Report No. 39426-IN India Rajasthan: State Financial Accountability Assessment November 19, 2005 Financial Management Unit South asia Region Document of the World Bank ABBREVIATIONS AND ACRONYMS alphabetically listed AG (A&E) Accountant General (Accounts & Entitlement) AC Abstract Contingent BE Budget Estimates BFC Budget Finalization Committee CAG Comptroller andAuditor General of India CGG Centre for Good Governance COPU Committee on Public Undertakings DC Detailed Contingent DDO Drawingand Disbursing Officer FRBM Fiscal Responsibilities and Budget Management Act 2005 GASAB Government Accounting StandardsAdvisory Board GFARs Government Financial and Accounts Rules GFRs General Financial Rules Go1 Government of India GoR Government of Rajasthan GSDP Gross State Domestic Product IFAC-PSC International Federation of Accountants - Public Sector Committee INTOSAI International Organization of Supreme Audit Institutions MTFP MediumTermFiscal Program NGO's Non-Government Organizations PAC Public Accounts Committee PFMA Public Financial Management and Accountability System PLAs PersonalLedger Accounts PRIs PanchayatiRaj Institutions PSEs Public Sector Enterprises RE RevisedEstimates SA1 SupremeAudit Institution SFAAs State Financial Accountability Assessments ULBs UrbanLocal Bodies Report Team and Acknowledgements This Assessment has been prepared by the SAWM task team led by Vinod Sahgal in collaboration with Ahmad Ahsan, Upasna Verma, Vikram Menon, Vikram Khub Chand and Ananya Basu (SASPR), Mr. Mam Chand (SARPS), Manvinder Mamak (SARFM) and William McCarten (WBI). The core team comprised of Mr. Dharam Vir, Ms. Girija Varma, Mr. Krishnan Srinivasan, Mr. Anup Kumar Agganval, Dhruba Purkayastha, Mr. D.N. Ghosh from Investment & Information Credit Rating Agency Limited(ICRA LTD), Mr. P.K. Jain, Mr.A.K. Ojha, Mr. Suneel Dhariwal, Mr. Rakesh Hooja, Mr. Arvind Mayaram from the Centre of Good Governanceat the H C MRajasthan State Instituteof Public Administration(HCMRIPA). The core team worked with the help of P.K. Subramaniam (SARFM), Vikram Menon (PREM) and peer reviewers, Rajat Narula (LOAS), Bill Allan at Washington D.C. under the general supervision of Robert Saum, Manager. The assessment benefited from a range of discussions with several officials of the Government of Rajasthan including Mr. Rajiv Mehrishi, the late Mr. S.P. Gupta, Mr. K.K. Gadeock, Mr. Vinod Pandya from the Deparment of Finance and Mr. Yaduvendra Mathur, Department of Energy along with Mr.G.L. Choudhary, Mr.R.S. Rathore, Ms. Sumitra Singh, The Honourable Speaker, Rajasthan Legislative Assembly. Mr. S.R. Goel and Mr. S.S. Bhandari, CharteredAccountants at Jaipur providedprofessional advice. The Accountants General at the Office of the CAG of India located at Rajasthan were extremely helpful in pointing the team to appropriate sources of information included in the annual reports of the CAG of India. Thanks are also due to Seema Sachdev for the publication of this Assessment, Rashmi Goel, Vidya Kamath and Vinaya Vitta1 Vemuri provided valuable administrative support, co- ordination and logistics on an ongoing basis. The report and its contents have been discussed with Government of Rajasthan officials. The views and opinions expressed may not necessarily reflect the views o f the state government, especially where the Bank has stateditsjudgment / opinion / policy recommendations. TABLE CONTENTS OF PageNo . Executive Summary ......................................................................................................................... i Chapter 1. Introduction.................................................................................................................. 1 Chapter 2. Budget Preparation....................................................................................................... 8 Chapter 3. Budget Approval ........................................................................................................ 15 19 Chapter 5 Internal Control includingInternal Audit................................................................... Chapter 4 Budget Execution ....................................................... '................................................ .. 24 Chapter 6. Government Accounts ................................................................................................ 35 41 Chapter 8. External Audit ............................................................................................................ Chapter 7. Financial Reporting.................................................................................................... 45 Chapter 9. Legislative Scrutiny.................................................................................................... 50 Chapter 10 Access / Right to Financial Information................................................................... . 54 TABLES. BOXES. DIAGRAMS. ETC . 10 Table 2. Budget Approval............................................................................................................ Table 1. Budget Preparation......................................................................................................... 17 20 Table 4. Internal Control includingInternalAudit ...................................................................... Table 3. Budget Execution........................................................................................................... 26 Table 5. Government Accounts.................................................................................................... 36 42 Table 7. External Audit................................................................................................................ Table 6. Financial Reporting........................................................................................................ 46 Table 8 Legislative Scrutiny ....................................................................................................... . 51 Table 9. Access / Right to Financial Information........................................................................ 56 Box 1.Significant Aspects of Compliance Gap ............................................................................ 11 .. Box 2.Extract from Memorandum of Undertaking Government of Rajastanand Government of India-March 2003 ...................................................................................................... 14 Box 3.The 16 Box 4. IncentivizingCompliance with Financial Management Rules:Andhra Pradesh............. 31 RajasthanFiscal Responsibilities andBudget Management Act, 2005 ..................... Box 5.Extract from the Report of the Reserve Bank of India Group to assess the Fiscal Risk Box 6. Government of India-Dutiesand Responsibilities of the Chief Accounting Authority .32 of State Government Guarantee-July 2002 ................................................................... 32 Box 7 38 Box 8. Illustrative Examples of Recommendationsof the CAG of India..................................... .Use of Public Accounts inManaging State Finances........................................................ 47 Box 9. Status Report on Follow Up Action on Audit Reports ..................................................... 53 Diagram 1. Public FinancialManagementand Accountability System ........................................ 3 Exhibit 1.IndiaCorruptionStudy 2005.......................................................................................... 2 Exhibit2.Leakageof FoodGrains-Rankingof States................................................................. 6 AnnexureI.ResourcesandTrends of ExpenditureinRajasthan.................................................. 58 AnnexureI1.BudgetLiterature-GoR ......................................................................................... 61 AnnexureI11 Statementof Comparisonof GoRAccounts with IFAC Standards....................... . Annexure IV. List of DocumentsReviewed................................................................................. 63 65 Annexure V.List of Officials Met................................................................................................ 69 RAJASTHAN STATE FINANCIAL ACCOUNTABILITY ASSESSMENT EXECUTIVESUMMARY INTRODUCTION 1. Democratic governments all over the world are undertaking reforms to their public expenditure management system. Reforms are aimed at bringingabout greater relevance, transparency, accountability and user friendly reporting for stakeholders. Improving the quality o f public expenditure has also assumed importance across India. Global experience suggests that using public expenditure efficiently and effectively i s becoming as important as mobilizing and allocating public resources inan optimal manner. Further, with rapid increase in plan and capital expenditure at states such as Rajasthan it has become even more important to ensure the effectiveness o f expenditure. There is, in this regard a growing appreciation that development i s as much an outcome o f efficient institutions as the other way around. 2. The Bank's Country Assistance Strategy for India has placed emphasis for modernizing the institutions o fpublic financial accountability andundertakingsuch diagnostic work as necessary to help build capacity for better public sector financial management. Financial Accountability Assessments (SFAAs) are carried out in all States where the Bank's engagement i s or likely to be significant. These assessments have both a developmental and fiduciar perspective. A number o f studies o f this nature have been carried out across the country. 7 3. The primary purpose o f this study is to support the reform efforts of the Government o f Rajasthan (GoR) through identifying specific opportunities for more effective financial management and control over public resources. The study was undertaken based on consultations with the Principal Secretary Finance Department and in conjunction with the economic analysis undertaken by the World Bank in Fiscal Year 2005 and the state's Center for Good Governance that culminated in the publication o f the Bank's Report: Rajasthan - Closing the Development Gap issued in August 2005. The Report pointed out that despite being considered one o f India's lagging states, Rajasthanmade impressive progress in the 1980 & 1990s. Since 1999, however new challenges have appeared, threatening further progress. Per capita growth rates have declined. Cognizant of such challenges, the GoR has started implementing policy reforms. 4. The diagnostics carried out focus on the performances o f the public financial management and accountability system (PFMA) of Rajasthan. It covers the following broad areas: (i) , Budget Preparation, Approval and Execution, (ii)Internal Control including Internal Audit, (iii)Government Accounting and Financial Reporting, (iv) External Audit and Legislature's Scrutiny; and (v) Public Access to Financial Information. 'Orissa,Karnataka, Andhra Pradesh, Uttar Pradesh and Punjab etc. Page i 5. Urban Local Bodies (ULBs) and Panchayati Raj Institutions (PRTs) are outside the scope o f the study. Typically, weaknesses found in financial control at the state level are even more apparent in local levels o f government, and capacity to deal with these even less. The objective o f re-invigorating local government will depend critically on further work on PFM issues at the local level-perhaps drawing on the principles developed in the SFAA and applying these at lower levels of government for which separate studies are already under way. Inregard to the Public Sector Enterprises (PSEs) the scope i s limited to the extent o f Government's fiduciary obligations relating to these entities. A broad view o f fiscal risk needs to take into account risks arising from quasi-fiscal activities that government undertakes through its enterprises. 6. The nature and extent o f analysis supporting the diagnostics was influenced by the GoR's decision to restrict Bank access to information generally available in the public arena. Observations and recommendations communicated by senior officials o f GoR for consideration and incorporation in the Report were very useful. The state's Centre for Good Governance (CGG) at Jaipur was appointed as a technical collaborator to the team conducting the assessment. CGG i s charged with the responsibility to prepare the Development Action Plan (DAP) and inconsultation with the GoR. OVERALLASSESSMENTTHREEPRIORITIES - 7. The overall picture i s mixed. The fiduciary risk i s substantial as i s the case of many other States in India. There is a well-documented system and procedures for financial management and accountability, but there i s a significant compliance gap that has dented the architecture o faccountability. (See Box 1). . BOX 1 SignificantAmects of ComdianceGar, Incidence o f Supplementary Grants unacceptably high, both interms o f the number o f Grants (over 80 per cent) and the amounts (nearly 25 per cent) involved; the overuse o f supplementary grants prevents establishment o f hard budget constraints. Annual budget not Secretary driven; the formal effort to achieve integration and harmonization only occurs at the end o f the budgetary process. The prescribed instructions o f zero- based budgeting not implemented, and the budget mainly prepared on incremental basis. Performance Budgets not prepared inthe manner prescribed. Excess o f expenditure over Grants frequent. Failure o f expenditure monitoring mechanism as seen from cases o f excess expenditure over Grants, injudicious movement o f funds etc. Lack o f fiduciary assurance for development projects No assessment by the Departmental Secretary/Head o f Department o f the effectiveness of internal controls Large-scale non compliance with prescribed control systems Key financial controls are not being observed, and remedial action is slow notable deficiencies are: Page ii --- Failure to clear suspense accounts at year-end (although improving) Large-scale transfer o f appropriations to deposit heads at year-end. Advance accounts on contingency spending are abused. 0 Annual Financial Reports, while prepared by the Accountant General on time, are not disseminated to the public ina timely way 0 Administrative as well as Legislative follow-up on audit o f both Government accounts and public undertakings inadequate The compliance gap, not uncommon in other jurisdictions considerably enhances the fiduciary risk and reduces the optimal utilization o f scarce resources and tax payers money. 8. The need i s also to modernize the system o f public financial management and accountability in order to improve the effectiveness o f expenditure. The system has not been fully complied with nor kept up with best practice. Currently, there are three broad areas for substantive improvements. 9. First, the system o f financial management needs to be reoriented towards greater emphasis on development outcomes and related reporting on program performance. This re- orientation would understandably take sometime to fully implement. Continuing with financial control over cash outlays based on incremental budgeting and financial reporting based on cash payments may no longer be sufficient. A beginning towards result orientation has to be made. 10. Second, there is need to further emphasize departmental accountability to the public for efficient and effective use o f public resources and cost effective delivery o f departmental services - whether they are health, education, water, electricity and so on. The role o f the departmental financial advisor would need to be broadened. 11. Third, the machinery for implementing the Rights to Information legislation which i s an important tool for enhancing public scrutiny needs to be further strengthened commensurate with the demands o f the more recent Rights to Information legislation at the center that would also apply to Rajasthan effective October 12, 2005. For instance, each department has to designate a senior official, who will be responsible for facilitating excess to information requested by citizens. This legislation i s a major breakthrough for advocates o f transparency and accountability. There i s at Rajasthan an immediate call for institution buildingincluding training o f senior officials supported by a change inmind set at all levels o f the civil service hitherto conditioned by the Official Secret Act and related rules o f conduct. At the same time the new legislation i s likely to trigger enhanced demand for better financial management and public accountability 12. There are a number o f similar reforms underway to the system o f public expenditure management at the Central Government. An Administrative Reform Commission has been appointed with a mandate to promote what could be far reaching reforms to the public administration. The budget management system i s to move its emphasis from cash outlays to development outcomes. An outcome budget was presented for the first time in Page iii August 2005. The cash based system for accounting is to be replaced with an accrual based system. Performance Indicators are being established for better monitoring and evaluation o f program delivery systems. The duties, responsibilities and powers o f financial advisors in administrative ministries have been redefined. All these are aimed at improving the public financial management and accountability system in line with best international practice. These reforms are likely to stimulate further demand for a more "e" based modern financial management and control systems at the Centre and at the states, particularly in the background o f significant amounts o f expenditure incurred on the Central sector and Centrally Sponsored Schemes. There i s an opportunity for Rajasthan to make concurrent reforms to its systems and procedures and bring them into line with best practice. 13. A striking message o f this report i s that o f a general failure in Rajasthan to assign overall responsibility for financial management and despite reasonable formal systems, a lack of effective mechanisms o f accountability. These points are made at various places in this report and suggestions for reform are made, but the central importance o f addressing these issues in a coordinated strategy has to be emphasized. Rajasthan may wish to depute one senior official in the Finance Department to lead the effort required for modernizing the system o f public financial management and accountability. There is need to develop a roadmap for strengthening the system including performance management and for moving towards accrual-based accounting inconjunction with an outcome-based budget system. 14. Addressing complex issues raised in this report would appear to require a very strong high-level effort driven by the Finance Department and with full Cabinet support. GoR needs to prepare, monitor and implement a time-bound Development Action Plan with intermediate milestones for modernization and further strengthening the PFMA. The Centre for Good Governance working for the Department o f Finance is well placedto take responsibility for designing and implementinga Development Action Plan to address the concerns raised inthis Report including the need for capacity building in areas like budget preparation, revenue research, cash management, internal audit and e-governance. A nodal monitoring unit functioning under the Principal Secretary Finance should coordinate and oversee the process with the active collaboration o f the Centre for Good Governance. It will be necessary to prioritize the related institutional reforms and sequence the related capacity buildingrequirements. Progress in this regardideally should be monitored at the level o f the Chief Secretary. SPECIFIC OBSERVATIONS Budget Preparation, Approval and Execution. 15. The design o f the system i s sound. There are well- defined procedures for all aspects o f budgeting and implementation including performance orientation. They allow for adequate reflection o f government policies and objectives including fiscal targets, ongoing involvement o f line departments, and disclosure requirements that are generally consistent with prevailing good practices in India. Recently budget preparation has further improved-there was, for instance, an improvement in estimation o f tax revenues from Page iv 2003-04 onwards. And there are continuing improvements in disclosure practices in line with recommendation o f the Reserve Bank of India and other similar regulatory bodies. Such measures intended to assist the GoR improve control and financial reporting in relation to the primary policy goal o f sustaining fiscal adjustment. 16. There are a number o f further opportunities for improvement. More user-friendly budget documents could be prepared along with a clear statement o f each department's mission and key indicators that provide benchmarks for monitoring program performance. Areas inbudgetingthat need further attentioninclude: (i) priority setting - there i s needfor more careful review o f the justification for continuing ongoing schemes and due consideration be given for alternatives and priorities established based on completion dates and related benefit, (ii)comprehensiveness - the budget would be more comprehensive if all expenditure was recognized including amounts transferred by the central government directly to district level agencies for centrally sponsored schemes, and subsidies whether explicit or implicit, (iii)performance budgeting in line with a more outputs/ outcome oriented approach - this approach has been accepted inprinciple by GoR and departments are expected to develop their performance budgets annually, (iv) medium term fiscal planning linked with the Five year Plan -budgeting in a rolling mediumterm framework supports better prioritization and implementation2, (v) monitoring o f implementation o f departmental activities on a regular basis throughout the year- example, GoR could look into the underlying causes leading to year end rush o f expenditure and bookings to the public account to ensure that the government rules are not being unnecessarily violated, and there appear to be recurring need for relatively large supplementary grants, and (vi) revenue administration - the extent o f arrears in assessments as well as realization o f government revenues points to opportunities for improved performance o f revenue administration. 17. There is a view that setting up o f subject matter committees by the Assembly to review departmental budget submission along with performance reports relating to past expenditure could add to the quality o f legislative scrutiny o f the budget and thereby greater openness to public inputs. Such a system prevails at the central level and in several States such as Kerala, Himachal Pradesh and Orissa. Internal Control Including Internal Audit: Internal Control: 18. Cash transactions are well controlled. Transaction level financial control over receipts and payments are working remarkably well. The system o f internal control however does not sufficiently focus on monitoring utilization o f expenditure with physical progress of development projects. Performance indicators relating to individual line departments and schemes have not been fully articulated. The emphasis has been far too much on statements o f cash transactions and review o f procedural controls, rather than on using reporting as a managerial tool for bettering operational performance and for achieving development objectives. The integrationwith the Five year Plan couldbe more intensive inthe context of the medium term perspective. Page v 19. There i s need to strengthendepartmental accountability for cost effective service delivery. Once a new public expenditure system involving changeover from outlay-orientation to outcome-orientation i s introduced, departments would need not only to achieve annual budget targets but also measure achievements against desired outcomes under major programmes. This would imply that the management information system should not only be capable o f generating intra-year and end-year information for monitoring budgetary targets but also achievement o f outcomes under major programmes. The computerised accounting system would need to be more integrated in line with a modern management information system that can help in monitoring outputs and outcomes linking financial with non financial information. A main task ahead is improve the quality o f information generated for decision making, tracking o f expenditure from the state treasury to the ultimate beneficiaries and more timely and useful departmental reporting on service delivery. 20. There i s need to re-examine the role o f the financial function. To successfully implement the proposed result based financial management system in each department, the roles and responsibilities o f financial officers such as the departmental financial advisor would have to be more broadly defined, employees would have to be retrained on e governance, the management information system would have to be upgraded, and financial rules would have to be modernised inharmony with those o f the central government. Internal Audit: 21. Methodology o f internal audit requires rethinking as in the case o f many other jurisdictions. Internal audit operates within the framework o f a compliance audit function and the limited resources made available for this purpose. The existing internal audit set- up lacks defined audit standards, plans or programs, and its coverage is uneven. The planning o f audit activities is not sufficiently linked to risk. Its role does not include identification o f systemic improvements to operations as required from time to time. The performance o f the internal audit units under the control o f the Heads o f Departments i s even less satisfactory. The lack o f follow-up by the executive in responding to internal audit reports i s another major drawback. Impact o f internal audit i s marginal. 