Report No. 44716-IN India Financing of Panchayati Raj Institutions in World Bank-Financed Operations March31, 2008 Financial Management Unit Document of the World Bank ABBREVIATIONS AND ACRONYMS CAG Comptroller and Auditor General of India CDD Community-driven development DFID Department for International Development(United Kingdom) GO1 Governmentof India IMF International Monetary Fund MoPR Ministry of PanchayatRaj NGO Nongovernmentalorganization OP/BP OperationalPolicy/Bank Procedure PEFA Public ExpenditureandFinancial Accountability PFM Public Financial Management PFMA Public Financial Managementand Accountability PRI Panchayati Raj Institutions GLOSSARY Panchayati Raj Institutions Collective descriptionof the 3 tiers of rural local governmentsacross India, numbering 539 Zilla Panchayat (district level); 6,105 Kshettra Panchayat (block level), and 233,25 1 Gram Panchayats (village level). Gram Panchayat Smallest electedPRIbody at village level. Panchayat Samiti or Kshettra Panchayat IntermediateelectedPRIbody at the block level. Zilla Parishad or Zilla Panchayat LargestelectedPRI body at the district level. Pradhans or Pramukh or Sarpanch Chairpersonof the Panchayatat the village level Gram Sabha (also called Gram Body consistingof persons registeredinthe electoralrolls relatingto a Sansad) village comprisedwithin the area of Panchayatat the village level. CONTENTS ExecutiveSummary .......................................................................................................................................... i I. Introduction............................................................................................................................................ 1 A. Background............................................................................................................................................. 1 B. Approach & Methodology...................................................................................................................... 2 I1. PFMA Fiduciary& InstitutionalFramework......................................................................................... 3 A B .. The Constitution(73rd Amendment) Act, 1992..................................................................................... 3 State LegislativeFramework.................................................................................................................. 4 C. Structures of PRIs-District, Block, andVillage Panchayats................................................................ 5 D Accountability Frameworkfor the Panchayats....................................................................................... 6 E.. Roles of Statutory Institutions................................................................................................................ 7 I11. OverallFiduciaryEnvironment:Policy and Practice........................................................................... 10 A. Summary Findings of Synthesis Study..................................................................................................... 10 B. New Initiativesfor Improvementof PFMA ......................................................................................... 14 C. RecommendedActions from Synthesis Study ..................................................................................... 16 Iv. Approachesto PRIFinancing:Methodsand Schemes......................................................................... 17 A. Tied and UntiedFunds ......................................................................................................................... 17 B. Centraland State Sponsored Schemes.................................................................................................. 18 C. GOVState Government Approaches to World Bank Financingto PRIs .............................................. 21 V. World Bank PoliciesandProceduresAs Apply to PRIFinancing....................................................... 23 A. Expenditure Eligibility Policy.............................................................................................................. 23 B. FinancialManagement Policy .............................................................................................................. 23 C. Procurement Policy .............................................................................................................................. 23 D Disbursement Policy............................................................................................................................ -24 E.. Disbursement Proceduresand Eligibility ............................................................................................. 24 F. Community-DrivenDevelopmentApproaches .................................................................................... 25 G. Anti-CorruptionStandards ................................................................................................................... 25 H. Treatment of FundTransfers to PRIs inthe StateAccounts ................................................................ 27 V I .FiduciaryAspects inWorld Bank-FinancedOperations...................................................................... 28 A. Key Characteristics ofthe FiduciaryFramework for Methods of FinancingPFUs.............................. 28 B. MappingExercise of World Bank-FinancedOperations inIndia........................................................ 30 C. Experiencesfrom World Bank FinancedOperations Outside India..................................................... 39 D. Assessing Performanceof the PRI: The DevolutionIndex................................................................. 41 VI1 BridgingPRIFinancingApproachesthrough Decentralization........................................................... 45 A. Aligning with World Bank's FiduciaryFramework:Two Scenarios................................................... 45 B. Suggestions for Achieving Agreement onthe Two Transfer of FundScenarios................................. 46 Annex A. PublicFinancialManagement FrameworkinKerala.................................................................... 54 Annex B. SummarizedInventoryof FinancialManagementandProcurementArrangements for Selected FlagshipCentrally Sponsored Projects .......................................................................................... 67 Annex C. Checklistof InstitutionalArrangements of Projects inWorld BankPortfolio Implementedby Annex D Mappingof FMArrangements for PRIFinancingin Select World Bank-FinancedOperations...73 .User Groups................................................................................................................................... 70 Annex E List ofPersons met and contacted................................................................................................ . 108 Select Bibliography...................................................................................................................................... 110 Box. Figure.Table Box 1: Major Constitutional Provisions on Planning and PFMA-related Roles and Responsibilities of Panchayati Raj Institutions............................................................................................................... . . 3 Box 2: KeyRecommendations of 1lth Finance Commissionwith Reference to ............................ Central 7 Box 3: Incentive-based Transfer of Funds Pursuantto State Finance Commission.................................... 8 Box 4: Summary Findingso f PFMA PRI.................................................................................................. 10 Box 5: CAG-PrescribedAuditing Standards and Guidelines for PRIs...................................................... 14 Box 6: The FutureofPRIAccountability, 6'h Round Table ofthe Ministryor Panchayati Raj................15 Box 7: Recent DevelopmentsRelatingto Transparency and Social Accountability inKarnataka ...........19 Box 8: Disbursement Procedures: Lump SumPayment or Actual Expenditure ...................................... 26 Box 9: Maharashtra Local Government Incentive Fund:US$4 million.................................................... 42 Box 10: Indonesia: Local Government PFM Measurement Framework..................................................... 43 Box 11: Key Elements of PFMA Framework for PRIs ............................................................................... 51 Box 12: Information about Kerala Mission ................................................................................................. 62 Figure 1. PRI-related Membership & Linkages .............................................................................................. 5 Figure 2: Public Financial Management & Accountability Framework.......................................................... 7 Figure 3: Sources of Funds for PRIs in Kerala.............................................................................................. 56 Figure 4: Public Financial Management and Accountability System-Gram Panchayat ............................. 57 Figure 5: Plan Formulation-A Flow Chart.................................................................................................. 58 Table 1. Typical Contents of PFMA-related Provisions in Selected State Acts and Rules........................... 4 Table 2. Data on Panchayats and Elected Representativesacross 30 StatesKJnionTerritories..................... 6 Table 3: PFMA Components - Desired Policy Outcomes and Practice ...................................................... 12 Table 4: State & Sector Distribution of Bank-Financed Projects Implementedthrough PRIs or its Subcommittees............................................................................................................................... 28 Table 5: Summary Checklist o f Financial Management & Procurement Arrangements in Select Projects in World Bank InvestmentLendingPortfolio................................................................................... 33 Table 6: Number and Average Populationof PRIs in Kerala...................................................................... 54 Acknowledgments Inthis report, the World Bank responds to a request from the Government of Indiato integrate and provide a central role to PRIs inWorld Bank-financedoperations. The report's findings will help to improve the understanding o f the parameters o f compliance with the decentralization framework and an agreement on the principles and elements o f a common PFMA platform for all relevant World Bank-financed operations. The study was conducted during January and June 2007. The World Bank Task Team was led by Manvinder Mamak, who worked closely with Dhimant Baxi (SAWS), Geeta Sethi (SASES), Rajat Narula (LOAG2), Paramita Dasgupta (SASPR), Shelka Arora (SARIM) and S. Satish (SASES) under the overall guidance of Robert Saum and P. K. Subramanian (SARFM). Consulting support for the study was provided by Manoj Agarwal. The study would not have been possible without the comments and advice o f Mr. T. R. Raghunandan (Joint Secretary, Ministry o f Panchayat Raj, Government o f India), Mr S. M. Vijayanand (Principal Secretary, Department o f Local Self Government, Government o f Kerala) and Mr. R. N. Ghosh (Principal Director, Local Bodies, Comptroller and Auditor General of India). The Task Team for the study appreciates the assistance provided by the State Teams o f several World Bank-financed operations in facilitating field visits and sharing their implementation experiences with the World Bank Team. The report builds on the earlier work o f the Synthesis Study on Public Financial Management and Accountability (PFMA) in Panchayati Raj Institutions (PRIs) which provided a reference point for mapping of the PFMA arrangements currently in place and highlightedgood practices that have emerged across the States. The report also draws on the several State Financial Accountability Assessments and PFMA studies of the Panchayati Raj Institutions, including those conducted as part o f the preparationof projects. The Team gratefully acknowledges the collaboration o fthe many people (withinthe World Bank and outside) who contributed in clarifying the decentralization principles and concepts and development o f the agreed approach in the context o f public financial management processes. The opinions presented here and any errors are the sole responsibility o f the authors and should not be attributedto the individuals or institutions acknowledged above. EXECUTIVE SUMMARY The Government o f India (GOI) is committed to strengthening Panchayati Raj Institutions (PRI) with a concerted effort to integrate and secure a central role for the village- to district-level governments in World Bank-financed operations. The World Bank is actively seeking ways o f achieving a greater degree o f internal coherence between Bank-financed operations and consistency with the GO1approach to decentralization. With these objectives as backdrop, the report Financing of Panchayati Raj Institutions (PRIs) in World Bank-Financed Operations provides advice to World Bank task teams and clients for designing appropriate fiduciary mechanisms o f PRI financing, ones that are consistent with the GO1 Constitutional framework and comply with World Bank operational policies and procedures. The report uses findings from a mapping exercise o f ongoing Bank-financed operations in Panchayati Raj Institutions, analyzing the public financial management and accountability (PFMA) and procurement arrangements to determine what has or has not worked well and whether any can be replicated or mainstreamed. The report also covers the efficiency issues o f Panchayati Raj Institutions dealing with multiple financing sources with a resulting heavy-load o f reporting requirements; the extent to which existing PRI systems are beingutilized or could have been utilized, and the views o f PRI staff. The Department o f Economic Affairs, Ministry o f Finance, wrote the following at the start o f the report process: Ministry of Panchayati Raj [MOPR] feels that till now in all the projects including DPIP [District Poverty Initiatives Program] and sector support programs taken up by the World Bank, the emphasis has been on implementation and fund flows through parallel bodies, while the MOPR has been emphasizingon central role to PRIs in all World Bank financed operations. This study may help to integrate all PRIs in all World Bank supported operationsinfuture. This issue o f PRI centrality was exemplified in Karnataka when in2003 the Government issued a Government Order transferring functions, finances, and functionaries to PRIs based on an activity map. In 2004, another Government Order required the transfer of State sector schemes to PRIs. This follow-up order has particular significance for World Bank operations in Karnataka as it (a) prohibits "parallel bodies" from implementing operations in subject areas devolved to PRIs; and (b) explicitly requires World Bank operations to be implemented "through PRIs only". PFMA InstitutionalFrameworkinPRIs The 73`d Constitutional Amendment Act and the 12 years succeeding its passage can be considered the first generation reform period with its central theme being creation and empowerment o f strong Panchayati Raj Institutions. However, the Constitutional provisions alone have not been an effective trigger for several reasons. Working now within the second generation o f reforms, the focus i s on devolution o f an effective functional transfer to Panchayati Raj Institution. From an operational perspective, the focus will be on strengthening administrative mechanisms that enhance the efficiency and capacities o f Panchayats. i The 73rd Constitutional Amendment required the establishment o f a 3-tier PRI structure with elected bodies at village, block, and district levels-ZiZZa Parishad (district level); Kshettra Panchayat (block level); and Gram Panchayat (village level). State legislation sets out the powers, responsibilities, functions, and obligations o f the three-tiered PRIs with regard to public financial management and accountability. The extent o f devolution varies across the States and generally takes three forms: functions, functionaries, andfinances. By and large, the framework prescribed in State Acts rules. The Central Finance Commission has had the legislative mandate to give directions with regard to the finances o f the PRIs. This practice began with the loth Finance Commission constituted after the 73'd and 74th Amendment to the Constitution. The llth Finance Commission in its report expressed concern over the maintenance o f accounts and audits, and noted that while most States had made provisions by way o f legislation for maintenance o f accounts by the Panchayats, detailed guidelines or rules had not been laid out in several cases. In many States, the formats and procedures for maintenance of accounts by these bodies prescribed decades earlier were continuing without improvements that take into account the increase in PRI powers, resources, and responsibilities. OverallFiduciaryEnvironment There is a growing acknowledgement of the centrality o f improved PFM arrangements in PRIs within Central Government and the States. This is evidenced by the increased level o f dialogue on the need for improvements and the measures being taken at both levels. This opens up significant opportunities for the World Bank in moving toward a common platform o f financial management arrangements which are consistent with the PRI's own systems. A 2005 World Bank-conducted study on PFMarrangements at the P k I level concluded that even while a well-defined legal and institutional PFM framework exists, there was considerable room for improvement in implementation. Budgeting in all three PRI tiers i s top-down rather than bottom-up and demand driven, prepared often to comply with statutory requirements and not as a tool for financial control or long-term planning. The PRI-adopted accounting practices have not kept pace with the increased and diversifiedflow o f resources despite legislation that provides for a tight set o f internal controls on the use o f PRI resources. There are no accounting standards or uniform accounting codes. Organized financial reporting i s scant inany o f the three PRItiers. Expendituresreported up the line are not verified for genuineness or accuracy. Although there are many audits, they tend to be late. Audit procedures are also lacking or deficient. On a more encouraging note, there are ongoing initiatives and success stories coming from Central and State levels that have potential for altering the accountability landscape. The innovative People's Campaign for decentralized planning inthe State o f Kerala has provided an excellent model for grassroots participatory planning. The State o f Karnataka has demonstrated that by its efforts to standardize property tax rates in rural areas, tax collection at the PRI level can be increased substantively. The 11th Finance Commission entrusted the technical guidance and supervision o f PRI accounts to the Office o f the Comptroller and Auditor General o f India. .. 11 To fulfill this mandate, the Comptroller and Auditor General have prescribed accounting formats for PRIs, as well as auditing standards. The States o f Orissa and West Bengal are making major headway in strengthening the accounting functions through information technology and inter- connectivity. Community-DrivenDevelopment For several decades the World Bank together with client countries has promoted community- drivendevelopment as means toward empowerment ofcommunities and local governments. The increasing trend o f a new generation o f projects i s funding innovative and flexible approaches to integrating community-driven development and decentralization. The new genre o f projects reflect a trajectory o f control that ranges from community control over development funds to local government control, with a number o f emergingcombinations depending on the scope and nature o f investments. In such local government development projects as in Bangladesh, Indonesia, Mozambique, Rwanda, Uganda, and Zimbabwe, the World Bank's point o f entry i s mainly in financing fiscal transfers and providing technical assistance for local government capacity building. Under most projects, local governments are eligible to receive funding up to a ceiling by jurisdiction or per capita, sometimes with poverty incidence included. Over time, performance-based criteria determine ceilings. Other criteria models for determining eligibility are emerging-central to the process i s establishment o f appropriate 'rules o f the game' for effective participation and accountability. A more systematic effort by the World Bank Office in Indonesia, in cooperation with the Ministryof Home Affairs (Government of Indonesia) and other donors, was designed to develop a measurement framework for local government financial management. This framework comprises a set o f strategic areas from the PFMA cycle, each with a selection o f key PFMA outcomes, a diagnostic tool kit o f selected indicators to help assess the outcomes, and a scorecard. The selected PFMA outcomes, presented in a modular structure, were considered important and relevant in the Indonesian context. The scorecard conveys the state o f PFM systems and practices o f the assessed local governments. Taken together, these would help identify those processes that are weak and not likely to support positive outcomes and help identify strengths and weaknesses o f PFMA systems, institutions, and processes at the local level. The scoring methodology sensitizes this fiamework to both the high performer and low performer yet allows a reasonable degree o f variation between the two ends. The measurement framework was tested in two "well performing" districts enabling the team to benchmark the outcomes. Approachesto PFUFinancing:State and Centrally Sponsored Schemes A centrally sponsored scheme tends to be implemented departmentally or through parallel arrangements-such as with user associations, District Rural Development Agencies, program- specific agencies, nongovernmental organizations, self-help groups-virtually by-passing the Panchayati Raj Institutions. At the 5`h Round Table o f Ministers o f Panchayat Raj at Srinagar, the Ministry o f Panchayat Raj constituted a task force of State PRI representatives to examine centrally sponsored schemess from the perspective o f Panchayats and State governments. Considering the strategic importance placed on these national programs and recognizing that 111 centrally sponsored scheme were likely to remain an important source for development funds, the time was right to consider a scenario wherein the PRIs continue to perform as implementing agents for central programs, but given due consideration to the increasing convergence of financial management requirements for individual programs. It i s this point at which a common set o f rules, regulations, and procedures (to be read as use o f PRI own PFMA systems) emerges as a framework for the requiredscenario. B y adopting a "Big Bang" approach to decentralization, Kerala i s clearly the front-runner in India. Kerala pursued and adopted a wide range o f reforms, including setting up a fiscal transfer system that assigned 20 percent o f the State capital budget as the vertical share for local governments. Derived from various legislative acts, rules, and bylaws, the PFMA framework in Kerala covers the range o f components o f the PFMA cycle, including budget preparation, approval and execution, internal control and internal audit, accounting and financial reporting, and external audit and legislative scrutiny. The framework is designed to provide a strong platform for the State to obtain fiduciary assurances for the effective and economical use o f funds provided to the Panchayat Raj Institutions. In practice, however, the financial control framework lacks rigor and oversight. In its effort to cope with the increasing funds handled by the Panchayats, the State o f Kerala issued several regulations on the use o f funds, which have resulted in an overly complex system. The challenge for the State now i s to simplify, consolidate, and institutionalize the various rules and operating procedures into a fully encompassing legal and institutional framework, updating and modernizing many o f the archaic accounting and reporting systems to support decisionmaking and local governance. CurrentApproachesto PRI FinancinginWorldBank-FinancedOperations In an investment lendingportfolio of 65 ongoing operations financed by the World Bank, there are 18 projects that are wholly or in part implemented either through PRIs or its subcommittees and parallel bodies. Conducted for this report, detailed desk reviews and on-site visits o f 12 o f the 18 projects, essentially in rural water supply and sanitation, watershed development and management, and rehabilitation and maintenance o f tanks, indicate that the portfolio i s aligned with the decentralization process. The move to give PRIs an appropriate, central role in implementation arrangements i s clearly visible inrural water supply and watershed projects; the other sectoral projects such as management o f water bodies and rural roads are still not quite aligned. Financing o f PRIs in World Bank-financed operations has traditionally fallen under sector specific investment lending operations. These are normally tied into strict administrative procedures and expenditures categories that do not give decisionmaking discretion to local governments, making them mere agents o f the Central and State governments. An alternative model o f financing PRIs has emerged wherein the World Bank finances the State in the transfer o f block grants or untied grants to PRIs. By definition, an untied grant should provide a near total freedom o f use to the PRIs. At best, only broad sectoral ceilings and a negative list o f unacceptable works need be prescribed. These transfers are accompanied by significant capacity-building and policy reforms, particularly in the context o f modernizing the PFM systems at the PRIs. iv All World Bank policies required under investment lending also apply to PRI financing operations. In the context o f PRI financing, it means that for each type o f resource transfer to PRIs, the conditions or supporting fiduciary environment should provide assurance that disbursed funds are used for intended purposes. In applying the new country financing parameters to PRI financing, the World Bank Operations Policy (OP) 6.0, Bank Financing, provides additional flexibility in financing block grants, the expenditure composition o f which may at best be broadly determined for the project. The requirements o f OP 10.02, Financial Management, pose some special challenges by way o f conducting assessments o f adequacy o f financial management capacity, determination o f a framework that can apply across a disparate set o f institutions, ability to provide consolidated financial reports o f actual expenditures, as well as determination o f acceptable audit arrangements. World Bank procurement requirements(OP 11.00) apply to operations which finance PRIs as well. OP/BP 12.0, Disbursements, requires that World Bank funds are disbursed for expenditures eligible under the project's legal agreement. In identifying eligible project expenditures which finance PRIs for block grants, the key challenge arises from the difficulty in establishing the point at which the expenditures become eligible for disbursement - on transfer o f funds by the State or when the transfer i s utilized and accounted for. As with all World Bank investment operations, those which finance PRIs are subject to the same fraud, anti-corruption, and relative sanctions, provisions, and remedies. The approaches followed reflect different, though not always contradictory, perceptions o f the role o f local government, and the principles and objectives o f the decentralization process. Complete consensus or coherence on the decentralization agenda among the Government o f India and the States is not always the case. Line ministries and departmentshave differing levels o f ownership o f State's decentralization agenda. The institutional project arrangements may not quite reflect the State's overall vision for decentralization or be consistent with the legal framework for PRIs. As such, the sector line departments and the World Bank task teams may be unable to engage substantively the State Panchayat Raj Departments and their field-level functionaries inthe project preparation processes. In some sectors, the presence o f parallel user institutions with undetermined linkages to the PRIs and legislated by State Acts, like the Water User Associations and Joint Forestry Committees, may overtake project roles o f the PRIs. This course o f action would likely continue to emphasize the ambiguities in the current framework and to pose a continuing challenge for the World Bank in responding to the decentralization agenda. Another important dimension o f the decentralization agenda i s agreement on standardized fiduciary arrangement that allows the existing fiduciary framework to be used for all projects/schemes o f the Central and State governments and other donor partners (including the World Bank). This approach i s consistent with the World Bank's view that the use o f "country systems" has significant potential to improve development impact. The use o f country systems in procurement is still evolving but its application for financial management has increasingly become a part o f regular business practice. In practice, however this poses its own set of challenges, particularly in view o f the significant compliance gaps in PFMA practice at the PRI levels, which puts accountability at risk. V The Way Forward Institutional arrangements in World Bank-financed operations can be seen as moving toward achieving a greater degree o f internal coherence and consistency with the GO1 Constitutional framework for decentralization. While there i s clearly an agreement on the principles, the progress in determining the elements o f a common platform for financial management arrangements for all relevant Bank-financed operations i s at fairly early stages o f development. As part o f project preparation, diagnostic studies of PFM arrangements have been undertaken to understandthe extent of divergence between relevant laws and their practical implementation at the PRI level. The extent to which the financial management systems in Bank-financed operations align with country (PRI) systems will require an assessment o f the adequacy of systems inplace. Normally a demanddriven selection method would be adopted inprojects with due consideration o f geographic and technical aspects. Given that financial management capacity at Panchayats may be at disparate levels, project teams might consider including a summary assessmento f fiduciary capacity o f the selected PRIs as part o fthe sub-project cycle, a point further discussed inthe recommendations below. The India Country Assistance Strategy (FY2005-08) states that the World Bank will ensure its programs are both consistent with and supportive o f a progressive shift to decentralized government. This implies that coherence in Bank-financed operations would be forged around the principles of subsidiarity, downward accountability, and local discretion, alongside specific interventions to support community participation and enhance financial accountability. The long-term goal would be to move toward a scenario wherein all resources are made available to PRIs. The PRI would be allowed to allocate fully according to its own priorities and subject to common processes on planning, financial management, procurement, and community accountability. But among the key stakeholders, it i s recognized that this scenario may take several years to emerge. In the medium and short term, the World Bank will work toward phased convergence o f a common platform o f implementation to manage the flow o f funds, accounting, procurement, and auditing arrangements across all Bank-financed lending where PRIs may have a key role withinthe decentralizationframework. State-level consensus plays a key rolk in achieving coherence on the trajectory o f the decentralization of governance and service delivery arrangements. A decision by a World Bank task team would still to some extent be measured by the State's own commitment to the decentralization agenda. Nonetheless, a default position might be assumed that for World Bank financing insectors where PRIs have a central role-most evidently inrural drinkingwater, rural roads, rural electrification, tanks, education, and health-arrangements would ensure PRI authority over project planning and implementation. Inmost instances this would require a user group (or independent organization) to serve as the PRI subcommittee. It should be noted that financial management i s not the sole determinant over decisions o f whether or not existing institutions will be used for implementingBank-supportedoperations. From the PFMperspective however and subject to the incorporation o f any necessary capacity strengthening measures, the default position would be that the existing P F M institutional frameworks are used for purposes o f Bank-supported operations vi RecommendationsandActions This report provides a set o f recommendations aimed at providing options toward building appropriate financing mechanism while financing through the PRIs. The manner and extent to which these may be applied would to a large extent need to be calibrated on the assessment o f fiduciary risk and the overall enabling reform environment. Inthe two scenarios that emerge as financing options for the World Bank, the suggested approaches may be summarized as follows: 0 Scenario 1, using tied funds for sector specific funding, would entail building into the project design measures that will ensure (a) the centrality of the role o f the State line departments implementing the project to be accountable for the effectiveness o f spending across the PRIs; and (b) the fiduciary arrangements are focused on enhanced levels o f compliance with the existing framework o f rules and procedures. There would however be some challenges in implementing this scenario which might require an incremental approach, calibrated to the perceived risks. 0 Scenario 2, using block grunts or untied funds, would make available untied resources to PRIs for allocation according to their own priorities, subject to common fiduciary standards as established by State legislation and through which they are held accountable by their communities. Higher tiers o f government focus on establishing service standards, monitoring compliance with prescribed rules, and intervening in the case of severe service delivery or financial failures. These operations typically aim to strengthen the PRI system as a whole, including the fiduciary framework and may include a broader set o f financial management and procurement reforms. The key challenge in taking the findings of this report forward would be to initiate a broader discussion within the task teams, with an objective to ensure that the findings are taken on board inthe designof future Bank operations. While this evidently applies to World Bank task teams, the findings have significant bearing on the manner that several GO1programs are designed and the role ascribed to PRIs and therein the fiduciary arrangements. The suggested actions are summarized for the various stakeholders as follows: Governmentof India: 0 Develop a coherent framework for financial and performance reporting o f Panchayati Raj Institutionsthat will provide timely feedback to the State governments as well as GO1 on the efficiency o f revenue mobilization as well as public expenditures at the PRI level. 0 Actively review present portfolio o f centrally sponsored schemes to ensure centrality o f Panchayati Raj Institutions and use o f common fiduciary framework vii State Governments: 0 Update and modernize accounting and reporting rules for PanchayatiRaj Institutions, in line with the commonfiduciary framework. 0 Provide guidance for treatment of project funds in PRI planning, budgeting, accounting, andreportingrequirements. 0 Review and strengthen Local Fund Audit's capacity to undertake timely and quality audits of PanchayatiRaj Institutions. WorldBank Task Teams: 0 Arrange discussionforums within the World Bankto disseminatefindings of the report. 0 Organize workshoph with external stakeholders (including Government of India and State governments) to initiate broader discussion on how the findings of the report apply to the GO1programs. 0 Pilot suggested approaches to the fiduciary arrangements in the design of selected operations from the present pipeline. Form a core team within the Financial Management and Procurement Units to work on the projectdesign of the selectedpilots. ... V l l l I. INTRODUCTION Mindfulof the commitment by the Government o f India (GOI) to strengthening Panchayati Raj Institutions (PRI), the World Bank's India Country Assistance Strategy for FY05-08 states that support to decentralization will be an important focus o f World Bank work with the Central Government and the State governments. To help India realize the potential o f the country's Constitutional amendments, the World Bank will ensure that its programs are both consistent with and supportive o f a progressive shift to decentralized government. InWorld Bank-financed operations where Panchayati Raj Institutions have mandated roles under the Constitution, the Government has requested that these local village-level to district-level government bodies be fully integrated and provided with a central role. The World Bank has responded by actively seeking ways o f achieving a greater degree o f internal coherence between World Bank-financed operations and consistency with the GO1 approach to decentralization. This action requires an understanding of the parameters of compliance with the decentralization framework and an agreement on the principles and elements o f a common platform for all relevant World Bank operations. A. Background A World Bank synthesis study on public financial management and accountability (PFMA) in Panchayati Raj Institutions provides a reference point for mapping PFMA arrangements inplace and highlights good practices that have emerged across the States.' The study concludes that while PRI accountability systems have many weaknesses, incremental steps to improve systems and processes are being taken. Government Round Tables, the Office o f Comptroller and Auditor General (CAG), successive Finance Commissions, as well as civil society have all made a case for improving accounting and procurement, strengthening audit function, building capacity o f accountants and auditors, and bringing about a culture o f transparency. However, given the disparate levels o f improvements in different States, it is quite difficult to set out the weaknesses or the mitigation measures for a generic framework across the country. In furthering the decentralization agenda, it is envisaged that an increasing number of World Bank-financed operations will involve transfer o f funds to PRIs in sector specific investments or tied grants, block or untied grants, or any variations o f the same. While a bulk o f Bank-financed operations have previously dealt with Gram (village-level) Panchayat, there are increasing instances where Zilla (district-level) Parishads and Panchayat Samitis (block-level) have been funded under Bank-financed operations as well. The nature o f fiduciary issues tends to vary across the three different tiers, particularly for the Zilla Parishads, which are quite large in some States. The weaknesses in the fiduciary environment and the regional variations (also noted are disparities within the State) inthe levels o f the fiduciary framework often pose major challenges to World Bank staff indesigning operations in line the World Bank Operational Policy and Bank Procedure on financial management (OP/BP 10.02) and on procurement (OP 11.OO). The ability ' PublicFinancial Managementand Accountability (PFMA) inPanchayati Raj Institutions (PRIs) (Rural Local Governments) Synthesis Study (World Bank, Washington, D.C. 2005). 