Report No. 29346-IN India - Orissa State Financial Accountability Assessment May 30, 2004 Financial Management Unit South Asia Region Document of the World Bank LISTOFACRONYMS alphabetically listed AG State Accountant General AP Andhra Pradesh BCC BackwardClass Citizens CAG Comptroller andAuditor-General CCA Common CadreAudit CFAA Country FinancialAccountability Assessment COPU Committee on Public Undertakings cos0 Committee of SponsoringOrganization ofthe Treadway Commission CPAR Country ProcurementAssessment Report DDOs DrawingandDisbursing Officers DFID UnitedKindgdom's Departmentfor InternationalDevelopment DPCS Comptroller andAuditor General's (Duties, Powers and Conditions of Service) Act, 1971 DRDA DistrictRural DevelopmentAgency FD FinanceDepartment FY FiscalYear GFRs GeneralFinancialRules Go1 GovernmentofIndia Go0 GovernmentofOrissa GP GramaPanchayat:Village-level tier ofthe PanchayatiRaj Institution IFAC-PSC InternationalFederationofAccountants, Public Sector Committee IM InitiatingMemorandum INTOSAI InternationalOrganizationof Supreme Audit Institutions IPSAs InternationalPublic Sector Accounting Standards LAD LocalArea Development LFA Local FundAuditor MINFIN DepartmentofFinance MLAs Membersofthe LegislativeAssembly MOP Memorandumto the President OERL OrissaEconomic Revival Creditnoan PAC Public Accounts Committee PFA Public FinancialAccountability PIL Public Interest Litigation PRD PanchayatRaj Department PRI PanchayatRaj Institution PS PanchayatSamiti: Block-level tier ofthe PanchayatiRaj Institution RBI Reserve Bank of India sc ScheduledCaste SFAA State FinancialAccountability Assessment SLA State Legislative Assembly ST ScheduledTribe TI TransparencyInternational uc UtilizationCertificate UP Uttar Pradesh U&HD Urban & HousingDevelopment ULB UrbanLocalBodies ZP Zilla Parishad: District-level tier ofthe PanchayatiRaj Institution ACKNOWLEDGEMlENT This Assessment has been prepared by a SARFM task team led by Vinod Sahgal and Manvinder Mamak under the overall guidance of Ian Mackintosh (SARFM). The core team comprised of Aruna Bagchee (DFID), Colin Clark (DFID), Supriya Pattanayak (DFID), Ivor Beazely (SARFM), P. K. Subramanian (SARFM), Vinaya V. Vemuri (SARFM), Nisha Peris (SARFM), Marina Wes (SASPR), Mohan Nagarajan (SASPR), SanthanamKrishnan(SAWS) andUpasanaVarma (SASPR). The core team worked with the help of consultants from Orissa, Delhi and Washington. Uche Mbanefo guided the development o f this Report. Advisors includedKapil Kapoor, V. J. Ravishankar, Salvatore Schiavo-Campo, Stephen Howes. The Assessmentbenefited from the peer reviews conducted by Amal Ganguli, JohnHegarty, Michael L.0.Stevens, Mozammal Hoque, Nicola Smithers and SovanKanungo. The Assessment benefited from a range of discussions with stakeholders at Orissa including senior officials of the Go0 leadby A. K. Tripathy, K.C. Badu, P.K. Mishraand S. S. Patnaik. The Accountants General o f the office of the CAG of India located at Orissa were extremely helpful inpointing the team to sources of information included in the annualreports o f the CAG of India. PREFACE The authors of a 1999 World Bankworking paper concluded that there "is new empirical evidence that governance matters, inthe sense that there is a causal relationship for good governance to better development outcomes such as higher per capita incomes, lower infantmortality andhigher literacy." In essence, good governance depends on establishing effective checks and balances on the exercise of official power, thereby holding public officials accountable so that they become true servants of the public they are supposed to serve. And transparency is the handmaid of financial accountability and control o f the public purse. Too little attention has been paid to this fundamental prerequisite. The performance o f public agencies should be publicly tracked and measured against clearly established benchmarks. This Assessment outlines ways to help such accountability mechanisms. It also points to the relationship between fiscal andfiduciary risk inthe context of democratic governance. As an example, the Public Accounts Committee of the United Kingdom noted in their Report on the Proper Conduct of Public Business that what was needed was "...a fiamework ... (which) must include effective systems of control and accountability, and above all responsible attitudes on the part of those handlingpublic money. Itis important that the drive to provide improved services at reduced costs should be sustained and that this drive should not be stifled byunnecessarybureaucracy. At such time it is even more essential to maintain honesty in the spending of public money and to ensure that traditional public sector values are not neglected inthe effort to maximize economy and efficiency." The Government of Orissa believes that permanentimprovements inpublic expenditure management will become possible only when the current fiscal crisis i s resolved, but initial steps are necessaryto put inplace the foundation for improving the budgetary and financial accountability systems critical for managing the fiduciary risk at Orissa. The SFAA for Orissa has been prepared for the Government o f Orissa in coordination with the Department of Finance at Bhubaneshwar and with the approval of the Government of India. Officials of DFID participated in the key deliberations on this Assessment. Valuable suggestions on an on-going basis were provided by the GOO.The DepartmentofFinance inBhubaneshwar concurs withthe mainanalysis, conclusions and recommendations o fthis Report as well as the accuracy ofthe information provided. The Assessment includes recommendations which are aimed at assisting the Go0 in preparinga DevelopmentAction Planfor strengthening public financial accountability. For more information, please contact Mr. Vinod Sahgal at the World Bank (vsahgal@,worldbank.or@. TABLE OF CONTENTS Pg. Nos. Executivesummary i - xi Action plan xii - xix Chapter I Introduction andBackground A. Introduction 1 B. The Stateofthe State 3 C. Background 8 ChapterII BudgetPreparation andApproval A. InstitutionalFramework 11 ' B. BudgetConstructionandApproval 11 C. Legislative Scrutiny andApproval 12 D. Characteristicsofthe Budget 12 E. Comprehensiveness 13 F. Realism 13 G. Other BudgetPreparationIssues 14 H. Staffing Issues 15 I.OrissaStateBudgetReforms 15 J. ConclusionsandRecommendations 15 Chapter III BudgetImplementation and Monitoring A. InstitutionalFramework 18 B. BudgetImplementation 18 C. CashManagement 19 D. RevenueIssues 20 E. Asset Management 21 F. DebtManagement 21 G. Contingent Liabilities 22 H. BudgetDocumentationandReporting 22 I.StaffingIssues 23 J. ConclusionsandRecommendations 23 Chapter IV Internal Control and InternalAudit A. Internal Control 25 B. InternalAudit 27 C. Staffing Issues 29 D. ConclusionsandRecommendations 29 Pg. Nos. ChapterV Accounting and FinancialReporting A. Institutional Framework 31 B. Accounting andReportingProcedures 31 C. Accounting Standards 33 D. Staffing Issues 35 E. StateReformPlans 35 F. Conclusions andRecobmendations 35 ChapterVI Panchayat Raj Institutions (Rural Local Bodies) A. Institutional Framework 37 B. FinancialRelationships andFlows 37 C. Financial Accountability Arrangements 38 D. Conclusions andRecommendations 40 ChapterVII Urban LocalBodies A. InstitutionalFramework 42 B. Budgetary Process 43 C. Monitoring 43 D. Accounts 44 E. Audit 44 F. Strengths 44 G. Weaknesses 45 H. Conclusions andRecommendations 45 ChapterVIII State Owned Enterprises (Statutory Boards and Authorities and Public Enterprises) A. InstitutionalFramework 47 B. FinancialRelationships andFlows 47 C. Accounts 48 D. Working Results 48 E. ReformProcess 49 F. Accountability 50 G. Conclusions andRecommendations 51 Pg. Nos. ChapterIX ExternalAudit A. Institutional Framework 54 B. Scopeof CoverageofPublic Audit 54 C. Reportinglevel, Audit Reports andTransparency 55 D. Vision andMissionof StatePublicAudit 55 E. CAG's AuditingStandards 55 F. Strategic Audit PlanandCustomized Audit Plans 56 G. Audit Types andApproach 56 H. AuditReports 56 I.QualityReview 57 J. Strengths 57 K. ImpactandFollowUp 57 L. Opportunities for Improvement 58 M. Conclusions andRecommendations 59 ChapterX LegislativeScrutiny and Oversight A. InstitutionalFramework 61 B. Mandate andProcess 61 C. The Composition ofthe Legislative Committees 61 D. Reportsofthe Committees andFollowUp 62 E. TheRoleofthe Accountant General(Audit) 62 F. Strengths ofthe System 62 G. Weaknesses ofthe System 62 H. Conclusions andRecommendations 64 ChapterXI Fiduciary Risk A. The Objective 66 B. FiduciaryRisk Methodologyof OECD andDFID 66 C. Evidence from World Bank-FinancedProjects 66 D. IndependentAssessmentsofPerceivedLevelsof Corruption 67 E. The Analysis inthis Report 68 Annexes Bibliography List of documents consulted -- List 72 o fpersonsmet 76 Appendix Development Action Planunder SFAA 79 ORISSA STATE: STATE FINANCIALACCOUNTABILITY ASSESSMENT (SFAA) EXECUTIVESUMMARY 1. The Country Assistance Strategy for India places emphasis on the need for modernizing public financial management and accountability systems and undertaking such diagnostic work as necessaryto help build Government's capacity for better public sector management and external scrutiny. Itcalls for SFAAs to be carried out inall States where programmatic adjustment loans are being prepared in support of reforms associated with the management of the fiscal and fiduciary risks. Where feasible other donors are invited to participate. And Government is encouraged to help formulate a specific time bound development plan for implementing the recommendations o f the Assessment. 2. Of India's 14 major States, Orissa has the second lowest per capita income and a growth rate o f 3% against the national average o f 5-6% per annum. The revenue deficit and fiscal deficit increased significantly over the years and stood, as of March31/02, at Rs. 28 billion and Rs. 39 billion respectively (inprevious year at Rs. 19 billion and Rs. 33 billion respectively) indicating the worsening financial position of the State. Capital expenditure for FY 02 is merely 8% of total expenditure. Interest payments consumed most of the State's own tax revenue. The State's ownrevenue base, as inthe caseofother IndianStates, is too limitedto support major improvement without central government and /or external assistance at least in the short and medium terrn. The State's own revenue comprises less thanhalf oftotal revenue receipts. 3. The Debt burden is considered to be excessive. The Government's debt stock is equivalent to more than half of the total annual production of Orissa - for the rest o f the country this ratio i s below 25%. 4. The trend in growth of the Net State Domestic Product since 1996-97 has been around 12% p.a. whereas the outstanding fiscal liabilities have increased by 19% pa. With the debt burdeno f Rs. 280 billion at March31, 2002 (Rs 120 billion at March 31, 1998), it i s not an exaggeration to say that Orissa like many other Indian States' is in a fiscal crisis. Salaries, pensions and interest payments now more than exhaust total revenues, at 180% of the State's own revenues. The authorities are facing a 'financial crunch' in the very practical sense of finding it difficult to pay the government's bills. Liquidity management overshadows almost all development efforts. The need for substantial Debt relief is under discussion with Government of India, as is the need to eliminate the revenue deficit. I Corresponding figures for remaining States in India are not very different. For example, in Kamataka, the trend in growth of the Net State DomesticProduct since 1996-97 has been around 12.49YOp.a. whereas the outstandingfiscal liabilities have increased by 18.65 YOp.a., as per datapublished in- StateFinances-A Critical Appraisal, A Research Paper Published by Intemational Centre for Information Systems and Audit (iCISA) Office of the Comptroller & Auditor Generalof India. 5. There is an issue of legislative control of the public purse'. An estimated Rs 68 billion o f accumulated "excess" expenditure (incurred by the government beyond budget allocations pointingto excessive mismatchbetween receipts and expenditures as well as - cases o f diversion of funds between budget heads) remained to be authorized by the legislature as requiredby the Constitution o fIndia. 6. Government of Orissa i s developing a robust reform programme, several major policy decisions have beentaken and implementation has beguninsome important areas such as Service delivery and decentralization, anti-corruption, administrative and civil service reform, and public financial accountability. Implementation of certain key reforms will be necessaryon a priority basis especially for civil service redeployment and right sizing without which fiscal crisis cannot be properly addressed. Similarly it will be necessary to complete the power sector reforms underway, further rationalize user charges, enhance tax and non-tax revenue andnegotiate debt relief with the center. There i s now a clear need to formalize a medium term fiscal framework (2002-07) that incorporates the above kinds of measures. Itwill also be necessaryto broaden the reform programme to include a capacity building component under the Chief Secretary's umbrage, on financialmanagementandpublic accountability. 7. The above reforms on the fiscal side are fully consistent with recommendations for strengthening financial management and public accountability being proposed in this Report. The Go0 i s aware that financial accountability inOrissa needs to be at par with best performing States. It also recognizes that improved financial control of public finances and capacity for safeguarding its assets will enhance growth and reduce poverty inthe years ahead. 8. This Assessment is designed to ascertain and help miti ate the extent to which public fimds in Orissa State are exposed to the fiduciary risk o f being applied (1) to 8 purposes other than those for which they are intendedor (2) without due consideration o f economy and efficiency. It is argued that the success of the State's recent reform efforts aimed to improve its fiscal position is linked to the extent to which its fiduciary risk i s mitigated. 9. The SFAAwas carried out duringthe periodFebruaryto May 2003 bythe Bankand DFIDinconsultationwiththe GOO. 10. The Go0 is commended for suggestingthat the Assessmentbeconducted inas open a manner as possible andthat the results be disseminated widely. * Over thelastthree years the amount of excess increasedfrom Rs 12billion inFY 98-99 to Rs39 billion inFY 99-00 andfurther to Rs64 billionby FY 00-01. The Bank'sCharter (Article 111SectionV (b) ofIDA3 Articles of Agreement) specifiesthat: The bank shall make " arrangements to ensure that the proceeds of any loan are used only for the purposes for which the loan was granted, with due attentionto considerations of economy and efficiency and without regardto political or other non-economic influencesor considerations". Inaddition, DFID's definition of fiduciary riskrefers to value for money as an important consideration. 11 11. The IndianConstitution and related central government-determined laws, rules and standards govern most of the key areas of public sector financial management and accountability such as budgeting, accounting, reporting and external audit. The State has neverthelesssufficient scope to manage andaccount for its resources, and so to determine the level of fiduciary risk to which they are exposed. Our analysis, as well as our recommendations for improving Orissa's management of public resources, fully reflects this juxtaposition of centrally driven precept and state- implemented management practice. 12. As a result o f the gap betweenprecept andpractice revealed by the analyses inthis Report, and illustrated particularly in Chapter XI, the fiduciary risk to public funds in Orissa is considered significant. The Go0 concurs with this assessment. The immediate problem is not so much with laws, rules, regulations, and standards, although these are not always in line with the most modern national and international practice. The main problem is the failure to effectively implement the spirit behind existing laws, rules and regulations governing basic financial management standards and public accountability procedures, such as the preparation of timely accounts and reconciliations and follow up action on known deficiencies, many o f which do compare favorably with the recognized principles supporting best practice inIndiaandother commonwealth countries. 13. The SFAA points to the need for capacity building in almost every significant aspect ofpublic financial accountability4. Specifically: 14. In budget preparation and approval the legal and institutional framework being applied at Orissa compares favorably with international as well as Indian best practice. Strengths include a well-established process, generally timely budget preparation, and an increasingly informative andrealistic budget presentation. 15. Orissa's Budget has not been operating as a tool for effective management control. The fiscal deficit for FY 02 was 22% above Budget Estimates. 16. Opportunities for substantial systemic improvement exist in areas of enhancing budget realism, particularly in forecasting of all major sources of revenue and receipts; the need to disclose in the Budget Estimates departmental objectives and outputs in addition to funding requirements, improved disclosure of fiscal risk, major assumptions, andcontingent andother liabilities such as pensions; tax expenditures (ifsignificant) and improved legislative scrutiny o f the budgetbefore it i s approved. Sufficient time could be allowed for a more informed debate on the budget and if necessary a vote on account could be obtained for meeting the requirements for the initial months o f the fiscal year. The system of budgeting should be capable of fostering not only fiscal discipline, but The overall concept of Public FinancialAccountability has been derived from Study 13 o f IFAC Governance in the - Public Sector: A Governing Body Perspective; August 2001. IFAC endorses principles o f governance including openness, integrity andaccountability. iii "allocative" and "use" efficiency as well - which calls for immediate improvements to the management and controlprocesses. 17. Inbudget implementation and monitoring, the legal and regulatory framework is reasonably sound; systems and structures are well established; the Go0 has sufficient access to technical andfinancial assistance; ongoing revenue monitoring has commenced, and so have proactive debt management and controls, in particular, the issuance of guarantees. 18. The implementation o f the budget is marked by numerous distortions, many o f which are traceable to the lack of realism in budget preparation, particularly revenue estimation, The central problem is shortfall in receipts leading to a liquidity crunch. Budgetvs. Actual variationis significant. 19. Opportunities for further improvement remain in the areas of revenue assessment and collection; cash management; reporting on departmental outputs linked with budget inputs; promotion of departmental ownership of budgets; incidence of large "overspending" and "under-spending" in appropriations; and evaluation capacity for lessonslearned. 20. The legall regulatory/ institutional framework for internal control and internal audit also compares favorably with the rest o f India, but less so with international best practice. For instance, cash inflows are difficult to predict, and risk management has not in the past been a driving force for control over transactions with major financial implications. And most importantly, payments are made without reference to the availability o fbudget. 21. There is room for improvement in control over tax assessment and collection. Inputsratherthanoutputs, andoutcomes are over emphasizedinthe day-to-day operating environment. Control o f the payroll may be one area o f risk that warrants attention given overstaffing across the government. Strict control over transactions and Civil Deposits inthe Public Account is another. Control over guarantees however has been tightened recently. A concerted effort i s being made to reduce unnecessary new hirings. Responsibilities of controlling officers and their FinancialAdvisors are well defined, and Secretaries (departmental heads) visit districts and projects. There i s increased emphasis on the disclosure of physical progress in utilization certificates supporting claims for reimbursement of funds. 22. The institution of "Financial Advisors" in individual Departments has become largely ineffective. The incidence of internal control weaknesses is reported to be largely unchecked. There is, inadequate articulation and disclosure o f specific departmental goals and objectives and how well they are achieved, lack o f formal risk management through computerized integrated financial management information systems including exception reporting for highrisk areas such as cost and productivity associated with the payroll; no departmental audit committees to mitigate fiduciary risk; internal audit does not report directly to the departmental heads; and departmental accounts are often not iv reconciled monthly. In addition, asset management is very rudimentary across the government andthe public sector. 23. Accounting and financial reporting rules comply with well-established national requirements, but not with International Public Sector Accounting Standards(IPSAS) for cash based accounting and financial reporting. Assets and Liabilities are not fully recorded. As a result the true andfair financial positionofthe State is not beingpresented to the public inthe State's Annual Accounts. The Go0 has full authority to improve its internal accounting and financial reporting arrangements. The State i s encouraged to promulgate its standards of accounting inline with its requirements for decision making at each major department. `Accounts at a Glance' - a recent innovation in public disclosure o f the State's finances- is reasonably informative on trends in government expenditure. It is an important step inthe right direction. Financial reporting formats are however unnecessarily complex. The information couldbe presentedina more simplified manner for Orissa's citizens. The current practice o f reporting the State's deficit using numerous indicators reducesthe overallunderstandability ofthis document. For example, providing four indicators for deficit may be more than necessary, i.e., Primary Deficit, Fiscal Deficit, RevenueDeficit andBudgetary Deficit (refer `Accounts at a Glance') 24. There is room for improvement in the whole area o f net-worked computerization across departments linked to the Accountant General (AG); discontinuance o f the practice of holdingfunds outside the consolidated fundo fthe State to avoid their lapsing; providing explanations for large "overspending" and "under-spending"; more timeliness in financial reporting; and the need to place simplified monthly departmental and aggregate quarterly financial statementson the web. 25. The legal/ regulatory framework for the financial management of State Owned Enterprises (SOEs) i s reasonably sound, but again, as in so many other links in the financial accountability chain, is not functioning as intended. Information on the status andneeds ofthe SOEs includingthose that should beprivatizedhasbeencompiled, anda reform process has been commenced. Its progress however i s somewhat mixed. The will to enforce accountability is not evident. There is much room for improving corporate governance andpublic accountability. 26. The autonomy of the SOEs that will remaininthe public sector is not fully assured. This is a serious limitation. Boards do not meet modern requirements of corporate governance and members are often appointed based on political affiliation rather than business competence5. The tenure o f senior managers is also a consideration. The frequency o f changes at senior levels i s perceived to be unnecessarily high. Business plans are not readily accessible; performance reporting including reporting against established benchmarks is often lacking. Some believethat there is serious doubt on whether people with business competencecan be persuadedto join such Boards unless the entire way of operating these enterprises is changed. Further, there would seem to be major constraintson the remunerationthat can be paid to attract and compensatethe right kindof people. Overcoming this requiresserious political as well as bureaucratic commitment. V 27. There are audit committees inhighrisk areas such as the power sector, but they do not adequately pursue issues relating to serious audit qualifications and their impact on the financial statements, nor do they focus the State's attention on the extensive weaknesses in internal control and internal audit at SOEs. Further, there are no periodic reports for the legislature on the extent to which SOEs meet their performance goals and the objectives o f public policy; annual audited financial statements are often incomplete and grossly in arrears, despite increasing computerization; audit reports are nearly all heavily qualified; and executive response and follow up to external audit and the Committee for legislative oversight viz. the Committee on Public Undertakings (COPU) recommendations is not timely. The recommendations o f this Assessment, if implemented, would strengthen the quality of corporate governance and operating performance o f these entities. For example, the importance of more timely and proper accounting andauditing arrangements. 28. While the State has passedthe requisite supporting legislationfor the functioning of Rural Local Bodies (Panchayat Raj Institutions) (RLBs or PFUs inHindi), the State's excessive involvement in their operations and unavailability o f adequate financial resources is slowing up the pace o f devolution relative to other Indian States such as Kamataka. 29. Financial accountability is getting due attention through on-going field visits; but resources available to PlUs to manage their affairs are inadequate to handle all the functions delegated to them by the State; there is an inadequate data base to determine PRIs aggregate financial position, or their operational outputs; external audits are heavily in arrear; there is a great need for training and computerization; and more importantly government officers, even in areas such as health and education, are not held fully accountable for their performance to locally elected representatives o f the communities they serve. 30. Urban Local Bodies (ULBs) are self-governed, but not self-financed. Information with the State on the functioning of ULBs in terms of their operating performance is sparse. This may be because the ULBs themselves do not have such information readily available. Basic accounting records and formats have been established, so have detailed procedural controls for incurring and recording transactions. Many ULBs are however not usingprescribedrecords/formats and are not adhering to detailed procedural controls. Budgetsarenormallypreparedannually. 