Report No. 38557-IN India Public Financial Management and Accountability in Panchayati Raj Institutions (Rural Local Governments) Synthesis Study December 21, 2006 Financial Management Unit South Asia Region Document of the World Bank LIST OF ACRONYMS alphabeticallylisted AG Accountant General AP Andhra Pradesh ANSIRD AbdulNazir Sab InstituteofRural Development ATR Action Taken Report AWW Anganwadi Workers BC Before Christ BDO Block Development Officer BPL Below Poverty Line CAG Comptroller & Auditor General CARISMA Computerization, Automation, Refinementof IntegratedSystem of Management and Accounts CBO Community Based Organization CEO Chief Executive Officer CHD Centre for Human Development css Centrally Sponsored Scheme CUTS Consumer Unity& Trust Society DFID Department For InternationalDevelopment (UK) DLFA Director Local FundAudit DPC DistrictPlanning Committees DPC Act Duties, Power and Conditions of Service Act 1971 DPEP District Primary EducationProgramme DPDA DistrictPanchayat Development Agencies DRDA District Rural DevelopmentAgencies EFC EleventhFinance Commission GO1 Government o f India GP Gram Panchayat GPMS Gram Panchayat Management System GRAMSAT Village Satellite GTZ Gesellschaft fiir Technische Zusammenarbeit (German Agency for Technical Co- operation) IA&AD Indian Audit and Accounts Department IFMAS IntegratedFundMonitoring and Accounting System IPAI Institute of Public Auditors of India IRDP IntegratedRural DevelopmentProgramme IRM Internal Revenue Mobilisation ISS Institute o f Social Sciences JGSY Jawahar Gram Samridhi Yogana JRY Jawahar Rozgar Yogana KP KshettraParishad KfW Kreditanstalt fur Wiederaufbau KSSP Kerala Shastra Sahitya Parishad LAD LocalAudit Department LFA Local FundAudit MKSS Mazdoor Kisan Shakti Sangathan MoPR MinistryofPanchayati Raj M o R D MinistryofRuralDevelopment MP Madhya Pradesh MP-LADS Member ofParliament LocalArea DevelopmentScheme - MTFP Medium Term FiscalPlan NASB National Accounting Standards Board NGO Non Government Organization NIC National Informatics Centre NIPFP National Institute for Public Finance and Policy NIRD National Institute of Rural Development O&M Operation and Management PAC Public Accounts Committee PAMIS Panchayat Accounting & Monitoring Software PESA Panchayat (Extension to ScheduledAreas) Act 1996 PFMA Public Financial Management and Accountability PRI Panchayati Raj Institution PRIASOFT Panchayati Raj Institution Accounting Software PS Panchayat Samiti RCC Roller Compacted Concrete RLB RuralLocal Bodies RTI Regional Training Institutes SC/ST Schedule Castel Schedule Tribes SFAA State FinancialAccountability Assessment SFC State Finance Commission SGRY Sampoorna Gramin Rozgar Yojna TFC Twelfth Finance Commission TGS Technical Guidance & Supervision TP Taluk Parishad ULB Urban Local Bodies UP Uttar Pradesh UT Union Territories vo Voluntary Organization VTC Voluntary Technical Corps XIM Xavier Institute o fManagement ZP Zilla Parishad TABLE OF CONTENTS Page No. ExecutiveSummary 1 I. BackgroundandContext 1 11. Legaland InstitutionalFramework 4 111. DevolutionofPowers 6 N. PlanningandBudgeting 9 V. FundFlows 12 VI. Budget Executionand Monitoring 17 VII. InternalControlandInternalAudit 19 VIII. Accounting 21 Ix. Asset Management 24 X. ExternalReportingand Transparency 26 XI. ExternalAuditing 30 XII. Soine Cross-CuttingIssues 33 XIII. In Conclusion 36 Annex I-Revenues& Expendituresof PRIs 38 Annex I1 Illustrationof Incentive-based Transfer of Funds - 40 Annex I11-Letter from UnionPR Minister 42 Annex N Annual ReportofHowrah ZP - 43 Annex V -Administrative Structure of GP 44 Annex VI-List ofPeopleMet or Spoken To 45 Annex VI1 Bibliographyand DocumentsReviewed - 47 ACKNOWLEDGEMENTS This Synthesis Study was conducted during March and April o f 2005. Priya Goel' and Manvinder Mamak led the study under the overall guidance o f Robert Saum, P.K Subramanian and Ivor Beazley (SARFM) and with help from Vikesh Mehta of Grant Thornton. Hemant Chadha carried out the initial data gathering and assimilation. This study would not have been possible without the comments and advice o f Ms. Sudha Pillai (Additional Secretary, Ministry o f Panchayati Raj, Government of India), Mr. Raghunandan (Joint Secretary, Ministryo f Panchayati Raj, Government of India), Mr.Ashutosh Dixit (Private Secretary to the Minister, Ministryof Panchayati Raj and Petroleum), Mr.R. N.Ghosh (Principal Director, Local Bodies, Comptroller and Auditor General of India) and Mr. Rajesh Singh (Director, Local Bodies, Comptroller and Auditor General of India), Mr.M.K.Khanna (Principal Secretary, Department o f Panchayati Raj,Government of Rajasthan), Mr. Sivalsailam (Secretary, Department of Panchayati Raj, Government of Karnataka), Mr. Swapneshwar Baya (Secretary, Department of Panchayati Raj, Government of Orissa), Mr. Dilip Ghosh (Joint Secretary, Panchayats & Rural Development Department, Government of West Bengal), Mr. Srinivasan Aiyer (DFID), Mr. Nikhil Dey (MKSS), Mr. George Matthew (ISS) and Mr. George Cherian (CUTS). Their help and information were invaluable inassembling this study. The report has been discussed with the Government of India but does not necessarily bear their approval for all its contents, especially where the Bank has stated its judgment / opinion / policy recommendations. This Study builds on state-specific diagnostic work done by several consultants to the Bank over the preceding six months. It also derives from information published by the Planning Commission, the Ministry of Finance, Ministry of Rural Development and the recently- constituted Ministryo f Panchayati Raj. The Bank also had access to similar state-specific studies undertaken by other donors such as DFID, GTZ and KfW. The Synthesis also draws on State Financial Accountability Assessments and related Public Financial Management and Accountability Assessments at the Panchayati Raj Institutions level. These were conducted at Andhra Pradesh (by Ken Jones), Karnataka (by T.K. Balakrishnan), UttarPradesh(by Rajat Narula and Priya Goel), and Orissa (by Vinod Sahgal). The selection of focus states for the study i s basedon a request from the Department of Economic Affairs. The Study benefited from a range o f comments and suggestions provided by Barbara Kafia (SARSQ), T.K. Balakrishnan(OPCFM) and Vinod Sahgal (SARFM). ' Forfurther informationonthe SynthesisStudycontactPriyaGoel at pgoel@worldbank.org Executive Summary Introduction 1. The 73rd Constitutional Amendment Act o f 1992 heralded a new era in the democratization and decentralization of India. This law designated Panchayati Raj Institutions (PRIs) as the third tier o f rural local government; PRIs are distinct from urban local bodies such as municipalities. PRIs exist in, and oversee, rural areas only. The Amendment provided for devolution of powers and responsibilities to different tiers of PRIs. 2. Since then, many states are in their second elective tenure. The process of empowering them has varied from state to state. These differences have a bearingon the extent to which the PRIs' financial management systems can assure that funds were used for the purposes for which they were intended. 3. PRIs need to have strong financial management systems to increase transparency, accountability, and management efficiency and to provide timely, reliable information to state governments. With the devolution of significant funds, along with functions and functionaries to PRIs, it is imperative that PRIs have in place an appropriate institutional framework for Public Financial Management and Accountability (PFMA) as well as systems and processes to effectively and efficiently discharge their responsibilities to the people. Objectivesand Scope of the Synthesis Study 4. Therefore, this Study has been designed to serve as a reference point for (i) mapping the PFMA arrangements currently in place; (ii) highlighting good practices that have emerged across States relative to PFMA; and (iii) summarizing issues that are most relevant to the Government of India, State Governments and the Bank when it comes to financing future projects through PRIs. This Synthesis also captures the recommendations of the Eleventh and Twelfth Finance Commissions, as well as the initiatives of the recently constituted Ministry o f Panchayati Raj (MoPR). Inter alia, the MoPR has laid out a road map for enhancing the accountability of PRIs to their constituents. 5. Because devolution of powers has resulted in different models in the various states, this study hasnot attempted prescriptive solutions or standardmodels for implementation.Rather, this study offers inputto the design o f Bank interventions and activities relatingto Decentralization; it is not in itself a Decentralization study. 6. This Study covers PRIs in six Indian states, including (i)Karnataka, Orissa and Uttar Pradeshwhere the Bank has carried out State Financial Accountability Assessments (SFAA); (ii) Rajasthan and West Bengal where several good practices have emerged at the urging of the state government and/ or the public at large; and (iii)Uttaranchal where the Bank has changed the design of existing projects, such as the Watershed Project to route funds through the PRIs as much as possible. Approachand Methodology 7. For the purpose of this Study, PFMA arrangements, in context of PRIs, have been envisaged as constituting an ecosystem of regulations, practices and processes concerning all aspects ofthe financial management system and cycle. 8. Attention centered around the evolution of PFMA arrangements and PRI practices as documentedin several studies in the public domain as well as PFM diagnostics in SFAAs carried out by the Bank. The methodology behind this Synthesis involved building on these studies and analyses in (i)discussions with Task Leaders, other Bank staff and consultants; (ii)the observance and gathering of information about innovative and good PFMA practices through field visits to Rajasthan, Orissa and West Bengal; and (iii) discussionswith senior officials inthe MoPR, Government of India (GoI), the Office of the Comptroller and Auditor General of India (CAG), andthe PanchayatiRaj Departmentsinthe states visited. Current PFMA Arrangementsand Good Practices Legal and Institutional Framework 9. The three tiers of PRIs obtained their legal status after the states enacted amended their own Panchayati Raj Acts [and related Rules] in conformity with the 731d Constitutional Amendment in 1992. These laws provided for institutional mechanisms such as the holding of Gram Sabhas, the establishment of State and Central Finance Commissions, District Planning Committees and jurisdiction over 29 subjects specified in the Constitution. States also set up Panchayati Raj Departments as the administrative arm of PRIs in the state. These departments work closely with the Ministry of Rural Development at the Go1level. Historically, this body has dealt with Centrally Sponsored Schemes (CSS) and other PRI issues. The legal and institutional framework has thus far made PRIs function as extensionsof the state and not as independentself- governing bodies inthe true sense. In2004, a new MinistryofPanchayatiRaj (MoPR) becamethe nodal agency to deal exclusively with policy matters relating to PRIs. Since then, the MoPR has held seven roundtables of PanchayatiRaj Ministers of the States and has also developed an action plan, including several initiatives relating to PFMA to facilitate the implementationof reforms in a homogenousmanner across the country. Devolution of Powers 10. Accountability should be assessed in the context of power and authority. Some states, like Karnataka, have taken the lead in implementing the devolution of funds, functions and functionaries for all 29 subjects assignedto PRIs. They did so after undertakinga detailed activity mapping exercise whose guiding principle was to limit an activity to a specific level of government. Other states like MP, Rajasthan and UP have also made significant progress in achievingdevolution ofpowers. Planning, Budgeting and Monitoring 11. While the state Acts and Rules contain elaborate provisions for the preparation and approval of PRI budgets, there is a lack of information about the progress of projects at the village level. Financial information is unreliableand often delayed; moreover, the flow of funds is unpredictablefrom the higher tiers. As a result, budgetingin all three Panchayattiers is top-down rather than bottom-up and demand driven. In addition, since budgeting is done in an unrealistic manner, there is no serious attemptto forecast revenues and expenditures. Budgetsare pro forma, they are prepared only to comply with statutory requirements; they are not used as a tool for financial control or long-term planning. 12. State legislation and executive orders have elaborate mechanisms for monitoring the physical and financial progress of public works at each PRItier and accountability arrangements are well defined. However, these processes have little meaning in the absence of bottom-up planning. Furthermore, the states appear to undermine the independence and sustainability of PRIs by directly or indirectly controlling the funds to be transferred to them, their projects, and their operational flexibility in executingthese projects. 13. Some states, such as Kerala, have changed this situation by creating a resource pool of approximately 10,000 experts called the Voluntary Technical Corps (VTC). The VTC vets and modifies projects prepared by the Panchayats. The VTC i s an innovative people's campaign for decentralized planning; with the VTC, PRIs are empowered to prepare their plans in a transparent and participatory manner. InWest Bengal, legislative amendments have introduced Gram, Block and Zilla Sansads for planning, budgeting and selection of beneficiaries at the respective PRI tiers. The Gram Panchayats(GP) at the village level must act upon any recommendations o f the Gram Sansad. Similarly, the Karnataka Local Fund Authorities Fiscal Responsibility Act requires the preparation of a Medium-Term Fiscal Plan (MTFP). It mandates performance-linkedbudgets and a consultative budget as part o fthe preparation process. Fund Flows 14. The flow o f funds to the three tier Panchayats mainly consist of Plan assistancefrom the Central and State governments. However, the timing and amount o f these funds varies considerably from one sate to another and is generally unpredictable. Although GPs have their own revenues from various [non buoyant] taxes and fees that they collect, these funds constitute an insignificant portion of their total revenues. For example, during 1998-99 to 2002-03, Panchayats in23 states generated only 6.4% of their total revenues. What further complicates the situation is that these funds come through many different paths and banking arrangements. 15. As a result o f the Government of Karnataka's efforts to standardize property tax rates in rural areas, tax collection have gone up substantially. This influx of revenue has added resources to the meager coffers o f PRIs. In addition, since 2003-2004, the Government o f Karnataka has earmarked funds for the GPs. The State Treasury credits these funds to the bank accounts maintained by the GPs intheir respective villages. Indoing so, the transfer time has shrunk to 12 days. The flow o f funds i s now more predictable and the potential for higher level PRIs to divert funds has subsided. Internal Control and Internal Audit 16. Ingeneral, the Panchayati Raj Act andRules of States provide for atight set of internal controls on the use o f PRI resources. However, these controls have not curbed the thousands of reported frauds and embezzlements at the PRI level. In order to achieve a strong control environment, there i s a need to strengthen systems and administrative processes so that accountability and oversight are routine. 