1 to finance block or untied grants without pre-determined specific end use by PRIs in an investment operation has been extensively discussed within the World Bank. The discussions deal specifically with the context o f identification o f productive expenditures (OP/BP 6.0, Bank Financing) and establishing the point at which the expenditures become eligible for disbursement-on transfer o f funds by the State or when the transfer is utilized and accounted for (OP/BP 12.0, Disbursements). The fiduciary arrangements should be responsive to the nature o f the resource transfer. Buildingfrom the synthesis study, this report Financing of Panchayati Raj Institutions in World Bank-Financed Operations looks specifically at issues o f arrangements for PRI-level public financial management. The arrangements being considered mean the use o f country systems at the PRI level as defined in individual State legislation or rules and regulations defined for the purpose. This report i s designed to provide practical advice that will better enable task teams and clients to understand how PRI financing with appropriate fiduciary arrangements could occur in World Bank-financed operations within the GO1 Constitutional framework and World Bank policies. This report examines the ways inwhich funds can flow to PRIs, the conditions or supporting fiduciary environment that surrounds each o f the financing methods, and the PFMA issues and how they could be addressed. B. Approach & Methodology This report used the active environment o f ongoing World Bank-financed operations to map PFM arrangemenk2 The objective was to analyze what has or has not worked well and determine whether any emerging good practices can be replicated or mainstreamed. While this task essentially entailed desk reviews, onsite visits were also made to the States o f Uttarakhand, Maharashtra, Kerala, and Karnataka. The visits provided opportunities for consultations with project staff, key officials inthe State government, as well as the Panchayat members. Literature reviews and consultations with experts and stakeholders from Central and State governments and local organizations aided in preparing this report. Efforts also went in the understanding and explanation o f the PRI efficiency issues dealing with multiple financing sources and the myriad reporting requirements. Along with view of PRI staff, the reporting also looks at the extent to which existing PRI systems are being utilized or could have been utilized. This i s quite pertinent to a Panchayati Raj Institutions that must deal with higher transaction costs when tied funds far exceed PRI's own revenue and individual funding sources, including Central Government and centrally sponsored schemes, have the own reporting requirements. This report does not address the fiscal decentralizationor equity and inclusiveness issues inPRI - level planning and decisionmaking nor does it seek to define in any manner the rules of engagement, which i s the subject o f other decentralization studies and sector-specific activities. * Financialmanagementarrangements comprise accounting, procurement, financial reporting, internalcontrols, audit andoversight functions, fund flow, transparency, and accountabilitymechanisms. 2 11. PFMAFIDUCIARY INSTITUTIONAL & FRAMEWORK A. The Constitution(73rdAmendment)Act, 1992 The Statement o f Objects and Reasons enacted in the GO1 Constitution(73'd Amendment) Act, 1992, observes that though the Panchayati Raj Institutions have existed for a longtime, they had not acquired the status and dignity o f viable and responsive people's bodies. This has been in part due to an absenceof regularelections; lack of financial resources; prolonged super sessions; inadequate devolution o f powers; and insufficient representationo f such weaker groups as scheduled castes, scheduled tribes and women. Article 40 o f the Constitution, which enshrined one o f the directive principles o f State policy, directs States to organize village-level Panchayats and endow them with such powers and authority as may be necessary to enable them to function as self-governing units. Inthe light o f experience in the past 40 years and in view o f observed shortcomings, the Government recognized an imperative need to enshrine inthe Constitution certain basic and essential features o f Panchayati Raj Institutions to impart certainty, continuity, and strength to them. Box 1 gives major Constitutional provisions related to planning and PFMA-related PRI roles and responsibilities. Box 1: Major ConstitutionalProvisionson Planningand PFMA-related Roles and Responsibilities of PanchayatiRaj Institutions Article 40 enjoins that the States shall take steps to organize village Panchayats with such powers and authority as may be necessary to enable them to function as units of self government. Article 243 (b) defines a Panchayat as an institution of self government and a Gram Sabha as consisting of all persons registered as voters in the electoral roll relating to the village within the area of the Panchayat at the village level. Article 243 A states that the Gram Sabha may exercise such powers and perform such functions at the village level as the legislature of a State may by law provide. Article 243 G provides that State legislatures endow the Panchayats with such powers and authority to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Panchayats for preparation of plans and their implementation for economic developmentand socialjustice. Article 243 H requires the States to authorize Panchayats to levy taxes, duties, etc.; to assign taxes, duties, etc.; and to provide grants and create funds for crediting money received and withdrawals there from. Article 243 Iprovides for the constitution o f a State FinanceCommission to review the financial position of Panchayats and to make recommendationsregarding principles governing distribution of taxes, etc. betweenthe State and the Panchayats, determination of the taxes, etc., which may be assigned to or appropriated by the Panchayats, extending grants-in-aid to the Panchayats, and the measures neededto improve the financial position of the Panchayats. Article 243 J stipulatesthat the States shall make provisions for maintenanceof accountsby the PRIs. Article 243 ZD provides that the States are required to constitute District Planning Committees to facilitate the process of decentralized planning. To be set up in each district, the committeeswould prepare composite plans covering both urban and rural areas. 3 With the promulgation of the Constitutional (73'd Amendment) Act, a new era in federal democratic set-up dawned in 1993 conferring Constitutional status to the PRIs, envisaging establishment of a democratic decentralized development process through people's participation in decisionmaking, and implementation and delivery with devolution of powers and responsibilities upon Panchayats at appropriate levels. As per Article 243G of the Constitution, 29 subjects listed in the 1lth Schedule of the Constitution were identified for devolution to the PRIs. The Government's Ministry of Rural Development was designated for implementation of the 73'd Constitutional Amendment. The Ministry of Panchayat Raj was created inMay 2004 as a reflection of GO1commitment to decentralization. B. State Legislative Framework Article 243 G of the Constitution establishes the legal basis for the empowerment of Panchayats. It mandates that State governments endow Panchayats with such powers and authority as necessary to govern them, while holding the Ministry of Panchayati Raj responsible for ensuring conformity with the Constitutional provisions. State Acts set out powers, responsibilities, functions, and obligations with regard to public financial management. The extent of devolution varies across the States in generally three forms--function, functionary, and finance. By and large, the framework prescribedin State legislation rules provide a common platform (Table 1) for basic level of PFMA procedures, with some variations across States. Table 1. Typical Contents of PFMA-related Provisions in Selected State Acts and Rules PFMA-relatedProvisions Powers, duties,function and Administration of Gram Panchayats Preparationofplan Acquisition of land, Gram Fund andproperty Gramfund FinanceCommission Audit Budget of Gram Panchayat External control Inspection Powerof State government 4 Gram Sabha, Gram Panchayat and committees Rulesregardingthe sittingand quorumof Gram SabhaandGramPanchayatand conduct oftheir proceedings 5 Records and inspections Rulesregardingthe maintenanceof records andregistersby GramPanchayat Preparation of projects and execution of works: Rulesfor the preparationofplansandestimates for works inGramPanchayatandthe executionof works andconditions of sanctions 7 Appointment etc. of servants Officers and servants, their salaries, allowances, andduties Appointment of Panchayatsecretary - Dutiesofsecretary 8 Custody and administration of the Gramfund Maintenanceof Gram fund and its transactions 4 PFMA-relatedProvisions Sanction o f expenditures from Gram fund Instructions for maintaining accounts Audit, steps for dispatch o f audit notes Payment and adjustment o f advances Payment o f bills, vouchers and claims Maintenance o f general cash book Maintenance o f deposit registers Maintenance and verification o f stock book Maintenance o f register o f public works Bills for works Details o f completion certificates Musterrolls for daily labor Finance (annual estimateof incomeand expenditure) Estimates Minimumcash balance of Gram Panchayat Gram Panchayat's expenditures under different heads C. Structures of PRIs-District, Block, and Village Panchayats The 731d Constitutional Amendment requires the establishment of a 3-tier PRI structure with elected bodies at village, block, and district levels. These structures are generally uniform across the country. A sample of the structure prevalent inUttarakhand is shown inFigure 1. Figure 1.PRI-related Membership& Linkages Zilla Panchayats DistrictPlanningCommittee 5 Uttarakhand has a 3-tiered Panchayat system-Zilla Panchayat (district level); Kshettra Panchayat (block level); and Gram Panchayat (village level). All 3 tiers are organizationally inter-linked in as much as the Pradhans o f the Gram Panchayat are members of the immediate superior body; the Kshettra Panchayats; and the Pramukhs o f the Kshettra Panchayat are members o f the Zilla Panchayat. The Zilla Panchayat can delegate its functions to the Kshettra Panchayat which can likewise delegate to the Gram Panchayat. The members o f the Zilla Panchayat and Kshettra Panchayat include other directly elected representatives while all members o f the Gram Panchayat are directly elected. Table 2.Data on Panchayatsand ElectedRepresentativesacross30 StatesmnionTerritories Number of Panchayats Number of elected representatives Gram (village) Panchayats 233,251 2,657,112 Kshettra(blockhntennediate) Panchayats 6,105 157,175 Zilla (district) Panchayats 539 15,759 Note: Numbers are from data as of December 1,2006. Source: The State of the Panchayats: A Mid-term Review and Appraisal (Ministry of Panchayati Raj, Government of India,November 22,2006). D. Accountability Framework for the Panchayats Figure 2 provides an overview o f the basic ingredients o f a PFMA framework that can be applied to the Panchayats. It i s based on provisions o f the Constitution, State legislation, and subsidiary rules. These are built upon the fundamental tenets o f propriety, probity, transparency, and participation and are derived from the following imperatives: Panchayat Raj Act and rules relating to conduct o f business by Panchayats, such as how often and how meetings are to be conducted, and records maintained and disclosed; State Panchayat Raj legislation creating Gram Sabhas and empowering them in plan approval, beneficiary selection, plan implementation monitoring, payment approval, and social audit; Established procedures for accounting and auditing; Framework for participatory bottom-up planning, which reflect the local needs and priorities; Structure for budgeting o f the Panchayats with adequate linkages to plans; Legislative provisions for Right to Information; Mechanisms for periodic disclosure o f information; Legislative provisions for an ombudsman, complaints-/grievance-handling mechanisms; Agreedminimumstaffing pattern particularly at the village level; Administrative mechanism that provides for adequate technical assistance and support to the Panchayat; Legislative or administrative provisions which enable Panchayats to forge links and provide support to local citizen's associations and user groups; Well-functioning system o f standing committees operating at each Panchayat level, which ensures committee-based decisions; Clearly defined system for timely, independent, and effective external audit inplace; Capacity-building plans for training village Panchayat members, functionaries, and departments inplace. 6 Figure2: PublicFinancialManagement& AccountabilityFramework a Public Demand + c 4 c - - Budget Exemion d -Cash Management c -4munrjng and MIS -hternal &ntrol and h d i t c -,%set and Liabilities --c b n a aement c Increased Acciuntability and Improved Service Delivery E. Roles of Statutory Institutions Central Finance Commksion: Beginning with the 1Oth Central Finance Commission constituted after the 73'd and 74th Amendment to the Constitution, the Commission has been giving directions with regard to PRI finances. The 1lth Finance Commission expressed concern over the maintenance o f accounts and audit and noted in its report that, while most States had made provisions by way of legislation for maintenance o f accounts by the Panchayats, detailed guidelines or rules had not been laid out in several cases (Box 2). In many States, the formats and procedures for maintenance of accounts by PRIs prescribed decades ago are continued without making any improvements taking into account the manifold increase in their powers, resources, and responsibilities. The Central Finance Commission also noted that there was no mechanism for collection o f data on the revenue and expenditure o f the three tiers o f Panchayats at a centralized place where it could be compiled and processed. Box 2: Key Recommendationsof 1lthCentralFinanceCommissionwith Reference to .... Accounts and Audit of LocalGovernments States should review the existing accounting heads under which finds are transferred to Panchayats; separate demand heads should be createdinthe state budgets for the rural local governments. The Comptroller and Audit General should be entrusted with the responsibility of exercising control and supervisionover the proper maintenanceof accounts and their audit for all the tiers of Panchayats. The director, Local Fund Audit, or any other agency made responsible for the audit of accounts of the Panchayats, shouldwork underthe technical and administrative supervision ofthe CAG. The Comptroller and Audit General should prescribe the format for preparation of budgets and for keepingof accounts. . Local bodies, particularly the village and intermediate-level panchayats that do not have trained accounts staff may contract out the upkeep of accounts to outside agencieslpersons. The Comptroller and Audit General report relating to the accounts of the panchayats should be placed before a Committee of the State Legislature constituted in the same lines as the Public Accounts Committee. 7 The 12thCentral Finance Commission, while noting that substantial progress had been made in the implementation of the above recommendations, also recommended that funding support continue to be provided to the Panchayats by the States for maintenance o f accounts and building o f a database helping to assure credible information on the PRI finances. Subsequently, guidelines issued by the Ministryo f Finance have made it mandatory to transfer grants released by the Central Government to the Panchayats within 15 days o f the same being credited to the State's accounts, as recommendedby the 12thFinance Commission, State Finance Commission: Article 243 Iprovides for each State to constitute a State Finance Commission. The State Finance Commission reviews the measures needed to improve the financial position o f Panchayats and makes recommendations regarding principles governing distribution o f taxes and other things betweenthe State and the Panchayats; determines the taxes, which may be assigned to or appropriated by the Panchayats; and extends grants-in-aid to the Panchayats. Box 3 provides an example o f the State Finance Commission recommendations in the State of Uttarakhand. The 12thCentral Finance Commission inits report noted however that the convention established at the national level of accepting the principal recommendations of the Central Finance Commissionwithout modificationis not beingfollowedbythe States. Box 3: Incentive-based Transfer of FundsPursuantto StateFinanceCommission RecommendationsinUttarakhand The State Finance Commission has recommended that in a given year, 70 percent of entitled amount be releasedinitially to each Zilla (district) Panchayat; the release of the remaining 30 percent should be linked to the financial and democratic good performanceof eachZilla Panchayat asjudged per the following criteria: Financial performance (15 percent): Four sets of indicators would be adopted: Competitive & productivity tax, as per norms adoptedfor the resourceforecasts; Non-tax revenuesto achieve a minimum growth rate of 5 percentper annum; Clearance oftax and non-tax arrears; and Closing the shortfall betweenpresent level of own resource generationand Rs.10per capita within two years (Le., 2002-03 and 2003-04). Democratic good performance: Progress toward more democratic and efficient working of the institution (15 percent), asjudged by: Frequencyand quality of proceedings of formal meetings of the Zilla Panchayatand its committees; Financial record-keeping; budget quality; and clarity of content, timely decisions, and particularly adherence to approval processes for incurring expenditure; Grading achieved in audit reports, and timely placement of reports before the Zilla Panchayat for discussion andreply. District Planning Committee: As per Article 243 ZD o f the Constitution, States are required to constitute District Planning Committees to facilitate the process o f decentralized planning. District plans should emerge from input by each Gram (village) Panchayat, Kshettra (block) Panchayat, and Zilla (district) Panchayat. District Planning Committees are required to consolidate these plans and draft them into district development plans for finalization by State governments. The process o f consolidation involves searching for optimal solutions when conflicts arise and clarifying technical and economic issues that require reconciliation. The Planning Committee circulars o f October 24, 2005 and August 25, 2006, laid down detailed guidelines to State governments on bottom-up planning through Panchayat, municipalities, and 8 District Planning Committees in conformity with the Constitutional provisions. The 2ndRound Table of State Ministers of Panchayat Raj (Mysore, August 2004 resolved that the District Planning Committee ensures discussions for the 1lth Plan are based on district plans Annual prepared inaccordance with Article 243ZD of Part IXA of the Constitution3. Presentlythere are 13 StatesLJnion Territories that have constituted District Planning Committees in accordance with Article 243 ZD of the Constitution. Many more States are moving to bridge this gap in their preparation for the 1lth and are expected to constitute their District Planning Plan Committee soon. Article 243ZD of Part I X A of the Constitution of India requires every State to constitute at the district level a District Planning Committee (DPC) to consolidate the plans prepared by the Panchayatsand the Municipalities in the district and to prepare a draft development plan for the district as a whole. The detailed provisions relating to the compositionof the DPC, manner in which the seats are to be filled, hnctions which may be assignedto sub committees and selection of Chairpersons of the DPC are to be determined by the State Legislatures. 9 111. OVERALL FIDUCIARY ENVIRONMENT: POLICY AND PRACTICE With the devolution o f significant funds, along with funds and functionaries to the Panchayati Raj Institutions, it i s imperative that they have inplace an appropriate institutional framework for public financial management and accountability as well as systems and processes to effectively discharge their responsibilities to the people. A. SummaryFindingsof Synthesis Study The 2005 World Bank-conducted Public Financial Management and Accountability ( P F M ) in Box 4: Summary Findingsof PFMA PRI Synthesis Study Panchayati Raj Institutions (PRIs) (Rural Local Governments) Synthesis Study covered six Indian Devolution in principle should be followed by States-Karnataka, Orissa, Uttar Pradesh, practical steps for the devolution of funds, Rajasthan, West Bengal, and Uttarakhand. The functions, and functionaries. Fund flows through the hierarchy of PRI levels are study was designedto serve as a reference point for a major bottleneck. mapping the PFMA arrangements, highlighting Requirements for accounts, internal controls, and good practices, and summarizing issues that are social accountability are set out in the PRI Acts most relevant to stakeholders. and Rules; practices across different levels of PRIs and across different States vary and are generally The study finds that even while a well-definedlegal weak. and institutional PFMA framework at the PRIs Among the main weaknesses of PRI audit are the poor quality of audits, no mandate to publish exists, there i s considerable room for improvement audited accounts or certified financial statements, in implementation. Although Gram (village) no statutory mandate to verify assets, and lack of Panchayats have their own revenues from various technical capacity in audit staff. While legislation provides for a tight set o f internal controls on use o f PRI resources, these controls have not curbed thousands o f reported frauds and embezzlements. The accounting practices adopted by the Panchayats have not kept pace with the increased and diversified flow o f resources entrusted to them. There are no accounting standards or uniform accounting codes for Panchayats. Organized financial reporting i s scant in any three PRI tiers. An important component o f vertical reporting i s the utilization certificate o f funds transferred from the Central or State governments. However, expenditures reported back up the line are not verified for their genuineness or accuracy. The statutory auditor o f all Panchayats is either the Local Fund Audit Department or the Office o f Comptroller and Auditor General. Chartered accountants engaged by the District Rural Development Agency audit centrally sponsored scheme funds. Although there are many audits, they tend to be late. Audit procedures are also lacking or deficient. 10 On a more encouraging note, the synthesis study documents several instances o f ongoing initiatives and success stories at the Central and State levels that have the potential for altering the accountability landscape. The innovative People's Campaign for decentralized planning in Kerala has provided an excellent model for other States. Followingthe detailed activity mapping exercise, Karnataka has taken the lead in implementingthe devolution o f funds, functions, and functionaries for all 29 subjects4 assigned to the PRIs. Karnataka has demonstrated that by its efforts to standardize property tax rates in rural areas, tax collection at the PRI level can be increased substantively. The 11th Central Finance Commission entrustedthe technical guidance and supervisiono f PRI accounts to the Office o f the Comptroller andAuditor General. To fulfill the mandate for technical guidance and supervision, the Comptroller and Auditor General has prescribed accounting formats for PRIs, as well as auditing standards. States like Orissa and West Bengal are making major headway in strengthening the accounting functions through information technology and inter-connectivity. Givingthe electorate access to information and introducing social audits at the Gram Sabha level help to ensure accountability and transparency. Good practices, like the Right to Information Act (pioneered in Rajasthan and introduced in 7 other States) and posting o f Gram Panchayat accounts for public display (in Karnataka, Uttar Pradesh, and Kerala among others) are emerging. In summarizing the key issues with respect to PFMA policy and practice in Panchayats, an attempt has been made to adapt the Performance Measuremedt Framework issued by the Public Expenditure& Financial Accountability (PEFA) Secretariat' to suit the local requirements. The key components o fthe PFMA framework, as may be applicable to Panchayats and desired policy outcome in each strategic area, are presented in Table 3. The practices described in Table 3 are derived from the World Bank synthesis study. While the observations generally represent the overall practice, there are notable exceptions and good practice examples are documented inthe study. Many new initiatives are also underway and discussed inthe following section. The Eleventh Schedule of the Constitution of India lists 29 subjects ranging across agriculture, infrastructure, health, education etc. The PEFA Framework incorporates a PFM performance report and a set of high-level indictors that draw on the HIPC expenditure tracking benchmarks, IMF fiscal transparency code and other international standards. It forms part of the strengthened approach to supporting PFMA reform, which emphasizes country-led reform, donor harmonization and alignment around the country strategy, and a focus on monitoring and results. This approach seeks to mainstream better practices that are already being applied in some countries. See Public Financial Management, Performance Measurement Framework, PEFA Secretariat, June 2005, www.pefa.org 11 Table 3: PFMA Components -Desired Policy Outcomes and Practice Desiredpolicy outcomes Practice Budgeting Inpractice, most development works at the PRI level occur Each PRI has a budget that covers all sources with tied finds (centrally sponsored scheme, State plan and utilization o f finds; the budget is available funds, etc.), making the planning exercise top-down. The to all members o f the General Assembly in an budget exercise is essentially an extrapolation based on easy and understandable form. figures from the previous year plus an inflation factor and is limited to own revenue sources and the low levels o f untied grants. See Note 1. Cash andfundpow management Fundflows from external sources, constituting a bulk o f the All revenues and grants are received in a funds at the PRI, remain by and large, unpredictable - predicted manner. partly on account o f delays and partial transfers. Own income, from taxes and levies, suffers from low collection rates. See Note 2. Internal controls In general, the State acts and rules have a tight set o f Basic procedural controls are in place; all internal controls for the use o f resources by way o f payments properly authorized and documented, transactional and budgetary controls. However, in practice, all receipts properly accounted for, the control measures are not implemented diligently, reconciliations/confirmation carried out on a reconciliations with Treasury books and bank balances regular basis, key financial decisions recorded in remain pending. Internal audit at the PRI level i s by and proceedings (minute) books. large non-existent or inadequate. Accounting Accounting by and large remains inadequate in scope, Accounting books are maintained regularly and timeliness, and reliability. Accounting formats and practices cover all receipts and payments; Accounting remain fragmented (for each source o f find) and no follows double entry bookkeeping systems and standards have been established. Accounts are maintained is maintained on a cash basis. on single entry cash-based system and are handled by the secretaries, who are not trained accountants. See Note 3. Asset management While accounting rules require the maintenance o f Complete records o f the assets o f the PRI are stocWasset registers, PRIs do not normally follow these maintained and updated on a timely basis. rules. Controls over assets are weak; there is no verification o f assets inannual audits. Procurement Procurement, particularly at the village level, is small in An efficient system o f procurement is in place terms o f size and value. Current procurement procedures promoting increased competition among vendors revolve mostly around direct contracting and through and providing greater value for money to the quotations. There are only a few examples o f open Plus. tendering. Various threshold limits are in vogue (for each scheme or project) and need to be harmonized. Procurement i s generally carried out by the Pradhan andor the Secretary and the involvement o f the respective committee is not visible. Post-procurement procedures for custody and management o f assets are weak. Financial reporting The State acts normally provide for the preparation o f Financial reports (receipts & payments annual financial statements and are essentially focused on statements, statement o f assets) are regularly upward accountability. Financial reporting for prepared and presentedto the General Assembly schemes/projects requirements vary and may follow and the authorities. different formats and frequency. At the village level, there is by and large a general lack o f awareness among the constituents about the various development and welfare schemes. See Note 4. 12 Desiredpolicy outcomes Practice External audit PRI audits are generally in arrears and audit follow up is External audits are carried out regularly; main limited. While the system has in-built provisions for findings of audit report discussed in General punitive surcharges, this i s not effective due to long drawn Assembly and appropriate follow-up actions out recovery procedures. Among the chief weaknesses of taken. PRI audits is the lack of a mandate to publish annual performancereports or certified annual financial statements of PRIs. See Note 5. Oversightand local transparency Subject to the rules, all records of administrative and There is a high degree of local level financial proceedingsof the PRIs are open for inspectionon transparency, includingpublic displays insimple payment of nominal fee. In addition, the Central and State and understandable forms on financial position governments have issued several directives to ensure and physical progress. transparency in the use o f public finds, including public displays, social audits, etc. SeeNote 6. Note 1: Severalmodels o f integratedplanning appro; hes have emerged. In Kerala, the use of Voluntary Technical Corps to assist the Gram Panchayatsin'the 'People's Planning Process' was a bold initiative, even as new thinking of the subject suggests that the model is being considered as overregulated and essentially unsustainable. In West Bengal, Gram Sansads have been given a significant role in identification of schemes, which the Panchayatsare obliged to incorporate inthe annual plans. Similarly, NGOs such as the Consumer Unity and Trust Society in Rajasthan, have shown that bottom-up needs assessment is feasible through carefil micro-planning at the village level. The Kamataka Local Fund Authorities Fiscal Responsibility Act 2003, covering the PRIs establishes an overarching framework for preparation of a Medium-Term Fiscal Planthat outlines the mission and goals of the entity. Note 2: Good practices emerging from Karnataka include the significant increase in property tax collections following amassive survey of the dwelling unitswithin the boundariesof each Gram Panchayat. Inanother initiative taken by the Government of Karnataka, the hnds transfer process from the State to the local rural governmentshas been streamlinedby entering into service agreements with 18 banks for e-transfers. Note 3: New Initiatives are being taken in Orissa to strengthen accountability through an ambitious e-governance program. This includes web-baseddata management systems to (a) track finds transferred across the three PRI tiers and online information on the cashhank scheme-wisebalances; (b) provide access to citizens to track allocations, expenditures, etc. on wage employment schemes; and (c) facilitate transmissionof block accounts to districts/State. The new set of accounting rules drawn up by the Government of Karnataka for Gram Panchayats is yet another example of good practice and aims at modernizing and updating the accountingrules. Note 4: Several good practice examples have emerged in the area of financial reporting. In West Bengal, some Panchayats (Howrah Zilla Panchayat) routinely publish their annual accountsheports and make this available to the public.InRajasthan,the PanchayatiRaj Departmentreceives quarterly and annual progress reports from all district and block PRIs; the reports from the Gram Panchayat are retained at the block level. In Maharashtra, the Zilla Panchayat accounts are published in the Official Gazette. Introduction of Right to Information Act inRajasthan,Karnataka, Uttar Pradeshand Kerala grant every citizen the right to obtain copies of official documents by paying a small fee. Note 5: Pursuant to the 1l*Finance Commission recommendations, the Office of Comptroller and Auditor Generalhas prescribed Auditing Standardsand Guidelines for Certificationof PRI Accounts. Note 6: This is an area which has perhaps seen the largest number of innovations. Some noteworthy developments are (a) introduction of public displays (Karnataka, Uttar Pradesh, Kerala among others); (b) televising the proceedings of Gram Sabha (Beandur Gram Sabha, Tamilnadu); (c) issuing a Citizens' Charter (Andaman & Nicobar); (d) holding Jan Sunvai or public hearings (Rajasthan); (e) initiating Jamabandi as a form of social audit (Kamataka) and (f) enlisting an ombudsman to deal with complaints regarding corruption at PRI levels. 13 B. New Initiatives for Improvement of PFMA Initiatives taken by the Office of the Comptroller and Auditor General aim to achieve harmony in budgeting, accounting, financial reporting, and auditing across the country. Pursuant to the recommendationsof the 11th Finance Commission in2001,the Comptroller and Auditor General has undertaken several initiatives aimed to standardize and improve PFMA arrangements of PRIs: a Twenty-two States have entrusted account maintenance and auditing to the CAG technical guidance and supervision for all three PRI tiers. The CAG has approved parameters in 5 States for engaging outside agencies to clear arrears in preparation of accounts. a To achieve uniformity, 16 accounts and budget formats are in place for receipts and payments with appendices for assets created, accrued income/expenditures, etc. Eighteen States have acceptedthe formats with some modifications. a Nine States have conducted the first phase of train-the-trainer programs to upgrade the skills of the Local FundAudit Department. a The Office of the Comptroller and Auditor General has prescribedauditing standards for PRIs (Box 5). Box 5: CAG-PrescribedAuditing Standards and Guidelines for PRIs These CAG-prescribed standards govern the conduct of the audit and determine what the auditor must do. The Office of the Comptroller and Auditor Generalis hopefid that these standards for audit of PFUs will help government auditors to foster a greater sense of responsibility, promote public accountability, and provide valuable assurance to concerned state and union territory agencies and other stakeholders. At present, as part of the audit of local bodies, the Director of the Local Fund Audit Department or the Examiner of the Local Fund does not generally certify the accounts. Rather it is a transaction audit only. Current audit procedures do not include physical verification procedures. Moreover, there is no provision for publishing the annual performance reports or the certified financial statements. The "`presents fairly" basis of accounting should not be significantly different fkom, and no less onerous than, the "true and fair view" basis of accounting adopted in the private sector. The former derives from generally accepted audit practices. Incentives for empowerment and accountability in Panchayati Raj: At an All India Panchayat Adyaksha Sammelan held in New Delhi, April 2002, a resolution passed that recommended an appropriate structure of providing incentives to recognize and encourage the Panchayats for outstanding performance. From this genesis, a scheme for Panchayat awards was instituted in 2005-06. In addition, the Ministry for Panchayati Raj felt that it was equally important to recognize the role of State governments and broadened the awards for the best performing States and Panchayats. The award indicators included the adequate devolution of functions, funds, and functionaries as exemplified by activity mapping, the extent of devolution of funds in accordance with activity mapping, and the control vested in Gram Panchayats over village-level functionaries. States were graded on the basis of the enabling powers given to Gram Sabhas, particularly the steps taken and orders issued with regard to facilitating regular and proper functioning of Gram 14 Sabhas. Their efforts to ensure effective participation of the marginalized and for putting in place proper arrangements for enabling the Gram Sabhas to undertake social audit were also considered. Three monetary awards of Rs.5 crore, Rs.3 crore, and Rs.1.2 crore were given to three top-ranking States, respectively. Following on this scheme, the Ministryhas also piloted a small scheme (awarding Rs.5 crore) to provide incentives recognizing Panchayat empowerment. Important milestones would trigger the proposed incentives to operate. These incentives were signing of a memorandum of understanding with the Union Government, deputing of functionaries for administrative functions in the Panchayats, transferring funds in the State budgets directly to Panchayat accounts, ensuring appointment of a Secretary for each Gram (village) Panchayat, assigning powers to the Gram Sabhas for selection of beneficiaries, and constituting District Planning Committees. The Ministry is now designing a more comprehensive scheme of incentives, based not on individual criteria but a more nuanced devolution index. The scheme will also cover the aspect of accountability of performance of Panchayats. Round tables for consensus building. In order to ensure that a national consensus is evolved through mutual consultations on the roadmap for Panchayati Raj, several round tables of State Panchayati Raj Ministers with the Union Minister have been convened to discuss identified dimensions of Panchayati Raj ranging from devolution of functions, funds, and functionaries; to district planning, training, ca acity building, and technology for enabling e-governance. Key actions coming out of the 6tF Round Table convened by the Ministry of Panchayati Raj are summarized inBox 6. Box 6: The Future of PRI Accountability, 6thRoundTable of the Ministry or PanchayatiRaj I The following actions should be consideredto strengthenPRI accountability: I 1. Standardshould be issuedto ensure that audits are efficient and achieve their purpose and there should be input from the PRIs. The focus of these standards should be fund management and tracking, not the flow o f funds. These standards shouldbe elementary, simple, and comprehensibleto elected representatives, and should focus on: When transactions should be examined; What should be monitored; How transactions shouldbe documented; and How they shouldbe disclosed. 2. For auditing to be effective, a National Accounting Standards Board should be established for local government accounts. This Board should complement the establishment of audit commissions or similar regulatory bodies at the State level. 3. An effectivesystem of internal audit should be set up. 4. Public Accounts Committees specific to PRIs should be set up. Alternatively, PRI accounts should be submitted to Panchayati Raj Committees o f the State Legislatures. A State-level committee to settle audit paragraphs is also an option. 