22. A risk based approach to audit is recommended. To make the internal audit process more effective, stipulated time period for audit response needs to be followed and a more thoughtful i.e., strategic and systematic audit approach should be introduced along with proper audit standards. A risk-focused approach would help in targeting high-risk areas, such as transmission and distribution losses in the power sector, preparing an effective audit plan, and operating within the limitations o f small audit team. High fiduciary risk areas such as public works, education, power and health and where the amounts involved are large or where social expenditures are increasing or where chances o f impropriety are highsuch as sales tax collections deserve greater audit attention. Ideally, there should be integrated internal audit set up reporting directly to the respective Administrative Secretaries. Page vi GovernmentAccounting and Financial Reporting: 23. Rajasthan has made significant progress in computerisation. All the treasuries and sub treasuries that make payments have been computerised. Computerization o f all those sub treasuries which do not currently makepayments would be the next logical step. 24. GoR follows a traditional single entry cash basis o f accounting. Only those transactions where cash has been paidor received are recorded by the system. Transactions where no cash has been paid or received are not recorded in the accounts, even if value o f the transaction has been received or a liability been contracted. Physical assets are not fully accounted for; utilization certificates do not refer to specific assets created or any other kindof value addition. Accounts nevertheless score well on a number of parameters set in the IFAC-PSC2standard on the cash basis o f accounting but do not meet the standard as a whole mainly due to lack o f definition o f coverage o f the economic entity and a lack o f a statement o f accounting policies. 25, Timeliness o f the publication o f accounts completion remains an issue. While the Annual Financial Reports (Appropriation Accounts and Finance Accounts) of the State are prepared regularly and within six months o f the closure o f the financial year, they are not tabled in the legislature immediately when the legislature i s not in session. As a result public dissemination becomes delayed. The Appropriation Accounts and the Finance Accounts o f 2002-03 were presented to the State legislature on January 20, 2004. The state may wish to consider using the web for publication o f monthly accounts (and cumulative) throughout the year as in the case o f Karnataka where the power o f e governance has now been well recognized. 26. The management of "Suspense Accounts" has significantly improved over the years. As o f March 2004, the outstanding balance under Suspense Account has been small and i s also showing a reducing trend. The large-scale transfer to Deposit heads in the Public Account undermines the accuracy and completeness of accounts. GoR needs to review the amounts under deposit heads (also called personal ledger accounts) and prevent further accretions. This practice o f using such accounts inany case i s of questionable value. 27. The annual accounts and monthly accounts do not present a complete picture of the GoR's financial performance/position. The absence o f well-defined accounting standards i s a major underlying factor. Even with the present cash accounting system, improvements could be made in the areas o f contingent and pension liabilities, quasi-fiscal activities pertaining to public sector undertakings, tax expenditures etc to ensure accuracy and completeness. The system has limitations, for instance, liabilities could be understated, fixed asset accounting i s often absent, full cost o f services cannot always be ascertained on a timely basis and commercial services cannot be priced correctly. Therefore, a progressive shift to accrual accounting is recommended and the same i s in line with the Central Government policy directive^.^ The introduction o f a formal system o f accrual International Federationof Accountants - Public Sector Committee The Twelfth Finance Commission in their Report submitted to the Government of India has recommended introduction o f accrual based system of accounting. The Finance Minister in his explanatory memorandum to Page vii accounting will require a medium to longer term plan of action developed in consultation withthe Comptroller andAuditor General of India(CAG). External Audit and Legislative Scrutiny: External Audit: 28. Audits are conducted by the Comptroller and Auditor General o f India (CAG) regularly. They cover the state's financial transactions. Additionally, oversight is providedover the external audits o f public sector undertakings conducted by private auditors. CAG's assistance to the PRIs and ULBs are o f recent and increasing interest. A reading o f CAG audit reports suggests that the fiduciary risk i s at least as significant as at other states across the country. According to a recent report issued by the Planning Commissionthere are significant leakages in the targeted public distribution system across India with Rajasthan on the high side albeit not on the top of the list o f states. Financial irregularities o f a similar nature are often being reported by the external auditors year after year. And audit reports on Public Sector Enterprises are almost always qualified and often very late. The impact o fthese audits too appears to be marginal. 29. The Audit function needs to promote productivity, answerability and fairness in the presentation o f financial information. While the majority o f audits focus on compliance with government rules and regulations the CAG has in the recent past placed greater emphasis on performance audits in line with more modern auditing standards and greater concern for the quality o f internal control and internal audit. Similarly, there i s a move a foot to strengthen the financial attest audit function to enable a professional auditor's opinion on the government's financial statements. These steps are designed to modernize the public audit function and improve its impact. They are fully consistent with the movement towards a more performance based managemento f public resources. 30. GoR's relationship with the Accountants General needs to be revisited. GoR is encouraged to enhance its ongoing dialogue with the Accountants General at Rajasthan on how auditors could contribute more effectively to the cost effective delivery o f services andmore timely dissemination o f audit results to the public. A movement inthis direction would help improve the scope, timing, public access and follow up o f audit observations in previous audit reports. This step would also help further exchange between the government and the C A G o f India on ways to minimize fiduciary risk and improve the effectiveness o f the financial management and the control procedures associated with the flow o f funds across the three levels o f Government. This direction would be consistent with best global practice which encourages external auditors to become agents for ongoing reform and catalysts for constructive change. 31. The question o f timely response by government to audit observations i s important. The Chief Secretary could take the lead by requiring and monitoring full compliance by all ParliamentdatedFebruary26, 2005 has stated, "the Government has acceptedthis recommendation inprinciple. The Government Accounting Standards Board in the ofice of the Comptroller and Auditor General of India would be askedto draw detailed road map and operationalfiamework for its implementation". Page viii line departments to the guidelines for providing timely response to the CAG's Audit Reports with suitable incentives for civil servants that respond with a positive attitude and take prompt action. Such a requirement would improve audit impact and more timely remedial action where appropriate. Legislative Scrutiny: 32. The impact o f external audit i s also linked to the quality o f legislative scrutiny and this works both ways. The two institutions work in a symbiotic relationship. The effectiveness o f one i s dependent on the other. The two oversight committees the Public Accounts Committee and the Public Undertakings Committee are performing their functions ina manner similar to other jurisdictions inIndia. 33. The impact o f the oversight committees could be further enhanced with timely action on the audit reports and on the reports o f the Committees. This needs to be monitored at the level of the Chief Secretary. The arrears in the follow up on the audit reports could be tackled through innovative strategies. And greater openness o f the work o f these two committees would enhance their effectiveness. Best international practice includes an annual debate on the work o f the Committees at the Legislative Assembly. Public Access to Financial Information: 34. Ready public access to financial information i s a powerful tool for promoting financial accountability. Rajasthan's access to information legislation provides a reasonable framework for establishing the public access to information. This legislation covers all government department and agencies and the steps to be taken for its implementationhave been communicated within government. There are sanctions against willful and malafide refusal to disclose and/or incorrect disclosure o f information. GoR now has over four years o f experience in this area. The experience in the implementation o f the State legislation can be leveraged for further strengthening public access to financial information. 35. The additional challenge before the GoR i s the implementation o f the Central Government - Right to Information Act, 2005 that is much wider in its ambit and sweep. This Act narrowly defines the exclusions with the over-riding proviso that information that cannot be denied to a member o f the state legislature shall also not be denied to any person. The Act also prescribes a whole range of suo mot0 disclosures. The power to levy penalties for violating the provisions o f the Act has been vested in the independent State Information Commissioner. The Act also contains provision for the propagation o f the citizen's right to information. 36. GoR needs to streamline its information and records management systems with adequate use o f computers. Officials need to take the lead in making best use o f Information and Communication Technology i.e. hardware and software, which is now readily available o f f the shelf. The initiatives already under way by way o f e-Mitra, land record computerization project, computerization of activities o f the Departments o f Commercial Page i x Taxes, Excise, Transport and Registration and Stamps can be hastened and leveraged. Action could be taken to place maximum information on the web site. Constructive use of publicly available reports on the internet could help to address a number o f the accountability and responsibility problems raised in the report. GoR also needs to issue general instructions for the guidance o f staff; impart the necessary training; and promote a culture o f transparency with change in the mindset o f bureaucracy that recognizes that information i s no longer its monopoly and that it will be heldaccountable on a day-to-day basis, and not only for the results but also for its actions and processes. MAINRECOMMENDATIONS 37. The Rajasthan Fiscal Responsibilities and Budget Management Act 2005 prescribes stringent targets o f elimination o f revenue deficit by March 2009 and progressive reduction o f fiscal deficit with tight cap on public debt. The Right to Information Act, 2005 is likely to witness heightened demand for public accountability for Government resources and tax-payers money. There i s already a rising level o f public aspirations and expectations for a better quality o f life. In this background the need for substantive improvements in GoR PFMA can hardly be over-emphasized. The recommendations of the SFAA are crucial for achieving the policy goals3 stated in the Bank's Report: Rajasthan - Closing the Development Gap issued in August 2005. In addition to providing diagnostics, this SFAA Report contains signposts for further action needed for effecting the desired reforms. The main themes o f a cross-cutting nature are: Strategic 1. Shift emphasis from outlays to outcomes as inGovernment o f India. 2. Hold the controlling officers responsible for the operating performance o f their departments. The Administrative Secretary should assume responsibility as the Chief Accounting Authority o f the department as inthe Central Government. 3. Promote openness in all areas o f administration; make preparations for the implementationo f the Central - Rightto Information Act, 2005. Operational 4. Improve the enforcement o f the existing rules and regulations, including for example response to audit and the recommendations o f the legislative committees. 5. Promote the use of computers and e-governance. 38. It would be timely to prepare and implement a Development Action Plan in collaboration with the Centre for Good Governance. The Development Action Plan would provide a road map to the GoR for the implementation o f the study's recommendations, including the use of e-governance and capacity building as needed in areas like budgetpreparation, Key fiscal goals ofrelevance identifiedinRajasthan-Closingthe DevelopmentGap are: (I)to sustainfiscal adjustmentby (i) implementationofthe FiscalResponsibilityand BudgetManagement(FRBM) Act, and(ii) preparationof a Medium-TermFiscal Plan(MTFP); (2) to improvepublic expenditurecomposition and quality of expenditure; and (3) to increasepublic expenditureeffectiveness. Page x revenue research, cash management, internal audit etc. The implementation o f the Development Action Planto be monitored at the level o f the Chief Secretary. 39. The recommendations o f the study relating to individual components o f the PFMA system are summarized inthe Attachment to the executive summary. Page x i Attachment to the Executive Summary Summaryof Recommendations (A) BudgetPreparation 1. Incidence o f Supplementary Grants 80 per cent by numbers and 25 per cent by amounts unacceptably high; analyze and examine the reasons for the highincidence o f Supplementary Grants and minimize the need for obtaining Supplementary Grants. 2. Analyze and examine the reasons for conditional approval to budget provisions. Minimize the need for post-budget approvals. 3. Inline with the prescribedrequirement o f zero based budgeting approach, carry out critical appraisal o f all programs and schemes at reasonable intervals with a view to discontinuing those that have lost their relevance or priority. Reflect the result o f such appraisals inthe forthcoming budget. 4. Ensurethat the budget proposal o f a department as a whole is ready well intime for priority setting by the Administrative Secretary who should have a more proactive role. 5. Prepare performance budgets in the manner prescribed in the Budget Manual; performance budgets should be vetted by the Planning Department and the Finance Department. 6. Prioritize the budget in favor o f last mile projects (after comparative detailed financial analysis o f other projects) for their early completion and fructification. 7. Prepare and disclose forward recurrent estimates on progradscheme basis. Also disclose the out-year recurrent costs for new capital projects. 8. Strengthen the existing revenue research units with capacity for sensitivity analysis, calculation of tax expenditures, identification o f additional sources of revenues etc. 9. Adopt a Medium Term Fiscal Program (MTFP) that commits the Government to a clear fiscal adjustment path will enhance the credibility o f the fiscal adjustment program. (B) BudgetApproval 1. In addition to implementing the Rajasthan Fiscal Responsibilities and Budget Management Act 2005, prepare the Budget Summary on the lines recommendedin the Reserve Bank o f India Report. Also disclose the amounts of tax expenditure, additional resource mobilization and the expenditurearrears. Page xii 2. Budget documents should disclose information on all receipts and expenditure relating to programs and schemes executed through the GoR entities. 3. Explain the reasons for variations between the B.E.s and R.E.s o f the current year and between the current year R.E.sand next year B.E.s. 4. Present with the budget a statement on the implementation o f the announcements made inthe last year's budget. 5. The detailed examination of all Demands for Grants by House Committees, as in some other jurisdictions and in the Union Government will enhance the effectiveness o f legislative scrutiny o f the budget and promote accountability. These committees should have the attributes o f similar committees o f the Union Parliament. (C) BudgetExecution 1. Critically review the reasons for budget variations and streamline and implement the monitoring system. 2. Install a more scientific cash management system to meet the requirement of enhanced empowerment o f the State Government for marketborrowing. 3. Prepare and implement a time-bound program for the clearance o f arrears in assessment o f revenue receipts; follow up cases o f under-assessments and hold the officers accountable. 4. Install advanced computerized systems for monitoring expenditure on a periodic basis. 5. Electronically connect sub treasuries on an on line basis with treasuries. 6. Maintain a time series analysis o f the trends inmonthly revenue and expenditure to support better cash management. 7. Enhance fiscal transparency by providing public access to information within the year on budget implementation. Quarterly reports with data on budget implementation and a commentary on major fiscal developments posted in the Finance Department web site could help to increase accountability and public confidence inthe management o f the state's resources. (D) InternalControlIncludingInternalAudit 1. Improve compliance with the prescribed internal control system through appropriate incentives. Carry out review o f internal control system at suitable intervals. Page xiii 2. Prepare performance indicators for programs and schemes and monitor the performance. 3. Furnish utilization certificates o f grants-in-aid paid to local bodies and others. Introduce a system o f obtaining performance-cum-achievement reports from the grantee institutions. Inthe cases o f large amounts o f grants-in-aid, say, in excess o f Rs. 10millionthe M O U systemmay be considered. 4. Modernize the internal audit system with shift o f emphasis on systems, and outputs/outcomes and follow risk- based approach. There should be an integrated internal audit unit for the department as a whole reporting to the Administrative Secretary. Internal audit should be Secretary-driven. 5. Prepare consolidated reports o f receipt and expenditure for the information o f the Administrative Secretary. 6. Take steps to increase the returns from investments in Public Sector Enterprises. Clear the arrears in accounts and clean up the balance sheets. Strengthen the internal audit set up inthe Public Sector Enterprises. 7. Explicitly define the role and responsibility o f the Administrative Secretary as the Chief Accounting Authority o f the Department. Strengthen the institution o f Financial Advisor. 8. Strengthen Guarantee management with accretions to the Guarantee Redemption Fund commensurate with the outstanding amount o f guarantees duly classified by risk. (E) GovernmentAccounts 1. Ensure regular reconciliation o f departmental figures o f accounts with the books of the Accountant General (Accounts & Entitlement) every month as prescribed. 2. Minimize the transfers to Deposit Heads -personal ledger accounts (PLAs). 3. Proactively cooperate with the Accountant General to clear and minimize the balances under the Suspense Heads. 4. Pending switchover to accrual based accounting; enter into a dialogue with the Accountant General for providing additional information on the lines recommended by the Twelfth Finance Commission. 5. Work with the Accountant General to build the road map for the move towards introducing accrual accounting and conducting pilots as appropriate in line with similar developments at the central government. Page xiv (F) FinancialReporting 1. Ensure that explanations for variations betweenbudgets and actuals are supplied in the Appropriation Accounts inall cases. 2. Enter into dialogue with the Accountant General for enhancement o f the frequency as well as the contents o f the Accountant General's Appreciation Note on Accounts. A monthly financial report o f the receipts and expenditure, aggregated up to the desired level, o f each administrative department for the Administrative Secretary may be considered. 3. Place monthly key financial data on departmental and aggregate performance inthe public domain usingthe web site o f the Government o f Rajasthan. 4. Ensure wider dissemination o f the document Accounts at a Glance. (G)External Audit 1. Ensuretimely response to audit observations at each stage. This is critical for audit impact. Senior Officers must set an example. Senior Officers should review the response to audit duringtheir inspections o f the subordinate offices. 2. Audit Committees should meet more frequently and in a purposeful manner prepared with final action to the satisfaction o f audit. 3. Monitor the progress o f response to material proposed for inclusion in the Audit Report at the level o f the Chief Secretary. 4. Consider the extent o f responsiveness to audit while writing the Annual Confidential Reports. 5. Enter into dialogue with the Accountant General for further deepening the relationship between the executive and audit. A quarterly management letter from the Accountant General to each Administrative Secretary could be a useful addition to the current system o f interactionbetweenaudit and executive. 6. Approach the Comptroller & Auditor General to expand the coverage o f its performance audits with a view to improving value for money and reducing fiduciary risk. (H)LegislativeScrutiny 1. Ensure that the suo moto self-explanatory notes are sent to the Legislative Assembly Secretariat within the prescribed period after the presentation of the Audit Reports. Page xv 2. Ensure that the Action Taken Notes on PAUCOPU recommendations are sent to the Legislative Assembly Secretariat within the prescribed period after the presentation o f the PAC/COPU Reports. 3. Monitor the progress o f submission o f suo moto self-explanatory notes and Action Taken Notes to the Legislative Assembly Secretariat at the level o f the Chief Secretary. Consider this while writing the Confidential Report. 4. Build appropriate strategies for clearing the backlog o f arrears in the examination o f Audit Reports with appropriate prioritization so that the Committees can follow up on the latest reports. This could include an enlargement o f the role of the Accountant General in relation to some o f the older Audit Reports as well as according o f higher priority to the more recent Audit Reports. 5. Decide on the twin issues o f the tenure o f members o f the oversight committees and holding public hearings o f the Public Accounts Committee and the Public Undertakings Committee. The Committees may revisit the issue o f public access to the evidence o f the departmental witnesses inthe light of a provision o f the Central -Right to Information Act, 2005, interms o f which the information that cannot be denied to a State legislature shall also not be denied to any person. 6. Provide information on the follow up action on audit and oversight committee observations in the departmental Annual Administrative Reports as being introduced inthe case o f important Departments o f the Central Government. (I)AccessmighttoFinancialInformation 1. Make preparations for the implementation o f the Central law; notify the Rules, issue suitable instructions, notify/appoint information officers, appoint independent Information Commissioner. 2. Initiate action to propagate the provisions o f the law; earmark and disclose commitment o f financial resources for the purpose. 3. Promote and enhance culture o f transparency with mindset change in the bureaucracy - with leadership provided by departmental secretaries. 4. Streamline information systems inline with sound records management practices. 5. Develop and implement training programs for officials responsible for providing access on fast track basis. Page xvi RAJASTHAN STATE FINANCIAL ACCOUNTABILITY ASSESSMENT CHAPTER 1:INTRODUCTION Backgroundand Introduction 1. Democratic governments all over the world are undertaking reforms to their public expenditure management system. Reforms are aimed at bringing about greater relevance, transparency, accountability and user friendly reporting for stakeholders. Improving the quality o f public expenditure has also assumed importance across India. Using public expenditure efficiently and effectively is becoming as important as mobilizing and allocating public resources well. 2. The Country Assistance Strategy for India has placed emphasis for modernizing the institutions of public financial management and accountability and undertaking such diagnostic work as necessary to help build capacity for better public sector financial management. Financial Accountability Assessments (SFAAs) are carried out in all States where the Bank's engagement i s or will likely to be significant. These assessments have both a developmental and fiduciary perspective. Similar assessments have been prepared earlier for other states including Karnataka, Orissa, Uttar Pradesh among others. 