31. The ULBs own revenue base is very weak; the transparency of their financial position is hamperedby the lack o f auditedfinancial statements showing their assets and liabilities; and there are arrears in independent auditing o f their cash transactions. Auditors' reports indicate highfiduciary risk. There is considerable scope for training and computerization of accounting records andthe need to introduce double entry accounting andmoremodernmanagementpractices iswidely accepted. 32. ExternalAudit of Go0 accounts (as of all government accounts inIndia) is carried out by the CAG - an independent constitutional authority. The legal framework for vi external audit is sound, and assures a level of independence and objectivity, comparable with some ofthe best systems inthe world. Reports are increasingly relevant, objective, material, comprehensive and accurate. These reports, as inthe case of other States, point towards high fiduciary risk to public funds on account of weakness in internal control includingthose associatedwithpoverty reductionprograms inrural areas. 33. Opportunities for further improvement exist inareas of timeliness, constructiveness, balance, greater emphasis on systems rather than individual transactions, and on preventive rather than solely detective measures. The Reports are not having the desired impact on the quality of Orissa's managementof public resources. The greatest weakness i s poor follow up and response to audit findings by the Executive. In addition there i s a perceived lack of sufficient civil society interest in or debate on audit findings, and insufficient ongoing dialogue between the auditors and the departmental heads on concrete ways to improve public sector management and reduce fiduciary and fiscal risks. The Go0 has indicated that the CAG should encouragea more modem approach to public audit reportingthat requires the auditor's overall opinion on areas covered by audit to be stated along with individual irregularities in line with the evolution in international practice. 34. Legislative Scrutiny of public finances is based on an established institutional framework that is well implemented in a non-partisan, independent, and unanimous manner. Media coverage has been increasing. Its impact is, however, severely limited by the failure o f the Executive to respond to the Public Accounts Committee (PAC) and the Committee on Public Undertakings (COPU) in a timely manner, the often dated subject matter reviewed by the Committees and reported upon by these Committees, limited research capacity for analyzing the cause of the problems uncovered, and most importantly, the in camera hearings with limited civil society or presence of technical expertise at their proceedings. Capacity building o f the Committee's researchsupport i s a highpriority. 35. Access to Financial Information. The functioning of the Government and its agencies has been characterized by lack of transparency and accountability across India partly due to the entrenched culture of bureaucratic secrecy underpinned by a long standing Official Secrets Act (OSA) and the government's detailed rules and limited public pressurefor improving the quality and cost o f service delivery. Inthis environment a system o f governance and accountability prevails where sharing o f financial information, on matters such as procurement and tax collection, among others, with civil society is often limited. It is in this context that the need to enhance public's ability to access Government financial information is crucial for ensuringparticipatory, transparent andaccountable governance. 36. Speedy public access to financial information electronically has been widely accepted as a basic prerequisite for the effective functioning o f good governance in democratic societies; there would be lessons to be learned from other IndianStates such as Andhra Pradesh and Kamataka as well as the central government that are gradually movingforward inthis relatively newareao fpublic governance. vii 37. We believe that substantive improvements in implementation suggested in this Report will depend as much on technical improvements to systems that clearly require immediate bureaucratic attention, as on the demand from the public for better performance in terms of cost effective service delivery - whether in the State's power, health and education sectors or other local government services such as clean water, public distribution of foodto the poorest ofthe poor, mass education andtransportation. 38. To reflect India's centrally-mandated, but State-implemented fiduciary and management framework, the recommendations to strengthen Orissa's capacity for the management o f its public resources and at the same time reduce fiduciary risk can be divided into four categories as follows: 0 Category A: Fivekey themes that cut across government which we believe would have the greatest impact in improving public financial management and accountability. Pursuit o f these Category A areas is recommended as areas that require the highestpriority attention. 0 Category B: Actions the Go0 can take within 1year to 3 years, without the need for Central Government approval. 0 Category C: Other actions that could take 2 years or longer which do not require Central Government approval. 0 CateFory D: Actions that would require Central Government approval or concurrence. Pursuitof the above approach(Category A themes) cuts acrosspractically all the aspects of public financial accountability and fiduciary risk discussed inthis Report. They, and Categories B, C and D recommended actions are included in the list o f main recommendations attachedto this summary. Strategyfor theDevelopmentAction Plan (DAP) 39. The Orissa SFAA team encourages the Go0 to take the next step to formulate the Development Action Plan (DAP) resultingfrom this assessment. This approach has the following advantages: 0 The Go0 is more likely to ownthe DAP ithasprepared; 0 The DAP is more likely to take account of any on-going public financial managementreformprogram; 0 The DAP is more likely to take full cognizance of the implementation capacity available inthe GOO,especially withregardto realistic time estimates; and 0 The DAP is more likely to be actually implemented, instead of remainingjust a planonpaper. 40. Like almost all similar Assessments this SFAA has given rise to more than 70 recommendations. The Orissa SFAA team has in consultation with GOO,identified the five most critical cross cutting themes from this study likely to have the most profound viii impact on public financial management and fiduciary risk in the State, and strongly recommends them to Go0 for early consideration. These are the Category A items. Categories ByC, and D recommendations (also attachedto this Executive Summary), are providedto assist the Go0 establish priorities and plans for implementation. This step is expectedto be completed bythe Go0 by Septemberof 2003. Cross cutting Themes Integrity and Financial discipline-Enforcement 0 Enforce more consistently and effectively prevailing laws, rules, & regulations pertaining to public sector financial management Improve enforcement o f existing laws and regulations relating to assessment and collection of revenue, expenditure, timely finalization of accounts at all levels of government including for example response to inspection reports and audit paragraphs, PAC and COPU requests, and recommendations and enforcement of penalties for non- compliance where appropriate. However, responses should be directed towards overcoming and preventing repetition of shortcomings cited, and not merely defensive explanations o f commissions and omissions. Reward those public servants that do regularly comply with the spirit ofthe laws andregulations governing public expenditure management. They should be encouraged with appropriate incentives, sufficient resources and fullpublic acknowledgement oftheir performance. Quality of Financial Information Computerization - 0 Prepare, and begin to implement, a step-by-step program designed to create computerized accounting and management information systems to support performance based accounting, tracking, monitoring, reporting and evaluation across government departmentsandagencies Elements of this program might include, for example: investment in modern computerized accounting and management information systems across departments and agencies; computerization and net-working of the treasuries accounting and management information systems o f the State Government, linking them with the AG's accounting and financial reporting system; and computerization of the accounting systems of PRIs, ULBsandSOEs as necessary. Mindset that accepts openness- Transparency 0 Open government's financial information and decision-making processes to civil society inline with evolving best practice inother IndianStates. Provide Orissa's civil society greater and more speedy access to financial information in line with evolving best practice in States such as Rajasthan, Delhi, Karnataka and Maharashtra. Implement greater transparency, disclosure, performance orientation, and ix openness in both reporting and dissemination of financial and physical outputs' information across all the major areas o f financial accountability discussed inthis report (budgeting, accounting, financial reporting, internal control and audit, external audit, legislative scrutiny, and the management of PFUs, ULBs, and SOEs). Accountability of Secretaries to the Government6-Chief Accounting Offers 0 Hold "controlling officers" answerable for the operating performance o f their departments, including action taken in response to public audit and legislative scrutiny, inline withthe statedresponsibilities o f secretariesto the government. Make all controlling officers (Secretaries to the Government) fully answerable to the public for mitigating fiduciary risk associated with all material transactions under their jurisdiction. Increasing the personal accountability o f departmental secretaries is crucial not only as an incentive to their own better performance, but as protection against the occasional political pressures. This would involve for example clarifying the accountability o f the bureaucracy as distinct from Ministers for meeting departmental objectives with due regard for economy and efficiency over and above the meeting o f spending limits. Inaddition, buildtrust among all the key stakeholders involvedwith the management o f public resources. For example, by the State Government relaxing its operational control over PRIs, with commensurate improvements in capacity for managing fiduciary risk so that devolution to the third level(s) of government may proceed as intended. The Chief Secretaryis seen as the source for future leadership inthis area7. Capacity Building - Ability & willingness to accept change and moveforward with conviction 0 Develop a dedicated capacity building program for implementing the recommendations ofthis Report Designandimplement a dedicatedcapacity buildingprogram(under the leadership ofthe Chief Minister) for strengthening public financial accountability o f controlling officers and the quality of their management of resources. This would include clarification of accountability relationships and reporting requirements and simplification of existing rules and regulations, management and staff training programs, provision o f appropriate tools for implementation o f new information systems etc. with support from national and if necessary international resources, to implement all the four areas listed above. The state would benefit from the lead being taken by other Indian States that are in the Research Paper on Accountability of Secretary to Government of India prepared by the Consortium for Financial managementof Public Systems, New DelhiIndia 'The - 2003 Transactionof Business Rules pointto the involvementof the Chief Secretaryincrucial decisionmakingareas of the Government. His role as the Headof the Administrative Cadre as well as Secretary to the Cabinet placeshim in a positionof privilege to exercisecontrol andpromotepublic financial accountability. The Chief Secretary could lead an institutionalized review mechanism in the matters such as financial discipline, performance monitoring, response to externalaudit and improvedfunctionsof FinancialAdvisors. X process o f modernizing their public financial accountability systems andrelated incentive structures. 41. A substantial commitment and sustained effort over several years will be required withthe backing of strong political and administrative will. An effective focal point for capacity building within Go0 needs to be identifiedby the Chief Minister inconsultation with the Chief Secretary to facilitate the development and implementation of a time bound action plan (DAP) for implementing the recommendations of this Assessment, including, the five key themes identified and described in detail above as Category A items emergingfrom this SFAA. xi Attachment to the Executive Summary The prewiling system of accountability of the Executive to the Legislature, arid of the Legislator to the people needs strengthening, to ensure adequate compliance with piinciples of sound fitiancial iiiamgernent to secure optimal utilization of public funds. The success of the autioii plat1proposed below will depend on the support provided bq the I'liief Minister, the Speaker of the Assembly and the Chief Secretary ofthe State of(Srissa The ti00 is requested to piepareaid iinpkeinenl a Developnmit Action lf1su1(DAP), duly prioritized, time-fianied and costed. with i i ~ l ~ ~ e ~ ~ e iresponsibility for each action assignedto a specific office. The five thanes Wed below as i t a ~ i o n C'akgory A are remorninendedto the Go0 for considelation inthe preparation ofthe DAP _____- _-_- I___ __-- ____ __- - --- ------ __ - -- I_--. I__ Category A ('ross ruttingthemes: Improvements expected to have the Highest Impact on Financial Accountability and Fiduciary Risk -----Recommended to the G o 0 as core to the Development Action PlaGDPj- --- - Improve the enforcement of existing laws and regulations, including. far example, i'ttsponse to inspection reports aid audit paragraphs, PAC' and COPU requests, recommendations and aiforcenient of penalties for non-conipliance. 9 Preparc and iinplernelit a program for the step-by-step con~puterj~~ioii net\vorking of the accounting and systems o frlie State Ciciveniinenl, the PRls, ULBsand SOEs, and linking t%13 with C"A0systems Implement greater tmnsparmcy. disclosure. result and perfiw"e oriel n, and opejilress in reportmg aid dissemination of financial and output infomiati discussed in this iqort. budgeting, accounting, financial rep PAC' andh'OPI1 activities, PRIs, IJLBs, and SOEs, Wold "controlling officers" answerable for the operating pa of including action taken in response to public audit aid legislative scrutiny, in tl1e ies of' secretwies ro rlte govemtnent, lnipleinent a capacity buildingprogram, including stafltrainitig. ~ u p p ~with consultants. and other resources r t to implemen~the DAP preparedbythe (io0as a result ofthis SFAA. xii - Category B Actions Orissa State Government ('an lnitiale Immediatelj Without Ventral Government Appro\al. - - _- --- ----- -.-rYearto3E!!rs ~ ~ _l_l__II__ I_____ 1 , Ascertain whai specific progress has been achieved in implementing the government measures described in the WhitePaper ofOctober2000. specifically. a) presentani~ualexpenditureprojections for the inediuni term to the Legislature, enhancedrevenue forecastingprocedures are instituted, and hvernnient oficers in budget fonimlation, tax adininistlliljoti and budget nionitoriag; 2. Ensure thar a11 central govemtnent funds destined for projects in Orissn State (including official external Flltiding) have started flowing through the Orissa Cioverninentbudget and are beingmanaged by the State: 3, Iniiiate the procedure (if involving the line departments. iiicludi finaicial advisers in the hudget;zry processinore intensively, inorder to share the ownership ofthe bu 4, Formst realistically on the following when preparing the Budget Estimates, while recognizing the constraintimposedby the Centre: a) external assistance; and b) tax and non-tax revenue receipts; 5. Suggest to the Speaker o f the Assetnbly that Subject Committees in the Assernhly are made innre effective by endowing thein with the attributes of Sirzlidhg Conitnitteesin the Centrid Cloven~nient,as described in this chapter. Deparuiients of Educdon. Public Health & Works inay &so be hrougjil in for exanr~natjo~i by the Subject L'onunittees, and 6, Provide sufficient time for a m r e infornieddebate on the budget and ifnecessary avote on account could be ed for tneetitigthe requirementsfor the initial nionths ofthe fiscal year. 1, Train and build aw~reiiessto replacebudgetary optimism with a more conservative apprcmeli: 2. Set up a tax research unit in the Delrsrfnieiit of Finance, to enable the introduciion of a more scientific method fur forecasting State revenues, 3. Train staff in the specific areas of mid teiin fnrecmting of revenues, scientific revenue estirnatittn, and preparation of perfonnance budgetsand perfonnance I 4. Enhancerevenueby betler enforcement. Further, tighten the assessment procedures, fix respcxkhility 011 the cttticers md take action agaitist oflicials respoiisible for specific cases o f utiderassessmentpointed aut in the CAWSreports: 5 Reduceincidence o f Excessesand Savings; and 6' Disclosemajor assumptionsaid high risk areas, aiid atso fully disclose contingent liabilities and the actuarial evaluation of pension obligations inthe years to come. as apatl ofthe budget docitinent 7 take steps to prevent defieient asset management, which leads to infructciuslwasteful expenditure. which inay be caused by inefficiency as muchas beingan indicator of conuption. xiii 1. Speedupthe re\ iew ofrules andregulationsas proposedby the Orissa~ o ~ ~ n mWhite Paper of 2002: e ~ i t 2, hplen~eiitiaithklly the existingrules and regulations, Rhileawaitingthe resultsofthe review; e more 1:ormnal Risk Managem exceptionreportin uaterly Analysis and Report ombetweeiiBudgetandActu sicai and Financial), 5. Involve FinancialAdvisors in all significant financial managementdecisions; 4 a1Audit reportdirectly 1.and 7 Imoderninternalauditt 1' counts should be psovi ent of ihe idated statement eminent as a whole sh d budget i s of the close ol. 2. in six months how to reconcile or write off unrec treasuries, andothers agencies osoffices, 3. ue unnecessarytransfers solidated Account to "Depo nblic Account. 4. within six months followin of the tiscttl year and 5. Disclosein the Annual Approprktion Accounts Explanationsfor SavingsandExcess(Grants), and 6. 1 inparativeinforination for 1 ngyear inalt annual financial tS I Expediteaudits,startclearingarrearsandtakefollow-upaction and do not reflect the accrued liabilities. 111 this regard, improve completeness and tiineliaess of Cash Accounts and account for the assets ofthest: bodies in a manner consistentwith the requirementsfor sound audh reports beforethe Coun atimely basisand akoid future dit of the IJLBs: and 3 The Housingand UrbanDevelopmentdepament shouldpresent a consolidatedpicture o f the financial and physical perfimntmceofthe ULBs.This rqmrt shouldbetabledinthe legislatureonan arinualbasis. xiv 1 Detine clearly the spec objectives o f the companies atld corporations When these include the achievement of certain so gods, there shouldbe a clear iwognitioit and stataiieiit ofthe related costs for the properappreciation of the financial andoperatingperfoiniaiice ofthe 2. Make businessplans visible and available on a timely basisfar state goveminent review; 3 Monitor tlie SOEs more effectively Key perforinance indicators should be identified and periodical repot~s ohtained and reviewed Tlie number of such perfbmiance indicators should be kept sinall. Kevieu rneettiigs sliould be chaired by the Secretary of the line departnienc, at which the representative o f the E)eparttneitt of I'ublic Enterprisesshouldhe a regular invitee; 4. 1,auncli a crash prcqpniine to biiiig the acc~iiiit~of the entities up to date. l k e accounts that are produced and presented should be transparent, any te~ldenc}towards proliferation of notes shouldbe discouraged The notes should generail) state the accounting policies adopred, deviation therefrom and such odiei matters as needexplaining: S lnsist that the effed of any qualifications, observations and coii~inentsof extenial auditors on the .norking results and financial positiari shoutd be clearly stated When such qualifications, obseriations aid notes rendei the external auditors opinion ineffective, there should be no hesitafictn in denying ai opinion on the accounts, 6. Establisheffective audit coiiiniiitees as mandated by the recentfy proposedamendment to the Act, 7 Discourage and curb the practice of appointing Members of the Legislative Assembly {MLAs) to the office of Chairperson, this has tlie potential to erode the autonoiny of' the Chveminent companies and blurs the lines ofaccountability, 8 Respond better to external audit as well as the recommeiidations o f the legislative conzitlittee individuals should be held accountiahle for their action Senior Government hnctioneriesshotrid be held accountablefor failure to enforce accountwbility; 9, Cause managements to introduce greater traiisparency in the Annual Repcrrts to the shareholders which should Ire a candid assessrnent of the achievenienis arid failures. slrengths and weaknesses o f the ennteiprise, aid its systems along with measures that are being talien to iniprove the c)rgaiization's financial and operatingperformance; 10 Publish an annual public enterprise survey This should inter alia give fhe exfait of` Government financial involvement in the tiovemnzent companies and corporations, their state of acouiits aiirl working results, achievement (if objectives, results o f external audit, r e c o ~ n ~ n ~ ~ ~o~f the~ jlegislative comnnttee and a ( ~ n s follow up action taken. The survey should he a public docunient freely available and also put on the State (iovemnient website, atid 1I, Appoint ChiefExecutivesand directors through traisparenl seleclicrn processwith a 3-5 years tenure in order to inditct professionalswith proven track record. xv 1, Senior officers shoul the progress of settlenient o g inspection reports aid paragraphs 2, 1 comment on responsivenes I 3. Officers of the Accountant General (Audit) and the Governmentdepartmentsshould jointly review the pre- sider whether these still nee 4 countable for their acts of 6 commission: aid action and acts as a deterrent goin es andwrong doings, 5. The AG (Audit) should write inana&ein~i~tletters to the Secretaries of the Government departments eveiy quarter pointing out the cases of serious financial irregularities wd system failures noticed during inspections. The ietteqs) should include the follow up action talcen audit obsewations. y, quarterly meetings shoul the AG (Atidit).an ittvatved departtmentalSecr 6 Strengthenrelationshipwith AGs inorder to. 1 Improve ccmstructiveness aid timeliness of external audit report; Ensureen steins rathei than individ s; and 1 Initiete pr rhmdetectivemeasures. 1. o he laid down and f'llo 2. Suggest to the Speiiker that Committees may catisider adoption of a similar procedure of examination o ent Reports. `The Coniini discuss the most recent rep CAC as a matter of e principle of "last iiifir@o to addressthe issue, 3. Include in the wiiu cers, an assessment of the response to the audit 4' Provide the Committees with s e a a i a l assistarice at suficiently superior levels commensurate with the o f issues dealt with by the ent of expexts on short term may be considered: 5. Suggest to the Speak emhm of the Committees e longer tenure; continuity at one third of the member year: and 6, Civil society should he sensitizedaid involved inthe accountability process, Transparencyhas its undoubted advantages In more annual report o f lh one hy the Vomnitrees co be presented IO the Hous e members and any cons d by them, Both these I tvementofthe civil socie ublic accountahilig, xvi l.lll-...-----.---- -- -- __....-I.---. - . _ _ . __II__ .- .-."_.-.I- Category C' Other Actions Whirh do not require Central Governmetit Approval, but which may or may not require External Assislance. ____.I _..._l-_ll.l_... --I., 2 yealsr.longer-.._.--.- .- .- . . ____ ___I_ tput/results infairnation and accounting fix results ti>colqitement the cui~ent,purely financial budgeting, to facilitate the assessment of the extent to which results of public expeliditwe are being achieved; and 2 Disclose inthe Budget Estimates' a) intendedoutputsinthe Demandsfor Cirants. 11) tax expenditure (ifsignificant); and c) assessment ofFiscal Risk includingimpact of delayeddecision making at the Centre 1, 13ocimtenttlie reasons for the rnmy hudget iinplenietitation distortions and problems associated with cash management, with a view to graduallyrenioving them, 2 Further, build evaluation capacily for lessons learned; 3 Kelax political pressureon the stuff involwd in the preparation ofthe hudget; aid 4 Prepare and disseminateperforniance budgets and mid-term reports on budget iiiiplementation at least oiice every 6 niorithsina innreuser-friendly format 1. Require all finance cadre officers to spend some lime in their career working as fitlance advisers or heading interiial audit units; and 2. Introducea system ofrewards for merit, andtake timely action in cases ofnegligence or dereliction of dull -" - ~ - I C'oniputerize dieSlate'saccountingsystemandnetworkit with theACi's office; and 2 Providetraining for existing staff' xvii I Transfer ail State(3ovenmentfunctionariesworkingon1WstothePRls, andinthe interimniakeState officials answerabteto litcnl electedrepresentatives; 2, Provide PRIswith the funds coniniensumtewith the fundioiis aidaugmen e capacity ofrhe PRIs to: m raisetheir own levels ofreveiiues; and learn fiarn the experiences of other States, where the accountability of PKIs is increasingly defined in terms of sector outcomes and increased delegation of planning. implementation. monitoring aid eviiluatiotl to the local go.vemments: 3 Computerize data base mi AggregateFinanciaiPosiiiun and Opemtional Uutpulsof PRls i ~ provideon-line ~ d public access to this data base: and 4, Review the need foi and siniplify the accounting, controls, reporting. auditing arrangements iuid training a view io iniproviixgthe effectiveness of the finan4 tnanagenicnt cost effectivenessof introducing c ( ? m p ~ ~ ~ e rati ~each(level ~ f ~ i i -- *- \*-__^ ^_I 1 Generate greater internal reveiiuesto narrow the tax gap 111 addition, the o ofperiodical revision of rates of the property tax sl~ouldbeexercised; 2 Enhanceown revenue base; 3 Introduceaccrwal basedaccounting, puterize the accounting system and rrcords ofthe llLl3s; and 5. Train employees of ULBs in more inodem financial nianagenient techniques associated vrith the need fur more cost eRective service delivery -- _Lu-x M I ",---- ~ 1 Establish an miis leitgth refatiatiship between the Cioiemineat and the COI latter should have coniplete operational freedoin in retuxit for hllpublic fin on it time11 basis, 2 Allow the managements sufficiently lungtenures to perfonri effectively and to be held to The role o f Cioverninent noniiiiee directors should be clearly spelt out for deteiiniuing the awo o f such dtrectors; arid 3 Cause the nia~iagernentsto introduce inodem inanagenioit practices, strengthen internal controls ineludirig intemal audit andbringthem on par with the best national pmtices 1 C'hrify the finaulcial accountability of Ministers as distinct From the C'ontrollingOEcers of depaTments and agenczes ofthe Go0 xviii I I I, AdditionofaclauseintheC'AG's(DPL'S)Act, 1971tomakeitobligatoryfordeparttneiitalofticers10reply to draft audit paragraphswithin the stipulated time %ame xix xx CHAPTER I INTRODUCTIONAND BACKGROUND A. INTRODUCTION 1. The Country Assistance Strategy for India places emphasis on the need for modernizing public financial accountability and undertaking such diagnostic work as necessary to help build the country's capacity for better public sector management and public scrutiny. It calls for State Financial Accountability Assessments (SFAAs) to be carried out inall states where programmatic adjustment loans are beingprepared.Similar SFAAs are beingundertakeninUttar Pradesh(UP), Karnataka andAndhra Pradesh(AP). 