to GCs. 0 The BPE has prescribed submission o f periodical reports on prescribed formats by the GCs. These reports are consolidated (department - wise) at the BPE, analysed and submitted to the government along with comments and recommendations for corrective action. These are also sent to the CEOs o f the concerned GC. The Director General BPE i s on the Board o f certain GCs and/or a member o f the Audit Committee. The BPE i s also an invitee inthe meetings o f the PUC. 0 The Boards o f Directors o f GCs are responsible for day to day management o f the company. iii) LegalFramework 0 Every GC is requiredto maintain books of account giving details o f all sums o f money received and spent, sales and purchases and assets and liabilities. For each accounting period ending 3 lSt March, GCs are required to prepare Balance Sheets and Profit and Loss accounts to reflect a true and fair picture o f the state o f affairs as at the year-end. These financial statements should comply with the Indian Accounting Standards and should be '13Also Statutory Corporations 89 prepared in accordance with Schedule VI o f the Companies Act. The Balance Sheets o f holding companies are requiredto include particulars o f subsidiaries. 0 The annual accounts should contain statutory disclosures by the Board on the state o f the company's affairs, material changes in the business during the year, qualifications o f auditors, Secretarial Certification Report, management's responses to auditors' observations and a statement o f Directors' Responsibility. Annual Accounts should be approved by the Board, signed by at least two Directors, including the Managing Director and be placed before the AGM within six months o f the end o f the financial year. Within thirty days of the date of the AGM, the accounts must be filed with the ROC. Stringent penalties are supposed to be imposed for noncompliance o f the above provisions' 14, 0 The accounts o f GCs are to be audited annually. The statutory auditors o f GCs are appointed by the Go1 on the recommendation o f the C A G from amongst the CAG's approved panel o f Chartered Accountants. The CAG has the power to conduct a supplementary or test audit o f GCs. Currently, such an audit i s conducted every year after the conclusion o f the statutory audit and a detailed review is conducted once every five years. Audit findings are communicatedto the head ofthe GC andthe concernedAdministrative Department, who are required to respond to the findings within six weeks. Subsequently, findings that are not settled are forwarded to the Principal SecretaryEecretary o f the Administrative Department seeking their comments within six weeks. Audit findings which are material in nature and those which indicate systemic weaknesses are included inthe yearly Commercial Reportissuedbythe CAG. 0 There is a mandatory requirement on public companies with paidup capital o f more than Rs. 5 crores to constitute an Audit Committee which also applies to GCs. ACs are required to discuss matters such as internal controls, audit observations and financial statements with the auditors. They are given the authority to investigate any o f these matters. 0 An annualreport on the working and affairs o f a GC are requiredto be placedbefore both Houses o f Parliament (incase the Go1i s a member) and/ or before the Legislature. 0 GCs are to report to their Board, the concerned Administrative Department and the BPE. 0 Monthly and Quarterly Progress Reports and Annual Flash Results are put up to the CEO and submittedto the Administrative Department and the BPE. iv) Workingof the PublicFinancialAccountabilitySysteminGCs `14Inpractisethis does not happen inUP. 90 0 Although the PSEs in UP have a vast and elaborate institutional and legal framework for assuring stakeholders, public perception o f accountability i s very poor . It i s widely believed that the exercise o f control by public representatives like politicians, ministers and civil servants handicaps accountability and results inthe decline o f the GCs. There i s also a general belief that Board members are nominated on the basis o f factors like affiliations to rulingparties rather than competence or experience. The term of CEOs o f GCs has either been short or the CEOs have been appointed on a temporary basis. This has eroded stability. Moreover, the Boards o f GCs including the Chairman and CEO are appointed by the government. 0 The Tables below present statistics regardingthe key positions inGCs: Profile o f Chairmanin34 working GCs: I Profile I Number of IProJile INumber I GCs of GCs Minister 4 Defence Services 1 I A S 27 Engineers 1 IPS 1 Profile Numberof Profile Number GCs o f GCs IAS 19 Provincial Civil Services 7 IPs 1 Engineers 5 Defence Services 1 Others 1 0 As is evident form the Table above, most GCs are headed by bureaucrats. This has undermined accountability o f these organizations as the officer heading the GC is often times related to the Administrative Department in some way. In other cases there are issues o f seniority and cadre between the head o f the GC and the Head o f the Administrative Department. 