5. PRIstaffing capacity and their audit offices should be expanded and staffingconstraints removed. 6. Social audits and other social accountability mechanisms should be encouraged. These mechanisms should exist not only at the Gram (village) Panchayat level but also at higher levels. There also needs to be adequate provision for follow up and public disclosure o f audit findings. 7. Those States that have not yet adopted the CAG-issued Technical Guidance and Supervision Guidelines should consider doing so. 15 C. RecommendedActionsfrom Synthesis Study It is appropriate to acknowledge that, while PRI accountability systems have many weaknesses that need to be corrected, incremental steps to improve systems and processes are being taken in several directions. The Government's Round Tables, CAG-issued guidelines for technical guidance and supervision, successive Finance Commissions as well as civil society representatives have made a case for improvements in accounting, strengthening the audit function, building capacity o f PRI accountants and auditors, and bringing about a culture o f transparency. The key action steps included inthe World Bank synthesisstudy remainvalid: 0 Devolution inprinciple should be followed by practical steps for the devolution o f funds, functions, and functionaries. 0 The budgeting and budget execution functions are dependent on the amount and timeliness o f funds flowing to PRIs. It i s thus critical that timely transfer o f funds i s made directly to the level for which they are meant. 0 Given the importance o f timely, accurate, and reliable financial reports as the basis o f accountability to civil society for usage o f public funds, due attention to the accounting function i s required. In this context, efforts would be required to strengthen accounting capacity at the village level, to ensure that the Gram (village) Secretaries who are responsible for accounting are trained and that the accounting requirements simplifiedto meet the increasing levels o f public funds handled at each level. 0 A vibrant control environment is important to a well-functioning PFMA system. New developments with respect to creating demand for accountability are seen as important steps inthis direction. 0 The external audit function serves the role o f independent scrutiny and attestation and therefore serves as an important means o f assurance. The steps taken by the Office o f the Comptroller and Auditor General to strengthen the process and quality o f audits through its mandate for technical guidance and supervision i s a good beginning and will help restore the validity o f the assurance function. 16 Iv. APPROACHES PRIFINANCING: TO METHODSSCHEMES AND This chapter discusses the methods and schemes for distributing fundto the Panchayat. A. Tied and UntiedFunds Funds are distributed to PRIs in either of two methods: tied funds or untied (or block grant) funds. (1) Tiedfunds Tied funds generally refer to all scheme-based, non-discretionary grants tied to a specific investment or activity transferred to PRIs. These include a multitude o f Central schemes, centrally sponsored schemes, State schemes, and all externally aided projects. These are normally tied into strict administrative procedures and expenditure categories that do not give discretion to local governments for making their own decisions and, in essence, making them mereagents o fthe Central and State governments. Typical features o ftied grants include: 0 Limitedexpenditure discretionto meet local needs and preference, 0 Uniform entitlements independent o f need or fiscal capacity, 0 Often unpredictable transfers renderingplanning meaningless, 0 Generally ring-fenced financial management arrangement. In the present scenario wherein the PRIs own revenue sources are negligible or limited, these grants often form a bulk o f the funds available to the PRIs. Partly in order to meet the scheme requirements, these funds are typically maintained in separate bank accounts, accounted for, and reported separately at periodic intervals through utilization certificates. Many o f these scheme accounts are also subject to audit by private chartered accountancy firms engaged by District Rural Development Agencies (the normal conduit for fund flows for Central and centrally sponsored schemes). Meeting the separate system and reporting requirements o f the different schemes can easily overwhelm the capacity o f the already stretched administrative capacity o f the PRIs and detract from development impact. While the obvious fallout i s increased administrative costs in meeting the myriad reporting requirements, accountability to voters i s an implication that must not be overlooked. (2) Untiedfunds or block grants By definition, a block grant (also called untiedfunds) would provide near total freedom o f use to the PRIs. At best, only broad sectoral ceilings and a list o f unacceptable works need be prescribed. Within this broad framework, PRIs are allowed to prepare any program in consonance with local needs. Thus PRIs are permitted to sanction administratively any scheme that they develop within the budgetary allocation and guidelines for usage without reference to any agency. The PFM framework has evolved substantively over the last decade to adapt to the block grant type o f transfers from the State. Not much experience is available nationwide inthe use o f untiedgrants, with the exception o f Kerala and (to a small extent) Karnataka. A defining feature o f the Panchayati Raj Institutions in Kerala is the fairly large share o f State- provided block grants and the PFM framework put in place for the State to derive assurance on the use of funds for intended purposes. Inadopting the "Big Bang" approach to decentralization 17 and adopting a wide range o f reforms, including setting up a fiscal transfer system that assigned 20 percent o f the State capital budget as the vertical share for local governments, Kerala i s quite clearly the front-runner o f decentralization inIndia. Derived from various legislative acts, rules, and bylaws, the PFMA framework covers the range o f different components o f the PFM cycle. Budgetpreparation; approval and execution; internal control, including internal audit, accounting and financial reporting, and external audit; and legislative scrutiny are designed to provide a strong platform for the State to obtain fiduciary assurances for the effective and economical use o f funds provided to the Panchayat Raj Institutions. In practice, however the financial control framework lacks rigor and oversight. In its effort to cope with the manifold increase in the abundant funds handled by the Panchayats, the State o f Kerala has issued several regulations on the use of funds, which have resulted in an overly complex system. The challenge for Kerala now i s to simplify, consolidate, and institutionalize the various rules and operating procedures into a fully encompassing legal and institutional framework, updating and modernizing many o f the archaic accounting and reporting systems to support decision making and local governance. Annex A provides a preliminary assessment o f the practice o f public financial management in Kerala. The major challenge from an accountability aspect in case o f untied block grant funding is to establish mechanisms to track and confirm that the use o f resources are consistent with the intended purposes and that remedies have been defined and processes elaborated to recover misused resources and/or penalize these misuses. Accountability i s defined as the state or responsibility o f being required to give an explanation for one's action or inaction. In the context o f local governments, accountability also refers to answerability o f the elected functionaries or institutions to the public and includes the existence o f mechanisms, which ensure that appointed officials and elected functionaries are answerable for their actions and use o f public resources. The primary tools used to enhance accountability include GradWard Sabhas, beneficiary committees, citizens' charter, Right to Information, internal, external and performance audits, suggestion boxes, complaint-handling mechanisms, and social audits. Box 7 gives examples o f recent developments in Karnataka related to transparency and social accountability. B. CentralandStateSponsored Schemes (1) Centrally sponsoredschemes Centrally sponsored schemes have been part o f the fiscal transfer landscape o f India for decades. At present, there are more than 200 centrally sponsored schemes, involving over Rs.72,000 crores per annum given either as grants, loans, or other contributions by the Central Government to the States. At an operational level, the largest inflow o f resources to State governments i s through centrally sponsored schemes. Design and implementation o f the centrally sponsored schemes need to ensure Panchayats complete control over the funds as well as ownership. A task force constituted in 2001 by the District Planning Committee to formulate operational guidelines departments observed that centrally sponsored schemes continue to be implemented departmentally or through parallel arrangements-user associations, District Rural Development Agencies, program-specific agencies, nongovernmental organizations, self-help groups virtually by-passing the PRIs. 18 Box 7: RecentDevelopmentsRelatingto Transparencyand SocialAccountabilityinKarnataka Jamabandi - is a form of social audit that now exists in Karnataka. The Executive Officer of the Taluk Panchayatappoints a senior officer to conduct aJamabandi inthe presenceof all elected representatives from the respective Gram (village) Panchayat and the public at large. The designated officer has to examine all activities undertaken by the Gram Panchayat during the previous year. If any member of the public wishes to examine pertinentrecords, he or she may do so andthe Jamabandiwill issue a reportthe next day. Ward Sabha and Gram Sabha - Ward Sabha may forward various issues to the Gram Panchayat. The Gram Panchayat, inturn, may placethe recommendations of all Ward Sabhasbeforethe Gram Sabha. The Gram Sabhas have been statutorily empowered to make decisions on as many as 21 subjects. Gram Sabhas must conduct business four times a year and develop a specific agenda for each of them. Decisions by Gram Sabhas regarding the selection of beneficiariesare binding on all implementingagencies. Gram Sabhas may also generate proposals and determine the priority o f all schemes and development programs for implementationinthe Panchayatarea by the Zilla Panchayator Taluk Panchayats(TP). Karnataka Transparency Act and Right to Information Act. All PRIs are under the purview of these two Acts. The former requires the tendering o f works over a specified limit; the latter gives the people the power to obtaincopies of PRI official documents. Disclosure of Assets and Liabilities. To ensure accountability, it is mandatory for elected members of Zilla Panchayatand Taluk Panchayatsto hrnishelectionexpenses to the State ElectionCommission.Likewise,elected members of Zilla Panchayat and Taluk Panchayats will have to submit details o f their personal assets and liabilities annually or they will be disqualified. Several amendments to the Karnataka Panchayati Raj Act have transferred the Government's powers to the State Election Commission. These amendments set the Government apart from the PRI electionprocess. Ombudsman. The State has proposed an ombudsman in each district. The ombudsman would deal with complaints regardingpoor administrationand corruptionby the PRI. The Ombudsmanwill act as a fact-finding and problem-solvingbody without the trappings of a court. During the 5thRound Table of Ministers of Panchayat Raj at Srinagar, the Ministryof Panchayat Raj constituted a task force to examine centrally sponsored schemes from the perspective of Panchayats and State Governments. The task force, comprising State representatives of Panchayati Raj, submitted its reports in December 2004 and issued the following main recommendations: Institutesafeguardsto prevent diversion of Central funds meant for Panchayats; 0 Issue baseline standards inaccounting and auditing; 0 Implement a legal and administrative framework that emphatically holds Panchayatsto account for transparency and for full disclosure of information; and 0 Devise prompt, web-based monitoring of performance of Panchayats down to the village level. Since 2004, several Central ministries have incorporated appropriate provisions in critical programs, such as the National Rural Employment Guarantee Act, the National Rural Health Mission, Sarva Shikha Abhiyan, and the Mid-Day Meal Program, to ensure the centrality o f the Panchayats inplanning and implementing these schemes. Considering the strategic importance placed on these national programs and recognizing that centrally sponsored schemes are likely to remain an important source for development funds, it 19 may be useful to consider a scenario wherein the PRIs continue to perform as implementing agents for central programs. There would be an increasing convergence o f financial management and procurement requirements placed upon PRIs in individual programs, to the point at which a common set o f rules, regulations, and procedures (to be read as use o f PRI- owned PFM systems) begins to emerge. Emergingfrom this scenario would be requirements for greater levels o f transparency and realism in fund allocations and disbursement in accordance with the PRIbudget calendar. Funds would flow to specific bank accounts but be accounted for in the PRI books o f accounts, reported from the PRIs own monthly consolidated financial reports, and audited as part o f the annual consolidated audit o f the PRI. A rationale for such an approach could be promoted by the evident reduction o f transaction costs to the PRI, enhanced ownership, and strengthened systems to close the gap between policy and practice. Overall, use o f its own systems would have significant potential to improve PRI development impact. A review of the financial management and procurement requirements o f selected flagship centrally sponsored schemes from this perspective inAnnex B suggests that there are significant opportunities for achieving a greater degree o f coherence between both the financial management and procurement requirements o f the various centrally sponsored schemes and consistency with the PRIs own systems and for the Central ministries to make concerted efforts to harmonize around strengthened country systems. (2) Rapid transfer of funds to Panchayats. The Government o f India made a commitment to ensure that all funds given to States for implementation o f poverty alleviation and rural development schemes by Panchayats are neither delayed nor diverted. In light o f this commitment, the Ministry o f Panchayat Raj constituted a task force inJanuary 2005 to examine the feasibility o f rapid fund transfers. Once the task force agreed to the feasibility, the Ministry recommended adoption o f the system to the Central and State governments. Computer-based software has now been prepared by the Ministry o f Panchayat Raj to maintain a database o f the bank accounts o f all 240,000 Panchayati Raj Institutions to facilitate transfer o f funds through banking channels, preferably electronically. Karnataka has implemented the system, using the fast expanding electronic network o f banks to transfer funds from the State Treasury to individual Panchayats. The Karnataka State Government sends (12'h Finance Commission) funds and its own untied statutory grant to all Panchayats through banks without any intermediary directly from the State Department o f Panchayati Raj. The arrangement includes 6 nationalized banks and 12 Grameen Banks, in which all 5,800 Panchayats at all levels hold accounts. The system protects Panchayats from Treasury bans and has reduced the maximum time taken for funds to reach each Panchayat from 2 months to 12 days. 20 C. GOI/State GovernmentApproaches to WorldBankFinancingto PRIs The Department o f Economic Affairs, Ministry o f Finance, wrote the following at the start o f the report process: Ministry of PanchayatiRaj feels that till now in all the projects including DPIP [District Poverty Initiatives Program] and sector support programs taken up by the World Bank, the emphasis has been on implementation and fimd flows through parallel bodies, while the MOPR has been emphasizingon central role to PRIs in all World Bank financed operations. This study may help to integrate all PRIs in all World Bank supported operations in future [from letter dated March 17, 20061. The 37threport o f the Standing Committee on Urban and Rural development observed that "not only pre-Part IX parallel bodies like District Rural Development Agencies, joint forest management, and water user groups are working, but certainpost-amendment parallel bodies like expert committee in Kerala and Janmobhoomi in Andhra Pradesh are also there".6 The Committee also noted that although the Line Ministries and Departments agrees that these parallel bodies are undermining the decisionmaking powers o f Gram Sabha and Gram Panchayat in respective States, nothing concrete has been done to remedy the situation. The Committee, therefore strongly recommended that all parallel bodies and programs working in various States should be brought under the overall monitoring and supervision o f Panchayats at the appropriate level. The Second Round Table o f State Ministers o f Panchayat Raj (Mysore, August 2004) agreed that "the Central and State governments may evolve modalities and mechanisms for granting permission to parallel bodies, including those established by foreign and multilateral donor agencies, so that parallel bodies do not undermine the Constitutional authority o f PRIs as institutions o f self-government but work together to their mutual benefit and the common benefit of the community". Over the last decade, many States have made several increasingly significant commitments toward functional and fiscal decentralization to local governments, including Panchayat Raj Institutions. These commitments have taken the form o f State Acts, subsidiary regulations, and Government Order covering matters from financial management and procurement to elections. In Kamataka, a 2003 Government Order transferred functions, finances, and functionaries to PRIs based on an activity map. In2004, another Government Order required the transfer of State sector schemes to PRIs. The latter Government Order has particular significance for World Bank operations in Karnataka as it (a) prohibits "parallel bodies" from implementingprojects in subject areas devolved to PRIs; and (b) explicitly requires World Bank operations to be implemented "through PRIs only". Several reasons are given why project authorities and village communities prefer the user group route rather than the Gram Panchayat subcommittee option: (a) members o f Gram Panchayat subcommittees are nominated by the Panchayat whereas executive body o f societies are elected; (b) more party politics leads to increased conflict (for example, a newly elected sarpanch stalled payments for work done under the previous incumbent); (c) sometimes the subcommittee Fromthe StandingCommittee report on the implementationof Part IX of the Constitutionpresentedto the Lok Sabha on 28 June 2002 and the Rajya Sabha on 20 November 2002. 21 membersexpect kick-backs from works implemented, barring which payments are delayed; and (d) there is a fear that user chargesmay beusedfor other developmental works inthe village. Conceptually however, a clear distinction needs to be made between projects supporting the delivery of basic local services, where local governments have a readily identifiable and high- priority responsibility, and those projects that are focused on supporting livelihoods (or private goods). This distinction assists indetermining the institutionalarrangements within World Bank operations to conform to the decentralization framework and avoids placing functions that are best left outside of direct localgovernment responsibility withintheir operational domain. 22 V. WORLD BANKPOLICIESAND PROCEDURESAS APPLYTO PRIFINANCING All World Bank policies required under investment lending apply to PRI financing operations. An overarching requirement, as stated inOP 10.00, Investment Lending: Identification to Board Presentation, is that all investment operations must be consistent with the World Bank's Articles of Agreement.7 Inparticular, this refers to the clause regarding use of financing proceeds for the purposes intended. Inthe context o f PRI financing, it also means that for each type of resource transfer to PRIs (e.g., block grants, specific investment), the conditions, or supporting fiduciary environment be determined in a manner so as to provide assurance that disbursed funds are used for intendedpurposes. A. ExpenditureEligibilityPolicy With the approval o f the country financing parameters' for India inMarch 2005, the expenditure eligibility policy (OP 6.0, Bank Fin~ncing)~ applies to all investment lending operations in the country. In applying the policy to financing o f block grants to Panchayati Raj Institutions, the expenditure eligibility policy provides additional flexibility. The expenditure composition o f block grants may now be more broadly defined as expenditures required meeting the objectives of the block grants being made under the project. Other implications of the policy on operations financing PRIs especially for block grants, relate to the greater flexibility in financing recurrent expenditures," a determination o f which is made based on sustainability at the sector and project levels, including sustainability of the project achievements/outcomes and the implied future budgetary resources. B. FinancialManagementPolicy In the design of investment operations that finance Panchayati Raj Institutions, the financial management standards and reporting requirements must fully adhere to OP 10.02, Financial Management. In the case of projects that finance PRIs, this poses some special challenges by way o f conducting assessments o f adequacy of financial management capacity, determination o f a framework that can apply across a disparate set o f institutions, ability to provide consolidated financial reports o f actual expenditures, as well as determination o f acceptable audit arrangements. These challenges become more pronounced for operations that finance block grants to PRIs. C. ProcurementPolicy As in all investment operations, World Bank procurement requirements (OP 11.OO, Procurement) apply to projects that finance PRIs as well. While the linkages to investment-style '*Referto paragraph 3(a) of OP 10.00, Investment Lending: Identification to Board Presentation. Country financing parameters provide an overall framework for all projects in the country covering (a) cost sharing, (b) recurrent cost financing, (c) local cost financing, and (d) financing of taxes and duties. The Bank's expenditurespolicy rests on three guiding principles: (a) the expendituresare productive; (b) the impact of the operationsfinanced under such loans on the borrowing country's fiscal sustainability is acceptable; and (c) acceptable oversight arrangements, including fiduciary oversight arrangements, are in placeto ensure that such loan proceeds are used only for the purposes for which the loan is granted, with due attention to considerationsof economy and efficiency. loBlock grants to PRIsare often classified as recurrent expendituresfor the State Governments. 23 operations implemented by PRIs are easier to establish, block-grant-style operations are not exempt from the same procurement requirements. Block-grant-style operations are characterized by an open-ended menu o f investments determined by the local governments as per their needs but beingto some extent limited to the constitutional and functional devolution of activities, For block grant operations, the policy requires that the underlying procurement processes conducted for the acquisition o f normally procurable inputsrepresenting output cost items are sound and in line with World Bank procurement principles. The purpose o f this i s to assure that the borrower has used competitive and fair practices. In a typical case, this would involve many institutions with disparate capacities involved inmany small-scale procurement operations, which would not be subject to World Bank prior review; and where national procurement procedures are used, the task team and procurement staff need to be assured that such procedures meet agreed national competitive bidding criteria or contain equivalent controls. Under sector specific investment operations, there i s an increased reliance on ex post reviews to ensure that contracting, shopping, or larger purchases have met World Bank standards o f transparency and fairness. Post review i s used on a representative sample basis to check such compliance, as for example when national competitive bidding i s used as the underlying modality o f contracting/acquisition. On the other hand, in block-grant-style operations, the emphasis is primarily on capacity building, and thus more reliance i s placed on the statutory and community oversight processes to obtain assurances on intendeduse o f funds. D. DisbursementPolicy The World Bank's Articles o f Agreement require that the World Bank "make arrangements to ensure that the proceeds o f any loan are used only for the purposes for which the loan was granted" and that the borrower may withdraw the loan proceeds "only to meet expendituresmade inconnection withthe operation as they are actually incurred." The World Bank's disbursement policies are part o f the overall institutional control framework that enables these requirementsto be met. Disbursementis the mechanism by which the World Bank makes payments for eligible project expenditures. OP/BP 12.0, Disbursements, requires that World Bank funds are disbursed for expenditures eligible under the project's legal agreement. Expenditures must be all within the project and category descriptions in the legal agreement and must be incurred for goods, works, and services procured in accordance with the Procurement Guidelines and Consultant Guidelines as provided for in the procurement schedule in the legal agreement. From a disbursement perspective, a key challenge for operations, which finance PRIs through block grants, may be to determine the point at which the expenditures become eligible for disbursement-on transfer o f grant funds by the State or when the transferred funds have been usedand accounted for. E. DisbursementProceduresand Eligibility For the purposes o f disbursements from the World Bank, the considerations for eligibility differ for operations that finance sector specific investments and those which finance block grants to the PRIs. For the sector specific investments or tied funds the principles by and large follow the community-driven development (CDD) guidelines in determining the eligibility o f expenditures for World Bank financing that include lump sum payments or actual expenditure (Box 8). On the other hand, transfers to PRIs for block grants are recognized as eligible expenditures for 24 purposes o f disbursements from the World Bank on evidence o f transfers from the State government through interim financial reports, further substantiated by annual audit reports. Any discrepancies between the amounts o f grants-in-aid reported in the interim financial statements and the annual audit reports would typically lead to adjustments o f subsequent disbursements, either recovered or reimbursed. This i s supplemented by the fiduciary measures, which may include (a) determination o f a list o f eligible activities to be financed from the block grant as determined in line with the Constitutionally mandated functions devolved to PRIs; (b) implementation o f an agreed action plan o f financial management reforms; and (c) assurance on end use o f funds through audit and social accountability mechanisms. F. Community-DrivenDevelopmentApproaches Partly on account o f the synergies inherent in the objectives o f decentralization and CDD programs, the guidance provided by the World Bank on the general principles o f CDD approaches could well apply to operations which finance Panchayati Raj Institutions.l1The decentralized nature o f CDD-type operations, where implementation takes place at the subnational level (village level), requires a good understanding o f the overall PFMA environment in which the project will be based, paying special attention to local government arrangements. ** This may often entail additional subnational diagnostics be undertaken with an objective o f identifying areas o f divergence between relevant laws and their practical implementation at subnational level. Recognizing that it will not be practicable or feasible to conduct fiduciary assessments o f all the local governments expected to participate in the project, the guidance note suggests that Bank staff should work with government counterparts to select a representative sample o f local governments/communities and perform assessments thereon. Results from these representative assessments can help inform project design particularly as it relates to accounting, funds flow mechanisms, procurement and disbursement arrangements, and reporting and auditing arrangements. The format o f the assessment as well as the findings from the representative sample can also provide a template or useful yardstick by which Government itself can conduct ongoing fiduciary assessments that can be used as an input to the World Bank supervision process. The results o f these assessments can well be used to develop a capacity strengthening plan for local government financial management and procurement, depending on the level o f government buy-into the reform. G. Anti-CorruptionStandards As with all World Bank investment operations, those which finance PRIs are subject to the same fraud, anti-corruption, and sanctions provisions and remedies. An argument used by many against devolution has been the perception o f high levels o f corruption at the PRI level. Some o f these perceptions are based on anecdotal second-hand information; there i s no hard evidence that '*" Community-drivendevelopment Fiduciarv Management For Communitv-DrivenDeveloument Projects - A Reference Guide gives control of decisionsand resourcesto community groups. These groups oftenwork in partnership with demand-responsivesupport organizations and service providersincluding elected localgovernments, the private sector, nongovernmentalorganizationsand centralgovernmententities.While normal Bank FM policy applies, CDD projects provideparticular challengesbecausethey typically involve the use of multiple implementingand sub-implementingentitiesand many of these entities,as well as the communitiesthey support, are inremote and geographicallydispersed locationswith poor communications, limited access to bankingfacilities and low levels of implementationcapacity. 25 corruption has increased due to devolution. It may well be the case that since Panchayats are much closer to the people than other forms of government, some corruption i s easily revealed to the public eye. Notwithstanding the perceptions, in the preparation of the project, the governance environment should be considered and where risks are deemed significant, additional ex ante controls may be warranted and built-inmitigation measures determined. Box 8: DisbursementProcedures: Lump Sum Paymentor Actual Expenditure Lump sumpuyments.Ifthe funding is made on a lump sum basis, as in MaharashtraRural Water Supply & Sanitation project, the periodic payments (tranches) to the community group are eligible expenditures. The initial payment could be an advance but should be made in line with the provisions of the financing agreement; typically, a bank guarantee is not required. Progress payments are not considered advances since they are payments made against physical progress. This method of financing PRIs is not widely practicedin the present country portfolio. Lump sum is the preferred method for subprojects that are large in number, small in scope, and technically simple. This method is based on the following criteria: subproject eligibility, method of implementation, and cost estimates, along with a defined outcome or delivery of an end product. The financing agreement is a contractbetweenthe State (through the concerned line department) and the PRI, against which disbursements will be made, usually in one or several tranches, and on the basis of physical progress. The review of the subproject will focus on the delivery of the end product described inthe financing agreement. This financing method involves direct community participation and often will include in-kind labor or materials contributed by the community, or subcontracting or procurement of goods and skilled labor. Such subcontractingmust comply with the financing agreement, and thus with the procurement procedures and financial management requirements set forth inthe project operationalmanual. Suchsubprojects are relatively simple to administer, as documentation and reporting is kept to a minimum, and the line department receives progress and completionreports as well as technical inspection certificates from its staff and from consultantsthat the line department hired. Another advantage is that the community has a built-in incentive for economy and efficiency, which allows for fewer and less onerous processcontrols by the line department. Actual expenditures. The funding provided to the community group is based on actual expendituresas inthe various watershed projects, with the initial advances to the community treated as an eligible expenditure as long as they are made in line with the provisions of the financing agreement. The final payment to the community would need to be based on the actual expenditures to ensure that advances to the community were not in excess of the actual cost and that actual expenditures are properly recorded. The above are only eligible to the extent that the work of the community group will be completedby the closing date of the loan. Actual expenditures should only be applied when (a) the subprojects are few and of large value (e.g., water supply schemes, watershed development) and are identified during project preparation; or (b) the cost cannot be satisfactorily estimated, but it has been determined that the community has the requisite capacity to implement the appropriateprocurement procedures. (The formal procurementproceduresassociated with this method require a high level of technical knowledge; if the community does not have sufficient capacity, technical assistance from the line department, a local government agency, an NGO, or a consultant would be a prerequisite). In either case, the community acts like an extended arm of the line department when this method is used to finance subprojects. The procurement procedures to be applied should be reviewed to determine their consistency with the loan agreement and the project operational manual. Disbursements to the community are made on the basis of eligible expenditures incurred or to be incurred by the community; hence the implementation of such subprojects involves a significant amount of paperwork, expenditure reporting, and fiduciary controls by the line department. 26 H. Treatmentof FundTransfersto PFUs inthe StateAccounts Inthe context of financing o f PRIs, all fund releases by the State governments to the PRIs are treated as grants-in-aid.13 The PRI accounts are separate, and consequently the ownership o f the capital assets created and the liabilities incurred thereby lie with the PRIs themselves. As per well-established accounting principles, grants-in-aid disbursed by the State are to be treated as revenue expenditure inthe accounts o f the State, irrespective o f the purpose for which the same i s spent. However, in case such grants are utilized for the ultimate objective o f creation o f capital assets, the issue arises as to whether the accounts should reflect such grants in aid spent for capital asset creation as capital expenditure in the State books. The issue has assumed increased importance after the 73rd Constitutional Amendment Act which envisages transfer o f substantial funds to PRIs for discharging their mandated functions. As a result, the revenue expenditure component o f the State government stands to increase significantly and thereby the revenue deficits. The Government Accounting Standards Advisory Board (GASAB) in its Exposure Draft 2 has attempted to address this issue and prescribe the principles o f accounting and classification o f grants-in-aid by the State to the PRIs (and other grantees) inthe financial statements o f the State. The Exposure Draft specifies that grants-in-aid be classified as revenue expenditure in the financial statements o f the grantor irrespective o f the purpose for which the funds disbursed as grants-in-aid are to be spent by the grantee. Where the financial statements o f the grantor classify the grants-in-aid as revenue expenditure, the financial statements o f the grantor should disclose details o f total funds released to the grantee and funds allocated for creation o f capital assets out o f the grants-in-aid released duringthe financial year. l3Grant-in aid are payments, transfers or devolution of funds, in cash or in kind, in the natureof donations or contributions by one government (grantor) to another government, body, institution, or individual (grantee). See Exposure Draft 2, dated 01 April 2004, issuedfor comments by the Government Accounting StandardsAdvisory Board. 27 VI. FIDUCIARYASPECTS WORLD BANK-FINANCED IN OPERATIONS In the current World Bank investment lending portfolio o f 65 ongoing projects, there are 18 Table 4: State & Sector Distributionof Bank- FinancedProjectsImplementedthrough PRIs or its projects (about 28 percent) which are wholly or in Subcommittees part implemented either through PRIs or its Panchayat Strengthening 11. Karnataka subcommittees and user groups. The components Watershed Development & 2. Himachal Pradesh implemented through PRIs or user groups would Management 3. Karnataka typically support the delivery o f basic local public 4. Uttarakhand Rural Water Supply & 5. Karnataka services where local governments have a readily Sanitation 6. Kerala identifiable and high-priority responsibility, with 7 . Maharashtra the exception of 5 projects that are focused on 8. Punjab 9. Uttarakhand supporting livelihoods (or private goods). Annex Tank Rehabilitation & I C provides details o f the implementation Management lo. Karnataka arrangements for the 18 projects. Health 111. Karnataka Poverty Reduction 12. Chhattisgarh For the purposes o f this report, a combination o f desk reviews and field visits were carried out on 12 projects wholly or in part implemented directly by PRIs or subcommittees; these essentially are in the rural water supply and sanitation, watershed development and management, rehabilitation and maintenance o f tanks. Table 4 lists State and sector distribution o f the 12 projects. Inan effort to understandthe fiduciary environment inwhich the project funds flow to the PRIs in these projects, the financial management and procurement arrangements have been mapped (Annex D). A. Key Characteristicsof the FiduciaryFrameworkfor Methodsof FinancingPRIs Within the two key methods o f financing PRIs-tied funds and untied or block grants-by World Bank-financed operations, key characteristics o f the fiduciary framework for the two methods o f financing can be summarized as follows: (1) Characteristicsof tied funds: 0 This is a traditional method o f financing followed in 16 out o f 18 projects in the portfolio and follows sector approaches under specific investment plans. Diagnostic studies o f the PFMA arrangements at PRI level may have been undertaken duringpreparation. Criteria for selection o f PRIs typically based on technical and geographic considerations; adequacy o f fiduciary arrangements not a consideration for selection o f PRIs to be financed under the project. Project i s budgeted for as a single line in the annual State budget under the line department. 0 Implementation responsibilities at the State level vest essentially with the sector line departments. 