2. A primarypurpose ofthis SFAA is to explore avenues for capacity buildinginareas of public financial accountability' of greatestrelevance to the State's reform agenda. This Assessment i s designed to ascertainand help mitigate the extent to which public funds in Orissa State are exposed to the fiduciary risk of being applied (1) to purposes other than those for which they are intended or (2) without due consideration to economy and efficiency. It is argued that the success of the State's recent reform efforts aimed at improvingits fiscal positionis linkedto the extent to which its fiduciary risk i s mitigated. 3. Fiduciary risk and financial accountability inOrissa State are governed by centrally- determined laws and rules in such key matters as budgeting format, classifications and procedures; accounting regulations; financial reporting formats and conventions; and external audit, Yet the State, by the way it implements the centrally-determined structure and norms, has full powers to manage its resources, and so to determine the level of fiduciary risk to which they are exposed. 4. To reflect the co-existence of centrally-determined precept and locally-implemented practice noted above, our analysis will, wherever possible, try to distinguish between those factors within the State's control and those which are not. Similarly, our recommendations, and particularly the approach to the development of an Action Plan resultingfrom them, will respectthis important distinction. 5. The specific objectives of the SFAA as defined in the Initiating Memorandum of January 2003 are: 0 Provide systematically conducted analytical work and enhance the knowledge base on the public accountability arrangementsinthe State; 0 Provide a forum for informed debates and discussions and thereby build a commonunderstandingo fthe key fiduciary anddevelopment issues, and facilitate informeddecision makingon the improvement programs; and 0 Support the exercise o f Bank's fiduciary responsibilities by identifying the strengths and weaknesses of accountability arrangements inthe public sector and * The overall concept of Public FinancialAccountability has been derivedfrom Study 13 of IFAC Governance inthe - Public Sector: A Governing Body Perspective; August 2001. IFAC endorses principles of governance including openness, integrity andaccountability. the risks they pose to the use of public and Bank/ donor funds in the context o f investment andadjustmentlending. 6. The IMwas approvedby Bank managementinJanuary 2003. Itwas based on (1) a preliminaryassessment of the systems of financial accountability' undertaken inAugust 2002, (2) subsequent discussions on the preliminary assessment with the Government of Orissa (GOO),(3) ongoing collaboration with DFID and (4) consultation with a number of stakeholders in Orissa including the accounting professions, officials o f the Comptroller and Auditor General (CAG) o f India located in Orissa and selected State legislators includingthe Speaker o f the Assembly. The approval for the IMwas based on the implicit understandingthat the Assessment should be concluded inthe WB fiscal year (FY) 03 on a phase one basis with a follow up in FY 04 to include "drill downs" as necessary inareas of highestrisk such as the power sector, health, payroll, etc. 7. A Special Secretary inthe DepartmentofFinance was appointed byGo0 to leadthe Assessment on behalf of the State. This Assessment was undertaken with the consent o f the Government of India (GoI). Officials provided advice to the SFAA team on an on- going basis during the conduct of the Assessment. The WB and the United Kingdom's Department for Intemational Development (DFID) recommended to the Go0 that a stakeholders workshop be heldwith private sector and civil society participation to guide the SFAA and assist the formulation o f GOO'SDevelopment Action Plan. The detailed work for the SFAA was undertaken by SAFWM with the assistance o f local and national consultants selected in consultation with Go0 and one international consultant". The Assessment was carried out during the period February to May 2003. The work representsa collaborative effort o f GOO,DFIDandthe WB". 8. The Go0 i s commended for suggesting that the Assessment be conducted inas open a manner as possible andthat the results be disseminated widely. 9. The main sources of information for this Assessment include the (1) the Constitutiono f India (2) Legislationgoverning the powers, duties, etc, relatingto the role of the CAG o f India; (3) Rules of Procedure and Conduct of Business inThe Orissa State Legislative Assembly (SLA) relating to legislative scrutiny o f the public purse; (4) Subordinate legislation, and financial rules and regulations governing the raising, use, accounting and internal control o f public funds and related responsibilities of officials regardingfinancial transactions incurred by the State and its autonomous bodies such as the public sector undertakings and enterprises; (5) legislation, rules and regulations governing rural and urban local government bodies; (6) Review of public documents and previous studies available at the Bank and other donor studies, as well as publications such as periodic white papers provided to the Bank by public sector officials; and (7) Discussions with stakeholders including concemed senior officials on procedures DraftFiduciaryNote SARFMNovember2002 lo coreSFAAteamconsistedof VinodSahgal,ManvinderManx& NishaPeris(SARFM),ColinClarke(DFID), The DharamVir, RajagopalanRamanathan, PakanatiRao, RamaRao, NyayapathyRao, Ullal Bhat, Vikesh Mehta,Seema Sachdev ( IndiannationalConsultants) andUcheMbanefo ( intemationalconsultant ). There are no other major intemationaldonors at Orissa,apart from DFID. 2 followed for budget preparation, budget execution, financial management, reporting, audit and subsequent scrutiny arrangements. B. THE STATEOFTHE STATE 10. Located on India's east coast, between West Bengal and Andhra Pradesh, Orissa is today the poorest of India's 14 major states, despite its rich endowment o f mineral wealth, forests, lakes, rivers and lengthy coastline, and a rich and ancient history with vast untapped potential for both cultural and eco-tourism. With a population o f 35 million, almost half of who are below the official poverty line, annual per capita income inthe state today (about US$250 compared with all India's US$480) is the same as in Rajasthan and Madhya Pradesh 15 years ago, and Uttar Pradesh almost 10 years ago. Orissa has fallen behind the rest of India, experiencing slower economic growth since 1970, and especially in the 1990s. The poverty headcount (FY 00 47% compared with India's 26%) declined by 10 percentage points between 1987 and 1993, but progress slowed down between 1993 and 1999, insharp contrast with developments inIndia as a whole. The poor in Orissa suffer from a dearth of income earning opportunities, inadequate basic public services, frequent natural disasters, and entrenched relations of social exclusion. The Scheduled Tribes (STs) constitute 22% of the total population in Orissa (compared to 8% inIndia) and 40% o f the poor inthe state. Regional disparity i s marked, with a relatively well-off coastal area, having historically benefited more from trade and public investment, and an extremely poor and isolated interior, populated largelybytribal forest dwellers. Figure 1: Total Receiptsfor FY 2001- 02 (Actuals) - Rs 112 billion i 3 Table 1: RupeeComes From(ConsolidatedFund) 2001-2002 Source: Government of Orissa `Accountsat a Glance2001-2002' Figure2:Total Expenditurefor FY2001 02 (Actual) - Rs - 112 billion Merest Payments ._._._.-.-.-.-._._._._._._._. I on Revenue i Investmentbyway of ! f Capital Expenditure is f i 8% ofTotal 1 Disbursementof ! Expenditure I I .._._._._._._._._._._._I_._._.I es Revenue expenditure 64% 8% Table 2: Rupee Goes Out (Consolidated Fund) 2001-2002 Source:Government ofOrissa `Accounts at aGlance2001-2002' '*Definition of `Capital Expenditure' as given inPara 297 of Chapter 16, SectionI1of The OrissaGeneral Financial Rules: "Expenditure ofa capitalnature is broadly definedas expenditureincurredwith the objecto fincreasingconcrete assets of a material and permanent character. Expenditure on a temporary asset can not ordinarily be consideredas expenditure of acapitalnature". 4 11. Itis necessaryto have some basic idea ofthe fiscal positionofthe state to appreciate the financial accountability systems obtaining inthe State o f Orissa. The fiscal positionof the State o f Orissa is in a very bad shape. While it is true of most Indian States, the position inOrissa is significantly worse thanmost States. The State i s inconstant distress on liquidity front. Frequent resort is taken to Ways andMeans Advances and Overdrafts. In the year 2001-02, these facilities were availed on 364 days. The expenditure on salaries, pension, interest payments and loan repayments exceeds total revenue by more thanRs. 7 billionper annum; growthofRevenueExpenditureis morethanthe growthof Revenue Receipts; assistance to grant-in-aid institutions has increased manifold. The salary and pension amounting to Rs. 1.58 billion was 59.36% of State's own revenue in 1980-81. It has now increasedto Rs. 49 billion (156.04% o f State's own revenue Rs. 32 billion) in2001-02. The salary and pension and debt servicing add up to 110.03% of the State's Total Revenue, includingreceipts from the center. The huge revenue deficits lead to large borrowing to meet Revenue Expenditure crowding out investment needed for development and anti poverty programs. Capital investment has declined to 8% o f total expenditure and 3.29% of GSDP in2001-02 from 20.73% o ftotal expenditure and 5.77% of GSDP in1980-81. 80 60 40 20 0 -20 Orissa Andhra Pradesh TamilNadu Kamataka Source: Datapublished by the ComptrollerandAuditor General of Indiafor FY 01-02 Note: ComparableDatafor UP. not available 12. The fiscal deficit of Orissa reached 10% of GSDP in 1999-00, the highest among India's major states, a result of lower-than-average revenue as well as higher than average expenditure (mainly on account o f salaries and interest). The structural roots o f the fiscal crisis inOrissa, as identified by the World Bank`s analytical reports in 1996 and 1999, are: (a) an excessively large, ineffective and unaffordable civil service a result of - government acting as a de facto job creation agency inthe past, (b) an excessive number of inefficient public enterprises, (c) large debt overhang resulting from central loan financing o f successive state development plans and (d) inefficient revenue system with widespread tax evasion and low cost recovery for public services. 5 measures14 include surrendering all unfilled posts, fieezing further recruitment in all departments except a few, cutting down non-plan expenditure by lo%, raising user charges, introducing new taxes like professional tax, widening the tax base, where possible, introducing zero based review" of projects costing more than Rs. 40 million and tightening the norms for giving guarantees. Suffice it to say that the State has initiated many positive fiscal measures, including some unpopular ones. The State has, however, a long way to go to achieve a modicum of fiscal stability and it cannot be achieved unless financial accountability issues are addressedadequately. 16. A preliminary Assessment conducted by the Bank in conjunction with preparatory work carried out in relation to the Orissa Economic Revival Credit/Loan16 in 2002 indicated that the fiduciary risk inthis State is on the high side despite the existence of a reasonably sound financial accountability structure inline with the one prevailing across India. The annual Reports of the Comptroller & Auditor General of India and periodic reports of the Public Accounts Committee of the State legislature provide considerable information on the need to substantially improve the management and control of public resources and return on public investment. Such reports also point towards the need for stronger preventive controls and public awareness of the costs o f mismanagement and irregularities. Manypublic andprivate officials holdthe same view. Table3: FiscalImbalances-Basic parameters Revenuedeficit Source: Datapublished by the Comptroller & Auditor General of India -Audited Report (Civil)for theyear endedMarch 31, 2002 ~~ l4As the PREMteam is monitoringthe fiscal issues, it isnot dealt with indetailinthis paper. l5Go0 has a PlanningDepartmentheaded by a Senior official, that assesses all capital projectsfor their viability on a zero-basedanalysis. lG proposedOrissaEconomicRevivalCrediVLoan(OERL) isthe fourthWorldBanksub-nationaloperationin The support of fiscal, governanceand structuralreformsby states of India. Itis the first inaproposedseries of 3 such operations during2002-07 to support the medium-termprogramfor economic revival bythe GOO,India's poorest state with 35 millionpopulation. 17. The trend in growth of the Net State Domestic Product since 1996-97 has been around 12% p.a. whereas the outstanding fiscal liabilities have increased by 19% pa. With the debt burden of Rs. 280 billion at March 31, 2002 (Rs 120billion at March31, 1998), it is not an exaggeration to say that Orissa like many other Indian States'* is in a fiscal crisis. Salaries, pensions and interest payments now more than exhaust total revenues, at 180% o f the State's own revenues. The authorities are facing a `financial crunch' in the very practical sense of finding it difficult to pay the government's bills. Liquidity management overshadows almost all development efforts. The need for substantial Debt relief is under discussion with Government o f India, as is the need to eliminate the revenue deficit. 18. The audited accounts of the State's finances show that all key fiscal indicators improved in 2000-01 (Table 3), but the improvement was not sustained in 2001-02, a year when central tax devolution fell seriously short o f budget targets. Revised estimates published by GOO, and preliminary data at the Finance Department indicate a significant improvement in 2002-03, with the State's own revenues exceeding original budget estimates. The primarydeficit (around 2% o f GSDP) and the overall fiscal deficit (around 7.5%) are estimated to have declined significantly below their average level o f the previous five years, accordingto unaudited information available in June 2003. The State Government's objective is to improve the fiscal situation further, to achieve a primary surplus and a declining debt ratio by FY 200619. C.BACKGROUND 19. ConstitutionalRelationshipsBetweenJurisdictions. India is a Union o f States with well- defined distribution of legislative powers between different jurisdictions. The Constitution o f India specifies the `matters' on which the Union o f India has exclusive powers to make laws (List 1in the Seventh Schedule), the `matters' on which States have exclusive power to make laws (List I1inthe Seventh Schedule) and the `matters' on which both the jurisdictions have the powers to make laws (List I11in the Seventh Schedule), with overriding powers in favor o f the Union Government inthe last case. The residuary powers rest inthe Union Government. 20. The Union Government and the State Governments, each has its own separate funds, classified into: ConsolidatedFund into which all revenue receipts and capital receipts are credited and from which all expenditure is to be.met. Contingency Fund which i s in the nature of an imprest account with the Union President or the State Governor to meet temporary and unforeseen expenditure pending its authorizationby the concerned legislature. Public Account into which other moneys are credited and from which disbursements are made. This is inrespect o f moneys for which Government acts as a banker. ~ Correspondingfigures for remaining States in India are not very different. For example, in Karnatakq the trend in growth of the Net State Domestic Productsince 1996-97 has been around 12.49 % p.a. whereas the outstandingfiscal liabilities have increasedby 18.65 % pa, as per data publishedin- State Finances-A Critical Appraisal, A Research Paper Published by International Centre for Information Systems and Audit (ICISA) Ofice of the Comptroller & Auditor Generalof India. 19Informationrelayedby the Bank'sPREM team. 8 21. No amount can be withdrawn from the Consolidated Fund except under the authority of the concerned legislature by way of anAppropriation Act. Any amount taken as advance from the Contingency Fund shall be recouped to it. Audit o f the Accounts of the Union andthe States is a matter included inthe Union List; hence there is a common Supreme Audit Institution called the Comptroller and Auditor General of India, for the audit ofthe accounts ofthe Unionand State Governments. 22. The powers to levy taxes andraise revenues flow from the distribution o f legislative powers between the Union and the State Governments. No tax can be levied except by law made by the appropriate legislature. 23. In terms o f the powers to raise resources, the Centre has a predominant position. Taxes on income both for individuals and corporate entities, vast majority o f excise duties and tax on import and export of goods, service taxes etc., are within the domain o f the Union. Taxes on consumption, trade and profession, registration and transfer of property are assigned to the States. The taxes assigned to the Union are comparatively more elastic andbuoyant andyieldhigher revenuescreating a vertical resource imbalance betweenthe Unionandthe States. 24. Recognizing the asymmetry in the assignment of tax powers and expenditure responsibilities, the Constitution has envisaged a transfer of resources from the Unionto the States. This structured revenue sharing arrangement not only attempts at vertical equity, it also provides States with additional resources to meet their expenditure obligations.20 25. The Constitution of India prescribes the transfer of Funds from the Union Government to the State Governments by way of: devolution o f a prescribed percentage of the net proceeds of specified Central Taxes; grants-in-aid to the State Governments to meet the costs of approved schemes; non-plan assistance as recommended by the Finance Commission. The Union Government also provides assistance for the State Plans and assistance for the centrally sponsored schemes. The allocation o f funds between States is governed by a number o f considerations, including equity and performance. Of late, equity considerations have beengiven significant attention21. 26. Both the Central and the State Governments have the powers to borrow on the security o f their respective Consolidated funds, but a State Government requires prior permission o f the Union Government to raise any loan if it has any outstanding Union Government loan or guarantee. Both the jurisdictions are empowered to give guarantees. Although the constitution envisaged the imposition of ceilings on the amounts o f loans 2oSource: Page 1, Paras 1.3-1.4, State Finances- A Critical Appraisal, A Research Paper Publishedby International Centrefor Information SystemsandAudit (iCISA) Office ofthe Comptroller& Auditor General o fIndia. 21"...Inthelasttwentyyears, however, coveringfive FinanceCommissions,efficiencyhasgenerallybeenignoredand equity considerations have had the precedence. Tenth Finance Commissionfor the first time accorded a weight of 10 per cent to tax effort as an efficiency recognizingparameter, which again got reduced to 5 per cent by the Eleventh FinanceCommission." Source:Page2, Para 1.7, State Finances-A Critical Appraisal, A ResearchPaper Publishedby InternationalCentre for Information Systems andAudit (iCISA) Office ofthe Comptroller& Auditor General of India. 9 and guarantees, no such ceilings have been prescribed so far. The States cannot borrow outside the territory of India. 27. The Go1 has floated several small savings schemes. Eighty per cent (sometimes even 100%) o f the collections under these schemes are passed on to the State Governments by way of loans. The Go1has also established a National Calamity Relief Fund from which fhds are provided to the State Governments to meet expenditure on major calamities such as floods, cyclones, drought, etc. 28. By amendments to the Constitution, Urban Local Bodies (ULBs), and Rural Local bodies (RLBs) (Panchayat Raj Institutions), assistedbythe State Governments, have also been givenrecognition, withpowers to raise their own resources. 10 CHAPTERI1 BUDGETPREPARATIONAND APPROVAL A. INSTITUTIONAL FRAMEWORK 1. Article 202 of the Constitution o f India requires a statement of the annual receipts andexpenditure ofthe Stateto be laidbefore the State Legislature. This Annual Financial Statement, popularly known as the budget, includes receipts andpayments o f the ensuing year, as well as a revised budget for the current year. The Orissa Budget Manual, although outdated (see below), is a good comprehensive document, with definitions and instructions for budget preparation, legislative approval, control o f expenditure, re- appropriations, supplementaryestimates, andprocedures for after the close o f the year. It also contains appendices dealing with procedures inthe Orissa Legislative Assembly, list o f items chargedon the Consolidated Fund, budgetary provisions o f the Constitution, etc. In addition, the State issued supplementary guidelines on October 31, 2002, for formulating the budget for 2003-200422. 2. The legal and regulatory framework is very good, and compares favorably with good international and Indian practice. It is transparent, provides for effective participationby all line departments, and makes it obligatory for them to own the budget and implement it faithfully. The budget manual is very clear about the role of all the parties in framing the budget and implementing it. The laws and regulations are also faithfully observed in practice. The Budget Manual, however, is badly in need o f updating. Numerous additions have been made over the years, but obsolete provisions, such as references to relations with England, which seem to date back to colonial times, have not beendeleted, B. BUDGETCONSTRUCTIONAND APPROVAL 3. As in most countries, the budget is put together through a combination of a "top down" and a "bottom up" approach. The Finance Department fixes the budget ceiling for bothplanand non-plan expenditures, but the line departmentsprepare their own budgets, which they forward to the Finance Department, for consolidation into the State budget. The Finance Minister presents the budget document to the Assembly on a date prior to the start o f the fiscal year, and determined by the Governor. After a period o f not less thantwo days, the Assembly discussesthe issuesofprinciple inthe budget.Not lessthan ten days thereafter, the Speaker allots not less than 14 days for discussion o f all the demands for grants. At the end of the allotted period, the Speaker puts to the vote all remaining issues. The Finance Minister then moves an Appropriation Bill, seeking the legislature's approval for the withdrawal of the money from the State's Consolidated Fund. 22The Orissa State fiscal year, as for all governments inIndia, runs from April 1to March31 11 C. LEGISLATIVESCRUTINY AND APPROVAL 4. The State Legislature has many committees to examine many issues indepth. Two types of committees deal with budgetary issues. They are Subject Committees and the EstimatesCommittee.Four MohanNagarajan(PREM), have beenformed dealing with high spending departments, namely Agriculture, Water Resources, Rural Development and rural local bodies (Panchayati Raj). They scrutinize budget allocations, and review plansor projects referred to thembythe Houseor its Speaker. 5. The seven-member Subject Committee is not permitted to examine or investigate matters o f day-to-day administration. It can recommend re-allocations within a budget ceiling, or reductions inallocations, not an increase inan allocation. It i s chaired by the Minister whose budget is under review; has only ten days to review the budget, and no secretariat; receives minimal information from the department being reviewed; and is generally ineffective from the point of view of budgetary control or accountability. By contrast, Standing Committees of the Central Government are reported to be more effective. They send out an exhaustive questionnaire seeking information on all aspects o f functioning of the department. They are chaired by a Member o f Parliament (not the Minister); hold comprehensive and intensive discussions for which four weeks are available; are serviced by a good secretariat, and the intensity of their discussions forces the Secretaries to own the budget and feel responsible for implementing it. The Orissa State Subject Committees would be far more effective if they functioned more like the central government StandingCommittee. 6. The twelve-member EstimatesCommittee is elected by the Assembly every year, and reports on possible improvements in the organization, efficiency or administrative reform consistent with the policy underlyingthe estimates; suggests alternative policies to promote efficiency and economy; examines budgetary layout; and recommends form of budget presentation. N o minister can be a member of the committee. The committee can continue examination of the estimates throughout the year and passing o f the budget i s independent o f this committee's examination. The examination is in depth but more useful from the policy andperformance point of view thanfrom a budgetary perspective. D. CHARACTERISTICSOFTHE BUDGET The budget consists of three parts namely; Consolidated Fund, Contingency Fund; and Public Account (all defined inChapter Iabove) 7. All expenditures are classified as under: 0 revenue (i.e., recurrent) and capital (i.e., investment); voted (Le., subject to legislative assembly vote), and charged (i.e., not subject to legislative assembly vote, for example, salaries of State Governor, Speaker o f the SLA, andother specified officials); and 12 0 plan(Le., included inthe developmentplan), and n~n-plan~~not so included). (i.e., E. COMPREHENSIVENESS 8. Untilnow, the mainexclusions from the State budget have consisted of funds paid directly by foreign donors (increasing from about Rs120 in 1996/97 to more than Rs 870 million in2002/3), as well as the central government (about Rs 6 billion a year) to entities withinthe State. This bypassing of the Statebudgetwas done inan effort to prevent the funds from beingdivertedto other uses, given the State's serious liquidity problems. The Central Government has decided to pass all its funding through the State budget, with effect fiom April 1, 2003. It has not been possible at this time, however, to confirm whether this is actually happening or not. F. REALISM Figure5: DeficitManagementFY 01 02 - Actuals - % increaseover budget estimates I I TamilNadu I Kamafaka I pradesh Andhra Central Government I' Source:Datapublishedby the Comptroller andAuditor General of Indiafor FY 01 0 - 9. Lack o f realism has been one of the weakest characteristics of the budget. There seems to be a compelling wish to expand the size of the Plan every year, without reference to the availability ofresources. This i s said to be driven by the political masters and encouraged by the members of the Legislative Assembly, as more expenditure is 23the 'Plan/ Non-plan distinction' has been introduced by Indian national polity, and applies to all States and the CentralGovemment. Note: This is anAll-India issue not dealt with inthis SFAA 24 Source: Pg 17, Table on "Receipt of ExternalAssistance of EAP implementation in Orissa without being routed through State Budget from 1996-97 to 2002-03 (as on 31.12.2002)" Orissa Budget at a Glance, 2003-04, Finance Department, Government of Orissa 13 associated with more development (not true in most cases). The ambitious Plan size makes the budget unrealistic andcauses undue stress to the fiscal position. 