0 Recent experience in UP has shown that Boards o f GCs have not been able to keep pace with changing business environment. Board meetings are poorly attended and managements are apathetic to the survival o f these enterprises. 0 Corporate Governance can only be effective if the Board takes responsibility, demonstrates leadership and encourage integrity as an important element o f organizational culture. 0 Since GCs are not purely commercial undertaking, bottom lines and profit margins have traditionally not been considered barometers o f their performance. Inthe absence o f other comprehensive performance measures, GCs have not been able to do justice either to their 91 commercial or social objectives. In order to be perceived as effective undertakings, GCs have to be evaluated against some criteria which take into account both their commercial and development goals. It i s imperative that such criteria be evolved so as to facilitate the accountability o f GCs. N o n - working GCs are those that are under liquidation or defunct or non - operating. There are 37 non - working GCs (excluding GCs transferred to Uttaranchal), o f which 9 are under liquidation and one has been sold. Accounts in these GCs have not been finalised for the last several years, with the majority o f them not having submitted accounts for ten years or more. 0 One important instrumento f accountability i s the budgetwhich sets out expected levels o f expenditure and monitors against those. In some GCs, the budget is placed before the Board for its approval only after the state budget has been passed by the Legislature or substantially after the commencement o f the financial year. The manner o f presentation o f budgets varies inter GC and also GCs within a sector. Some GCs, though actually incurring losses, prepare budgets showing net surplus o f income over expenditure. This presents grave fiduciary concerns and points to flawed accounting practices. 0 The level o f assurance derived from accountability instruments like Audit Committees (AC) i s not forthcoming. Although statutorily about 25 working GCs are required to have ACs, not all have these. Where ACs exist, they are not efficient. GoUP should take measures to ensure that ACs are functional, vibrant entities that serve to strengthen transparency and accountability. It is seen that most of the GCs are unable to finalise their financial statements within the stipulated time frame or within reasonable time thereafter. As o f 30.09.2001, in 53 working GCs the arrears ranged from one year to 15 years, despite the C A G and BPE monitoring the position and appraising the concerned Administrative Ministries periodically. Coupled with the above situation, in some GCs even the accounts have not been written. Consequently, audit cannot be conducted timely (for the year ended 31.03.2001, only one GC submitted accounts for the year to the CAG for audit), information for strategic planning i s not available and the use o f public funds remains un- assessed. In cases where accounts are available after a considerable period o f time, the delayed results find limited purpose and the audit findings may not be capable o f resolution or may not result in the desired outcome. Consequently, in some GCs, no accounts have been placed before the AGM in the last three years or were placed at adjourned AGMs. Another accountability tool : internal audit has not achieved the desired results. Inhouse internal audit skills are not commensurate with requirements. In most GCs, neither does an internal audit manual exist nor has one been developed. Audit instructions and internal audit findings are not consolidatedand put up before the CEO or the Board. Often there i s no independent authority for review o f the adequacy and independence o f internal audit and the status o f follow - up and compliance o f audit findings. Since GCs have recently 92 constituted Audit Committees (ACs) in accordance with Section 292A o f the Act but the mandate o f these ACs i s illdefined. v. PotentialImprovementAgenda Adverse public perception should be addressed by disseminating the achievements made by the GCs, the problems faced by them and the measures taken by GoUP for improvement in their working, including accountability aspects. The public should be made aware o f the policies in these areas through wide publicity. These should be followed up through information on actual achievements. N o n working GCs should be shut down formally. The primary reason that closure cannot be effected is that most non working GCs have not finalized accounts for several years. This situation has assumed grave proportions and continuing budgetary support from GoUP i s going to these entities each year without any accountability o f the use o f that money. The closure o f non working GCs should be considered a priority and a cut off date for finalization o f accounts may be agreed by GoUP and within that date, accounts should be prepared ifnecessary by contracted staff and closure formalities completed. 