17. The SFAAs have documented that internal audit is either nonexistent or inadequateat the PRI level. West Bengal i s an exception. A special cadre of internal auditors exist at all the three tiers o f Panchayats. Equally important, this arrangement i s recognized as a good practice. It ensures that internal audits take place. However, because the auditors represent the Panchayats and Rural Development, they are vulnerable to conflicts of interest and their independence i s in doubt. Accounting 18. The accounting practices adopted by the Panchayats, each o f which i s an accounting unit, do not reflect the financial resources entrusted to them. Their registers and books of accounts have not been upgraded to enable them to account for the increased and diversified flow of resources in the present decentralized system. There are no accounting standards or uniform accounting codes for Panchayats. Variation exists even within the same State. Furthermore, the accounts are often late and unreliable. In addition, the current accounting systems do not allow for an assessment o f the cost of services, the tracking and record keeping of community infrastructure and other assets that the PRIs own. 19. However, the lack o f reliability is changing as a result o f a recommendation put forth by the Eleventh Finance Commission, namely it entrustedthe Technical Guidance and Supervision (TGS) of PRI accounts to the CAG. Twenty two States have already complied with this requirement. To fulfill the TGS mandate, the CAG has prescribed accounting formats for PRIs, 16 in all, as well as auditing standards, guidelines for certification audit, a list of codes for programmes, functions and activities of PRIs. Eighteen states are in an advanced stage o f implementing these formats; several others are modifying the formats in keeping with local requirements. 20. Orissa has initiated an E-Governance plan for PRIs to strengthen their accounting functions through Information Technology (IT) and inter-connectivity. Web-enabled state-wide databases will soon be in place to track the transfer o f funds across the PRI tiers to show the balances available for each one, expenditures incurred in each CSS/ State scheme and to display online PRIaccounts at the Block and State levels. West Bengal has undertaken a similar IT based initiatives for improving the accounting [including the introduction of double-entry bookkeeping] at the district and intermediate level PRIs. External Reporting and Transsarencv 21. Organized financial reporting is scant in any of the three PRItiers. Each PRI tier submits financial and physical performance reports to the nexthigher tier. Butthere i s no consolidation of financials by the PRI at the intermediate or block levels. The frequency o f reporting, the level of detail and quality o f information contained in them varied significantly across the states and within the same state. An important component ofvertical reporting is the utilization certificateof funds transferred from the Central or State Governments. However, expenditures reported back up the line are not verified for their genuineness or accuracy. This means that the utilization certificates that the implementing officers provide are taken at face value. It raises the possibility of differences between reportedexpendituresand expenditures incurred. 22. To improve accountability, the Central and State Governments have issued many directives that focus on enhancing transparency in the use o f funds. One outcome has been to create a `fourth tier' of institutions/ Community-Based Organizations (CBO) below the GP. The goal is to ensure more participation by people closest to project execution and to expect greater accountability from them. The establishment of Ward Sabhas inKarnataka, Palli Sabhas in Orissa and Village Development Councils (VDC) inWest Bengal arejust a few examples. 23. Giving the electorate access to information and introducing social audits at the Gram Sabhalevel help to ensure transparency. Good practices worth mentioning are: Rightto InformationAct (pioneered inRajasthan; now introducedinseven other States) The postingo fGP accounts for public display (Karnataka, UP and Kerala amongst others) TelevisingGram Sabhaproceedings (Karnataka) Encouragingwomen to participate inthe Panchayatthrough Vama Panchayats(Uttaranchal) Vaarta Boards at ward headquarters display daily information regarding the names of workers, material costs, etc (Kerala) Citizen's charter specifying responsibilitiesof each PFUtier (Andaman & Nicobar Islands) Jan Sunvai or public hearing (Rajasthan) Jamabandi or social audit (Karnataka) External Audit 24. The statutory auditor o f Panchayatsinall three tiers is either the Local FundAudit (LFA) or the CAG. Chartered accountants engaged by the District Rural DevelopmentAgency (DRDA) audit CSS funds. Although there are many audits, they tend to be late. West Bengal is an exception. Nearly all GPs there have been audited by the Examiner of Local Accounts (ELA), who is an officer attached to the office of the State Accountant General (AG). 25. Moreover, audit procedures are lacking or deficient. For example, PRI auditors are not required to verify assets. A typical audit o f a GP's annual financial statements usually includes verifying the propriety o f individual items. But the audit does not encompass the existence, completeness, valuation, presentation and disclosure of the financial statements. In addition, there is no mandate for PRIs to publishingtheir annual performance reports or their certified financial statements. 26. However, the TGS of the EFC has made recommendations to improve the accountability of PRIs; the CAG has prescribed an audit methodology and procedures for LFA. The TGS also expects the CAG to train for the LFA staff, to vet their programs and to approve their audit plans. There is also a provision for the CAG to follow up on audit findings; the AG is supposed to monitor whether the auditors meet their deadline. 27. To ensure the auditors' independence, the Twelfth Finance Commission recommended that officials of the Panchayati Raj Department should not be statutory auditors of the village Panchayats. Further, the CAG should audit accounts of the intermediate and district Panchayats. These recommendations should be taken seriously for the purpose o f enhancing transparency and strengthening the audit function. 28. Follow up o f audit reports does not occur in an organized manner at any level. Replies and clarifications to audit observations are not forthcoming in a timely way. As a result, the effectiveness o f the audit declines. In addition, legislative committees do not scrutinize the Annual Report o fthe LFA Department. Conclusion The Government of India has a well-defined legal and institutional framework for rural local governments or PRIs. Nevertheless, there is considerable room for improvement in carrying out the spirit of the law. More than a decade after the 731dConstitutional Amendment, PRIs are still evolving, some more rapidly than others. It is true that past studies have highlighted several weaknesses from a PFMA perspective. There i s a need to strengthen the framework for accountability at PRI level, especially mechanisms to ensure adherence to basic financial controls, putting more trained accountants on the ground to match the increased levels of financial responsibility, enhancing transparency and public involvement and the value o f states learningfrom each other's experience by sharing good practices. It is however encouraging to note that the series of ongoing initiatives at the Centre and State levels have the potential for altering the accountability landscape. Furthermore, there are several success stories. All stakeholders, especially other states, need to take note o f these initiatives and consider emulating them. The implementation of these initiatives would help mitigate fiduciary risk associatedwith a PRIproject and inform the designof future Bank interventions. This Synthesis attempts to highlight good practices in various aspects of the Financial Management Cycle inthe context of issues and concernsraised in previous studies. I. BackgroundandContext 1. Traditionally in India, plans and programs for the rural population originated at the state level. This top-down approach imposed development priorities on rural communities and restricted the development of administrative institutions at rural local bodies [called Panchayati Raj Institutions (PRIs)' inIndia]. Inthe 1 9 9 0 there was a paradigm shift inthe strategy for rural ~ ~ development. The Government of India [GoI] decided to decentralize financial and administrative powers to PRIs3.As a result, the administrative capacity o f PRIs began to accommodate their new role. Administrative capacity included processes and institutions for Public Financial Accountability (PFMA) for monies that the PRIs had at their disposal. These PFMA processes are the focus of this study. 2. Since the 1990s, institutions and processesfor PFMA at PRIs have been evolving rapidly. There is universal agreement that if PRIs are to effectively discharge their development responsibility, then they must exercise stewardship and control o f the funds at their disposal. Therefore, PRI accounting systems are beingupgraded in many states, despite the overwhelming pressures of decentralization. The CAG has issued directives, which set forth accounting forms and formats for PRIs at different levels. Public scrutiny of funds i s being encouraged and some state governments; the CAG and NGOs are doing substantive work in this area. The CAG is strengthening the external assurance function by developing standard manuals for PRI audits. Civil Society organizations, active in some states, have succeeded in bringing about landmark legislation [Rajasthan - Rightto Information Act] regarding PRI accountability. This study tries to capture all these efforts to improve accountability. 3. For the purposes of this study of PRIs, the PFMA may be compared to an ecosystem of regulations, practices and processes in the following areas of the financial management system and cycle: Legal and institutionalframework Devolution o f funds, functions and functionaries Planning and budgeting Fundflows Budgetexecution and monitoring Internal control and internal audit Accounting Asset management External reporting and transparency External auditing 4. This study intends to map PFM arrangementsand accountability inPRIs by synthesizing work done by the World Bank and other donors [like DFID, KfW and GTZ]. It covers project reports and studies as well as diagnostics conducted at the state level [such as the State Financial Accountability Assessments]. It also takes the following initiatives into account relative to PRI accountability: work undertaken by different state governments, the Planning Commission, the recently-constituted Ministry o f Panchayati Raj (MoPR) at the Go1 level, the Local Bodies wing of the Office of the Comptroller & Auditor General o f India (CAG), NGOs and civil society ''Annual Report2002-03, Government of India, Ministryof RuralDevelopment. Annual Report2002-03, Government o f India,Ministryof RuralDevelopment. organizations. The authors also sought inputs from Bank staff and consultants who have worked with PRIs. 5. This study is relevant because of the substantial public expenditures PRIs incur. Several programs carriedout by the Ministryof Rural Development, Government of India under `Central AssistancePrograms' or 'Centrally Sponsored Schemes' routinely provide funds to the three tiers of PRIs directly or through the state governments. In addition, state governments provide funds4 through intergovernmentaltransfers; a substantial proportion' of State expenditures go to PRIs that way. The Bank also channels funds to PRIs by supporting six existing projects;6this support is consistent with its Country Assistance Strategy. Therefore, the Bank seeks to map a fiduciary framework for India's PRIs by using this study to document the baseline system and ongoing improvements. This study clearly identifies the strengths of the system as well as gaps that need to be addressed. 6. This synthesis study also documents GoI's own vision for PRIs embodied in recommendations of the Planning Commission Task Force on PRIs. This Task Force suggested that PRIs administer and carry out all future Externally Aided Projects entrusted to them. Furthermore, a recentorder by the Governmentof Karnataka State [October 20041made a similar stipulation, namely that World Bank or other Externally-Aided Projects should be implemented by PRIs only. 7. This study focuses on the following six states: Karnataka, Orissa, Rajasthan, Uttar Pradesh, Uttaranchal and West Bengal. The goal is to identify and highlight good practices amongst these PRIs. In addition, this report includes examples from other states, namely Kerala, Madhya Pradeshand Tamil Nadu. Key objectives of this Study 8. The third tier of Governmentat the rural level has receivedmore and more attention. The main objectives of the study are (i) to develop a better understandingof PFMA issues inPRIs by mapping existing processes; (ii)to identify good practices; and (iii)to synthesize knowledge gained from the SFAAs and other analytical work with experience gained from working with PRIs at the project level. This combined experience will inform the design of future Bank interventionswith PRIs. It may also be of value to central, state and local governmentsthat want to improve their own PFMA arrangements with PRIs. 9. Because devolution to PRIs has resulted in different models in the various states, this study does not attemptto put forth prescriptive solutions or implementationstandards. 10. This study is not intendedto be about fiscal decentralization.Nor does it cover issues of inclusion, the state of GP finances, efficiency in service delivery to the people, sector-specific A newscheme SampoornaGrameenRozgarYojana, launchedinSeptember2001was implementedentirely throughthe three tiers ofPRIs; the annualallocationfor this scheme was Rs. 4,900 crores for the year 2002-03. InKamataka,thetotalexpenditurefor rural localgovernmentsisequivalentto about20percentofStateexpenditures.Eightypercent of the budget of local governments comes to them through a complicated system of 428 state and central government conditional grants. InKerala, 18%of the state expenditurestake place at the local government level, with about 80% of the grants beingfor plan purposes and allocated as 'general purpose' grants. The quantum and system of allocations may differ in each state and largely depends on the paceo ffiscal decentralization reforms. tiThese projects include: KamatakaRuralWaterSupplyandSanitation11, KeralaRuralWater Supply & SanitationProjectfund implementationof rural water supply and sanitation schemes implemented by the Village Panchayats.In addition, several District Poverty Initiativesmeduction Projects (DPIPDPRP) exist in AP, MP, Rajasthan and Chattisgarh; they finance small community infrastructurepublic works by Village Panchayats. Intotal, these projects are valued at approximately US$500 million or more. and capacity building; these are the subjects of other studies. Rather this study is about accounting, budgeting, internal controls and auditing; the intent is to document practices and to offer insight to the design of Bank interventions. 11. Legal and Institutional Framework Evolutionof PanchayatiRaj in India 1. The following chart summarizes the evolution of the third tier o f democratic self- governance inIndiafrom earliest times (BC) to today: 2. While self-governing village communities existed &om earliest times, the following laws by the GO1substantially empowered the Panchayats: (i) GO1Act of 1935 granted them the power to administer themselves, including the responsibility for criminaljustice (ii) The73'd constitutionalAmendment Act 1992establishedathree-tier structureoflocal self Governments in rural areas; the Act recommended that State Finance Commissions suggest - measuresto improve the finances of local bodies and it mandated regular elections for PRIs every five years. 3. The 73'd Amendment suggested reservations for Scheduled Castes (SCs), Scheduled Tribes (STs) and women for membership in Panchayats and for the post o f chairperson. It also mandated that State Election Commissions hold PRI elections at all levels. Moreover, it added an EleventhScheduleto the Constitution, which gave PRIsjurisdiction over 29 subjects. 4. Subsequently in 1996, the Panchayat Extensionto Scheduled Areas Act (PESA) extended Panchayats to tribal areas in nine states'. This Act empowered tribal communities and ensured their inclusionindecision-making. 