10. Another example of this lack of realism is the inclusion in the budget of many projects for which external funding has been requested, but not confirmed. The budget document for 2003-2004 mentions that some (10 out of 20) of the projects are in the pipeline(36.7% invalue). Some ofthemwere statedto be inpipelinethe previous year as well. "Savings" are shown against these projects when they do not materialize within the year, Of the Rs. 10.5 billion of external assistance budgeted in 2002/03, only Rs. 4.3 billion was actually received by end of February 2003 (one month to the end o f the fiscal year). The average external assistance received in the last five years has been around Rs.4.2 billion, and yet the budget for external assistance in 2003/04 i s Rs.11.7 billion, clearly an over-estimate. This could be avoided by including only those projects in the budget, which have reasonablechances ofbeingapproved inthe current year. 11. The Audit Report for the year ending 2001 mentions the case of the Department of Water Resources where the budget of the entire department was finalized, even though the concerned department failed to send its budget proposals to the Department of Finance. A similar instance involving the Works Department was observed in the subsequent year. This was done to avoid holding up the entire budget of the State, but it points to a certain lack o f discipline inthe budgetaryprocess 12. Other examples of unrealistic budgeting include: 0 over-estimation of the share of central government taxes that will be received by the State; (for example in 2001/02 about Rs. 32 billion were budgeted, but only about Rs. 26 billion received; in 2002/03 Rs. 35 billion budget was revised downwards to Rs. 31billion); and 0 finalizing the State plan (by the central PlanningCommission) during the course o f the fiscal year instead of prior to the presentation of State budget, thus leaving open-ended the amount of that planthat would actually be included inthe current year's budget. 13. The above factors make the budget unrealistic, and impossible to implement as passed. G. OTHERBUDGETPREPARATIONISSUES - Lack of a MediumTermFramework 14. The budget is still prepared as an annual exercise, and is not directly relatedto any ongoing plan of receipts and payments. A rolling budget covering a minimum of three years, of which the current year's budgetis the first year, is preferable. 14 - Needfor Outputor ResultsInformation 15. All budgeting is still done in purely financial terms, with no related information disclosed on expected outputs or results. The State should introduce, at least for its major departments and its capital budget, disclosure of performance or output targets, which would enable the State to judge the extent to which it i s achieving departmental objectives o f expenditures. H. STAFFINGISSUES 16. Over-staffing in overall numbers is the issue across the entire public sector. However, appropriate expertise is not always available at the right place at the righttime. There would appear to be a need for training inbudget planningtechniques, especially in the area o f accurate forecasting of receipts and payments. It is unclear, however, how much of the unrealistic budgeting has been due to lack of training, how much due to politicalpressure andhow much dueto insufficienttimely informationfrom the Centre. r. ORISSA STATE BUDGET REFORMS 17. Inan October 2000 "White Paper on Expenditure Management and Administrative Reforms" the Go0 admits that "problems exist at all stages of the budget and expenditure management processes". The White Paper proposes the following remedies to the budgeting problems identified: The State has adopted a medium term framework approach, whereby an expenditureprojectionis formulated for the next five years, updatedannually, and presentedto the Assembly at the same time as the annual budget. It has not been implemented so far. The State claims to have "started introducing realism inrevenue forecasting inthe budgetary process, leading in 2003 and beyond to a systematic improvement in the accuracy of the forecasts". This is borne out by the revised estimates figures for FY 2002 - 03 for receipts which is inexcess of the budget estimates by Rs. 2 billion. This excess amounting to about 5 % of total revenues reflects a more accurate and conservative original estimate. This has to be checked with actual figures whenthe accounts for the year are ready. The State also proposes to set up a training program for orienting the State Government officers in budget formulation, tax administration, and budget monitoring. Go0 is said to have appliedto DFID and the WB for assistancewith this. J. CONCLUSIONSAND RECOMMENDATIONS 20. Budget preparation and approval are based on a fairly good and comprehensive legal and regulatory framework, but the process still results in a budget whose 15 persistently over-optimistic projections of both capital expenditures and revenues, vitiate its chance of getting implemented as designed. To the extent that this lack o f realism reflects political pressure, if any, rather than weak technical capacity, training alone will not solve the problem. There is therefore a need for better understanding between the politicians and the bureaucracy on the implications of unrealistic budgeting. What i s needed i s greater motivation and desire to improve current practices. The Controlling Officers have primaryresponsibility for improvingbudgetrealism. 21. To the extent that the inadequacies described above have a technical origin, the following measuresare recommended: 1. ascertain what specific progress has been achieved in implementing the government measures described in the White Paper of October 2000, specifically: a) present annual expenditure projections for the medium term to the Legislature; b) ensurethat enhancedrevenue forecastingprocedures are instituted; and c) train State Government officers inbudget formulation, tax administration andbudgetmonitoring; .. 11. ensure that all central government funds destined for projects in Orissa State (including official external funding) have started flowing through the Orissa Government budgetandare beingmanagedbythe State; ... 111. Initiate the procedure of involving the line departments, including the financial advisers in the budgetary process more intensively, in order to share the ownership o fthe budget; iv. introduce outputlresults information and accounting for results to complement the current, purely financial budgeting, to facilitate the assessment o f the extent to which results ofpublic expenditwe are being achieved; V. forecast realistically on the following when preparing the Budget Estimates, while recognizing uncertainty ofCentral flow: a) external assistance; b) tax andnon-tax revenuereceipts; and c) Central Assistance for StatePlan; vi. disclose inthe BudgetEstimates: a) intended outputs inthe Demandsfor Grants; b) tax expenditure (ifsignificant); and c) assessment of Fiscal Risk including impact o f delayed decision making at the Centre; 16 vii. suggest to the Speaker of the Assembly that Subject Committees in the Assembly are made more effective by endowing them with the attributes of Standing Committees in the Central Government, as described in this chapter. ' Departments of Education, Public Health & Works may also be brought infor examinationbythe Subject Committees; and viii. provide sufficient time for a more informed debate on the budget and if necessary a vote on account could be obtained for meeting the requirements for the initialmonths ofthe fiscal year. 17 CHAPTER111 BUDGETIMPLEMENTATIONAND MONITORING A. INSTITUTIONALFRAMEWORK 1. The Budget Manual prescribes the norms for expenditure control, including the prohibitionof any expenditure above appropriations. The Orissa General FinancialRules contain detailed internal control regulations, including a requirement to spend hnds judiciously and to identify surpluses. Surpluses not re-appropriated to other expenditures within the same approved budget heading, must be returned to the Finance Department for the use of other departments, after legislative approval through supplementary budgets. Any excess spending i s reported upon by the CAGYreviewed by the Public Accounts Committee (PAC), and regularized by the State Legislative Assembly. These regulations are in tune with the best intemational practices o f reporting back to the legislature any deviationfromthe approved amounts. B. BUDGETIMPLEMENTATION 2. The implementation of the budget is marked by numerous distortions, many of which are traceable to the lack of realism in budget preparation, particularly revenue estimation, discussed in the preceding chapter. For example, in 2001/2002 the State's share of central taxes was budgeted at nearly Rs.32 billion, but the State received only Rs. 26.5 billion. The 2002/2003 budget of almost Rs.35 billion has had to be revised downwards to about Rs.31 billion. But despite these experiences, the 2003/2004 budget still provides for anticipated receipts of Rs.34.3 billion from this source. It i s to be noted that these likely figures are indicated by the central government to the state governments basedon the central budget figures ofreceipts. 3. Lack o f liquidity is a constant worry. The Finance Department (FD) controls the release of funds to the other departments strictly based on the availability o f cash. This kind of constant cash rationing upsets the priorities fixed in the budget. It also causes Secretaries to disown responsibility for implementing the budget as passed. Other distortions inbudgetimplementation may be summarized as follows: 0 Resource-linked projects, accorded priority in cash rationing receive an initial installment, they have to give a Utilization Certificate (UC) for earlier installments before they canreceive further releases o f funds. Frequent inabilityto providethe UCs means the cashflow gets impeded. The money is received from central government mostly towards the end of the year. Unable to spend the money in a short time, and fearing lapse of funds, the unspent amount i s kept in Civil Deposits Head in Public Account, and subsequently spent without legislative clearance thereby vitiating legislative control. Closing balances held in such accounts have grown from almost Rs. 2 billion inMarch 1997to more thanRs. 6 billion inMarch2001. 18 The severe cash shortage is one of the reasons for large variations between approved and actual expenditure every year. These "savings" amounted to more than 10% oftotalbudgetallocation in27 out of42 budgetheadsin2001-0225. In 2000/2001, 14 line departments, which had "savings" of Rs. 19 billion surrendered only Rs. 5.6 billion. On the other hand, in 56 individual sub-heads, the entire allocations were surrendered, indicatingslackness inbudgeting. Starting o f works for which funds fail to materialize, results inarrears inpayment due to contractors andpresumably instoppage/delay of the work. The size of the problem is reportedto be large, though no reliable data are available. Re-appropriation of allocation fiom one budget head to another within the same Grant, introduced to enable the government to change its priorities during the year, appears to be excessive in both amounts involved and number o f grants, thereby contravening the legislative intent. Supplementary budgets, oftentwo ina year, represent another abuse o f flexibility. The supplementary budgets as a percentage of the original budgets were 24 (1998-99), 22 (1999-2000), 16 (2000-Ol), suggestingpoor budgeting. According to an external audit report: "Controlling Officers are responsible for ensuringthat the control over expenditure is effective andto guardagainst rush of expenditure inthe montho fMarch. Test check by audit disclosed that in 19 cases, 52 per cent to 100 per cent of the total expenditure for the year 2000-2001 was incurredduringthe monthof March2001." The line departments do not receive fiom the State Accountant General (AG) timelyor usefulfigures. Instead o f monthly reconciliation of the departmental figures with AG's accounts required by regulations, most departments now perform the reconciliation only once a year. Furthermore, in 2000-01, 11% o f all expenditures by value, representing 61 departments out o f 377, remained unreconciled, even after the year-end, according to the Audit Report on Orissa26. C. CASHMANAGEMENT 4. Cash flow planning has been very poor. The Reserve Bank of India (RBI) allows each state (including Orissa) to draw funds up to specified limits as Ways and Means Advances to meet temporary cash shortages. When the limit is exceeded, the state goes into overdraft; and, if the overdraft is not repaid within 12 days, the RBI can stop all payments on behalf of the state. During the first ten months of 2002/2003 Orissa State was inWays andMeans status for 137 days, and inoverdraft status for another 164, for a 25Source: Pg. 29, Report of the Comptroller and Auditor General of India, for the year ended 31March 2002 (Civil), Government of Orissa "Infiscalyear2002,16%oftheaccountswereunreconciled. 19 total of 301 days out of 306, during which the State's receipts were insufficient to cover its payments. The constant liquidity crunch diverts the energies of senior state officials Erom creative and constructive activities to trying to get enough funds to pay salaries, pensions, andother urgentobligations. 5. Even the forecasting of the Ways and Means advance requirements is poor. For example, in2001/2002, the State forecast Ways and Means requirements o f only Rs. 20 billion, but ended up requiring more than Rs. 64 billion. The 2002/2003 forecast of Rs. 15 billion had to be revised upwards to Rs. 65 billion. In spite of this, the requirements for 2003/2004 are again budgeted at Rs. 15 billion. One gets the impression that the persons preparingthese forecasts are indenial, and perpetually optimistic. Lessons learnt need to be recorded. Other examples of unrealistic optimism have been discussed above andinChapter 11.We recommendatwo-pronged attackto solve this problem: 0 a political decision to remove (or at least limit) political pressures on the staff involvedinthe preparation ofthe budget; and 0 training and awareness building designed to replace budgetary optimism with a more conservative approach. D. REVENUEISSUES 6. Largely due to its agrarian economy, and the non-taxation of agricultural income across the whole o f India, the State of Orissa does not generateits own tax revenueto the extent that many other States inIndiado. This situation makes it doubly important for the State to ensureefficient tax assessment, collection, andfollow up of arrears. RevenueEstimation 7. Until recently, revenue forecasting left much to be desired. Expenditure requirements were first worked out andthereafter the resources were estimated to service the expenditure. The receipts never materialized as estimated. The Finance Department (FD) now tries to work out the revenue estimates independently of the expenditure requirement by adding a "buoyancy factor" to the previous year's realization. The revenue estimates for the year 2002-03 have proved accurate, with actual receipts marginally higher than estimate. Apart from better estimation, widening of tax base, increasing user charges and better tax administration also helped. The following table illustrates the improvement in revenue (tax and non tax) collection with reference to estimate. Table 4: Improvementinrevenue (tax and non tax) collection 20 Despite the improvement noted above, the current methodology for forecasting revenues, basedon applying a "buoyancy factor" to the previous year's receipts, i s still more rule of thumb than scientific. We recommend that the Go0 create, as soon as possible, a tax research unit, one of whose first priorities will be the introduction of a more scientific methodfor forecasting Staterevenues. RevenueMonitoring 8. The State has a good system of monitoring the revenue streams. Every month the receipts of the previous month are compiled and reviewed by the Chief Secretary. The statement for the month of December 2002 showed revenues higher than forecast, and also higher than in December of the previous year. The external audit report for 2000/2001, nevertheless, revealed anunderassessmentof nearly Rs. 1.8 billion, about 6% of the State's total own revenue. We recommend a tightening o f the assessment procedures, and action against officials responsible for specific cases o funderassessment. E. ASSET MANAGEMENT 9. The Orissa General Financial Rules give exhaustive directions on asset management procedures. However, it was not possible to do any field study on the asset management practices. The Audit Reports are replete with cases ofpoor maintenanceof asset registers, particularly in the field offices. Good asset management requires maintenance o f appropriate records and regularreconciliation withthe books of account. F. DEBTMANAGEMENT 10. The Go0 is heavily indebted. According to the budget document for the year 2002- 03, the total debt of the government i s about Rs. 282 billion, more than half o f it due to the Central Government. Between 2001-03 the debt grew by Rs. 35 billion - a clearly unsustainable rate of growth. The State does, however, have very good debt management 21 systems, in so far as repayment is concerned. Debt and repayment due dates are noted and followed up diligently. While the Accountant Generalautomatically pays the loans of Go1without referenceto the Stateonthe fifteenth ofevery month, the State has also been paying back the other loans on time. This is very creditable, considering the perennial liquiditycrunch. G. CONTINGENT LIABILITIES 11. The State of Orissa has huge contingent l i a b i l i t i e ~arising out of the guarantees it ~ ~ has given to many public undertakings, autonomousbodies and urbanmunicipal bodies. As of February28, 2002, the maximumamount guaranteedwas Rs. 85 billion, while the outstanding guarantees were estimated at Rs. 53 billion. As many o fthese institutions are not financially healthy, there is a real risk of these contingent liabilities turning out to be real liabilities. The State has recognized this danger and has initiated many positive corrective steps, includingthe following: issuingcomprehensive guidelines on guarantees; limitingguaranteesto a few institutions meeting specifiedcriteria; requiringCabinet approval ofanynew guarantee; requiringevery beneficiary to have finalized and audited its accounts for the two preceding years; embarking on a program to scale down the guarantees to 80% of their current level over a period of 5 years; recallingunusedguarantees; providingdetailed formats for reporting guaranteesto the legislature; publishingdetails of guaranteesin"Budget at a Glance" -a document tabled with the budgetat the legislature; and setting up, with an initial contribution of Rs. 200 million, a Guarantee RedemptionFundto be managedby RBI. H. BUDGETDOCUMENTATIONAND REPORTING 12. Budget documentation has improved substantially, especially the `Budget At a Glance'. The data on outstanding debt, guarantees, various financial ratios, social indicators and comparison with other States, are useful pieces o f information. There is scope for including many other parameters, including for example physical progress along side the promises made inthe budget at least on a few selectedparameters. GOO'S White Paper on the fiscal reform (see Chapter 11) contains an honest appraisal of the problems, the causes and possible solutions, including the tough measures needed. The publication o f the White paper required official honesty and political courage which shouldbe acknowledged. ''Contingent Liabilities include liabilities arising out of arbitration proceedings/awards in respect of major works contracts.They also includeLetters of Comfort, ifany. 22 13. The budget and all the associateddocumentsare placed inthe official website of the State. They are, however, difficult for a common manto understand. Also, as pointed out in the preceding chapter, they contain only financial figures, with no indication of physical achievements, results, or any other performance indicators. Furthermore, effective monitoring of budget implementation requires reporting more frequently thanonce a year. 14. We recommend that the government provide performance information for all the departments in a more user-friendly form, and report, at least once every 6 months to enable the legislature, as well as the average reader, to understand, and meaningfully discuss the purpose o f proposed expenditures and have meaningful discussions on policies and programs. 15. Externalreporting, external audit, andother aspectsof transparency are discussed in subsequent chapters of this report. I.STAFFINGISSUES 16. As pointed out inthe preceding chapter, the issue in Go0 i s over-staffing. 1.6% of the State's population work for the State, compared with 0.8% for the whole of India. However, we recommend training for the staff in specific areas, such as mid term forecasting o f revenues, scientific revenue estimation, and preparation of performance budgetsandperformance reports. J. CONCLUSIONSAND RECOMMENDATIONS 17. The unrealistic budget preparation practices noted in the preceding chapter, have, until now, resulted in a budget implementation experience bordering on the dysfunctional. The State Government has, however, initiated many bold measures to try to redress the situation. In addition to the Government measures mentioned in the preceding chapter, and those discussed above with regard to loan guarantees, Go0 has (according to its White Paper) established a Fiscal Reform Cell inthe FD to monitor the budgetary reform process. The Government has also introduced such measures as zero- based review of projects, whereby all projects costing above a certain amount are reviewed in a one-off exercise, and all those found incapable of yielding returns above a certain threshold are closed down. 18. In addition to the above measures, and others announced in the Go0 2002 White Paper, we recommend the following actions inconjunction with recommendations inthe previous chapter: 23 1. document the reasons for the many budget implementation distortions and problems associated with cash management, with a view to gradually removing them. .. 11. Further, buildevaluation capacity for lessonslearned; ... 111. relax political pressure onthe staffinvolvedinthe preparation o fthe budget; iv. train andbuildawarenessto replace budgetary optimismwith a more conservative approach; V. set up a tax researchunit inthe Department of Finance, to enable the introduction of a more scientific method for forecasting Staterevenues; vi. train staff in the specific areas o f mid term forecasting o f revenues, scientific revenue estimation, and preparation of performance budgets and performance reports; vii. enhance revenue by better enforcement. Further, tighten the assessment procedures, fix responsibility on the officers and take action against officials responsible for specific cases o f underassessment pointed out in the CAG's reports; ... v111.reduce incidence of Excessesand Savings; ix. prepare and disseminate performance budgets and mid-term reports on budget implementation at least once every 6 months ina more user-friendly format; X. disclose major assumptions andhighrisk areas, and also fully disclose contingent liabilities andthe actuarial evaluation of pension obligations inthe years to come, as apart o fthe budgetdocument; and xi. take steps to prevent deficient asset management, which leads to infructous/wasteful expenditure, which may be causedby inefficiency as much as being anindicator o f corruption. 24 CHAPTERIV INTERNALCONTROLAND INTERNALAUDIT A. INTERNALCONTROL 1. Go0 has a very elaborate and detailed system of internal control, which is documented in the Budget Manual, General Financial Rules, Delegation of Financial Power Rules and Treasury Codes, as well as in various office procedure manuals. Financial Advisors are located in every government department as guardian of internal control. They report to the Secretary ofthe Department. 2. The Go0 has not articulated its standards for internal control. The International Organization o f Supreme Audit Institutions (INTOSAI)28 has developed standards for use in designing internal control systems, and as a guide for auditors in assessing these controls. These standardsinclude: documentation, and recording, of all transactions and significant events, and the ready availability o f such records anddocuments for examination; restriction of the authorization o f transactions and significant events to only persons acting withinthe scope o ftheir authority; no one personto be responsible for more than one of the following: authorization, processing, recording, or reviewingoftransactions or events; competent supervision to ensurethat managementcontrol objectives are achieved; limitation of access to resources and records to only authorized individuals accountable for their custody or use; and periodical comparison of resources with recorded amounts, to ensure accountability, the frequency o f such comparison being determined by the vulnerability ofthe asset. COS0 standards go a step further, by stressing ethical values, competence, and self- discipline o f staff at all levels. 