0 The administrative ministry interacts with the GC only through its representative on the Board. It should be mandatory for this representative attend Board meetings and AGMs. An independent evaluation of the relationships between Administrative Departments and their respective reporting GCs shouldbecarried out. There should be continuity and stability in CEO appointments. Higher level appointments should be made on merit alone and should not be influenced by political considerations. 0 A highpoweredbody may be set up for advising GoUP on sound managerialpolicies and appointment o f top management posts. This practice exists in Go1 which has evolved a selection policy and PESB has taken initiatives to improve the selection process. 0 Appointment o f professionals on the Board should be encouraged, so that they bring in a new perspective to the entity. Experience o f persons employed at a senior level incentral GCs engaged in similar activities can be gained by appointing them on the Board as non Executive Directors. In several GCs, proposals pertaining to substantial capital expenditure, disposal and procurement are screened by committees before being recommended to the Board. Such a system needs to be encouraged and strengthened. GCs should establish functional working groups with knowledge o f subject matter which can vet proposals before they are accepted. 0 Performance measurement indicators should be evolved to cover both commercial and non commercial aspects o f performance. Criterion such as extent o f achievement o f organisational objectives, effective funds management and reduced dependence on budgetary assistance should be made a part o f performance measurement. 93 CoPU should initiate studies on subjects like procurement systems, levels o f adherence to Public Sector Accounting Standards andprevalent internal control mechanisms. 0 The capacity of the BPE should be strengthened so that it is able to effectively monitor areas like finalization o f accounts, implementation o f effective internal audit system and follow up o f audit reports among other things. BPE should prepare time bound action plans for monitoring areas that require improvement and deficiencies. The monitoring system o f BPE should be strengthened specifically inthe following areas : *:* Audit backlog and action taken to cover settle audit findings *:* Revenue realization *:* Repayment o fprincipal and payment o f interest to Government *:* Status o f guarantees issued by GoUP 0 Independence o f ACs should be given priority and induction o f non executive professionals as members could be considered to strengthen the functional capabilities o f these bodies. It should be ensured that all GCs which are required to have ACs have formed them and these bodies are functional. 0 There i s a need for adequate and expeditious resolution o f the CAG's audit findings. Each GC should fix clear lines o f responsibilities at all levels for timely and effective resolution o f audit findings and the position o f compliance should form part o f the agenda at each Boardmeeting. 0 A Task Force on Accounts may be constitutedat the level of BPEto monitor the position of preparation and finalisation o f accounts. The information in this respect is presently included in the financial reports submitted by GCs to the BPE. This Task Force should review the problems faced by GCs to cover up arrears, including shortage o f personnel or inadequate infrastructure. If required, the task o f data entry and collation could be outsourced, so that the work i s expeditiously completed. 0 Internal audit should be made visible. Clear instructions to internal audit staff should be issued and a mechanism for presenting the unresolved issues o f internal audit to the parent administrative department, BPE and top management o f the GC should be devised. The function should be adequately resourced and skill sets o f the staff should be commensurate with the size and nature o f the activity. 