5. One o f the initiatives o f the 73`d amendment was granting legal status to Gram Sabhas at the GP level. The intent was to improve accountability and participatory development. Most State legislation made Gram Sabhas responsible for supervisingand monitoring the operation o f Gram Panchayats, examining their accounts and audits and participating inthe planningprocess. 6. The 73`d Amendment recommended setting up SFCs to make suggestions about sharingdistributing and assigning taxes, duties, tolls and duties between the States and PRIs and grants-in-aid from the states' Consolidated Fundto the Panchayats. 7. This Amendment also expanded the domain of the Central Finance Commission. The Finance Commission was asked to suggest measures to augment the States' Consolidated Fund with additional grants to supplementthe Panchayats' resources. 8. A discussion on the institutional framework of PRIs would not be complete without mentioningthe Ministryof Panchayati Raj (MoPR) which was set up on May 24,2004 to oversee all matters concerning rural local bodies. 9. MoPR has made many initiatives regarding PRIs, particularly the PFMA. Chief among them were the Round Table Conferences by Ministers-in-Charge o f Panchayati Raj o f all the States and Union Territories in India. Seven of these round tables occurred between July and December 2004; 150 resolutions relating to various aspects of PRIs were either adopted or recommended for joint acceptance by the Centre and the States. Among the more important resolutions dealt with PRIs' effective devolution of funds, functions and functionaries, the empowerment o f the marginalized, the holding of regular elections, the improvement of accounting and audits, and capacity building in PRIs to discharge their responsibilities as rural local governments. 10. It is pertinent to add that the Ministry has commenced monitoring the progress of the States against these action points; the first status review occurred inNew Delhion April 11, 2005. The Way Ahead on Legal and InstitutionalFramework 11. It is important that Central and State Governments recognize that Constitutionally different levels of PRIs were meant to be lateral bodies. The three tiers were not envisaged as a hierarchical structure for purposes of functions, fund flows or accountability. Now that considerable thought and effort is being given to orientation o f PRIs as rural local governments, Go1and State Governments could orient legislation and institutions towards creating a regime of equals rather than the more traditional vertical arrangements that have existed historically where responsibility was conferredfrom one level to another rather than beingshared between partners. 111. DevolutionofPowers 1. Article 243-G of the Constitution establishes the legal basis for the empowerment of Panchayats. It mandates State Governmentsto endow Panchayats with such powers and authority as may be necessary to govern them. This provision gives State legislatures discretionary power to strengthen the finances of the Panchayats by: (a) giving them certain revenue powers, (b) sharingState revenues with them and (c) supportingthem with grants-in-aid. 2. The devolution of powers to PRIs was to take three forms (referred to as the three "F"s), viz. functions, functionaries and financedfunds. States like Karnataka, Kerala, Maharashtra, MP, Orissa, Rajasthan, Sikkim, Tamil Nadu, Tripura, UP and West Bengal have issued detailed instructions and placed departmental officials with them. As of December 2001, the status of devolution amongPRIs inthe focus States appears inTable 1: Table 1 State No. OfDepts./ Subjectstransferredto Panchayats Fund Function Functionary Karnataka* 29 29 29 L Orissag* 0 11 11 Rajasthan" 18 29 18 UP 12 13 09 Uttaranchal 12 13 09 West Bengal 12 29 12 Source: Report of PlanningCommission Task Force * denotes latest positionbasedon fieldvisits In addition to Karnataka, Sikkim and Pondicherry have devolved to the PRIs all three Fs associated with all the 29 subjects. The State Governments of MP, UP and Rajasthan have claimed that they have also made considerable progress in this direction. Some of those recent initiatives are describedinthe next few boxes. Box 2: DevelopmentsinPanchayatiRaj inKarnataka BELURDECLARATION - A proclamation known as the Belur declaration occurred on January 2004. It said: "What needs to be done at aparticular level needs to be done at that level only." The GoK committed to devolving finds andofficials to strengthenthe Panchayats' capacity to handle the expandedmandate. To facilitate this activity mapping would be undertaken and capacity enhancement measures like strengthening GP administration to integrate village level revenue functions with GP administration, creating an Ombudsman for every district to ensure accountability, and strengthening the technical and financial management capabilities o f GP was promised. PRIs, in turn, committed to maintaining the highest level o f integrity and transparency in all public expenditures. They also agreed to incorporate in their operations such best practises as conducting a minimumof two Ward Sabhas and two Gram Sabhas each year, selecting only beneficiaries that qualify Chapter4 of the Reportofthe Second SFC inOrissa states that the devolutionof subjects is limited to (i)accountabilityto the ZP/ PS or the GP as the case may be (ii)visits to some of the Government offices/ institutionsby the headof the concernedPRI(iii) transmissionof reportsabout performanceof certain officers and (iv) sanctionof casual leaveto the heads of few such offices.This report hasrecommendedthat the Statetake up the further devolutionof powers andmake it more meaningful. for various schemes, enhancing reserves through tax reform and higher rates o f tax collection, and creating and maintaining income-generating assets as well as fulfilling the aspirations o fthe people. GovernmentOrders The State Government carried out Activity Mapping that specifies the role o f each PRI tier within their purview. InOctober of 2004, Government Orders transferred several State Sector Schemes to the District Sector and rationalized the District Sector Schemes. This regrouping resulted in a decline in the total number of schemes from 654 to 335. A total of 176 State Sector Schemes, representing an outlay of Rs. 1,887 crores, have gone to the three PRIs. Approximately Rs. 800 crores went to Zilla and Gram Panchavats: another Rs.200 crores went to Taluk Panchavats. 3. The Madhya Pradesh Government has recently amended its Panchayati Raj Act to allow StandingCommittees to strengthen the devolution process to GPs. The duties and responsibilities o f the Gram Panchayat are clearly defined. However, the Standing Committees are to help supplement the institutional framework available to GPs regardingthe three F's. Similarly, the Government of Uttar Pradesh has adopted measures to enhance the effectiveness o f the devolution process across the three tiers o f PRIs. See the Box below: Box 3: Recent InitiativesTaken By Government OfUttar PradeshFor EmpowermentOf PRIs (Source: Abstract From The ReportOfThe PlanningCommissionWorking Group) To sustain decentralization and encourage people's participation, the State Government has devolved many functions and powers to the Panchayats. New ResponsibilitiesAssigned to Gram Panchayats: Identify beneficiaries and disburse pensions and scholarships. Funds for public works, maintenance o f assets, and the payment o f salaries and honorarium to teachers and GP Vikas Adhikaris. - - Transfer-four percent o fthe State's total tax revenues to the Gram Panchayats. This step resultedinan unprecedented increase in funds from Rs. 20 crore in 1996-97 to Rs. 328 crore in 1999-2000. In addition, funds from the rural development schemes and the Tenth Finance Commission Award have gone to the Gram Panchayats. Gram Panchayats now collect irrigation taxes from the State Tube-wells and impose surcharges on landrevenue. To improve transparency, the villagers may obtain a copy o f any Gram Panchayat document for a nominal fee. Gram Panchyats must hold a minimumo f one meeting each month. Inthe case of Women Pradhans, husbanddmale relatives are not allowed to attend these meetings as proxies for the women. The works o f the Gram Panchayats will proceed through six committees, namely Planning and Development, Education, Construction Work, Health/ Welfare, Administration and Water Management. ResponsibilitiesHanded Over to Kshettra Panchayats: The local bodies will receive 10percent ofthe State's tax receipts. The six Subject Committees previously mentionedwill execute all public works, Empowerment of Zilla Panchayats: Instead o f the District Magistrate, the Chief o fthe ZP will be the Chairman o fthe (DRDA). The governing body o f DRDA now comprises the Chairpersons o f the six Standing Committees of the Zilla Panchayat and 50 percent ofthe Pramukhs. 0 A separate officer, with the title of Chief, will be in charge of developingwork implementedby the DRDA/ Zilla Panchayat. This ChiefOfficer will replacethe District Magistrate. Box 4: Recent Initiatives taken by the Rajasthan Government In August 2004, the State Government convened a high-level Ministerial Committee. This committee consisted of the following ministers: Home, Education, Food & Civil Supplies, Social Development and the Minister for Panchayati Raj and Rural Development to move devolution forward. Since then and Marchof2005, this committee has meteighttimes. Recently,this same committee has visitedother States such as Karnataka. The Way Ahead on Devolution of Powers 4. The preceding examples show how the states are complying with the spirit of the Constitutional amendments. These are positive steps in improving the sustainability and authority of PRIs and therefore their accountability. Going forward, it i s important to understand that the extent to which devolution has unfolded is the consequence o f the direct relationship between responsibility and authority and this is what is expected to inform the course of future devolution also. In addition, there are many states [such as Orissa and West Bengal] where devolution has happened in principle but not in practice and in going forward, it would be essential that practice follows principle. IV. Planningand Budgeting 1. Bottom-up planning is imperativeto effective development, efficient service delivery and sound accountability. Article 2430-ZD of the Constitutional Amendment Act (1992) provides for District Planning Committees (DPCs) to consolidate the plans prepared by individual Panchayats in the district and to prepare a draft development plan for the district as a wholeg.The intent behind this arrangement was to link strategic planning with budgeting and physical targets with expenditures. The planning provision exists in the PanchayatiRaj Act and inthe Rules of States; they relateto the preparationandapprovalof PRIbudgets. 2. As a practical matter, however, the amount of untied funds the PRIs receive is very low. Most developmentwork occurs with tied funds from the central GOI. So, planning continues to be top down. Budgeting is an exercise in extrapolationbased on figures from the previous year plus an inflation factor. Because the timing of transfer of funds is unknown, PRIs are unable to relyonthese funds for important initiatives. Although the SFC mandatedthat PRIs receiveuntied funds, the Twelfth Finance Commission (TFC) commented "...very few states honoured their commitment for release of additional resources." 3. Nevertheless, some states have made incremental progress in planning. Kerala is one example, specifically the Voluntary Technical Corps (VTC). VTC consists of about 10,000 experts whose mandate is to vet and revise projects prepared by the Panchayats.Similarly, other States need to identify voluntary groups and institutions that could provide services, training and support for programmes at the local level. The Planning Commission has recommended Kerala as a modelfor other States to emulate. Details of the Kerala Model appear inBox 5. Box 5: People'sPlanningCampaignin Kerala as per the Reportof the Working Groupon DecentralizedPlanningand PRIs The People'sPlanningCampaignhas a methodfor participatoryplanning at the local level. The basis for this methodology goes back to an experiment carried out in Kalliassery Panchayat of Kannur District in the early 90s and later modifiedfor large-scaleapplications.The key features of this methodologyappear below. 1. Needs Identification: The needs of rural communities are identifiedthrough Gram Sabha meetings. These semi-structuredmeetingshave plenary and sub-group sessions dealing with specific developmental issues. The decisionsare documentedinthe minutesand sharedwith the Panchayats. 2. Situation Analysis: Thereafter, the demands of the Gram Sabha go into a Development Report. This report describes the status of each sector of development. It contains a problem analysis and a direction for future development. This analysis occurs once; the Reports will be revised before the next five-year plan. 3. Strategy Setting: Based on feedback from the Gram Sabha and the Development Report, a one-day seminar takes place at the PRI level. Participants include experts, elected officials, representatives nominated by Gram Sabhas, and members of the public. The seminars suggest priorities and general strategiesfor projects for a givenyear. Accordingto the Report ofthe Working Group on DecentralizedPlanningand PRIs ,Ministry of Rural Development, November 2001, only 11States, namelyHaryana(only infour Districts), Karnataka(in 18 out of27 districts), Kerala, MadhyaPradesh, Manipur (intwo out of four districts), Rajasthan, Sikkim, Tamil Nadu, Tripura, UttarPradeshand West Bengal hadconstitutedDPCs. 4. Projects: The ideas that came out of these three stages include projectsat the PRI level. EachPRI has about 12 Task Forces dealing with different sectors of development. An elected official heads each Task Force. The Vice Chairman of the Task Force is usually a non-government expert. Project plans outline objectives, describe the benefits, explainthe finding andexecution of it. 5. Plan Finalization: The respectivePRI fmalizes its planfor the year and submits it to the DPCsthrough the Expert Committees. The Panchayat is fiee to take up any project, regardless of cost, but subject to available resourcesand sector limits. 6. Plan Vetting: The Expert Committee at the Block or the District level evaluates the projects for their technical viability and their conformity with government guidelines for costing and planning. Next the committee forwards them to the DPC. They cannot change priorities or projects; they can only ask for adjustments. 7. Plan Approval: The DPC gives formal approval to the plans, and then the PRI can start implementation.The DPC cannot change a PRI's priorities. Administrative approvalfor implementation i s given by the PRI. Every PRI has unlimited administrative powers, restricted only by its financial resources. Facilitating the Campaign are approximately 650 Key Resource Persons at the State level, about 10,000 District ResourcePersons and about 100,000 Local Resource Persons (100 per Village Panchayat). Each ofthemreceives basic training. 4. Similarly, NGOs, such as the Consumer Unity and Trust Society (CUTS) in Rajasthan, have shown that bottom-up needs assessment i s feasible through careful micro-planning at the village level and with the blessingso f the Gram Panchayat (see Box 6). 5. Another important step in bottom-up budgeting occurred in West Bengal. The West Bengal Panchayat (Amendment) Act of 1992 provided for the establishment of Gram Sansads. These are legal entities below the level of the GP; they take an active interest in planning, budgeting and selecting beneficiaries (Details in Box 7). Subsequently, West Bengal has made even more progress in bottom-up budgeting. In 2003, an amendment to this Act made it obligatory for GPs to act upon any recommendations o f the Gram Sansad. The recent amendment envisages a Block and a Zilla Sansadthat is similar to the Gram Sansad. 