3. Rajasthan i s India's largest state by area, located in the northwestern part o f the subcontinent. The State, though primarily an agricultural and pastoral economy, has the second largest mineral resources inIndia. With a population o f over 56.5 million, three-quarters of which reside in rural areas, an estimated 8.65 million people were living below the poverty line in 1999-00 (3.8% of India's poor). Although the financial position o f the State has improved in the past two years, it remains fragile. The outstanding debt has been rising steadily for several years and has now exceeded Rs. 530 billion. A synopsis o fthe finances ofthe GoR is giveninAnnexure I. 4. This study on the Public Financial Management and Accountability (PFMA) System o f the Government o f Rajasthan (GoR) seeks to complement the World Bank Report, Rajasthan - Closing the Development Gap (August 2005). The Report pointed out that despite being considered one o f India's lagging States, Rajasthan made impressive progress in the 1980 & 1990s. Since 1999, however, new challenges have appeared, threatening further progress. Per capita growth rates have declined. Notwithstanding improvements in fiscal performance over the past two years, the fiscal position remains fragile. Public debt, already high, continues to increase. Care needs to be taken that the increase in capital spending produces the desired impact on growth, instead of only adding to the debt burden, and that mounting off-budget liabilities, principally inthe power sector are managed. The outstanding amount o f guarantees as on March 31 2004 stood at Rs. 170 billion, or 16 percent o f Gross State Domestic Product (GSDP). The guarantees policy o f the government has been quite liberal in the past, with the government limitingoutstanding guarantees to the estimated receipts in the consolidated fund of the State at the end o f the year. Increased interest payments, outstanding fiscal liabilities, ratio of fiscal liabilities to the GSDP, and Page 1 reducedavailability of borrowed funds after providing the interest and repayment had been listed as some of adverse indicators of the State's fiscal position in the Comptroller and Auditor General of India (CAG) Report for 2003-04.' Cognizant of such challenges, the GoR has started implementing policy reforms aimed at restructuring the state's debt, reducing the revenue deficit and improving the quality of expenditure. 5. A country wide study of the perception of petty corruption ranked Rajasthan as the 5th highest among 20 major states. Exhibit 1-IndiaCorruptionStudy 2005 STATE COMPOSITEINDEX RANK Kerala 240 1 Himachal Pradesh 301 2 Gujarat 417 3 Andhra Pradesh 421 4 Maharashtra 433 5 Chattisgarh 445 6 Punjab 459 7 West Bengal 461 8 Orissa 475 9 Uttar Pradesh 491 10 Delhi 496 11 Tamil Nadu 509 12 Haryana 516 13 Jharkhand 520 14 Assam 542 15 Rajasthan 543 16 Karnataka 576 17 MP 584 18 I J&K 655 19 Bihar 695 20 Source: Study by Centrefor MediaStudies,June 30, 206 6. The purpose of this SFAA study i s to support the ongoing efforts of the GoR for better financial management and control in conjunction with efforts towards fiscal consolidation. The study was undertaken based on consultations with the then Principal Secretary Finance in conjunction with the economic analysis undertaken by the World Bank for the Report issued inAugust 2005. 7. There i s a growing appreciation that development is an outcome of efficient institutions rather than the other way round.2 Further, the sustainability of fiscal 'Report ofthe Comptroller and Auditor General of India for the year ended 31 March2004 (Civil) Government o f Rajasthan Government of India, Planning Commission,Approach paper to the TenthJive Year Plan (2002-2007) Page 2 consolidation, as prescribed in the Rajasthan Fiscal Responsibilities and Budget Management Act, 2005, i s as dependent on fiduciary considerations as on technical and administrative capacity. Prudent financial management o f public resources ensures better delivery o f public services, enhanced productivity, minimization o f fiduciary risk, greater accountability to stake holders, accelerated development and promotes overall fiscal consolidation through minimization o f inputs and maximization o f outputs and outcomes. In this context, complementing the World Bank Report, Rajasthan- Closingthe DevelopmentGap,the study critically examines the GoR current PFMA, identifies its strengths and explores the opportunities for further improvement for the more economical, efficient and effective use of public resources. Scope of the Study 8. The study ranges over the different components o f PFMA including budget preparation, approval and execution, internal control including internal audit, Government accounts and financial reporting, and external audit and legislative scrutiny. (See diagram 1 below). The study covers the public accesshight to financial information as an instrument o f promoting transparency in and accountability o f administration. Diagram 1 PublicFinancialManagementand AccountabilitySystem Resource Legislative i--' PublicFinancial L I BudgetExecution Accountability Public Enterorises ExternalAudit) Urban Local Bodies b J 9. The urban local bodies and the Panchayati Raj Institutions are outside the scope o f this study. Typically, weaknesses found infinancial control at the state level are even more apparent in local levels o f government, and capacity to deal with these even less. The Page 3 objective o f re-invigorating local government will depend critically on further work on PFM issues at the local level-perhaps drawing on the principles developed in the SFAA and applying these at lower levels o f government for which separate studies are already under way. 10. In regard to the public sector undertakings the scope is limited to the extent of Government's fiduciary obligations relating to these entities. A broad view o f fiscal risk needs to take into account risks arising from quasi-fiscal activities that government undertakes throughits enterprises. Methodology 11, This SFAA Report has been prepared mainly through a desk study o f the available literature supplemented by discussions with the senior officials o f GoR. Apart from making use of the information available in the Bank's Report, "Closing the Development Gap" particularly Chapter 3, "Increasing Fiscal Space for Development and Using It Effectively"; and Chapter 4 "Improving Governance and Public Service Delivery", published literature o f the GoR like the budget documents, annual reports o f the departments, manuals and the Audit Reports o f the Comptroller and Auditor General o f India as well as the annual administrative reports o fthe Offices o f the CAG inRajasthan havebeeninspected. 12. The nature and extent o f analyses supporting the study has been influenced by the GoR's decision to restrict Bank access to information generally available inthe public domain. Observations and recommendations communicated by senior officials o f GoR for consideration and incorporationinthe Report were very useful. 13. The Centre for Good Governance at Jaipur was appointed as a technical collaborator to the team conducting the assessment. CGG i s charged with the responsibility to prepare the Development Action Plan (DAP) and inconsultation with the GoR. GeneralObservations 14. GoR's PFMA System as a whole presents a mixed picture. The systems and procedures are well documented for the efficient, economic and effective management of public resources; and these compare favorably with the PFMA systems o f the other comparable jurisdictions in the country. The systems and procedures have also been subjected to careful examination in the past in the quest for improvedperformance3. Additionally central institutions govern some o f the components o f PFMA particularly government accounts, financial reporting and external audit. Furthermore Central Government practices often act as the role model and in the context of transfer o f funds between levels o f government significantly impact the financial management at the level o f the State Government. A main message of this study i s that the PFMA System of GoR is in need o f revitalization and modernization in certain important For example Bhanot Committee, Shiv Charan Mathur Committee; currently an Expenditure Review Commissionis engagedonthe task of identifyingareas ofeconomiesinGovernmentexpenditure. Page 4 respects. Some aspects o f the colonial model on which the system has been operating since independence are now out o f date. However, incremental reforms o f similar systems in countries which share a common Commonwealth or Westminster approach to PFMA have ensured reasonably high levels o f efficiency, effectiveness and public accountability. Hence reform o f the Rajasthan PFMA system in ways which draw upon the lessons from jurisdictions with similar institutional heritages i s well worth the effort. 15. There i s a growing recognition that outlays do not necessarily meanoutcomes4 and the focus o f PFMA has to shift from mere incurring o f expenditure to getting the best value for the moneys spent in terms o f the desired outcomes and cost effective delivery of departmental services. This involves pervasive changes throughout the entire PFMA cycle commencing from budget preparation and presentation and including implementation and control to external audit and legislative scrutiny. 16. GoR is commended for having recognized the importance o f providing public access to information that saw its expression in the enactment o f Rajasthan - Right to Information Act in 2000 ahead o f most other States in the country and even the Central Government'. The global experience with such legislation is that when properly structured and implemented it promotes public confidence in Government, higher productivity o f resources and greater public participation in developmental process. The recently enacted Right to Information Act, 2005 by the Central Government which applies to all States inthe country including the State of Rajasthan i s much wider in its ambit enlarges the scope o f suo mot0 disclosures and narrowly defines the exclusions and thereby i s likely to witness enhanced demand for accountability from the stakeholders for the efficient and effective use of public money. This further underscores the needfor makingsubstantive improvements inthe PFMA system. 17. While opportunities for further improvement undoubtedly exist in the existing design of PFMA system an equally important issue, as in other jurisdictions, i s one o f better compliance with the prescribed rules, regulations and procedures. The compliance gap, not uncommon in other States, enhances the fiduciary risk and reduces the optimal utilization of resources. The high level of leakages in the targeted public distribution system i s a case inpoint.6 States have been grouped together based on the proportion o f subsidized grains leaked out o fthe distribution system. 'GovernmentFreedomof of IndiaFiscalPolicy StrategyStatement laidbeforethe Parliamentwith the Budget2005-06 The central InformationAct, 2000 remainedunimplementedinthe absence of the relevant rules to be notifiedthereunder; the saidAct has beenrepealedbythe Rightto InformationAct, 2005. Government of India, Planning Commission, Performance Evaluationof Targeted Public DistributionSystem (2005). Page 5 Exhibit 2 Leakage of Food grains -Ranking of States - Abnormal Very High High Leakage Low Leakage Leakage Leakage (25-5OY0) (upto 25%) (More than (SO YO YO) -75 75%) 1 2 3 4 Bihar and Punjab Haryana, Madhya Assam, Gujrat, Andhra Pradesh, Pradesh and Uttar Himachal Pradesh, Kerala, Orissa, Pradesh Karnataka, Tamil Naduand I IRajasthan Maharashtra and IWest Bengal 18. The challenge for GoR lies in devisingajudicious mix o f incentives and disincentives for minimizing fraud, waste and abuse o f public funds. The need for capacity building is also indicated inseveral areas such as, budget preparation, revenue forecasting, cash management, records management and internal audit. 19. Improvements to the public financial management and accountability system would require extensive use o f e-governance. GoR has already made some progress in areas such as the computerization o f treasuries. Some o f the initiatives underway include e- Mitra, land record computerization project, computerization of activities o f the Departments o f Commercial Taxes, Excise, Transport and Registration and Stamps, Secretariat networking, videoconferencing facility etc. This modernization needs to be further built upon with a view to the development of a management information system that is both functional and more performance oriented than the existing inputs based style o f operational management and control. Constructive use o f publicly available reports on the internet could help to address a number o f the accountability and responsibility problems raised inthe report. 20. In this background o f modernization the role o f the departmental Secretary to Government becomes crucial and assumes a much wider responsibility in line with the Central Government where there i s already an embedded role for the Secretary as the Chief Accounting Authority.' Within the framework of Government policy, the departmental budget and its implementation as well as accounting, financial reporting, internal control including internal audit, will have to be Secretary-driven and the Secretary will be expected to take full responsibility for the economic, efficient, effective and transparent use o f the resources o f his department for achieving the stated departmental objectives. The associated governance issues like the role o f internal audit, monitoring and evaluationetc. would also have to be revisited. 21, There are a number o f similar reforms underway to the system o f public expenditure management at the Central Government. An Administrative Reform Commission has 7See Rule 64 of Government o f IndiaGeneralFinancialRules 2005. Page 6 been appointed with a mandate to promote what could be far reaching reforms to public administration. The budget management system is to move its emphasis from cash outlays to development outcomes; an Outcome Budget has been presentedfor the first time inAugust 2005. The cash based system for accounting i s to be replaced with an accrual based system. Performance Indicators are being established for better monitoring and evaluation o f program delivery systems. The duties, responsibilities and powers o f financial advisors in administrative ministries have been re-defined. All these are aimed at improving the public financial management and accountability system in line with best international practice. These reforms are likely to stimulate further demand for a more "e" based modern financial management and control systems at the centre and at the states particularly in the background o f significant amounts o f expenditure incurred on the Central sector and Centrally sponsored schemes. There i s an opportunity for Rajasthan to make concurrent reforms to its systems andprocedures and bringthem into line with bestpractice. 22. A striking message o f this report is that o f a general failure in Rajasthan to assign overall responsibility for financial management and despite reasonable formal systems, a lack o f effective mechanisms of accountability. These points are made at various places in this report and suggestions for reform are made, but the central importance o f addressing these issues in a coordinated strategy has to be emphasized. GoR may wish to depute one senior official in the Finance Department to lead the effort required for modernizing the system o f public financial management and accountability system and to develop a roadmap for strengthening the system including performance management and moving towards accrual-based accounting in conjunction with an outcome-based budgetsystem. 23. Fiscal consolidation and closing the development gap at Rajasthan i s critically dependent on improvements in the PFMA. Addressing complex issues raised in this report would appear to require a very strong high-level effort driven by the Finance Department and with full Cabinet support. GoR needs to prepare, monitor and implement a time-bound Development Action Plan with intermediate milestones for modernization and further strengthening the PFMA. The State's Centre for Good Governance working with the Finance Departmentis well placed to take responsibility for designing and implementing the Development Action Plan including how to proceed with the reform process. The Development Action Plan would also incorporate the measures required for capacity building in areas like budgeting, cash management, revenue research, internal audit etc; as warranted. A nodal monitoring unit functioning under the Principal Secretary Finance should coordinate and oversee the process with the active collaboration of the Centre for Good Governance and report regularly to the Chief Secretary. Page 7 CHAPTER 2 :BUDGET PREPARATION InstitutionalFrameworkand Processes 1. In a democratic polity the purpose o f budgets has to be seen as one transcending beyond the mere statement of income and expenditure o f Government and assets and liabilities to the articulation o f hopes and aspirations of the people and their actualization within the framework o f transparency and accountability. The requirement o f preparing an annual budget i s prescribed in the Constitution o f India. Article 202 o f the Constitution prescribes that an Annual Financial Statement (popularly known as the Budget) shall be presented to the legislature setting out the estimates o f the receipts and expenditure o f the State for that year. 2. GoR Budget Manual and the Annual Budget Circular issued by the Finance Department some time in August every year set out in sufficient detail the procedure for the preparation of the annual budget by the line departments, its finalization by the Finance Department through the process o f examination by the Budget Finalization Committee (BFC) and consolidation for being presented before the legislature. The Finance Department /Minister may hold pre-budget meetings with the stakeholders to know the views o fthe cross section o f civil society. 3. The Budget Manual and the Annual Budget Circular require the adoption o f zero-based budgetingapproach. GoR has prescribed a list o f over 30 departments that are requiredto prepare Performance Budgets. The Budget Manual contains detailed instructions for the preparation o f Performance Budgets as well as the forms in which these should be prepared. The Performance Budgets are required to be placed by the line departments before the State legislature intime for discussion of the Demandsfor Grants. The Finance Department and the Planning Department are not associated with the preparation o f Performance Budgets. 4. Designated Controlling Officers' prepare the budget proposals relating to the non-Plan expenditure and the ongoing Plan schemes and forward them to the Finance Department. Similar proposals for new schemes are formulated and sent only after receipt o f intimation o f sectoral ceilings from the Planning Department. The proposals are scrutinized and examined by the BFC convened by the Finance Department on which both the line department and the Planning Department are adequately represented. The draft minuteso f the meeting o f the BFC are made available to the Secretary o f the line department and the Secretary Planning Department. The Finance Department compiles the State budget from the finalized departmental estimates. 8 GoR Budget Manual defines Controlling officer as a Head of Departmentor any other departmentalofficer who i s entrusted with the responsibility of controlling and incurring of expenditure and/or collection of revenue by the authorities subordinateto the department. For every Grant, one officer (or more insome cases), generally the Head of the Department is nominated as the Controlling Officer, who is responsible for controlling the expenditure against the various grants placed at his disposal. Page 8 Strengthsand Opportunitiesfor Improvement 5. There are several positive features o f budgetary process. For example, the systems and procedures are comprehensively documented and the roles and responsibilities are unambiguously defined with predictability and transparency about the process. 6. GoR Rules prescribe adequate participation, within the framework o f an over-all policy, o f the line departments in budget preparation, both at the initial formulation o f proposals and at their subsequent scrutiny and finalization throughthe BFC. The participation o fthe Planning Department inthe BFC and the preparation o f Plan estimates inaccordance with the pre-determinedPlan ceilings provide an inbuiltmechanism that ensures that the policy objectives are adequately reflected inthe budget. The GoR current practice o f having one common functionary for the Finance Department and the Planning Department at the senior level o f the Principal Secretary institutionalizes and reinforces such integration o f the budgetary process with the policy objectives. Nevertheless, the potential for full integration and harmonization at the budget formulation stage remains unrealized. Rajasthan retains a dualistic budgeting framework in which formal efforts to achieve integration andharmonization only occur at the end o fthe process. 7. However, since the budget estimates (BE) are prepared, examined and finalized by the BFC in respect of each Controlling Officer (Head o f Department), the consolidated position regarding all Controlling Officers in an Administrative Department as a whole may not emerge till a very late stage o f the budgetary exercise for effective priority setting. There is thus the need for the more proactive role o f the Administrative Secretary inthe early stages o fbudgetpreparation. 8. There i s another concern. The incidence o f Supplementary Grants both in terms o f numbers of Grants and the amounts involved is very high. Supplementary Grants have been obtained for more than 80 per cent o f the Grants, and the amounts involved have been as high as 25 per cent. This reflects on the quality o f initial budgeting and undermined the usefulness o f the initial budget presented to the Assembly as an instrument to establish hardbudget constraints. 9. It i s also seen that the proposals for new items (Plan as well as non-Plan) are generally cleared at the budget stage with the caveat o f a further reference, examination and approval on file. The provisional approval with the requirement o f subsequent clearance impacts the downstream exercise o f budget execution, planning, cash forecasting and implementation since (unlike other expenditure) in such cases mere approval o f budget does not authorize the departments to start its implementation. Pending final clearance o f such expenditure, the line departments are unable to go ahead with planning and implementation andthe forecasts o f cash flow will remain at best tentative. Page 9 Table 1-BudgetPreparation Strengths Opportunities for Improvement Budget Preparation Budgetproposalsexaminedinrespectof eachHeadof Comprehensivelydocumentedsystems Department;consolidatedpicturerelatingto any particular andprocedures Grant doesnot emergetill towardsthe endofthe budgetary Linedepartmentsare actively involved exercise Institutionalizedarrangementfor the New itemsofexpenditure generally approvedfor inclusion integrationofthe planningandthe inthe budgetsubjectto subsequentclearance on file; budgetaryprocesses minimizethe incidence of expenditurerequiring post Rulesprescribefor zero based budget approvalofFinanceDepartment budgeting Incidenceof SupplementaryBudgetshighbothinterms of Rulesprescribefor preparationof the number of Grants (over 80 percent) andamounts (about performancebudgets 20- 25 per cent Revenueresearch cells exist inthe Largenumberofprojects remainingincomplete;prescribe Departmento f CommercialTaxes as andensure explicit emphasis on prioritizationin favor of well at the Secretariatlevel last mileprojects; this will minimizeunproductive Enactmentofthe Fiscal investments ResponsibilitiesandBudget Budgetnormally preparedon incrementalbasis;carry out Managementlaw in2005; critical review o f all programsand schemesat reasonable implementationofthis law will intervals andreflect the result of suchreviews inthe budget improve fiscal discipline andpromote Prepare performancebudgetsas prescribedinthe transparency instructions; Finance Departmentand PlanningDepartment shouldvet the performancebudgets. Prepare anddiscloseforward recurrentestimates on plan schemes/programs as well as the out year recurrent costs for new capitalprojects Strengthenthe revenueresearchunits with capacity for sensitivity analyses, identificationofnewer sources of revenueetc. Intensifyeffortsto enhance non-taxrevenue in linewith the MemorandumofUndertakingsignedwith GOI. 10. Further, despite the instructions contained in the GoR Budget Manual to follow a zero based budgeting approach, which are reiterated in the Annual Budget Circular, the estimates are prepared essentially on incremental basis. Consequently, schemes and activities that cease to be as relevant in the changing scenario run the risk o f being budgeted regardless o f their continued fruitfulness. For example, in the Secondary Education Department in 252 cases schools/faculties that were found to be uneconomical as per the norms prescribed by GoR were being continued in six districts alone involving minimumannual expenditure ofRs. 165 millionon salariesg. 11. Also the budget focuses mainly on financial inputs. GoR instructions for the preparation o f performance budgets are in line with the country best practices, but the prescribed instructions are not always followed. 9Report of the Comptroller and Auditor Generalof India for the year ended 31 March2004 (Civil) Government o f Rajasthan Page 10 12. The Departments do not prepare the Performance Budgets in the form and inthe manner prescribed in the Budget Manual; there is also no uniformity in the matter. The object- wise details o f expenditure are not provided, the financial and physical targets and achievements are not correlated and the unit cost o f providing the service i s not disclosed. The information on the actuals vs. revisedestimates o fthe preceding year is not given." 