0 Budgets and Action Plans should be prepared and placed befQrethe Board prior to the commencement of the year or soon thereafter. These budgets should be realistically preparedand usedto monitor financial performance duringthe year. 0 Training for all echelons o f management should be carried out as a continuing activity. The responsibility for arranging training programs could be vested with BPE through state level institutions. 94 GovernmentCompanies inUttar Pradesh A. Working GovernmentCompanies B. Non Working Government - (other than subsidiaries) Companies (other than subsidiaries) Agriculture & Allied p. ProcessineCorn. Ltd. P.BhumiSudhar Nigam 11 " I Area Develop I U.P.MatsyaVikas NigamLtd. U.P.BundelkhandVikas NigamLtd. 1 I_ U.P.(Paschim) GannaBeeiEvamVikasNirzamLtd. 1111 U.P.PoorvanchalVikas NieamLtd. Y Y U.P.PoultryandLivestock Specialities Ltd. AllahabadMandalVikas NigamLtd. I__ // U.P.(Rohelkhand-Tarai)GannaBeejEvamVikas BareillyMandalVikas NigamLtd. IINieamLtd. II U.P.(Poorva) GannaBeejEvamVikasNigamLtd. Lucknow MandaliyaVikas NigamLtd. - U.P.(Madhva) GannaBeeiEvamVikas NigamLtd. /II/ Aera MandalVikas NieamLtd. GorakhpurMandalVikas NigamLtd. 11 Corpn. Ltd. ! ~ U.P. Samaj KalyanNirmanNigamLtd. Drugs, Chemicals& Pharmaceuticals The IndianTurpentineandRosinCompanyLtd. Electronics I Industrv U.P.Electronics Corpn.Ltd. Financing The PradeshiyaIndustrialandInvestmentCorpn. of U. I U.P. StateBrasswareCorp. Ltd. P.Ltd. U.P.Alpsankhyak Vittya Avam Vikas NigamLtd. U.P.StateIndustrialDevelopmentCorpn.Ltd. Handloom & Handicrafts Miscellaneous - U.P. State HandloomCorm Ltd. U.P. ChalchitraNieamLtd. 95 I U.P.Export Corpn. Ltd. U.P.Development SystemsCorpn.Ltd. U.P.Mahila KalyanNigamLtd. U.P.BhutpoorvaSainik KalyanNigamLtd. Power I/I U.P. I Power Coruoration Ltd. U.P.RajyaVidyut UtpadanNigamLtd. 11 U. I P. State Tourism Develooment Corm Ltd. Financing Handloom & Handicrafts 7 Industry U.P.DigitalsLtd. UPSIC PotteriesLtd. Power Kanpur Electric Supply 1E. GovernmentCompaniesunder 1 F. GovernmentCompaniestransferredto ~ liquidation Uttaranchal IndianBobbinCompanyLtd. Trans Cables Limited Gandak SmadeshKshetriyaVikas Nigam UP HillElectronics Corp. Limited Ltd. BhadohiWoollens Ltd. KumaonMandalVikas NigamLimited The Turpentine SubsidiaryIndustriesLtd. Garhwal MandalVikas NigamLimited 97 Name 98 Annex 9 PublicFinancialAccountability inStatutoryCorporationsandDevelopmentAuthoritiesin Uttar Pradesh I. Introduction In this Annex we assess the current institutional and legal framework o f public financial accountability in Statutory Corporations (SCs) and Development Authorities (DAs) in Uttar Pradesh (UP) and highlight the key issues which have an impact on sound financial accountability principles. SCs are enterprises that are established under a specific legislation containing their purpose, structure, powers and functions. They are body corporates having perpetual succession, a common seal and power to hold and dispose of property and can sue and be sued. They have autonomy and can invest, raise capital and borrow within the terms o f their statutes. SCs are required to act onbusiness principles. 11. Overview o f Statutory Corporations inUttar Pradesh InUP, there are seven SCs, of which, UPRTC, UPWC and UPFC have been established under central omnibus statutes and UPJN, UPFoC and UPAEVP under specific state enactments. UPEWC i s a society registered under the Societies Registration Act, 1860. The table below gives the profiles o f all the SCs inthe state. 111. Profile o f SCs Nameof the SC GoverningAct Activity Administrative Department UP State Road Road Transport Road Transport Transport Transport Corporation Act, 1950 Services Corporation (UPRTC) UP Financial State Financial IndustrialFinancing Industrial Corporation (UPFC) Corporation Act, 1951 Development UP State State Warehousing Warehousing Co-operative Warehousing Corporations Act, 1962 Corporation (UPWC) UP Jal Nigam (UPJL) U P Water Supply and Water Supply & Urban Sewerage Act, 1975 Sewerage Services Development UP Forest U P Forest Corporation Preservation, Forest Corporation (UPFoC) Act, 1974 Supervision & Development o f Forests UP State Employees Societies Registration Welfare o f employees Food & Civil Welfare Comoration Act. 1860 o f the state ISuvvlies 99 I Nameof the SC IGoverningAct 1Activity I AdministratGq Parishad (UPAEVP) Parishad Act, 1965 Urban Development All seven SCs are working corporations, but none o fthem had finalized their accounts for 2001- 2002 till September 2002'15. Out o f the four working SCs which finalized their accounts for previous years by Sept 2002, there were only two : UP State Warehousing Corporation and U P Avas Evam Vikas Parishad, which had earned profits for two or more successive years'I6. Despite poor performance and complete erosion o f paid up capital, the state government continued to provide financial support to these corporations inthe form o f contributions towards equity, further loans, conversion o f loans into