6. On the issue o f budgeting, a reference to the Karnataka Local Fund Authorities Fiscal Responsibility Act, 2003" i s warranted. This statute establishes an overarching legal framework for fiscal and financial management in a wide range o f entities including PRIs. This act requires the preparation o f a Medium-term Fiscal Plan (MTFP) that outlines the mission and goals of the entity, its medium-term fiscal objectives and performance indicators. Annual budgets must be in line with the MTFP. The act also stipulates financial management principles that govern those entities, including those applicable to budgeting, accounting, and auditing and fiscal transparency. Mandated features include performance-linked budgets and a consultative budget preparation process. Implementing this act i s a major priority that will also require significant effort, given capacity constraints. The act applies to the various entities upon notification by the State Government. '"Thisparagraphis a reproductionofparagraph3.22 ofthe KarnatakaSFAA Report 7. In preparationfor the Bank's funding of the Karnataka Panchayatand Service Delivery Project, the Government of Karnataka drew up a new set of Accounting Rules applicableto Gram Panchayats. The FM Assessment Report for the proposed project states that a fiduciary framework would be establishedto implement new planning guidelines (MTFP) in all GPs. The goal is to prepare a plan at the beginning of every year that shows the use of Block Grants under the project. The Way Ahead on Planning and Budgeting 8. For planning to be meaningful, the process needs to include local peopleand to identify what they want. The community should drive the plan, as was true of the CUTS micro plans. The scant amount of untiedfunds makes the grassroots ineffective. Ifthe state governmentswere committedto a timetable of devolution of unrestrictedgrants to the villages, that planning would help rural communities. Eventied funding that villages receivefrom centrally-sponsored schemesdoes not follow a time table, nor is there any assurance oftheir receipt.Evenwhen funds for particular centrally sponsored schemes (CSS) are received, the selection of beneficiaries and sites for installation ofvillage assets has already been done centrally. The GPs do not have a say inwhat, where or whom the schemes shouldbenefit.To linkplans with budgetsandphysical progress, the CSS methodologyshould be more consultative.The Gram Sansads inWest Bengal have initiated an exercise inparticipatory planning that could be a model for other states. Similarly, Karnataka's planning guidelines are also a step inthe right direction. 1. PRIs receive funds mainly from external sources in addition to raising their own income from the levy o f taxes (primarily at the village level). Taxes levied by village bodies are usually buildings and land, on the registration and mutation o f properties, water supply, entertainment, vehicles, advertisements, market fees and fees on transport operators, etc. These taxes are relatively non buoyant and ineffective for the PRIs to use as resources. Compounding the problem is their low collection rate. As a result, PRIs tend to have a low fiscal base. Statistical evidence from 1990-91 to 1997-98 shows that the internal revenue mobilization (IRM) for Panchayats from 23 states constituted only 4.17% of the total revenue o f those States. From 1998- 99 to 2002-03 IRMincreased to 6.40% of total state revenue. But in 1997-98 IRMaccounted for only 0.04% of the states' GDP compared to an expenditure o f 1.38% by the GDP. 2. The other main external funding sources for PRIs are (i)funds from the State's Consolidated Fundto carry out State functions as per SFC recommendations; (ii) tied funds from line departments at the State level when financial devolution has taken place; (iii) funds from tied the Central Government for the execution of CSS; (iv) tied funds received directly from the Centre/ State under the MP-LADS and MLA-LADSschemes for identified and approved public works and (v) grants-in-aid as from the Finance Commission award (the most recent was the TwelfthFinance Commission -TFC). 3. Typically State government grants, most of them tied except for SFC devolutions, account for 80% or more o f the Panchayats' total resources. See the Table 2 overleaf. This table summarizes the statewide revenue devoted to IRMand assigned or devolved by the six States that are the subject o f this study for all levels o f PRIs duringthe past 5 years". Inall the 6-states, IRM represents a very small percentage of total revenue. A detailed tabulation appears in Annex I. 4. Because their own resources are low, Panchayats have to rely on funding from the states and the GoI. As previously mentioned, based on SFC recommendations, the only untiedfunding available devolves from the states. The TFC mentions that most states have reneged on their SFC commitments totally or in part. Where states have transferred untied funds to PRIs, there have been delays and partial payments. Inmany instances, state governments operate Personal Deposit or Personal Ledger Accounts and document the transfer of funds in these accounts. But in fact there is no corresponding transfer of these funds. Consequently, PRIs are unable to rely on the untied funds that they receive to satisfy expenditures such as staff salaries or the salaries of elected representatives, minor maintenance works like Panchayat buildings, etc. Untilthe transfer Tipx o f funds actually happens, the Panchayatsmust dependon their own revenue or untiedfunds. State Item 1998-99 1999-00 2000-01 2001-02 2002-03 Karnataka Own Revenueas YOofTotal Revenue 1.53 1.31 1.42 Assignment'DevolutiodGrantsinaid as % of Total Revenue 98.47 98.69 98.58 98.62 Other Revenueas % of Total Revenue 0 0 0 Total Revenue(%) 100 100 100 Total Revenue(Rs. Crore) 3,370.57 4,378.79 4,717.97 Orissa Own Revenueas % of Total 5.40 3.97 7.82 6.48 2.93 State Item 1998-99 1999-00 2000-01 2001-02 2002-03 Assignment/Devolution/Grants inaid 94.60 96.03 92.18 93.52 97.07 as YOof Total Revenue Other Revenueas % of Total 0 0 0 0 0 Revenue Total Revenue("h) 100 100 100 100 100 Total Revenue(Rs. Crore) 170.79 218.31 115.91 135.90 182.33 Rajasthan Own Revenueas % of Total 2.09 2.18 2.25 2.06 2.08 Revenue Assignment/Devolution/Grantsinaid 62.24 65.54 62.99 64.87 63.29 as % of Total Revenue Other Revenueas % of Total 35.67 32.28 34.76 33.07 34.63 Revenue Total Revenue(%) 100 100 100 100 100 Total Revenue(Rs. Crore) 1,521.14 1,678.97 1,637.15 1,806.81 1,811.63 Uttar Own Revenueas %of Total 11.50 10.61 9.60 9.24 10.14 Pradesh Revenue Assignment/Devolution/Grants inaid 66.74 53.90 52.28 54.35 71.14 as % of Total Revenue Other Revenueas % of Total 21.77 35.49 38.11 36.41 18.73 Revenue Total Revenue(%) 100 100 100 100 100 Total Revenue(Rs. Crore) 403.46 502.29 612.50 641.14 623.21 Uttaranchal Own Revenueas % ofTotal 7.02 8.42 15.15 21.01 9.94 Revenue Assignment/Devolution/Grants inaid 27.78 37.12 53.08 31.84 15.66 as `YOof Total Revenue Other Revenueas % of Total 65.19 54.46 3 1.77 47.10 74.41 Revenue Total Revenue("h) 100 100 100 100 100 Total Revenue (Rs. Crore) 66.80 61.20 32.14 23.27 61.38 West Bengal OwnRevenueas % of Total 16.89 10.36 5.26 7.30 17.64 Revenue Assignment/Devolution/Grantsinaid 82.65 89.36 94.60 92.5 1 82.36 as % of Total Revenue Other Revenueas % of Total 0.47 0.28 0.14 0.19 0 Revenue Total Revenue(%) 100 100 100 100 100 Total Revenue (Rs. Crore) 171.94 285.79 618.05 460.18 177.23 :ates and .oI(on CS 1 1. The physical flow of funds to P& and the associatedtimeframe for disbursement varies with the source of those funds, for example, CSS, State, Finance Commission or Line Department funds, how the funds will be used (salaries or public works), and the availability o f banking arrangements.However, this can be said; the flow of funds is generally unpredictable. As a result, fiscally constrained Panchayatscannot rely onthe tied grants promisedto them. 6. It is also noteworthy that fund flow arrangements vary significantly across states. For example, in Rajasthan, funds intended for GPs usually flow from the State to the ZP and then to the intermediary level -PS before being transferred to the GP. InRajasthan, SGRY, a CSS, is an exception to this rule. The Rural Development Cell o f the ZP [formerly DRDA] transfers the GP's 50% share directly. In Orissa, on the other hand, the DRDA acts as the PRIs' banker and transfers the respective shares o f funds to the three tiers o f PRIs for CSS. 7. There are no statutory requirements or deadlines for the transfer of funds. In general, PRIs do not know how much money they will receive or when. The unpredictability undermines the Panchayats' ability to function. It also has an impact on accountability. Panchayatofficials are seldom held to account for their use of funds. The chart below attempts to depict the multiplicityof fund flow routesacrossthe three tiers ofPRIs: 8. Despite many obstacles, some PRIs have developed good practices in the way they use the limited funds at their disposal. Karnataka is one example. According to the 2003-04 Annual Report of the Rural Development & Panchayat Raj Department, Government of Karnataka has conducteda survey of all rural households.The goal was to develop an accurate list of people on BPL living in the district, to identify CSS beneficiaries who were eligible for the program and those who were not. The startingpoint for the survey was the voter's registration list for each GP broken down by constituency. Questionnaires were limited to the number of registered voters. The survey was successfulbecause the Panchayats owned it; it was their idea. There were also a few surprises. For example, in one constituency, the registeredBPL population represented113% of the total number of people living there. Afterward, the government was able to establish the correctnumber ofrural beneficiariesandtarget the state schemes more efficiently. 9. The second example from Karnataka, documentedin the same Annual Report mentioned previously, had to do with local taxation. Guidelines came out in May of 2003, which standardizedthe rules for collecting property taxes for all Gram Panchayats. Later, a process for evaluating taxes went into effect; it allowed people to participate in that process. Subsequently, two activities ensued. The first was a massive survey of each and every dwelling unit/ structure within the boundaries of the gram Panchayat. Second, the Annual Rateable Value (ARV) for levying property taxes was determined for each zone within each taluk. For example, houses or shops on land adjoining a state highway were far more valuable than any other area within the same village. A committee at the taluk level supervised the physical survey (intermediate level). Members of the committee were either engineers or elected representatives of the GP. All dwelling units were categorized inthree ways: (i) thatched; (ii) or (iii) Each category tiled; RCC. was further subdivided based on: (a) personal use or (b) commercial use. The Gram Panchayat could levy property taxes at a uniform rate up to a maximum of 10% o f ARV. Based on data for 176 taluks, the chief outcome of this exercise was an increase inthe number of properties from 74.2 l a b s to 104.5 lakhs and a corresponding increase in the property tax collected from Rs.37.86 crore to Rs. 86.25 crores. 10. As a result of initiatives by the Government of Karnataka to standardize property tax rates in rural areas, tax collection has gone up substantially and added much needed resources to the meager coffers of rural local bodies. The government of Karnataka is also an exception regarding funds transfer. Since 2003-04, the State Treasury credits the bank accounts of GPs in their respective villages. The availability of suitable banking arrangements has helpedto facilitate this policy. The Department of Rural Development and Panchayati Raj has entered into Service Level Agreements with 18 banks. The State Government issues a single cheque from the "Repositor" bank account, then the funds get transferred by wire and are available to the GPs up to 12 days later. This process also prevents the potential diversion of funds at higher level PRIs. These simple initiatives have augmented the funds of rural local bodies, reduced the number o f steps in the funds transfer process and given rural local bodies a measure of predictability. Other states could easily imitate Karnataka's initiatives. The Way Ahead onFundFlows 11. The flow of funds across the three tiers of PRIs shouldnot be hierarchical, i.e. from ZP to TP to GP since each tier potentially becomes a bottleneck for the smooth and timely flow of funds to the next tier. Some States [such as Karnataka] have circumventedthis route and demonstrated greater efficiency infund flow. There has been a fair amount of debate about whether performance indicators should be introduced at the GP level inorder to determine the quantum of funds that should be flowing to a particular GP. There are compelling arguments both for and against performance measurementsor scorecards. While there are argumentsthat clearly lay out the points in favor of performance measurements,there are also arguments against such a systemwhich point to the fact that GPs with better capacity will perform better, be rewarded and become stronger while the GPs with poorer capacity will languish. Since this is a philosophical debate, this Study has deliberately stayedaway from this. However, notwithstanding this, some states have mentionedthe need for performance basedtransfers as inUttaranchal [the details of how this could be operationalized, as specified inthe SFC Report are set out in Annex 111which may well create this system going forward. Inaddition, the Ministryo f Panchayati Raj is considering settingup an Incentive Fundfor states where aggregate levels o f performance on key indicators are better. VI. Budget Execution and Monitoring 1. As observed inearlier sections ofthis Report, bottom-up planning and budgeting by PRIs i s still evolving. However, there has been a fair amount of progress in the monitoring and execution o f public works at the local level. Elaborate mechanisms are in place to track physical progress and their corresponding expenditures across three tiers o f the PRIs; accountability arrangements are well defined at each level. In its simplest form, the PS at the intermediate level controls the issuance o f muster rolls to GPs. These muster rolls record attendance and document the payment of wages to workers on a project. They are numbered in advance, stamped for authentication, and valid for a seven-day period. Moreover, the number o f names on each muster roll is limited.As a further check, the Junior Engineer o f the PS corroborates this information. 2. In addition, at the State level, the Statistics Division of the Panchayati Raj/ Rural Development Department collates information on the financial and physical progress of public works based on monthly, quarterly and annual statements received from each district. Periodic meetings o f the Accounts Officers of the ZPs and DRDAs at the State level supplement these reports and State officials visit PRIs on a random basis as well. Box 9 shows the typical steps in the monitoring of public works projects across the PRI levels. The chart below shows the typical steps involved in the execution and parallel monitoring of development works which are executed at the GP level. The Way Ahead on Budget Execution and Monitoring 3. Going forward, budget execution and monitoring will gain meaning if the budget representsan endorsementofthe needfor local development and is not simply an extrapolation of the previousyear's numbers. Althoughthe PRIs haveprocedures inplacefor these purposes,they have littlemeaningifbudgetandplanningis top downrather thanbottomup. Furthermore, the states appear to be underminingthe independence and sustainabilityofthe PRIs by directly or indirectly controlling their funds, the projects they undertake and the lack of flexibility they have inexecuting them. Our conclusionis that monitoringand oversight ofbudget execution is relevant only if PRIs have the independence and the means to make their own decisions. VII. Internal Control and Internal Audit 1. Ingeneral, thePanchayatiRajActs andrelatedRulesofmost stateshaveatightsetof internalcontrols for the use of resources, particularly those dealing with PRI funds. Key internal managementcontrols are summarized inBox 10: 2. Inpractice, however, the SFAAs have documented that at the PRIlevel internal auditing is either non-existent or inadequate. It is pertinent to mention that since the early 1980's West Bengalhas had a special cadre of internal auditors at all three-tiers of Panchayats;I2the intentwas to achieve accountability o f PRIs for funds at their disposal. This arrangement i s recognized as a best practice because it ensures that internal audits actually take place. However, this practice '*The PanchayatAudit and Accounts Officer conducts audits at the GP level.Meanwhile, the Sub-DivisionalAudit and Accounts Officer and ParishadAudit andAccounts Officer, respectivelyconduct audits at the Panchayat SamitiandZilla Parishadlevels. has also been criticized for conflicts of interest. Moreover, it compromises the independence of audit officers because they are officials of the Panchayats and Rural Development Department itsele3. In certain states, such as Orissa, where DRDAs continue to coexist along with the ZPs, external CA firms empanelled with the CAG carry out these audits instead. 