0 Limitedrole o f the State departmenth of Panchayat Raj inproject preparation and implementation. 0 Depending o f the present levels o f devolution o f functions and functionaries at the district level, implementation at the district level i s managed either by field units o f 28 the line departments (as inUttarakhand and Punjab) or the districthlock Panchayats (as inMaharashtra and Karnataka). 0 Planning processes are by and large, limited to the project activities. A likely implication i s that the project may or may not be included in the PRIs budget or annual work plans, largely, on account o f the inability to synchronize with the budget andplanningcalendars. Technical and administrative sanctions for subprojects at the PRI level are provided bythe line departments at district or subdistrict levels. 0 Typically, the project would not attempt generic PRI capacity-building or decentralization reforms inthe State. 0 By and large, financial management and procurement arrangements remain ring- fenced, even when the funds may flow through the PRIs. Though, increasing usage o f existing PRI rules and systems for financial management, procurement, and monitoring (including auditing) i s being attempted (as inUttarakhand and Himachal Watershed projects). Likewise, procurement procedures would be ring-fenced, primarily in order to allow an enhanced authority to PRI officials to take the procurement decisions that normally would be outside their delegated authority. 0 In almost all cases, the project funds are not included in the 'village funds,' Le., annual financial statements o fthe PRIs do not include the project. 0 From the State and PRI's perspective, multiple projects requiring similar capacities result in high transaction costs. Cost duplication may be occurring in supervision, capacity-building activities and in community mobilization. For instance, all projects require independent auditing but often restrict this to project expenditures alone. Projects also typically employ facilitation teams doing quite similar work. In some cases expenditures go beyond the traditional scope o f projects to assist in community mobilization, as i s the case with the watersheds project funding entry point and income-generating activities. (2) Characteristics of untied funds or block grants: Diagnostic studies o f the PFMA arrangements at State and PRI levels would be undertaken during preparation and follow-up actions by the State to implement the recommendations. 0 The World Bank is engaged with overall fiscal and public expenditure reforms at the State or sector level-reforms focus on improving accountability arrangements. 0 The fiduciary design o f the sector projects (e.g., funds flow, financial reporting, monitoring, auditing) in the State are increasingly moving to greater use o f country systems and follow normal government policies, procedures, and fund flows; these are not implementation arrangements created for the benefit o f the projects. 0 There i s a high and uniform level o f commitment to decentralization at the State level, which i s not likely to be reversed. 0 The development of a coordinated planning and budgeting cycle applicable across all PRI functions i s seen as critical factor, toward the development o f meaningful local budgetsand associated local accountabilities for outcomes. 29 Basic accounting rules to ensure the completeness of accounts, timely and transparent reporting, procurement procedures, and adequate external auditing are being implemented. As a tier of government, the PRIs have a larger degree of discretion inthe use of resources, limitedby the positive list of functions devolved by the State legislation. There i s greater predictability in the flow of funds within the budget cycle, clear financial accountability, and specific measures to strengthen overall institutional capacity across services. A clear planning framework and guidelines are inplace, requiring each of the PRIs to prepare a plan that shows how the block grant i s meant to be used; this plan is subject to some sort of quality reviewby the State. There is an agreement between the State and the Gram Panchayat that the block grant is meant for implementation of the village's plan; unused funds are not returnedto the State but are used for additional activities within the framework of the block grant program and village plan. The State has a monitoring mechanism for the block grant program; there is a possibility in later years (say year 3) that some villages will not receive the block grant due to poor performance or non-achievement of certain agreed milestones. Each village is subject to an audit of its own operations and will publish its accounts, along with doing other transparency activities; these accounts and audits will be monitored as part of the State's monitoring and World Bank's supervision, but not as part of the World Bank's fiduciary requirement for "audit of project expenditures." There i s a separate project component for village capacity building on strengthening the ability at the PRI level to manage their funds; a consistent implementation plan and system of support for all PRIs is evolving inthe State. The project component i s defined as the block grants and the project finances block grants provided by the State to the PRIs; these are accounted for as grants-in-aid in the State Accounts as well as the audited project financial statements. The emphasis of accountability is shifting from the traditional notion of `upward accountability' toward more innovative methods of community participation, social responsibility, and transparency in decisionmaking - all aimed at enhancing accountability to the constituents. B. MappingExercise of World Bank-FinancedOperationsin India There is significant discretion open to the States for implementing the Constitutional amendment on decentralization. Legal measuresto implement the relevant Constitutional amendments have taken time to emerge but now exist alongside an extensive set of regulations and implementation arrangements. Collectively these require decentralization o f functional authority over selected subjects to PRIs, associated with common fiscal arrangements (intergovernmental allocations and disbursements), financial management arrangements (local budgeting, accounting reporting and auditing rules), andprocurement arrangements. Considerable effort has also been directed to legal requirements for community participation, social audit, and other measures which promote downward accountability. 30 The World Bank portfolio is already moving in the direction o f better alignment with the decentralization process as reflected in the design o f projects that were approved prior to and after the changes in the legal framework in 2003 and 2004. While the move to develop implementation arrangements, which give PRIs a central role at the appropriate level, i s visible in rural water supply and watershed projects, projects in other sectors such as management of water bodies andrural roads are still not quite clearly aligned. The approaches reflect different, thoughnot always contradictory, perceptions o fthe role o f local government and the principles and objectives o f the decentralization process. While it may be assumed that full consensus or coherence exists within the Government o f India and the States on the decentralization agenda, this i s not always the case. This i s not unusual. Various line departments have differing levels o f ownership o f the State's decentralization agenda, and some interest grou s oppose it outright. The inability to substantively engage the State Panchayat Raj Departmentj4 and their field operatives in the project preparation processes means that the institutional arrangements may not quite reflect the State's overall vision for decentralization or be consistent with the legal framework for PRIs. In some sectors, the presence o f parallel user institutions legislatedby State Acts, like the Water User Associations, Joint Forestry Committees with undetermined linkages to the PRIs may overtake the role o f the PRIs in the projects. The ambiguities inthe current framework are likely to be a result o f this and will continue to pose a challenge for the World Bank inrespondingto the GO1agenda. Another important dimension to the move toward phased convergence to a common platform i s the agreement on standardized fiduciary arrangements in a manner that allows the existing fiduciary framework to be usedfor the purposes o f all projects/schemes o f the Central and State governments and other donors (including the World Bank). This approach i s consistent with the World Bank's view that the use o f country systems has significant potential to improve development impact.l5While the enabling policy framework for the practical application o f this approach for financial management has increasingly become a part o f regular business, the position on use o f country systems in procurement i s still evolving. At one level, strict adherence to detailed World Bank rules is required for international competitive bidding. However, the guidelines do flexibly permit the use o f national competitive bidding procedures for public procurement in the borrower country, specifying that the country procedures may be used in Bank-financed procurement if they are reviewed and modified as necessary to ensure economy, efficiency, transparency, and are broadly consistent with the Bank's procurement rules. This essentially means that supplemental measures to meet Bank's requirements that go beyond local practices and policies are specified inthe Loan Agreement or in a parallel letter or agreement that i s incorporated by reference into the Loan Agreement. l4 State PanchayatRaj Departments are responsible for determinationof policiesand procedures for PRIs in the State. Typically, the block grants to PRIs (based on agreed State Finance Commissionrecommendations) are budgeted under the Panchayat Raj Departments. District PanchayatRaj Officers (DPRO) at the district level and Block DevelopmentOfficers (BDOs) at the block level administer and arrange the transfer of funds to the PRIs. Under the State Act and rules, the District Collector and DPROBDO wield a substantive amount of control on the functioning of PRIs, including inspections. Centrally sponsored schemes are typically administered by District Rural DevelopmentAgencies through the DevelopmentCommissioners(also CEO o f Zilla Parishads) and BDOs (also CEO o f KshettraPanchayats)at the block level. Countrysystems constitutethe useof the country's national,subnational or sectoral institutionsand applicablelaws, regulations, rules andproceduresfor the operationbeingsupported by the World Bank See Expanding the Use ofCountry Systems in Bank-financed Operations, Issues and Proposals, R2005-001812, March 9,2005. 31 Inpractice, however, the move to usingthe existing fiduciary systems at PRIs poses its own set o f challenges. The significant compliance gaps in the PFM practice at the PRI level has the potential o f denting the accountability architecture as contained in well-documented system and procedures for financial management and accountability. There is also a need to modernize and simplify the outdated accounting systems in order to cope with the increased volume of Panchayat funds and keep up with good practice. Notwithstanding the above, institutional arrangements inWorld Bank-financed operations can be seen as moving toward achieving a greater degree o f internal coherence between World Bank- financed operations and consistency with the Constitutional framework for decentralization. While there is quite clearly an agreement on the principles, the progress in determining the elements o f a common platform for financial management and procurement arrangements for all relevant World Bank-financed operations i s at fairly early stages o f development As part of the project preparation, diagnostic studies o f the PFM arrangements have been undertaken to understand the extent o f divergence between relevant laws and their practical implementation at the PRI level. The extent to which the financial management systems in World Bank-financed operations align with the country (PRI) systems will necessarily need to respond to an assessment o f the adequacy o f the systems in place. Normally a self-selection method by the Gram Panchayats is adopted in the projects with due consideration o f the geographic and technical aspects. Given that financial management and procurement capacities at Panchayats are at disparate levels, it may be useful to consider including a summary assessment o f fiduciary capacity o f the selected PRIs by the project staff as part o f the project cycle (discussed further inthe recommendations section). There is a growing acknowledgement o f the centrality o f improved PFM arrangements in PRIs within the Government o f India and the States. This is evidenced by the increased level o f dialogue on the need for improvements and the several measures beingtaken, both at the Central and State levels. This opens up significant opportunities for the World Bank inmovingtoward a common platform o f fiduciary arrangements, which are consistent with the PRI's own systems. Table 5 provides a quick checklist o f the key parameters o f the fiduciary arrangements in selected World Bank-financed operations followed by a discussion on the 8 elements o f financial management and procurement arrangements that were used for mapping the 12 projects wholly or in part implemented directly by PRIs or subcommittees. Refer to Annex D for detailed mapping o f the 12 projects. 32 Table 5: Summary Checklist of Financial Management& ProcurementArrangements in Select Projects in World Bank InvestmentLendii ; Portfolio NO QUESTIONS b 5 I s the implementing entity (user committee level) an 1 officially constitutedrecognized subcommittee o f the Y N Y Y Y Y Y Y N local government? Does the project design provide for an assessment o f 2 the fiduciary capacity of PRI as selection criteria? N N N N N N N N Are the procedures for operation o fproject bank 3 accounts at the sub project level in line with the N N Y N N Y N Y N provisions of the PR Act and Rules? - ----- Are the sub project funds included inthe "fund" o f the 4 local government as defined by the PR Act and Rules? N N N N N Y N N N - - ----- Inpreparingthe annual planshudgets andannual 5 financial statements, does the local PRI include the N N N N N N N N N - sub project finds? - ----- Are the procurement processes prescribed for the 6 project aligned with the PRIs financial ruleshegulations, with respect to approval of the Procurement plan, grievance redressal and complaint mechanism, Public display o f all procurement related N N N N N N N N N information, limits for administrative and technical sanction o f estimates and contracts and procurement methods to be used? Does the project design use the audit reports o f PRIs I to provide assurance for end use o f the project funds? N N N N N N N N N - - - UWI iP (UttarakhandRural Water Sup y and anita Project): PRWSSP (Punjab Rural Water Supply and SanitationProject); MRWSSP(MaharashtraI. ral Water Supply and Sanitation Project); KRWSSP(Kerala Rural Water Supply and SanitationProject); KWDP (KarnatakaWatershed DevelopmentProject); KCBTP (Karnataka Community-BasedTank Project); SKRWSSP (Second KarnatakaRural Water Supply and Sanitation Project); HPMHWDP (Himachal PradeshMid Himalayan WatershedDevelopment Project). Element 1:Budgeting World Bank-financed operations are budgeted at the GO1and State levels. However, the project may or may not be included in the PRIs budget or annual work plans, partly, on account o f the inability to synchronize with the budget and planningcalendars. This i s also a reflection o f the duplication and overlapping responsibilities for budget approvals across various agencies, renderingthe task o f preparingan integratedbudget difficult. Good practice model is however emerging in Karnataka where a significant initiative i s underway to assist the Gram Panchayats inthe preparation o f perspective five-year development plans that reflect all projects/schemes. The provision o f a separate Panchayat window in the State budget through link documents will help PRIs get a better picture o f the fund allocations. The budget formats and templates-provided by the Comptroller and Auditor General under the technical guidance and supervision function entrusted to it by the 1lth Central Finance Commission-should go a long way if implemented in ensuring development o f meaningful local budgets and associated local accountabilities for outcomes 33 Element 2: Staffing Partly on account o f inadequate staffing o f the fiduciary functions at the PRI level, the design of the financial management arrangements in World Bank projects has resorted to engaging external accountants or training bookkeepers at the subcommittee level to be responsible for the project accounting functions. This often overlooks or undermines the centrality o f the role o f the Panchayat Secretary inthe accountability framework established by legislation. Instances o f good practices are increasingly emerging from projects (Kerala Rural Water Supply, Uttarakhand and Himachal Watershed Projects) where the project supplements the accounting resources available to the Gram Panchayat by engaging assistants to the Panchayat Secretary. The benefits o f the approach are (i) accounts assistants would be hired by the Gram Panchayats themselves and are therefore accountable to the them; (ii)they would provide full-time assistance to the Gram Panchayat Secretary to meet the project-specific requirements o f accounting and reporting; and (iii) training provided to the accounts assistants will prepare a cadre o f well-trained persons with a potential to become Gram Panchayat Secretaries in the future. Element 3: Fundflows The project funds flow directly into the segregated project bank accounts o f the subcommittees o f the Gram Panchayat. Only in a few instances, as in Kerala Rural Water Supply & Sanitation Project, the project funds are routed through the Gram Panchayat bank accounts to the Beneficiary Committee bank account. While the State Act and rules provide flexibility in the matter o f number o f bank accounts that the Panchayat can maintain, they i s not quite clear if the Panchayat has the power to be able to delegate the operation o f bank accounts to subcommittees. In many projects, the State has used the enabling clause in the State Act to issue Executive Orders to this effect. As a case inpoint, Uttarakhand State Act and rules mandate that all funds o fthe Gram Panchayat be maintained in the Gram Nidhi only, and no funds are to be maintained in the name o f any subcommittee. The fiduciary arrangements for the Watershed Project and Rural Water Supply & Sanitation Project thus reflect this approach. Ina subsequent development under the Watershed Project, by virtue o f a Government Order, dated July 24, 2006, the State arranged for the responsibilities o f the Panchayat Secretary under the Watershed Project, including operation o f bank account, to be transferredto the female member o f the Water & Watershed Committee or in absence o f such female member, to any nominated Panchayat member. For the Rural Water Supply & Sanitation Project, the notification, dated May 19, 2005, allows the responsibilities of the Gram Panchayat Secretary under the project to be transferred to a nominated departmental worker, who can be appointed as a Co-Secretary. Commonly advanced reason why the project authorities and village communities prefer to bypass the Panchayat Secretary i s the unavailability o f Panchayat Secretary, partly because each Secretary is responsible for 4-5 Panchayats. Another unstated reason could be that the Secretary, who i s a Government staff on deputation, prefers to go by the book o f rules and delays payments. There is also a fear that user charges may be used for other developmental works inthe village. 34 All of the above results in isolating or 'ring-fencing' the project arrangements from the PRI systems. These ring-fenced arrangements eliminate or limit the role o f the Panchayat Secretaries, who i s by statute the custodian o f the Panchayat funds and thereby an integral part o f the control framework. Element 4: Accounting The accounting function at the Gram Panchayat level is by statute the responsibility o f the Panchayat Secretary. The State Acts and rules, supplemented by Accounts & Budget Rules issued by the State provide the essential framework, which i s based on single entry manual accounting system. The accounting architecture i s essentially built around the main cash book and supporting registers; the number of bookshegisters (ranging from 28-35) to be maintained and their templates are prescribed inthe bylaws. The cash book i s requiredto provide a scheme- wise breakup o f the closing balances; the rules do not provide for preparation o f trial balances or bankreconciliation statements. World Bank-financed operations would typically prescribe their own accounting requirements, documented in the Community Operational Manuals. The books o f accounts are required to be maintained at the subcommittee or user group level and are simplified for use at the community level. The Manuals normally would not suggest the manner inwhich the project accounts at the subcommittee should be treated in the books o f the Panchayat nor does the State provide any clarification or guidance on the matter. Consequently, inmost cases, the project funds would not be considered as part o fthe Panchayat funds While many o f the States have adopted the new accounts and budget formats developed as part o f the technical guidance and support provided by the Comptroller & Auditor General, only a few States have revised the bylaws to reflect the new requirements. The new formats provide a uniform code-based chart o f accounts that should, if implemented, enable the PRIs to prepare integrated financial statements (including receipts & payment accounts and balance sheet). This opens up new opportunities for the World Bank and indeed all other donors (including the Government o f India) to use the PRIs own accounting systems to provide the information required on the project/scheme-related expenditures, supplemented by schedules providing detailed information if required. This will obviate the need for maintaining parallel set o f accounts and substantively reduce the transaction costs to the PRIs and the State. Element 5: Procurement Procurement rules and procedures to be followed at the PRI level are laid out indetail in all State Acts and rules. By and large, these are characterized by low threshold limits for the Gram Panchayats; the rules do not take into account the increased levels o f funds now being handled. Consequently, most procurement decisions require administrative and technical approvals by the "competent authority" as prescribed. The competent authority for the Gram Panchayat i s either the block development officer or engineering staff o f the line departments. It is thus not surprising that procurement capacity at the Gram Panchayat levels is low and Procurement Committees, where formed, are by and large dormant. 35 On the other hand, several good practice models have emerged from World Bank-financed operations, where communities (by way o f user groups or subcommittees o f Panchayats) have demonstrated ability to undertake development works o f superior quality and costs lower than their Government counterparts. In all World Bank-financed operations implemented at community levels, the procurement procedures are detailed in the Community Operational Manuals and provide for processes that may not necessarily be consistent with the State rules. The procurement processes for the project emphasizes the need for transparency in the procurement cycle. This could be achieved through publishing contract opportunities and contract awards and specifying inbidding documents the criteria for evaluating bids; in addition through enhanced internal and external auditing o f procurement and evidence that audit findings are being acted upon; as well as through enhanced opportunity for public oversight through establishing effective complaint mechanisms, setting up public meetings to discuss procurement operations, and providing clear and simple information on procurement practices. In the revised Accounting & Budget Rules, 2006, Karnataka has updated the procurement procedures for development works to be undertaken by the Gram Panchayat. The revised rules allow the Panchayat to provide administrative sanctions for all works below Rs.10 lakhs (approximately US$25,000) provided that adequate budget allocations exist. Estimates are to be prepared by the Gram Panchayat engineer, who can provide technical sanctions for works up to Rs.50,000. The basic principles o f Cannon's of Financial Propriety as envisaged under the provisions o f Karnataka Financial Code forms the basis for awarding works, which necessarily have to follow competitive tendering processes. Work orders are required to be issued for all works and contracts signed for all supply o f material and execution o f works. Measurement books are required to be maintained and checked measurements recorded. Each Gram Panchayat i s required to install a display board containing details o f (a) works, location and assets to be created; (b) amount provided; (c) contribution to be collected; (d) amount to be spent from Panchayat fund; and (e) total expenditure proposed. Element 6: Internal Control & Audit All the State Acts and rules contain several traditional methods of internal and external controls. Internal control mechanisms would include rules for disqualification o f members, avoiding conflict o f interest situations, initiating motion o f no-confidence, and empowering the Gram Sabha to remove the President. Elaborate provisions for external oversight over the functioning o f the PRIs are in-built into the legislation, empowering the Government to block execution o f resolutions and hold enquiries, as required inpublic interest. Recognizing the principle that the primary accountability o f the PRIs should be to its own constituents, many States have put in place such non-traditional and innovative mechanisms as social audit, public displays, Right to Information, ombudsman, and Citizen Charters. Inthe present circumstances, wherein the accountability structure is sharply fragmented by the aggregate o f the scheme/proj ect requirements, the traditional controls do not really work. While some o f this can be attributed to the weaknesses inaccounting and audit, the fear that large-scale irregularities infinancial transactions may invite disciplinary actions i s also diminishing, because reports on such misdemeanors come out long after the concerned officials have finished their terms. Social audits and other more innovative accountability mechanism are still at nascent 36 stages and much remains to be done to institutionalize the tools and methods. Internal audit arrangements are normally not inplace or ineffective where available. Prepared for each project, an Operational Manual includes a section on operational and financial controls. Additional controls are put in place through the requirement o f independent interim audits by chartered accountancy firms engaged by the project, either at the point o f release o f funds or on a periodic basis. The Operational Manuals re-emphasize the non-traditional methods o f accountability, often requiring social audit committees to certify utilization o f funds or public displays on financial and physical progress. Overall, the need for such Manuals, which result in ring-fencing the project from the PRI systems, can be seen both as a cause and effect o f the perceived weakness in the control framework. This scenario is likely to continue, until at least such a time that there is a convergence o f requirements placed upon the PRIs inindividual projects/schemes, to the point at which a common set o f rules, regulations, and procedures, which are based on their own systems, begins to emerge Element 7: Financial Reporting While the requirements for interim financial reporting may vary across the States, annual financial reporting o f the PRIs i s a standard feature in all the State Acts and rules. All PRIs are requiredto prepare annual financial statements covering all sources and uses o f funds. However, the multiplicity o f accounts, accounting centers, accountants, and reporting streams result in delays o f several months in preparing and submitting financial statements. O f more concern however i s the fact that the Panchayat financial statements remain incomplete and fail to fully capture the extent o f financial resources they handle. This i s attributed to two primary causes: (a) the financial statements reflect only own funds (State block grants and own revenues) and do not include other sources o f funds (centrally sponsored schemes, plan funds that flow through line departments etc.); and (b) regular intercepts made by the State for electricity bills. For the centrally sponsored schemes, the Panchayats regularly furnish utilization certificates; these are however poor substitutes for annual financial statements. For all World Bank-financed operations, PRIs prepare monthly financial reports in form and content agreed and documented in the Operational Manuals. These reports are generated from the project books o faccounts maintainedby accountants engaged andtrained underthe project. This is quite clearly a less than ideal scenario as it does not seek to build significant transversal institutional capacity or systems in the State government or PRIs that would support effective decentralized systems o f governance. However, as mentioned earlier, the budget formats and templates provided by the Comptroller and Audit General under the technical guidance and supervision function, if implemented, should enhance the ability o f the PRIs to prepare consolidated financial statements and thereby pave the way for the World Bank and other donors (including the Government o f India) to be able to obtain information on project finances from the PRIs own systems. 37 Element 8: External Audit The State Acts and rules provide authority to the State government to determine the auditors for the PRIs. Ingeneral, the GramPanchayats are audited by the Examiner o f Local FundAccounts under the respective Local FundAudit Acts of the State. Block and district level Panchayats are typically audited by the Comptroller and Auditor General. The Local Fund Auditors Act empowers the auditors with the powers o f the civil court under the Code o f Civil Procedure with respect to surcharge and recovery of funds. The Acts also provide for the manner in which the audit objections will be dealt with, requiring the President to convene a special meeting o f the Panchayat to consider the objections made by the auditors and decide about actions to be taken. Inpractice, however, there are hugearrears inaudits, many o fthe pending audits dating back 10- 15 years. Audits tend to be transaction based and the reports do not express an opinion on the financial statements. For the World Bank-financed operations, determining the auditing arrangements pose many challenges, arising in part from the said weaknesses in the audit process. The implementation arrangements which transcend across different audit jurisdictions (Comptroller and Auditor General, and Local Fund Audit) pose other difficulties, with respect to obtaining a single audit report for the project. This i s often overcome by instituting separate chartered accountancy audits for the PRIs, supplementedby sample audits undertaken by the project auditor. On the overall, the audit arrangement becomes complex andresults inhighadditional costs to the State. Arising from the observations and recommendations o f the 11th Finance Commission, several initiatives have been taken to strengthen the audit functions o f the PRIs. The Auditing Standards for Panchayati Raj Institutions and Urban Local Bodies and Guidelinesfor CertificationAudit of Accounts of Panchayati Raj Institutions prescribed by the Comptroller and Auditor General had been forwarded to the Government for adoption and use by the Department o f the Local Fund Audit. Under technical guidance and supervision entrustment, the Office of Comptroller and Auditor General i s conducting supplemental audits o f PRIs. These measures should go a long way inimproving the quality o f audits at the PRI level. Inthe best scenario, the project funds would be audited as part o f the annual consolidated audit o f the PRI, thereby eliminating the need for instituting parallel audit processes. The new measures being taken to strengthen the capacity o f PRI audit, accompanied by other improvement initiatives in accounting provide significant opportunities for the design of World Bank-financed operations to become formally compliant with the legal framework. 38 C. Experiencesfrom World BankFinancedOperationsOutsideIndia For several decades now, the World Bank together with client countries across the globe has promoted community-driven development as the means to empower communities and local governments, often phasing in empowerment by starting with communities. The approach to local planning inthese projects has been limited, usually focusing on a community's selection o f projects from a menu supported by each project. While this reflects a clear demand within communities, the process does not substitute for local planningthat would elucidate the range o f community development needs and establish a basis both for government budgeting and for leveraging other sources o f funding in a coherent and complimentary way. Lessons emerging the experiences across the broad range o f CDD projects are now being reflected inthe increasing trend o f new generation o f projects that aim to fund innovative and flexible approaches to integrating community-driven development and decentralization. The new genre o f projects reflect a trajectory o f control that ranges from community control over development funds to government control, with a number o f emerging combinations depending on the scope and nature o f investments. In the local government development projects in Uganda, Mozambique, Zimbabwe, Rwanda, Indonesia, Bangladesh (among others), the World Bank's point o f entry i s mainly in financing fiscal transfers and providing technical assistance for local government capacity building. Under most projects, local governments are eligible to receive funding up to a ceiling by jurisdiction or per capita, sometimes with poverty incidence included. Over time, performance-based criteria determine ceilings. Various models o f determining the criteria for eligibility to participate are emerging; central to the process is the establishment o f appropriate "rules o f the game" for effective participation and accountability. As a case inpoint, some select examples o f innovative approaches in which the local governments are being engaged in World Bank financed operations are discussed below. (1) Tanzania: Local GovernmentSupport Project (P070736) Financial management performance i s a key criterion for selection o f local government. For selection o f local government agencies for fundingunder the project, minimum access conditions have been identified and are included in the Assessment Manual. One o f the seven parameters for selection include an assessment o f financial management performance, further subdivided into the following: (a) filling in position o f Council Director, Treasurer, and internal auditor; (b) final accounts o f previous financial year produced as per Local Government Act, 1982, and submitted for audit on time; (c) clean audit opinion for the last fiscal audit accounts; (d) no financial irregularities have been reported by the internal or external auditors in the past twelve months; (e) bank reconciliation statements for all accounts prepared monthly; (f)internal audit in place and functional and (8) regular production o f financial reports on a quarterly basis. Assessment o f participating local government agencies, in terms of both minimum conditions and performance measures, will take place every year by a team o f four members representing a broad range o f expertise. The well-performing local government agencies would be rewarded with access to 20 percent additional funds and those that do not perform well will have their allocation reduced by 20 percent. Noncompliance with the minimumconditions will result inno grants for the next period. 39 (2) Bangladesh: Local Governance Support Project (PO98273) Integrating social accountability into the financial and procurement audit processes i s a key innovation under the project and the means by which accountability permeates and i s integrated into existing procedures and practices. Its role in making auditors aware o f requirements o f transparency inaddition to financial propriety i s also expected to be an important contribution to reforms. The Comptroller & Auditor General o f Bangladesh has the mandate for the external audit o f public sector entities, but due to capacity and resource constraints has not been able to carry out annual audit o f Union Parishad (local governments) on a regular and timely basis. The project proposes to introduce timely audits by forging a partnership between Local Government Department, Comptroller & Auditor General, and the Institute o f Chartered Accountants o f Bangladesh (ICAB). The Local Government Department in collaboration with the Comptroller & Auditor General has prepared an audit strategy laying down the details o f implementation arrangements and arrangements for dissemination, follow-up, and quality control o f the audit process. The annual external audits o f the eligible Union Parishads will be carried out by chartered accountants under the project. The primary objective o f the audit will be to provide financial assurance on the annual financial statements o f the Union Parishads. The scope o f audit will also be extended to provide limited assurance on the Union Parishads procurement activities, its compliance with transparency and participation requirements, and the environmental and social framework. The Comptroller & Auditor General will ensure quality and integrity o f the audit process through its Audit Quality Assurance cell by conducting a professional review o f an annual sample o f approximately 20 percent o f the audits conducted o f eligible Union Parishads. On completion o f the quality assurance checks, the Audit Quality Assurance cell will present a report on their findings to the Comptroller & Auditor General, who will share it with the Local Government Department. The I C A B through its professional development committee and its Investigation and Disciplinary Committees will provide strong professional oversight over the chartered accountants conducting the audits and have assured the World Bank that any references to the ICAB by the Comptroller & Auditor General and/or Local Government Department on audit quality concerns will be objectively investigated and that the ICAB will take disciplinary action against its members. The Local Government Department will also blacklist those auditors against whom allegations o f professionalmalpractice are proven and will explore the possibility o f taking punitive legal action, ifrequired (3) Indonesia: Initiativesfor Local GovernanceReform Project (PO76174) Component A for Local Governance Reforms includes a subset for reforms relating to procurement. Under this subcomponent, participating kabupatens (local governments) will be requiredto institute a series o f graduated reforms inprocurement over a period o f 3-4 years, with agreed benchmarks for monitoring progress. These will be institutionalized through the issuance o f Bupati (head kabupaten executive) decrees and supported by capacity building o f kabupaten staff and provision o f equipment and software. 