equity and subsidies. Statistics regarding budgetary support provided by GoUP is summarized inthe table below '17: Particulars Year 2001-2002 (Rupees crores) Grants / Subsidy for : Projects/Programmes/Schemes 376.52 Other subsidy 2.05 Total outno 378.57 The accounts o f most o f the SCs were inarrears for many years ,the status o f which is presented inthe table below"*: Number of Year since Statutory which Corporations for they are which accounts pending are pending 2 1997-98 4 1999-00 1 2000-01 3 2001-02 'I5 As per the audit report of the CAG for March2002 'I6 As per the audit report of the CAG for March2002 'I7 "*CAG Audit Reportfor March2002, Chapter 1, page4 CAG Audit Reportfor March2002 100 IV. Public Financial Accountability Framework & Arrangements The institutional framework for ensuringaccountability i s set out below: i) Introduction SCs are govemed by the Acts under which they were constituted. The Acts governing SCs set out the purpose, constitution o f the Board, functions, powers and duties of the management, sources o f funds and other matters o f financial management, such as accounts, audits, and budgets. SCs are required to prepare annual budgets, maintain proper accounts and records and prepare an annual statement o f accounts, to have these accounts audited, prepare an annual report o f their activities and furnish returns, statistics and other information, in the manner prescribed. They are required to provide audited accounts and annual report to the GoUP to be laid before the State Legislature. Management The and management of SCs is vested with their Board which consists o f a Chairman and Directors, i s appointed in the manner prescribed and includes exofficio directors and elected representatives. The Board has to hold meetings during such tenure and in such manner as prescribed. Each SC has a Managing (or Executive) Director as the CEO and some have a Finance Director appointed by the state government. The roles and responsibilities of the Management are contained in the governing statute and GoUP's directives. The Board has the power to carry on functions o f the SC through Committees and delegate its powers to the CEO or other officers. The table below gives the profile o f the Chairman and CEO of the SCs inUP: Present profile o f Chairman and CEO in SCs Name o f the Profile o f Chairman sc Profile of CEO Indian Administrative Services Indian Administrative IUPFoC I Minister I Indian Forest Services 101 ii) Budgeting Budgetsare prepared by SCs (withthe exceptiono f UPFC) every year based on factors like level o f activity, previous year performance, expected budgetary support and inputs received from the field units. Budgets include planned capital expenditure, receipts, expenditures and expected profits or losses. Budget estimates for previous completed year and actuals for that year are also included for comparison. Insome SCs, estimates for the ongoing year and actual achievement up to the initiation o f the budgetfor the ensuing year are also given. The budget is approved by the CEO and the Board and forwarded to the GoUP for information and approval. Any shortfall in resources i s covered through provision o f demand for additional funds from GoUP and other stakeholders. Status of implementation of the budget is periodically put up before the Board and the top management. Re-appropriation and re-estimation can be done subject to certain conditions and approval o f the competent authority. One good practise example i s the budget prepared by UPWC which contains detailed write ups, i s supported by tables based on estimations o f capital outlays, recurring and non recurring expenditure, expected revenue generation and receipts from the state treasury. iii) Accounting Accounts are normally prepared on double entry system using the accrual basis o f accounting (although some SCs like UPAEVP are in the process o f adopting such as a system). Most SCs have a decentralised system o f accounting wherein accounts are kept at the divisional level where accounts staff have been deployed. The field units periodically send accounting statements on prescribed formats to the head office for final consolidation. Although computers are usedat head offices accounting at the divisional level i s generally manual. iv) Financial Reporting SCs prepare annual accounts in the manner prescribed in their respective Acts. These accounts along with the auditors' report are put up to the Board for their consideration and thereafter forwarded to GoUP. SCs also prepare an Annual Report on the performance o f their duties under respective statutes. The Annual Accounts and Report are placed before the State Legislature. SCs also submit statements and returns to GoUP. These include monthly or quarterly Progress Reports