3. In addition to internal auditing, the controls within the PRIs' administrative processes need to be tightened. According to another Bank report, the Study Report on Accounting and Financial management Systems of Three Tier Panchayats inKerala: "Panchayats at all three tiers do not implement internal controls ina diligent manner. The lack o f reconciliation of local body accounts and Treasury books on a regular basis results in huge variances between book balances and the Panchayats' real balances. The frequent restrictions imposed on payments from the Treasury result in many Treasury checks not being honored. However, the Panchayats have already booked these checks as expenditures. This creates a mismatch between actual expenditures and book expenditures. Most o f these checks tend to get revalidated, ifthe Treasury does not honor them within three months. This phenomenon o f uncashed Treasury checks raises a control issue since the local body i s not ina positionto know the extent o f its payment obligations on any specific day." The Way Ahead on InternalAudit 4. It should be noted that we are not advocating a tight supervisory control by the state or any other oversight bodies. Rather we are suggesting that the PRIs should routinely structure their systems and procedures in a way that establishes accountability and oversight and to minimize fraud and embezzlement. Inpreparationfor the DFID-funded SRD Programme, the Governmentof West Bengal is workingon shifting the internalaudit function out ofthe P&RD Department. VIII. Accounting 1. PRIs at all levels are accounting units and that is mandated by Article 2435 of the Constitution and reinforced by the states' PRIActs and Rules. 2. Recently the Ministryo f Finance and the EFC have vested the overarching responsibility for facilitating reliable accounts with the CAG of India. While the Ministryo f Finance mandates that the CAG ensures pro er accounting and auditing of funds related to centrally-sponsored schemes devolved to PRIs ,the EFC recommended that the Technical Guidance and Supervision IF (TGS) o fPRIaccounts shouldbe with the CAG as well. 3. Twenty two states have entrusted the TGS for rural local bodies to the CAG. To fulfil the TGS mandate, the CAG has prescribed accounting formats for PRIs, auditing standards, guidelinesfor certification audit, a list of codes for programmes, plus functions and activities. 4. With respect to accounting, the CAG has prescribed receipts and payment formats on a cash basis. These formats, 16 in total, provide for accompanying statements on demand and collections and assets that address critical aspects of accruals for PRIs. Similarly, cash-based budget formats are also prescribed. S. No. I Extent of Adoption" States I / local language; implementation commenced Pradesh, Uttaranchal (6 States) 2. Modifications of State requirements agreed AP, Assam, Goa, Gujarat, Haryana, Himachal upon by the State A G and proposed for Pradesh, Maharashtra, MP, Orissa, Rajasthan, implementation in2005-06 (12 States) Tamil Nadu, Tripura 3. Still indiscussion with State A G (4 States) Chattisgarh, Manipur, Punjab, West Bengal 4. Little progress (2 States) Arunachal Pradesh, Sikkim 6. In practice, accounts maintained by PRIs are inadequate in scope, timeliness and reliability. Accounting formats and accounting practices remain fragmented across states and PRI levels. Although Panchayats at all levels maintain cash accounts, district and intermediate level PRIs have greater capacity. Therefore, the quality and timeliness o f their accounting is better than that of GPs.16The responsibility for maintaining accounts in higher level Panchayats lies with Accounts Officers. These officers come from a separate Subordinate Accounts Cadre of the State Administrative Service. At the GP level, accounting is the responsibility of the GP l4This mandate is only for the funds flowing to PRIs and not those flowing to the DRDAs. This status as ofApril 2005 is basedon information providedby Director (Local Bodies) at the Office of the CAG. l6The situationinWest Bengal seems to be different; the GP accounts fare better thanthe highertier accounts basedupon observations by the DFID team as parto ftheir Post-designStrategic Studyon FiduciaryRisk andFinancialManagement Issues of the SRD Program. Secretaries or their equivalent. Usually these GP Secretaries are not trained in accounting, and yet, they are responsible for the maintenance of accounts for more than one GP. Consequently, the quality o ftheir accounting suffers. 7. Accounts at the GP level tend to be simple, with limited diversity in the nature of transactions; the number o f entries is low. Complexity increases, however, as one moves up the tiers, particularly at the district level where PRIs deal with more sources o f funds [such as CSS, State, EFC, SFC, Line Departments]. The same complexity is true for the DRDAs which have legacy accounting systems." PRIs do not adhere to any particular accounting standards. The accounting treatment accorded to various items of income and expenditures also varies across PRIs. In fact, the chart o f accounts could vary across PRIs in the same State as well as across States. As a result, it i s difficult to make any intra-state or inter-state comparison and analysis. 8. The lack o f reliable financial information about the physical progress o f public works projects, the existence and status o f assets, and the cost o f service delivery compound the lack of reality about budgets, the unpredictable flow of funds and the diffusion of accountability. 9. The Government of West Bengal has recently negotiated the implementation of the DFID-funded Strengthening Rural Decentralization (SRD) Programme. SRD plans several changes to the Accounts and Finance Rules, 2003. The goals are two: to introduce double-entry bookkeeping across the district and to intermediate level PRIs and to comply with the CAG's requirements. Similarly, in preparation for the Karnataka Panchayat and Service Delivery "Detaileddescriptionofaccountingprocedures,books,andrecordsmaintainedbyDRDAscanbefoundinAccountingProcedurefor DRDAdSocieties, 2001 issuedby the Mom. Project" to be funded by the Bank, the Government of Karnataka has drawn up a new set of Accounting Rules applicable to Gram Panchayats.The Government proposes to implement these rules and at the same time enhance the GP's accounting capacity. The Way Ahead onAccounting 10. These are constructive steps in the creation of reliable and timely accounts at the GP level; other states could emulate them. For these improvements to be sustainable, however, Gram Secretaries need to receive training and their numbers need to be commensurate with their responsibilities. With regards to the training to PRI accountants and auditors, there is evidence which points to the fact that CAG has done the first phase of training to trainers in 9 states for audit and the second stage o f training to the lower tier accounts functionaries has been started in Bihar, Orissa, Kerala and Gujarat. In addition, if the public was aware that public officials are accountable for public monies, then they would demand better quality accounting and record keeping. Going forward, the states need to put in place structures and build human capacity to provide assurances that funds devolved to this level will be appropriately and comprehensively accounted for. the FMAssessment Report for the proposedprojectstates that a fiduciary frameworkwould be establishedto implementthe new planningguidelinesofGovernment ofKamataka(MTFP) inall GPs.A planwould be preparedat the beginningof every year to show howBlock Grantswould beused. .............................................................................................. Page 22 IX. Asset Management 1. The SFAA Synthesis study concluded "all SFAAspoint to asset management as a major weakness.19yyThe same is true o f PRIs. There are several reasons for this situation: (i) Thecashbasisofaccountingdoesnotrequirethetrackingofcapitalexpendituresorthe maintenance of detailed asset registers. Accounting Rules issued pursuant to the State Panchayat Acts [such as Rajasthan] require the maintenance of a Stock Register and a detailed log of vehicles owned by PRIs. However, PRIs do not follow these rules. (ii) None of the reporting formats at any PRI level requires the disclosure of assets or community infrastructure. The only monitoring for public works projects is for centrally sponsored schemes. Reports to the Central Ministry o f Rural Development are in aggregate numbers only by district and by type of project. (iii) There is alackofclarity onwhat constitutes anasset andwho owns it.Forexample, streetlights, parks, storm water drains, etc. are not considered assets. (iv) There is a fair amount o f focus on budgets for new works, particularly works that are to be created from the funds o f a particular scheme. Nevertheless, there i s inadequate emphasis on safeguarding O&M's existing assets. PRIs' low-income base exacerbates the situation, so too does the unpredictability and the meager amount of unrestricted funds that they receive. (v) Control on assets is weak; there is no verification of assets inannual audits. PRI external auditors are not requiredto carry out a physical verification o f assets as part o f their procedures. (vi) There i s no institutional mechanism to track assets. Despite the fact that the Panchayat leadership serves a five-year term, since there are no checks and balances to monitor creation, usage and maintenance of assets, there is no incentive for people in power to bring about better asset management. 2. Despite these weaknesses, some PRIs, particularly at the intermediate level, have taken the initiative to maintain asset records. These registers contain the location and cost details of all public works completed in that GP's jurisdiction. For example, Rajasthan's Panchayat Samiti Nimaheda in Zilla Chittorgarh i s a showcase for accounting. Among other records, detailed asset registers exist for all GPs under this PS. l9ReferPage 13 ofthe SFAA Synthesis Report The Way Ahead on Asset Management 3. Since PRI assets are created out o f community resources, they should be properly inventorized, maintained and accounted for. The maintenance o f simple asset registers is a basic tool for achieving this. It is pertinent to note that the accounting formats prescribed by the CAG (referred to inthe section on Accounting) also include formats for maintenance of records of land, roads and building, etc. If implemented properly, these records would serve to establish a database of assets at the PRIlevel. X. External Reporting and Transparency 1. The PRI Acts and Rules at the state level provide for the preparation of financial statements, such as the receipts and payments account. Reporting is entirely based on upward accountability. Each PRI tier submits financial and physical performance reports to the next higher tier on a monthly or quarterly basis, depending on the state. These reports are in addition to the PRIs' annual reports. The higher PRI tier, in turn, submits independent reports of its activities and flow of funds to the next tier. But there is no consolidation of financials at any level. Consequently, the extent of detail and the quality of information presented in the annual report varies significantly across states and within the same state. In Rajasthan, the Panchayati Raj Department receives Quarterly Progress Reports (QPR) and Annual Progress Reports (APR) from all district and intermediate level PRIs; the QPRs and APRs from the GPs stay at the intermediate PS level. These are relatively simple statements that summarize each PRI's opening balances, receipts, expenditures and closing balances of each category of funds [such as CSS, State, EFC, SFC]. By comparison, in West Bengal, some districts publish a detailed annual report similar to annual reports by the Panchayats and Rural Development Department. These district reports give details about fund flows, activities, the status of audits, punitive action taken in response to complaints, progress in key CSS and State schemes, information about staff positions and computerization. InMaharashtra, the ZP accounts for the year ended March 31are publishedinthe Official Gazette by November 15theach year. 2. To strengthen accountability, the Central and State Governments have issued many directives to enhance transparency in the use o f funds. However, at the local level, there is a lack of awareness among the rural population about large-scale release of funds by the Central Government and about various development and welfare schemes. Two fundamental tools which will help to improve this situation are giving the electorate a rightto information and introducing social audits at the Gram Sabha level. Specific initiatives include: Introduction o f the Right to Information Act by States,20such as Rajasthan, Karnataka and UP. This legislation grants every citizen the right to obtain copies of official documents by paying a small fee. 0 Public display o f GP accounts inmany states ( Karnataka, UP and Kerala amongst others) Televising the proceedings of the Belandur Gram Sabha near Chennai in Tamil Nadu, a positive step intransparency and accountability Encouragingwomen to participate inthe Panchayatprocess; Vama Panchayats in Uttaranchal are an example. Kerala prescribes a daily public notice appears at the site of every public works project. This notice must list the names o f workers and the wages they've earned, materials purchasedwith unit costs, quantities, transport charges and contingency expenses.The State Government has also required the construction of a large notice board, called the Vaarta Board, at the headquarters of every ward. These and other notices must be displayed or subsequent grants to the Panchayat are withheld. '"The following states have introducedthe Right to Information legislation: Goa, Karnataka, Kerala,MadhyaPradesh,Maharashtra, Tamil Naduand UP inadditionto Rajasthan.A Right to InformationBillat the Centre, which applies only to the Central Government, i s pending approval by Parliament. Citizen's charter inAndaman & Nicobar Islands specifies the responsibilitieso f each PRItier towards its citizens. Citizens know what to expect from their rural local governments and can holdthem accountable for non-performance. Jan Sunvai inRajasthan (see Box 13) 0 Jamabandi inKarnataka (see Box 14) 0 A letter from the UnionMinister incharge o f Panchayati Raj congratulates Gram Panchayats on the devolution o f powers. It assures them o f funds and officials commensurate with their activities. The GoK published this letter in a Newsletter that was routinely issued to all Panchayats.