40 At entry, participating kabupatens are required to assign an appropriate officer as a focal point to lead and coordinate the procurement reforms. At the outset a local procurement policy will be developed which is in line with national procurement reforms stipulated by Presidential Decree. The procurement reform focal point will work with other key parts o f kabupaten government to streamline regulations to promote economy, efficiency, and open competition. Transparency related to procurement policies, procedures, and practices will also be ensured. A workable mechanism to handle complaints and apply sanctions will be established in addition to an annual survey o f bidders and civil society about kabupaten procurement practices. Under the capacity- buildingcomponent, training will be provided to keyDines (technical agencies at regional level), BAWASDA (internal auditors), and procurement watchdogs. D. AssessingPerformanceof the PRI: The DevolutionIndex A decade after the 73`d Constitutional Amendment Act and what many may consider as the first generation o f reforms with the central theme being creation and empowerment o f strong Panchayats, it is widely acknowledged that the Constitutional provisions alone have not been an effective trigger for the empowerment o f Panchayats. The progress in achieving effective decentralized governance has not been uniform across the States. In an effort to better understandthe enabling environment and the efforts underwayby the various States to fulfill the constitutional mandates, the National Council for Applied Economic Research (NCAER) at the request o f the Ministry o f Panchayati Raj has developed a Devolution Index. The Devolution Index is a first such attempt at measuring the three fundamental dimensions o f decentralization, namely, functions, funds, and functionaries. The Index does not aim to measure the outcome o f decentralization. The sub-index for devolution o f finances, designed to assess the success in creating conditions that strengthen PRIs financial abilities, focuses largely on fiscal aspects o f devolution; one out of nine indicators relating to finances deals with the efficiency in the audit processes at the PRI level-percentage o f PRIs whose accounts are audited within one year o f the end o f each financial year. Under the World Bank-financed operations (Maharashtra Rural Water Supply & Sanitation Project, Uttarakhand Watershed Development project and Tamilnadu Womens' Empowerment project), some efforts have been made on a pilot basis to develop a set o f criteria on which to assess the performance o f PRIs, specifically from the perspective o f accountability, transparency indecisionmaking, andefficiency inpublic service delivery. Box 9 provides some aspects o fthe pilot. 41 Box 9: MaharashtraLocalGovernment IncentiveFund: US$4 million The support would allow selected Gram (village) Panchayats and Zilla (district) Panchayats to develop an approach to institutional building to become more effective, accountable, and responsive; and contributeto improving quality of decentralization,devolution, and local governance. The incentive fund would provide grants to nine selected Zilla Panchayats at about US$150,000 each to make them more accountableto peopleand assume a greater developmentrole. Zilla Panchayatsuse the project grants to finance expenditures on consultantfees for institutional restructuring and capacity development, including for budget making, implementation, monitoring and evaluation, and introduction of new information technology systems and equipment. The incentive fund would support about 225 Gram Panchayats in nine districts with one-time grants ranging between US$8,000 to US$lO,OOO equivalents.The pilot would fund investments in using and adapting innovative approaches used in Gadge Baba Abhiyan (sanitation campaign) for stimulating Gram Panchayats that have worked on management, inclusion, and good governanceto participatein a developmentmarketplaceand showcase their efforts. Based on this competitive process, selected Gram Panchayats would be provided intensive capacity building support in various areas, including participatory planning and budgeting, community organization, promotion of self-help groups, inclusive decisionmaking, community-basedprocurement, financial management, negotiation skills, and development of a community report card system to support user evaluationof village-provided services and self evaluationby the GramPanchayats. The key outcome of the proposed pilot would be a tested institution-building approach for Zilla Panchayats, which could be scaled up to include the other districts of Maharashtra.The project would also invest in cross Zilla Panchayat learningand knowledge management activities to draw key lessons for other decentralization programs of the Maharashtra Government. The lessons learned would be shared and used to initiate dialogue to develop a programmatic approachto developing demand-driven approaches in decentralization. A more systematic and significant effort has been made by the World Bank Office inIndonesia, in cooperation with the Ministry of Home Affairs and with inputs from several other donors to develop a measurement framework for local government PFM arrangements. This framework comprises a set o f strategic areas from the PFM cycle, each with a selection o f key PFM outcomes, a diagnostic tool kit o f selected indicators to help assess the outcomes and a scorecard. The selected PFM outcomes, presented in a modular structure, are those that were considered important and relevant in the Indonesian context. The scorecard conveys the state o f PFM systems and practices o f the assessed local governments. Brief notes have been provided for guidance o f enumerators. Taken together, these would help identify those processes that are weak and not likely to support positive outcomes and helps identify strengths and weaknesses o f PFM systems, institutions, and processes at the local level. A scoring methodology has been developed that sensitizes this framework to both the high performer and the low performer o f local governments, yet allowing a reasonable degree o f variation between the two ends. The measurement framework was tested in two districts that are commonly regarded as "well performing" inthe context o f local Indonesiangovernments, to enable the team to benchmark the outcomes. Box 10 provides additional information on the cascade o f core modules within the framework. 42 Box 10: Indonesia:LocalGovernmentPFMMeasurementFramework The methodology draws on the conventional PFM processes employed at the national level, comprising segments o f budget outturns, budget planning and formulation, cash and treasury management, procurement, accounting and reporting, internal controls, and oversight. The adopted methodology differs slightly from generally accepted national PFM assessments as it has been modified to reflect current PFM trends, desired short-term outcomes in PFM processes, and binding constraints at the local government in Indonesia. In order to achieve these long-term PFM outcomes and with the aim o f making the measurement framework workable, nine core "strategic areas'` (or modules) o f PFM were identified, representing the core dimensions o f an open and orderly PFM system at local level. For each o f these strategic areas, a strategic objective was articulated to help define the benchmark o f good practice thereby providing a logical link between the larger objectives sought to be achieved and the related outcomes that are to be measured. Further, for each such strategic area, desirable outcomes were selected that would logically contribute to the achievement o f the strategic objective needed to be measured. A total o f 27 such outcomes were developed across the entire framework. Finally, for each o f these 27 outcomes, a set o f selective indicators was defined that will help measure if the outcomes are likely to be achieved. This downward cascade, from strategic areas to outcomes to indicators, is embedded in this measurement framework and provides the basis for an assessment o f the state o f affairs at each level o f this framework. Outcomes in PFM strategic areas are designed to collectively contribute to the achievement o f strategic objectives through the attainment o f particular PFM outcomes; the drill-down indicators provide the tools for assessing the overall level of performance associated with each PFM outcome and within each strategic area. In a relevant development, the PEFA16 Secretariat is actively engaged in development of guidelines for adopting the PEFA Performance Measurement Framework" to the application at subnational government level. The advantages of the PEFA Framework at central government level equally apply at subnational level, particularly in terms of providing an assessment on the basis of a full overview of the PFMA system with ability to track progress over time. The Framework therefore could be instrumental inassessing and developing essential PFMA systems at the subnational level and provide a common platform for reform dialogue. In an effort to facilitate a consistent approach to the application of the indicators developed by the OECD/DAC-World Bank Round Table on Strengthening Procurement Capacities in Developing Countries, OECD/DAC'* has published a User's Guide laying down the methodology for assessment of national procurement systems. The indicators are intended to provide harmonized tools for use in the assessment of procurement systems. Although the l6 PEFA is a partnership between the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of ForeignAffairs, the Royal Norwegian Ministry of ForeignAffairs, the InternationalMonetaryFundandthe StrategicPartnership with Africa. "ThePFMPerformanceMeasurementFrameworkisanintegratedmonitoringframeworkthatallowsmeasurementofcountry PFM performance over time. It has been developed by the PEFA partners, in collaborationwith the OECDDAC Joint Venture on PFM as a tool that would provide reliable information on the performance of PFM systems, processes and institutions over time. ' The Development Assistance Committee (DAC) is the principal body through which the Organization for Economic Cooperation and Development (OECD) deals with issues related to co-operation with developing countries. See www.oecd.org/dac. 43 indicators are designed for use in the assessment o f the central government or national procurement system in a country, they can be adapted for use in subnational or agency-level assessments. Subnational applications o f PEFA have already been conducted countrywide for districts and municipalities in Uganda and Tanzania (based on samples on such entities), and stand-alone activities in Punjab and Baluchistan Provinces in Pakistan and Bogota City in Colombia. On- going cases include further provinces in Pakistan, Ethiopia, Kurdistan Regional Government o f Iraq, and partial applications at the State level inNigeria. Given the increased demand for these types o f activities, there is a need to learn lessons and develop guidelines for such future activities. 44 VII. BRIDGINGPRIFINANCING APPROACHESTHROUGH DECENTRALIZATION Recognizing the Government o f India's commitment to strengthening Panchayati Raj institution^,'^ the World Bank's India Country Assistance Strategy for FY05-08 states that support to decentralization will be an important focus o f World Bank work with the Government o f India. To help India realize the potential o f the Constitutional amendments, the World Bank will ensure that its programs are both consistent with and supportive o f a progressive shift to decentralized governments. This implies that World Bank operations would be forged around the principles o f subsidiary, downward accountability, and local discretion, alongside specific interventions to support community participation and enhance financial accountability. Even as there i s a general agreement that the long-term goal would be to move toward a scenario wherein all resources be made available to PRIs to allocate fully according to their own priorities (by way o f block grants) and subject to common processes on planning, financial management, procurement, and community accountability, it i s recognized that this scenario may take several years to uniformly emerge across all the States. A. Aligningwith World Bank's Fiduciary Framework: Two Scenarios Achieving greater coherence across World Bank-financed operations requires a degree o f consensus on the trajectory o f the decentralization o f governance and service delivery arrangements at the State level. The determination o f the most appropriate place in the continuum o f options available will be ajudgment call o f the World Bank task teams and will to some extent be a measure of the State's own commitment to the decentralization agenda. Inthe medium and short term and as a measured response to the decentralized agenda, two clear scenarios emerge as options for the World Bank. Scenario 1: Financing of tied grantsfor sector investments The World Bank would continue to finance operations where PRIs perform as implementing agents for the Central Government or the State inthe form o f tied funds. But there would be an increasing convergence o f requirements placed upon PRIs in individual programs to the point at which a common set o f rules, regulations, and procedures begin to emerge-a set o f rules and procedures that align with the PRI's own systems as determined by the State legislation. A default position might be assumed that for World Bank financing in sectors where PRIs have a central implementation role-most evidently in rural drinking water, rural roads, rural electrification, tanks, education and health-implementation arrangements in World Bank- financed operations would ensure PRI authority over project planning and implementation. In most instances this would require user groups (or independent societies) to be subcommittees o f the Panchayats. It may be added that fiduciary considerations are not however the sole determinant o f decisions o f whether or not existing institutions will be used for the purposes o f l 9 "The UnitedProgressiveAlliance (UPA) Government will ensurethat all funds givento states for implementationof poverty alleviationand rural developmentschemes by Panchayats are neither delayednor diverted. Monitoringwill be strict. Inaddition, after consultationswith the States, the UPA Government will consider crediting electedPanchayatswith such funds directly. Devolutionof funds will be accompaniedby similar devolution of functions and functionaries as well. Regular electionsto panchayatbodies will be ensuredandthe amendedAct in respect of the Fifth and Sixth Schedule Areas will be implemented. The UPA Government will ensure that the Gram Sabha is empoweredto emerge as the foundation of PanchayatiRaj": Excerpt from CommonMinimum Program ofthe United Progressive Alliance 45 implementingWorld Bank-supported operations.20Fromthe fiduciary perspective, however, this will entail building into the project design measures that will ensure (a) the line departments o f the State implementing the project are accountable for the effectiveness o f spending across the PRIs; and (b) the fiduciary arrangements are focused on enhanced levels o f compliance with the existing framework o f rules and procedures, as against efforts to bring about more substantive institutional reforms. Scenario 2: Financing of block grants InStates that have demonstrated commitment to decentralizationagenda, the World Bank would seek to finance operations wherein additional united resources are made available to PRIs to allocate according to their own priorities, subject to common fiduciary standards as established by the State legislation and through which they are held accountable by their communities. Higher tiers o f government focus on establishing service standards, monitoring compliance with prescribed rules, and intervening in the case o f severe service delivery or financial failures. These operations typically aim to strengthen the Panchayat system as a whole, including the fiduciary framework, and may include a broader set o f financial management and procurement reforms. These operations essentially focus on providing capacity support to PRIs and specific actions required from the State regarding its fiscal systems o f inter-governmental transfers. Allocations are determined in advance o f the financial year and are included in relevant PRI budgets. A single transfer o f funds is made directly to the bank account o f the relevant PRIon a regular disbursement schedule. Expenditures could remain earmarked for specific purposes through transfer conditions that create specific functional "windows". B. Suggestions for AchievingAgreement on the Two Transfer of Fund Scenarios The following section summarizes the possible ways for achieving an agreement on the elements o f an acceptable fiduciary environment for the two principal scenarios o f resource transfer, which can be used as common platform for all relevant World Bank projects. These are suggested steps and are not intended to be a set o f definitive recommendations, nor are these in order o f preference or priority. The manner and extent to which these may be applied would to a large extent need to be calibrated on the assessment o f fiduciary risk and the overall enabling reform environment. (1) Fiduciary arrangementsfor tiedfunds (a) A starting point for preparation o f projects that are to be implemented by PRI should entail developing an understanding o f the enabling fiduciary environment in which the project is to be implemented. As part o f the project preparation, the Bank staff may consider undertaking limited level of diagnostic work on the PFM arrangements at PRI levelinthe State with an objective o f understanding the levels o f compliance with the statutory requirements o f the State and the gaps between policy and practice. Existing reports such as State Financial Accountability Assessment or other government/donor documentation are useful source documents for a broad assessment o f the local systems. 20See FinancialManagementPracticesin Bank-FinancedInvestmentOperations(FinancialManagement Sector Board, World Bank,November 2005). 46 (b) Given the large number o f PRIs that will be implementing the project, it i s unlikely that all participating PRIs will be individually assessed. Typically, not all participating Panchayats are identified prior to project effectiveness. However, with a view to validating the findings o f the diagnostic study, World Bank fiduciary staff may, working with the department counterparts, select a representative sample of Panchayats and perform assessments thereon. Results from these representative assessments can help inform project design particularly as relates to accounting, funds flow mechanisms, procurement, disbursement, financial reporting, and auditing arrangements. (c) As part o f the project design, a mechanism may be built in whereby the project management team can conduct ongoing fiduciary assessments as an integral part of the subproject cycle. This will require the determination o f a simple template or checklist to measure the level o f compliance with the existing fiduciary requirements at the Panchayat level. The yardstick may consider all or some selective elements o f financial management, procurement and accountability framework at the PRIs level; see Box 10 for typical contents o f a PFM framework. In determining the benchmarks, it may be useful to involve the State Panchayat Raj departments to the extent feasible. An important consideration in the determination o f the benchmarks should be that the process should not be such as would unduly slow down the project implementation. (d) The assessment of readiness is not intended to disqualify or reject the Panchayat, in the event that the Panchayat is unable to meet the agreed benchmarks but to enable corrective actions to be taken. This is an alternative to what may be a typical response o f donors (including the World Bank) to agree to ring-fence the project funds. Typical examples of corrective actions could include (i) preparation o f annual financial statements o f previous financial year (or earlier financial years, if these are in arrears); (ii)completion of backlog in audits; (iii)filling in vacant positions of Panchayat Secretary (iv) bank reconciliation statements for all accounts prepared; and (v) follow-up actions to the audit observations initiated. A timetable for the corrective actions so determinedfor each Panchayat will need to be prepared and agreed upon, led by the district- or block-level functionaries o f the Panchayat Raj Department or the project management unit o f the line departments in consultation with the Panchayat Raj Department. In all circumstances, the related costs, if any, may be financed under the project. This may include costs o f engaging qualified accountants to assist the Panchayat or a cluster o f Panchayats or costs o f retaining audit firms. (e) Several good practice examples have emerged in ongoing projects in context o f providing technical assistance in accounting and bookkeeping to user committees. While these interventions have been limited to the accounting requirements under World Bank-financed operations, there are good reasons to believe that the scope o f the technical assistance in financial management and procurement provided under the project could well be extended to cover the entire PFU, the underlying premise being that working within the PRIs own PFMA framework, including supporting efforts to strengthen the systems, would substantively enhance sustainability o f the project investments. To the extent possible, these initiatives 47 should leverage the State's own medium-term plans and initiatives underway to strengthen the accounting functions at the PRI level or at the least help pilot or test newapproaches, which ifsuccessful may be scaled up bythe State. (f) By the very nature o f the institutional arrangements wherein user groups implementing World Bank-financed operations are mandated (by the Act itself or through State's executive order) as subcommittees o f the Panchayats, a fair assumption would be that the project funds are included inthe PRI budget and annual financial statements. In reality, however, the project funds (as with the other CentraVState or donor funds) are not included. The PRI budgets and financial statements reflect essentially own revenue funds and untied funds from the Central and State government. A prerequisite to establishing a common platform would be to ensure that the PRI accounts for the funds provided under the World Bank- financed operationare in its books of accounts. As part o f the project preparation tasks, the task team may consider the following specific measures: (i)require the State to clarify or confirm through an executive order that the funds under the said project are to be included as part o f the PRI funds; and (ii)ensure that the financial management arrangements are designed in a manner to ensure that income and expenditures related to the project (regardless o f the operational arrangements) are brought into the Panchayat accounts. This may require explicit arrangements to be documented inthe Project Operational Manual (ifany). (g) With the underlying assumption that all World Bank operations that finance investments in sections or functions devolved to PRIs will ensure PRI authority over project planning and implementation, then fund flow arrangementswill need to be designed in a manner that project funds flow to PRI-controlled bank accounts. By and large, all State PRI Acts and rules permit PRIs to open separate bank accounts; this means that project funds could still flow to separate bank accounts and be earmarked solely for project-related expenditures, ifrequired. Inorder to formally comply with the legal framework, all such segregated project bank accounts should necessarily be operated by officials authorized by statue. Some States (as in Uttarakhand), through enabling provisions inthe State PRIAct, have issued executive orders to allow the operation o f bank accounts to be transferred to members o f subcommittees. While such measures are seen to significantly enhance the local discretion and downward accountability at the subcommittee level, decisions in this regard will need to be carefully considered to ensure that the principles o f ownership and subsidiarity are not compromised. (h) Accounting arrangements for the project (regardless o f the implementation arrangements) will need to be designed in a manner that the financialinformation required can be derived from the monthly financial reports of the PRIs. This will require the Chart o f Accounts to be adapted to properly account for and report on project activities. The design o f accounting arrangements at the user committee level (ifany) will needto be specified inoperationalmanuals but should essentially follow the PRIs own systems. Internal controls will necessarily have to be based on PRIs own ruleddelegation o f authority as defined in the legislation and subsidiary bylaws and rules. Such measures will significantly reduce transaction costs for the State and 48 the PRI and help leverage the capacity-building initiatives taken under the project to strengthen PRI systems. (i) The existing control framework provides extremely limited discretion at the Gram Panchayat level to take financial and procurements decisions and requires prior approval from officials at the block level. Inresponse, the project design often resorts to specifying enhanced delegation o f financial powers for the project operations. These measures, where considered essential for smooth project implementation, should necessarily be supplemented by specific initiatives aimed to enhance downward accountability and transparency. Several good practice examples have emerged from the ongoing portfolio o f World Bank projects, including increasing transparency through the requirement o f publishing contract opportunities and contract awards, and/or specifying in bidding documents the criteria for evaluating bids, public displays o f financial progress, etc. These initiatives ifseen inthe broader perspective o f capacity building provide ready demonstrable models o f excellence, which can be scaled up at the PRI level. 0) In designing procurement arrangements, special efforts will need to be made to re- energize the dormant procurement committees of the Panchayats,ensuring that the subcommittees are accorded a central role in the procurement decisions for the project. These measures may be supplemented by enhanced opportunities for public oversight through establishing effective complaint mechanisms, setting up public meetings to discuss procurement operations, and providing clear and simple information on procurement matters. (k) The practice o f instituting separate chartered accountancy audits for the project funds at the PRI level is not very cost effective and does not result per se in providing adequate fiduciary assurances (partly on account o f the variable levels o f audit capacity within the private sector). As an alternative, the World Bank team should look at available options to leverage on the audit reforms underway and reach upfront agreementswith the LocalFundAuditors (or any other State-designated bodies responsible for PRI audits) to provide timely audit reports for the PRIs covered under the project. These measures may be supplemented by (i) instituting social audit processes, which entail obtaining a Gram Sabha resolution on the annual financial statements, using score card methods, public hearings, joint on-site appraisals, etc. and (ii) instituting special focused audits on an annual basis on a sample basis; audits may be focused on systems and transaction-based procurement, accounting and reporting, physical verification o f assets created, downward accountability mechanisms inplace, etc. on a rotation basis. (2) Financing transfers of `block grants' by the State to PRIs (a) As insector specific lending scenario, diagnosticstudies on the PFMarrangements at the PRI levelwould be a startingpoint to the preparation process. These studies will however need to cover the wider context o f the adequacy of the fiduciary framework to help understand the need for policy reforms. In this context, it would be useful to bring in the good practice examples from other jurisdictions as well lessons learned from implementation experiences. The study would help the task 49 team to understand the overall decentralization scenario in the State as well as the initiatives underway or in the pipeline for improvements at the PRI level. Existing reports, such as State Financial Accountability Assessment or other government/donor documentation are useful source documents for a broad assessment o f the local systems. (b) Quite typically, the counterpart agency at the State level for operations financing block grants to PRIs will be the State Department o f Panchayat Raj or/and State Finance Department. Upfront engagement of the World Bank fiduciary team in preparation activities should necessarily entail seeking active partnership of the counterpart Government agencies in the studies. By following this approach, the task teams can ensure that the fiduciary arrangements are designed to be consistent with the State's own vision and reforms underway. The extent to which these efforts are successful will to a large extent depend on the level o f ownership demonstrated by the State Panchayat Raj departments. Nonetheless, it will allow the team to convey the World Bank's commitment to work intandem with the State's own vision. (c) In undertaking the diagnostic work, use of PEFA measurement framework as well as the OECD/DAC procurement indicators, suitably adapted to application at the local government level, should be encouraged. Forging partnerships with other active donors would help to harmonize efforts. The Indonesian experience in this respect can provide useful lessons in designing the diagnostic studies. The development and use o f an integrated performance measurement framework will help to provide an assessment on the basis o f a full overview o f the PFMA system with ability to track progress over time as well as a common platform for reform dialogue. (d) The project design would thus envisage a deeper level of engagement of the World Bank WduciaG staff. While the startingpoint indesigning the project would invariably be to conduct a diagnostic study o f the PFMA arrangements at the PRI level in the State (in many cases, this may already be inplace), including a review o f the ongoing reforms, the objective would to assist the State in developing a broader agenda o f PFMA reforms, which may have policy as well as process-related imperatives. (e) Improvement o f the PFM systems would thus be an intrinsic part o f the project and designed to assist the State in preparing a credible roadmap that may include several elements of PFM-related reforms ranging from (i) development o f planning and budgeting framework; (ii)accounting simplification and modernization o f processes, including revising the accounts, procurement and budget rules, introduction o f double entry accounting systems; (iii)financial reporting, consolidation, and oversight (including computerization); (iv) capacity-building arrangements or provision o f technical assistance in financial management and procurement in-built into the processes; (v) developing a timeline for completing backlog o f accounting and audit; (vi) strengthening o f audit capacity; and (vii) developing a timetable for resolving the pendingaudit observations among others. 50 (f) In following the key principles of subsidiarity, downward accountability, and local discretion, P F M improvement initiatives will need to support specific interventions to support community participation and enhance financial accountability. Financial management and procurement staff will need to work with the task team to build in measures designed to improve transparency in financial and procurement decisionmaking forged around the tenets o f downward accountability. (g) Inthis enablingenvironment, fiduciaryprocessfor the projectwouldessentiallybe built around the State and PRI fiduciary framework (including the planned reforms or reforms underway). The transfer o f funds from the State to the PRIs would be considered as eligible expenditures for purposes o f the project and the information for the purpose derived from the State accounts. The State (and the project) would in turn, derive fiduciary assurances on the use o f funds for intended purposes from the robustness in implementation o f the PFM reforms, duly monitored by the State (and the World Bank). This approach has the benefit of providing a significant boost and leadership to the decentralization agenda o f the State and reduces the transaction and compliance costs for all parties. It would secure a key role for the World Bank in the evolution o f the decentralization agenda in the State (should this be desired) and ensure that key risks associated with the project are effectively addressed. Box 11: Key Elements of PFMA Framework for PRIs Each PRI has a budget which covers all sources and utilizationof funds; the budget is available to all members ofthe GeneralAssembly in an easy and understandable form. All revenues and grants are receivedina predictedmanner. Basic procedural controls are in place; for example, all payments properly authorized and documented, all receipts properly accounted for, procurement procedures followed, reconciliations/confirmations carried out on a regular basis, key financial and procurement related decisionsrecorded inMinuteBooks. Accounting books are maintainedregularly and covers all receipts and payments; Accounting follows double entry bookkeeping systems and is maintainedon a cash basis. Complete records of the assets ofthe PRI are maintainedand updatedon a timely basis. Financial reports (for example, Receipts & Payments Statements, Statement of Assets) are regularly prepared and presentedto the GeneralAssembly and the authorities. External audits are carried out regularly; main findings of audit report discussed inGeneral Assembly and appropriatefollow-up actionstaken. There is a high degree of local-level transparency, including public displays in simple and understandable forms, on financial position, procurement,and physical progress. 51 C. The Way Forward Quite clearly, any suggestions for the way forward will have to start with building of consensus on the needto adopt approaches that substantively integrate and provide a central role to PRIs in World Bank-financed operations. While this evidently applies to World Bank task teams, the findings have significant bearing on the manner that several GO1programs are designed and the role ascribed to PRIs; and therein the fiduciary arrangements. Accordingly, the next steps would entail the following action points for the respectiveplayers: For Governmentof India 0 Develop a coherent framework for financial and performance reporting of PRIs that will provide timely feedback to the State governments as well as the Government on the efficiency of revenuemobilization, as well as public expenditures at the PRI level. Actively review present portfolio of centrally sponsored schemes with the objective to ensuring centrality of PRIs and use of common fiduciary framework. For StateGovernments Update and modernize accounting and reporting rules for PRIs in line with the common fiduciary framework, incorporating budget formats and templates provided by the Office of the Comptroller and Auditor General under the technical guidance and supervision function entrustedto it by the 11th Central Finance Commission. Provide guidance for treatment of project funds in PRI planning, budgeting, accounting, and reporting requirements. Review and strengthen Local Fund Audit's capacity to undertake timely and quality audits of PRIs. For World BankTaskTeams Disseminate the study findings among World Bank task teams through brown bag lunch discussions or other such forums with an objective to actively engage teams on the key findings and suggestedapproaches; 0 Arrange dissemination workshops with key GO1 and State line ministries and departmentsinan effort to initiate abroader discussion on how the findings equally apply to the GO1 programs and demonstrate how subjecting the PRIs to separate fiduciary processes often results inundermining local capacity and limits the positive impact to the scale of the individual programs. 0 Within the financial management team of the World Bank, it i s proposed that the suggested approaches to the fiduciary arrangements be piloted in the design of selected operations from the present pipeline. 52 0 Inorder to facilitate the above item, it is suggestedthat a core team be formed withinthe Financial Management & Procurement Units to work on project design o f the selected pilots. To the extent feasible, particularly inthe context o f the assessment o f acceptable levels o f fiduciary risks and the overall enabling reform environment, the fiduciary arrangements will need to ensure the following: El Project or specific scheme funds are included inthe PRI annual budget and annual work plans. El Staffing of the accounting and financial management functions in Bank-financed operations designed to ensure that the centrality o f the role of the Panchayat Secretary inthe accountability framework as established by the Legislation i s not undermined or overlooked. El Project funds flow primarily into PRI-managed bank accounts and, if required, into segregated project bank accounts. El Guidance provided with respect to the manner inwhich the project accounts at the subcommittee should be treated inthe books o f the Panchayat. El Special efforts made to ensure that arrangements for project results enhance procurement capacity at the GramPanchayat levels; and procurement committees, where formed, are involved indecisionmaking. El Internal financial controls (traditional and non-traditional) instituted by State statute, like social audit, public displays,' Right to Information, ombudsman, and Citizen Charters, are adopted/adapted to the project design. El To the extent feasible, information on project finances be obtained from PRIs own financial reports. El Indesigning audit arrangements for the World Bank-financed operations, special efforts will be requiredto adopt a risk-based approach to determine the scope and coverage o f audit; subprojects implemented by local governments, intermediary entities, or community groups are typically audited randomly on a sample o f low- amount subprojects and on all high-amount subprojects. 