13. Although the State Directorate o f Evaluation under the Planning Department carries out periodical evaluation o f a selected number o f schemes, there i s little evidence o f such evaluations featuring in or are being factored in the Performance Budgets of the administrative departments. The evaluation challenge inRajasthan i s compounded by the facts that the largest category o f capital expenditures i s for major irrigation with a planned gestation period o f 15 to 20 years and ex post actual gestation periods o f 25 to 35 years. One way to achieve improvements in evaluation work on irrigation projects would be to have the C&AG undertake a ex poste 'lessons learned' type evaluation o f large irrigation projects from inception to completion. 14. Neither the GoR Budget Manual nor the Annual Budget Circular explicitly envisages conscious and structured prioritization of projects and schemes for the early completion o f ongoing works. There were 374 incomplete projects as of March 2004, in which Rs. 25.59 billion were blocked. Of these 133 projects on which Rs. 19.84 billion had been spent had not been completed for periods ranging from 5 to 41 years." Under a Union Government programme intended for accelerating the completion o f ongoing projects that were in an advanced stage o f completion, GoR spent Rs. 2 billion on two projects, which interms ofexpenditure incurred so far hadregistered lessthan 33 per cent progressI2. 15. The Rajasthan Fiscal Responsibilities and Budget Management Act, 2005, prescribes the targets of revenue and fiscal deficit, fiscal deficit, outstanding debt etc. to be achieved by the GoR. One o f the objectives of the Act is to ensure fiscal stability in Government finances. Careful and ongoing monitoring of actuals will be necessary to track progress. As well the executive could advise the Assembly and the public concerning which fiscal indicators and benchmarks are uppermost in importance in its monitoring activities. The Rulesunder the Act are beingnotified. 16. GoR's own revenue receipts have witnessed a robust growth in recent years. GoR tax receipts are monitored on a daily basis and an incentive system for achieving and loBased on a study of the Performance Budgets of the Agriculture Department, Higher Education Department, Public Health Engineering Department and the Rural Development Department for 2004-2005. In the Department of Power the amount o f subsidy to be provided is not detailed by unit cost and type of market segment. l1Report of the Comptroller and Auditor General of India for the year ended 31March 2004 (Civil) Government of Rajasthan. The Report also mentions that the expenditure of over Rs.2.9 billion incurred on construction of Sidhmukh and Nohar Irrigation Projects had remained unfruitful since the water courses were not constructed due to non-completion of micro-canalization survey for want of budgetprovision. 12 Report of the Comptroller and Auditor General of India for the years ended 31 March 2003 (Civil) Governmentof Rajasthan Page 11 exceeding tax receipts i s in place. Revenue research units exist in the Commercial Taxes Department and inthe Secretariat. 17. There i s scope for increasing non tax revenue. The position o f receipts on account o f user charges i s less satisfactory. For example, a relatively modest amount o f Rs.339 million was realized during 2003-2004 from 5 major and 12 medium irrigation projects with a capital outlay o f Rs.32. 41 billion, i.e. just about one per cent that did not cover even the direct working expenses. Way Forward 18. While GoR has a good laid down system o f preparation o f budget, there are several opportunities for further improvement. GoR needs to analyze the principal reasons for the highincidence of Supplementary Grants for appropriate action. The incidence of interim approvals o f expenditure with the requirement o f a subsequent clearance on the file needs to be minimized. This will result inbetter empowerment o f the line departments, promote accountability, improve the quality o f cash flow projections and cash management and quicken the execution o f new schemes for their early fruition. 19. The line department and the Finance Department should jointly carry out a critical appraisal o f all programs and schemes at reasonable intervals. The result o f such an appraisal should be reflected in the ensuing budget with a clear disclosure o f the relocation o f manpower and other resources currently deployed on programs and schemes that are proposed to be discontinued as a result o f the periodic appraisal. This will ensure that programs and schemes with diminished relevance and utility in the changed scenario give way to higher priority activities and provide better outcome from the available resources. 20. In order to be really meaningful the Performance Budget should be prepared in accordance with the procedure prescribed inthe Budget Manual and vetted by the Finance Department and the Planning Department before these are finalized. Properly prepared Performance Budgets would immediately shift the focus from input budgeting to output budgetingandprovide the basis for outcome budgeting.Credible outcome indicators need to be developed, preferably inconsultationwith the Planning Commission, Government o f India where considerable work on this subject i s already under way. 21. There i s need for explicit prioritization in favor of early completion o f the ongoing projects (after comparative detailed analysis of other projects) so that the benefits from these projects start flowing at the earliest and the incidence of unproductive expenditure blocked inincomplete projects i s minimized. 22. GoR needs to prepare forward recurrent estimates on programme/scheme basis. GoR also needs to prepare and disclose the out year recurrent costs for new capital projects for macro economic stability. Page 12 23. Medium Term Fiscal Program (MTFP) that commits the Government to a clear fiscal adjustment path will enhance the credibility o f the fiscal adjustment program. Although the FRBMcommits the GoR to explicit deficit targets, provides formulas for some of the variables, and requires that assumptions on which targets are based be clarified, it does not stipulate that the State prepare a Medium Term Fiscal Plan laying out the plan o f how targets will be achieved. A medium term program that clearly identifies the mediumterm adjustment path, based on well articulated fiscal adjustment policies, will helpto make the Government's commitment to fiscal reforms more credible. 24. The budget for an administrative department should be prepared and consolidated well in time for priority setting. The Administrative Secretary will have to assume a more proactive role in the budgetary process. H e should set out the priorities and review the justification for the ongoing schemes before these are includedinthe budget. For this the budget o f a department as a whole should be available with him well in time. Simultaneous consideration o f budgets o f departments that have overlapping objectives e.g., employment generation would provide synergy. 25. The revenue research units need to be strengthened with capacity for sensitivity analysis, calculating the tax expenditure as well as identifying additional sources o f revenue. This will add greater realism to the estimates o f revenue receipts, promote better knowledge and disclosure o f the financial implications of tax proposals and help identify additional sources o f revenue. 26. GoR also needs to intensify its efforts to enhance non-tax revenues in line with the commitments made in the Memorandum of Undertaking between the GoR and the Go1 signed inMarch 2003 (See Box - 2). Improving cost recovery innon-tax user charges can be started by carrying out a review of the gap between the cost o f supply o f government services and infrastructure and payments, and identifying the areas where the consumers will be willing to get better services for higher user charges.l3The Department of Finance could take the lead for monitoring and encouraging revisions to user charges as and when necessary. ~ l3The World Bank Report Rajasthan Closing the Development Gap (August 2005); some of the measures suggested inthe report are (i)auctioning of mineral leases in lot sizes for a period of time long enoughto attract better bidder response, (ii)setting of higher rates of tuition fees for non-exempt categories of students in engineering and medical colleges and other higher and professional institutions, (iii)levy of user charges for specializedcurative care services inlarge tertiary hospitals and selected secondaryhospitals, and (iv)a water rate structure that reflects scarcity value of water. Page 13 BOX-2 Extractfrom Memorandumof Undertaking Governmentof Rajasthanand GovernmentofIndia-March2003 Non TaxMeasures A. Restructure the role of Government ineconomic activities to enable commercialization and out sourcing, wherever possible. Areas of economic activities for commercialization shall be identifiedandprocess startedby 1.4.2003. B. Ensure that the ultimate responsibility of running services is vested with statutory non- Government bodies. (i)Userchargesshouldbeindex-linkedtowholesalepriceindexandtheprocessofperiodic revision should become automatic. Indexation of user charges to be completed and introduced by 30.6.2003. State Government will draw up guidelines enabling the departments to increasethe user charges annually on the basis of indexation during this time frame. (ii)Indexationofbusfarestotheinputcoststobeintroducedby31.12.2002. (iii)Feesofeducationalinstitutionshavealreadybeenrevisedin2000-01. Thiswillagainbe revised in 2005. In major hospitals, Medicare Relief Societies have been formed. These societies are self financing bodies and fix up hospital charges on a no-loss-no profit basis. (iv) Water rates (Irrigation rates) for all categories ofusers:- (a) Determine the subsidy element in cost recovery as a percentage of O&M cost by 1.6.2003. (b) Index these rates and progressively increaseto cover 100% of O&M by 1.6.2007. Page 14 CHAPTER 3 :BUDGET APPROVAL InstitutionalFrameworkandProcesses 1. Legislative approval of the budget is the essence o f democracy. Under the Constitution no expenditure can be incurred from the ConsolidatedFundnor can any tax be leviedwithout the approval of the State Legislature. The legislatureprovides the necessary authorization through Appropriation Act and Finance Act. The effectiveness o f legislative approval of the budget i s critically dependent upon the information made available to legislators and its scrutiny at the legislature. 2. The budget documents which are furnished to the legislature are listed in Annexure 11. The literature includes Statements o f Investments, Loans and Guarantees, Targets and Achievements and FundingPattern of Annual Plan. These are all useful documents. 3. GoR also brings out the following two other documents viz; Budget at a Glance and Budget Study;these are preparedby the State Government's Directorate o f Economics and Statistics in collaboration with the Finance Department and contain useful budget analysis. Additionally, GoR brings out an Economic and Purpose Classification of the State Government Budget. The contents o f these documents are also briefly described in Annexure 11. 4. The Rajasthan Fiscal Responsibilities and Budget Management Act, 2005, requires the GoR to present the following with the Annual Budget, namely (a) Medium Term Fiscal Policy Statement and (b) Fiscal Policy Strategy Statement (See Box 3). The Act requires the GoR to disclose inter alia the annual pensionary liabilities of the Government calculated initially on the trend forecasts and subsequently, after five years, on actuarial basis. Any significant changes in the accounting standards, policies and practices that impact on the computation o f fiscal indicators shall also be disclosed. Strengthsand Opportunitiesfor Improvement 5. GoR budget documents are fairly comprehensive and envisage sufficient disclosures, particularly with the implementation o f the Fiscal Responsibilities and Budget Management Act. The position compares favorably with the other jurisdictions in the country. However, the information i s scattered over several volumes and i s not readily available ina reader-friendly manner. Page 15 BOX-3 The RajasthanFiscalResponsibilitiesand BudgetManagement Act, 2005 TheMedium Term Fiscal Policy Statement shall set forth the fiscal objectives and strategic priorities o fthe State Government with clear enunciation o f the underlying assumptions. Inparticular the Policy Statement shall include an assessment of sustainability relating to (a) The balance betweenthe revenuereceipts and revenue expenditure; (b) the use o fcapital receipts including borrowings for generating productive assets; (c) the estimated yearly pensionary liabilities for the next ten years, worked out on trend forecast basis duringthe first five years and on actuarial basis thereafter. TheFiscal Policy Strategy Statementshall inter alia contain (a) the fiscal policies of the State Government for the ensuing financial year relating to revenuereceipts and expenditure, borrowing and liabilities include guarantees, lending and investments, user charges on public goodshtilities and description of other activities such as guarantees and activities o f the public sector undertakings which have potential budgetary implications; (b) the strategic priorities o fthe State Government inthe fiscal area for the ensuing financial year; (c) key fiscal measures and the rationale for any major deviation in fiscal measures pertainingto revenue receipts, subsidy, expenditure, administeredpricing, borrowings and other liabilities, including guarantees; (d) evaluation of the current policies ofthe State Government. 6. GoR budget documents do not fully capture all receipts and expenditure that are administered through its entities and to that extent lack comprehensiveness. For example, the Union Government provides financial assistance for the implementation o f several schemes that are administered by the State Government entities like the District Primary Education Programme that i s co-funded by the Union Government and the State Government. However, the GoR budget documents disclose neither the amount of Central assistance nor the expenditure incurred there against and lack comprehensiveness to that extent. The precise extent o f deficiency cannot be quantified since the related information was reportedly not available withthe State Government. 7. Also, GoR budget documents do not disclose the additional resource mobilization, amount o f tax expenditure, the amounts o f implicit and explicit subsidies and the amounts o f arrears outstanding. Although information regarding receipts from the Public Account is available, the extent of off-budget surrogate borrowing is not explicitly disclosed. During 2002-2004, Rs. 7.34 billion raised by market borrowing by two public sector enterprises viz; the Rajasthan State Road Transport Corporation and the Rajasthan State Minerals and Mines Ltd. Page 16 were kept in the Public Account to augment the resources o f the State G~vernment.'~For further observations regarding the use o f Public Account surpluses, please see Box 7 in Chapter 6. Table 2 -BudgetApproval Strengths Opportunitiesfor Improvement Budget Disclosures Budget Disclosures. GoRbudgetdocumentsfairly comprehensive Prepare Budget Summaryon the linesofthe anddetailedas inother States RBIReport GoR `Budget At A Glance', `Budget Disclosetax expenditure, expenditurearrears, Summary' and `Economic andPurpose additionalresourcemobilizationandthe Classificationofthe State Government amounts of implicit and explicit subsidies Budget' highly informativedocuments with Disclosethe amountof offbudgetborrowing time series and sectoralanalyses of receipts State the reasonsfor variations betweenthe andexpenditure budgetestimates,revisedestimates andbudget FRBMAct 2005 prescribesadditional estimatesfor the forthcomingyear inthe disclosures Demandfor Grants Present alongwith the Budget, a statementon Legislative Scrutiny the implementationofthe budget Legislative supremacy prescribedinthe announcements made inthe budget ofthe Constitution previousyear No expenditure can be incurredfrom the Reflectall expenditureincurredthrough GoR ConsolidatedFundwithout legislature's entities inBudgetDocuments approval; budgetmust bepresentedto and Prepare andnotify the rules underthe FRBM passedby the legislature Act, 2005 The RajasthanLegislativeAssembly holds a generaldiscussiononthe budget; debates the Legislative Scrutiny FinanceBill; anddiscusses about one third System o fexamination o fDemandsfor Grants o f the totalnumber o f Demandsfor Grants by House Committeeswill enhance the every year. effectivenessof legislative scrutiny ofthe budget. 8. Although GoR budget documents mention the heads involving variations between Budget Estimates (BEs) and the RevisedEstimates (RES)o f the current year and between the RES o f the current year and the BEs o f the following year, the documents do not state the reasons for such variations. Such variations are indicative o f the progress (or lack thereof) o f various schemes as well as shifting priorities o f Government. 9. According to the Rules o f Procedure and Conduct o f Business in Rajasthan State Assembly, the Assembly deals with the budget in two stages, namely (a) a general discussion and (b) voting on demands for grants. Two Estimates Committees have also been constituted on departmental basis to suggest economies, improvements in l4 Report of the Comptroller and Auditor Generalof Indiafor the year ended 31 March2004 (Civil) Government o f Rajasthan Page 17 organization, efficiencies etc as well as alternative policies. The reports o f these committees are not however linkedwith the passage o f the budget. 10. The Rajasthan State Legislative Assembly generally discusses only about one third o f the total number o f grants. The system o f Departmentally Related Standing Committees for the detailed discussion o fthe demands o f each department does not exist. Consequently, a major portion o f Government expenditure may escape up front legislative scrutiny. Way Forward 11. GoR budget documents are fairly comprehensive but these needto be made more reader- friendly in order to promote informed debate and discussion and civil society participation. GoR should progressively move over to the presentation o f a Budget Summary in the manner recommended by the Reserve Bank of India''. Consistent with the generally accepted norms of transparency, GoR also need to disclose the tax expenditure, the amount of additional resource mobilization, the amount of off budget borrowing and the amount o f arrears outstanding. 12. GoR budget documents need to include the information on all Central Government receipts and expenditure for proper and complete depiction o f expenditure on the schemes implemented through its entities for correlation with their outcomes. The existing administrative structure and mechanism are capable of capturing the amounts o f Central Government assistance as well as the expenditure incurred there against particularly when the schemes are co funded by GoR. 13. GoR budget documents should clearly state the reasons for variations between B.E.s and R.E.s. o f the current year as well as between R.E.s and B.E.s of the following year. Additionally, as in the Government o f India (and in some States like Karnataka), GoR should present along with the Budget, a statement on the implementation o f the budget announcementsmade inthe budget o f the ongoing year. 14. GoR's Economic and Purpose Classification of the State Government Budget i s potentially a very informative document, but it i s issued late. The document inrelation to the Budget 2003-2004 was publishedinAugust 2004 Le., after the budget year was over. The document is issued by the Directorate o f Economics and Statistics. The Finance Department should own this useful document which should be issued along with the budget. 15. The detailed examination o f all Demands for Grants by House Committees, as in some other jurisdictions (Himachal Pradesh, Kerala and Orissa for example) and in the Union Government, will enhance the effectiveness o f legislative scrutiny o f the budget and promote accountability. To be really effective these committees should have the attributes o f similar committees o f the UnionParliament. l5Report o fthe Core Group on Voluntary DisclosureNorms for the State Governments (2001) Page 18 CHAPTER 4 :BUDGET EXECUTION InstitutionalFrameworkandProcesses 1. Information on budget execution reflects the extent to which the Government policies, programs and schemes are actually implemented. The Finance Department communicates the budget allotments to Heads o f Departments and other Controlling Officers. The Finance Department also advises the Administrative Departments of the new items of expenditure provided (or approved) inthe budget and the Administrative Departmentsare responsible for issuing necessary orders to the Heads o f Departments and other officers regarding such items. Except where it i s otherwise specified the line departments are free to implement the budget without any further reference to the Finance Department as per the financial powers delegated to them. Strengthsand Opportunitiesfor Improvement 2. GoR has been successful in achieving substantial fiscal marksmanship over the years16. During2002-2003 while the fiscal deficit and primary deficit were well below the budget estimate, the revenue deficit had marginally exceeded the budget. But during 2003-2004 revenuedeficit, fiscal deficit and primary deficit all remained withinthe budget estimates. That this was achieved despite the severe drought conditions only adds to the achievement o f GoR. 3. However, the allocative priorities o f the budget suffered serious deviations in all respects: between revenue and capital expenditure, between Plan and non-Plan expenditure and as amongst General, Economic and Social Services." In each of the three years ended March 2004 capital expenditure bore a disproportionately severe brunt of expenditure squeeze; the shortfall in capital expenditure ranged from 5 to 21 per cent vis a vis the budget estimates against the shortfall o f 1to 7 per cent inrevenue expenditure. 4. Similarly, Plan expenditure bore a disproportionately severe brunt o f the expenditure squeeze during the years 2002-2003 and 2003-2004. During 2002-2003 the shortfall in Plan expenditure was 20 per cent against the shortfall o f less than 6 per cent in non-Plan expenditure. During2003-2004 non-Plan expenditure overshot the budget provision by 4 per cent while Plan expenditure suffered a shortfall o f over 18 per cent. 5. While the shortfall in expenditure was evenly distributed over General Services, Economic Services and Social Services during 2001-2002, the subsequent two years witnessed a disproportionately large impact o f shortfall in expenditure on Economic Services and Social Services. l6 GoR BudgetDocuments "GoRBudgetDocuments Page 19 6. The Rajasthan Fiscal Responsibilities and Budget Management Act, 2005, requires the Finance minister to review the trends in receipts and expenditure inrelation to the budget estimates on six monthly basis with reasons for variations and proposed remedial action. This is a welcome feature that will ensure mid-termintrospection at the political level and necessary course correction. Table 3 -Budget Execution Strengths Opportunities for Improvement General Budget Outturns Except where it is otherwise specifiedthe line Deviations of expenditure from the budget in departmentsare free to implement the budget the matter of allocative priorities; the deviations without any further reference to the Finance negatively affected expenditureon capital, Plan Departmentas per the financial powers and economic and social services. delegatedto them Needfor more effective monitoringof Inaddition to the internal fmancial reportsof expenditure; Supplementary Grants have been expenditureand receipts, the Heads of found to be wholly unnecessary in some cases Departmentsreceive statements ofprogressive and inadequatein some other cases thereby expenditurefrom the Accountant Generalevery disclosing soft spots inthe monitoring month for monitoringof expenditureagainst mechanism.Critical analysis of savings in budgetprovisions grants, their surrender and re-appropriation The FRBMAct 2005 requiresthe Finance supportsthis conclusion. Minister to conduct six monthly reviews of Make fuller use ofthe treasury computerization trends of receiptsand expenditures inrelation as an instrument of expenditure control to the budgettargets, explain the deviations if Need for examining cases of expenditure any andtake suitable remedial measures. recurrently affected by year-end rush. Accounting ConsistencyinReporting: Achieve Budget Out-turns consistency betweenthe accounts of unbundled GoR has progressively secured greater fiscal power sector corporations and the state discipline with the actuals of primary deficit, accounts and budget to clarify subsidies, loans, revenue deficit and fiscal deficit remaining capital investment (equity) and financial losses within the budget estimatesduring2003-2004 and profits. The amount of expenditure affected by year- end rushhas progressively declined. Cash Management Install more scientific cash management CashManagement system, particularly inthe context of arecent Well-documented system of cash flow Union Government decision for enhanced projections empowermentof State Governments for raising No overdraft during 2004-2005 market loans Revenuereceipts RevenueAdministration. Regularmonitoringof revenue receiptson daily Reduce the incidence of arrears of assessment basis and collection of revenue receipts 0 Improvement intax administration has led to Improve the quality of internal audit ofreceipts robusttax revenue growth inrecent years Improve the quality o fresponseto observations of internal audit and CAG's audit and address systemic failures and weaknesses Page 20 7. GoR has prescribedelaborate procedures for monitoring of expenditure against the budget provisions. The rules require the spending officers to report the expenditure to the Controlling Officers every month. Additionally, the Controlling Officers receive statements of progressive expenditure from the Accountant General (Accounts & Entitlement)every month. Neverthelessthere were serious deviations18: The aggregate actual expenditure exceededthe amount of the original grants during all the three years 2001-2002to 2003-2004. Despite the Supplementary Grants, excess expenditure occurred in 12 Grants/appropriations during 2001-2002; in 7 Grants/Appropriations during 2002- 2003; and in 12 Grants/Appropriations during 2003-2004 requiring regularization by the legislature. On the other hand Supplementary Grants proved wholly unnecessaryin several cases, as the actual expenditure did not come up to the level of even the original budget. This happened in 19 cases during 2001-2002, in 27 cases during 2002-2003 and in 13 cases during 2003-2004. The Controlling Officers did not surrender the provisions not required, or surrendered the provisions whensavings did not actually exist. Even within Grants there were cases of injudicious transfer of funds betweenvarious Heads of accounts. Such transfers caused excesses under the transferring Heads, while in some other cases excess expenditure occurred despite the augmentation of provisions through re-appropriations. 