(See Annex 111) Some Panchayats like Howrah ZP in West Bengal routinely publish their accounts in a way that is available to the public. (See Annex IV) Box -13: Jan Sunvai and the Right to Informationcampaign in Rajasthad' The Mazdoor Kisan Shakti Sangathan (MKSS) is a peoples' organization that has usedcollective analysis and political action as a means of empowerment. MKSS pioneered thejan sunvai or public hearing for poor and exploited villagers to speak up and be heard. Public hearings demanding access to muster rolls, vouchers and records of bill payments of development projects at the Panchayat level have crystallized issues; they make tangible the abstract notion of transparency and the right to information. In public hearings, evidence of wrongdoing by Panchayat and village authorities, which auditors had overlooked, came before the community at large. During the first public hearing in Kot Kirana (Pali district), muster rolls revealed that one-half of the names were fictitious. There were also severalfalse bills. For example, records for a building at the site of the public hearing showed it to be complete. And yet, there were bills for doors, windows, roofing and finishing. Everyone at the hearing could see that not even the walls were in place. At another public hearing in Bhim's Rajsamand district on 7 December 1994, it was the same story. Bhairon Nath and Company had defraudedthe block of Rs 37 lakh through false billing. And yet, government auditors had checkedandclearedthe company, but infact, the company existedonly on paper. Today Rajasthantoday has a Right to InformationAct inplace. Jan sunvais have been establishedto do a social audit of government's performance. Certain areas in Orissa now perform these audits and other parts of the country are planning to do likewise. The Rajasthanexperiment culminated in social audits at the Panchayat level. There is no doubt about the practical impact these social audits have had inkeepinga constant check on the government's performanceand the ability of the peopleto demandaccountability in the use ofpublic funds. 3. In some states like Rajasthan social audits are mandatory. Reports indicate that Gram Sabha meetings have also been extremely effective in offering a public forum that serves the same purpose. The experience gained from the experiment on Jan Sunvais (Public Hearings) in Rajasthan [see Box 141 is instructive. The village movement for Jan Sunvais to fight corruption and mismanagement o f funds has been quite effective. Box 14: Recent Developments relating to Transparency and Social Accountability in Karnataka" Jamabandi - is a form o f social audit that now exists in Karnataka. The Executive Officer of the Taluk Panchayat appoints a senior officer to conduct a Jamabandi inthe presence of all elected representatives from the respective Gram Panchayat and the public at large. The designated officer has to examine all activities undertakenbythe Gram Panchayatduringthe previousyear. Ifany member o fthe public wishes to examinepertinent records, he or she may do so andthe Jamabandiwill issue areport the next day. Ward Sabhas and Gram Sabhas - Ward Sabhas may forward various issues to the Gram Panchayat. The GP, inturn, may place the recommendationsof all Ward Sabhas before the Gram Sabha. The Gram Sabhas have beenstatutorily empoweredto 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 beneficiaries are binding on all implementing agencies. Besides, Gram Sabhas may also generate proposals and determine the priority of all schemes and development programmesfor implementation inthe Panchayat area bythe ZP or TP. Karnataka Transparency Act and Right to InformationAct - All PRIs are under the purview ofthese two Acts. The former requires the tenderingof works over a specified limit; the latter gives the peoplethe power to obtain copies of PRI official documents. Disclosure of Assets and Liabilities - To ensure accountability, it is mandatory for electedmembers of ZP and TPs to furnish election expensesto the State ElectionCommission. Likewise, electedmembers of ZP and TP will have to submit details of their personalAssets andLiabilities annually or they will be disqualified. Severalamendments to the KarnatakaPanchayatiRaj Act havetransferred the Government's powers to the State Election Commission. These amendments set the Government apart from the PRI election process. Ombudsman - The State has proposedan Ombudsmanineach district. The Ombudsmanwould deal with complaints regarding mal-administration and corruption by the PRI. The Ombudsmanwill act as a fact finding andproblem-solving body without the trappings of a court. 4. The Ministry o f Rural Development (MoRD) has issued instructions which stipulate that the Gram Sabha should be empowered to conduct social audits o f all public works and beneficiary-oriented programmes at the village level. These bindinginstructions also require that the Gram Sabha should award the completion certificate for all village level public works only after conducting social audit of the work in question. Most state governments have committed to his inprinciple, but they have yet to issue orders to put these social audits into operation. Box 15: Other Good Practices in Institutionalising PFMA processesfor ExternalReportingand Transparency Rajasthan The State Government recently announcedthe establishment o f a Panchayati Raj Committee, modelled after the Public Accounts Committee, which would review the audit reports of PRIs. The leader of the opposition party inthe State Assembly is likely to be the Chairpersonofthis body. Orissa To accelerate decentralization and participation beyondthe Gram Sabha level, the Orissa Act provides for meetings of Palli Sabha. A Palli Sabha is made up of voters of a revenue village and presided over by Ward members. The GP convenes these meetings of the Palli Sabha. Palli Sabha makes decisions about the selection of beneficiaries, the preparation of these schemes, and the selection of Village Labour Leaders. West Bengal District Council The "District Council for Panchayats" exists in each district; it includes the leader of the largest opposition party, the Additional Executive Officer of the ZP and other members elected by the ZP. The primary duties of the District Council are (i)to examine the accounts of the Panchayats within its jurisdiction and compare it inter alia to the budget they have approved as well as their annual reports and other books of accounts; (ii)to satisfy itself that money disbursed from these accounts was spent for the service or purpose it was allocated for; and (iii)to inject parliamentary democracy into village democratic institutions andbuildinan audit mechanism;the latter is consistentwith the Public Accounts Committee. GramUnnavan Samiti(Village Development Council) This is a new concept, which has yet to go into operation. However, the objective is to ensure active participation by the local people in carrying out an equitable distribution of benefits through rural development programs. The VDC will be accountableto the Gram Sansad. The Way Ahead on External Reporting and Transparency 5. Going forward, it is important to increase the awareness of rural populations regarding the usage of public funds. People need to be familiar with the importance and procedures for social audits and their right to information and transparency. Adult-literacy programmes are one way to achieve that inplaces where they exist. NGOs and the local media may also be associated with this public education programme. It is only when the general public starts to hold public officials accountable that accountability takes hold. XI. External Auditing 1. Sections 243 Jthrough 243 Z o f the Constitution mandates the annual audit o f PRIs at all levels. According to State law, either the Director of Local FundAudit or the CAG are nominated PRI auditors. Table 4 shows who holds the office o f statutory Auditor to PRIs indifferent states. Table 4 State Audit arrangementsZ* Karnataka Audit by CAG for first two tiers under section 19(3) ofthe DPC Act The Controller of State Accounts (Karnataka State Audit Department) audits the GPs -~ ~ Kerala Audit by Examiner o f LFA DRDAAudit under section 14of DPCAct Maharashtr ChiefAuditor, Local FundAccount Maharashtra a Also under Section 14 o f CAG's Act where applicable Orissa Director Local FundAudit for first two tiers o f PRIs Test audit by State AG Rajasthan Director Local FundAudit for all three tiers o f PRIs Test audit by State AG Tamilnadu Director Local FundAudit for first two tiers of PRIs Audit o fZilla Parishadalso u/s 14o fDPCAct Uttar Audit by Director LFA and Chief Audit Officer, Cooperative Societies and Pradesh Panchayats Audit o fZilla Parishadds 14 of DPC Act. All external auditing of PRIs comes under the CAG and staffed by the AG and Panchayati Raj Dep&tmene4 Uttaranchal Audit of ZPs, KPs and GPs conducted by Director, Treasury cum State Internal Auditor West Audit conducted by Examiner,LocalFundAccounts ofIA&AD Bengal InadditionauditofZillaParishadundersection 14ofDPCAct 2. Inadditionto beingappointed statutory PRIauditors inthe states ofWest Bengal, Bihar and Jharkhand, the CAG has discretionary powers to audit PRIs based on the CAG Duties, Powers and Conditions of Service Act (DPC Act). In West Bengal, the auditing o f PRIs comes under the Examiner of Local Accounts (ELA). This officer is part o f the Finance Department and attachedto the State AG.25 3. Pursuant to the TGS recommendations, described inthe Accounting section, the CAG has prescribed an audit methodology and procedures for Local FundAudit in the absenceof statutory 23Note that ofthe States mentioned inthis table, inthe States of Kerala, Maharashtra, Tamil Nadu and Uttaranchal, the State AG also carried out a test audit of PRI accounts ''Asstatedhas 24 inChapter F ofthe UP SFAA. The ELA completed 125 years of service. auditors. The TGS also calls upon the CAG to train LFA staff, to vet programs and agencies that conduct programswhere the CGA does not do the training, and to approve the LFA's audit plans. TGS guidelines require a follow up of audit findings. The AG is supposed to monitor .thequality and timeliness of the audit. 4. While there are provisions for improving PRIaudits, few improvements have taken place. Inpractice, PRIaudits are a formality as many audityears are pending26and audit follow up is limited. PRI audits only address requirementsfor reporting audit findings to state governments. Originally the system was supposed to build in provisions for disallowance and punitive surcharges. However, that did not work out due to drawn-out recovery proceedings. As a result, GPs inmost states - with the exception of West Bengal. In West Bengal, 3,300 GPs out of 3,353 PRI audits have no teeth.*' Audits of ZPs and intermediate Panchayatsare timelier than those of GPs were audited for the year 2003-2004. During transaction audits by CAG and the Ministry of RuralDevelopment, DRDA accountswere found lacking inaccuracy and scope. 5. Amongst the chief weaknesses of PRI audits is the lack of a mandateto publish annual performancereports or certified financial statements of PRIs. Moreover, the auditors never hear the public directly since their work is confined to a review of records. There is no statutory mandate to verify assets. The number of staff is inadequate to the task and qualified staff are lacking. As a result, the quality of the audit suffers. 6. Going forward, it is essential to strengthen the audit function, to build the capacity of auditors, to ensure a regular follow up of audit findings, to provide for publication of audit reports andto reinstatepunitive measuresfor fraudand defalcation. 7. LFA statutory auditors should be independent of state governments. Auditing standards and certification guidelines should be revised to suit local contexts. Based on the recommendations of the Twelfth Finance Commission, officials of the Panchayati Raj Department should not be statutory auditors of the village Panchayats.28Accounts of the intermediateand districtPanchayats should be auditedby the CAG2' to enhance transparency and strengthenthe audit function. 8. To ensure that PRI accounts accurately present financial position, the CAG has prescribed !Guidelinesfor Certijkation Audit of PRIs ' as part of the TGS. During the test check performed by the State AG, it should be determined whether the DLFA has followed the guidelines and the certification has been done properly. That would improve the quality of work by the primary auditors and inject greater accountability. The Way Ahead on External Audits 9. Some of the resolutions adoptedby the VIthMoPR Round Tables (inBox 18 below) sum up the Government's views on the future of PRI audits. These resolutions address what the 26For example, there are nearly4,000 audit years pendingat the GP levelin Rajasthan.Further, inthe caseof completedaudits, approximately one million LFA audit paras are outstanding. InKarnataka, for the year 2002-03, audits of 500 GPs are pendingand for the year 2003-04, all GPs are pendingaudit. InUttaranchal,for the year 2002-03, ,audits of 1,000 GPs, 93 KPs and 12ZPs are pending. 27For example, inthe Stateof Bihar between 1991and2002, ,the ExaminerLAD issued 1,116 surchargenoticestotaling Rs.4.62 crores. Similarly, during the same period, the LAD inJharkhand issued 397 notices totaling Rs. 2.3 1crs. However, the surcharge has failed as a deterrentto delinquentofficials due to abysmallypoor recoveries,which were less than 10%. 28InTamilNadu,the DeputyBlockDevelopmentOfficer isinchargeofPRIauditseventhoughheisafimctionaryunderthe state government directly responsiblefor implementingdevelopmentprogrammes. 29This recommendationappears inpara8.19. It summarizes best practices recommendedby the National Instituteof Rural Development (NIRD).The NIRDwas commissionedto study the innovations/ best practices adoptedby different states to augment PRIresources. Government [at the Centre and the States] and the office of the CAG consider key to enhancing the quality of PRIaudits. Some of these improvements appear inthe preceding paragraphs; others are summarized inBox 18. Box 18: The Future of PRI Accountability suggested by the MoPR's VIth Round Table Since PRIs are regarded the thirdtier o fgovernment, the following actions should be considered to strengthen their accountability: 1. To ensure the audit i s efficient and does what it i s supposed to do, there should be standards for these audits and input from the PRIs. The focus o f these standards should be find management and tracking, not the flow o f funds. These standards should be elementary, simple and comprehensible to elected representatives, and should focus on: a. When transactions should be examined; b. What should be monitored; c. How transactions should be documented; and d. How they should be disclosed For auditing to be effective, a National Accounting Standards Board (NASB) should be established for local government accounts. This Board should complement the establishment o f audit commissions or similar regulatory bodies at the State level. 2. A systemo f internal audit should be set up. 3. Public Accounts Committees (PACs) specific to PRIs should also be set up. Alternatively, PRI accounts should be submitted to PR Committees o f the State Legislatures. State level committees to settle audit paras is also an option; Andhra Pradesh is one example. 4. PRI staffing capacity and their audit offices should be expanded, staffing constraints removed. 5. Social audits and other social accountability mechanisms should be encouraged. These mechanisms should exist not only at the GP level but also at higher levels. There also needsto be adequate provision for follow up and public disclosure o f audit findings. 