53 ANNEXA. PUBLIC FINANCIAL MANAGEMENT FRAMEWORK IN KERALA A CaseStudy for BlockGrants A defining feature of the PanchayatiRaj Institutions inKerala, particularly inthe context of this study, is the fairly large share of the block grants (about 20% of the State's own annual outlay) provided by the State and the public financial management framework put inplace for the State to derive assurance on the use of funds for intendedpurposes. State's gthPlan (1997-2000) outlay to local self governments for projects and programs drawn by PRIs in Kerala them was followed by several reform measures, Level I Number I Average population including institutional and structural changes, developing a framework for preparation of Gram Panchayat 999 26,846 comprehensive area plans etc. The key initiative Block Pancha~at 152 175,030 Was called People's CaKlpaign for fOlTllUkltiOn O f District Panchayat 14 1,900,324 Devolutionof Finances. The notable features of devolution of finances in Kerala consisted of the following points: . The Kerala Panchayat Act, 1994provides that subject to its provisions and guidelines and financial and other technical assistance provided by the Government, the Panchayats shall have exclusive power to administer the matters enumerated in the Schedules of the Act and to prepare and implement schemes relating thereto. This Panchayats have a wide . autonomy of functioning withinthe spheres devolved uponthem. The State Budget has a section for a separate Panchayat Sector budget. Appendix IV of the State budget provides details of funds allocated to PRIs, under the different heads of . accounts. PRIs in Kerala typically receive funds from nine main sources as depicted in Figure Al; the three main cateogires of funds are as follows: Untied plan allocation, which is about 30 to 40 percent of the State's Plan allocation; Allocation for different subjects transferred to PRIs, which includes plan and non plan funds that are tied to specific schemes; . Maintenance Grant and Generalpurpose grants. The funds devolved to Panchayats includes and subsumes within it the Central Finance Commission (CFC) and RIDF (Rural Infrastructure Development Fund).The CFC grants are subsumed into the State devolution, on the ground that the State i s already giving substantial grants to Panchayats. In a "Joint Statement of Conclusions of Devolution to 54 Panchayats - the Way Forward" signed between Government o f Kerala and Government of India on 20 August 2006, it was agreed that Block Grants released by the Central Government on the recommendations of the 12thFinance Commission will be released within fifteen days from the State Consolidated Fund to all Panchayats in accordance with the recommendations of the State Finance Commission as mandated under Article 280 of the Constitution. m From December 2004, the State introduced a bill system for the drawal of Pladnon plan grant finds and General Purpose and Maintenance grants from the Consolidated Fund through the Treasury. For this purpose, the PRI declared the Gram Panchayat Secretary and other implementing officers as Drawing and Disbursing Officers. The Personal Deposit Accounts maintained by the PRIs in the Treasury for transfer of Pladnon plan grants were closed. Allocations are made on a monthly basis at the rate of 1/14`h of the annual allocations being released every month for the first 10 months of the financial year; the balance being paid inthe last two months based on the financial position of the State. After allocations are made, these funds remain inthe consolidated fund of the State till they are drawn. Under the bill system, the PRIs are permittedto draw funds required for payments against contingent bills, on the strength of allocation letters in the name of individual Panchayats. The exception being made for General Purpose grants which may be drawn in lump sum and deposited into the Gram Panchayat bank accounts along with their own funds. The arrears due to Kerala Water Authority from the respective Panchayatis deducted at source. Inall other cases, the unutilizedfunds lapse at the end of the year. 55 Figure 3: Sources of Funds for PRIsin Kerala Maintenance Devolved Funds Grants for Grants for decentralized State Fundsfor droughtlflood Own Funds and non tax revenue 1. Taxes, etc. collected locally by Gram Panchayats, the only tier of the PRIs empoweredto levy taxes. Gram Panchayats levy property taxes, professional tax, entertainmenttax, service tax, and show tax. In addition, there are other non-tax revenue sources such as rents, other income from properties such as markets, bus stands, shopping complexes etc. Other levels of Panchayatshave no self revenues. 2. Funds for Plan Grants for schemes formulated by the PRIs as part of the decentralized planning exercise, relating to functions entrusted to them under the schedules of the respective Acts. The allocations are made by the State (Secretary, Local Self Government) to District Panchayats and by the Rural Development Department, through Assistant Development Commissioner (General) to Block Panchayats and through Deputy Directors of Panchayats to GramPanchayats 3 . The State sponsored Plan schemes include Special Livestock Breeding Program, distribution of house sites to rural landless. Non plan schemes include unemployment wages, agricultural workers pension etc. The allocations flow through District officers of concernedLineDepartments. 4. From the year 2004-05, the State passed on funds for General Purpose Grants (non plan) as per the recommendations of ZndState FinanceCommission recommendations.Fund flows are as in(2) above. 5. From the year 2004-05, the State passed on funds for Maintenance Grants (non plan) as per the recommendationsof 2ndState Finance Commission recommendations.Fund flows are as in (2)above. 6. The centrally sponsored scheme include SwarnajayanthiGram Swarojgar Yojana (SGSY), Indira Awas Yojana (IAY), Total Sanitation Campaign etc. as well as Central Finance Commission grants and funds for these schemes flow through the District Rural Development Agency, State Poverty Eradication Mission (Kudumbsaree) to Block Panchayat, Gram Panchayat, and District Panchayat. The Central shares for the centrally sponsored scheme are not routedthrough the Statebudget. 7. The funds for drought relief, literacy programs etc. are received through District Collectors and various agencies and kept in separatebank accounts. 8. Loans obtained from State Government and Financial Institutions likeHUDCO, Kerala Urban and Rural Development FinanceCorporation Ltd. etc. 9. The receiptsfrom other sources are beneficiary contributions, voluntary contributions, contributions inkind, etc. 56 PublicFinancialManagementand Accountability System. The PFMA framework inKerala as represented inFigure A2, is quite typical for similar jurisdictions, and has been modified to the extentrequiredto represent the special features of State oversight and downward accountability, considered a hallmark o f decentralization reforms inKerala. The PFMA framework covers the range o f different components o fthe PFM cycle, including budget preparation, approval and execution, internal control including internal audit, accounting and financial reporting, and external audit and legislative scrutiny and together provides a strong platform for the State to obtain fiduciary assurances for the effective and economical use o f funds provided to the PanchayatiRaj Institutions. Inthe followingparagraphs, an effort has been made to briefly define the desired outcome, policy, practice and progress ineach strategic area o f the framework, inaneffort to understand the strengths, weaknesses and opportunities for improvements. Figure4: PublicFinancialManagementand AccountabilitySystem Gram Panchayat - State places consolidated accounts and audit report ProjectAppraisal Beneficiary Committe Right to Information Citizen's Charter Budgeting Desired outcome Each PRI has a budget which covers all sources and utilization of funds; the budget i s available to all members o fthe General Assembly inan easy and understandable form. 57 Policy Kerala has by far, the most comprehensive framework for participatory planning, considered as a viable and sustainable model for the whole country. The legislation provides the necessary linkages between the planning and budgeting processes. The Kerala Panchayat (Amendment) Act (2000) requires that all funds, includingplanfunds be brought into the budget. The District Planning Commissions have a defined role in the approval and consolidation of Panchayat (and Municipalities) Plans into a draft Figure5: PlanFormulation-A li'low Chart development plan for the district. Detailed guidelines provided for the purpose, ensures that the draft district plans are duly considered APP~DIEAnnuel Plan while preparationofthe Stateplans. Rsrisw Annupi Plan Practice 1 Despite the set of rules and regulations, Fln~lizsAnnual Plan comprehensive budget preparation is still DEVELOPMENT Fl"a1,re p"or,fisP. suggss, seldom practiced. The budget does not present e SEMINARS dsuslopmsnt an integrated picture of finances of a village PANCWAYAT Finalizs drsn plans I Panchayat.Nor is there any systematic budget el preparation at the block and district level. Ina G R A M W A R D ld.nt#fy pmbl.ms and pr#or#t!as performance review of the plan formulation process conducted by the Office of the AI WORKING prepsr. dran ptopct propossis Comptroller and Auditor General for the year GROUPS 2004-05, the auditors observedthat: ".. O0rr-n SOVSO R.W* an"Um..I(.,*. n fMSandr*r .d A"mDr o.n.r.1 d hdl. (01tn. .ma1011 3l M.rsh m s ,L=* 5.il The budget of the Panchayats were inaccurate due to non-incorporation of expenditures on plan schemes or Centrally sponsoredprojects; There continues to be a tendency to inflate the estimates and prepare a high surplus budget, specifically inown funds; Projects formulated by improperly constituted Working Groups without due care and deliberation; Low participation and inadequate deliberation at GradWard Sabhas; District Planning Committee approved projects before clearance from Technical Advisory Committees; Failure to undertake stock taking of assets created during Ninth Plan means that projects for tenth Plan formulated on insufficient basis; As a result of delays in approval of annual plans by the District Planning Committees, before the commencement of the financial year 2004-05, approved annual plans could not be incorporated into the budgets. The State Planning Board in its review (January 2006) on ten years o f decentralization observed that the planning process has become overly regulated with the State micro-managing every aspect of the process and thereby reducing the autonomy of the Village Panchayats. The report recommends that the planning framework needs to be simplified, leaving it to the PRIs to seek technical and other assistance as required. 58 The weaknesses inthe implementation o f the planningand budgetingframework as identified by the auditors as well as newthinkingemergingon the need for simplifying the processes makes it abundantly clear that the State needs to take a considered view on the continued validity o f the `People's Planning Campaign' and measures neededto ensure that the processes are followed in spirit as well as form. For the budgetingto be a useful exercise as a policy linkedplanning aid, it i s important that the budgets are comprehensive and include all sources and uses o f funds. Cashand Fund Flow Management Desired outcome All revenues and grants are received ina predictedmanner Poky The State laws and rules lay down some basic procedures for managing the `Panchayat Fund', defined to include (a) own income; (b) grants released by the Government for implementation o f schemes, projects and plans formulated by the Village Panchayat; (c) grants released by the Government for the implementation o f schemes projects or plans assigned, delegated or entrusted to the Village Panchayat under this Act; (d) money raised through donations, contributions and grants from the public and non-Governmental agencies and (e) amounts borrowed by the PRI. All grants received from the State (including plan funds) are through allocations which remain with the Consolidated Fund o f the State, drawn only through contingent bills. Consequently, the GO1system o f transfer o f funds through the banking channels have not been implemented in the State. For all other funds, the Panchayats are allowed to maintain accounts innationalized banks. Practice The Panchayats inKerala face the problem o f an even resource flow that i s essential for planning and maintaining a smooth expenditure pattern. For the Village Panchayats, this i s applicable to grants as well as own revenues. The peak collections o f tax (such as building tax and profession tax) take place during the closing months o f February and March each year. The State's financial situation has also affected normal treasury transactions and treasury bans and restrictions continue to present a problem. The issue o f inflated estimates o f own revenues has been discussed earlier inthe study and i s largely attributed to the statutory requirement that the closing balance should be at least five percent o f the total revenue. Ineffect, cash management i s by far, limited to prioritization o f payments and is primarily on account o f the disintegrated manner in which the Panchayat implements its various schemes and projects using a combination o f treasury and bank accounts. There are increasing instances o f Panchayats availing loan funds from financial institutions', though there i s no information on whether these funds were used to meet cash requirements. With enhanced revenue generation measures, efficient cash management will become an important element o f financial management for the PRIs. ' Duringthe year 2004-05, Gram Panchayats availed loans amounting to Rs.21.46 crores and DPs availed loans amounting to Rs. 236.47 crores during 2004-05 (Source: Report ofthe Comptroller and Auditor General of India for the year ended 3 1 March 2005: Local Self Government Institutions) 59 InternalControls Desired outcome Basic procedural controls are inplace; all payments properly authorized and documented, all receipts properly accounted for, reconciliations/confirmation carried out on a regular basis, key financial decisions recorded inProceedings (Minute) books Policy The KeralaPanchayat Raj (investment andwithdrawal o f Panchayat Fund)rules, 1996 lays down the requirement for the President of the Gram Panchayat to authorize, by way o f written orders, all withdrawal o f money from the Panchayat fund. The Secretary i s required to sign all cheques or documents to withdraw money from the Panchayat fund. In addition, Chapter XV o f the Kerala Panchayat Raj Act 1994 (as amended by various Acts) provides detailed procedures for conduct o f Panchayat meetings, constitution and functions o f Standing Committees, functional committees, subcommittees, ward committees and joint committees. In a major initiative to strengthenthe control framework, the State created the performance audit2 authority to assist the Panchayats in building their financial management capacity and conduct internal audit. For the purpose, the State appoints Performance Audit Officers at the regional level to conduct performance audit once in three months in various Panchayats through audit teams. The rules define in detail the duties and functions, procedures and provides a detailed checklist for matters to be considered by the performance auditor. The Rules also lay down the follow-up procedure at the level o f the Panchayat, which require placing the report at the next Panchayat meeting, correction o f the identified mistakes and implementation o f the recommendations, requirement o f publishing copies of the report on the notice board of the concerned Panchayat Office, discussions inthe Grama sabhas, Practice A due review of the various audit reports3indicate that despite the control measures put inplace, these are not as effective as they should be in ensuring that systems o f internal financial controls work well. Some observations from the audit reports include: 0 Misuse o f plan funds without considering benefits to the public or the institution (for example, Rs.10 lakh given as advances to officials not collected back;4 0 Diversion o f plan funds i s a common phenomenon in PRIs, including diversion from approved projects to non-approved projects, diversion from sectoral allocations, diversion from SCP/TSP norms etc.; 0 Breaking o f office procedures- matters related in the purchase o f stationeries, tools and equipments etc. for distribution to beneficiaries existing government procedures are not 2 The Kerala PanchayatRaj (Manner of Inspection and Audit system) Rules, 1997 defines "PerformanceAudit" as the inspection on the administration intendedto evaluate whether the developmentaland social welfare functions vested ina Panchayat and the financial and controlling powers entrusted to that Panchayat are being executed and utilised effectively. Performance Audit Report (1997-98 to 2001-02); PerformanceAudit Report (2002-03); Consolidated Audit Report; Local Fund Audit Report(2002-03). Performance Audit Report (2003-03), Municipalities, page 5. 60 only followed but are violated inmost o f the cases but no actions are initiated against the violation. Care i s not taken to keep the minutes books o f Administrative Committee, other Subcommittees by majority o f Panchayats. There is an increasing view inKerala that the performance audit is not quite serving the purpose for which it was created. Though the primary duty was defined to examine current accounts and provide management advice, so far the performance audit has only been concerned with a post- mortem examination o f accounts. The conventional method o f statutory audit i s being used and the focus i s on formal compliance with financial rules. It has been acting as an external inspecting agency, not as a guide to improve the financial management function o f local bodies. On the overall, there i s a low level o f awareness among Panchayats about the utility o f the performance audit arrangements, and its reports are not given the importance they deserve. The importance o f an effective internal audit function as an integral part o f the control framework cannot be overemphasized and the State will need to consider ways inwhich the function can be strengthened. Accounting Desired outcome Accounting books are maintained regularly and covers all receipts and payments; Accounting follows double entry book keeping systems and i s maintained on a cash basis. Policy Accounts are maintained on a single entry system on a manual basis. The Kerala Panchayat Act, 1994 and the Kerala Panchayat (Budget) Rules 1963 provide the essential framework for maintenance of accounts. One clerk in each Gram Panchayat performs the tasks o f the Accountant on additional charge. There i s a full time accountant at the District Panchayat level InJune 2003, the State accepted the budget and accounting formats for PRIs prescribedby the Controller and Auditor General (CAG) and they came into force with effect from April 1, 2004. The State constituted a committee consisting o f Principal Secretary (Finance), Senior Deputy Accountant General (LBA) and the Director o f Local FundAudit for monitoring the progress of implementation o f the new accounting regimen. Practice The account rules currently inforce inGramPanchayats were framed more thanforty years back and have not been updated. With multiple accounts required to deal with various State, central and own funds and multiple expenditure centres, the accounting system has become fairly complex. Rules do not capture the present day reality and are thus, unable to cope with the increased levels o f funds now handled. 61 Box 12: Information about Kerala Mission Intheir comments to the State PlanningBoardas part o f the rapid assessment study o f ten years o f Information Kerala Mission (IKM), established in Panchayati Raj in Kerala, the auditors have 1999 as the flagship e-governance project of the suggested that a "Grant- in-aid Finance Code" Government of Kerala, is an attempt to strengthen should be prepared and published, comprising all local self governance through ICT (Information Communication Technologies) applications. It the rules and regulations dealing with Plan envisages computerizing and networking 1215 local formulation, implementation, monitoring and self government bodies in Kerala and is the largest evaluation, resource mobilization, fund and most comprehensive local body computerization transactions, keeping o f registers, receipts and project inthe country. vouchers, filing o f annual accounts, and common The application packages developed by IKM accounting principles, computerized accounting include: Sulekha (Plan Monitoring System), Sevana systems, fixing o f liabilities, misappropriation o f (Service Administration), Soochika (Workflow funds and its disciplinary actions and procedures, system), Saaphlaya (Employment Information system), Sahatha (Revenue Collection), Sankhya process o f audit and accounts etc. applicable to (Accounts), Stapana (Establishment), Sugama PRIs staff, elected members o f the PRIs, audit (Decision Support system) and Samoohya groups related to PRIs etc. (Community Databaseregistration). Computerization o f the accounting initiated through 'Information Kerala Mission' (see Box A1) has been proceeding extremely slowly. While the software suites have beenready for some time now, the implementation has slowed down because o f the delays inthe centralized procurement o f computers. Asset Management Desired outcome Complete records o f the assets o f the PRI are maintained and updated on a timely basis Policy Kerala Panchayat (Accounts) Rules 1963 prescribes the procedure for record keeping and safeguard o f assets. These include various registers and records o f immovable property, stock registers, investmentregisters etc. With effect from 2 October 1995, the G o v e k e n t transferred assets and liabilities o f the institutions relating to the transferred functions to the LSGIs in the process o f decentralization. The transferred institutions included Krishi Bhavans, Primary Health centers, hospitals and dispensaries, schools and agricultural farms having considerable assets in the form of land, buildings andmovable properties. Practice Asset management continues to be an area o f weakness, with inadequate or absent records. The CAG reports for the last two years (2003-04 and 2004-05) have brought to the attention o f the State Government the need to take steps in identification of the nature and location and for the valuation o f assets and liabilities o f the transferred institutions. The transferred assets have not yet been incorporated in the asset registers o f the LSGIs and formal transfer in the revenue records has not been made. The LSGIs are reported to have spent Rs. 51.73 crores during 2004- 05 (and assets valued at Rs. 552.82 crores out o f Plan funds during 2002-03 and 2003-04), as per certificate furnished by Deparment o f the Local FundAudit for creation o f assets. The details o f 62 assets were not available for want o f recipient wise details o f expenditures incurred. In the absence o f identification and valuation o f assets and due to incomplete maintenance o f asset registers, the auditors have found it difficult to obtain a reasonable assurance regarding proper maintenance and safeguarding o f assets. Y Procurement Desired outcome Anefficient system o fprocurement is inplace promoting increased competition amongvendors andproviding greater value for money to the PRIs Policy The Kerala Panchayat Raj Execution o f Public Works Rules 1997 provides a detailed set o f procedures for procurement related to public works. The rules require the PRI to prepare a priority list o f works to be executed at the beginning o f each financial year. Other procedures relating to determination o f annual rates at district level, preparation o f estimates, technical sanctions, publication o f tender notices, acceptance o f tenders, entrustment o f works through negotiations, check measurements; inspections etc. are detailed inthe rules. The rules require the Panchayat to place the details o f the work to be placed before the Gram Sabha, published inthe notice board o f the Panchayat Office as well as on the notice board at the work site. All procurement related documents like approved tender, estimate, rate decided by the Panchayat, quality, bills for the purchase o f materials and goods etc. o f a public work i s considered as a public record and the Panchayat i s liable to issue the copy o f such records on requisition, to any person on realizing fixed fees. No separate guidelines are inplace for procurement o f equipment or hiringo f technical services Practice Notwithstanding the detailed rules and procedures, audit reports continue to point out instances o f inadequate records, absence o f physical verification as well as transactions leading to unfruitful investments, idling machinery and dumping o f material etc. This suggests that there are significant opportunities to improve efficiency and effectiveness o f spending by adopting better planning processes which are linked to the budget and the need for improved oversight and transparency inthe processes. Financial Reporting Desired outcome Financial reports (for example, receipts & payments statements, statement o f assets) are regularly prepared and presented to the General Assembly andthe Authorities 63 Policy The Act and related rules prescribe the followingprocedures for financial reportingby PRIs: . . Submission o f accounts to the auditor within four months o f the close o f each financial year; Submission o f abstract o f annual report as certified by the auditor, showing receipts, charges ... and the unspent balances with the audit report to the officer authorized by the Government not later than fifteenth day o f the second month o f the next financial year; Consolidation o fthe report and submissionto Government by the authorized officer; Government causing the accounts together with the audit reports to be laid before the Legislative Assembly; Government to publishthe annual accounts o f the Panchayats. The State has constituted a separate committee o f legislature, inthe lines o f Public Expenditure Committee, called the Committee on Local FundsAccounts, with effect from June 2003 to examine the audit reports o fthe PRIs. Practice As pointed by the CAG in their various reports, that there are some major ambiguities and conflicting provisions in the existing framework. These relate to inconsistencies in the dates for submission of annual accounts, lack o f clarity on dates for submission o f audited accounts to Government and Legislature, ambiguity regarding Annual Accounts and Annual Reports, scope and processes for consolidation process from the lowest level to an overall position at the State level and the new C A G formats o f budgets and accounts. The legislative intention o f publishing the consolidated accounts on an annual basis has consequently, never been fulfilled. However, the biggest weakness in the system lies in the inability o f the PRIs to prepare a consolidated annual statement o f accounts as prescribed in the Act and rules. The financial statements prepared by the PRIs normally do not include plan funds or funds from other sources and are limited to own funds. As a result, there i s no single point source o f information o f the financial position o f the PRIs. ExternalAudit Desired outcome External audits are carried out regularly; main findings o f audit report discussed in General Assembly and appropriate follow-up actions taken 64 Policy As per the legislation, the external audit of the PRIs in Kerala is carried out by the Director of Local FundAudit Department on an annual basis. The Local FundAudit legislation requires that an annual consolidated audit report to be sent to the Government, who shall place the same before the Legislative Assembly. In 2002 the Kerala Government entrusted the audit o f PRIs to the CAG for the purposes of providing technical guidance and supervision of audit. The Government has also accepted the budget and accounts formats prescribed by the CAG's Office. A committee constituted in June 2005 consisting od Principal Secretary (Finance), Senior Deputy Accountant General (LBA) and the Director o f Local Fund Audit for monitoring the progress andprovide oversight inthe areas of technical guidance and supervision. CAG conducts transaction audit of PRIs under the technical guidance and supervision scheme as well as under sections 14/15 ofthe Comptroller and Auditor General (DPC) Act 1971. Practice Large backlogs in preparation of annual accounts and audits continue to be an area of concern. O f 10,931 accounts which were receivable during the nine year period o f 1996-97 to 2004-05, 4,256 accounts (39%) were outstanding as at end-November 2005. Audit by Department of the Local FundAudit was inarrears inthe case of 11.5% of the accounts received. This i s largely on account of the inadequate staff strength at Department of the Local Fund Audit to cope with the manifold increaseinthe workload. Deparment of the Local FundAudit also needs to provide its staff with substantive training opportunities to update them with better practices and modern professional trends inaccounting and audit. The Panchayat Raj legislation provides that the audit reports of all levels o f Panchayats and the replies furnished by them should be placed before and discussed in Gram Sabhas. Given the delays in audit, incomplete accounts and low turnout in Gram Sabhas, it i s unlikely that this stipulation can be met in the spirit intended. The State is actively considering consolidating the audit functions and creating a functional audit commission to support local government management. Oversight and LocalTransparency Desired outcome There is a high degree of local level transparency, including public displays in simple and understandableforms on financial positionand physical progress Policy One of the important contributions made by the People's Campaign is the introduction of the concept of downward accountability of PRIs. The innovative tools of accountability introduced inKerala include: 0 Social audit through the empowerment of the gram sabha, neighborhood committee and monitoring committee; 0 PerformanceAudit 65 Beneficiary Committees to execute public works 0 Introducingtransparency by: - Conferring right to information on citizens -- Prescribing rules for selection o f beneficiaries Providing for the citizen's charter 0 Creating a watchdog institution, the ombudsman to ensure fair play inthe functioning of Panchayats. Practice Kerala provides a good role model in fully recognizing that the primary accountability o f the local governments i s towards its constituents. But muchremains to be done to institutionalizethe various innovative accountability tools. For instance, over time the interest and enthusiasm over the creation o f the institution o f Ombudsman has waned, with the number of Ombudsmen reduced from seven to one with the institution taking on a more formal functioning style with lawyers appearing before it. Conclusion In adopting the "Big Bang" approach to decentralization and adopting a wide range o f reforms, including setting up a fiscal transfer system that assigned 20 percent o f the State capital budget as the vertical share for local governments, Kerala i s quite clearly the front-runner o f decentralization in India. The PFMA framework, derived from the various legislative Acts, rules and bylaws covers the range o f different components o f the PFMA cycle, including budget preparation, approval and execution, internal control including internal audit, accounting and financial reporting, and external audit and legislative scrutiny are designed to provide a strong platform for the State to obtain fiduciary assurances for the effective and economical use o f funds provided to the Panchayati Raj Institutions. In practice, however the financial control framework lacks rigor and oversight. In its effort to cope with the manifold increase in the quantumof funds handled by the Panchayats, the State has issued several regulations on the use o f funds, which have resulted in an overly complex system. The challenge for the State now i s to simplify, consolidate and institutionalize the various rules and operating procedures into a fully encompassing legal and institutional framework, updating and modernizing many o f the archaic accounting and reporting systems to support decision makingand local governance. 66 W t- rn -0 C 14 i M rcl C 0 E z 0 -5 0 L 4 N m \ \ \ \ \ X X \ X X t> a 0 N d c 3 X \ \ \ \ X - \ \ X X X \ x, $1 X X X X X ANNEXD. MAPPINGFMARRANGEMENTS OF FOR PRIFINANCINGSELECT IN WORLD BANK-FINANCEDOPERATIONS Element 1: Planning& budgeting An initial Memorandum of Understanding (MoU) is signed between the WMD and Gram Panchayats (within the selected project area) who are willing to participate inthe project. As per set criteria WMD communicates the total budget envelop for the Gram Panchayat for a period of 5 years. Within the given budget envelop, a 5-year Gram Panchayat Watershed Development Plan (GPWDP) is preparedby the Gram Panchayat with the assistance of MDT and is based on specific proposals from Revenue Village Committeeh (RVC) and other user groups. The GPWDP i s a detailed annual action plan for the implementation of the sub project. After approval by the Gram Sabha, the GPWDP is submitted to the DPD for review and appraisal. After approval of the GPWDP, an annual work plan (including procurement plan) is prepared by each Water and Watershed Subcommittee (WWC) of the Gram Panchayat. This is also approved by the Gram Sabha and then submitted to the DPD. On approval, a legal MOU is executed betweenGram Panchayatand DPD covering various aspects as per the operational manual. Element 2: Staffing During project preparation, one of the potential areas of risk to smooth project implementation was identifiedas the low number of State appointed GP Secretaries - presently there are 1,398 Secretaries covering 7,227 Gram Panchayats, an average of about five Gram Panchayats per Secretary. As part of the mitigation measures, it was agreed that under the Project, each Gram Panchayatwill appoint an accounts assistant locally who will assist the GP Secretary in book keeping, accounting, cash book writing and preparation of vouchers and all matters relating to updatingof accounting and reportingpertaining to the project. Inasubsequent developmentunderthe project, by virtue ofaGO dated24" July 2006, the Statehas arrangedfor the responsibilities of the GP Secretary under the project, including operation of bank account, to be transferredto the female member of the WWC or in absence of such female member, to any GP member nominated by Gram Panchavat. 73 Element 3: Flow of funds Fund flows for the project are through WMD. The Gram Panchayats assisted by WWC manage the project funds through a dedicated bank account, operatedby the Pradhanand Secretary of the Gram Panchayat (since revised as per GO referredto above). Element 4: Accounting A F M Manual and a GP accounting manualhas been preparedunder the Project. These manuals document in detail the accounting processes and policies relating to the project. All releases to Gram Panchayats as releases against amroved work dan are recordedas exDenditure inthe books of accounts ofthe Proiect. Element 5: Procurement Gram Panchayatswill procure goods, works and services using the proceduresand forms detailed inthe Community Procurement Manual (CPM) that has been prepared specifically for this project and agreed with the World Bank. The CPM contains procedures, thresholds, forms and formats for all types of procurements required under the project. The CPM also provides for social audit of procurementdecisions by way of (a) requiringthe ProcurementPlan to be place before the Gram Sabha; (b) information with respect to intended procurement over Rs. 2,500 to be displayed by the Gram Panchayat on notice boards at the Panchayat Bhawans, community halls and other public places; and (c) open all documents and recordsfor public inspectionon requestand payment of prescribed fees. The manualalso describesthe complaint handling mechanismset up for the project. Element 6: Internal Control & audit A F M Manual and a GP accounting manualhas been preparedunderthe Project, expectedto supplementthe policies given in State Financial rules. In practice project specific financial rules and regulations are used as the final authority for project implementation. The project adopts the social audit functions at the Gram Panchayat as laid down under the "Hariyali" (GO1 guidelines for watersheddevelopment programs). The project has specified a firm of Charteredaccountants is envisagedto undertake quarterly internal audit ofthe project. Element 7: FinancialReporting Monthly reporting formats from each of the accounting centers have beendesignedto provide summarizedmonthly financial information on the project expenditures and activities. These are compiled by WMD on a monthly and quarterly basis to provide meaningful FMRs at the project level. Gram Panchayats are required to prepare monthly expenditure reports and present them in the relevant Gram Sabhas/ WWC/GP meetings and also to be publicly postedon the notice board. For the project, separate financial reports are preparedon amonthly and annualbasis. Element 8; External Audit The Auditor General, Uttarakhand are the external acceptable auditors for the project. As per the agreed TORS,the AG is required to cover Gram Panchayats on sample basis. The Project auditor is envisagedto certify the financial statements, however conventionally the CAG does not carry out an audit of annual financial statements. 74 CHECK LIST 3 6 I 75 D2. Himachal PradeshMid Himalayan Watershed DevelopmentProject Element 1: Planning & budgeting Ward level micro plans formulated at the community level are aggregatedand compiled to form Gram Panchayat Watershed Development Plans (GPWDP). The Gram Panchayat supported by the WDCs will be responsible for preparinga GPWDP on the basis ofrecommendationfrom user groups from the respectiverevenuevillages andalso a detailedannual action planincludingcost estimates, cost sharingand identifyimplementingagencies or groups for specific activities. Inaddition, the GramPanchayat is responsiblefor identificationo f families eligiblefor assistance under the livelihood component (based on wealth ranking exercise documented in the Community Operations Manual). Each Gram Panchayat submits the GPWDP and Annual plan to Gram Sabha for approval. At Regional/ district level the WDO will (i) review and approve the overall watershed development plan and well as the annual work planof individualGram Panchayat(ii) consolidatethe annualactionplanof all the GramPanchayatsunder the WDO; (ii) prepare annual work plan for the WDOs. At the State Levelthe project will (i)compile and consolidate the annualbudgets and Annual Work Plan (AWP) of various implementingunits and submit the same to the State/ NRMS (FinanceCommittee) for budgetapproval (ii) allocatethe approvedbudget to WDOs on a timely basis as per approved work plans. The project attempts to institute an incentive fund to reward GPs meeting pre-determined Performance standards with intent to strengthen functioning of Gram Panchayats and fostering long-term sustainabilityofproject activities. The Performancestandards will include financial Managementbenchmarks. Element2: Staffing As per Government of Himachal Pradesh (GoHP) policy, there is one Panchayat Secretary for every 2 Gram Panchayatsbut due to shortageof GP Secretaries inthe State this ratio is often 1:3. Inorder to addressthis shortfall GoHPhas sanctionedthe appointment ofPanchayat Sahayaks(Assistants) on contractualbasis. Under the Project each Gram Panchayatwill appoint an accounts assistant locally who will assist inbook keeping, accounting, cash book writing and preparation of vouchers and all matters relating to updating of accounting relevant to the project. They will complement Panchayat Sahayaks or Secretarieswho are primarily responsible for preparationofaccounts, minutes of meetings and subsidiary accountingrecords. Element3: Flow of funds Fund flows for the project are through the Line Department. At GP level, the project funds will be placed in a separate dedicatedbank account to be operated by GP president and Secretary. Payments by Gram Panchayats to user groups will be basedon financing agreements. 76 Element 4: Accounting An operationalmanualanda GP accountingmanualhave beenpreparedunder the Project. The accountingprocesses and policies prescribedfor the project essentially builds on the existing records of the GO with focus on addressing the gaps (Le. accounting for beneficiary contributions, periodic financial reporting) and is designed to meet the WorldBank's fiduciaryrequirements. All releases to Gram Panchayats as releases against approvedwork plan will be recordedas expenditure inthe booksof accounts ofthe Project. Element 5: Procurement GramPanchayatswill procure goods, works and servicesusingthe proceduresand forms detailed inthe Community Procurement Manual (CPM) that has been preparedspecifically for this project and agreed with the World Bank. The CPMcontainsprocedures,thresholds, forms andformats for all types o f procurementat this level. The CPM also provides for social audit of procurement decisions by way of (a) requiringthe procurement plan, audit report, compliance, physical and fmancial progress,utilizationcertificates to be place before the Gram Sabha; (b) information with respect to projects, all works, beneficiaries is displayed by the Gram Panchayat on notice boardsat the PanchayatBhawans,community halls and other public places; and(c) open all documents and records for public inspection on request and payment of prescribed fees. Complaint /Grievance redressal mechanism is through Gram Sabha.. Element 6: Internal Control & audit The GP accounting manual prepared under the Project is expected to supplement the policies given in State Financialrules. Inpractice projectspecific financial rules andregulationsprevail.The project adoptsthe social audit functions at the Gram Panchayat as laid down under the "Hariyali"(G0 1 guidelines for watershed development programs).Quarterly internalaudit by a firm of charteredaccountancyis expectedunder the Project. Element 7: Financial Reporting Monthlyreporting formats from each of the accountingcentershave been designedto provide summarizedmonthly financial informationon the projectexpendituresand activities. These are compiled at the State levelon a monthly and quarterly basis to providemeaningfulFMRs at the project level. Gram Panchayatspreparemonthly expenditure reports and present them in the relevant Gram Sabhas/ GP meetings. These reports are also publicly postedon the noticeboard.Underthe projectonly project moniesare reportedmonthly and annually. Element 8; External Audit CAG are the external auditors for the project.GPs financial reports are expected to be reviewed by the internal auditors- charteredaccountancyfirms. 