3. Incomparison withthe international standardsindicatedabove, the Go0 regulations provide for: at least one supervisory level staff ineven small offices; separation of responsibility for the ledger from responsibility for the cashbook; *'Source: uww.intosai.org/3- INTCOe.htm1 25 a physical verification of cash, at least once a month, by someone other than the cashier; a periodicalinspectionof field offices by controllingofficers; quarterlyvisits ofall districts andproject inspectionbythe Secretaries; a routine Treasury check of all bills for salaries, contingencies, and other office requirements; a checks o f Public Works Department accounts by Accounts Officers whose cadre is controlled bythe Accountant General; a field inspection o fworks by ChiefEngineers; elaborate procedures and conditions to be satisfied before any work can commence; a elaborate provisions in the General Financial Rules (GFRs) and other departmental manuals relating to the purchase, receipt, issue, and physical verification o f stock and stores; proper maintenance and valuation of stores; verification and reconciliation of departmental figures with those maintained by the Accountant General; a individual responsibilities to implement various internal controls, of which the following from Rule 12o fthe GFRsi s typical: "every officer must satisfy himself not only that adequate provisions exist within the departmental organization for systematic internal checks calculated to prevent and detect errors and irregularities inthe financial proceedings o f his subordinate officers and to guard against waste and loss of public money and stores, but also that the prescribed checks are effectively applied"; and other rules provide for personal responsibility for any loss sustained by the Government through fraud or negligence, as well as procedures for writing off losses. 4. The Go0 internal control system described above complies, by and large, with the standards recommended by INTOSAIbut not the more modernset of standards (COSO) governing performance and integrity o f information. COSO emphasizes the need for a strong control environment and `tone at the top'. The role of the Chief Secretary becomes crucialfor providingthe leadership for financial accountability. 26 5. There is too much reliance on control of individualtransactions rather than systems based on delegation of authority and performance based incentives. Discussions with Go0 officers also indicated that the detailed regulations are generally complied with at the 'transaction' recording level. Compliance with the spirit behindthe system of internal control is neither complete nor perfect, however. For example, despite the requirement for every department to reconcile its accounts monthly with the Accountant General, and have face to face discussions on a quarterly basis, if there are still unresolved issues, more than 15% o fthe accounts requiringreconciliation have been left unreconciled every year between 1996197 and 2001/2002. It would also appear that, inthose cases where the rules are not obeyed, there i s a reluctance to assign blame or responsibility to any individual. This practice is not only contrary to the regulations, but i s also believed to act as a disincentive for staffto comply withthe requirements ofthe system. 6. Audit reports are replete with instancesof fraud, waste andabuse ofpublic funds. A reviewofthese reports points to numerousdeficiencies ininternal control associatedwith revenue and expenditure including procurement, asset management, and control over the p a ~ ~ 0 1 1 ~ ~ . 7. The Government may be annually incurring large expenditure to meet liabilities arising out of arbitration awards. There appears to be no focal point to account for such contingent liabilities, nor does any Department maintain a register regarding pending arbitration cases andthe amountsthat may be involved. 8. Financial Advisors need to be empowered by measures such as financial incentives inthe form of Special Pay. Furthermore, ifall "sanctions" carried the messagethat they havebeen scrutinized by Financial Advisors that would further enhancetheir position. 9. There is a belief among many in the public service at Orissa that the excellent intentionbehindthe largely sound institutional and legal framework for ensuringinternal control has been slowly undermined by years o f indifferent and negligent implementation, the reasons for which are complex. It i s also believed that there is no rewardfor financial discipline and no adverse consequence for irresponsible discharge of fiduciaryresponsibilities. B. INTERNALAUDIT 10. Orissa Government has an internal audit system of long standing. It is manned by Orissa Finance Service Officers, Orissa Subordinate Finance Service Staff and Orissa Service of Auditors. It consists o f four wings: i. CommonCadreAudit(CCA); ii.EfficiencyAudit; iii.LocalFundAudit;and iv. GramPanchayatAudit. 29 This SFAA report does not list all the individual weaknesses identified in the C&AG's Reports. These reports are availableonthe web. 27 The first and secondwings are dealt withinthis chapter. 11. Common Cadre Audit, is undertaken in all departments, except indepartments like public works, irrigation, which have a Divisional Accountant attached to them. Each Department has a financial advisor under the secretary, who controls the internal audit. All internal audit staff is under the control ofthe respective department, with the finance department looking after establishment matters only. Internal audit parties inspect all offices under the administrative control of the Department and issue reports, somewhat similar to those issuedbythe Accountant General. Points raisedinthe reports are pursued untilfinally settled. 12. Efficiency Audit i s directly under the control of the finance department. Its services may be requisitioned by a Department in a special case, or the finance department may initiate an investigation on its own accord. During 2000-01 and 2001-02 about forty special audits were conducted by the efficiency audit units relating to eleven departments. 13. Regardless of the type of audit, the response to internal audit reports from the offices inspected is poor. Inseveral cases, first replies have not been received for years. No steps have been taken to rectify the irregularities pointed out in the reports. Even where a special audit was initiated by a Department, there areno subsequent steps to rectify the irregularities brought to notice. 14. Inaddition to serving as financial advisors (heading up internal audit units) officers in the finance service cadre may also serve as treasury officer or in commercial tax offices. Most officers seem to find these other options more attractive than financial adviser's work. There i s a widespread perception that the rewards are higher for working inthe treasury department andor tax department. This situation can be improved if all finance service cadre are required to work for a time as financial advisers as part of their career development. 15. The Treasury does not exercise budgetary control while making payments. Treasuries do not have budget information at hand nor up-to-date data on expenditure previously incurred. The Go0 has recognized this major weakness. This problem can be addressed through the computerization programme underway. There is a proposal to provide on-line information to the treasuries on cumulative expenditure against departmental budget. 16. Audit reports suggest, however, that the good legal framework and elaborate institutional framework for internal control and internal audit are not having the desired impact. The following examples illustrate the problems: 0 The CAG report for the year ended March 31, 2002 showed avoidable irregular expenditure cumulatively amountingto Rs. 3.3 billion; excess payments to firms Rs. 3.1 billion, etc. Irregularities pointed out indicate a failure in the internal control system, particularlyrelatedto cashandmaterials management. 28 0 The audit report for the year ended March 31, 2002, gives a list of major and medium capital works, involving expenditures of nearly Rs. 40.52 billion, which hadbeen going on without completion for many years, some for as long as thirty years. 0 Arrears of revenue (ie., taxes assessed but not collected) have been a regular feature o f the annual audit reports. While the percentage of cumulative arrears to tax collected has been reduced steadily over the last six years, there is still a substantial amount to be collected. C. STAFFINGISSUES 17. There is enough staff inthe Government to permita wide distribution of duties, and a good system of internal control. Technical capacity for internal audit also does not appear to be a major barrier to performance. What may require additional attention is the need for appropriate incentives for increasing productivity. The training proposed inthe Orissa Government White Paper on Public Expenditure Management and Administrative Reforms will probably suffice for now, although it needs to be elaborated in far more detail thanis described inthe White Paper. D.CONCLUSIONSAND RECOMMENDATIONS 18. The legal and regulatory framework for internal control and internal audit are good inprinciple. Yet the application ofthe framework resultsinmanyweaknessesinpractice, due mainly to the failure to attach personal responsibility, or apply sanctions that are provided for in existing regulations. The informal systems do not match the formal systems3'. What i s needed, therefore, i s not the introduction of new laws or regulations, butthe updating andfaithfhl application ofthe regulationsthat already exist. 19. If budgeting is made realistic and monitoring of budget implementation is streamlined, a well structured internal audit deployed purposefully with well defined mandate canbe of great helpintoning upfinancial managementprovided, senior officials are made to realize that audit, both internal and external, i s an important aid to administration rather than a mere fault finding exercise. Internal Audit Reports should be of a quality that can promote this attitude. This is an area where proper orientation and regulartraining are extremelyimportant but often overlooked. 20. The above conclusion is inline with the findings of the Orissa Government White Paper of 2002, which, while acknowledging some of the existing weaknesses, calls for a review of existing laws and regulations with a view to removing obsolete and unnecessarily complicated procedures. 30Source: Pg 15, 19 May 2003, Opinion: Business Standard: Douglas C. North, a renowned economic historian and Nobel prize winning economist defines institutions as `formal' (constitutions,laws and property rights) and `informal constraints' (sanctions, taboos, customs, traditions and codes ofconduct) on political, economic and social interactions. 29 21. Inview of the above analysis, we recommend: 1. speed up the review of rules and regulations as proposed by the Orissa Government White Paper of 2002; 11. *. implementfaithfully the existingrules and regulations, while awaitingthe results o fthe review; ... 111. introduce more Formal Risk Management through exception reporting for high riskareas; iv. prepare Quarterly Analysis and Reports on variations between Budget and Actuals (Physical and Financial); V. involve FinancialAdvisors inall significant financial managementdecisions; vi. require all finance cadre officers to spend some time in their career working as finance advisers or headinginternal audit units; vii. makeInternalAudit report directlyto the Secretary; v111. provide proper orientation .*. and regular training on modern internal audit technique; and ix. introduce a system of rewards for merit, and take timely action in cases of negligence or dereliction ofduty. 30 CHAPTERV ACCOUNTINGAND FINANCIALREPORTING A. INSTITUTIONAL FRAMEWORK I.UnderSections10and11oftheComptrollerandAuditorGeneral's(Duties,Powers and Conditions o f Services) Act 197131(CAG's Act) enacted by the Parliament under Article 149 of the Constitution of India, the CAG compiles accounts of all the States o f India except Goa, from the initial and subsidiary accounts rendered by treasuries and other departments. From these compiled accounts, he prepares annually Finance Accounts and Appropriation Accounts, which together with the audit report thereon, are submitted to the Governor for being laid before the legislature. There is an enabling provision32 for the State Governments to take over the accounting function from the CAGYbutthis optionhas not yet been exercisedby any of the State Governments. Article 150 o f the Constitution empowers the Central Government to lay down, on the advice o f the CAG, basic rules regarding forms o f accounts of bothCentral and State Governments. In Orissa, CAG performs the accounting functions through the Accountant General (Accounts and Entitlements). The issue o f the State Government taking over the compilation o f accounts is a complex nation-wide issue33. Separation of audit from accounts i s consistent with international best practice. Given capacity constraints at Orissa this matter i s not an immediate concern. 2. The two issues of: (a) whether government accounting and auditing at the state level inIndia should be completely separated in accordance with good international practice and as implemented at the central level and (b) whether the States should take over full responsibility for their accounting, in order to promote their ownership of, and responsibility for, this function, are controversial. Some argue that the CAG responsibility for both accounting and auditing hasnot, inpractice, resulted inany loss o f independence or conflict of interest, in addition others argue that most of the States are not yet fully equipped to handle their own accounting. In any case, both are national rather than state issues, which could be revisited in the context o f a Country Financial Accountability Assessment (CFAA) for India. B.ACCOUNTING AND REPORTINGPROCEDURES 3. Government revenues are received either by treasuries and sub-treasuries or by notified banks. Payments are made against bills drawn by Drawing and Disbursing Officers (DDOs) and presented to the treasuries. Certain departments such as Public Works and Forest are empowered to receive revenues directly, which are remittedto the 31Source: http://cag.nic.in/about-dpc3.htm Chapter 111, Section 10 & 11, Duties and Powers of the Comptroller and Auditor-General 32 "...Provided further that the Governor of a State may with the previous approval of the President and after consultationwith the Coniptroller andAuditor-General, by order, relievehim from the responsibilityfor compiling- (i) the said accounts of the State (either at once or gradually by the issue of several orders); (ii) Source: .... http://cag.nic.in/about-dpc3.htm Chapter111, Section10, Duties andPowersofthe Comptroller andAuditor-General. 33This issue involves the GoI, GOO,the staff unions, the RBI and others. This issue is not dealt with further in this Report. 31 treasuries or bank in lump sum and they draw funds through cheques. Monthly accounts submitted to the AG by the treasuries and the departments are supported with requisite schedules and vouchers. From these, the AG compiles monthly accounts for the entire State, showing receipts and payments classified under relevant heads, which closely follow the budget classification. The various departments o f the government also maintain their own accounts for control over expenditure and monitoring of revenue collection. These accounts have to be reconciled with those compiled by the AG to ensure accuracy. The monthly cash balances inthe books of the AG are to be reconciled withthose shown inthe treasuries andinthe books ofthe ReserveBankofIndia. 4. AppropriationAccounts show the accounts of sums expended ina financial year, compared with the sums specified inthe schedule appendedto the relevant Appropriation Act, authorizing the executive to draw funds out of the Consolidated Fund. These Accounts show the savings and excesses under each grant and appropriation, with reasonsprovidedbythe Executive. Inpractice, however, the explanations for savings and excesses are not forthcoming in many cases, and to that extent transparency i s lost. Excesses have to be regularized by the Legislature. It i s through these accounts the Legislature overseesthe legality ofthe expenditure. 5. Finance Accounts show receipts and expenditures from the Consolidated Fund, Contingency Fund and the Public Account, classified under the major and minor heads34. In addition, they show loans granted and investments made in public sector undertakings, loans to local bodies, and loans received fiom Central Government, Life Insurance Corporation, etc. They include all deposit, reserve and sinking funds transactions, showing opening and closing balances. Guarantees given by the Government for loans raised by local bodies, Government commercial concerns and others are enumerated in detail, even though they represent only contingent liabilities. A statement is prepared by summarizing all the debit and credit balances at the end of the year linked to the cash position to "prove" the accuracy o fthe Accounts. Audit Report 6. Inhis audit report, the CAG certifies, not that the financial statements show a true and fair view, but that both the Appropriation Accounts and the Finance Accounts are prepared andexamined under his directioninaccordancewith the CAG's (Duties, Powers and Conditions of Service) Act 1971 and they are correct statements, subject to his ~ 34Chapter Iprovidesandexplanationofthese terms. # The balance increasedfrom Rs 4 billion inFY 97-98 to Rs 8 billion inFY 01-02. In FY 00-01the balance was Rs 6 billion. 32 observations in the Reports themselves or in the Audit Reports. There is no law specifically laying down the form of certificates inthe case o f Government Accounts in India(including Orissa State). C.ACCOUNTING STANDARDS 7. The Go0 accounts are maintained on a single entry cashbasis, and therefore do not show accrued expenses, or accrued income. They also do not show total assets or their depreciation. Accounts for commercial activities of departments, however, are requiredto be maintained inproper commercial form under special rules issued by the Government onthe advice ofthe AG. 8. Since government accounting standards and practices are centrally determined for application throughout the country, their thorough and critical review is best reserved for the Country Financial Accountability Assessment (CFAA) for the whole o f India. It is, nonetheless, interesting to observe how the current application of existing national standards compares with the practice and standards recommended by the International Federation o f Accountants, Public Sector Committee (IFAC-PSC). 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 IFAC3' encourages governments to make. It also encourages governments to progress to the accrual basis o f accounting, for which different standards apply. 9. Evenwithinthe limitations imposed bythe centralized accounting standards, certain current practices could be improved. For example: e Reconciliations: There are large unreconciled differences between treasuries and many public works departments, some datin back to 19641'65. Similarly, 827 loan accounts balances as o f March 31, 20025 ,relating to Urban Development 6 andVillage and Small Industries, amounting to about Rs. 316million, the earliest dating back to 1968/69, had not been accepted by the concerned officers. We recommend that the Go0 appoint a small committee to determine within less than six months howto reconcile or write offthese differences. Such differences are an aggregate of account maintained by the AG and the detailed accounts maintained bythe departments. Timing of Annual Reporting: The current period from year-end to the issue of the AG's accounts (currently about 12 months) could be considerably shortened. Presentation of accounts need not await the submission of the audit report to the Legislature. The State of Karnataka, for example, i s said to have issued its latest annual accounts in four months. We recommend that efforts be made to issue audited accounts ofthe State earlier thanat present. 35Draft: Financial Reporting under the Cash Basis of Accounting, InternationalPublic Sector Accounting Standard (IPSA`S), Issuedby the InternationalFederationofAccountants, January 2003 36 Source: Report of the Comptroller and Auditor General of India, for the year ended 31 March 2002 (Civil), GovernmentofOrissa. 33 0 Comparative Figures:International Public Sector Accounting Standards require that final accounts disclose comparative information in respect o f the previous period for all numerical information contained therein. Except for the summary statement of the Finance Accounts, such comparative information, which facilitates an understandingof changes in government activity from year to year, i s not being provided. We recommend that comparative information for the previous year be provided inall government annualfinancial statements. 0 Computerization: About half of the 38 treasuries have been partially computeri~ed~~.These are not inter-connected. Monthly accounts to the AG are submitted manually, and not through computer software. Full computerization would speed up the preparation of both monthly and annual financial statements. We recommend that full computerization o f the accounting system, including networking with the AG's office, be speeded up and information requirements agreedupon. 10. A detailed comparison o f the above mentioned International Public Sector Accounting Standards (IPSAS) with standards practices by the GOO, reveals significant deviations from IPSAS, which need to be addressed at the national level, where the standards are determined. The Go0 accounts do not include a comprehensive statement of accounting policies; they are published (generally) within 12 months following the ~~ 37 Itis our understanding that 20 Treasuries out of 36 have initiated the computerization process, albeit in a limited manner at this stageof development. 34 I year-end (IPSA'S prescribe 6 months); they do not identify extraordinary items (e.g., disaster relief), they do not disclose fixed assets; andthey do not disclose the proportion o f Go0 ownership o f companies or corporations it controls; inall cases and accounts are maintained on a single entry cash basis instead of double entry system assumed by IPSAS. 11. InNovember 2002 the CAG set up a Government Accounting Standards Advisory Board to formulate and propose accounting standards to improve the usefulness o f Government financial reports. The Board i s headed by the Deputy Comptroller and Auditor General, and includes representatives o f the GoI, State governments, Reserve Bank of India and Private Sector Auditors. An exposure draft on the need for improved disclosure of guarantees has been issued. The question whether the Government in India should switch from cash based to accrual based accounting system has been referred to this Board, which still has to submit its recommendations. Any change in this matter in Orissa Statehas to await the decision ofthe GoI, basedonthe advice of the CAG. D. STAFFINGISSUES 12. The minimum qualification for staff entering the CAG's office i s a university degree. Candidates must also satisfy a Staff Selection Commission. The staff receives adequate training at various times o f their career progression. Written examinations are prescribed for promotion to certain supervisory levels. At higher managerial level, the selection is made by the Union Public Service Commission through a highly competitive examination. There are several training institutes maintained by the CAG to cater to all cadres. E. STATEREFORMPLANS 13. The Go0 White paper on Public Expenditure Management and Administrative Reforms does not contain any specific comment or action planwith regardto accounting standardsor financial reporting. F. CONCLUSIONSAND RECOMMENDATIONS 14. Good financial reporting is crucial for expenditure and revenue tracking. The accounting standards o f the Go0 fall short o f standards (IPSAS) recommended by the IFAC for cashbased financial accounting and reporting, but this is a national, not a State issue, since government accounting and reportingstandards inIndiaare largely controlled from the center, notably by the CAG. The form of the finance accounts needs to be simplified andmade more user friendly inline with best practice. Within the confines of existingstandards, we recommend the following improvements: a) monthlyaccountsshouldbe providedon eachdepartmentofthe Government, andaconsolidated statementonthe Government as awhole showingboth actual and budgetinformationwithin 6 weeks ofthe close o fthe month; 35 b) define withinsix monthshowto reconcile or write offunreconciled differences betweendepartments, treasuries, andothers agenciesor offices; c) discontinue unnecessarytransfers fiomthe ConsolidatedAccount to "Deposits'' inthe PublicAccount; d) issue Annual Financial Statements of the Statewithin six months following the endofthe fiscalyear andplacemonthlyFinancial Statementsonthe net; e) disclose in the Annual Appropriation Accounts Explanations for Savings and Excess (Grants); Q include comparative information for the preceding year in all annual financial statements; g) computerize the State's accounting systemandnetwork it with the AG's office; and. h) providetrainingfor existing staff. 36 CHAPTERVI RURALLOCALBODIES(PANCHAYAT RAJINSTITUTIONS) A. INSTITUTIONALFRAMEWORK 1. PanchayatRaj Institutions (PRI) are the local governmentsinthe rural areas andhave been an integral part of the Indian rural society, albeit in different forms from time immemorial. The Constitution of India38recognized their presence as far back as 1948: 'The State shall take steps to organize village Panchayats and endow them with such powers and authority as may be necessary to enable them to function as units of self government'. 2. The 73'd Constitutional Amendment was a formal instrument introduced by the Central Government in 1992 and was blessed by the State Assemblies, to introduce a minimumlevelofruraldecentralizationuniformly acrossthe States. 3. The Constitution Amendment mandates political empowerment of the PIUs leaving issues of design and implementation on sectoral, administrative and fiscal aspects of decentralizationto the States. InOrissa, the StateAssembly passedthe requiredconformity Acts in 1994, 1995 and 1997 to set in place the present form of the 3-tier system of PanchayatiRaj consisting of Zilla Parishad at the district level (ZP), Panchayat Samiti at the block level (PS) and GramaPanchayat at the village level (GP). 4. PRIs are directly under the general supervision and control of the State. The first State Finance Commission was set up in 1996 to make recommendations as regards the financial powers ofthe panchayats. The presentthree-tier structureinOrissais as follows: Location Nos Zilla Parishad At Districts 30 PanchayatSamiti At Blocks 314 GramPanchayat At Villages 6,234 B. FINANCIALRELATIONSHIPSAND FLOWS 5. In FY 2002, the State Government provided Rs. 9.1 billion39(6% of the State budget4') to PRIs and the Center provided Rs. 3.3 billion. Of the total (State and Center) allocation of Rs. 12.4 billion allocatedto the PRIs, 38% (Rs. 4.7 billion) ofthe funds were providedthrough District Rural Development Agency (DRDA), the nodal agency set up as 38Article 40 PartIV Organisationofvillage Panchayats. 39Databasedon own calculationbasedon official dataprovidedby PRDepartment andfrom State Budget documents. The State budget indicates#at 40% ofthe expendituresrelateto 'district sector'. 