6. Those states, which have not yet adopted the Technical Support Guidelines o fthe CAG, should consider doing so. MI. SomeCross-CuttingIssues Issue Comments 1. Maze of CSS and Routingthe flow o f funds to PRIs andbanking arrangements vary according State- sponsored to the source o f funds andtheir purpose. These aspects also vary across schemes tend to states. For example, CSS funds typically move fkom MoRD to DRDA confuse accounts, thento the three respective tiers o f PRIs, based on a pre- accountability determined formula. Inthe SGRY, the formula is 20% ZP: 30% PS: 50% GP. That particular scheme offers a treasury route, and in some cases, a commercial bank route. InRajasthan, the ZP receives these funds directly. Thenthey move sequentially to the PS andnext to the GP. The total number o fCSS and state schemes runs into several hundred.Many o fthemrequire the maintenance o f separate bank accounts at the GP level [eg. SGRY, PMGSY, IAY] and the submission o f separate audited utilization certificates (UC). Ina sense, these UCs are issuedand auditedinisolation ofentity accounts; they are often submittedon aprovisional basis, particularly at year-end,to comply with requirementsfor drawing the second installment under the CSS even though expenditures may not have beenincurred. Because there are so many sources o f funds, fund flow routes, banking arrangements, and uses o f funds as well as varying requirementsby different Central/ State schemes, accountability arrangements are compromised and complex. This state o f affairs adversely affects fiduciary assurance obtained from FM [refer the chart inSection VI for details]. The example quoted from the CAG report inthe Orissa SFAA and reproducedhere is a case inpoint. This chart shows that only 38% o f expenditures [of the expenditure test checked] by SGSY inOrissa were incurred for the programme; the balance was irregular inone way or another. In2004, the Government ofKarnataka issuedaseries ofOrdersto rationalize the number o f schemes and to ensure the direct transfer o f funds to the appropriate PRItier that will carry it out. When fully implemented, these practices will enhancethe level o f assurance from the PRIs' FM arrangements. Issue Comments 2. Externally-Aided "In theExternally Aided Projects (EAP) the involvement of `community` projects have tended and participation ofpeople`, where included in its design, is to ring-fence FM conceptualizedthrough engagement of NGOsfunded through theproject. arrangements by Thus,the entire apparatus of PRIs electeddemocratically by thepeople establishing parallel having a Constitutional mandate about their existence and legitimacy bodies aboutpowers they should exercise in respect of certainsubjects lies unused. TheEAPs do not trust them and are therefore deprived of vast space, support and cooperation which otherwise could have been availablefor the benefit of theprojects. Even the involvementof NGOs funded through theproject is not brought within the ambit of transparency and accountability to the community through appropriate linkages with the PRIs.~'. The Central and state governments have expressed concern about the benefits o fthe PFMpractice o f bypassing PRIs when it comes to EAPs [including Bank projects such as DPEP/ DPIP] The Government o f Karnataka issued an Order inOctober 2004 whereby PRIs would implementall future EAPs within their ownjurisdiction. 0 The Bank and other donors accept this position; DFID's SRD project inWest Bengal andthe Bank's Service Delivery Project inKarnataka are examples o f working through PRIs. Inthose cases, state government have agreed to address the donors' specific action points concerning fiduciary assurance and those which promote the best PFM practices at the PRI level. 3. Steps initiated by The EFC had set aside Rs.200 crores to set up a computerized database o f some states to set up Panchayat finances at the district, state and Central Government levels. databases to create Allocations come from the state and were based on the number o f urban and and track local bodies. This databasewas to have satellite connectivity and is to be a information for reliable source o f data for PRI revenues and expenditures. The CAG upwardreporting established the formats for data collection. This initiative stems fkom the state's own e-Governance initiatives and the needto comply with the CAGs new accounting and budget formats (refer to point 4 below). Some states have made significant progress inthis area. Key steps have beento provide computer hardware to the PRIs, satellite connectivity at the State level and customized accounting/ MIS software. These databases enhance accountability by facilitating (i)tracking the flow o f funds across all PRI tiers inreal time (ii)compiling actual project expenditures (iii) monitoring the physicalprogress o f development works, and (iv) settingup a citizen's section on the website so the public can check on the status o f funds transferred to their villages and lodge e-mail/ voice complaints Orissa has been fairly successful inits pilot runo f Priasoft, Ruralsoft and PAMIS West Bengal is implementing IFMAS and GPMS for accounting plus service delivery software such as CCMS and COSA The Rajasthan Government has recently approvedthe CARISMA project, which has similar elements o f hardware, software, and inter-connectivity. Issue Comments 4. Initiatives taken Pursuant to the recommendations o fthe EFC in2001, the CAG has by the CAG aim to undertaken several initiatives aimed to standardize and improve the PFMA achieve harmony arrangements o fPRIs: among accounting, - 22 states have entrusted to the CAG technical guidance and supervision financial reporting (TGS) functions account maintenance and auditing all three PRI tiers o f and auditing across PRIs-CAG has approved the parameters infive states for engaging outside the country agencies to clear arrears inthe preparationo f accounts - To achieve uniformity, 16 accounts andbudget formats are inplace for receipts and payments with appendices for assets created, accrued income/ expenditures, etc. 18 states have accepted the formats with some modifications. - Nine stateshave conducted the first phase o ftrain-the-trainer programs to upgrade the skills o fthe local fund audit department. 5. Current PRIs follow the cash basis o f accounting which centers around the accounting practices maintenance o f a cashbook and bank records. Insome cases, separate bank are cash book accounts exist for individual schemes, such as SGRY expenditures. centric; they track However, inthe absence o f double entry, accrual accounting, there is limited transfers o f funds information about the assets created, settlement o f advances, and the and aggregate compilation o f expenditures on an activity-by-activity basis. expenditures only. As such, current FMarrangements make it difficult to calculate the cost of services. West Bengal is somewhat different. IFMAS and GPMS are basedon a double-entry system o f accounts; ledgers are based on a set o fmaster account codes defined and modified at the sub-account level. From a PFMA perspective, this software has useful features such as daily bank reconciliations. Lack of PRI 0 PRIs, particularly GPs, are severely constrained by limitedcapacity to meet Capacity their mandate as rural local governments. Consequently, they must fulfill their accountability obligations with inadequate staff and staffthat are insufficiently trained. For example, inUttaranchal, one Secretary is allocatedto five or six GPs. It is the responsibility o fthis person to maintain the account books. A Bank study documented that the GP Secretariestake their account books with them intheir bags. Intheir absence, evenroutine activities likewritingcheques get delayed. 0 The executive management structure of GPs fails to ensurethat trained staff are inplace andthat all positions are filled. Traditionally, GPs do not hold elected representatives accountable for explaining the use o fpublic funds to their constituents. The chart inAnnex V shows the typical administrative arrangements for GPs. XIII. InConclusion Inconclusion, 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. GoI's Round tables, CAG (TGS), 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 of transparency. The other constituents o f PFMA like internal control, asset management, budget preparation, execution and management also require attention. Some key action steps that evolving PFMA systems in PRIs should consider including are set out below: 1. Devolution inprinciple should be followed by practical steps for the devolution of funds, functions and functionaries. This has not been done in many states (amongst which are West Bengal and Orissa which are covered in this study). Inaddition, the framework for devolution should take account of the fact that the three tiers of PRIs were constitutionally meant to be lateral bodies and not hierarchical ones. This is especially pertinent to the route o f funds flows that is used by most state governments where funds flow hierarchically from one level of PRIto another creating incentives for bottlenecking of funds for `release money'. This study documents some good practice examples where funds are being transferred directly to all tiers of PRIs from state governments. This practice could be emulated by other states. Go1is also consideringthe use of commercial banks for transfers across different levels o fPRIs for Centrally Sponsored Schemes going forward. Homogeneity in policy and practice across the Centre and States on this would make for speedy transfers, better cash management and economies of scale (viz lower banking charges and lower transaction costs). 2. The budgeting and budget execution functions are dependent on the quantum and timeliness o f funds flowing to PRIs. In evaluating budgeting and budget execution, we should draw a distinction between the three tiers of PRIs. The District and Intermediary PRIs are mandated tasks that are usually extensions of the functions of the state government and the flow o f funds to these levels is relatively smooth. Inaddition, since these two tiers normally do not carry out development works directly and so, they are not severely affected by funds flow problems. Since the mandate for development is with the village panchayats and their own revenues are low, they are dependent on funds flowing down from the state and central government. The timing and the quantum of these funds varies by source and intended usage (as was shown by the Chart on Page 20). Inaddition, as funds are mostly transferred hierarchically from one tier of government to the next, this results in bottlenecks and delays. Therefore, the budgetingexercise done by village panchayats is an exercise in extrapolation while budget execution tends to be a cash management exercise. Going forward, it is important to ensure that timely transfers are made directly to the level that they are meant for. This would help the village panchayats plan their expenditures and monitor budgets and they could then be held to account for works or services that they have committed to undertake ina particular period. 3. Since timely, accurate and reliable financial reports are the basis o f accountability to civil society for usage of public funds, the accounting function in the context of PRIs needs attention. While the requirements for maintenance o f accurate and timely accounts are set out in the PRI Acts and Rules, practices across different levels of PRIs and across different states vary. While at the District and Intermediate levels, there is often good accounting capacity, the village level panchayatsoften have little capacity and inadequate guidance regarding the preparation o f accounts. There have been movements to strengthenthis function with the CAG havingintroducedaccounting formats and boththe TFC and EFC having stressed the requirements for accurate and timely accounts. However, much remains to be done, to strengthen accounting capacity at the village level, to ensure that the Gram Secretaries who are responsible for accounting are trained and that the formats used for accounting are appropriate to the transactions at that level. It is pertinent to note that some states like Karnataka and West Bengal are considering switching from the cash basis to accrual basis o f accounting at the village level. While this is a good initiative, there should be careful consideration of whether this is supported by capacity at that level. In addition, the nodal and guidance providing bodies like the CAG should consider these movements and work to ensure that there is homogeneity in accounting across particular levels of PRIs throughout the country. The accounting function should also take account of the need to maintain, depreciate and provide for assets, particularly at the GP level. 4. A vibrant control environment is important to a well functioning PFMA system. As stated in Section VIII, there are comprehensive rules and regulations with respectto the controls that should be in place but practices are weak. While there cannot be a prescription for good internal controls, certain practices like strong internal audit and mechanisms of social accountability reinforce the control framework. So, state governments and PRIs should work to ensure that people are aware o f their rights and demand accountability from elected representatives and that internal audit is a useful exercise which helps the systems and processeswithin PRIs to function appropriately. 5. The external audit function serves the role of independent scrutiny and attestation and therefore could serve as an important means of assurance. Amongst the main weaknesses o f PRI audit are the poor quality o f audits, no mandate to publish audited accounts or certified financial statements, no statutory mandate to verify assets and lack o f technical capacity in audit staff. The CAG has taken steps to strengthen the process and quality of audits through its TGS mandate. But the capacity of LF Auditors remains weak, their processes are archaic and the backlogs in audit make the function lose much o f its validity as an assurance function. The training o f all audit staff (both those belonging to AG offices and LFA) are imperative to improve the quality of audits and audited accounts. The "Terms o f Reference" or the mandates o f the auditors at all levels should be revisited to include the function for attesting financial statements, verifying assets and making it mandatory for the audited accountsto be published. The actions laid out in the preceding paragraphs are some of the very basic steps that could be taken to bring about an improvement in PFMA systems o f PRI institutions to enable them to handle their responsibilities as rural local governments. The eventual destination for PRIs i s best enunciated in the words o f Mahatma Gandhi, "The Panchayat shall have all the authority and jurisdiction required Panchayats will be the legislature,judiciary and executive combined to operatefor its year of office. There is perfect democracy based upon individual freedom. The individual is the architect of his own government. My idea of village swaraj is that it is a complete republic.. .... " ANNEX I REVENUES& EXPENDITURESOFPRIsINTHE FOCUSSTATES31 Rs. Crore) State Item 1998-99 1999-00 2000-01 2001-02 2002-03 Karnataka Revenue OwnTax 51.61 57.27 66.83 52.36 59.46 OwnNon-tax 0.00 0.00 0.00 0.00 0.00 TotalOwnRevenue 51.61 57.27 66.83 52.36 59.46 Assignment+Devolution 3,3 18.96 4,321.52 4,65 1.13 4,321.15 4,243.57 Grants-in-aid 0.00 0.00 0.00 0.00 0.00 Others 0.00 0.00 0.00 0.00 0.00 TotalOther Revenue 3,318.96 4,321.52 4,651.13 4,321.15 4,243.57 Total Revenue 3370.57 4,378.79 4,717.97 4,373.51 4,303.03 Expenditures RevenueExpenditures 2,5 19.42 3,634.34 4,041.57 3,666.88 3,525.80 CapitalExpenditures 570.48 543.67 480.89 535.55 570.08 Total Expenditures 3,089.89 4,178.00 4,522.57 4,202.43 4,095.89 Orissa Revenue OwnTax 0.48 0.45 0.48 0.48 0.21 OwnNon-tax 8.75 8.21 8.58 8.33 5.30 TotalOwnRevenue 9.23 8.66 9.06 8.81 5.51 Assignment+Devolution 75.62 56.49 64.99 65.19 82.07 Grants-in-aid 85.94 153.16 41.86 61.90 100.26 Others 0.00 0.00 0.00 0.00 0.00 TotalOther Revenue 161.56 209.65 106.85 127.10 182.33 Total Revenue 170.79 218.31 115.91 135.90 187.84 Expenditures RevenueExpenditures 120.79 100.81 115.91 135.90 135.51 CapitalExpenditures 50.00 117.50 0.00 0.00 46.82 Total Expenditures 170.79 218.31 115.91 135.90 182.33 Rajasthan Revenue Own Tax 3.04 4.70 4.75 4.79 4.84 OwnNon-tax 28.77 3 1.92 32.15 32.35 32.84 TotalOwnRevenue 31.81 36.62 36.89 37.14 37.68 Assignment+Devolution 59.50 77.67 81.24 92.5 1 93.87 Grants-in-aid 887.20 1,022.70 949.93 1,079.62 1,052.66 Others 542.64 541.98 569.08 597.54 627.42 TotalOtherRevenue 1,489.34 1,642.35 1,600.26 1,769.67 1,773.94 Total Revenue 1,521.14 1,678.97 1,637.15 1,806.81 1,811.63 Expenditures 638.59 827.60 896.11 923.52 996.73 RevenueExpenditures 700.55 753.50 669.23 707.85 739.96 CapitalExpenditures 1,339.14 1,581.10 1,565.34 1,631.38 1,736.69 3'This informationhasbeen collated from Annexure 8.8 referredto in para8.25 of the Reportof the Twelfth FinanceCommission. It may be notedthat the purposeofthis table is not to establish