77 CHECK LIST N o N 4 N 5 N N Y 78 D3. Karnataka Watershed DevelopmentProject The project will be implemented in three clear batches, each overlapping with the other. Each batch will have duration of about four years, the first year being devoted to social mobilization, the next two years to implementation, and the last year to consolidation. The MWMGs would be registered societies under the Karnataka Societies Registration Act, 1960 by the name of Sujala Watershed Society (SWS). The SWS have since been notified as subcommittees of Gram Panchayats under Sec 61A. The Micro Watershed Development Plans (MWDP) would be prepared by the SWS through a highly participatory and consultative approach. Preparation and implementation of MWDPs will be undertaken by SWS with technical assistance rendered by Taluk Watershed Teams and support from NGOs in social mobilization and community participation. A Memorandum of Understanding(MOU) signed betweenthe SWS, Zilla Panchayat and the NGO after approval of MWDP (endorsed by Gram Sabha) and Sub-plan by the Zilla PanchayatStandingCommittee would form the basis for implementation of watershed development activities. The project is budgeted for in the State budget as a separate single line. For the expenditures to be incurred at the district and village levels the WMD grants are provided to Zilla Panchayats-these form an integral part ofthe Zilla Panchayat budget and the 'district sector' inthe State Budget Element 2: Staffing The accounting functions at the Zilla Panchayat are managed by the Chief Accounts Officer (CAO), supported by a number o f Accounts Officers, Accountants and Accounts Clerks. The DWDOs are also provided with supporting Accounting staff and contractual or redeployed accounting staff to function as satellite accounting units. The WDD & DWDOs has outsourced the operation of the Computerized Financial management System (CFMS) to a chartered accountancy firm, who place their staff at each DWDO and the WDD level to enter all project related accounting transactions, including the SWS into CFMS. Village book keepers, preferably literate or semi-literate women, identified and engaged by the communities would be trained to maintain the primary books of accounts for the SWS. The prime resoonsibilitv is ofthe Secretarvofthe SWS or GP subcommittee as the case mav be. Element 3: Flow of funds Fund flow of the project is through the Treasury systems. Zilla Panchayat authorizes the DWDO to make payments as requiredto SWS through the cheque book facility provided by the Treasury, to the extent o f the Letter of Credit (LC) issuedon a monthly/quarterly basis. The release of funds to the SWS would be based on the approved MWDP/Sub-plan and MOU signed betweenthe Zilla Panchayat, SWS, and the NGO. The SWS will open and maintain a separate project bank account called the 'Implementation Account'. The ImplementationAccount will be operated jointly by one of the office holders of the SWS (Chairperson or Secretary) along with the field officer (as the Treasurer) of WDD. This will amlv in 50% of the SWS and inthe remainingSWS the Treasurer will be selectedfrom the members ofthe SWS itself. 79 Element 4: Accounting A Financial Management Manual prepared for the project, describes the financial management system that will apply to all project-related transactions. All sources of funds, including contributions from beneficiaries, would be accounted for and reflected in the project financial statements; and similarly all project expenditures will be reflected in the project financial statements. All payments made through the State Treasury will be recorded in the computerizedaccounting system. The Zilla Panchayat and the DWDO will be separate accounting centers and will record expenditures against supporting documents after approval of competent authorities. The release of funds to S,WS will be recorded as advances and accounted for only when the SWS provide supporting documentation on actual expenditures incurred. Monthly abstract of expenditures at the SWS along with vouchers, bank pass books will be submitted to the DWDO Office and incorporated into the project accounting system. Formats of simple accountingrecordsto be maintained by the community groupshave been developed. Element 5: Procurement All project activities to be financed under the Credit would be procured in accordance with the World Bank Guidelines for Procurement of Goods, Works and ConsultancyGuidelines for hiring Consulting Services (including NGO services) to be financed under the Credit. All civil works, goods and services would be procured using India specific World Bank's model documents. Element 6: Internal Control & audit To ensure that sound internal control in maintained throughout implementation, the project design provides for an independent chartered accountancy fm to carry out an internal financial review on a quarterly basis. The audit would cover financial transactions and an assessment of the operation of the financial management system (including internal control mechanisms) at all expenditure centers, including the district offices of the watershed department and the SWS. The first release of funds to the SWS i s based on the requirement of the sub-project for two months activities. Subsequent releases of funds are made on a monthly basis and are (a) based on an abstract of expenditures against the earlier release along with the vouchers for the month; and (b) linked to an independentverification, certification and documentation process of the physical works undertaken or completed by the SWS. The verificatiodcertification process i s the joint responsibility of the field officer of the watershed department and the designatedNGO. Element 7: Financial Reporting Zilla Panchayat and DWDO prepare monthly financial reports and submit them to the WDD and other reporting authorities either electronically or through diskettes. WDD consolidates these reports for the entire project. The SWS is required to submit an abstract of expenditures along with the bank cheque counterfoils and deposit challans and bank reconciliation statement.In addition, the bookshegisters, vouchers and bank pass books would be open for perusalby members. Element 8; External Audit 1The financial statements ofthe Droiectare auditedbv the ComDtroller andAuditor General of India. I 80 CHECK LIST QUESTIONS I s the implementing entity (user committee level) an officially Does the project....................................................... constitutedrecognized subcommittee o f the local government? ___________--____---------- designprovide for an assessment ofthe fiduciary capacity ofPRI as selection criteria? Are the procedures for operation ofproject bankaccounts at the sub project level ____________________------ o f the PR Act and Rules? inline with the provisions Are the sub project funds included inthe ''find" ofthe local government as _______________by the PR Act and Rules? defined Inpreparing the annual plandbudgets and annual financial statements, does the ........................................... local PRI include the sub project funds? ---- Are the procurement processes prescribedfor the project aligned with the PRIs financial rules/regulations, with respect to approval o f the Procurement plan, grievance redressal and complaint mechanism, Public display o f all procurement related information, limits for administrative and technical sanction o f estimates .............................. and contracts and procurement methods to be used? ............................................................................................................ Does the project design envisage a separate audit procedure as against usingthe entity audit reports to provide the requiredassuranceon enduse ofthe project funds? 81 D4. Maharashtra Rural Water Supply and Sanitation Project Element 1: Planning & budgeting The Executive Engineer, Water Managementand Sanitation Departmentwill be the Team Leader of the District Appraisal & Monitoring Team (DAMT) and will be responsible for appraising and approving or recommending administrative, financial, technical and process sanction of the Village Action Plan to the Project Coordinator, Project Director or DWMSC depending upon the estimatedcost and delegatedpowers of sanction., monitoring the progress o f Village Action Plan implementation and recommend to DFMT, release of installments to the Gram Panchayatsbased on achievement of milestones of activities as planned by the Gram Panchayat in the Village Action Plan and conduct performance audit of Village Action Plan implementation covering technical, social, environmental aspects by engaging an external agency. At the village level the Gram Sabha will be responsible for: (a) approving participation in the Project and approving any contracts/MoU to be signed between Gram Panchayatand Zilla Panchayat; (b) appointment of the VWSC; (c) approving the Village Action Plans; (d) recommend levels o f community contribution, tariff rates, operation and maintenance charges etc. to be collected from community members; (e) appointing Social Audit Committee (SAC) and take action by itself or to direct Gram Panchayatto take appropriate legal action based on the reports of SAC; (f) review the progress of activities undertaken by the VWSC, periodically for ensuring inclusiveness, equity, transparency, cost effectiveness and other principles o f the Project; (g) approving statements of accountsand other reports, budget and annual accounts etc. on Project implementation presented by the Gram Panchayat; and (h) recommend agencies for performance audit, financial audit and technical audit on the working of VWSC and Project implementation. Gram Panchayat under the Bombay Village Panchayat Act 1958 will be responsible for overall coordination of project activities and specifically: (a) facilitate and monitor the VWSC activities; (b) request and receive all funds under the project and maintain separate books of accounts with the assistance from VWSC; (c) approve the appointment of Procurement Sub-committee, Finance Sub-committee and such other sub-committees suggested by VWSC; (d) recommend to the Gram Sabha for its approval, the Village Action Plan for water supply and sanitation prepared by VWSC; (e) coordinate with the DAMT for obtaining the required sanctions for the Village Action Plan; (f) finalize and incorporatethe accounts of VWSC with GP accounts and place before the Gram Sabha for approval; (8) arrangeto get the accounts of VWSC audited by Local Fund Audit or firm of chartered accountants, take action on the reports of SAC as recommendedby Gram Sabha; (h) arrange to demand community contribution, water charges etc. from the community members as approved by Gram Sabha through VWSC; and (i)enter into contractual agreementsiMoU with Zilla Panchayat for implementing the Project and contract SOs, consultants and other service providers required for availing various technical assistance services from among the panel prepared by the ZP and with the approval o f Gram Sabha and monitor their activities. VWSC will maintain and operate the bank account on behalf of the Gram Panchayat through persons authorizedby Gram Sabha from amongstthe VWSC membersand preparefinancial statements, maintain books of accounts and other records on behalf of the Gram Panchayat and submit them to Gram Sabha for approval. The VWSC will operate through various Sub-committees on Finance, Procurement etc. and execute contracts and procure materials and services on behalf of the VP as amroved bv the Gram Sabha. 82 Element2: Staffing DFMT is a small team consisting o f a finance officer assistedby accounts clerks and two administrative clerks will take care o f the fmancial support activities to the district level arrangement. The DFMT will also be responsible for arranging and coordinating the fmancial audit o f Project account o f Gram Panchayats. An accountant with adequate skills and experience in community accounting and capacity buildingwill be an integral part o f the DFT and will be responsible for GP level facilitation and training functions. At the village level, the finance, accounts and social audit functions will be with different committees. At the GP level the VWSC can hire the services o f an accountant or entrust the responsibility to a member o f VWSC duly trained under the project for book keeping and maintaining accounts. Ifnecessary skills are not available at the village level, a suitable person can be identified and trained as a Dara-Drofessional. Element 3: Flow of funds All project funds will be accounted for indedicated accounts at the district and Village-level governments. Release o f funds to Gram Panchayats for implementation o f schemes will be based on achievement o f predetermined and mutually agreed physical and process milestones. Funds will be released in installments as per the agreed Financing Agreements. GOM will transfer the funds based on the annual work plans to the PL account maintained by the OMT in installments. From the P L account funds required for State level Project expenditure will be met. The funds for the district level operations will be transferred to the Zilla Panchayat from the PL account. A separate bank account in a scheduled bank will be maintained at the Zilla Panchayat level, which will be operated by the District Team in Zilla Panchayat under single or joint signatures, depending upon the amount o f transaction. The officers may be Chief Executive Officer, Additional Chief Executive Officer, and Senior Accounts Officers o f the District Financial Management Team or other officers in WSSD in Zilla Panchayat as approved by OMT. The expenses for the district level operations and expenses o f the DFT, DAMT, DFMT and the Administration Unit will be met from this account. As per the approved village level action plan and agreed milestones therein, funds will be transferred from this account to the Gram Panchayat. A dedicated account will be opened at the GP level, to receive funds from the Zilla Panchayat and also to credit capital contribution by the community. This account will be operated on behalf o f VP by VWSC members under thejoint signature o f at least two officer bearers o f Village WSSC, nominated for the purpose by the Gram Sabha. At least one signatory shall be a woman. At both Zilla Panchayat and GP levels, the sub project funds are not considered as part o f their own budgets or accounts. Element 4: Accounting Gram Panchayats participating in the project to: (i)open and maintain separate bank account for the project funds; and (ii) maintain separate record and accounts for the said funds. A F M Manual and COM has been prepared under the Project which document in detail the accounting processes and policies. All releases to Gram Panchayats as releases against approved work plan will be recorded as expenditure in the books o f accounts of the Project. At all accounting centers, separate books o f accounts will be maintained for the project funds as per the requirements specified in the Financial ManagementManual. VWSC/Gram Panchayatwill maintain simple accounts recordhegisters as prescribed inthe manual. Element 5: Procurement Gram Panchayats will procure goods, works and services using the procedures and forms detailed in the Community Operational Manual (COM) that has beenpreparedspecifically for this project and agreed with the World Bank. The COM contains procedures, thresholds, forms and formats for all types of procurement at this level. The CPM also provides for social audit of procurement decisions by way of (a) requiring the Procurement Plan to be place before the Gram Sabha; (b) information with respectto intended procurement over Rs. 2,500 to be displayed by the Gram Panchayat on notice boards at the Panchayat Bhawans, community halls and other public places; and (c) open all documents and records for public inspection on request and payment o fprescribedfees. 83 Element 6: Internal Control & audit A Project Financial Management Manual and the Community Operational Manual (COM) prepared under the Project provides the control framework for the budgetingand expenditure management. DAMT is responsible for carrying out the performance audit of implementationof the Village Action Plan. The Social Audit Committee (SAC) is a self-check and internal monitoring mechanism for the Gram Sabha and the Gram Panchayat on the activities of the VWSC and other sub-committees. The specific roles are to (a) continuouslyreview the functioning o f the VWSC and its various sub-committees inorder to ensure that they carry out their rolesandresponsibilitiesin a just and fair manner and not violating the principles o f the project like, inclusion, equity, cost-effectiveness, transparency, environmentalsoundness etc.; (b) conduct detailed scrutiny o f such actions or decisions andreport the findings along with recommended remedial measures to the Gram Sabha; (c) request for convening special Gram Sabha to discuss findings o f social audit, which are of very serious nature. The report o f the SAC, as approved by Gram Sabha will be forwardedby the Gram Panchayatto the DWMSC. Such reports will be made available to any member o f the Gram Sabha upon request and payment o f a fee. The important findings in the report will be prominently displayed in the notice board o f the Gram Panchayat at least seven days in advance o f the Gram Sabha; and (d) chair the Gram Sabha discussing social audit report, ifthe Sarpanchis amember inVWSC or any of its sub-committees. Element 7: Financial Reporting Monthly reporting formats from each of the accounting centers have been designedto provide summarized monthly financial information on the project expenditures and activities. These are compiled by OMT on a monthly and quarterly basis to provide meaningful FMRs. Expenditures reportedunder the project would need to be regularly reconciled with the reports submitted to the Accountant General's Office Gram Panchayats will prepare monthly expenditure reports and present them in the relevant Gram Sabhd VWSC/GP meetings and also to be publicly posted on the notice board. The financial arrangements between the Zilla Panchayat and Gram Panchayat will not require financial accounting for the sub project expenditures inthe projectbooks. All paymentsagainst the contracts will be recorded as expenditures inprojectbooks. However, the Gram Panchayatswill be requiredto submit regular statements of expenditures summarizingsources and uses of hnds against the plans in order to build accountability and demonstratethe presenceof adequate accounting and bookkeeping arrangements.GramPanchayatswill prepare a simple report which will be presentedto its members and in the Gram Sabha and provide all records for scrutiny by members and is also publicly posted inthe noticeboardin the Gram Sabha. Element 8; ExternalAudit The Comptrollerand Auditor General of India(CAG) through its offices inMaharashtrawill be the statutory auditor for the project.The AG's office will conduct annual audit o f the operations o f the OMT at the State level, Drinking Water Management and Sanitation Department at the Zilla Panchayat level and a selected sample of Gram Panchayats at the village level. Gram Panchayats as constituents of localrural governmentsare audited by the State Governmentunder the Bombay Local Fund Audit Act, 1930. As a demonstration o f good practice, each of the Gram Panchayats implementingthe project will be required to submit audited statements of expenditures and audit reports for the project within 6 months of the close of the financial year. The Gram Panchayats will also have the option of engaging firms of chartered accountants from the panel prepared by the Zilla Panchayat.Follow-up o f the audit observations will be monitoredby the District FinancialManagement Teams. This arrangement is limited to the sub project expenditure bv the VWSC onlv. 84 CHECK LIST .......................................................... Q-UESTIONS Yes I s the implementing entity (user committee level) an officially Y constitutedhecognized subcommitteeofthe local government? ........................... Does the project________________-_______________________---~~--------~- designprovide for an assessment ofthe fiduciary capacity of PRI as selectioncriteria? Are the procedures for operation of project bank accounts at the sub project level .......................... inline with the provisions ofthe PRAct andRules? Are the sub project funds included inthe "fund" ofthe local governmentas defined by the PR Act and Rules? --------------- Inpreparing the annualplandbudgets andannualfinancial statements, does the ........................................... localPRI includethe sub project funds? ---- Are the procurement processes prescribedfor the project aligned with the PRIs financial rules/regulations, with respectto approval ofthe Procurementplan, grievanceredressaland complaint mechanism,Public display of all procurement related information, limits for administrative and technical sanctionof estimates .............................. and contracts andprocurement methodsto be used? ............................................................................................................ Does the project design envisage a separate audit procedureas againstusing the entity audit reportsto provide the required assuranceon enduse ofthe project funds? 85 Element 1: Planning & budgeting Overall Work Plan (OWP) is agreed between GoUA and WB contains year wise physical and financial targets for each activity under each component of the Project. OWP is prepared by PMU. This forms the basis for year wise budgetpreparationfor the year. PMUprepares DWSMDPMU wise physical and financial targets for eachyear. The DPMU wise targets are based on number of GPsNWSSCs controlled by them. This shall provide the overall framework for each DWSM/DPMU. Based on this the DPMU prepares the Annual Work Plan along with Budget which is submittedto DWSC and the Governing body of DWSM for approval. The approved AWP is submitted to PMU where they are analyzed for deviations from OWP. A consolidatedAWP is preparedat PMUto the Governing body of the SWSM for approval. Budget is re appropriated in the manner and mode as stipulated by the Finance Committee ofthe PMU to individuals and project offices. The Project follows a scheme cycle not exceeding 24 months consisting of four distinct phases namely pre planning, planning, implementation and post project completion phase. The main output of pre planning phase is prioritizing of Gram Panchayats. During the planning phase UWSSC are formed depending on number of schemes to be implementedin a Gram Panchayat, preparation of Detailed Project Reports (DPR) for each of the UWSSCs. All Single Village Schemes (SVS) will be based on demand driven approach. UWSSC and Gram Panchayats have the main role of planning and implementingof all SVS. SVSM supportedby PMU is responsible for approving the District annual work plans and the budgets for support activities to be taken up by sector institutions. SWSM supportedby PMU is responsiblefor preparing the over all sector budget. MOUs for works over 2 million are signed by SWSM. DWSM supportedby DPMU are responsible for preparing annual district work plans and for signing the MOUs for SVS and smaller MVS. Gram Panchayatwith support from DPMU are responsible for plans and budgets for the schemes underthe Gram PanchayatThese plans are approved inGram Sabhabefore they are sent to DPMU. Element 2: Staffing During project preparation, one of the potential areas of risk to smooth project implementation was identifiedas the low number of State appointed GP Secretaries - presently there are 1,398 Secretaries covering 7,227 Gram Panchayats, an average of about five Gram Panchayats per Secretary. As part of the mitigation measures, it was agreed that under the Project an accounts manager and an assistant at each district andjunior accounts assistant at sub - district level, each covering a cluster of eight UWSSCs. The junior accounts assistant will assist in book keeping, accounting, cash book writing and preparation of vouchers and all matters relating to updating of accountingrelevantto the project. Ina subsequentdevelopment, by virtue of aGO dated 19* May 2005, UWSSC has beendeclareda subcommitteeof the Jal Prapandhak Committee of the Gram Panchayat. Further as per notification the responsibilities of the GP Secretaryunderthe project canbe transferred to anominatedworker who can be appointed as a Co secretary. 86 Element3: Flow of funds Fund flows for the project are through the Line Department. The Funds received by Gram Panchayat shall be deposited in the Nidhi 1 Bank Account of the Gram Panchayat. These funds would be transferred to the bank account of UWSSC within 15 days of the receipt of the funds. The GP bank account is operated by Pradhan and Secretary (refer above notification) and the UWSSC bank account is operated by Chairman (Gram Pradhan) and Treasurer (elected from subcommittee). Element4: Accounting A F M Manual and a GP accounting manual has been prepared under the Project. They document in detail the accountingprocesses and policies. All releases to Gram Panchayats as releases against approved work plan will be recorded as expenditure in the books of accounts of the Project. UWSSC reports expenditure reports to DWSM through Gram Panchayat. At sub DPMU level the reports from UWSSC are converted into double entry in accountingsoftware. At DWSM level computerized accounts are prepared.At SWSM level consolidation of reports of DWSM and sector institutions is done. Element 5: Procurement GPsAJWSSCs will procure goods, works and services using the procedures and forms detailed in the Procurement Manual (PM) that has beenprepared specifically for this project and agreed with the World Bank. The PM contains procedures, thresholds, forms and formats for all types of procurement at this level. The PM also provides for constitution of social audit committee by the Gram Panchayat. This committee ensures that PM is followed and reports any violation or deviation to the Gram Panchayat together with monitoring the adherence of project principles and rules in selection of beneficiaries, implementation of sub projects and all decisions of UWSSC. The manual also describesthe complaint handling mechanism. Element6: Internal Control & audit A F MManual and a GP accounting manualhas beenpreparedunderthe Project, expectedto supplementthe policies given in State Financial rules. In practice project specific financial rules and regulations are used as the final authority for project implementation. The Project requires a setting up of internal audit wing in SWSM to cover DWSM, PMUand others. Element7: Financial Reporting Monthly reporting formats from each of the accounting centers have been designed to provide summarized monthly financial information on the project expenditures and activities. These are upwardly consolidated from UWSSC - GP-SUB DPMU - DPMU - PMU to provide meaningful FMRs at project level. UWSSCs prepare monthly expenditurereports and presentthem inthe relevant Gram Sabhd WWC/GP meetingsand also to be publicly posted on the notice board. Under the project only project monies are reportedmonthly and annually. Element8; External Audit I PrivateCharteredAccountant firm are the External auditors for the Project. 87 CHECK LIST Yes.N o Y N N N 5 N N Y 88 Element 1: Planning& budgeting The project is implemented in about 700 Gram Panchayats (some 2,100 villages) in 4 successive but overlapping batches.A detailed project implementationschedule has been developedfor a six-year implementationperiod. Each batch has a 24-month scheme cycle consisting of four distinct phases (preplanning-3 months, planning-6 months, implementation-12 months, and post Implementation-3 months). The District Project Approvals Committee (DPAC), chairedby the ChiefExecutiveOfficer (CEO) providesthe administrative approvalfor the projects. The Zilla Parishad Engineering Department (through their sub-divisions)provides social and technical support to Gram Panchayats and ensures that only sound designand constructionengineeringpracticesare adoptedby the Gram Panchayats. The sub project does not form an integral part of the Panchayats annual plan and budget. The Project funds are budgetedinthe State Sector inthe State Budget. Element 2: Staffing The project has engaged a chartered accountancy firm at the district level to place one accountant per two Gram Panchayats for regular and timely maintenance of accounts for the project. The accountant hired at the GP level will also be responsible for training on the job the GP secretaryhill collector/membersand VWSC members in simple - maintenance of books of accounts for O&M records. Training on the operation of project computerized financial management system to the finance and accounting personnel at KRWSSA and DSUs has been imparted by the consultantsappointedfor designand developmentofthe software. The primary responsibilityo f financial management at the GP level remains with the Panchayat Secretary, who is assisted by the accountant from the chartered accountancy firm. At Zilla Panchayat level the financial management function is handled by the Chief Accounts Officer on deputation from the State Accounts Department. He is also responsible for the accounting and reporting function for the Taluk Panchavat. Element 3: Flow of funds RWSS I1project is budgeted in the GoK budget as an identifiable single head budget item. GoK transfers the funds required for the project in advance, including its own share, on a quarterly basis, to KRWSSA's bank account. KRWSSA, inturn, transfers funds in advance to the Zilla Panchayat-DSUs(separate bank account) also on a quarterly basis. There is no funds transfer to Gram Panchayats during the preplanning and planning phase. In the implementationphase, Zilla Panchayat-DSUsprovide advances to Gram Panchayats (separatebank accounts) in four installments of 25% each. GP cheques are signed jointly by the GP President and Secretary. While the Zilla Panchayat-DSUmakes direct paymentsto the charteredaccountancyfirms, these are certifiedby the GramPanchayat. 89 Element 4: Accounting At the GP leve1,the existing accounting system will be enhanced to improve efficiency. A cashbook, a Scheme wise ledger, works register includingthe contractor's receivables/payableposition and a register for recording subsidies payments will be maintained. The improvements inthe accounting system will feed into the overall efforts being made for improving efficiency in accounting systems at the State level in the decentralized institutions ofthe State. For O&M, VWSCs will maintain a separate bank account per village. Element 5: Procurement All project activities to be financed under the Credit would be procured in accordance with the World Bank Guidelines for Procurement of Goods, Works and Consultancy Guidelines for hiring Consulting Services (including NGO services) to be financed under the Credit. All civil works, goods and services would be procured using India specific World Bank's model documents. Element 6: Internal Control & audit A F M Manual has been preparedunder the Project which supplements the policies given in State Financial rules. In practice, project specific financial rules andregulationsprevail. There is no provision for a separate internal audit in the project. The F M manual provides that KRWSSA appoints internal auditors for its activities, in case considered essential. The project auditors are expected to carry out their audit on a quarterly basis with sample Gram Panchayats each quarter being subject to audit. At GP level, the accounting firm will be required to certify the utilization certificate before the subsequent installment for a scheme could be released. In the implementation phase, Zilla Panchayat-DSUs would advance funds to Gram Panchayats (separate bank accounts) in four installments of 25% each. The first instalment would be released on: (a) approval by CEO, Zilla Panchayat of the Implementation Phase Proposal (IPP) which will also include a confirmation of the availability of a full time secretary in the Gram Panchayat, and (b) evidence that the beneficiary contribution due from the community and the Gram Panchayat has been received in the GP project account. Subsequent instalment will be releasedon the basis o f (i) a utilization certificate from the GP accounting firm certifying 80% utilization of the last installmentplus 100% utilization ofthe previous installments, and (ii)a certificate from the Zilla Panchayat- ED indicating that the simple benchmarks set for achieving physical targets have indeedbeen met. The payment to the contractorisupplier will be made by the Gram Panchayat on the basis of bills being certified and recommended for payment by Zilla PanchayatED. The Gram Panchayat will also countersign on the contractors' bills certifying their approvalofthe performanceofthe contractor. Element 7: Financial Reporting Monthly reporting formats from each of the accounting centers have been designedto provide summarizedmonthly financial information on the project expenditures and activities. These reports flow vertically up from VWSC - >GP+DSU-> KRWSSA and are consolidated at each step to provide for meaningful project financial reports. The Financial manualrequiresthat at each Gram Panchayat, there will be a public display of the status ofproject receipts and usage village wise and scheme wise. At VWSC level, the operations and maintenance data in terms of receipt and usage of money will be displayed publicly inthe VWSC office. Element 8; ExternalAudit PrivateCharteredAccountant firm i s the external auditor for the Project and accordingly will audit KRWSSA. Gram Panchayatsare auditedby the Local Audit Department.This would include audit of VWSC also. 90 CHECKLIST 3 I 91 Element 1: Planning& budgeting The project will be implementedin 80 Gram Panchayats in five successive but overlappingbatches, consisting of 5, 15, 20,25, and 15 GramPanchayatsrespectively. A detailedproject implementationschedulehas beendevelopedfor a six-yearproject implementationperiod. Eachbatch would follow a 27-monthscheme cycle consisting o f four distinct phases (preplanning-3 months, planning-12 months, implementation-8 months, and post implementation-4 months). Preplanning The main activities would be SO prequalification, GP selection, and the signing of a planning phase - tripartite agreement (PPTA) between KRWSA, GP, and SO. Planning - main activity would be orientation and capacity building for Gram Panchayats and SOs, take-over of existing Kerala Water Authority (KWA) schemes by Gram Panchayats, BG registration, forming the BCs, opening bank accounts, resource mapping, and preparing and signing the "agree to do" reports between KRWSA and Gram Panchayat. The planning phase would conclude with signingof an ImplementationPhaseQuadrilateralAgreement (IPQA) betweenKRWSA, GramPanchayat,SO, andthe participatingBGs.A separate ImplementationPhaseTripartiteAgreement (IPTA) would be signedbetweenSO, Gram Panchavat. andKRWSA for managingSO contracts. Element2: Staffing DPMU's FM functions are managedby Accounts Officers.Due to the increasedwork loadonthe GP staff as a result o f decentralization,KRWSA has decidedto provide one accountantto each GramPanchayatfor accounts keepingand report preparation. KRWSA would make adequate provision for training the finance and accounting staff both in KRWSA and DPMU in financial management and use of computerized systems. For providing training and implementation assistance in accounting and reporting to SOs, Gram Panchayats, and BCs, KRWSA would appoint two charteredaccountancvfirms. Element3: Flow of funds Each Gram Panchayat will open a separate Bank account for managingthe project funds. Duringthe planning phase, transfer to GramPanchayatwouldbe made intwo equal installments. However, during implementationphasethe first installment would be 40%, the second40%, andthe last installment20%. BC would opena separate Bank accountfor managingthe projectfunds. Duringthe preplanningandplanningphases, there will not be any transfer of funds to BC. Duringthe implementation phase the first installment would be 40%, the second 40%, and the last installment 20%. The second and third installments would be released by Gram Panchayat upon receipt of audited utilization certificates. Element4: Accounting GP accounting systems would be strengthenedto meet the project accountingrequirements particularly scheme-wise Droiectcost details. Simdemanualaccountingsvstems wouldbe imdementedat BC level. 92 Element 5: Procurement BCs and Gram Panchayats will procure goods, works and servicesusingthe proceduresand forms detailed inthe WB procurementguidelines. Element 6: InternalControl & audit A financial management manual is inplacewhichcontainsdetaileddescriptionofthe financial accounting,budgeting, funds flow, and reporting systems andprocedures.KRWSA will appoint separate audit firm(s) to audit and certify the use of funds by SO, Gram Panchayat, and BC during the preplanning, planning, and implementationphase of each batch. For providing training and implementation assistance in accounting and reportingto SOs, Gram Panchayats, and BCs, KRWSA will appoint two charteredaccountantfirms. At Gram Panchayats,there will be a public display of the status of project receipts and usage village wise and scheme wise. At BC level, the operations and maintenance data interms ofreceipt andusage of moneywill be displayedpubliclyinthe BC office. Element 7: Financial Reporting Monthly reporting formats from each of the accounting centers have been designed to provide summarized monthly financial information on the project expenditures and activities. These are upwardly consolidated from BC -GP- DPMU - KRWSA. This will provide meaningful FMRs at the project level. At Gram Panchayats,there will be a publicdisplay ofthe status of project receiptsandusagevillagewise and scheme wise. At BC level, the operations and maintenancedata interms o freceiptandusageof money will be displayedpublicly inthe BC office. Element 8: External Audit KRWSA will appoint an independent chartered accountant firm to audit KRWSA's and the DPMU's account books, andto certifythe annualprojectfinancial statements. 