8. GoR Budget Manual contains exhaustive instructions for cash management through regular reporting of projections of cash inflows and outflows to the Finance Department by the Controlling Officers. The Manual contains specific instructions for monitoring of cash inflows in respect of (i) donor funded expenditure and (ii) expenditure on Central Sector Schemes and Centrally SponsoredSchemes. Inaddition to the monthly reviews by the Finance Departmentandthe Planning Departmentthese are also monitoredat the level of the Chief Secretary and the Council of Ministers every quarter. 9. GoR did not take recourse to overdrafts even on a single day during 2004-2005. This is a welcome development that needs to be appreciated; even as it is at least partly due to the effect of the debt-swap scheme and the gradual petering out of the consequences of the pay revisioninthe nineties. 10. Government financial rules prescribe that the rush of expenditure particularly in the closing monthof the year shall be regarded as a breach of financial regularity and should be avoided. It is expectedthat the seasonality of expenditure will have played itselfout by the third quarter of the year. During 2003-2004 over 80 per cent of the year's total expenditure of Rs. 4.69 billion under 13 Account Heads was incurred in the last quarter; the expenditure incurred in March alone exceeded 73 per cent of the total expenditure. The amount of expenditure affected by year-end rush has been progressively declining. 18Appropriation Accounts Government of Rajasthan and Reports of the Comptroller and Auditor General of India Page 21 This is a welcome development. There are a few account heads, however, under which year-end rusho f expenditure seems to occur year after year.l9 11. GoR Commercial Tax Department has displayed impressive leadership in administrative reforms. However, the incidence of arrears o f assessment and realization o f revenues i s quite large. GoR hadnot completed more than 26 per cent o f the sales tax assessments due during 2003-2004. The pendency inrespect of the miningreceipts was 80 per cent of the cases due for assessment up to 2003-2004.20 Overall the arrears o f revenue receipts had increased b 73 per cent from Rs.13.93 billion to Rs.24 billion between 1999-2000 and 2003-2004. z The incidence o f under-assessments is quite large. External audit by the CAG's organization has pointed out under-assessments o f over Rs.13 billion during 2002- 2003 and over Rs.7 billion during 2003-2004; the follow up action also does not seem to be adequate22. Internal audit is in arrears, the follow up action on the reports o f internal audit is inadequate and the work is not properly monitored23. There is also need for more effective action for speedy settlement o f disputed cases. 12436 Sales Tax cases were pending dispute resolution from 1995-96 onwards; the Commissioner of Commercial Taxes had not maintained consolidated information regarding the amounts under dispute. Way Forward 12. GoR has good systems in theory for monitoring o f expenditure but there i s a compliance gap. The Rajasthan Fiscal Responsibilities and Budget Management Act 2005 prescribes stringent targets of elimination o f revenue deficit by March 2009 and progressive reduction of fiscal deficit as well as mid-year appraisal o f receipts and expenditure. In this background GoR needs to critically review the underlying causes for budget variations and year end rush o f expenditure and the deficiencies in the expenditure monitoring mechanism and take appropriate remedial action. Extensive use o f E- governance i s expected to provide significant assistance in monitoring the progress o f expenditure. GoR i s encouraged to place the results o f half- yearly review o f budget out- turns inthe public domain24. l 9Accounts at a GlanceGovernmentofRajasthanfor 2003-2004 20Reportof the Comptroller and Auditor Generalof Indiafor the year ended 31March 2004 (Revenue Receipts) Governmentof Rajasthan 2' Reportofthe Comptroller andAuditor Generalof Indiafor the year ended 31 March2004 (Civil) Government ofRajasthan 22 Report of the Comptroller and Auditor General o f India for the years ended 31 March 2003 and 2004 (Revenue Receipts)GovernmentofRajasthan 23 Reportofthe Comptroller andAuditor Generalof Indiafor the year ended 31 March2003 (Civil) Government o f Rajasthan 24 Fiscal transparency should be enhanced by providingpublic access to informationwithin the year on budget implementation. Quarterly reports with data on budget implementation and a commentary on major fiscal developments posted in the Finance Department web site could help to increase accountability and public confidence in the management of the state's resources (The World Bank Report, Rajasthan Closing the DevelopmentGap, 2005). Page 22 13. The Twelfth Finance Commission has recommended the discontinuance o f the system of imposing a 70:30 (10:90 in the case o f special category States) ratio between loans and grants for release o f assistance to the State Governments. Instead the Centre will confine itself to extending Plan grants and leave it to the States how much they wish to borrow and from whom. The acceptance o f this recommendation by the Government of India presents an additional challenge to GoR cash management system. GoR needs to maintain a time series analysis o f the trends in monthly receipts and expenditure and install a more scientific and sound cash management system that would ensure timely availability o f funds on most favorable terms through carefully calibrated market borrowing program, enhance line department empowerment to implement the budget, minimize recourse to WMA and overdrafts and ensure more beneficial investment of surplus funds, ifany. 14. The year-end rusho f expenditure significantly enhances the fiduciary risk. Insome cases the expenditure may only be virtual expenditure representing transfer to Deposit head in Public Account thereby giving a misleading picture o f the accounts that are presented to the legislature. GoR should look into the underlying causes leading to year-end rush of expenditure, particularly under the heads that have witnessed recurring such uneven flow of expenditure and enforce compliance with its FinancialRules. 15. GoR should prepare and implement a time-bound programme for clearance o f arrears in assessment o f receipts. GoR should also urgently follow up cases of under-assessments, hold the officers accountable and address the underlying systemic deficiencies. The disputed cases should be more closely monitored and innovative strategies may be evolvedfor their early settlement. Page 23 CHAPTER 5 :INTERNAL CONTROL INCLUDING INTERNAL AUDIT InstitutionalFrameworkandProcesses 1. A sound system o f internal control i s pivotal to the efficient performance o f public financial management that minimizes fiduciary risk and ensures that the public resources are economically and effectively utilized for the designated outcomes. Internal audit, the controller of controls, polices the implementationo f controls. 2. GoR has an extensive system o f internal control, which i s primarily documented in the Government Financial and Accounts Rules (GFARs), Budget Manual and Treasury Rules. Department specific Rules are prescribed for certain departments like the Public Works Finance and Accounts Rules. The departmental regulations and instructions supplement the framework o fthe rules. Strengthsand Opportunitiesfor Improvement 3. GoR internal control system compares favorably with the INTOSA125good practice , guidelines. The rules prescribe that the transactions are promptly recorded, the roles and responsibilities are defined with appropriate delegation o f financial powers and segregation o f duties, and physical control i s established to secure and safeguard all valuable assets. There i s also a certain degree o f emphasis on outcomes that are required to be monitored at appropriate levels. 4. A positive feature o f GoR internal control system i s the availability o f financial advice on tap to the executing officers. GoR has an established cadre o f Rajasthan Accounts Service, with a band of dedicated and motivated members. Members of the service are positioned in all departments with a clearly defined position in the official hierarchy that places them next only to the Head o f the Department. They are required to be consulted in all financial and accounts matters and particularly in purchases. It is one of their primary duties to see that all departmental rules and regulations are complied with. In smaller offices/ departments members o f the Rajasthan Subordinate Accounts Service may be positioned with broadly similar role. 5. The GoR Budget Manual prescribes an exhaustive system of internal reporting of the progress o f expenditure and revenue at the level o f the Controlling OfficerMead o f the Department. The system i s intendedto serve the twin purposes o f monitoring the flow o f expenditure and receipts against the budget figures and also to provide basis of reconciliation o f departmental figures with the accounts o f the Accountant General. 6. GoR departmental instructions prescribe for monitoring o f physical progress o f projects and schemes. For example, the Divisional Officers of the Public Works Department are required to send to the Chief Engineer statements of physical and financial progress of works every month. GoR Budget Manual contains elaborate instructions for quarterly 25International Organization o f Supreme Audit Institutions Page 24 Government level monitoring o f physical and financial progress o f projects and schemes by the Administrative Departments, which are required to prepare performance budgets.26 7. GoR had framed a set o f Grant o f Guarantee Regulations as early as 1970, which have been updated from time to time. A guarantee on behalf of the GoR can be given only by the Principal Secretary, Finance Department, with the approval of the MinisterKabinet in specified circumstances. The Regulations stipulate the assessment of the credit worthiness o f the institution, the collateral to be provided as well as monitoring its performance. A guarantee fee has also been prescribed. Although GoR had committedto "consider" a legislative ceiling on guarantee^^^, the position i s currently regulated by a May 1999 Resolution o f the Cabinet in terms of which the amount o f guarantees outstanding at the last day o f any financial year shall not exceed the estimated receipts in the ConsolidatedFundo fthe State. This hasbeen observed during2003-2004.28 8. The basic issue in relation to internal controls i s one o f compliance. The Director o f Inspection, which conducts internal audit o f Heads of Departments only (see paragraph 17 below), reported financial irregularities involving Rs. 6.16 billion during 2002-2003 and Rs 5.57 billion during 2003-2004. Misappropriations, losses, failure to render account of amounts drawn in advance, reconcile revenue receipts, absence o f evidence o f utilization o f money were some o f the irregularities reported. The Director of Inspection also detected irregularities o f the money value o f Rs.118.6 million and Rs. 277.1 million during2002-2003 and 2003-2004 respectively on physical verification o f stores.29 9. Analysis o f the irregularities commented inthe audit inspection reports (reports not settled till March2004) o fthe external auditor viz; the Accountant General (Audit) relatingto the Irrigation Department, District Rural Development Agencies, Industries and College Education also showed that there were numerous cases o f irregular payments, irregularities in purchase o f stores, withdrawal o f funds from the treasury in excess o f immediate requirement, avoidable, wasteful and unauthorized expenditure, losses to Government etc3'. That the failure o f controls was fairly widespread was indicated by a similar analysis o f the reports relating to the Public Health Engineering Department, Medical and Health Department, Watershed Development and Soil Conservation Department and Social Welfare Department (reports not settled till March 2003), and 2002). Prima 7; Education, Ground Water and Forest Departments (reports not settled till June *'GoR 26 BudgetManualAppendix VI Memorandum of Undertaking (March 2003) reached between Government of Rajasthan and Ministry of Finance, Governmentof Indiaon the RajasthanMediumTerm FiscalReformsProgramme **Finance Accounts 2003-2004 Government of Rajasthan. The Rajasthan Fiscal Responsibilities and Budget Management Act, 2005 enjoins upon the GoR to ensure that total outstanding debt, excluding public account, andrisk weighted outstandingguarantees in a year shall not exceedtwice ofthe estimatedreceiptsin the State's ConsolidatedFundat the close ofthe financial year. 29AnnualReportsofthe Directorof Inspection 30Report of the Comptroller and Auditor General of India for the year ended 31 March, 2004 (Civil) Governmentof Rajasthan 31Reports of the Comptroller and Auditor Generalof India for the year ended 31 March 2002 and 2003 (Civil) Governmentof Rajasthan Page 25 Table 4 -InternalControlincludingInternalAudit Strengths Opportunities for Improvement 0 Internal control on par with other 0 Financial Reportsrelate to each Headof Department; jurisdictions consolidatedreport of aparticular department not 0 Internal control generally complies with available; prepare consolidatedfinancial reports for the INTOSAIguidelines information ofthe Secretary 0 Comprehensivelydocumented systems 0 Internal controls focus mainly on inputs and not on and procedures outputs and outcomes; needfor greater integrationof 0 Roles, responsibilities and financial financial and output evaluation powers clearly defined 0 Performanceindicators not prescribedwhile these can 0 Segregationof duties as appropriate easily be capturedinthe case ofthe power sector and 0 Transactionspromptly recorded are vital to achieving accountability. 0 Adequate control on acquisition, 0 Independentperformance evaluation reportedly custody, use and accounting of assets handicappedby staff shortage 0 Institutionalized systemof financial 0 No periodic overall assessment by the Secretarymead advice at appropriate levels of Departmentregarding the efficiency and 0 Systemof quarterly review of physical effectivenessof internal control and financial progress of schemes by the 0 No mechanism for ongoing review of internal control line departmentsas part ofperformance system budgeting implementation 0 Compliance inadequate;reports of internal audit, 0 Institutionalized system of independent Directorate of Inspection and CAG's audit replete with performanceevaluation of schemes cases of infractions of controls 0 Comprehensive internal financial 0 Internal audit inneedof modernization with focus on reporting systems of progressof systems, outputs/outcomesand adoption of risk expenditure, progress ofrevenue assessment approach; governanceissues like staff collection, cash outflow projections and inadequacies needto be addressed. performanceof schemes 0 Internal audit should be Secretary/ Headof Department 0 System of internal audit driven. 0 Follow up action on audit observations inadequate, underlying systemic deficiencies not addressed 0 Strengthenmonitoring and utilization of assistance provided to local bodies and others 0 Explicitly define the role ofthe Administrative Secretary as the Chief Accounting Authority ofhis department 0 Arrears inthe accountsof Public Sector Enterprises 0 Accounts of Public Sector Enterprisestendto be qualified -more effort is required to obtain unqualified audit opinions and on atimely basis. 0 Return from investmentsin Public Sector Enterprises could be improved hrther 0 Internal audit system inthe Public Sector Enterprises needsubstantialstrengthening 0 Strengthenguarantee management, make adequate provisions inthe GuaranteeRedemption Fund commensuratewith the amount of outstanding guarantees appropriately riskbased. Page 26 10. There are also instances o f circumvention o f controls through side winding devices. Unutilized materials are shown to have been consumed through fictitious entries.32 The practice o f splitting up works to avoid the sanction of the higher competent authority i s also reportedto be not uncommon. 11. According to the General Financial and Accounts Rules, Heads o f departments /Offices may draw money as advance on Abstract Contingent (AC) Bills to meet immediate requirements o f funds for expenditure but they must submit Detailed Contingent (DC) Bills in respect of such advances within one month. Contrary to the requirement of the Rules, D C bills are being submitted after long delays that may range up to twelve years andmore. Also, D C bills have not beensubmittedfor Rs. 614 million, some from1983-84 onwards.33 12. GoR incurs substantial amounts through provision o f assistance to local bodies and others but monitoring ofthe utilization of assistance so provided is weak. Utilization certificates o f such assistance were in arrears, in some cases from 1993-1994. Even the information relating to the assistance provided and the expenditure incurred there against was not forthcoming, insome cases from 1999-2000.34 Unlike the Central Government Rules, the GoR Financial Rules do not require the grantee institution to furnish a performance-cum- achievement report. Consequently, there i s no way o f knowing whether the intended outcomes by incurring expenditure through payments o f grants-in-aid are achieved in these cases. 13. The effectiveness o f existing output and outcome controls is also not quite satisfactory. For example, in the Agriculture Department a Monitoring and Evaluation Cell consisting o f 87 Statistical Officials and headed by a Joint Director was functioning under the direct control o f the Director o f Agriculture but the Joint Director had no information regarding the physical and financial progress o f the schemes. Eventhe evaluation and monitoring o f the performance/results achieved against financial assistance released to various autonomous bodies/corporations viz. Agricultural Colleges; Rajasthan State Seeds Corporations was not conducted.35 In connection with the implementation o f the Child Labour (Prohibition and Regulation) Act, 1986 the Labour Commissioner did not have vital statistical information regarding the hazardous and non-hazardous establishments, the Non government organization working inthe area, the number o f children brought into mainstream education et^.^^ 32 According to the Report of the Comptroller and Auditor General of India for the year ended 31 March 2003 (Civil) Government o f Rajasthan stock material valued at Rs. 41 million was lying in stores though the records showed that it had been consumed on various works. In some other cases material valued at Rs.26 million was bookedto various works and subsequentlywithdrawnat the commencementofthe next financial year. 33Reportof the Comptroller andAuditor General of India for the year ended 3 1 March2004 (Civil) Government of Rajasthan 34 Report ofthe Comptroller and Auditor Generalof India for the year ended 31March2004 (Civil) Government o f Rajasthan 35 Report of the Comptroller andAuditor General of Indiafor the year ended 31 March2003 (Civil) Government ofRajasthan 36Reportof the Comptrollerand Auditor General of India for the year ended 3 1 March2004 (Civil) Government o f Rajasthan Page 27 14. Although the position regarding monitoring o f outputs and outcomes i s somewhat better in respect of the Centrally Sponsored Schemes, it appears no critical examination of reports received from the lower formations is done for taking remedial and corrective a~tion.~' The performance indicators have also not beenprescribed. 15. There is no system o f periodic self-assessment o f the efficacy o f internal control. It also appears that the prescribed expenditure monitoring system has become dysfunctional. The departments do not reconcile the accounts with the books o f the Accountant General every month; this i s done only twice a year. The numerous cases o f excess expenditure andinjudicious re-appropriation also support this perception. 16.Also, the prescribed system does not generate information relating to a department as a whole. The figures are required to be consolidated in respect o f and up to each Controlling OfficedHead o f the Department. A department may have one or more than one Controlling Officer /Head o f Department. Consequently the position o f total spending o f an administrative departmenti s not available at the level o f Secretary. 17. GoR has a two-tier Internal Audit system. Firstly, there i s an internal audit unit at the disposal o f each Head o f the Department. Secondly, the Director o f Inspectionunder the Finance Department has been entrusted with the function o f internal audit o f Heads o f Departments. The Director o f Inspection also carries out special audits at the instance o f the Finance Department. The responsibility ofphysicalverification o f stores ofall offices has also been entrusted to the Director o f Inspection. Internal audit operates within the framework o f a compliance audit function and the limited resources made available for this purpose. 18. Notwithstanding the gravity o f irregularities pointed out by the Director o f Inspection (See paragraph 8 above), the follow up action was inadequate and tardy. As many as 3048 inspection reports with over 37000 audit objections had not been complied with at the end o f March2004, some o f these from 1979-80. 19. The performance of the internal audit units with the heads of departments i s even less satisfactory. CAG's review of the performance o f internal audit in three departments viz. the Departments o f Sales Tax, Small Savings, State Insurance and Provident Fund disclosed understaffing and heavy incidence o f arrears o f internal audit, as well as compliance with the observations o f internal audit with some of the reports pending settlement since 1991.38 In the Tribal Area Development Department, the only internal audit party was inoperative since May 1996.39 The tendency to re-appropriate the internal audit staff for other purposes i s also reported. 37Reportofthe Comptroller andAuditor Generalof Indiafor the year ended 31 March2004 (Civil) Government of Rajasthan 38 Reportofthe Comptroller and Auditor Generalof Indiafor the year ended 31 March2003 (Civil) Government ofRajasthan 39Reportof the Comptroller andAuditor Generalof Indiafor the year ended 31March 2004 (Civil) Government o f Rajasthan Page 28 20. Also, internal audit is essentially input-oriented. The existing internal audit set-up lacks defined audit standards, the planning o f audit activities i s not sufficiently linked to risk and the role o f internal audit does not extend to identification o f systemic improvements. The system is in need o f modernization, with adequate emphasis on systems rather than only on transactions and based on a careful risk assessment. 21. A separate Directorate o f Evaluation functioning under the Planning Department carries out periodic evaluation o f schemes for their physical and financial performance and the achievement o f the stated objectives. Representatives o f the Non-Government Organizations (NGO's), Universities etc. may be associated with such evaluations. A recent innovation is the association o f representative o f the Directorate o f Evaluation with the work of physical verification of assets conducted by the Directorate of Inspection. The evaluation studies o f the Directorate o f Evaluation contain useful recommendations for course correction. Systems and procedures also exist for follow up action. We were informed that the Directorate is severely handicapped because o f persistent shortage o f staff and other resources and not much use i s made o f its evaluation studies in the preparationo f budget. 22. Fiduciary assurance40relating to development projects i s limited. A critical review o f the financial management and accountability arrangements o f the Bank's portfolio in Rajasthan has disclosed several deficiencies. The financial statements and audit reports o f projects need to be aligned more closely to generally accepted standards o f accounting and auditing. Assets created often are often under accounted for-the emphasis i s on annual accounting for receipts and payments not on the cost benefit or value for money o f the assets being created from public money. Each project has two different financial reporting systems operating concurrently (the government's own treasury based system and the parallel project based financial reporting system), but the system does not normally require a reconciliation o f the project expenditure with the government records thereby diminishing the reliability o f the project's expenditure reported and claimed. Further, where separate institutional arrangements (registered societies) or separate bank accounts (outside the treasury) have been put in place to facilitate project implementation, unfamiliarity o f the government accounting staff with the double entry accounting requirements has limited the positive impact o f such initiatives with the audit reports commenting on systemic weaknesses like non-reconciliation o f books o f accounts, incomplete records and noncompliance with institutional guidelines on payments and expenditures. While substantial investments in developing, computerized accounting and reporting systems for some o f the projects have been made, effective implementation o f these systems has been seriously handicapped by capacity constraints. The internal audit arrangements are also weak and the follow-up on the audit observation i s inadequate. 