inter-statecomparisons.This table is presentedto give the reader a flavor ofthe breakup ofthe quantum of Panchayatfinances inevery state as per GoI's latest available data when this report was written. State Item 1998-99 1999-00 2000-01 2001-02 2002-03 Total Expenditures UP Revenue OwnTax 9.43 11.51 11.68 10.87 11.02 OwnNon-tax 36.95 41.79 47.15 48.39 52.15 TotalOwnRevenue 46.38 53.30 58.83 59.26 63.17 Assignment+Devolution 253.90 270.58 3 19.08 348.04 382.24 Grants-in-aid 15.35 0.14 1.16 0.4 1 61.09 Others 87.83 178.27 233.43 233.43 116.71 TotalOther Revenue 357.08 448.99 553.67 581.88 560.04 Total Revenue 403.46 502.29 612.50 641.14 623.21 Expenditures RevenueExpenditures 72.56 74.49 99.10 78.35 64.76 CapitalExpenditures 327.40 506.22 518.98 354.97 530.04 Total Expenditures 399.96 580.71 618.08 433.32 594.80 Uttaranchal Revenue OwnTax 0.74 0.79 0.84 0.88 0.92 OwnNon-tax 3.95 4.36 4.03 4.02 5.18 TotalOwnRevenue 4.69 5.15 4.87 4.89 6.10 Assignment+Devolution 15.61 20.93 15.81 6.37 6.37 Grants-in-aid 2.95 1.79 1.25 1.04 3.24 Others 43.55 33.33 10.21 10.96 45.67 TotalOther Revenue 62.11 56.05 27.27 18.38 55.28 Total Revenue 66.80 61.20 32.14 23.27 61.38 Exuenditure RevenueExpenditures 33.31 39.37 18.42 3 1.93 9.70 CapitalExpenditures 20.67 23.39 12.71 14.73 20.12 Total Expenditures 53.98 62.76 31.30 46.66 29.82 West Revenue Bengal OwnTax 6.82 6.86 9.00 9.57 9.87 OwnNon-tax 22.22 22.76 23.53 24.04 21.39 TotalOwnRevenue 29.04 29.62 32.53 33.61 3 1.27 Assignment+Devolution 4.15 0.40 5.02 12.74 0.00 Grants-in-aid 137.95 254.97 579.65 412.95 145.96 Others 0.80 0.80 0.84 0.88 0.00 TotalOther Revenue 142.90 256.17 585.51 426.58 145.96 Total Revenue 171.94 285.79 618.05 460.18 177.23 Exuenditures RevenueExpenditures 171.94 285.79 618.05 460.18 177.23 CapitalExpenditures 0.00 0.00 0.00 0.00 0.00 Total Expenditures 171.94 285.79 618.05 460.18 177.23 Note: It is interesting that in some states total expenditures are exactly thesame as thereportedtotal revenue [Orissa and WestBengal]. ANNEX I1 ILLUSTRATION OF INCENTIVE BASEDTRANSFEROF FUNDS PURSUANTTO SFC RECOMMENDATIONS(UTTARANCHAL) Each SFC prescribes a separate formula or basis for the devolution of funds to the PRIs taking into consideration the funds available for devolution inthe State and the specific circumstances of the State concerned. For example, in Uttaranchal, the Report of the First SFC specifies the following Devolution Scheme: Gram Panchavats (i) All GP would be classified into only 5 classes based on the distance of the headquarters o f their respective blocks from the nearest railhead. (ii) The devolutionwould bemade inrounded per capita terms. (iii) The per capita entitlement of the GPs would remain unchanged as long as the State's gross tax revenues trends from year to year remained within a range of 25%. The GPs entitlement would change in multiples of 25% at a time, and such a change would materialize only inthe year following a cumulative change in State revenues by +/- 25%. (iv) The quantum o f amount devolved would be calculated at a rate varying from Rs. 30 - 90 per capita, based on 2001 Census, varying according to the 5 classes. KshettraPanchavats The SFC has recommended an annual grant-in-aid of Rs. 3 lakhs each per annum to those K P s with Census 2001 population up to 50,000 (45 in number) and a grant-in-aid o f Rs. 5 lakhs each to those KPswhich have more than 50,000 population (50 innumber). Zilla Panchavats The SFC has recommended that all ZPs should be classified into 5 classes similar to the classes for GPs based on the distance from the nearest railhead. The devolution would be made in rounded per capita terms which would remain unchanged as long as State gross tax revenues trends from year to year remained within a range of 25%. The entitlement would change in multiples of 25% at a time, and such a change would materialize only in the year, following a cumulative change o f State revenues by +/- 25%. Butrapidly, within two years, a responsibility has to becast on the ZPs to substantially raise their own resources. Thus, while recommending devolution, the Commission also recommends that in a year, initially 70% of entitled amount be releasedto each ZP; the release o f the remaining 30% must be linkedto the financial and democratic good performance of each ZP to bejudged, as per the following criteria: Financialperformance: Four sets of indicators would be adoptedas follows (i) C&P Tax, as per norms adopted for the resource forecasts (ii) Non-tax revenues to achieve a minimumgrowth rate of 5% per annum (iii) Clearance o f tax and non-tax arrears (iv) Closing the shortfall between present level o f own resource generation and Rs.10 per capita within two years, i.e. 2002-03 and 2003-04. The entitlement to the release o f 15% for financial performance would be determined by a State Level Monitoring Committee chaired by the Finance Secretary to Government. Democraticgood performance:Progresstowards more democratic and efficient working of the institution (15%), asjudgedby (i) Frequency and quality o f proceedings o f formal meetings of the ZP, and its Committees (ii) Financial record-keeping, budget quality and clarity o f content, timely decisions, and particularly adherence to approvalprocessesfor incurring expenditure (iii) Grading achieved in audit reports, and timely placement of reports before the ZP for discussion and reply. The entitlementto the release o f 15% for institutional/democratic performance will be determined by the Commissioner o f the Division, whose findings would be sent to the State Level MonitoringCommittee for the releaseo fthese funds. Inthe case ofnon-performing ZPs, 30% ofthe amount due for transfer will bewithheldand kept separately inan account to be released inthe year inwhich the performance level reachesthe desirednorms. ANNEX111 LETTER FROMUNIONPANCHYATIR4JMINISTER CONGRATULATING ?ANCHAYATSONTHE DEVLOUTION OFPOWERSTO THEMINKARANATAKA p.0. No.&!L% M.(I'II)/VW/lqcw rist *-em** m m O T m m T $ R P P f t - l l O 001 Minister Petroleum8 NaturalGas and Penchayati Raj Government of India New Delhi 110 001 17November 2W You are aware of the UnionGovernment's commitmentto a time-boundprogrammefor effective devolution toPanchayatRajinstitutionskeepinginmindthemeletterandspiritofthe 73rdamendmentoftheConstitution. You would recall that the HonourablePrime Minister, while addressingthe Chief Minister's Conferenceon poverty Alleviation and Rural prosperity through panchayati raj at New Delhi on 29-6-2004 exhorted the Chief Ministen to play avisionary role in the empowerment of the PanchayatiRaj Institutions(PRIs). Iwas touchedandimpressedby your forthright speechon that occasionandwas assuredthat devolution to PRIs in Karnatakais insafe hands underyour ableandfarsighted leadership. Inmy opinion, the trigger for true devolution is roleclarity, which canonly bebroughtout by aclearactivity moppingbetweenthree tiers of PRIs, which clearlystates out their roles and responsibilitieswith respectto functions devotedto them, Iwas happy to noteinthe RoundTable Conferencethat karnatakahappens to be the only State that hastakensteps to issuean activity mappingframework inaccordancewith the framework circulatedby the GOI. However, activitymappingisonly the trigger for furtherchanges.Inorderto bringtrue meaning to activity mapping, schemes will have to be transferred to the PRIs. Heads of accounts and line items inthe budgetwill havealso to stand transfemd to the appropriate PR tier. IamnowgiventounderstandthatKarnatakahasinmid-october2004passedafar-reachingorderthathas effectivelyoperationalisedthe activity mappingthat was issuedby it last year. Iam deeply impressedby the fact that Karnataka has completed this task by eansfemng almost 176 schemes, which total to around Rs. 1887.23crores of funds from the StateSector to the District Sector.To my mind, there can be nogreater action thanthis, which displaysyour total commitmentto panchayatiraj. Iwouldliketoplaceonrecordmyheartfeltcongratulationsfortakingthisstep.Kamatakahasalwaysledthe countryininnovationsandtodayyouagainstandbeforetheentirenationasanexamplefor effectivedevolution. IintendtousetheexampleofKarnatakatoallotherstatestoshowthatindeedsuchfar-reachingstepsare desirableand possible. IThankyouonceagain. ShriDharamSingh Chief Minister Government Of Karnataka Vidhana Soudha -1 Bangalore. 2 0 1 - ~ v n e s f t Y m , ~ ~ - 1 1 0 0 0 1 ~ : 0 1 1 - 2 3 3 8 1 4 6 2 , 2 3 3 8 6 6 2 2 ~ : 0 1 1 - 2 3188 6 1 3 201-A Shastri Bhawan, NW Ddhi-110001 Tele :011-2338 1482,2338 66 22 F ~ :x011-2338 61 18 ANNEX IV ANNUAL REPORT OFHOWRAHZP INWEST BENGAL ANNEXV ADMINISTRATIVE STRUCTUREOFA GP [Source: Decentralization Report, World Bank] ANNEX VI LISTOFPEOPLEMETOR SPOKENTO 1. Aniruddha Manager Chatterjee 2. Arvind Deewan Accounts Officer Department o f Panchayati Raj, 3. Ashutosh Dikshit Private Secretaryto MinisterofPetroleum and Panchayati Raj 4. BGMadappa Consultant to ANSIRD, Mysore Government of Karnataka 5. BPYadav Senior Deputy Accountant General 6. Dilip Ghosh Joint Secretary Department, Government of West cBengal 7. IGeorge Cherian Director CUTS, Jaipur, Rajasthan 8. IGeorgeMathew Director Institute for Social Sciences MGovindRao Director MinistryofRuralDevelopment, Department o f Rural Development, Government of Rajasthan PRIA Department o f Panchayati Raj, Government o f Rajasthan MinistryofRuralDevelopment, Accounts Go1 15. Secretary MKSS,Rajsamand, Rajasthan I 17. 1 NikhilDey 16. PK Jha CEO Zilla Parishad Chittorgarh PNVijayvarghi 1ChiefAccounts Officer Department of Panchayati Raj, Government o f Rajasthan 18. RajeshBhardwaj Project Director & Joint Indira Gandhi Panchayati Raj & Director (SIRD) Gramin Vikas Sansthan(IGPRS) 19. RajeshSingh Director, Local Bodies CAG 20. RNDash Director, Special Panchayati Raj Department, Projects Government o f Orissa 21. RNGhosh PrincipalDirector, LocalBodies 22. Sitaram Chaudhari Junior Accountant 23. SK Mathur Director Management I 24. Soma RoyBurman Director Government Accounting StandardsAdvisory Board (GASAB) 25. Sudha Pillai Additional Secretary MinistryofPanchayatiRaj, Go1 26. SuneelaAjmera Director LFA Department, Department of Finance, Government of Rajasthan 27. SrinivasanAiyer Team Leader DFID 28. Swapneshwar Baya Commissioner-cum- Panchayati Raj Department, Secretary Government of Orissa 29. TR Raghunandan Joint Secretary MinistryofPanchayati Raj, Go1 30. Vivek Khanna Centre Coordinator CUTS-CHD, Chittorgarh, Raiasthan ANNEX VI1 BIBLIOGRAPHY AND DOCUMENTSREVIEWED I. Reports 1. Report of the Task Force on Panchayati Raj Institutions -Planning Commission, December 2001 2. Report o fthe Working Group on Decentralized Planning and Panchayati Institutions - Planning Commission, November 2001 3. SFAA Reports ofKarnataka, Orissa andUttarPradesh 4. Report o fthe EleventhFinance Commission 5. Report of the Twelfth Finance Commission 6. Report o fthe Second SFC o f Rajasthan 7. Report o fthe Second SFC o f Orissa 8. CAG PRIReports o f Maharashtra, Orissa, Rajasthan, UP 9. Fiscal Decentralizationto Rural Governments inIndia 10. Institutions for PRIAccountability -Karnataka Working Group 11. Draft Report Working Paper on Public Financial Accountability inthe Panchayati Raj Institutions inthe State of Karnataka 12. Panchayati Raj Finances inWest Bengal -AC Jena 13. Administrative Reforms Commission-Report Seven on Panchayati Raj in Rajasthan 14. Status of Panchayati Raj Institutions inRajasthan (1994-99) 15. Post-Design Strategic Study on Fiduciary Risk and FinancialManagement Issues (Final Report) 16. DecentralizationinIndia (Challenges & Opportunities) -UNDP Report 17. Accounting Procedure for District Rural Development Agencies / Societies -A Report - Government of India, Ministryof Rural Development 18. India InfrastructureReport 2003: Public Expenditure Allocations and Accountability, A Vaidyanathan 11. ResearchPapers/ StudiedArticles 1. A report byBadiulMajumdar -Trip to visit Panchayatsof West Bengal, India 2. Aruna Roy, NikhilDey and Shankar Singh, DemandingAccountability 3. Axel Hadenius, Decentralizationand Democratic Governance: Experiences from India, Bolivia and South Africa 4. Civil Society and Governance: The Case of South Africa (CORE) 5. Craig Johnson, DecentralizationinIndia: Poverty, Politics and Panchayati Raj 6. Devaki Jain, Recreating the Budgetary Process: Women Direct Fiscal Policy 7. DrKumiNaidoo, Civil Society, Governance andGlobalization 8. DrKumiNaidoo andVolkart FinnHeinrich, GlobalCivil Society and Challenges ofthe New Millennium 9. Finances of Panchayats inMadhyaPradesh-PRIA -A Study 10. George Mathew, Director, Instituteof Social Sciences, Political Sociology o f Clientism: Patronage, Corruption and Accountability inthe Panchayats 11. Governance Resource Center, GRC Exchange -Delegationto Devolution: Karnataka 12. HoldingTogether:Collaborations & Partnerships inthe RealWorld 13. Indira Rajaraman, Revenue Incentivesat the ThirdTiers 14. Kathy Brock, Promoting Voluntary Action and Civil Society through the State 15. Kripa Ananth Pur, Selection by Custom and Electionby Statute: Interfaces inLocal Governance in Karnataka 16. Manabi Majumdar, Indrashis Mukerjee, Delegationto Devolution: West Bengal 17. Maitreesh Ghatak, Maitreya Ghatak, Recent Reforms inthe Panchayat System in West Bengal: Towards Greater Participatory Governance 18. Manoj Kumar Rai, Village Democracy and Civil Society 19. MohammedNazrul Islam and SN Sangita, Institute for Social and Economic Change, DecentralizedGovernance Development inIndia :A West Bengal Experience 20. More Teeth to PRIs inJ&K (article) 21. NRInamdar, VK Kshire, District PlanninginIndia 22. N.Subramaniam, The New Panchayati Raj Experience: Observations o fthe New Panchayati Raj Experience inMadhya Pradesh 23. Occasional Paper, EnsuringAccountability Through (UNDP) 24. Overview o f Decentralization inTamil Nadu, Tamil NaduEmpowerment and Poverty Reduction Project-April 2003 25. Panchayati Raj System,Government of Assam 26. Pari Baumann, Panchayati Raj and Watershed Management inIndia: Constraints and Opportunities 27. ParvathiMenon, Bangalore :A Retrograde Step 28. PRIs may get 1% of tax pool (article) 29. Prof. Abdul Aziz, Democratic Decentralization inKarnataka 30. RajeshTandon, Does Civil Society Matter? 31. RajeshTandon and Ranjita Mohanty, Civil Society and Governance 32. RajeshTandon, Voluntary Action, Civil Society and the State 33. Rural Realities inRajasthan (Frontline) 34. Shika Jha, Panchayats:Functions, Responsibilities and Resources 35. S.L. Goel and Shalini Rajneesh, Panchayati Raj inIndia: Theory and Practice 36. S.N.JhaandP. Mathur, DecentralizationandLocalPolitics 37. SudhaPillai, Strengthening of Panchayati Raj Institutions 38. Surat Singh, DecentralizedGovernance inIndia: Mythand Reality 39. Surat Singh, Problems and Prospectsof PanchayatFinances: A Study of Common Land 40. UNDP Initiatives inRajasthan 41. Yogindar K Alagh, Panchayati Raj and Planningin India: Participatory Institutions and Rural Roads 111. Others 1. Panchayati Raj Acts and Rules of Various States 2. Annual Report (2003-04) o f Panchayati Raj Department of Orissa 3. Annual Report (2003-04) o f Department of Panchayati Raj o f Rajasthan 4. Annual Report (2003-04) o f Department of Panchayatsand Rural Development of West Bengal 5. Annual Report (2003-04) of LFA Department of Rajasthan 6. Annual Report (2003-04) of Howrah Zilla Parishad, West Bengal 7. Government Orders from Karnataka relating to Devolution o f Powers and Belur Declaration 8. Government Accounting Standards Advisory Board (Discussion Paper on "Accounting and Classification o f Grants-In-Aid givento local Bodies of the State Government" 9. Accounts at a Glance -2000-0 1 (MoRD, KrishiBhavan, New Delhi) 10. Presentation of the Grants Release System-M o m , Government o f India 11. Technology of PRIs inRajasthan (Presentation) 12. Round Table Conferences o f Ministers In-Charge of Panchayati Raj 13. Panchayati Raj India Report ,(volumes I& II), NIRD,Hyderabad 14. M.A.Oommenand Abhijit Dutta, Panchayatsandtheir Finances IV. Websites 1. www.cag.nic.in 2. www.Panchavat.nic.in 3. www.wbprd.wb.nic.in 4. http://orissanov.nic.in/Panchayat 5. www.planningcommission.nic.in 6. www.rural.nic.in 7. www.ri.ghttoinformation.org 8. www.priasoft.nic.in V. Videos 1. Movie on Right to Information CampaigninRajasthan, 2000