37 societies (registered under the Societies Registration Act, 1948) at the district level. The remaining62% (Rs.7.8 billion) was mainlyfor salaries of staff4l. 6. The Panchayat Raj Department (PRD) of the State Government is accountable for ensuring that an adequate financial managementand accountability framework for the PRIs i s inplace and that funds provided by the State and Center are used for purposes intended. The PRIs are expected to provide utilizationcertificates to support their use of grant-in-aid funds. The Finance Department of the State Government conducts full audits of the PRIs. The results ofthese audits are acteduponbythe PR Department. 7. The PR Department is also expected to monitor the implementation of the schemes funded by the State and Center to ensure that the purposes intended are being achieved. Monthly physical and financial progress reports are provided to the PR Departmentby the implementingagencies through DRDAs. The audits of DRDAs are carried out by firms of chartered accountants, in addition to CAG's audits and the reports reviewed by the PR Department. C. FINANCIALACCOUNTABILITY ARRANGEMENTS42 8. STRENGTHSOFTHE SYSTEM: 0 A framework for financial accounting, reporting and auditing is in place for all fundsprovidedto the PRIs. 0 The keyaccounting functions have beenstaffed. 0 Constitution of Palli S a b h a ~(as~ward level constituents o f Gram SabhaM, the ~ general body of the Grama Panchayat) and introduction o f social audit45 arrangements at the Grama Panchayatlevel. 9. WEAKNESSES OFTHE SYSTEM 0 PRIs remainalmost exclusively dependent on funds from the State and Center. This limitsthe extent to which the local governments canbe self-governing bodies.This i s exacerbated by fiscal stresses at the State level making budgeting processes ineffective. 41 One of the major issues facing Orissa is establishing an appropriate proportion between development` welfare expenditure and salaries. 42 A detailed review of the PRIs was undertaken by the World Bank, and a working paper on Public Financial Accountability inPRIswill be availableshortly. 43 Every `Grama' constitutedis divided into wards and for every suchward, a `Palli Sabha' is constituted. 44 `Grama Sabha' i s a village assembly and comprises all persons registered as voters to the Assembly in a village or groupof contiguous villages notified as a `Grama'. 45 `Social Audit' is a mechanism for the `Palli Sabha' to publicly review the development works undertakenwithin their ward. The special meeting convened for the social audit is attended by all Government officials and allows the membersto discusstheir objectionsandresolveby consensusor show of hands ifthe work is satisfactoryand free from irregularities. 38 Major decisions, such as what kinds of programs will be undertaken and who will be the implementing agency, remain with the State and the Center. PRIs play minimal role in the planning and implementation of schemes - for every function that has been devolved to the PRI, there are specific Line Departments o f the State or agencies like DRDAs. Excessive levels of State controls over the PRIs, such as the power of the Collector46 in ordering enquiries against the elected representatives, authority to suspendresolutions passed in the meetings of the elected representatives of PRIs, have resulted inthe PRIs beingperceivedas extensionsofthe State. The accountability o f the executive of the PRI remains essentially to the Collector at the District levelandthe State, andnot to the electedrepresentativesofthe PRIs. The accountability of the elected representatives to their constituents is compromised by their limitedrole inthe managemento f resources spent at each o f the levels of PRIs. The secrecy that surrounds the executive action is most apparent in the selection of beneficiaries for subsidy and poverty alleviation programs - records o f meetings do not show how the choices were arrived at or the options or criteria for selection, often concealing the highlevels of arbitrary decision making. The Management Information System at the PR Department does not provide information on the financial position of PRIs. This limits the ability of the State to take informeddecisions onthe allocation of resources betweenPRIs andto the PRIs as a whole, basedonthe needs ofthe ruralpopulation. There are far too many cases of weak accounting, inadequate internal controls (pending utilizationcertificates for Rs. 910million47for grant-in-aid from the State, unadjusted advances of Rs. 320 million4*for 95 Panchayat Samitis as on 31 March 2002, unspent balances of grants on 31 March 2002 amounting to Rs. 1.2 billion4') and related irregularities, such as diversion of funds reported by the external auditors repeatedly over the years. There appears to be no concrete action plan to address the given fiduciary risk associatedwiththe funds spent inrespectof PRIs. The effectiveness of the audit function is questionable, given (i) largenumberof the pending audits (12,990 GPs from 1995-96 to 2001-02); (ii) no audits of ZPs conducted since 1996-97; and (iii) the large number of surcharge cases pending disposal 50,939 cases amounting to Rs. 123 million as on 31 December 2002 for - GPs alone, besides 43,000 odd cases amounting to approximately Rs. 94 million for PSS. 46 Collector is the administrative head ofthe District and also the Chief Executive Officer of the ZP and Executive Director ofthe DRDAs. 47 As per data providedby the PR Department 48 ASper CAG report(Civil), 2001-02 49 ASper CAG report (Civil), 2001-02 39 D. CONCLUSIONSAND RECOMMENDATIONS 10. It i s clear from the above that the State's handinthe management ofthe PRIs has not allowed the devolution process to proceed as may have been intendedby legislation. The reasonsfor this are complex andworthy of analysis at the national level. 11. The motivation to comply with the accountability framework inplace is undermined bythe diffusion of roles andresponsibilities betweenthe various levels of government with limitedchecks andbalancesprovidedbythe State Legislature, as is evident from the CAG audit reports o f recent years. 12. Steps are being taken to reduce the fiduciary risk. Preliminary discussions have commenced with the CAG on streamlining the accounting and financial reporting systems includingthe consolidation of the internal audit function. Initiatives are beingtaken to train the auditors on PRIauditing. 13. Inthe White paper on `Public Expenditure Management andAdministrative Reforms' publishedin2002, the Go0 committed to a 12 point program for empowering the village panchayats and set up a highpowered Committee under the Chief Secretaryto recommend measures for greater devolution o f powers and resources to the elected local bodies. The Government also committed to take steps to strengthen the capacity of field administration down to the districts and blocks. However, the recommendations made by the high powered Committee in March 2003 to hand over accountability of functionaries of 26 departments to the PRIs was reduced to 11 departments by the Cabinet o f Ministers. The Cabinet also limited the authority o f the PRIs to the approval o f casual leave o f the functionaries. 14. It is evident that the core issue is the need to strengthen the capacity of the PRIs to undertake the functions assignedto them. The recommendations are as follows: i)transferallStateGovernmentfunctionariesworkingonPRIstothePRIs;andin the interimmake State Officials answerableto local electedrepresentatives; and ii)providePRIswiththefundscommensuratewiththefunctionsandaugmentthe capacity o fthe PRIs tos0: raise their own levels ofrevenues; learn from the experiences o f other States, where the accountability o f PRIs is increasingly defined in terms of sector outcomes and increased delegation o f planning, implementation, monitoring and evaluation to the local governments; 50 Fundsavailableare not adequateto carry out the functions assignedto the PRIs. Eithermore funds would needto be allocated, which looks difficult inthe presentcontext, or, the functionsassignedneedto bereviewed. 40 iii)computerizedatabaseonAggregateFinancialPositionandOperationalOutputs ofPRIs andprovide on-line public access to this database; iv) expedite audits, clear arrearsandtake Followupaction; and v) review the need for and simplify the accounting, controls, reporting, auditing arrangements and training requirements of the accounting staff with a view to improving the effectiveness of the financial management system. Further, evaluate the viability and cost effectiveness of introducing computerization at eachlevel. 41 CHAPTERVI1 URBANLOCALBODIES(ULBs) A. INSTITUTIONALFRAMEWORK 1. The legal and institutional framework i s provided by the provisions of the Constitution through the 74* Amendment, the Orissa Municipal Act, 1950 and the Orissa Municipal Rules, 1953. The two Municipal Corporations have been formed by a recent enactment called the Orissa Municipal Corporations Act, 2003, which came into effect from 18-04-2003. The State Government has not passed any specific law inpursuance of the 74thAmendment to the Constitution 2. There are 103 urban local bodies (ULBs) in Orissa, categorized as Municipal corporations (2), Municipalities (34) and Notified Area Councils (67) with reference to the size o fthe population. 3. The elected body comprises the public representatives (called councilors) who hold office for a period of five years. Members of the State Legislative Assembly for their respective constituencies are also members of the council. Additionally Go0 nominates a few councilors. The Council i s the policy making body. Various standing committees are formed as per the statute for rendering specialized functions; there are standingcommittees on finance, public health, hospitals and dispensaries, public works, etc. 4. The ULBs function under the overall administrative control of the State Housing andUrbanDevelopment Department. TheDirectorofMunicipalAdministrationis the head of the department. EachULB is headedby anexecutive officer who i s ordinarily an officer of the Orissa Administrative Service. The executive officers o f the two Municipal Corporations are known as ChiefExecutives. 5. The State Government has the powers to call for information, conduct inspections, give directions, and dissolve a ULB, cancel orders and even rescind resolutions of the Council under specified circumstances. 6. The functions of the ULBs fall under two categories, namely, obligatory functions such as maintenance of roads, street lights, sanitation, water supply, registration of births and deaths, public immunization and regulation of buildings; and discretionary functions such as formation and maintenance of layouts, parks, schools, hospitals, libraries etc., There are separate departments for the performance of these functions besides an administrative and a finance and accounts department. 7. The own resources of the ULBs are very limited. These comprise rates and taxes, includingproperty tax, license and other fees, income from property, receipts under special laws like fees, ferry rent, etc. The major source o f income o f the ULBsi s the grant received from Go0 in lieu of Octroi receipts. Additionally, ULBs receive specific purpose grants from Go0 like road maintenance grant, for payment o f salaries for teaching and non- 42 teaching staff. The ULBs also receive central funds as mandated by the Finance Commission, besidesfunds for the execution of centrally sponsoredschemes. 8. Duringthe year 2002-03, anaggregateamount ofRs. 1330millionwas budgetedby the State for the ULBs. 9. A few construction activities of the ULBsmay be funded from the MP's/ MLA's'' Local Area Development Funds. 10. Go0 has advanced loans to the ULBs. An amount of Rs. 314 million was overdue as on 3lSt March 2002, besides the overdue interest of Rs. 69 million. The amount of guarantees outstanding as on 31St March 2002 aggregated Rs. 230 million. These guarantees had been given for repayment of principal and payment of interest on loans raised by the ULBsfor basic sanitation andwater supply schemes. B. BUDGETARYPROCESS 11. The ULBs prepare an annualbudget inthe format prescribed by law. After approval by the Council, the budget is sent to Go0 for review and finalization. The amendments made by the Go0 are incorporated and the final budget is drawn. The budget estimates of revenue and expenditure are mainly based on ad hoc increases over the previous year's budget, considering the amount of funds expectedto be providedbythe GOO. 12. The government releases the budgeted funds to the ULBs through the controlling department. The funds are released at appropriate intervals. No re-appropriations are allowed except with the approval o fthe Council onthe basis ofthe recommendations ofthe executive committee. There are no off budget items as such unless some specific contributionis made bythe community for execution of a particular public utility. C. MONITORING 13. The Housing and Urban Development Department monitors the activities and functioning o f the ULBs.The receipt o fthe utilizationcertificates i s reviewed every month. The implementation o f some of the major schemes like National Slum Development Project, Swararna Jayanti Sahari Rojgar Yojna and Valmiki Ambedkar Awas Yojana for alleviationo f urbanpoverty is monitored. Inthe context of raising resources for upgrading civic services, according to a study conducted by the Participatory Research in Asia (expected to be published shortly) "the collection efficiency i s estimated to be less than 50%"52. 5' Members of Parliamentand of the LegislativeAssemblyhave allocations of funds authorizedby law to spendat their discretionon local projectsintheir constituencies 52 Business Standard, June 17,2003: page 4, "States sapping local bodiesfinancially". 43 D. ACCOUNTS 14. The ULBs maintain accounts in the formats prescribed in the Orissa Municipal Rules. The accounts are kept on cashbasis and insingle entry form. There are no specified standards or policies for the maintenance of accounts. The books of accounts, records, registers etc., are maintained inprescribed forms under various heads of accounts inrespect o f all transactions. The main accounting record is the cashbook from which accounts are built up in the form of classified registers inwhich revenue and expenditure transactions are entered under different account heads. The classified registers are used for compiling the monthly receipts and payment summary. The annual accounts are prepared from the monthlyaccounts. 15. In terms of the 7 4 Amendment to the Constitution, the State government may ~ make laws for the maintenance of accounts and their audit. In pursuance of the recommendations o f the Eleventh Finance Commission, the Government o f India issued guidelines for utilization of local bodies grants in June 2001. As per these guidelines the CAG has prescribed the format of the budget and accounts for the Panchayati Raj institutions and UrbanLocal Bodies. Orissa has not so far implemented the format. These formats encourage financial accounting on an accrual basis and more effective asset management along with better cost accounting procedures relating to services provided by ULBs. E. AUDIT 16. The audit of the ULBs i s conducted annually by the Local Fund Auditors of the State Finance Department. The government proceduresare followed; no auditing standards as such have been prescribed. Audit covers hundred percent transactions of ULBs. When embezzlements are detected, the auditor has the power to allow the errant employee to deposit the amount to make good the loss. Surcharge i s levied for minor omissions and commissions after due process o f issue of notice to the errant employee. The amount of surcharge can be recovered as arrears o f landrevenue. Serious irregularities are reported to the appropriate authorities for necessary action. Whether action actually takes place is not adequately documented. F. STRENGTHS 17. The main strengths ofthe financial system as prescribedare; 0 Well defined rules and regulations for the functioning o f the ULBs; basic accounting records and formats are well established; Appointment o fthe suitable officials inkey positions; Budgetsare also required to be preparedannually; andalso approved by GOO; System of review o f financialperformance by Go0 i s prescribed; and 0 Hundredpercent audit is done bythe Examiner LocalFundAudit. 44 G. WEAKNESSES There is a gap between precept andpractice. A study o f a selectednumber of audit reports reveals that: Budgets are not beingsent to the Go0 for approval inevery case; Demand andtax collectionrecords are not properly maintained; Embezzlement of tax receipts (money collected from tax payers not credited to ULBsaccounts); Utilization certificates of grants are not being furnished to the State Government; Amounts remainunspentfor the purposesintended; ULB revenues are overestimated by the bodies. Unrealistic estimates are generally not achieved andthe reasonsfor shortfall are not analyzed; The audit o f ULBs i s in arrears. While this has been attributed to shortage of staff, the need is obvious for adoption of scientific systems of statistical sampling. The audit reports needto be placed before the Council; and Further, the transparency of their financial position i s hampered by the lack of audited financial statements showing their assets and liabilities; and there are arrears in independent auditing of their cash transactions. Auditors' reports indicate significant fiduciary risk. H. CONCLUSIONSANDRECOMMENDATIONS 18. The financialpositionofthe ULBsis not very healthy. Only 38 out of 103 ULBs, includingthe two Municipal Corporations are reportedto be operationally sound. There i s need for greater generation o f internal revenues andnarrowingthe tax gap. The option of periodical revision o frates ofthe property tax needsto be exercised. User chargesare another way to augment revenues. 19. The accounts of the ULBs are maintained on cash basis and do not reflect the accrued liabilities, nor the very substantial assets o f these public bodies. The Go0 needs to implement the format recommended bythe CAG. 20. The Housing and Urban Development department needs to present a consolidated picture of the financial and physicalperformance o fthe ULBs.This report should be tabled inthe legislatureonanannualbasis. In view of the above, in consultation with the Go0 the following recommendations are beingmade: i) generate greater internal revenues to narrow the tax gap. In addition, the option of periodical revision of rates o f the property tax should be exercised; ii) enhanceownrevenuebase; 45 iii) implementtheformatrecommendedbytheCAG,astheaccountsofthe ULBs are maintained on cash basis and do not reflect the accrued liabilities. In this regard, improve completeness and timeliness o f Cash Accounts andaccount for the assets ofthese bodies ina manner consistent withthe requirementsfor soundasset management; iv) introduce accrual basedaccounting; v) computerize the accounting systemandrecords of the ULBs; vi) place the audit reports before the Council on a timely basis and avoid future delay inaudit ofthe ULBs; vii) the Housing and Urban Development department should present a consolidated picture of the financial and physical performance o f the ULBs.This report should be tabled inthe legislature on an annual basis; and viii) train employees of ULBs in more modern financial management techniques associated with the need for more cost effective service delivery. 46 CHAPTERVI11 STATE OWNEDENTERPRISES(SOEs) A. INSTITUTIONAL FRAMEWORK 1. The legal and institutional fiamework for the Government companies and the statutory corporations under the control o f the Government of Orissa (GOO) i s provided by the Companies Act 1956 and the specific statutes under which the statutory corporations have beenestablished. These are Central Government laws. 2. As of 31'' March 2002, there were 68 Government companies under the control of the Go0 registered under the Companies Act, 1956. O f these there were 35 non-working companies in the process of liquidation/ closure/ merger etc. In addition there are three statutory corporations. 3. The accounts of the Government Companies are audited by statutory auditors appointed on the advice of the Comptroller and Auditor-General o f India (CAG). Under the law the CAG has the right to give directions to the statutory auditors, review their work, and also to conduct supplementary audit. The audited accounts are presentedat the Annual General Meeting of the company/corporation and are public documents. The annual accounts of the companies and statutory corporations and the CAG's reports thereon are submittedto the Government, which lays them before the State Legislative Assembly (SLA). 4. Under Article 208 ( I) of the Constitution of India the SLA has framed Rules of Procedure and Conduct of Business which among other things, prescribe the constitution of a committee for legislative oversight called the Committee on Public Undertakings (COPU). The COPU follows up on the Audit Reports of the CAG and may also take up matters/ companies not covered by the Audit Reports. Additionally, the Legislature's Committee on Papers laid on the Table monitors the timely submission of the annual reports ofthe statutory corporations andcompanies. 5. The Government companies and statutory corporations function under the respective line departments. Inaddition, the Department of Public Enterprises is the nodal agency responsible for laying down general policies and guidelines for the effective management o f public enterprises, regulating industrial project proposals through the Project Approval Committee, laying down norms for financial discipline, and prescribing modelMemorandumof Understanding B.FINANCIALRELATIONSHIPAND FLOWS 6. Government funds have beenprovided by way o f investments inequity and loans to Government companiesand statutory corporations as follows: 47 1IEquity 1 Loans fruwees in millions GovernmentCompanies 14760 16174 StatutoryCorporations 1853 371 Source: Report of the Comptroller andAuditor General of India, for theyear ended 31 March 2002 (Commercial), Governmentof Orissa In addition, Government guarantees in respect of Government companies and corporations outstanding at the endofMarch2002 are reported to be Rs. 38471 million. 7. The budgetary payments inthe form of equity and loans and grants and subsidies from the State Government to 10working Government companies andthe three statutory corporations during 2001-02 totaled about Rs. 759 million. Source:Report of the ComptrollerandAuditor General of India,for theyear ended 31 March 2002 (Commercial), Government of Orissa 8. Government funds involved in the 35 non-working companies amounted to Rs.869.4 million (equity Rs. 584.2 millionandloansRs.285.2 million). C. ACCOUNTS 9. Only three out ofthe 33 working companieshadfinalized their accounts for the year 2001-2002. None o f the statutory corporations had finalized its accounts. The extent of arrears infinalization of accounts rangedup to eight years. The accounts of non-working companieswere inarrears rangingupto 36 years. 10. SOEs have been informed that the Government will not sanction additional cost of living allowances nor provide additional guarantees unless serious effort is demonstrated towards finalization of annualaudited accounts. 11. The audited reports on all three completed accounts were qualified. Given that similar irregularities are beingpointedout year after year, the qualifications inthe reports of the auditors do not appearto have any effect. D. WORKING RESULTS 12. According to the latest finalized accounts of 33 Government companies and three statutory corporations, 20 companies and one corporation had incurred aggregate losses 48 of Rs. 7320 million and Rs. 143 million respectively. Only seven companies had earned aggregate profits of Rs. 1154 million; the aggregate profit earned by two corporations amounted to Rs. 41 million, The remaining companies had not commenced commercial activities or finalizedtheir first accounts. 13. The accumulated losses of six companies aggregating to Rs. 12280 million exceededtheir equity of Rs. 4748 million. The accumulated losses of the 35 non-working companies, amounting to Rs. 23861 million according to the latest finalized accounts had completely wiped out their equity o f Rs. 22113 million. The main reasons for the losses were understood to be a combination of ineffective management, overstaffing, time and cost over runinproject implementation, lack o f professionalism indecision making, lack of accountability and poor productivity. These enterprises are not always headed by professionals either with aproventrack record or with adequately longtenure to allow for the achievement ofthe highlevels o fperformance. 14. Of all the State SOEs likely to remaininthe Government ambit, the performance o f the power sector, more particularly the energy distributors needto be keenly investigated, to assess: (i) impact of power thefts; (ii) the inability of the distributors to reduce such losses, and (iii) visibility ofrelating the cost of efficient operationswithTariffs. E. REFORMPROCESS 15. The Go0 has initiated a reform process in order to ensure hgher growth, provide competition, promote efficiency, provide good governance and eliminate budgetary support. Some of the enterprises have been divested and various bold divestiture options are being considered for some others. As part o f the reform process, the erstwhile State Electricity Board, a statutory corporation, hasbeen unbundled and power distributionhas been privatized. Government needs to hasten its decision regarding the fbture of companies which have become defunct. Completing their accounts and have them audited would be a good first step. 16. A study has been undertaken on what to do about the loss-making companies while the reform process is implemented. The concern is that the condition of these companies, 49 both physical and financial, will rapidly deteriorate during the period when reforms are being discussed, debatedandimplemented. Suchdeterioration will cause greater stress on the State Budget and will also make the companies more unattractive to any intending buyer, thus reducing the potential realizable value. 17. Go0 inconsultation withthe Ministry of Finance Go1undertook (April 15, 1999) to act upon a time bound reform program for investmentand restructuring of certain State Owned Enterprises. The CAG Report for year ended March 31, 2002 points out that a review of action taken (as at September 2002) indicates that none o f the milestones have been achieved53. F. ACCOUNTABILITY 18. The core issue remains one of accountability. Government companies and statutory corporations are primarily accountable to the shareholder which inthis case i s the GOO. The involvement of government funds also implies accountability to the SLAYand, throughit, to the people o f Orissa State. The legal and institutional framework which lays down the requirements o f presentation of accounts, audit by external auditors and follow upbythe legislative committees is intrinsicallysound. 19. The facts and figures presented above indicate, not only a dismal profitability record, but also a dysfunctional accountability mechanism for most of the Government companies and statutory corporations. There can be no accountability without accounts. Prolonged arrears in accounting and auditing therefore imply a breakdown of accountability. There are also indications that internal accountability mechanisms such as internal control and internal audit are inpoor shape. 