40Fiduciary assurance relates to the arrangements in place to ensure that project finds are used for the purposes intended with due regard for economy, efficiency and effectiveness. Page 29 23. Corporate governance arrangements need monitoring. As on 31 March 2004, there were 23 Government companies with a total Government investment of Rs.130.79 billion. Of these 7 companies with an investment of Rs. 123.2 million were non-working. A meager amount of Rs.163.5 million was declared as dividend during 2003-2004; this worked out to 0.53 per cent of the amount of equity investment of the working companies. Only 11 out of the 16 working companies had finalized their accounts for 2003-2004. Of the 7 non-working companies the accounts of 2 companies were in arrears. The accounts are always qualified. The statutory auditors reports also indicate serious deficiencies in internal audit set up; internal audit system is neither commensurate with the size and nature of the companies nor is there adequate follow up of internal audit report^.^' While the annual Reports of the CAG are very informative on the overall situation of PSUs and accessible, the results of secondary audits conducted by the CAGYwhere private auditors have already conducted an annual statutory audit under the Companies Act, are less visible to the public. The effect of the CAG's comments arising out of the supplementary audit of PSUs on their working results is mentioned in the CAG's Annual Commercial Audit Report. It is also mentioned inthe Annual Reports of the companies which contain the comments along with the statutory auditor's Report. Value addition by the CAG inthis area is difficult to readily assess. 24. Inaddition to the Government companies, there were three statutory corporations inwhich GOR had invested Rs. 9978 million. The accumulated losses of two of the corporations had exceededtheir paidup capital. 25. The Public Enterprise Profile brought out by the GoR contains wealth of information relating to these entities. The latest available Profile is only for the year 2000-2001. Way Forward 26. While GoR has a well designed system o f internal control that compares favorably with similar systems in other jurisdictions, there is a compliance gap. Large- scale non- compliance with the prescribed control systems and audit observations that report infractions of control i s indicative of enhanced fiduciary risk. GoR needs to consider adoption of Government of Andhra Pradeshrecent orders which seek to withdraw further spendingpowers from the departmental officers who do not respondto audit observations intime (See Box 4). The systemshould alsobeperiodically assessed for its efficacy. 41Report of the Comptroller and Auditor General of India for the year ended 31 March 2004 (Commercial) Government of Rajasthan Page 30 BOX-4 IncentivizingCompliancewith FinancialManagementRules: Andhra Pradesh InApril 2002, the Government ofAP issueda Government Order (GO 507), whichrestated some basic financial management rules o fthe state, and also attempted to set up an incentive structure for compliance with these rules. The basic move was to link fund releasesto prior adherence with financial management requirements,usingself-certification. GO 507 includes the following provisions: No amounts can be drawn for a particular scheme untilthe responsible Drawingand DisbursingOfficer (DDO) indicates that at least 50% o fpendingaudit paragraphs for the years up to 2000/02 have been replied to. No further Abstract Contingent (AC) Bills (advances for expenditures) will be paiduntil Detailed Contingent bills (expenditure statements) are provided for earlier A C bills, No funds will be released after the lotho fthe monthto a DDO unless s h e certifies that indicating how the funds will be released against the A C bill were actually utilized. s/he has undertaken a reconciliation o f accounts for the previous month (this refers to the reconciliation between departmental and treasury figures). Fundswill not be released to Personal Deposit Accounts or bankaccounts unless utilization certificates show that at least 75% o f the funds released earlier has beenspent. Prior to the release o f funds, local bodies and other government entities need to have completed their statutory audit for 1999/00, and have cleared their audit objection. Source: Karnataka P F M Study, WorldBank,April 2004. 27. With the increasing emphasis on outputs/outcomes, GoR should work out performance indicators for the various programs and schemes being implemented by it. The governance issues relating to the Directorate o f Evaluation should be satisfactorily addressed. 28. GoR needs to have more effective control over the proper utilization of grants-in-aid provided to local bodies and others. Performance-cum-achievement reports should be obtained from the grantee institutions. In the cases of bodies and authorities that are provided large amounts by way o f grants, say in excess o f Rs. 10 million in a year, a system o f M O U may be considered. 29. Guarantee management needs to be further strengthened. GoR has created a Guarantee Redemption Fund from 2002-2003, and amounts o f Rs 132 million and Rs 519 million were credited to the Fund during 2002-2003 and 2003-2004 respectively. Against the outstanding amount o f guarantees o f Rs 172.39 billion as o f March 2004, only a small amount o f Rs 641 million was available inthe Guarantee Redemption Fund. GoR needs to explicitly classify the guarantee portfolio by risk and take steps to top up the Fund accordingly by making suitable appropriations and set aside funds separately preferably in central government securities inthe Public Account. (See Box 5). Page 31 BOX-5 Extract Fromthe Reportof the ReserveBankofIndia Group to Assess the FiscalRiskof State GovernmentGuarantee-July 2002 The guarantee commissions charged by States do not bear much relationto the underlying risk andmay not be sufficient to constitute the Guarantee RedemptionFund(GRF). Secondly, it is infeasible at the present stage to increase guarantee commission as most bodies infavor o f which guarantees are extended are also inthe public sector. Therefore, the Group recommends that at least an amount equal to 1percent o f outstanding guarantees may be transferred to the GRF each year form the fisc specifically to meet the additional fiscal risk arising on account o f guarantees. The guarantee commission collected could also be credited to this Fund. I' 30. GoR should take steps to modernize the internal audit system with a shift o f emphasis in favor o f audit o f systems and output/outcomes and adoption o f a formal risk-based approach that will ensure optimization o f productivity o f internal audit staff. The inspection report o f the Directorate o f Inspection must comment upon the effectiveness of the internal audit units o f the Heads of Departments. Internal audit should be Secretary- driven. A consolidated summary o f the significant findings o f internal audit should be prepared for the Administrative Secretary. Ideally, there should be integrated internal audit organization reporting directly to the concerned Secretary o f the administrative department. The need for the associated capacity building i s also indicated. 31. This will be in line with the need for greater departmental accountability. For the same reason the departmental figures of receipts and expenditure should be consolidated for each line department and critically reviewedby the Administrative Secretary. BOX-6 - DutiesandResponsibilitiesof Governmentof India the ChiefAccountingAuthority The Secretary o f a Ministry/Department who i s the Chief Accounting Authority o f the Ministry/Departmentshall: (0 be responsible and accountable for financial management o f his Ministryor Department. (ii)ensurethatthepublicfundsappropriatedtotheMinistryorDepartmentareusedforthe purpose for which they were meant. (iii)beresponsiblefortheeffective, efficient,economicalandtransparentuseofthe resources o f the Ministry or Department inachieving the stated project objectives o f that Ministryor Department, whilst complying withperformance standards. (iv) appear before the Committee on Public Accounts and any other Parliamentary Committee for examination. Page 32 (v) review and monitor regularly the performance ofthe programs and projects assignedto hisMinistryto determine whether stated objectives are achieved. (vi) be responsible for preparationof expenditure and other statements relatingto his Ministryor Departmentas requiredby regulations, guidelines or directives issuedby Ministryo fFinance. (vii) shall ensure that hisMinistryor Departmentmaintains full and proper records of financial transactions and adopts systems and procedures that will at all times afford internal controls. (viii) shall ensure that hisMinistry or Department follows the Government procurement procedure for execution o f works, as well as for procurement o f services and supplies, and implements it ina fair, equitable, transparent, competitive and cost-effective manner. (ix) shall take effective and appropriate steps to ensure hisMinistryor Department :- (a) collects all moneys due to the Government; and (b) avoids unauthorized, irregular andwasteful expenditure. Source: Rule 64 General Financial Rules, 2005, Governmentof India Ministry of Finance, Department of Expenditure. 32. There is need to strengthen departmental accountability for results. Once a new public expenditure system involving changeover from outlay-orientation to outcome-orientation i s introduced, departments would need not only to achieve annual budget targets but also measure achievements against desired outcomes under major programmes. This would imply that the management information system should not only be capable of generating intra-year and end-year information for monitoring budgetary targets but also achievement o f outcomes under major programmes. The computerised accounting system would need to be more integrated in line with a modern management information system that can help in monitoring outputs and outcomes linking financial with non financial information. A main task ahead i s to improve the quality o f information generated for decision-making, tracking o f expenditure from the state treasury to the ultimate beneficiaries and more timely and useful departmental reporting on service delivery. 33. The foregoing discussion would inevitably lead to a reconsideration o f the role o f the Administrative Secretary as the Chief Accounting Authority, which needs to be more formally and explicitly defined. This has been done in the Union Government in the General Financial Rules 2005. (See Box 6). Within the framework o f Government policy, the departmental budget and its implementation as well as accounting, financial reporting, internal control including internal audit, will have to be Secretary-drivenand the Secretary will be expected to take full responsibility for the economical, efficient, effective and transparent use o f the resources o f his department in achieving the stated departmental objectives, while complying with contemporary performance standards. Simultaneously, the Administrative Secretary would need to be provided the necessary infrastructure. The institution o f Financial Advisor will have to be suitably strengthened and equipped to play a meaningful role inthe envisioned environment with shift inemphasis from input control to control o f outputs and outcomes. Page 33 34. GoR should take suitable steps for increasing where appropriate the returns from the investments inthe public sector enterprises. Seven Government companies including five non-working companies had been incurring losses for the last five consecutive years (as per their latest finalized accounts) and their net worth had become negative.42 It i s necessary to establish clear responsibilities in Government for addressing the potential risks from its PSEs more effectively. A broad view o f fiscal risk needs to take into account risks arising from quasi-fiscal activities that Government undertakes through its enterprises. The Finance Department may take the lead and look beyond budget policy as the sole source o ffiscal risk. 35. The Audit Reports of the Comptroller and Auditor General o f India are full o f instances o f managementfailures. For example, the Rajasthan Rajya Vidyut Utpadan Nigam Limited suffered transit shortages o f coal of over Rs. 245 million during 2002-2003. In another case, the Rajasthan State Mines and Minerals Limited paid Rs.51 million on account o f the cost oftrees that existedon the landacquired by it, but it did not safeguard its interests towards recovery o f sale proceeds of trees.43 While maintaining an arm's length relationship, there i s clear need for professionalization o f management as well as introduction o f improved management practices. Also, the public sector managers should be held accountable for any unnecessary losses by taking action that i s immediate and visible. 36. The accounts o f public sector enterprises should be brought up to date under a time-bound programme with suitable cleaning up o f the balance sheets where required. The deficiencies ininternal audit should be remedied. 42Reportofthe Comptroller andAuditor Generalof Indiafor the year ended 31March2004 (Commercial) Governmentof Rajasthan 43Reportofthe Comptroller andAuditor Generalo f Indiafor the year ended31 March2004 (Commercial) GovernmentofRajasthan Page 34 CHAPTER6 :GOVERNMENT ACCOUNTS InstitutionalFrameworkandProcesses 1. Government Accounts represent the financial translation o fthe activities o f the State. The accounting policies and the comprehensiveness o f the accounts are important elements in ensuringaccountability. 2. Under the Constitution the accounts o f the Union and the State Governments shall be kept in such form as the President may prescribe on the advice o f the CAG. The basic structure o f the form o f accounts i s common to all jurisdictions; this ensures a measure o f uniformity, which facilitates the compilation o f accounts o f the various jurisdictions in a common and comparable format. 3. In line with the provisions o f the Constitution, Government Accounts are maintained in three parts: Part IConsolidated Fund; Part I1 Contingency Fund; and Part I11 Public Account. A distinctive feature of the system o f Government accounts is the minute elaboration o f financial transactions o f Government with both receipts and payments being differentiated and classified in detail. The accounting system is designed to give information in terms o f the Constitutional provisions relating to the Fund (Consolidated Fund, Contingency Fund and Public Account) its nature (revenue or other than revenue), function (economic, social or general services), programme, etc. The six-tier system o f classification o f accounts currently followed ensures that data i s captured in sufficient detail so as to disclose expenditure on specific sectors, functions, programs, sub-programs, schemes, executing offices and inputs. This i s o f considerable use in performance evaluation and accounting for results. 4. Government Accounting Standards Advisory Board (GASAB) has been established under the auspices o f the CAG for the formulation and updating o f accounting standards in Government and for their implementation. GASAB i s a multi-departmental Central Government body on which the States are represented by rotation. 5. In terms o f the Comptroller and Auditor General's (Duties, Powers and Conditions o f Service) Act, 1971 the CAG is mandated to compile the accounts o f the State Governments except the Government o f Goa. InRajasthan this function i s carried out by the Accountant General (Accounts andEntitlement)functioning underthe CAG. 6. The treasuries are the focal points at which transaction o f Government receipts and payments occur. As an exception to this departments like the Public Works Department and the Forest Department are authorized to make payments by cheques. These units render the inputs to the Accountant General inthe prescribed format. Strengthsand Opportunitiesfor Improvement 7. GoR has made significant progress in computerization. All the thirty-eight treasuries and 100 sub-treasuries (those with authority to pass bills) have been computerized and are Page 35 connected through an Intranet. The treasuries send their inputs to the Accountant General both in the electronic form and in the form o f hard copies. There are generally no significant delays inthe receipt o f the inputs inthe Accountant General's Office. 8. The compilation o f accounts i s fully computerized in the Accountant General's office from the primary source document viz; the voucher. The Accountant General's Office i s now able to generate financial information on GoR receipts and expenditure at all levels o f aggregation e.g. at the level o f Drawing and Disbursing Officer, Controlling Officer, district, expenditure incurred by a department on any particular scheme et^.^^ 9. GoR rules prescribe a detailed system o f reconciliation of departmental figures o f receipts and expenditure with the books o f the Accountant General every month; this guards against misclassification o f transactions as well as well fraudulent transactions. 10. A high level Standing Committee comprising senior officials o f the Accountant General and the GoR has been established for the consideration and pursuance o f accounts related matters. There are two sub-committees on accounts and reconciliation. The institutionalized committee system not merely facilitates speedy resolution o f outstanding issues but also promotes ownership o f the accounts by the State Government. Table 5 -GovernmentAccounts Strengths Opportunities for Improvement Form of accounts prescribedby the Presidenton the advice State level ofthe CAG and is common across alljurisdictions Leveragethe full potential oftreasury level Prescribedsix-tier system of classification of accounts computerization ensures that data is capturedin sufficient detail so as to Greater synergy betweenA.G.'s voucher reflect expenditureon specific sectors, functions, level compilation and treasury compilation programs, sub-programs, schemes, executing offices and Out standingsunder Suspense still large inputs Transfers to Deposit Heads to prevent lapse Treasuries, Public Works Divisions and ForestDivisions ofbudget provisions affect the true and fair which make initial paymentsor receive money generally position of accounts and Government send the inputs for compilation of accounts intime finances Full computerization o f compilation of accounts inthe Reconciliation generally done twice a year on Accountant General's office from voucher level six monthly basis; the quality of in-year Substantialprogress in computerization of accounts at the accounts open to question treasury level Arrears in confirmation of the amounts of StandingCommittee on Accounts and its two sub- outstandingloans, the detailed accounts of committees not merely provide a forum ofresolution of which are maintained by the Accountant outstandingissues but also promote Government General ownership of accounts Systemof monthly reconciliation of departmentalaccounts National level with the accounts compiled by the Accountant General Accounts kept on cash-basis with its Decliningtrend inout standingsunder `Suspense' which associated limitations vis a vis accrualbased are being tackled in systematic manner accounting GovernmentAccounting Standards Advisory Board No formally articulated accountingpolicies functioning under the auspices of the CAG to set standards and standards and to direct, superviseand introduce accounts reforms Issue of classification of expenditurerevenue and other than revenue 44Administrative Report ofthe Office ofthe Accountant General (A&E) Rajasthan2003-2004 Page 36 11. The above are some of the positive features o f Government accounting in Rajasthan but several issues remain, which significantly impact on the utility o f accounts for outcome assessment and accounting for results. Some o f these are State level issues, while the others require action at the national level. 12. The departmental officers do not reconcile their accounts with the books o f the Accountant General every month. This i s generally done twice a year, on six monthly basis.45 Consequently, the quality and accuracy o f in-year accounts remains open to question. 13. The Accountant General maintains detailed accounts o f certain types o f loans and the year-end balances are communicated to the departmental offices for their confirmation. In several cases the departmental offices have not communicated the acceptance o f balances to the Accountant General for years, from1968-69 onwards.46 14. Also, despite sustained efforts being made, large amounts still remain outstanding under Suspense heads and are not adjusted to final heads of classification. There i s also no delineation between the out standings under the Suspense heads that have expenditure impact andthe balances that impact the GoR cash balance. 15. Another factor that affects the accuracy o f accounts and the true and fair position i s the practice o f transfer o f amounts to Deposit Heads, some time to avoid lapse o f the budget provision. During 2002-2003, Rs. 16.29 billion were drawn through Nil payment vouchers and transferred to Civil Deposits. Besides, Rs. 18.9 billion also drawn through Nil payment vouchers were transferred to other Deposit Heads.47 This persistedduring 2003-2004 as well; Rs. 17.67 billion drawn through Nil payment vouchers were transferred to Civil Deposits and Rs.33.64 billion also similarly drawn were transferred to other Deposit Heads.48 45Accounts at a Glance GoR2003-2004 46FinanceAccounts Governmentof Rajasthan2003-2004 47Reportof the Comptrollerand Auditor Generalof Indiafor the year ended 31March2003 (Civil) Government o f Rajasthan 48Reportofthe Comptroller andAuditor Generalof Indiafor the year ended 31 March2004 (Civil) Government of Rajasthan Page 37 BOX-7 Use of Public Account in ManagingStateFinances Extract from the Record Note of the Conference of the Finance Secretaries of the State Governments (December 2004) organized by the Ofice of the Comptroller and Auditor General of India New Delhi "While discussing the issue o fuse o f Public Account surpluses inmanaging the State finances, it was mentionedthat on annual basis, Public Account Surpluses constituted about one third of the deficits o f the State Governments.. . Ifallocated proportionately, more than halfo frevenue deficit o f State Governments was met with the Public Account Surpluses. As such it was felt that following implications could be considered so far as use o f Public Account Surpluses was concerned; (i) it ledto distortions inAccounts; (ii) amountedto it front loading o f deficits; (iii) itreduced the effective rate o f interest onfiscal liabilities; (iv) it resulted ininadequate legislative control; and last but not the least (v) it invariably resulted in complacency inresource management on part o f the State Governments." 16. In some cases the expenditure by way o f transfers to Deposit Heads may represent only virtual expenditure. For example, according to the Audit Report o f the Comptroller and Auditor General o f Indiafor the year ended 31 March2003, Rs.106 milliontransferredto the Personal Deposit Account of GramPanchayats hadremainedunspent for three years. 17. The combined effect o f out standings under Suspense Heads (which may mean that the expenditure has not been adjusted to the final heads and thereby under stated) and the transfers to Deposit Heads (which may meanthat the expenditurefigures are inflated) i s to undermine the reliability o f accounts and diminishtheir use as a tool o f measurement o f outcomes and accounting for results. 18. These are State level issues. The basic national level issue is the absence o f formally articulated accounting standards, except what i s mandated inthe rules and regulations e.g. the General Financial and Accounts Rules. This is currently beingattended by GASAB. 19. In Rajasthan, . as in other jurisdictions, Government Accounts are maintained on cash basis. Consequently, the accounting system does not bring out the accrual aspects of accounting such as fixed assets - land, buildings and plant, liabilities arisingout of unpaid bills, unpaid subsidies to the power sector, pension obligations, unrealized tax revenues and other receipts as well as the cost o f using the existing resources (depreciation etc.). This also diminishes the utility o f accounts as a tool o f measurement o f outcomes vis a vis the inputs. 20. A third national level issue relates to the classification o f expenditure between revenue and capital. The Constitution o f India recognizes two types o f expenditure: expenditure on revenue account and other expenditure. GoR General Financial and Accounts Rules define Capital expenditure broadly as expenditure incurred with the object o f increasing concrete assets o f a material and permanent character. Expenditureon a temporary asset Page 38 or grants-in-aid shall not ordinarily be considered as expenditure o f a capital nature.49The issue i s explained inthe following paragraphs. 21. During 2003-2004 GoR provided for and paid grants-in-aid of Rs.6.34 billion to local bodies under Capital section o f budget and accounts.s0 Strictly, these should have been classified under revenue expenditure. 