and Annual Flash Reports to the BPE. v) Statutory Audit The statutory audit arrangements o f SCs are contained intheir governing statutes. A summary of the audit arrangements inthe different SCs i s presented inthe Table below: 102 Statutory Audit arrangements inSCs Name of the Audit Name of the SC Audit arrangements sc arrangements UPRTC UPFC By Chartered Accountants appointed by GoUP in consultation with CAG. Supplementary audit by CAG on own motion or on Sole audit by request by GoUP, and if CAG. state government i s requiredto make payment I of amounts guaranteed. UPWC By Chartered Accountants and supplementary audit by CAG. UPFoC By Examiner, LocalFunds UPAEVP Accounts and CAG at the reauest of the Governor. The auditors are required to give their opinion on whether the accounts present a true and fair picture. vi) InternalAudit Most SCs have established Internal Audit sections where audit i s carried out on annual basis by Audit Officers. There is an absence of Audit Committees (although UPRTC has established an audit sub committee of the Board) and separate internal audit manuals. Instructions for internal audit are contained either in the Accounts Manuals or are issued separately by the heads of internal audit. Audit reports are made available to the audited units for their comments and based on the compliance are put upto top managementfor action. Efficient internal audit departments exist in UPRTC where 22 internal audit cells have been established: 1each of the 18 regions, 2 at the workshops and 2 at the Head office. There are 10 Audit Officers who conduct audit of the units allotted to them on a quarterly basis, by rotation. Audit checklists containing about 30 points are prepared and included inthe Accounts Manual. Audit Officers at the regions are also generally membersofthe Regional PurchaseCommittee. A sub committee of the Boardhas beenformed for considering the position of outstanding internal audit observations and conducting quarterly reviews of these before presenting them to the Board. The function of internal audit is working very well in UPJN also where the internal audit wing consists of 11auditors. These officers carry out the audit of 188 divisions, 10zones and the head * As per the rules, audit i s to be done by a firm of practicing CharteredAccountants 103 office. Internal audit instructions are contained in the Accounts Manual. Audit programs are decided by the Auditors and then recorded ina Circle Register. Eachauditteam consists of about 3 persons. Auditedunits are given a time frame of 6 months for compliance. vii) Oversight Arrangements The Annual Accounts of SCs are to be placed before the State Legislature. CoPU is empowered to examine these documents. SCs are requiredto follow the policy directives of the GoUP. Some statutes of SCs empower GoUP to make enquiries into the workings o f SCs and in the circumstances where they are found not to be following the instructions GoUP can supersede the Boardand appoint a newBoard (as has beendone inUPFC) or takeover the administration of the company (as has been done inUPRTC). V. Workingof the PublicFinancialAccountabilitySystem Principal financial management issues emerging inthe existing framework and arrangements in SCs are set out inthe sections that follow: i) Management There have been frequent changes inthe top management of the SCs and especially inthe high level posts of Chairman and Managing Director. This affects the working of the SCs and also contravenesthe directive of GoUP which requires that the minimumtenure o f three years be kept for these high level posts. An example of these frequent changes i s the fact that during the last five years, eight personshave heldthe post of Managing Director inUPFoC and four inUPFC. ii) AnnualAccounts Annual Accounts are prepared by SCs in the manner as prescribed by GoUP. A review of the accounting policies is requiredto align them with the accounting standards issued by the ICAI. There have been delays in finalization of accounts. For the year ended 31.03.2001, none of the SCs could provide accounts for that year to CAG for audit. UPRTC, UPFC and UPWC provided accounts for 1999-2000, UPFoC and UPJN for 1998-99 and UPAEP for 1994-95. UPEWC has not providedany accountsto CAG since 1997-98, when audit was entrusted to the CAG. There i s no Accounting Manual in UPWC and UPEWC and that in UPJN was prepared in the late seventies. Disclosure of contingent liabilities and guarantees provided by GoUP i s inadequate in some SCs. InUPRTC, as at 31.03.2002, there are 17429 (16510 as at 31.03.2001) legal cases pending invarious courts against it.However, the liability on account of such cases is stated as indeterminate. UPJN does not quantify its contingent liability for disclosure in the annual