20. Inaddition to the weaknessesnoted above: 0 Historically, the Government companies and the statutory corporations have been established with a multiplicity of objectives, which are not always mutually compatible. The duty has been imposed on themto meet certain social obligations which may be inconsistent with the achievements o f purely commercial objectives, yet the cost of meeting the social objectives is not separately disclosed. 0 The issue o f autonomy o fthe Government companies and statutory corporations has not been satisfactorily resolved. Political interference also adversely affects performance. 0 At the same time the monitoring role of Government, which is the shareholder, hasnot been effective. Business plans are not drawn up for state government review on a timely basis. ''CAGReportfor year ended on March31,2002, `Restructuring Programmeof GOO',para 1.5.1, page 13. 50 0 There are audit committees inhighrisk areas such as the power sector, but they do not adequately pursue issues relating to serious audit qualifications and their impact onthe financial statements, nor do they focus the State's attention on the extensive weaknesses ininternal control andinternal audit at SOEs. 0 Responseto external audit andthe recommendations of the legislative oversight committee has beenpoor. 21. This SFAA report does not list all the individual weaknesses in control and accountability identifiedinthe C&AG's Reports54.A careful reading o fthe Audit Report for year ended March 31, 2002 suggests a range o f important issues o f corporate governance that need attention including the need for monitoring Memorandum of Understandings (MoUs) such as between the State Government and the Ministry of Power, Go1on the implementation of the reforms program inthe power sector55.Further, the Audit Report among a range of observations pertaining to a number of SoEs points out for example that despite a hike intariff GRID Corporation o f Orissa Ltd and private distribution companies incurred a loss of Rs. 21 billion mainly due to increase in transmission and distribution losses. Inthe case of the Review on Orissa Agro Industries Corporation Ltd the Report points out that this company need to formulate suitable procurement policies and procedureswith a view to make available agricultural tools and implements at competitive rates to the small farmers. It also points out that improper financial planning and failure to deposit statutory employees provident fund deductions resulted ina payment o fpenal damagesof Rs. 12.2 million. Inthe case ofthe Orissa State Warehousing Corporation head office administrative overheads ranged between 19 and 22% of warehouse receipts during 5 years ended March 31,2002 as against the norm of 8%. The excess expenditure on this account works out to Rs. 80 million. G. CONCLUSIONAND RECOMMENDATIONS 22. The functioning o f the SOEs, at present, falls short o f the legal/regulatory framework laid down for their financial management. To overcome the shortfalls, a reform process has been ~ommenced~~. Go0 reform process of public sector The enterprises envisions the ultimate continuance of only a few selected companies. The opportunities for improvement are accordingly discussed in the context of this ultimate goal. 23. Good Corporate governance requires that there be a successionplaninplace ineach enterprise and senior appointments be madebasedonproventrack record. ~~~ 54 All CAG reports are availableonthe web. 55 CAG reportfor year ended on March 31,2002, `Reforms inPower Sector', para 1.11.1, page 17. 56 The Go0 undertook a detailed review of the SOEs and a White Paper has been issued which providesanalysis on their financialposition. 51 We therefore recommendthat GOO: i) define clearly the specific objectives o f the companies and corporations. When these include the achievement of certain social goals, there should be a clear recognition and statement of the related costs for the proper appreciation o fthe financial andoperating performance ofthe enterprise; ii) make business plans visible and available on a timely basis for state government review; iii)establish an arms length relationship between the Government and the companies and corporations. The latter should have complete operational freedom inreturn for full public financial accountability operating on a timely basis; iv) monitor the SOEs more effectively. Key performance indicators should be identified and periodical reports obtained and reviewed. The number o f such performance indicators should be kept small. Review meetings should be chaired by the Secretary of the line department, at which the representative of the Department of Public Enterprises should be a regular invitee; V I launch a crashprogramme to bringthe accounts o f the entities up to date. The accounts that are produced andpresented should be transparent, any tendency towards proliferation of notes should be discouraged. The notes should generally state the accounting policies adopted, deviation therefrom and such other matters as needexplaining; vi) insist that the effect of any qualifications, observations and comments of external auditors on the working results and financial position should be clearly stated. When such qualifications, observations and notes render the external auditors opinion ineffective, there should be no hesitation in denying an opiniononthe accounts; vii) establish effective audit committees as mandated by the recently proposed amendmentto the Companies Act; viii) discourage and curb the practice of appointing Members of the Legislative Assembly ( MLAs ) to the office o f Chairperson; this has the potential to erode the autonomy of the Government companies and blurs the lines of accountability; ix) respond better to external audit as well as the recommendations of the legislative committee. Individuals should be heldaccountable for their action. Senior Government functionaries should be held accountable for failure to enforce accountability; 52 X I allow the managements sufficiently longtenures to perform effectively andto be held to account. The role of Government nominee directors should be clearly spelt out for determining the accountability of such directors; xi) cause the managements to introduce modern management practices, strengthen internal controls including internal audit and bring them on par withthe best nationalpractices; xii) causemanagementsto introduce greatertransparency inthe Annual Reports to the shareholders which should be a candid assessment o f the achievements and failures, strengths andweaknesses ofthe enterprise, andits systems along with measuresthat arebeingtaken to improve the organization's financial and operating performance; xiii) publish an annual public enterprise survey. This should inter alia give the extent of Government financial involvement in the Government companies and corporations, their state of accounts and working results, achievement of objectives, results o f external audit, recommendations o f the legislative committee and follow up action taken. The survey should be a public document freely available andalso put on the State Government website; and xiv) appoint Chief Executives and directors through transparent selection process with a 3-5 years tenure in order to induct professionals with proven track record. 53 CHAPTERIX EXTERNALAUDIT A. INSTITUTIONALFRAMEWORK 1. India has a unitary public audit function in a federal set up. The CAG is the country's Supreme Audit institution, and also the auditor ofthe Stateof Orissa. H e i s an authority prescribed in the Constitution- an officer neither of the executive nor of the legislature- on par with the apex judiciary. The Constitution prescribes exhaustive safeguards for the independent functioning o f the CAG like guaranteed fixed non- renewable tenure, full access to information, and the right to table his reports at the Legislature without hindrance. In Orissa, the CAG functions through the Accountant General (Audit) located at the State capital Bhubaneshwar. 2. Globally the expectations of the Parliament and the Public from Supreme Audit Institutions (SAIs) have undergone a change. In addition to discharging the traditional functions of highlighting irregularities and pointing out weaknesses, SAIs are expected to play a more proactive role and act as an aid to management in improving system efficiency and effectiveness. While this could be partly achieved through the periodic audit reports, SAIs have been exploring other means of disseminating their findingshdeas to the Public, includingresearchinState Financess7. 3. The framework in India and Orissa is reasonably sound and compares favofably with other developing democracies. However compared to the more advanced Westminster democracies there is room for improvement in the areas of timeliness of audit, emphasis given to the system rather than the transaction audited, building of a stronger working relationship with the auditee and the nature and extent of public interface betweenthe auditors andcivil society. B. SCOPE OF COVERAGE OFPUBLICAUDIT 4. The duties, powers and conditions of service of the CAG are prescribed in the Constitution and the laws framed thereunder more especially, the CAGs (Duties, Powers andConditions of Service) Act, 1971. Inadditionto the audit o f accounts ofthe GOO, he also audits the accounts of statutory corporations, Government companies, other authorities and bodies as prescribed by law. The scope o f coverage is comprehensive withtwo exceptions. First, he is not the auditor o f companies where the State has less than 51% of the equity. The power distribution companies fall in this category. Second, inthe rare case of State owned statutory Corporation where the audit was not assignedto the CAG as was inthe case ofIDCO. 57 Research Paper published by Intemational Centre for Information Systems and Audit (ICISA) Oftice of the Comptroller& Auditor GeneralofIndia 54 C. REPORTINGLEVEL,AUDIT REPORTSAND TRANSPARENCY 5. The CAG submits his Audit Reports to the President or the Governor who shall mandatorily cause them to be laid before the appropriate Legislature. What i s to be included in the Audit Reports is to be decided entirely and exclusively by the CAG. The Reports become public documents after beingpresentedinthe Legislature and are placed on the CAG web site. The CAG also writes on anannual basisto the State Chief Minister about the salient points made in the State Audit Reports. An epitome o f the Audit Reports is also published. D. VISIONAND MISSIONOFSTATEPUBLICAUDIT 6. The public audit function is inthe process o f renewal. The purpose of public audit i s to safeguard the financial interests of the State and to promote accountability and sound and economical management practices. Inpractice, the CAG's audits are mainly to verify compEiance with rules and regulations of the Government and the extent to which program objectives have been met, inthe effort to assist the Legislature in the exercise o f financial control over the executive. Unlike the more developed nations such as UK, Canada or Australia that have a similar constitutional framework of accountability, the focus of audit inIndiahas not beento act as an agent of change and renewal of the public sector, nor to provide independent audit assurance on the fair presentation o f summary level financial statements of the government in accordance with statedaccounting principles andpolicies. This may however changerapidly given the growing interest of the CAG of India in conforming to evolving international standards of public sector audit, and steps underway to modernize of the public audit system. 7. The absence of any definition of the Expression `Audit' inthe Constitution or in the CAG's (DPCS) Act, 1971has enabled audit to respond to the continuous changes in the pattern of Government activities, receipts and expenditure, keep pace with the international developments in the profession, and match the rising expectations of the stake holders regardingpublic accountability. E. CAG'SAUDITING STANDARDS 8. The CAG has promulgated his ownAuditing Standardswhich prescribe principles and practices to be followed inthe conduct of Audit, and constitute the criteria against which the performance of Audit can be benchmarked. The Auditing Standards have drawn heavily uponthe Auditing Standardselsewhere e.g. the INTOSAI, albeittailored to the national environment. These standards and related policies are national, and cannot be changedbythe GOO. 55 F. STRATEGICAUDIT PLANAND CUSTOMIZEDAUDIT PLANS 9. The AG (Audit) prepares a two year rolling strategic audit plan designed to optimally utilize audit resources, meet the constitutional and statutory obligations of State Public Audit, maintain an element of surprise, and ensure that no auditable unit escapes audit over a prescribed time cycle. Deviations from audit plans are requiredto be analyzed and explained. 10. Detailed customized Audit Plans are centrally preparedfor conducting value for money audit of all Indiaprogrammes, projects and schemes that feature simultaneously inthe CAG's Audit Reports on the Union andthe State Governments. Audit plansfor conducting Value for money audits of the State Government programmes, are prepared bythe AG (Audit ). G. AUDIT TYPES AND APPROACH 11. The AG (Audit ) carries out three broad categoriesofAudit: FinancialStatements Audit (essentially for compliance), Financial or RegularityAudit, andValue for Money Audit. Despite this three-fold classification, the audit function is indivisible. The AG (Audit) follows a two track approach: Off-site Audit ofvouchers andaccounts which is conducted inthe office o f the Accountant General, and On-site Audit which i s carried out by deputing peripatetic audit teams to the offices of the auditees. The latter is the principal instrument of audit. Audit teams prepare the inspection reports on the conclusion o f audit after duly considering the replies of the auditees to the preliminary audit memos issued in the course of inspection. A typical inspection report comments upon serious financial irregularities that may need the attention of the Legislature and other irregularities. H. AUDITREPORTS 12. The Audit Reports are shown to the executive at the highest level of bureaucracy at the draft stage. Reports are very informative regardingcases o f non-compliance with government rules and regulations. Recent Audit Reports have indicated weak budget control, insufficient revenue collection, inadequate accounting reconciliation, large wastage o f public resources, inappropriate accounting, poor return on investment, diversion of funds, failure to achieve programme objectives and numerous instances of poor management of public resources including those provided by donors such as the World Bank. The Audit Report for FY02 quotes the specific example of a Rural Development Program in which the auditor tested 42% of the total expenditure and found that only 38% of the test sample was actually spent on the program within the fiscal year. The remaining 62% was either lying unused somewhere, diverted to other uses, or affectedby other irregularities. 56 I.QUALITYREVIEWS 13. Although there exists no formal peer review mechanism at Orissa, CAG's own stringent procedures ensure high quality output. The facts and figures in CAG's audit reports have rarely, if ever, been challenged or disputed, and the Reports enjoy tremendous respect and carry high degree of conviction and credibility. The CAG has his own mechanism for intemal control including internal audit. The expenditures and accounts o f the offices are audited by different specified offices of the CAG. There is no provisionfor external audit ofthe CAG. J. STRENGTHS 14. The public audit function is characterized by high degree of integrity and competence. Inherent strengths of the State Public Audit in Orissa include: high status of the CAG enshrined inthe Constitution; independencefrom the executive as well as the legislature; fieedom of the CAG to define audit scope, determine the nature and extent of audit as well as the scope o f his Reports; the requirement that the Audit Reports should be tabled before the Legislative Assembly, and thereafter become public documents; Auditing Standards promulgated by CAG; well-documented Audit Manuals and instructions; strategic audit plans to ensure optimization o f audit resources; customized audit plans for conducting specific audit tasks; highly informative audit reports; audit comments basedon documentary evidence that ensures their veracity; opportunity given to the executive at each stage to explainand clarify its position; range of pubic sector activities examined and covered; highly professional manner in which the Audit Reports are written; in-built quality control measures for high quality output; and elaborate instructions issued by the state government for settlement of audit objections, response to audit and action on recommendations o f Legislative Committees. K. IMPACTAND FOLLOWUP 15. After being tabled in the Assembly, the CAG's Reports are examined by the appropriate legislative oversight Committee which recommends follow up action. There i s no prescribed role for civil society, and public demand or follow up action is conspicuous by its absence. 16. The Go0 has pointed to the need for improving executive response to audit observations inthe White Paper issued in 2002. The Go0 has also instructed that the reply to the inspection report should be sent to the Accountant General (Audit) within one month. The reply to the draft para for the Audit Report should be sent within six weeks; Explanatory Notes on audit paras should be sent to the Legislative Assembly Secretariat within three (now four) months. Action Taken Notes on the recommendations of the Legislative Committees should be sent within six months. Despite the above measures, however, the impact of public audit on Orissa's development agendaappearsto be minimal. 57 L. OPPORTUNITIESFORIMPROVEMENT 17. The public audit system is not having the desired impact. Perceptions of the auditees in Orissa include that: the CAG's Audit Reports are not timely and speak of matters of the distant past; the reports are too negative and not always presented in a sufficiently constructive manner, and they often do not delve into the cause of the problems detected, and consequently, do not make specific recommendations for operational improvements to governments systems and programs. The auditee points out that there is a call for change inmind-set, makingthe audit an agency for promoting positive changerather thanmerely aninstrument for the detection of irregularities. 18. Inour view the core issue, however, is inadequate response to public audit at all levels, bordering sometimes on indifference on the part of government officials, which has seriously dented the accountability architecture. Inspection reports have been outstanding since 1964-65, the departments do not sendreplies even to draft paragraphs intended for inclusion in CAG's Audit Reports, explanatory Notes on paragraphs finally included in the CAG's Audit Reports have not been furnished from 1989-90 onwards, and a very large number of recommendations of the Legislative Committees are awaiting implementation. The elaborate system prescribed by Government for the speedy settlement o f audit objections, scrutiny o f CAG's reports and action taken on reports of the Legislative Committees seems to have become dysfunctional. More than 60% o f Draft Paragraphs proposed by the Accountant General (Audit) for inclusion in CAG's Audit Reports for the year ended 31StMarch 2002 which were sent to the highest level o f State bureaucracy at the draft stage were not responded to by the Executive. 19. Neither the senior bureaucracy nor the political masters appear to have demonstratedthe will to take concrete action against past irregularities pointed out by audit. There appearsto be very little incentive to take action on suchtransgressions(no matter how severe) given the complexity of procedures for disciplinary action, lack of public demand for financial accountability, and the slowness with which the enforcement machinery works at Orissa inline with other parts ofthe country. 20. The bureaucracy has expressed a view that very often the decisions are the consequence o f the orders o fthe political executive. Inthese cases it would be unfair to expect the bureaucrat to be held answerable. It i s the Minister who should be held answerable. The dilemma that is faced by the civil servants insimilar situations has led to the evolutionof a system inthe Westminster set up whereby a civil servant inthe UK i s authorized to point out to the Minster that he has a duty to report to the CAG any decision which the former believes is improper, unlawfbl or irregular in some material respect. No responsibility attaches to the civil servant where the civil servant i s overruled andhe hasinformed the CAG inaccordancewith the procedure statedabove. At Orissa, the civil servant facing suchadilemma hasaccess to the Chief Secretary. 58 M. CONCLUSIONSANDRECOMMENDATIONS 21. The key problem of external audit as an instrument for reducing fiduciary risk in Orissa State i s notthe quality ofthe audit work or its reporting, but its lack of impact as a result mainly o f the timeliness of reporting and the very poor response to audit findings by the Executive, and lack of public clamor for better response. Selection of topics for audit, basedon more rigorous risk assessmentmay provide an answer to this problem. Another suggestion from the Go0 is to engage auditors to provide an overall assessmentwith a clear opinion, on the quality o f management assessedby audit along withthe irregularities encountered. 22. In Andhra Pradesh, the State Government has made fiu-ther releases o f funds to the executing officers contingent upon their rendering replies to the audit inspection reports, audit paragraphsandPAC recommendations". 23. The Go0 has taken some initial steps to remedy the poor response to audit described above. Among other measures it has set up a committee for each department to follow up on the departmental responsesto AG's queries and the actions taken, and also an `apex' committee headedby the Chief secretary has been established to review the main issues. Implementation of these procedures however has been difficult. There i s no ongoing dialogue with CAG on the core issue of indifference towards follow up, or on the related constraints to satisfactory implementation o f audit recommendations. 24. A set of indicators has also beenprescribed to assess and reviewthe performance andresponsivenessof Government departments. One ofthe indicators prescribed is the disposal of pending audit paragraphs and inspection reports. The rating o f the officers could be reflected intheir Annual Confidential Reports. The senior officers need to be heldaccountable for failure to enforce accountability. To further improvethe audit impact inOrissa, we recommendthe following measures: i) senior officers should review the progress o f settlement of outstanding inspection reports and paragraphs during their inspection o f subordinate offices; ii) empower Financial Advisors to comment on responsiveness of departmental officers to audit in the Annual Confidential Reports of the latter; iii) theofficers oftheAccountant General(Audit) andtheGovernment departments shouldjointly review the pre-2000 inspection reports and consider whether these still need to be pursued; iv) Addition of a clause in the CAG's (DPCS) Act, 1971 to make it obligatory for departmental officers to reply to draft audit paragraphs withinthe stipulatedtime frame; 58 Inthis regard, see box on Government of AP's "Norms of Public FinancialAccountability before releaseand drawl of funds" on page49. 59 V I individuals should be held accountable for their acts of omission and commission; and action should be taken which i s prompt, visible, and acts as a deterrent against similar lapsesandwrong doings; vi) the AG (Audit) should write management letters to the Secretaries of the Government departments every quarter pointing out the cases of serious financial irregularities and system failures noticed during inspections. The management letter(s) should include the adequacy o f follow up action taken on previous audit observations. Additionally, quarterly meetings should be held based on a structured agenda, between the AG (Audit) and each o f the involved departmental Secretaries; vii) strengthenrelationship withAGs inorder to: 0 improve constructivenessandtimeliness of external audit report; 0 ensure emphasis on systems rather than individual transactions; and 0 initiatepreventive rather thandetective measures; and viii) clarify the financial accountability of Ministers as distinct from the Controlling Officers of departmentsandagenciesofthe GOO. At question is what additional incentives could be providedfor the state's bureaucracy to encouragemore timely andsubstantive responseto audit observations. 60 CHAPTERX LEGISLATIVE SCRUTINY AND OVERSIGHT A. INSTITUTIONAL FRAMEWORK 1. Legislative oversight over public finance is the keystone of the architecture of responsible government and parliamentarydemocracy. This involves oversight over the raising of revenues, spendingof public moneys and holdingthe executive accountable for the achievement ofthe designatedgoals, objectives andpurposes. The legalframework is provided by the relevant provisions of the Constitution of India, the laws framed thereunder and the Rules of Procedure and Conduct o f Business inthe Orissa Legislative Assembly promulgated under the Article 208(1) of the Constitution. The institutional framework is on par with the framework at the Union Government level and other state Governments. It also compares favorably with other developing countries and is largely at par withmore developed Westminster democracies. 2. Legislative oversight over public finance is exercised both before and after the raising o f revenues and spending o f public moneys. This chapter is concerned mainly with"ex post facto" legislative oversight. B. MANDATE AND PROCESS 3. The Rules of Procedure and Conduct of Business in the Orissa Legislative Assembly prescribe the constitution of the Committee on Public Accounts (PAC) and the Committee on the Public Undertakings (COPU) for follow up action on CAG's Audit Reports. 4. PAC deals with the CAG's Audit Reports (Civil) and the Audit Reports (Revenue Receipts) which relate to Government departments; COPU deals with the CAG's Audit Reports (Commercial) on Government companies and corporations. CAG's Audit Reports stand remitted to the appropriate committee after their presentation to the Legislative Assembly. C. THE COMPOSITIONOFTHE LEGISLATIVECOMMITTEES 5. Boththe Committees are elected by the Assembly from amongst its members (other than a Minister) according to the principle ofproportionate representation. The Chairmen are appointed by the Speaker. By convention, the Chairman of the PAC i s not from the ruling party. The term of office of members of the Committees is one year. The Committees are provided secretarial support by the Assembly Secretariat. One Section Officer and a prescribed number of assistants are exclusively sanctioned for each of the Committees. 