22. An Expert Group set up by Government of India has held in its Report (2004) that the current norms for distinguishing between revenue and capital expenditure are based on sound accounting principles and are in line with the international practice. As regards the transfers to other jurisdictions, it i s the ownership o f the asset created thereby that should determine its classification in the books o f the transferring jurisdiction. For the sake of transparency such transfers as are intended for the creation o f assets should be classified as capital grants under the revenue section inthe books o f the transferor. Way Forward 23. GoR Accounts score well on a number of parameters set out in the IFAC-PSC standard5' on the cash basis o f accounting but do not meet the standard as a whole mainly due to lack o f definition o f coverage o f the economic entity and a lack o f a clear statement o f accounting policies. 24. GoR should more actively cooperate with the Accountant General in the efforts being made by the latter for clearance o f the amounts outstanding under Suspense heads. GoR should also discourage transfers to the Deposit Heads. Ideally, all personal ledger accounts should be closed at the end of the year, and at least the larger local bodies, shouldbe encouraged to keep their funds inbanks52. 25. The cash based accounting system has limitations, for instance, liabilities could be understated, fixed asset accounting i s often absent, full cost o f services cannot always be ascertained on a timely basis and commercial services cannot be priced correctly. Nevertheless, it i s recognized that there are several difficulties inimmediate switchover to accrual-based accounting. There are practical problems, conceptual issues, huge costs and timeframe. But this must remain the ultimate goal. The Twelfth Finance Commission has recommended that the Central Government should gradually move towards accrual basis o f accounting. In the interim period additional information in the form of statements should be appended to enable more informed decision-making. The additional information may relate to subsidies, expenditure on salaries, expenditure on pensions, committed liabilities, maintenance expenditure segregation o f salary and non-salary portions and liabilities and repayment schedule on outstanding debt. GoR i s encouraged to enter into a dialogue with the Accountant General for suitably implementing this recommendation at the State level. Additionally, the GoR could work with the 49Rule 338 ofGoR GeneralFinancialandAccounts Rules FinanceAccounts Governmentof Rajasthan2003-2004 "InternationalFederationofAccountants-PublicSectorCommittee 52This will require amendment to the GeneralFinancialandAccounts Rules. Page 39 Accountant General to build the road map for the move towards introducing accrual accounting and conducting pilots as appropriate in line with similar developments at the central government. Page40 CHAPTER 7 :FINANCIAL REPORTING Institutionalframework andprocesses 1. Financial reports represent the window through which Government is viewed in financial matters. Under the Comptroller and Auditor General's (Duties, Powers and Conditions o f Service Act), 1971, the Accountant General (A&E) who compiles the accounts o f GoR from the inputs received by him from the treasuries, public works divisions etc also prepares the financial statements of GoR. The Accountant General sends the following financial reports to the State Government: 0 Inyear Monthly Accounts ofGovernment classifiedunder MajorHeads; a Monthly Statements o f Progressive Expenditure; a Quarterly Appreciation o fthe Accounts o fthe State Government; a Finance Accounts; and a Appropriation Accounts. 2. The Finance Accounts and the Appropriation Accounts, which are the Annual Statements, carry the Audit Certificate o f the CAG and, as prescribed in the Constitution, these are tabled inthe State Legislative Assembly; thereafter these become public documents. 3. The Accountant General also brings out an annual document called the "Accounts at a Glance". Strengthsand Opportunitiesfor Improvement A positive feature of financial reports is that these are prepared and sent out intime. Thus the Monthly Accounts are sent out within less than two months and the annual financial statements viz; the Finance Accounts and the Appropriation Accounts are sent to the Governor within six months o fthe close o f the financial year. However, there are delays in the availability o f the Annual Statements in the public domain. The delays arise mainly because as per a requirement o f the Constitution these Statements have to be first tabled in the State Assembly, which may not be in session when the statements are ready and submitted to the Governor. Also the Monthly Accounts are not in the public domain as in some other States like Karnataka. Consequently, the civil society i s denied the opportunity o f observing the Government fiscal performance duringthe year. The monthly statement o fprogressive expenditure is a useful management tool. It enables the controlling officers to keep watch over the progress o f expenditure against budget provisions, thereby monitor the progress o f schemes and take timely corrective action including applying for additional funding. Page 41 8. The Accountant General's Quarterly Appreciation o f Accounts i s another useful management information tool. It describes the sources and application o f funds, the up-to- date progressive position o f receipts and expenditure with analysis o f their progress relative to the corresponding quarter o f the preceding year, the extent o f delays in the receipt o f accounts and documents from treasuries and divisions, the position o f reconciliation o f accounts, the balances under suspense heads, the extent o f recourse to ways and means advances and overdrafts etc. Table 6 -Financial Reporting Strengths Opportunities for Improvement MonthlyFinancialReportspreparedand sent to the The Annual Financial Statements are not in State Governmentwithin less thantwo months publicdomain within six months ofthe close of Monthlystatement ofprogressiveexpenditure is a the financial year becauseof delays in useful managementtool that enablesthe controlling presentingthe FinanceAccounts andthe officers to keep a watch over the trend of AppropriationAccounts to the State Legislative expenditureagainstbudgetprovisions Assembly Accountant General's QuarterlyAppreciationof Monthly Accounts andAccountant General's Accounts containsusefulmanagement information Quarterly Appreciation of Accountsnot in presentedinan analytical manner publicdomain Annual FinancialReports(FinanceAccounts and Accounts at Glanceneedswider dissemination Appropriation Accounts) sent to the Governor after Annual Financial Statements do not fully meet audit within six months ofthe close ofthe year the IFAC standards;CAG's Audit Certificate Annual FinancialReportsrequiredto be presented does not say that these presenttrue and fair to the State LegislativeAssembly andthereafter view become available inthe public domain The departmentalofficers do not furnish the Appropriation Accounts useful instrumento f reasons for savings/excessexpenditureinthe reportingon the financial progressof AppropriationAccounts; this diminishesthe programs/schemesbesides informingthe legislature usefulnessofthe AppropriationAccounts o f the extent ofdeviations in expenditure from the FinanceAccounts not very user-friendly authorizedbudgetprovisions FinanceAccounts do not disclosethe assets FinanceAccounts contain wealth o finformation createdby incurringcapital expenditure that canbe of use to seriousstudents of public Out standingsunder Suspenseandtransfersto finance DepositHeadsto prevent lapse of budget Accounts at a Glancea highly informativeanduser- provisions underminethe veracity ofthe Annual friendly document FinancialStatements 9. The Appropriation Accounts compare the actuals o f expenditure under different heads with the legislatively approved authorizations and report to the legislature significant cases o f savings and excesses with the reasons as intimated by the controlling officers. In view o f the functional system o f classification, the Appropriation Accounts are a useful instrument o f measuring the financial progress of the schemes besides the efficiency and effectiveness o f budget preparation and expenditure control. But their usefulness is diminished since the departmental officers do not furnish the reasons for savings/excess expenditure in all cases. Consequently, the reasons for slow progress in the implementationo f the schemes are not disclosed. Page 42 10. The Finance Accounts contain wealth o f information that can be o f use to serious students of public finance. The Finance Accounts present the accounts of the receipts and outgoings o f GoR for the year, together with the financial results disclosed by revenue and capital accounts, the accounts o f Public Debt and liabilities as worked out from the balances recorded inthe accounts. Apart from the statements o f receipts and expenditure, some explanatory notes to statements in the Accounts provide details o f the State's guarantees, borrowings, the minimumcash balance requiredto be maintained by the State, limit for ways and means advances, and overdrafts etc. The document is, however, not very user-friendly even to a professionally trained person. The document should also include information on major subsidies, debtor-wise maturity profile o f debt and outstanding arrears etc. The Finance Accounts do not disclose the physical assets created by incurringof capital expenditure. 11. A comparison o f the Annual Financial Reports with the best practice shows that in Rajasthan, as in other States, the Financial Reports do not completely satisfy IFAC-PSC standard, mainly because o f a lack o f definition o f their coverage, and lack o f a statement o f accountingpolicies. A detailed comparison i s given inAnnexure 111. 12. Also inhis audit report the CAG certifies, not that the financial statements show a true and fair view, but that both these are prepared and examined under his direction in accordance with the CAG's (Duties, Powers and Conditions of Service) Act 1971 and that they are correct statements, subject to the observations in the Reports themselves or in the Audit Reports. There is no law specifically laying down the form o f certificates. The matter i s currently engaging the attention o f the CAG. 13. The Accounts at a Glance i s a highly informative and user-friendly document but it needs wider dissemination. Way Forward 14. Summing up, the major limitations o f the financial reports as an aid to accounting for results are rooted inthe limitations o f Government accounts. The accounts are not merely cash-based but their veracity i s severely compromised because of out standings under Suspense Heads and transfers to Deposit Heads. 15, GoR should take steps to ensure that the departmental officers furnish explanations for variations between the budget and actuals inall cases inthe Appropriation Accounts. The issue o f delay in the public availability o f Annual Financial Reports i s a national issue, which needs to be discussed at a periodic conclave of the Presiding Officers of the legislatures. 16. With the current trend towards greater openness and transparency, GoR needs to respond positively to a suggestion for public availability o f the monthly key financial data. The document Accounts at a Glance should be more widely disseminated. Page 43 17. GoR i s encouraged to enter into a dialogue with the Accountant General for enhancement of the frequency of the Accountant General's Appreciation of Accounts as well as for enrichment of its contents. Additionally, GoR may enter into a dialogue with the Accountant General for a department-wise monthly account of receipts and expenditure at the desired levelof aggregation. Page 44 CHAPTER 8 :EXTERNAL AUDIT InstitutionalFrameworkandProcesses 1. External Audit provides independent assurance of the extent to which budget objectives are met. Government o f Indiahas a unifiedaudit ina federal set up; with a constitutionally ordained Supreme Audit Institution (SAI), called the Comptroller and Auditor General o f India (CAG) that is common to the Union and the State Governments. The Comptroller and Auditor General's (Duties, Powers and Conditions o f Service) Act, 1971 formally defines the audit jurisdiction o f the CAG. Broadly, the C A G i s authorized to audit not merely the receipts and expenditure o f Government, but also the autonomous bodies and the public sector enterprises. In Rajasthan the CAG functions through the Principal Accountant General (Audit) andthe Accountant General (Audit) located at Jaipur. 2. The Accountant General's Office discharges the audit function through off- site audit as well as on-site audit. Off-site audit is conducted with reference to the accounting documents received in the Office o f the Accountant General (A&E). On-site audit office i s conducted by visits to the departmental offices. Audit Notes and Audit Inspection Reports are issued on the conclusion o f off-site audit and on-site audit respectively. The more important cases are included inthe Audit Reports. 3. The C A G currently issues three Audit Reports in a year one each on expenditure, receipts and public sector enterprises. The Reports contain a mix of performance appraisals and transaction audit paragraphs, the latter placed in the appropriate context and with an orientation that i s increasingly focused towards outcomes. The CAG's Audit Reports are required, under the Constitution, to be placed before the legislature where after these are inthe public domain. 4. The C A G personally writes to the Chief Minister communicating the major findings o f the Audit Reports. 5. GoR has issued comprehensive instructions for timely response to audit; the reply to the inspection reports must be furnished within four weeks and the reply to the matters proposed for inclusion in the Audit Report, which the AG communicates by name to the Administrative Secretary with copy to the Finance Secretary, must be sent within six weeks. A mechanismto hold meetings o fthe Audit with the Administrative Secretaries to discuss matters proposed for inclusion in the Audit Reports has also been in~titutionalized.~~ 6. Audit Committees comprising representatives o f audit, executive and the Finance Department have been set up to review the departmental action taken on inspection reports for their speedy settlement. ''Report o f the Comptroller and Auditor General o f India for the year ended 31 March2004 (Civil) Government of Rajasthan Page 45 Strengthsand Opportunities The robustness of the CAG's organization, its independence, reach and jurisdiction are well recognized. The CAG has promulgated his own Auditing Standards suitably adopting the restructured Auditing Standards issued by the INTOSAI in 200154;the CAG's internal procedures, including peer review and multi-layered scrutiny of audit reports at the draft stage are intendedto promote high quality output. An Audit Advisory Board comprising of eminent persons from different walks of life has been established at the national level. Besides, its advisory role, the Board also provides a degree of oversight on public audit arrangements of the CAG's organization. Table 7 -ExternalAudit Strengths Opportunitiesfor Improvement IndependentInstitution prescribed inthe Needfor adequate andtimely responseto audit Constitution observations Auditing Standardsgenerally onpar with the Needfor timely remedialand corrective action INTOSAIAuditing Standards with reference to audit observations Well documentedaudit systems andprocedures Incentiviseresponseto audit designedto ensurehigh quality output Audit committees should meet regularlyat Transparency in audit processes;f i l l opportunity prescribedintervals givento the executive for its say at each stage Greater interactionbetweenthe Accountant Reportsconstructive General and the State Government at the apex Internalpeer review levels-bothat the planningand completion stages Audit Reports inpublic domain after these are o f the audit. presentedto the State legislativeAssembly InspectionReports not inthe public domain The CAG personallywrites to the Chief Minister Occasionaldelays inthe Audit Report; some regardingmajor findings ofthe Audit Reports times causedbecause the State Legislative Audit Advisory Boardat the nationallevel Assembly may not be insession when the Audit GoR detailedinstructionsfor action on audit Report is sent to the Governor observations More informedpress coverage o f CAG final Institutionof Audit Committees for follow up on report audit objections 8. The CAG's organization i s constantly reviewing its procedures for the better fulfillmentof the Constitutional mandate of the SA1and be inline with the best practice. For example, CAG's recent Performance Audit Guidelines (2004) would provide for a higher degree of interaction with the auditees. The salient features of performance audit will consist, among others, of strategic planning in pursuit of realization of the strategic goals and objectives, risk-based planning and selection of subjects and attainment of the ultimate objective of value-addition to the public sector programs. The CAG has also issued a separate set of Guidelines on the Performance Audit of Regulatory Bodies. These guidelines are to be applied at Rajasthaninthe future. 9. The CAG's Audit Reports are generally timely and contain useful suggestions for improvement. (See Box 8). However there was an exception in the case of the Civil 54Preface to the Auditing Standards, 2"d Edition 2002; it i s one of the basic postulates of CAG's Auditing Standardsthat the SA1shouldcomply with the INTOSAIstandards inall mattersthat are deemedmaterial. Page 46 Report for 2003-2004 which was ready in May 2005 but disclosed in September 2005 approximately six months behindschedule. There i s transparency about the process with full opportunity being givento the executive to explain its position at each stage. 10. The audit inspection reports issuedby the Accountant General after the audit inspection of departmental offices are not inthe public domain. 11, Timely action on audit observations can lead to significant saving for Government. For example, GoR recovered revenue receipts o f Rs. 291 million (which had been under assessed) during 2003-2004 at the instance of external audit5'. Similarly an amount of over Rs. 31 million could be recovered during 2003-2004 in consequence o f the audit observations on works e~penditure.~~ BOX-8 IllustrativeExamplesof Recommendationsof the CAG of India" CIVIL The State Government may frame its own Education' Policy and guiding principles for transferhotation of staff thus improving quality of education. Government should consider allotting more schools for girls' education and education for tribal students. Emphasis may be given on science and technology and vocationalisation of education as envisaged inthe National Policy on Education. Rationalization of staff as per actual requirement and prescribed norms should be carried out. Up gradation of schools may be made as per prescribed norms and procedure so as to avoid growth of uneconomical schools. Source: Report of the Comptroller and Auditor General of India, for theyear ended 31 March 2004 (Civil) Government of Rajasthan, Review on Secondary Education Department REVENUERECEIPTS The Government may consider the following58: 0 A strong mechanism needs to be developed to prevent unauthorized occupation of land. Provision needs to be incorporated for levy and collection of differential cost o f land from beneficiaries on account of exchange o f land from undeveloped landto developed land. Effective steps needto be taken to ensure that the cost of land i s recovered in accordancewith the rules and procedures and in case where allotments are liable to be cancelled, action should be taken promptly. Internal controls to safeguard the Government revenue needto be strengthened. Source: Report of the Comptroller and Auditor General of Indiafor theyear ended 31March 2004 (Revenue Receipts) Government of Rajasthan. 55Report ofthe Comptroller andAuditor General of India for the year ended 3 1 March2004 (Revenue Receipts) Government of Rajasthan 56AdministrativeReport of the Office of the PrincipalAccountant General (Audit) Rajasthan for the year 2003- 04 57One illustration each from Civil, RevenueReceipts, and CommercialAudits reports of the CAG 58Receiptsof ColonizationDepartment Page 47 COMMERCIAL The (Rajasthan State Warehousing) Corporation should exercise control over administrative expenses and prepare budget estimates on realistic basis. The Corporation should invest funds judiciously in long term fixed deposits and expand storage capacity assessing its viability. Also, the Corporation should attract more primary producersto store their agricultural produces in its warehouses. ISource: Report ojthe Comptroller and Auditor General ojlndiafor theyear ended 31 March 2004 (Commercial) Rajasthan.1 12. GoR can derive full benefit o f external audit with adequate, proper and timely follow up action on audit observations. Although GoR has issued comprehensive instructions for the purpose,there is a bigcompliance gap that needs to be bridged. 13. Government Departments did not send replies to 3 out of 6 performance appraisals and 3 out o f 22 paragraphs included in the Audit Report (Civil) for the year ended March 2004. The Departmentsreplied to 2 out o f the 4 Appraisals included in the Commercial Audit Report and sent replies to 6 out o f the 10 paragraphs only. For the Receipts Audit Report out of the cases involving Rs. 3.82 billion on account o f short levy, non levy etc. o f taxes, duties etc. referred to them, Government Departments did not respond to cases involving Rs. 1.6 billion. The attitude to Audit at the highest level o f bureaucracy is likely to set an unfortunate example for the subordinate levels. 14. As many as 8589 inspection reports on audit o f expenditure involving 36726 outstanding paragraphs hadnot been settled as o f September 2004. Insome cases even the first replies to the inspection reports that were required to be sent within one month had not been furnished for five years and more. The amounts involved in the CAG's outstanding inspection reports relating to receipts had increased from Rs. 8.14 billion to Rs. 11.18 billion between June 2002 and June 2004. In respect o f PSE's 1071 inspection reports involving money value o f Rs. 22.6 billion had not been settled as o f September 2004. 15. Audit Committees set up for the speedy settlement o f outstanding inspection reports are also not proving very effective. The Audit Committee relating to receipts held only 3 meetings during 2003-2004 against 14 meetingsthat were required to be held. The Audit Committee relating to expenditure discussed only 2754 paragraphs and settled 658 paragraphs during 2003-2004, this cannot be considered to be satisfactory considering the huge backlog o f over 36 thousand paragraphs. Way Forward 16. While a robust external audit system i s universally acknowledged to be in place, its effectiveness has been greatly impaired by the lack o f adequate response to audit observations. Consequently, valuable opportunities get missed out for course correction, systemic improvements, savings inexpenditure and recoveries o f Government dues. Page 48 17. GoR needs to be timelier in its response to Audit with remedial and corrective action that not merely settles the infractions/irregularities reported but also addresses the systemic deficiencies. The Audit Committees must meet with the prescribed frequency and in a more purposeful manner with the executive departments ready with final action to the satisfactiono f Audit. 18. The response to the material proposed for inclusion in the Audit Reports needs to be monitored at the level o f the Chief Secretary. The senior officers must provide the leadership and during their inspections o f the subordinate offices they should review the response to pending audit observations. The adequacy of response to audit should be taken into account whole writing the Annual Performance Appraisal Reports. At stake i s the public money. 19. There i s also need for further deepening and enhancing the level o f interaction between audit and executive. This step would further enhance the audit impact. GoR can make fuller use o f the specialized skills of the CAG's organization in its quest for better value for money. A quarterly communication in the form of a management letter from the Accountant General to each Administrative Secretary informing the latter o f the significant points noticed during audit inspections would be a welcome addition to the current practice o f issue of inspection reports and separately forwarding material in the form o f a draft paragraph for the audit report to the Administrative Secretary in due course. This however requires a change in mindset o f the executive that regards audit as its eyes and ears and sees timely response to audit as one of its primary duties. A valuable spin off o f this would be the further enhancement of the quality and content of audit including its recommendations in the furtherance o f Audit's role as an agent for constructive change. Page 49 CHAPTER9 :LEGISLATIVE SCRUTINY InstitutionalFrameworkandProcesses Legislative scrutiny secures the accountability o f the executive for the achievement of the outcomes for the budget provided to it. As in other jurisdictions legislative scrutiny in Rajasthan draws its authority from the Constitution o f India. The Committee on Public Accounts (PAC) and the Committee on Public Undertakings (COPU) are constituted under the Rules o f Procedure and Conduct o f Business inRajasthan Legislative Assembly promulgated in terms o f Article 208 o f the Constitution. The CAG's Audit Reports automatically stand remitted to the PAC (Civil and Revenue Receipts) and COPU (Commercial) for follow up action after these are tabled inthe Assembly. 