accounts. iii) Budget Budgeting practices in GCs are lacking. In some GCs, the budget i s placed before the Board for its approval only after the state budget has been passed by the Legislature or after the commencement of the financial year (UPEWC, UPWC and UPFoC). UPFC does not prepare a 104 budgetand inUPEWC the budget for 2002-03 shows an expected loss o f Rs. 88.00 lacs without a provision for meetingthis loss. iv) Internal Audit The system o f internal audit in SCs needs to be formalised. There is currently no internal audit manual and no formal reporting to top management i s done. In most SCs, the function i s inadequately resourced in terms o f available capacity and number o f auditable units. As a consequence not all units are covered every year and follow up o f audit findings i s weak. Audit i s generally i s transaction based and does not focus on underlying systems weaknesses. The skills level o f the auditors are not adequate to carry out specialised tasks such as Works Audit. Functions o f auditors are subject to change and auditors are sometimes placed in accounts. Audit findings are not placedbefore the BoardinSCs such as UPWC, UPEWC and UPJN. As an example of the status of this function, the case of UPRTC may be considered where the, internal audit cell consists o f 10 Audit Officers who are expected to conduct the internal audit at the 118 depots, 18 regions, 2 workshops and the head office. 6397 audit paras are outstandingso far inUPRTC. InUPJN, internal audit staff consists o f 9 Auditors and 2 Audit Officers placed at the head office for conduct of audit at 118 divisions, 10 zones, other offices and head office. An auditable unit i s covered once in2 or 3 years and even thena test audit i s conducted. v) Budgetary Support GoUP i s extending budgetary support by way o f grants to the SCs. However, improvements in accountability are not set as pre conditions for support. Given the fact that there are arrears in finalisation o f accounts and serious observations o f the statutory auditors/CAG, support should be predicatedon performance . vi) InternalControl System Internal control systems with respect to adjustment o f personal balances, inventory management, physical verification of assets and reconciliation o f inter office accounts need to be streamlined. As anexample, inUPRTC, there was a debit balance of Rs. 506.94 crores and a credit balance of Rs. 501.17 crores on 31.03.02. 105 VI. PotentialImprovementAgenda A broad framework of recommendations has been developed to address these issues. These are set out inthe sectionthat follows: i) Management The tenure o f the Chairman and CEO should be long enoughto ensure stability and continuity in decision making and inimplementingkey decisions. ii) Accounts All accounts pending finalization should be expeditiously finalized. A Task Force on Accounts may be constituted in SCs to monitor the position o f preparation and finalisation o f accounts and to cover up arrears. The Task Force may also study the manner o f presentation and disclosure in similar entities in other states and recommend for their adoption to GoUP. The Task Force may include an accounting professional for expert advice. Placing C A G audit reports inthe Legislature All audit reports issued by the CAG have to be placedinthe Legislature, but inthe case of most SCs, audit reports o f many years are pending placement. GoUP should take steps to place all AG reports before the Legislature to ensure accountability'19. iii) Budget SCs should be encouraged to prepare budgets on time and place them before the Board prior to the commencement ofthe concerned year or soon thereafter. The use ofbudgets as a mechanism o f control should be recognised and amendments and re-appropriation should be put up before the Board for approval. iv) Audit Committee Audit Committees should be constituted in the SCs under a written charter as an independent body to oversee internal audit arrangement, status o f audit follow up and finalisation o f accounts. Independence o f the Audit Committee should be given due priority and induction o f non - executive professionals as members may be considered. GoUP may consider setting up an apex Audit Committee (jointly for GCs and SCs) headed by the Director General, BPE and including the Secretaries o f Administrative Department by rotation, a representative o f the AG (Commercial) and an audit professional. v) Internal Audit Internal audit should be real and visible and be well placed inthe organizational hierarchy. The internal audit function should be adequately resourced and the skill sets o f the staff should be commensurate with the size and nature o f the activity. It should also be ensured that internal CAG Audit Reportfor 2002 106 auditors periodically upgrade their