6. Go0 instructions require that the Government departments should furnish detailed explanatory notes to the Assembly Secretariat on matters commented on in the CAG's 61 Audit Reports within a period of three months (recently revised to four months) of their presentation to the Legislature. The Committees are empowered to summon witnesses at the highest level of bureaucracy, send for records and persons, and take evidence. A verbatim record of the proceedings is required to be kept when a witness appears for evidence. The meetings ofthe committee are not opento the public. D. REPORTSOFTHE COMMITTEESAND FOLLOWUP 7. The Committees generally function in a non-partisan manner and their reports embody the decisions of the majority of the members present and there shall be no minute o f dissent. The Committees present their reports to the Assembly as soon as these are ready. Government departmentsare required to furnish statements of action taken on the Committees reports withinsix months of their presentation. E. THE ROLEOFTHE ACCOUNTANTGENERAL(AUDIT) 8. The Accountant General (Audit) assists the Committees in their work by scrutinizing the Explanatory Notes as well as the Action TakenNotes of the departments mainly for their accuracy, preparingquestionnaires for the examination of departmental officers and supporting the Committees duringevidence taking. F. STRENGTHSOFTHE SYSTEM 9. Legislative scrutiny and oversight of public financial accountability has certain inherent strengths, representedmainly by the attributes described above; including both the PAC and COPUhave been establishedunder rules framed interms o f a Constitutional provision; all-party representation; Chairman o f the PAC from a non-ruling party; prohibition o f Ministerial membership; non-partisan nature; majority vote of members present, with no minute of dissent; powers to summon any official; and the support and assistance o f the CAG's organization. Inaddition, conferencesof Chairman of the PACs o f Unionand State Governments are heldperiodically for a mutually beneficial exchange of views. G. WEAKNESSESOFTHE SYSTEM 10. Notwithstandingtheir inherent strengths, the Committees have not been sufficiently effective intheir mainduty o f ensuring proper legislative oversight ofpublic finance. The Committee system works largely in camera - civil society interface remains minimal. The Committees do not table annual reports on their own performance for the Speaker's attention at the Legislature. 11. The mainconcernsinclude the following: e Both the committees are heavily in arrears; PAC from 1990-91 (Audit Report- Civil); and from 1988-89 (Audit Report-Revenue Receipts) and COPU froml987-88 (Audit Report Commercial). 62 0 Government departments have not furnished "SUO moto" Explanatory Notes on Audit paragraphs from1991-92 Audit Report (Civil), 1989-90 Audit Report (Revenue Receipts) Note: The COPU in their meeting held on 13.08.2002 unanimously resolved to waive audit parastill 1992-93. Year of Audit Total paragraphs Number of paragraphs/ reviewsfor Report /reviews inAudit which explanatory noteswere not Reports(Civil) received 1991-92 70 10 1993-94 60 18 1994-95 57 14 1995-96 61 15 1996-97 77 56 1997-98 64 37 1998-99 64 60 1999-2000 54 50 2000-2001 54 54 Total 561 314 L On average 56% of Audit Observations have not beenrespondedto by Line Departments. Similarly, ExplanatoryNotes have not beenfurnishedto 221paragraphs/reviews out of a total number of 578 paragraphs/ reviews which were included in the audit reports (revenue receipts) from 1989-90onwards. 0 Government departments have also not furnished Action Taken Notes on Committees' recommendations. As many as 3193 recommendations o f the Committees are outstanding for implementation. 0 Dueto non-receipt of explanation for overspending bythe departments, excess o f expenditure over the budgetary provisions (Rs. 68 billion) had not been regularized from 1996-97 onwards; an important requirement of the Constitution ofthe financial supremacy ofthe legislature couldnot berealized. 0 The secretarial support available to the Committees is not commensurate with the nature, variety and complexity of issues dealt with in the CAG's Audit Reports, andfollowed up by the Committees. 0 The currently prescribed tenure of one year for the members o f the Committees i s considered muchtoo inadequatefor the effective discharge o f the functions of the Committees. 63 H. CONCLUSIONSANDRECOMMENDATIONS 12. The Legislative oversight and scrutiny system is not having its desired impact onthe State's development process. The core issues are the lack of timely hearings on transgressionspointed out by audit, as well as the inadequate executive responseto both audit and subsequent recommendations of the oversight Committees of the Legislature. There are several factors involved. The main reasons for this, however, are a mindset at both the bureaucracy and the political culture that i s symptomatic of working in camera, along with general apathy to public financial accountability, and the absence of any effective punitive action for failure to respond in a timely manner to audit observations and recommendations ofthe Committees. The needis also evidentfor better researchand organizational support to the Committees, and more civil society participation in their deliberations. 13. Adequate and timely, corrective and remedial action i s the essence of effective financial accountability, the absence of which can breed unhealthy cynicism inthe entire accountability architecture. At issue is the use of public money for development and fightingpoverty. 14. Suitable strategies need to be considered for overtaking the backlog o f arrears and strengthening the oversight function of the Legislature. 15. Both the PAC and the State Government have shown heightened consciousness o f the need for giving timely responseto Audit paragraphs and PAC recommendations with time boundtargets. The measures suggestedinthis paper are expected to fast forward the work of the Committees and enhance their impact on the state's development process. The rolethe Speaker ofthe Assembly and civil society decide to play could be crucial for the way reforms can be affected. Accountability delayed is, like justice delayed, accountability denied to the citizens of Orissa andIndia-rich andpoor. 64 16. Public pressure i s an important element in the governance process that determines the efficiency o f public services, which inturnultimately dependson sound management of public funds. InOrissa, as inmany other States, the civil society needs to be energized and assistedto generate suchpressure. The State Government could take the initiative to evolve suitable arrangement by which informed citizens may act as pressure groups to assist in securing better compliance of principles of public accountability. For example, the Action Taken Report on Audit observations presented to the Legislature could be discussed and commented upon by group(s) of concerned citizens so that public interest andpressurecouldbe generatedonvital issuesof audit ofpublic funds. We recommendthe following improvements: i)encourage enlargementofthe role of AG (Audit) infollowing up cases of previous Audit Reports which the Committees may not like to pursue for detailed examination. Insuch cases the Committees may obtain specific recommendations of the AG (Audit) whether the departmental replies are acceptable and thereafter decide the further course of action. A stringent time schedule needs to be laid down andfollowed for this exercise; ii)suggest to the Speaker that Committees may consider adoption of a similar procedure of examination of selected paragraphs even of current Reports. The Committee should discuss the most recent reports of the CAG as a matter o f priority. The principle of "last infirst out ''i s one way to address the issue; iii)include inthe annual confidential reports of the departmental officers, an assessment of the quality of responseto the audit reports andrecommendations o f the Committees; iv) provide the Committees with secretarial assistance at sufficiently superior levels commensurate with the nature, variety, and complexity of issues dealt with by them; appointment ofexpertson short term contracts maybeconsidered; v) suggest to the Speaker that members of the Committees should have longer tenure; continuity and change can be ensured by stipulating that one third o f the members retire every year; and vi) civil society should be sensitized and involved in the accountability process. Transparency has its undoubted advantages. In more developed democracies the hearings o f the Committees are open to the public. A beginningmay be made by issuing a detailed press release at the end o f each sitting of the Committee. An annual report of the work done by the Committees could also be presented to the House listing the accomplishments o f Committee members and any constraints faced by them. Both these measures will ultimately promote greater involvement of the civil society inensuringpublic accountability. 65 CHAPTERXI FIDUCIARYRISK A. THE OBJECTIVE 1. One of the objectives of this report, as stated inthe opening chapter, is to assess the extent to which public funds inOrissa are exposedto the risk of beingused for purposes other than those for which they are intended; or without due regard to economy and efficiency; in other words, to assess the fiduciary risk59to which such public funds are exposed. Intrying to form ajudgment on this matter, the Orissa SFAA team considered the following: 0 the fiduciary risk assessment methodology of OECD/ DFID; 0 evidence from projects financed by the World BankinOrissa State; 0 independentassessments ofperceivedlevels ofcorruption; and 0 evidence presentedinChapters Ithrough X ofthis report. B. FIDUCIARYRISKMETHODOLOGY OF OECDAND DFID 2. This methodology basically poses nineteen questions under seven main headings in an effort to determine levels o f fiduciary risk. When we asked these questions about Orissa State, we found that the State complies with fifteen out of nineteen criteria inthe methodology. We also found, however, that the methodology apparently fails to assign different weights to the different questions. We believe, for example, that the question of whether rules and regulations are actually implemented should carry more weight than questions about the existence o fthose regulations on paper. A libraryfull of the best laws in the world can provide no assurance onJiduciary risk if the laws are not implemented egectively. This methodology provides a limitedbasis for assessingthe fiduciary risk as articulated inthe BanksArticles of Agreement. C. EVIDENCE FROMWORLD BANK-FINANCEDPROJECTS 3. A recent special review of project audit reports in Orissa State (and Uttar Pradesh State) concluded that there i s limited assurance on the fiduciary risk attaching to Bank providedfundsbecause: 59 TheBank's Charter (Article 111 Section V (b) of IDA'SArticles of Agreement) specifiesthat : The bank shall " make arrangementsto ensure that the proceeds of any loan are used only for the purposes for which the loan was granted, with due attentionto considerations of economy and efficiency and without regardto political or other non- economicinfluencesor considerations". 66 0 it is difficult to judge from project audit reports whether or not there is independent assurance that the funds are actually being used (as distinct from spent) for the purposesfor which they were intended6*;and 0 project audit reports do not address the economy and efficiency aspects of project implementation. 0 The financial management arrangements at the `project level' are subject to similar constraints and shortcomings seen at the state level. While `ring fenced' systems are in place at the project level to provide timely information on the project expenditures and physical progress, the issues of reliability o f the information remain. This is largely on account o f the inability to reconcile the expenditures with the Government accounts and results in CAG annual reports certifying only part ofthe expendituresreported. 0 Additionally, annual CAG audit reports provide only a limited level of assurance on the use o f the funds - focused essentially on certifylng the SOEs and not the total project expenditures. Delays in providing funds for project implementation have been a standard feature of the Orissa portfolio. Though the State provides quite adequately for the project requirements in the budget, cash liquidity problems often result in less than adequate funds being put in the hands of the DepartmentsProject Units for implementation purposes. This leads to inefficiencies in project management. Follow up on audit observations is weak, resultinginsubstantial disallowances being adjusted bythe Bank61. D. INDEPENDENTASSESSMENTS OF PERCEIVEDLEVELS OF CORRUPTION 4. One of several parameterswhich assist indeterminingthe level of fiduciary risk i s the level of reported corruption. In Orissa State there has not been a Country Procurement Assessment Report (CPAR). Authoritative international organizations, such as Transparency Intemational (TI), do not normally publish indices o f perceptions of corruption within states in a country. There is, therefore, no really authoritative assessment o f the level o f corruption in Orissa State, nor is there any reliable way of comparing corruption levels in Orissa State with that in other States inIndia or in other countries. The latest TI index placed India as a whole in79* position out of 90 countries, denoting a relatively highlevel ofperception o f corruptionat the Country level. " " 5. A DFID-financed study of anti-corruption efforts in Orissa State was undertaken in FY 2002. This study did not attempt to determine the level of corruption, either in 6oBasedon a letter of the Country Director, The World Bank, dated January 15, 2003 addressed to the Departmentof EconomicAffairs, Ministry of Finance, GOI, it is understoodthat a review of the independent audit reports submitted for the India portfolio of investmentprojectsindicatesthat inthe State of Orissa, Bank funds totaling Rs. 284 million (out ofIndiatotal ofRs 1536 million) havebeenusedfor ineligibleexpenses. The Go0 has established in each department Audit committees to monitor progresson audit findings as well as an Apex Committeeheadedby the Chief Secretaryto reviewthe processandmonitorthe follow up at each department. 67 absolute terms, or inrelation to other IndianStates or other countries. Itsjustification for the study is that: "The problem of corruption is said to have become deep rooted and to be getting more serious and widespread." The Bank was informed that Go0 plans to formulate and adopt a broader anti-corruption strategy based on wide-ranging consultations andpublic debate62. 6. The study identified both the strengths and the weaknesses in the way in which corruption is beingtackled by Go0 and goes on to recommend that Go0 should develop a simple, clear, coherent and complete strategy to deal with enforcement o f the laws against corruption; education of the whole community on the dangers of corruption; and for reducingcorruption inOrissa State6 . development o f public support. The rePort has a total of twenty-four recommendations 7. None o f the report's analyses, however, helps us injudging the absolute or relative level o f corruptioninOrissa State, or its impact on the level of fiduciary risk. E. THEANALYSIS INTHISREPORT 8. The facts and analyses in Chapters Ithrough X o f this report probably represent our most reliable source of information for assessment of the level of fiduciary risk inOrissa State. The clearest message emerging from those analyses is that although central laws, standards and norms predominate in such key areas as budgeting, accounting and auditing, the Statenevertheless, has scope to manage its resources, andthereby determine the level o f fiduciary risk to which they are exposed. It is precisely in this area of the implementation of existing laws and standards that wide gaps between theory and practice have been observed, as we illustrate below with a few examples flowing from this report. Impact of unrealistic revenue forecasting which ignores the norms of proper budgeting is illustrated inthe table below; Risk: Budget is not realistic. This has adverse conseauenceson expenditure manapement and integrity of the approved Plans (also refer "Budget implementation" and "Cash Management" on Pages 15- 17 o fthis report). 62OrissaMOPMarch28,2003 preparedby PREM 63The Go0 has acknowledgedthe needto address issues offraud, waste andabuse ofpublic funds.The Go0 hasput inplacean internalvigilanceunitineach ofthethree major nonwage spendingdepartments. 68 The regulation requiring monthly reconciliation of accounts is not being complied with in a significant number of cases. Risk: Untimelvhon detection of Fraud and Misclassifications and uncertainty regarding proper utilization. Reconciliation's between AG & Concerned Controlling Officers FY2001-02 No. of accounts for Reconciliation I 290 Reconciliation's not done I 46 16%accountsun-reconciled 9 Rural Local Bodies (PRIs) do not present Utilization Certificates in time, as required by regulations. Amounts pending appear to be larger than necessary. Risk: Delays inproiect implementation PendingUtilization Certificates (rupees in million) .1998199to 2002103 910 L RuralLocalBodies (PRIs) are not beingaudited on a timely basis. Risk:Untimelyhondetection offraud, waste andabuse offunds anddelay inappropriate remedial and corrective action. State-owned enterprises are heavily in arrears in presenting their audited accounts. tisk: The investment inState-ownedcompanies is undermanaged 1 No. of Companies ExtentofArrears 33 Working Companies 85 % in default (up to 8 years) 35 NonWorking Companies 100% indefault (upto 36 years) 9 The Executivedoes not respond adequately to external audit. 69 Risks: 1.Improvementinsystems andprocedures get delayed; and 2. Enforcement is weakened Source:Data Publishedby the Comptroller&Auditor General of badi 0 Excess expenditure is not being regularized by the legislature as required under the Constitution. Cumulative unauthorized expenditure is rising. Risk: Legislature Control of the State budget i s weakened FYI 98 FYI99 FYI 00 FYI 01 FYI02 Rs. 11 billion Rs. 12billion Rs. 39 billion Rs. 64 billion Rs. 68 billion In, perhaps, the clearest illustration of lack of assurance that funds are being applied to their intended purpose, 62% of the tested expenditure in a rural development program was irregular in one respect or another. Only 38% of the tested sample was actually used on the program. Risk: Fundsare not being fully used for purposes intended 70 SWAHNJAYANW GRAMSWAKOZGAR YOJANA by the State Govemme RS. 233.78 WOES I Source: Pg. 129,Report of the ComptrollerandAuditor General of India,for theyear ended31 March 2002 (Civil), Government ojOrissa Note: Rs. I crore = Rs. I O million 9. We compared the audit reports of Orissa with the situation at Kamataka, Andhra Pradesh, Uttar Pradesh, and Tamil Nadu, and found on the whole a remarkable similarity in the messages being conveyed by the State's external auditor's reports. 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Report on the activities of the Department of Public Enterprises for the year 2001-02 by Public Enterprises Department. 77. Reportsof the CommitteeonPublic Undertakings-OrissaLegislative Assembly 78. Reportsofthe Public Accounts Committee, OrissaLegislative Assembly 79. Requirementsfor reporting- information data from State Govt. 80. Revenuemonitoringreports 8I. RulesofProcedureandConductofBusinessinthe OrissaLegislative Assembly 82. Ruth J Alsop et a1 (World Bank), Inclusion and Local Elected Governments: The PanchayatRaj System inIndia 83. S. S. Patnaik, Additional Secretary, Finance Department, Government of Orissa, Presentationon internal audit system made at the General Body Meeting of Orissa Sub- Ordinate Finance Service(Local FundAudit), 23 February 2003 84. Samiksha Darpan (2003), Audit Journal o f Orissa Sub-ordinate Finance Service (Local FundAudit) Association, Bhubaneswar 85. Some Reportsofthe SubjectCommittees andthe EstimatesCommittees 86. State Financial Accountability Assessment (Preliminary Draft) (UttarPradesh) 87. Status ofAudit ofGovernmentCompanies, AG Audit-11, Orissa. 88. Status Paper on " Financial Accountability" Role of Secretary to the Government o f Indiaas the ChiefExecutive Officer (CEO)/Chief Accounting Authority (CAA). 89. Technical Guide on Accounting and Financial reporting by Urban Local Bodies of the Institute of CharteredAccountants ofIndia 90. The debt registers 91. The instructions issued by FinanceDepartment on BudgetFormulation. 92. The OrissaGazette Supplement - ( Publishedby Authority) 93. The OrissaGeneralFinancial Rules 94. The OrissaIndustrial Infrastructure Development Corporation Act. 1980 95. The OrissaIndustrial Infrastructure Development Corporation Rules. 1981. 96. The Overseers - Public Accounts Committees and Public spending - David G. McGee QC 97. The responsibilities of an Accounting Officer Her Majesty's Treasury Government of the UnitedKingdom 98. UnitedStatesFederalManagersFinancial IntegrityAct, 1982 99. Vinod Vyasalu & Abdul Aziz (2002), Organization Review of PanchayatRaj Department inOrissa, DFIDIndia 74 100. WhitePaperon Orissa StateFinances 101. White Paper on Public Enterprise ReformApri1,2002 by Dept. of Public Enterprises, Govt. of Orissa. 102. White Paper on Public Expenditure Management and Administrative Reforms, DepartmentofPublicEnterprises,Governmentof Orissa 75 ListofPersons Met Dr. Bannerji, Joint Secretary, Ministry of Finance (State Plans), Government, of India 2. Dr.P.K. Choudhry, DeputyDirector, Dept.ofPublic Enterprises. 3. Dr.R.V. Singh, Director, PlanningandCoordinationDepartment. 4. Executive Engineer, PrachiIrrigationDivision, Governmentof Orissa 5. Mr.A KNaik, BlockDevelopmentOfficer, PanchayatSamiti, Ghatagaon. 6. Mr.A.K. Sabat, FCA, PartnerofA.K.Sabat & CoyCharteredAccountants. 7. Mr. A.K. Samantaray, IAS, Principal Secretary, Dept. of Housing & Urban Development. 8. Mr.Ashok Patnaik,DeputyDirect, DeptofPublic Enterprises. 9. Mr. Aurobinda Mishra, Deputy Secretary, Finance Department, Government of Orissa. 10. Mr.B. Baral, (Audit Superintendent) 11. Mr.B. K.Patnaik, Secretary, Water Resources. 12. Mr.B.B. Singh Samanta, Engineer-in-Chief, Irrigation Department, Government of Orissa 13. Mr.B.K.Nanda, Director of Treasuries, Government of Orissa 14. Mr. B.K. Tripathy, Dy.Director (Accounts), Finance Department, Government of Orissa 15. Mr. B.P. Misra, Director, Municipal Administration, Dept. of Housing & Urban Development. 16. Mr.BimbadharPatro, Audit Officer, (Head Quarter) 17. Mr.C S Mishra, ProjectDirector, DRDA & Executive Officer, ZP, Keonjhar. 18. Mr. C. Venkatramana, Chairman-cum-Managing Director, National Aluminium Company Ltd. 19. Mr.C.J. Venugopal, IAS,ManagingDirector?OrissaMining CorporationLtd. 20. Mr.DNaik,Additional Block Development Officer, PanchayatSamiti, Ghatagaon. 21. Mr.D.C. Sethi, Executive Officer, GopalpurNAC 22. Mr. D.K. Das, Resident Manager, Adam Smith Institute & Formerly Executive Director (Finance), Industrial Development Corporationof OrissaLimited. 23. Mr.D.K.Samantray ExecutiveDirector (Finance), OrissaMining CorporationLtd. 24. Mr. D.N. Padhi, IAS, Chairman-cum-Managing Director, Orissa Hydro Power CorporationLtd. & Principal Secretary, Dept. ofEnergy. 25. Mr.D.V. Kurien,Adviser, PlanningCommission, Government Of India. 26. Mr.DhirendraSwamp, Additional Secretary (Budget), Government. of India 27. Mr.G.B. Mukherjee, Principal Secretary, ForestDepartment,Governmentof Orissa 28. Mr.GunanidhiJena, OAS,ChiefExecutive, Cuttack Municipal Corporation. 29. Mr.J. Panda, Secretary, Primary Education. 30. Mr.J. Sethi, Deputy Secretary& ProjectDirector, UrbanPovertyAlleviation Cell 31. Mr. J.K. Mohapatra, IAS, Commissioner-Cum-Secretary Department of Public Enterprises 32. Mr.Jena, FinancialAdviser, Agriculture. 76 33. Mr.K.C. Badu, Addl. Secretary, DepartmentofFinance, GovernmentofOrissa 34. Mr.K.N.Ravindra, Company Secretary, NationalAluminium CompanyLtd. 35. Mr.MRDebrata,BlockDevelopmentOfficer, PanchayatSamiti, Khurda. 36. Mr.M.NaveenKumar, IA & AS, A.G. (Audit-11), Orissa 37. Mr.Mahalik, Under Secretary, Dept.of Local FundAudit. 38. Mr.Misra, FinancialAdviser, PanchayatRajInstitutions. 39. Mr.N.Roy, FinancialAdvisor, ForestDepartment, Governmentof Orissa 40. Mr.N.C. DasEx. ManagingDirector, OrissaMining CorporationLtd. 41. Mr. Narottam Das, Ex-Director, Finance, Industrial Development Corporation of OrissaLtd. 42. Mr. P.C. Mishra, Financial Advisor, Panchayat Raj Department, Government of Orissa. 43. Mr. P.K. Mishra, Financial Advisor, Panchayat Raj Department, Government of Orissa. 44. Mr. P.B. Misra, Financial Adviser & Joint Secretary, Dept. of Housing & Urban Development. 45. Mr.P.K. Mishra(Audit Superintendent) 46. Mr.P.K. Mishra, Special Secretary, FinanceDepartment, Government of Orissa 47. Mr.Pattanaik, Secretary, Public Works Department. 48. Mr.Poti, Scretary, Rural Development 49. Mr.Pradhan, Additional Secretary and FinancialAdviser Water Resources 50. Mr.Pradhani, Financial Adviser, RuralDevelopment. 51. Mr.RNDash, Director (SpecialProjects), PanchayatRaj Department,Government ofOrissa. 52. Mr. R V Singh, Special Secretary, Planning and Co-ordination Department, Government of Orissa. 53. Mr.R.Misra, Director, Finance, GridCorporationofOrissaLtd. 54. Mr.R.N. Das, IAS (Retd) Ex. Chairman, OrissaMining CorporationLtd., Ex-Chief Secretary, Government. of Orissa. 55. Mr.R.R.Misra, IRS,DirectorFinance, OrissaHydroPowerCorporationLtd. 56. Mr. S S Sethi, Additional ProjectDirector, DRDA, Khurda. 57. Mr.S.B. Parida, OAS, ExecutiveOfficer, PuriMunicipality 58. Mr.S.C. Bhadra, FCA, PartnerofSRB &Associates, CharteredAccountants. 59. Mr.S.K.Panda,OAS, Executive Officer, BerhampurMunicipality 60. Mr.S.N. Pradhan, (Audit Superintendent) 61. Mr. S.S. Patnaik, Addl. Secretary, Departmentof Finance, Governmentof Orissa 62. Mr. S.W. Oak, Principal Chief Controller of Accounts, Central Board of Direct Taxes, New Delhi. 63. Mr.Samal, Secretary, OrissaLegislative Assembly 64. Mr. Sapneswar Baya, Director (Grama Panchayats), Panchayat Raj Department, Governmentof Orissa. 65. Mr.Sarangi, Secretary, SC, ST and Tribal Welfare. 66. Mr.Senapati, Joint Secretary, OrissaLegislative Assembly 67. Mr. SidharthaPradhan, IRS, Commissioner of Income Tax (Admn. Bhubaneswar) and formerly Secretary, Special Secretary & Addl. Secretary, Dept. of Public Enterprises. 68. Mr. Srinivas Rath, Development Commissioner and Secretary, Planning and Coordination. 69. Mr.T.K. Misra, Secretary, FoodandCivil Supplies. 70. Mr.T.K. Misra, Special Secretary, Transport 71. Mr.Tripathy, Finance Secretary 72. Mr.UtpalBhattacharya, Principal Accountant General, Orissa. 73. Mrs.Anita Pattnak, IA & AS, A.G. Audit-I, Orissa 74. Mrs.Anusuiya Basa, DGofAudit, CAG, India 75. Mrs. Aruna Makhan,Controller Generalof Accounts, New Delhi. 76. Smt. Alka Panda, Secretary, Agriculture. 77. -------------,Grama PanchayatExtensionOfficer, Panchayat Samiti, Khurda. 78. --------------,Grama Secretary, Uparadiha Grama Panchayat. 79. -------------,Sarpanch, Narangarh GramaPanchayat. 78 79 0 00 m 00 m d c I m p' cn N m m . . . . .. . , ... .' ; t_ , ,. ,, .' 2 . . I. II I I .I . . P 01