93 CHECK LIST 94 Element 1: Planning & budgeting Overall Work Plan (OWP) is agreed between GOP and WE? contains year wise physical and financial targets for each activity under each component o f the Project. OWP is prepared by SPMC. This forms the basis for year wise budget preparation for the year. SPMC prepares DWSC/DPMC wise physical and financial targets for each year. The DPMC wise targets are based on number of GPsiGPWSCs controlled by them. This shall provide the overall framework for each DWSM/DPMC. Based on this the DPMC prepares the Annual Work Plan (AWP) along with Budget which is submitted to DWSC and the Governingbody of DWSM for approval. The approved AWP is submitted to SPMC where they are analyzed for deviations from OWP. A consolidated AWP is prepared at SPMC to the Governing body o f the SWSM for approval. Budget is re appropriated in the manner and mode as stipulated by the Finance Committee of the SPMC to individuals and project offices. The Project follows a scheme cycle not exceeding 21 months consisting of four distinct phases namely pre planning, planning, implementationand post project completion phase. The main output of pre planningphase is prioritizing of Gram Panchayats. During the planningphase GPWSC are formed depending on number o f schemes to be implemented in a Gram Panchayat, preparationo f DetailedProject Reports (DPR) and CommunityAction Plans for each of the GPWSCs. All Single Village Schemes (SVS) will be based on demand driven approach.. GPWSC and Gram Panchayats have the main role of planningand implementingo f all SVS. SWSM supported by SPMC is responsible for approving the District annual work plans and the budgetsfor support activities to betaken up by sector institutions.SWSM supportedby PMU is responsiblefor preparingthe over all sector budget. DWSM supported by DPMC are responsible for preparing annual district work plans and for signingthe MOUs for SVS and smaller Multi Village Schemes (MVS). Gram Panchayat with support from DPMC are responsible for plans and budgets for the schemes under the Gram Panchayat. These plans are approved in Gram Sabha before they are sent to DPMC. Gram Sabha under the law have the power and responsibility to approve annual budget and plan of development program and review annual statement o f accounts and annual progress reports. District plans are approved by the DWSC. GPWSC has been set up as a sub-committee under the Section 25 of the Punjab Panchayat Raj Act (PPRA). The GP's Sarpanch will be the Chairpersonofthe GPWSC. Element 2: Staffing Panchayat Secretary at the GP level maintains Panchayataccounts.Numberof GP Secretaries in the State are very less and often there are 5-8 Gram Panchayats sharing one secretary. There are 2,555 secretaries (1690 permanent+ balance contractual) working for 12,443 Gram Panchayats inthe State. As part of mitigation measures, an accountant will be recruited by the GPWSC (to be financed by the project) to take care of the accounting requirements at the GPWSC. At each DPMC, a Divisional Accountant will be deputed to the Divisions. He will be supported by an Assistant Finance Manager as per terms of reference and job descriptions acceptable to IDA, hired from the market on contractual basis. They will be supported by two Finance Assistants, commerce graduate with experience of computer applications. Training of accountants, GP Secretaries and GPWSC members on book-keeping, procurement procedures, reporting, banking, reconciliations, records retention, audit certification and social audit is part ofthe project design. 95 Element 3: Flow of funds Fund flows for the project are through the Line Department. Funds will be transferred by SPMC to GPs/ GPWSCs through an independent channel of SPMC- DPMC-GPWSC (and not through DWSS divisions providing technical and monitoring support) for Single Village Schemes and for intra-village works of Multi Village schemes. The GOP would budget for the project by the components split between GO1 funded and World Bank funded schemes on the expenditure side with corresponding provisions in the receipt side in the State Budget. This will facilitate accounting by components using mainstream government accounting systems. This will be supported by a detailed Annual Work Plan. Finance Dept. will issue Letters of Credit (LOC) to SPMC (within 2 weeks o f the request from DWSS) based on its quarterly requirement of funds, which will in turn reallocatethese funds (LOC) to various DPMCs. DPMCs will be responsible for further release of funds to GPWSCs and allocation of LOC to DWSS Divisions. The LOC system would be used in the project, except at the GPWSC level, where a separate bank account will be maintained for receipt and payment of project funds. The bank account will be operatedjointly by the GPWSC Chairman (GPs Sarpanch) and Secretary.Presently, drawls are made under thejoint signature of the Sarpanch and the PanchayatSecretary subject to a threshold limit of Rs. 50,000/- . For any amount over and above Rs.50,0001- the cheque has to be countersignedby BDPO. The current notification with regard to threshold limits also requires attachmentof attestedcopy of resolution passedby Gram Panchayatfor release of payment by bank. Element 4: Accounting A F M Manual and a GP accounting manual has been prepared under the Project. They document in detail the accounting processes and policies. Books o f accounts by the SPMC, DPMC and Divisions o f DWSS will be maintained under the standard government Accounting Systems and monthly accounts will be renderedto the A G and reconciled on a quarterly basis. Tranche releases to GPWSCs recorded as Grant-in-aid inthe books and will be eligible for reimbursement consistent with guidance on CDD type projects. A simple, manual system o f book-keeping (cash book) and renorting has been develoned for the GPWSCs. Element 5: Procurement Gram Panchayats will procure goods, works and services using the procedures and forms detailed in the Procurement Manual (PM) that has been prepared specifically for this project and agreed with the World Bank. The P M contains procedures, thresholds, forms and formats for all types o f procurement at this level. As per PM, complaint redressal mechanism will be set up at State as well as District level. All complaints are to be handled at a level higher than that o f a level at which the procurement process is beingundertaken. Element 6: Internal Control & audit A F M Manual and a GP accounting manual has been prepared under the Project and expected to supplement the policies given in State Financial rules. In practice project specific financial rules and regulations are applied to the projecthub project. Internal audit of the project (for SPMC, DPMC and divisions of DWSS) and concurrent audit of GPWSCs is by independentfirms of CharteredAccountants as per TOR consentedby the World Bank. Element 7: Financial Reporting Monthly reporting formats from each ofthe accounting centers have beendesignedto provide summarized monthly financial information on the project expenditures and activities. These are upwardly consolidated from GPWSC -GP-DPMC - SPMC to provide meaningful FMRs. GPWSCs prepare monthly expenditure reports and present them in the relevant Gram Sabhd GP meetings and also to be publicly posted on the notice board. Under the project only project monies are reported monthly and annually. Element 8; External Audit The Comptroller and Auditor General of India (CAG) through its offices in Punjab will be the external auditor for the project. The CAG's office will conduct an annual audit of the financial statements of the project covering all sources o f funds (Go1 and the World Bank). Audit by the CAG may include a sample review of the GPs implementing the project also. 96 CHECKLIST S.NO 1 2 3 4 5 7 97 D9. Karnataka Communitybased Tank Project Element 1: Planning& budgeting Government of Karnataka (GoK) will provide the budget for the project as an identifiable budget line item each year under Water Resources Department - Minor Irrigation. The annual budget will be basedon the annual action plan and financial requirementsprepared by JSYS. JSYS will enter into bi/tri-partite Memorandum of Agreement (MOA) i.e. contractual arrangements with CFTs and the TUGS.These MOASwill be based on Tank System Integrated Tank Development Plans (ITDPs). MOAS would specify performance milestones and payment terms linked to these milestones. The ITDPs are approved at Village Sabha and are than vetted by the CFTs and District Project Committees, set up under the project and forwarded to the DPUs for consolidation. The consolidateddistrict plans are sent to the State Project Unit (SPU) for State wide consolidation. Only in 68 cases out of 1300, the TUGShave taken the option to be constituted as subcommittees of Gram Panchayats - the balance have been formed as registered societies (95%). The Project funds are budgetedinthe State Sector inthe State Budget. Element 2: Staffing At TUG level, the support for book keeping and accounting and financial planning is provided by the CFT. The prime responsibility is ofthe secretary of the society or the GP Subcommittee as the case may be. Element3: Flow of funds JSYS on a quarterly basis requests for the release of funds from WRD (Minor Irrigation) which forwards the requisition to the Finance Department to obtain a Letter of Credit (LoC). Based on the LoC obtained, WRD issues an order sanctioning the quarterly allocation for JSYS. JSYS draws the funds from Treasury after obtaining a countersignaturefrom WRD. JSYS makes the funds available in advance to the DPUs on a quarterly basis. DPU in turn, provides funds to the TUGSas per the payments schedules inthe sub-project agreements (Le. ITDP and MOA). Each sub project agreement specifies the payments schedule based on the requirement of the TUGSon the basis of physical milestones (including TUGSown contributions to the sub-project costs). TUGSopen separate bank accounts for project funds. Where TUGSare part of the Gram Panchayats, the Gram Panchayat opens separate bank accounts earmarked for this purpose. The authorized signatories for the bank account are the SocietiedGram Panchayats Presidentand Secretary. The ITDP funds are deposited ina bank account called `Tank ITDP' and used for accounting for the JSYS funds. Two office bearers of the TUG operate the bank account. For all Tank System Sub-project MOASof value more than US$30,000, the bank accounts are operatedby three office bearers (Treasurer of society added) ofthe TUG. Element 4: Accounting 98 A Financial Management Manual has been developed for the project, which documents in detail the applicable accounting policies and procedures. The books of account are maintained on a hybrid system of cashlaccrual. The Manual has a separate section for the bookkeeping and accounting arrangements for the TUGS.Books of accounts for the project are to be maintained using double-entry bookkeeping principles. Standard books of accounts (cash and bank books,journals, ledgers, etc.) would be maintained at the JSYS and DPUs levels. For the TUGSregistered as societies, a simple cash book, stocks, works register is prescribed. Formats of the books/registers have been provided inthe Manual. At the GP level, the existing accounting systemwill be used.However, the CFTs (as part of their tasks) are requiredto ensure that the existing accounting systems are enhanced to improve quality and to meet the World Bank's requirementsas documentedin the Financial Management Manual. Gram Panchayatwill maintain a separate Bank Account to account for the proiect. Element 5: Procurement All project activities to be financed under the Credit would be procured in accordance with the World Bank Guidelines for Procurementof Goods, Works and Consultancy Guidelines for hiring Consulting Services (including NGO services) to be financed under the Credit. All civil works, goods and services would be procured using India specific World Bank's model documents as well as the formats of the community contracts specifically approved for the Project. Element 6: Internal Control & audit A F M Manual has been prepared under the Project which i s expectedto supplement the policies given for societies and Gram Panchayats. In practice project specific financial rules and regulations prevail, There is no provision for a separate internal audit inthe project. However, JSYS is requiredto appoint a separate audit firm to certify the use of funds by TUGS on a sample basis. Also the CFTs and District Planning Committee are co signatories to the utilization certificates besides the Presidenthecretaryof TUG and DPUs. Payment would be made after achievement of the performance milestones are certified by the CFTs. Ifthe ITDP funds are not utilized in 12 months they are re transferredback to JSYS. For making these finds available again certain conditions haveto be fulfilled by the TUGS e.g. resolution of gram sabha seeking extension of time and specific reasons for non utilization, audited certificate of monies spent, the society renewal certificate, recommendation from CFT and DPU and proof of community contribution. Element 7: FinancialReporting Monthly reporting formats from each of the accounting centers have been designed to provide summarizedmonthly financial information on the project expenditures and activities. These are consolidated from TUGS->DPU+ SPU to provide meaningful financial reports. Payments against the TUG contracts are recorded as expenditures in JSYS books. However, the TUGSare required to submit quarterly statement of expenditures summarizing sources and uses of funds against the plans in order to build accountability and demonstratethe presence of adequate accounting and bookkeeping arrangements.Inorder to ensure transparency,the TUG is requiredto publicly post on the notice board inthe GP Office, a simple summary of the accounts (amounts received from the members and JSYS, amount spent and balances in hand). In addition, the books/registers,vouchers and bank pass books would be open for perusalby members. Element 8; External Audit Private chartered accountancy firm is the external auditor for the Project. Entity financial statements and audit reports are submitted to the World Bank within six months of the close of each financial year. TUGSregistered as societies will be required to get their accounts audited annually as per the requirements of the Karnataka Societies Registration Act (1960). Where the TUGS form part of Gram Panchayats, the GP accounts will be audited by Controller of State Accounts, Government of Karnataka. JSYS accounts will also be open for audit by the State Accountant. CHECK LIST 99 100 Projects financing block grants to PRIs D10. ChhattisgarhDistrict Rural PovertyProject NameofProject Cost of Project-________________--____________ , ChhattisgarhDistrict RuralPovertyProlect(PO764671 I US$ 129.35_-___________-__________________________----~ _ _ _ _ _ _ _ _ _______ ______________ million(World Bank share: US$ 112.56million) Effective date I 13-NOV-03 Closing Date I 3 1-Mar-09 BriefDescription 1ii The Project's developmentobjective is to improve opportunities for the poor and vulnerable, especially women and tribal. One ofthe sub components ofthe project (US$ / 33.51 million) is to support village governments inbecoming more responsiveand III governmentsfor financial management, participatory budgeting (Panchayat plans) and effective inassistingthe poor and vulnerable by increasing the capacity of local ~ dissemination of information. Implementation Arrangements: ............................... .......................................................................................................................................................... State Level I State Project Unit (SPU) set up as aregisteredsociety inthe Panchayats and Rural Element 1: Planning& budgeting The project would co-finance subprojects in Panchayat plans in about 2000 Panchayats covering the selected villages. These small subprojects would cover investments within the functions devolved to Panchayats, such as small rural roads, health posts, community halls, school rehabilitation, drinking water, sanitation, electrification, management of Panchayat lands, management of tanks, etc. All target Panchayats would initially be eligible to receive a small budget from the project, but for continuing project support they would need to meet the following criteria: (a) positive support to theproject through communications, CIGformation and conducting of participatory Gram Sabhas; (b) provision of safe drinking water to the poorest habitations; and (c) satisfying basic financial managementstandards. All GP subprojects would require community contributions of up to 5% in cash and the GS would decide how funds would be raised. Panchayat plans would be financed from other sources of funding as well, and would need to be discussed and approved by the Gram Sabha. Panchayat Plans, covering public goods and services within the functions devolved to Panchayats inthe State PanchayatAct, would be elaborated annually in a participatory manner and taking into consideration available schemes, own resources and the funds available from DRPP. Element 2: Staffing As for all GP funds, the accounting for project funds are managed by the Panchayat Secretary and Sarpanch - no specialarrangements have been made underthe project. Element 3: Flow of funds The sub project is embedded in the Panchayat Plans and therefore forms an integral part of the Panchayats annual budget. For each approved sub project, the finds are released by the Zilla Panchayat in two-three tranches into the bank accounts of the Gram Panchayat. While the first release is an advance, subsequent releases are conditional on submission of utilization certificates confirming the use of funds and physical verification of assets created conductedby the technical staff at Zilla Panchayat. Element 4: Accounting IMainstreamPanchayat accounting system is used for recordinglreporting of expenditures. 101 Element 5: Procurement The Community Operational Manual specifiesthe procurement processes to be followed for the sub projects and are basedon para 3.15 ofthe World Bank's ProcurementGuidelines. Element 6: Internal Control & audit The sub project funds are subject to the standard accountability and oversight processes in place at the GP level, including social audit, approval of plans by the Gram Sabha etc. The project has put in place a mechanism of conducting six monthly financial reviews for the project funds utilized at the GP level. These audits are conducted by charteredaccountancyfirms emuanelledat the district level. againstagreed TORS. Element 7: FinancialReporting Submission of utilization certificates for the funds provided by the project are the primary means of obtaining assurance on intendeduse of funds. No other financial reports are provided, Element 8; External Audit External audit for Gram Panchayats is conducted by the Local Fund Audit - no arrangementshave however been made under the uroiect to obtain copies of these reuorts. 102 Dll.Karnataka Health SystemDevelopmentand ReformsProject Element 1: Planning & budgeting Support under KHSDRPwill follow a dual approachof `programmatic support' for existing government programs in primary and secondary care (for subcomponent 1B Improving primary and secondary care services' effectiveness) and traditional project support for the innovations that form all other project components. In case of the programmatic support component, a substantial part of the funds would be used by the Panchayati Raj Institutions (PRIs); given the current state of the decentralization reforms, the World Bank support in this case would be for expenditureat the Zilla (District) Panchayats and releases to the Taluk (Block) Panchayats. The World Bank will provide support for the programmatic support subcomponent (1B) against certain existing lines of GoK budget coveringexpenditure on existing activities at the State as well as the PRI level. This support will be providedon an incrementalbasis, funding increase inGoK's own expenditure as per a pre-definedformula. The sub project is embeddedinGoK budget and therefore forms an integralpart of the Panchayatsannual planand budget at the district and Taluk level. Element2: Staffing Regular departmental staffs at district level as well as Taluk level are expected to carry out the FM functions. At Zilla Panchayatlevel, the finance and accounting function will be handled by one divisional accountant assisted by clerical staff. Element3: Flow of funds The sub project is embedded in GoK budget and therefore forms an integralpart of the Panchayats annual plan and budget at the district and Taluk level. The Project funds are budgeted in the State as well as district sector in the State Budget. The State has put in place a system of district sector inthe State Budgetwhich is in effect a Panchayat budget window wef 1987.The budget is also accompaniedby a link book, which gives details of how allocations are further separated district wise. Thus each Zilla Panchayat knows how much funds is to come to Panchayats as a whole inthe district. . The Budget for these devolves from Finance Departmentto SPMU inDoHFW and from SPMU to DHOs as well as Zilla PanchayaUTP. Funds will be released through the treasury system in the form o f a budget release order. No separate institutional arrangements have been envisaged and existing Govt arrangements are used for obtaining fiduciary assurance. 103 Element 4: Accounting A Financial Management Manual has already been developed which lays down in detail the applicable accounting policies and procedures. Mainstream Govt accounting system i s used for budgeting and recordingireporting of expenditures.The project components are embedded in GoK accounting and treasury systems. Specific and unique heads of accounts will be created for each of the components to facilitate correct reporting of financial progress. Releases to Taluks will be consideredexpenditures. Element 5: Procurement Goods and services under Component IB ofthe project would be procured following the provisions ofthe Karnataka Transparency in Public Procurement Act (KTPP) and Act and Rules 2000 and the various circulars, orders being issued in pursuance of the implementation of the Procurement Reform Action for the State as a follow up to the State Procurement Assessment Report (2001). As envisaged in the agreed Health Sector Procurement Reform Action Plan, specific Procurement Manual and Standard Bidding Documents for equipment and drugs will be developed and adopted for use. In the case of International Competitive Bidding, Bank procedures would be followed. Expenditureson pharmaceuticals(including medical supplies) and medical equipment will not be eligible for IDA financing unless such Manual and SBD are established.Subject to the implementation of the agreed Health Sector Procurement Reform Action Plan, the existing procurement legal framework would be generally acceptable under sub component IB ofthe proiect. Element 6: Internal Control & audit Certain portion of the finds provided to the Zilla Panchayat will be firther transferred to the TP for incurring of expenditure; these are recorded as `transfers' in the Zilla Panchayat audited financial statements. Though it will be possible to extract information on actual `expenditure' against these transfers from 174 separate TP Audit Reports; in accordance with the block grant approach, the project plans to derive alternative assurance on these funds on the following basis. (a) Review performanceof the entire project basedon the monitoring of annual agreed milestones. (b) Since funds released will be againstspecific heads ofthe budget, possible misuseof the same is (c) Performanceon the ground will be regularly monitored Element 7: Financial Reporting Mainstream Government accounting systems are being used and the project activities are embedded in heads of accounts of GoK Accounting/treasury systems. Information from treasury will be used to prepare Project Financial Management Reports. Element 8; External Audit Funds for a certainportion of the programmatic support component will be transferred to the PRI Sector for expenditure on the health related activities. Information on the same will be available through the Zilla Panchayat (district) audit reports. Since all expenditure at the Zilla Panchayat level is already audited by the CAG and this also includes expenditure relating to the health sector; KHSDRP intends to rely on the existing audit mechanismwhenever possible. Therefore, the DoHFW will provide the World Bank with a consolidated report on Audit of the Health Sector related expenditure by Zilla Panchayats. This report will provide (district-wise) information on the expenditure incurred by Zilla Panchayats on health care services. Individual Zilla Panchayat audit reports will be available w o n reauest. 104 D12. Karnataka Panchayat StrengtheningProject Effective date I 04-0ct-06 I ~ I Village level I Gram Panchavat (GP) Element 1: Planning& budgeting Gram and Ward Sabhawould be the key points of consultation and planning. They would approveplans and budgets of Gram Panchayats and review the GP performance. Gram Panchayat will make expenditure decisions as per the Activity Mapping and the annual plans to be implemented following the new Planning Guidelines and in a participatory and open manner. Technical support to Gram Panchayat will be provided by RDPR by creating resource centers at the Taluk level. TP, where agreed with the SIRD, would assume responsibility for O&M of the Taluk resource centers. Each Taluk would be equipped with services of at least an engineer (to review GP infrastructure projects and carry out the initial environmental screening), an accountant (to review the extent to which Gram Panchayats are following the Financial Guidelines, to provide assistance on the matter where needed, and to collate Panchayat accounts at the block level for transfer to the district), and a social specialist. Zilla Panchayat through the District Planning Cell would monitor the planning process of Panchayats to ensure that they follow the guidelines. The sub project forms an integralpart of the Panchayats (at all levels) annual plan and budget. The Project hnds are budgeted inthe State Sector as well as the district sector inthe State Budget. The Block Grants will be budgeted as a Capital head of expenditure under appropriate guidance from National Government Accounting Standards Board (GASAB) and the Comptroller and Auditor General (CAG) The budget codes ofthese expenditureheads will be decided at the time of budget preparationby GoK. Element 2: Staffing Accounts Superintendent at the TP, Secretaries at Gram Panchayats will be responsible for maintaining and submitting expenditure reports and relevant supporting documentationof project funds expended by their respective agencies. The TP- CEO and Gram Panchayat-Sarpanch will be responsible for exercising control on expenditures. At the village level, the Secretary, who is an official ofthe State Government, is deputedto the Gram Panchayat and i s routinely responsible for all the financial and administrative matters will also account for the Block Grants. All project funds will be in the nature of Block Grants (for the specific purpose of improvement and expansion of services) and will be accounted for within the existing accounting, reporting and audit framework of the Gram Panchayats. Element 3: Flow of funds GoK will provide advance funds to commence the project. At the beginning of each year, the allocation to the Rural Development & Panchayati Raj Department under the respective heads for the investment and the programmatic components would be made available. Thereafter, the block grants will be transferred directly to the bank accounts of the Gram Panchayats and release spendingauthority to TPs to spend through the Treasury. 105 Element4: Accounting The accounting arrangements at the village will be mainstreamed. The GP accounts as mandated by the Karnataka PRI Act will account for the Block Grant funds from the project received as well. GoK would continue with the existing accounting treatment o f block grants in its Books and thereafter will revise the accounting treatment, if required, on the basis o f final advice received from GASAB. For the Block Grant component, the Annual Financial Statement for the project will reflect transfers from GoK to the Gram Panchayats. Transfers reflected in the project AFS will be reconciled with the transfers shown inthe books o f accounts o f the State. These transfers are considered as part o f Zilla Panchayat and Gram Panchayat funds. Element5: Procurement Government of Karnataka has undertaken a program of reforms in public procurement. The Karnataka Transparency in Public Procurements Act, 1999 prohibits procurement other than by invitation of tenders. As mentioned below the Government of Karnataka has fixed thresholds above which the Act will be applicable. The project has adoptedthe same thresholds. The Government has also issued rules and circulars under the Act. The Act provides for (a) open invitation o f bids; (ii) adequatetime for bidding period; (iii) public opening of bids; (iv) evaluation to be on the basis of responsiveness to the bidding documents; and (v) mechanism for handling complaints. The Government of Karnataka has also issued guidelines for specifying qualification criteria, evaluation of bids etc. The major difference between the accepted national competitive biddingproceduresinother Indian projects andthe proceduresunder the Karnataka Act relatesto: (i) two cover tender system; (iiconducting negotiations; and (iii)DGS&D Rate contracts are acceptable as substitute of tendering. In view of above for the purpose of national competitive bidding the procedures followed under Karnataka Transparency in Public ProcurementAct, 1999 will be followed under the project except the above three provisions which differ from World Bank's accepted procedures under national competitive bidding. The DGS&D rate contracts will however be acceptable as substitute for shopping procedures. Gram Panchayats using block grant monies, goods estimated to cost more than $2,100 equivalent per contract, and works estimated to cost more than $4,200 equivalent per contract, may be procured under contracts awarded on the basis of national competitive bidding using the procedures under the Karnataka Transparency in Public Procurement Act o f 1999 (as amended) and the additional provisions agreed between the Borrower and the Association in writing from time to time. Otherwise, goods and work estimated to cost more than $30,000 equivalent may be procured under contracts awarded on the basis of national competitive bidding. The bidding documents developed by the Government of Karnataka, will be used for national competitive bidding. These documents are based on the World BankNew Delhi Office documents.However, for contractsabove Rs. 5 million, the documentsare based on two cover system. Since the two cover system is not acceptable, the W-2 document o f the World Bank will be used in case there is any contract above Rs. 5 million. Shopping: For Gram Panchayatsusing block grant monies, goods and work estimatedto cost respectively less than $2,100 and $4,200 equivalent may be procured under contracts awarded on the basis of Shopping. Otherwise, goods and work estimated to cost less than $30,000 equivalent may be procuredunder contracts awardedon the basis of Shopping. Direct Contracting: Goods and works which the Association agrees meet the requirements for Direct Contracting may be procuredin accordance with the provisions o f said procurement method. Contracts above $10,000 equivalent will require prior clearance from the Association. Community Driven Procurement: Works such as Water Supply, Forestry, Plantation, Sanitation, etc., maybe carried out by the community, inaccordancewith proceduresdescribed in operationalManual. Force Account: Works which the Association agrees meet the requirements for Force Account may be carried out in accordance with the provisions o f saidprocurement method. Consultants: Consultants would be selected using the following methods: Quality- and Cost-Based Selection (QCBS), Quality-BasedSelection (QBS), Single-Source Selection, and Selectionbased on Consultants' Qualifications. The standard Requestfor Proposals(RFP) and conditions of contracts will be usedfor all contracts. Social audit through participatory and transparent process - Institutionalarrangementsfor social audits at the village level will provide the framework needed to ensure that there i s checks and balances and transparency in the procurement process, including access to information relating to procurement. The information related to procurement under block qrants would also be put up to Gram sabha. 106 Element 6: Internal Control & audit Controls on the Block Grant funds will be through the fiduciary framework that is put in place in this project. This framework will ensure that directives from the RDPR regarding the eligible expenditures for use of Block Grant funds, that regular Gram Subhus are held to document the proposed uses of Block Grants; that there are approval procedures inplace which ensure that Block Grants are proposedto be used only for the extension and expansionof services as envisagedunderthe 29 items devolved to the Gram Panchayats.For the purposesof monitoring, capacity building and assurance on end use of Block Grants funds, the RDPR will monitor the consolidated audit report of Gram Panchayats receiving Block Grants audited by Karnataka State Audit Department and additional fiduciary reviews of a sample of Gram Panchayats receiving Block Grants will be undertakenby a firm of private accountants periodically during the implementation phase. Inadequateassurance on the end use of Block Grant funds will result in disallowances. Element 7: FinancialReporting New accounts, audit and works manual for Gram Panchayats has been prepared and approved by GoK. The accounting and reporting arrangementsat the Panchayat will be mainstreamed. The GP accounts as mandatedby the KarnatakaPRI Act will account for the Block Grant funds received as well. The GP accounts and budget rules 2006 provides for specific formats of monthly and yearly reporting as well as formats for maintaining books of accounts. As per rule 11, as specified under sec 241 of the act, the secretary of the Gram Panchayat shall prepare and lay before the Gram Panchayat at a meeting which shall be heldbetweenthe first day of Feb and the tenth day of March, a complete account of the actual and expected receipts and expenditure for the official year ending on the 3lStMarch next following together with a budget estimate of the income and expenditure of the Gram Panchayat for the official year to commence on the lst of April next following. Rule 108 describes monthly preparation of receipt and payment statement in form 50, monthly trial balance in form 51 by Secretary and places it for review by the Gram Panchayat. Rule 109 describes annual accounts of the Gram Panchayat inform 50, 52 and 53 which requires approval by Gram Panchayatunder sec 243(3) of the act to be ready by 30" April of each year. Rule 99 deals with grants received by the Gram Panchayat and their utilization to be entered inForm 42. At the end of the year an abstract showing opening balance, grants received, and grants utilized and the balance at the end is recorded and attested by the Adyaksha and Secretary. The Secretary ensures that the UCs inform 43 are sent to competentauthorities as indicated inthe terms ofthe grants. The State has acceptedthe technical guidance and supervision system of the CAG. The State has also approved and adoptedthe CAG formats for accounting with some modifications. Element 8; External Audit Audit of annual financial statements and FMRs (on all components) will be conductedby a firm of private Chartered Accountants. There is no separate PAC for reviewing audit paras of Panchayats. Kamataka is the first State to enact a separate fiscal responsibility act for elected local authorities. Rule 112(1) readwith sec 246 envisages the annual audit of GP accounts by the Controller State Accounts. Rule 112(2) deals with certification of audit report within one month after completion of audit and ensures audit report contains certified statement of annual receipt and payment account, income and expenditure account and balance sheet of the Gram Panchayat. Rule 113 deals with action on annualaudit report. Actions by secretaryto recoveries and place action taken report before the audit committee (rule 114- can be formed under section 61A) of the Gram Panchayatalong with Audit report. Audit committee to review quarterly and place a report before Gram Panchayat. Gram Panchayat through Secretary to prepare compliance report and sent to Assistant controller Local audit Circle. 107 ANNEXE. LISTOFPERSONSMETAND CONTACTED S.No NAME DESIGNATION ORGANIZATION i 1. Mr.Gambhir Singh Director UttarakhandRural Water Supply & Sanitation Project 2. 1Mr.JagdishChandra IFinance Controller UttarakhandRural Water Supply & Sanitation Project 3. Mr.UtpalKumar Singh Chief Project Director & Uttarakhand DecentralizedWatershed Secretary, PWD and Development Project Horticulture 4. Mr.DJK Sharma Additional Director Uttarakhand Decentralized Watershed I DevelopmentProject 5. Mr.JP Joshi Deputy Secretary, Government of Uttarakhand Department of Panchayati Raj 6. Prof. NRamakantan Director Kerala Institute of Local Administration (KILA) 7. MrPV Unnikrishnan Member, State Planning InformationKerala Mission Board & ex-Executive Mission Director 8. Ms Shahina Associate Professor Cooperation Banking College, Kerala Agricultural University, Thrissur 9. MrU.B.Kandeth Consultant Retd Senior Audit Officer, AG Office & Guest Faculty, KILA Professor KILA Talikulam President and officials I Mr.S MVijayanand Principal Secretary Department of Local Self Government, Government o f Kerala 13. Mr.SDPillai Senior Deputy Office of the Principal Accountant Accountant General General (Audit) Kerala 14. Mr.T Bhasi Director Local FundAudit Office, Kerala 15. Mr.NSPillai Sr. Deputy Accountant Local Self Government, Government of General (on deputation as Kerala State Performance Auditor) 16. ProfMA Oommen Economist & Coordinator Instituteof Social Sciences, Kerala Office 17. Mr.KPremkumar Joint Director and Head, Information Kerala Mission Technical Support & Infrastructure Management 18. Dr.KGopalan Executive Mission InformationKerala Mission Director 19. Ms.Geeta Meshram Team Leader District Facilitation Team ,Nagpur Jalswarajya (Maharashtra Rural Water I 20. 1 Supply & Sanitation Project) Mr.JP Shende I Sr.AO & Team Leader District FinancialManagement Team, Nagpur 108 S.No NAME DESIGNATION ORGANIZATION 21. Officials Members ofVWSC Mangli Village, Nagpur Subcommittee S.No NAME DESIGNATION ORGANIZATION 22. Mr.PratapMohite Controller of Accounts Reform Support & Project Management Unit(RSPMU) Jalswarajya (Maharashtra Rural Water Supply& Sanitation Project) 23. Mr.Sunil Gedam Regional Facilitator Reform Support & Project Management Unit(RSPMU) Jalswarajya (Maharashtra Rural Water Supply & Sanitation Project 24. Officials Members of VWSC Taluk Ramtek Panchayat Samiti, subcommittee Gram Panchayat - Dongertaal, Maharashtra 25. Sandeep Deshmukh Project Director Jalswarajya, Maharashtra Rural Water supply iiSanitation Project 26. MsMrudul Sambare Senior Accounts Officer Maharashtra RWSP 27. Mr.BSRamPrasad ExecutiveDirector Jala Samvardhane Yojana Sangha, (Karnataka Community based Tank Project) 28. Mr.BSRamanand Participatory Jala Samvardhane Yojana Sangha, Management Specialist Karnataka Community basedTank Project) 29. Mr.RJBhasker Finance Manager Jala Samvardhane Yojana Sangha, Karnataka Community basedTank Project) 30. Mr.HRSriniwas Additional Project Sujala Watershed Project Director (Coordination) 31. Mr.V Nagaraj ChiefAccounts Officer Sujala Watershed Project 32. Mr.Shrikant BVanahalli Additional Director KarnatakaRural Water Supply & (Finance & SanitationAgency Administration) Advisor 33. MrHamidAhmad DeputyDirector KarnatakaRural Water Supply & (Operations) Sanitation Agency 34. Mr.Prakash Panchayat Facilitation Gram Swaraj Project (Karnataka Expert Panchayat Strengthening Project) 35. Mr.DSRamesh Chief Information & Gram Swaraj Project (Karnataka Environment Panchayat Strengthening Project) 36. Dr.K Chandrashekar Panchayat Specialist Gram Swaraj Project (Karnataka Panchayat Strengthening Project) 37. Mr.SMMathapati Chief Finance Officer KarnatakaHealth Systems Development and Reforms Project 38. Mr.TR Raghunandan Joint Secretary MinistryofPanchayati Raj, Government o f India 39. Mr.RNGhosh Director IComptroller & Auditor General, Delhi 109 SELECT BIBLIOGRAPHY Alia Law Agency. 2006. Uttar PradeshPanchayatRaj Act, 1947. For Uttar Pradeshand Uttarakhand. Comptroller & Auditor General of India. 2005. Local Self Government Institutions, Government of Kerala, Report for the Year ended 31March 2005. Comptroller & Auditor General of India. 2002. Model Budget Format for Panchayati Raj Institutions (October). Comptroller & Auditor General of India. 2004. Training Module on Audit o f Gram Panchayat (November). Department of Drinking Water Supply. 2004. Guidelineson Central Rural Sanitation Program: Total Sanitation Campaign (January). Ministry of RuralDevelopment. 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