skills to adapt newer audit methods and procedures so as to improve audit coverage. In SCs which have technical functions (like UPJN and UPFoC), technical audit may be considered. vi) Internal Control Systems Internal Control systems should be reviewed and revamped inthe areas o f reconciliation o f inter office, personal accounts and physical verification. Special reviews could be initiated in these areas through experts. vii) Role o f CoPU CoPU should initiate studies on horizontal subjects such as procurement systems, financial management and internal control systems. viii) Role o f BPE The capacity o f the BPE should be strengthened so that it is able to effectively monitor various areas o f financial management like finalization o f accounts, effective internal audit systems and follow up o f audit reports. The monitoring system o f the BPE should be further strengthened to include the status o f : Audit backlog and actiontakento cover up arrears Revenue realization Repayment o f principal and payment o f interest to Government Status o f guarantees issued by GoUP ix) Training Regular training o f accounts and audit staff should be carried out on a regular basis and should be made compulsory. x) Conclusion While the accountability framework for SCs is vast and adequate, there need for the rules to be implemented. There i s no dearth o f legal provisions on financial accountability inthe respective Acts o f the SCs. Regular financial reporting, finalization o f accounts, effective internal controls, prudent fund management, efficient internal audit and regular and long serving staff are all components o f accountability. The onus o f ensuring that these systems are applied and find users rest with GoUP and SCs themselves. Imperative to engendering strong accountability are incentives for performance and penalties for nonperformance. 107 Annex 10 PublicInterest Litigation Public interest litigation began to emerge in India around the late 1970s and early 1980s when the Indian judiciary responded in a sympathetic way to the initiatives o f Indian social action groups, journalists and scholars. It became possible for any member o f the public, not only public interest groups, to initiate litigation by merely addressing a letter to ajudge. Inthis way a number o f public interest issues affecting prisoners, workers and children were brought to the attention o f the court. Three features came to characterize this litigation inIndia: An expansion o f the doctrine of standing (locus standi) which permitted any bona fide petitioner to bring matters o f public interest before the court. The petitioner was not required to show that he or she was personally affected 0 Dispensing with formal court procedures for the commencement o f such actions. Actions could be initiated by writing a letter to the court, and this would be converted into a formal petition and notice issued on the respondent 0 The use o f novel methods to gather facts. Often the court appointed a socio-legal commission o f inquiry to investigate the disputed facts and submit a report to the court. This litigation has beenreferredto as public interest litigation (PIL) or social action litigation. In developing this litigation the Supreme Court o f India has argued that court procedures must be deformalized to enable all segments o f society to have access to the courts. Most disadvantaged and economically underprivileged groups lack the capacity to approach the courts on their own, thus the court should permit non-governmental organizations and public interest groups to litigate on their behalf. The use o f PIL has expanded. A dynamic relationship has developed between investigative journalism and PIL, where both PIL petitioners and the court have drawn on newspaper reports intheir identification o f issues. Expenditures from the Contingencies Fundare the subject of a PIL in March 2003. The Allahabad High Court ordered a special audit by the CAG. Another example i s the enforcement o f environmental regulations. After a prolonged legal battle, the court ordered the U P Pollution Control Board to monitor Ganges river water quality monthly, and set up a special audit to investigate how money had been spent under the Ganga Action Plan Phase I.Several firms that did not have primary effluent treatment plants were closed. The results have beendramatic: biochemical oxygen demand (BOD) has fallen from 9 mg/l to 4 mg/l. Sources: International Environmental Law Research Center (www,ierlc.org,), Rakesh Jaiswal (www.aubum.edu) and Times o f India, 14 March 2003. 108 d 0 0 e4 521 > c, E 0 2 3 4 L 3 23 0 3 9 Q) c .I p3 % u ph a s0a 2a m Q EQEl0 t .I c, E3 E, a s 2 p3 c, Q L 5 e m T I-r 7- I L 4 4 4 2 3 3 3 3 5 3 5 2 5 .e 8 E Z 8 T 3 3p m ; 3c Z 6 2 0 - 1s c.l N 2 23 E P 2 Z d