2. The PAC (15 members) and the COPU (also 15 members) represent the State Legislature inminiature butfunction inanon-partisan manner. Their reports are generally unanimous and carry the moral authority of the entire House. A Minister i s barred from being a member o f these Committees; the Chairman of the PAC i s usually from the Opposition. The Reports are tabled in the House and thereafter become public documents. The Committees are equipped with adequate powers to examine GoR officers at the highest level o f bureaucracy as well as to call for Government records and documents for their work. The Committees have the benefit o f the advice of the Accountant General in the follow up on the Audit Reports. 3. GoR has issued detailed instructions regarding follow up on Audit Reports. The Departments are requires to send suo moto self-explanatory notes on Audit Report paragraphs to the Assembly Secretariat within three months o f the presentation o f the Audit Reports. The Departments are also required to send Action Taken Notes on the recommendations o f the PAC and the COPU within six months o f the presentation o f the reports o fthe Committees. Strengthsand Opportunitiesfor Improvement 4. Timely follow up action on CAG's Audit Reports can result in significant savings for Government and compliance improvement. During 2003-2004 GoR recovered Rs. 12.5 million as a result o f follow up action on Audit Reports (Civil) for the years 1995-96 and onwards.GoR also issued directions in29 cases for avoidance of irregularities pointed out by 5. Although GoR has issued detailed instructions regarding follow up on Audit Reports, these are not being complied with. Consequently, valuable opportunities get missed out for course correction, recoveries procedural improvements etc. 59Administrative Report of the Office of the PrincipalAccountant General (Audit) Rajasthanfor the year 2003- 2004 Page 50 6. Government Departments had not sent suo rnoto self-explanatory notes in respect of 44 out of 292 paragraphsof the Audit Reports (Civil) to the Legislative Assembly Secretariat by January 2005; some of these had been pending since 1998-99. For the Revenue Receipts Audit Reports, the requisite notes had not been sent in respect of 59 out of 128 cases included inthe Audit Reports for the years ended March2002 and March 2003. Table 8 - Legislative Scrutiny Strengths Opportunitiesfor Improvement Legislative scrutiny derives its authority from the 0Delays inthe submissionof Self Coistitution ExplanatoryNotes Legislative Committeesrepresentthe State Legislative Arrears inthe considerationofAudit Assembly inminiature Reportsby the Committees LegislativeCommitteesfunction ina non-partisanmanner, Delays inthe submissionof Action their reportsare generally unanimous and carry the moral TakenNotes on the recommendationsof authority of the House the Committees Reportsofthe Legislative Committeestabled inthe House Includestatus report on audit andthereafterbecomeavailable inthe publicdomain observationsinthe Department's Legislative Committeeshave adequatepowersto examine Administrative Report. officials at the highestlevelof bureaucracyas well as to call Greater openness for records anddocuments Tenure ofthe members ofthe LegislativeCommitteeshavethe benefit ofthe adviceofthe Committees Accountant Generalinthe examinationof matters included 0 The Assembly holdan annualdebate on inthe Audit Reports the work of the Committees Systemo ftime-boundsuo mot0 submissionof Self- 0 Proceedingnot open to the press ExplanatoryNotesto the Assembly Secretariat Systemoftime-bound submissionofActionTakenNotes on the recommendationsofthe Committees 7. Also, Government Departments had not sent Action Taken Notes on a very large number of recommendations of the PAC arising out of the Civil Audit Reports, some o f these had been pending since 1995-96. In the case of Revenue Recei ts Audit Reports, action on some of the recommendations had beenpending for 13 yearse$ . Government Departments had not sent Action Taken Notes on the reports of the COPU presented between August 2002 and August 2003; some of these related to matters reported in the CAG's Audit Reports for the year1991-92 andonwards6'. 8. Both the PAC and the COPU are inarrears. During2003-2004 the PAC discussed some of the cases that had featured in the CAG's Audit Reports (Civil) for the years 1999-2000 and 2000-2001 and finalized its recommendations on some of the cases that had featured inthe Audits Report (Civil) for the years 1996-97to 2000-200162.Inrespect of the Audit Report (Receipts) cases reported in the Audit Reports for the years 2000-2001 and 60Reportofthe Comptroller andAuditor Generalof Indiafor the year ended31March2004 (Revenue Receipts) GovernmentofRajasthan 61Report of the Comptroller and Auditor General o f India for the year ended 31 March 2004 (Commercial) GovernmentofRajasthan 62Administrative Report of the Office of the PrincipalAccountant General(Audit) Rajasthanfor the year 2003- 04 Page 51 onwards were awaiting discu~sion~~.The COPU was in arrears for the Audit Reports (Commercial) for the year 1998-99 and onwards.64 9. The PAC had held 12 meetings during 2003-2004; the COPU had met 4 times during the same year.65 10. The delays in follow up action on the Audit Reports have cascading effect. With the passage o f time, incumbents who are inthe best position to explain their position and who should be held accountable are likely to have moved away (or even retired in some cases) and the current incumbents may find themselves handicapped. What i s worse, an impression o f indifference to accountability may get generated if the officials start harboring the feeling that they would not be personally held accountable or that even the audit comment may wither away with the passage of time. Delays in consideration o f Audit Reports and makingrecommendations in consequence o f the mature consideration by the Committees also cause delays the remedial and corrective action. 11. As per Article 205 o fthe Constitution o f India it is mandatory for State Government to get the excess over a grant/appropriation regularized by the State Legislature. However, a number o f states have been behind schedule. At Rajasthan the excess expenditure amounting to Rs 1,009 crore for the year 2000-2001 to 2002-2003 had not been regularized as o f August 2004. This appears to be a breach o f Legislative control over appropriations. Way Forward 12. The effectiveness of legislative scrutiny of public finances has been considerably impaired by the all-pervasive delays. The timely supply o f suo mot0 self-explanatory notes and the Action Taken Notes needs to be monitored at the level o f the Chief Secretary. As in the case o f response to audit observations, the performance inthis regard shouldbe taken into account while writing the Annual Confidential Reports. Additionally, as inthe Central Government (see Box 9) the Annual Administrative Reports o f important Departments could contain a status report on the follow up action taken on audit observations. 63Report of the Comptroller andAuditor Generalof India for the year ended 31March2004 (Revenue Receipts) Government of Rajasthan 64Report of the Comptroller and Auditor General of India for the year ended 31 March 2004 (Commercial) Governmentof Rajasthan 65Administrative Reports of the Offices of the Principal Accountant General and Accountant General (Audit) Rajasthan2003-2004 Page 52 BOX-9 Status report on follow up action on audit observations As far as an improved compliance mechanismis concerned besides greater monitoring by the executivebranch andpromoting more active interestby PACs and PUCs, we have also ensuredthat details o f audit compliance inthe Centre are reported inthe Annual Reports of important departments o f Government o f India. This has enabled greater oversight by Parliament and its Committees over compliance o f audit observations. Source: Address of the Comptroller andAuditor General of India on the occasion of the inauguration of theXYIII Conference of the Accountants General September 2005 13. The Legislative Committees may consider suitable strategies for clearing the backlog o f arrears with appropriate prioritization so that the Committees can follow up on the latest reports. This could include an enlargement o f the role o f the Accountant General in relation to some of the older Audit Reports as well as according of higher priority to the more recent Audit Reports. 14. Currently, the members o f the Committees have a prescribed tenure o f one year only, which can be extended by the Hon'ble Speaker for another six month. However, anecdotal evidence suggests the existence o f a healthy tradition whereby the members are re-elected to the Committees and infact enjoy continuance o f tenure for the life o f the House. This i s a welcome feature in Rajasthan. The question o f providing de jure status to this healthy tradition i s worthy o f consideration. 15. There i s one more issue. The proceedings o f the Committees are not open to the press and the public and the evidence o f the officials tendered before the Committees i s not in the public domain, though a Committee may issue a press release at the end o f a sitting. Both these issues need to be debated at an all-India periodic conclave o f Hon'ble Presiding Officers o f the legislatures or the Chairpersons of the Committees. The Committees also need to revisit the issue o f public access to the evidence o f the departmental officers inthe light o f the Right to Information Act, 2005.66 Greater openness and public access to the verbatim record of deliberations o f oversight committees would ensure better civil society involvement, promote accountability and enhance the effectiveness o f legislative oversight. Best international practice includes an annual debate on the work o f the Committees at the Legislative Assembly. Under Section 8 ofthe Central Right to Information Act, 2005, the information that cannot be denied to the - Parliament or a State legislature shall not be deniedto any person. Page 53 CHAPTER 10 :ACCESS / RIGHT TO FINANCIAL INFORMATION InstitutionalFramework 1. AccessIRight to Information has been judicially recognized as being embedded in the Fundamental Rights guaranteed by the Constitution o f India.67 According to the Hon'ble S,upremeCourt the fundamental right to freedom of speech and expression, guaranteed by the Constitution, also includesthe right to acquire information andto disseminate it. Ifthe people are to perform their role as sovereign and instruct their Government, they must have access to all information, ideas and points o f view. 2. Also, India i s a signatory to the UN Declaration o f Human Rights that proclaims that every one has right to freedom o f opinion; this includes freedom to hold opinions and to seek, receive, and impart information and ideas through any media regardless o f frontiers. 3. GoR has already achieved a sufficiently high level o f fiscal transparency that i s more or less on par with other jurisdictions in the country. The budget documents, the financial statements, the annual reports o f the Departments, the Audit Reports o f the CAG and the Reports o f the legislative committees are in the public domain and contain plethora o f financial information for informed debate and discussion and for holding Government accountable. The State's Fiscal Responsibilities and Budget Management Act, 2005, seeks to ensure greater transparency infiscal operations o f the Government and conduct o f fiscal operations in a medium-term framework. Suggestions made in the preceding chapters for additional disclosures like the amounts o f tax expenditure and debt maturity profile would be in line with the best practice. Wider dissemination o f the reports already beingpublishedwill enhance civil society involvement. 4. GoR i s commended for having recognizedthe importance o f public access to information inits quest for strengthening good governance and public accountability. The passage of the Right to Information Act in May 2000 and its notification in January 26, 2001 thereafter, well ahead o f most other States and the Central Government6*,i s a testimony to the forward looking approach beingadopted for improving governance and accountability. 5. The global experience with such legislations i s that when properly structured and implemented such legislation promotes public confidence in government, higher productivity o f resources and leads to a healthier environment for investment and growth along with greater public participation in the developmental process. In Rajasthan the effective use o f the State - Right to Information Act by certain Non-Government Organizations like the Mazdoor Kisan Shakti Sangathan and the Urmul Jyothi Trust has led to the detection and exposure o f numerous cases o f leakages and mis-utilization o f 67Supreme Court o f India, State of Uttar Pradesh vs. Raj Narain AIR1975 SC865; Ministry o f Information and Broadcasting vs. Cricket Association o f Bengal Supreme Court Cases 1995(2); Vineet Narain vs. Union o f India AIR 1998 SC 889 The Central Freedom of Information Act 2000 didnot come into force inthe absence of the related rules that were to be notifiedunder the Act; the Act has since beenrepealed. Page 54 public funds, subsequent remedial action by way o f refunds and recoveries and has had deterrent effect. The right to information has indeed force multiplier effect for promoting transparency and accountability. StrengthsandOpportunitiesfor Improvement 6. The State Right to Information Act provides a reasonably good framework for providing - the public right to information. The framework covers all Government departments and agencies and the steps to be taken for its implementation have been spelled out and communicated widely within Government. 7. There are no major unreasonable conditions imposed on public to obtain access, including cost o f application. In furtherance to the Act, major Government departments having public dealings have taken steps to implement the Act, by promulgating the Citizen's Charter. The Charter i s meant to demystify the Government administrative procedures for general public, by displaying relevant information on services due to citizens on boards and conspicuous areas.69 The experience in the implementation o f the law can be built upon for the implementation o f the Central - Rightto Information Act, 2005. 8. There i s however an impression that the State Right to Information Act does not go far - enough. Neither the Act nor the rules framed under the Act prescribe the mandatory suo mot0 disclosures. These are left to the individual departments; and the departments have been content merely to notify the Citizen's Charter. The Act does not define the exclusions sufficiently narrowly and the principle o f severability i s not laid down in the Act. 9. The Act prescribes the time limit o f one month within which the information must be supplied. The Act also prescribes a similar time limit o f one month within which the first appeal (that lies with the district vigilance committee/departmental authority) must be decided. But, the delay in deciding the appeal i s not automatically treated as rejection. In the absence o f an order by the first appellate authority, the independent second appellate authority has refused intervention on the ground that there i s no impugned order against which it can entertain an appeal! This leaves the applicant inthe unenviable position o f a double jeopardy; first he i s not provided the information and second the appellate authority refuses to intervene. 10. The penalty provisions in the Act do not inspire confidence. The Act prescribes levy o f penalties for willful refusal to supply information or for willful supply o f incorrect information. But such a penalty can be levied only by the departmental authorities and under the relevant disciplinary rules. The disciplinary authority is only part of the State administrative machinery and not an independent authority and anyhow the disciplinary proceedings notoriously take time. 69The World Bank, RajasthanClosing the Development Gap, August 2005 Page 55 Table 9 -Access / Right to FinancialInformation Strengths Opportunities for Improvement Over-allfiscal transparency Over-allfiscal transparency Fiscal Transparency compares well with Need for wider dissemination of various other States publications; opportunities already listed at Budget documents, Annual Financial appropriate places will promote over-all fiscal Reports, Annual Reports of the transparency Departments,Audit Reports, Reportsofthe PACKOPU inthe public domain StateRight to Information Act FRBM Act 2005 seeks to hrther enhance 0 State - Right to Information Act does not fiscal transparency prescribethe suo mot0 disclosures; these are left to the discretion of individual departments StateRight to Information Act 0 Exclusions are not narrowly defined in the State GoR among the first few States to enact law and implement Right to Information law at 0 Absence ofprinciple of severability the State level 0 No independent authority to levy penalties for non-supply of information; the power continues Central Right to Information Act to vest inthe departmentalauthorities only The Central - Right to Information Act, 0 Delay in supply of information beyond the 2005, which is much wider in its ambit, stipulatedperiod inthe first appealnot treatedas becomes automatically applicable in denial Rajasthan. GoR can build on the 0 Too legalistic an interpretation has preventedthe experience already gained in the redressal of appeals in favor of the information implementation ofthe State law seekers 0 Neither the law nor its implementation perceived to be sufficiently citizen-friendly Central Right to Information Act Make preparationsfor the implementation of the Central law, notify the Rules, issue suitable instructions, notifylappoint information officers, appoint independentInformationCommissioner Initiate action to propagate the provisions of the law; earmark and disclose commitment of financial resources for the purpose Promote and enhance culture of transparency with mindset change inthe bureaucracy Streamlineinformationsystems Way Forward 11. The real challenge before the GoR is the implementation o f the Central - Right to Information Act, 2005 that i s much wider in its ambit and sweep. The Act narrowly defines the exclusions with the over-riding proviso that information that cannot be denied to a member o f the State legislature shall also not be denied to any person. The Act prescribes a whole range o f suo moto disclosures. The power to levy penalties for violating the provisions o f the Act has been vested in the independent State Information Commissioner. The Act also contains provision for the propagation o f the right to information. Page 56 12. In view o f this new development GoR needs to streamline its records management and information systems with adequate use o f computers. The initiatives already under way by way o f e-Mitra, land record computerization project, computerization o f activities of the Departments o f Commercial Taxes, Excise, Transport and Registration and Stamps can be hastened and leveraged. Action could be taken to place maximum information on the web site. Constructive use o f publicly available reports on the internet could help to address a number o f the accountability and responsibility problems raised in the report. GoR also needs to issue general instructions for the guidance of staff; impartthe necessary training; and promote a culture o ftransparency with change inthe mindset o f bureaucracy that recognizes that information is no longer its monopoly and that it will be held accountable on a day-to-day basis, and not only for the results but also for its actions and processes. Regular orientation programs may be held for the Officers with the specific purposes o f training them about better record management; improving access to information and reducing secrecy; benefits of transparency and accountability; and providing widespread publicity to the Act. Page 57 Totat E x ~ ~ ~for~FYi 2003-~04r (Actuals) Rs 230 billion ~ e - Revenue@ x ~ ~ naccountedufor~82eper cent of total funds ~ ~ ~ ~ ~ ~ ~ l ~ b ~ e (Revenue e x ~ e n ~ ~ ~ u n s{*I lntensst ~ LS61% ~ ~on RevenueAccount =s 21%) ~ @ ~ f Interest P a ~ ~ e on~ $ n RevenueAccount 21% Disbursementof Loans Bt Advances 4% Revenue Expenditure 61% Capital ~ x ~ e n d ~ ~ ~ r e ~ 14% t'age 58 A synopsis of thefinances of the State Government Cfromthe Report of the CAG (civil)for theyear ended 31 March 2004) 0 The revenue receipts o f the State Government constitute only 24 per cent o f the total receipts, balance came from Capital receipts and Public Account receipts. 60 per cent o f the revenue came from the State's own resources, Central tax transfers and grants-in-aid contributed towards the remaining 40 per cent o fthe total revenue. 0 The growth rate o f total expenditure was higher than the growth rate o f revenue receipts during the year. Revenue receipts could cover only about 67 per cent o f the total expenditure in2003-04, leaving the balance to be financed from borrowings. 0 Revenue expenditure accounted for 82 per cent o f total funds available during 2003- 04, which was higher than the share o f revenue receipts (67 per cent o f total receipts) o f the State Government, leading to revenue deficit. Interest payments increased steadily (from Rs 28.25 billion in 1999-00 Rs 47.77 billion in 2003-04) primarily due to continued reliance on borrowings for financing the fiscal deficit. Given the rising revenue expenses, the allocative priorities o f the State need due consideration. 2001 2002 - 2002 - 2003 2003 2004 - Budget Actual Budget Actual Budget Actual (i)RevenueExpenditure 162.34 159.49 182.14 170.16 190.98 188.48 (ii)CapitalExpenditure 19.19 18.17 25.70 20.27 34.44 31.77 (B) Plan & Non Plan Expenditure (i)PlanExpenditure 40.30 39.33 50.65 40.29 65.40 53.48 (ii)NonPlan 141.25 138.36 157.19 148.15 160.02 166.81 ExPenditure (C) Sectoral Distribution (i)GeneralServices 73.41 72.20 82.77 76.87 85.38 84.94 (ii)SocialServices 72.41 70.70 80.50 73.37 87.39 84.79 (iii)EconomicServices 35.53 34.75 44.58 40.20 52.63 50.51 Source: Government of Rajasthan `Budgetat a Glance' The actual expenditure of the State inthe nature o f plan expenditure, capital expenditure and developmental expenditure reflect the allocative priorities o f the State. Higher the ration o f these components to total expenditure, better is deemed to be the quality of expenditure. Page 59 Quality of expenditure @er cent to total expenditure*) 1999-2000 2000-01 2001-02 2002-03 2003-04 Plan Expenditure 20.9 19.5 22.1 22.2 24.2 Capital Expenditure 10.1 8.4 10.2 10.6 14.4 Developmental 60.5 59.7 59.4 59.6 61.4 ExDenditure * Totalexpenditure excludes expenditure on loans and advances Source: Report of the CAG (Civil)for theyear ended 31 March 2004, Governmentof Rajasthan Page 60 Annexure I1 Budget Literature GoR - The budget literature, which is furnished to the Rajasthan State Legislative Assembly, comprises The Finance Minister's Budget SDeech: This gives an analytical review of the salient features o f the financial situation and indicates in broad outline any special steps that may be considered necessary and desirable to secure a balanced budget, which may prove to be an effective instrumento f economic development. DetailedEstimatesandDemandfor Grants;These containthe following: Volume -I:Summary and Statement o f Revenue and Receipts and Expenditure and Disbursements by Major Heads, Schedule o f Demands for Grants and Appropriations; Volume -2A: Detailed Estimates o f Revenue receipts; Volume- 2 B: Detailed Estimates o f Revenue Expenditure (General Services); Volume-2C: Detailed Estimates o f Revenue Expenditure (Social Services); Volume-2D: Detailed Estimates o f RevenueExpenditure(Economic Services); Volume-3A: Detailed Estimates o f Capital Receipts and Expenditure; Volume -3 B: Detailed Estimates o f Receipts and Disbursements o f Public Debt, Loans and Advances, Contingency Fundand Public Account; Volume 4 A : List o f pay Scales, Rates o f allowances, Summary o f Officers and establishment along with details; Volume-4B: Headwise details o f grants to Panchayat Samitis and Zila Parishads; details o f receipts and expenditure of Centrally Sponsored Schemes, Sector and Headwise Provisions for Plan Schemes, Component Plan, Special Central Assistance, List o f Standard Objects, Statement o f Investments, Loans and Guarantees, Targets and Achievements and Funding Pattern of Annual Plan and Glossary o f Words; and Volume 4 C ; Details of various Public Works. Demandsfor Grants According to the Rules o f Procedure and Conduct o f Business in Rajasthan Legislative Assembly, a separate demand shall ordinarily be made in respect o f the grant proposed for each department. However, the Finance Minister may include in one demand grants for two or more departments or make a demand in respect o f expenditure, which cannot be readily classified under any particular departments. Other Documents GoR also brings out the following two other documents viz; Budget at a Glance and Budget Study; these are prepared by the State Government's Directorate o f Economics and Statistics incollaborationwiththe FinanceDepartmentand containusefulbudgetanalysis. Page 61 The document Budget at a Glance depicts `Where Rupees Comes From' and `Where Rupees Goes to'; a source-wise analysis o f receipts; and destination-wise analysis o f expenditure, `revenue' and `capital', ` non-Plan' and `Plan' and within these expenditure on General Services, Social Services and Economic Services. It also contains `Highlights' of the State's Annual Plan for the budget year. The amounts o f revenue deficit, fiscal deficit, budgetary deficit and primary deficit are also stated. The document Budget Study provides more detailed time series analysis (with actuals o f the preceding three years) o f revenue receipts from different sources and information on sectoral break-up o f expenditure as between Developmental Expenditure and Non-Developmental Expenditure, and Expenditure on General Services, Social Services and Economic Services with trend indexed to base-year 1993-94. It also contains information o f expenditure on critical sectors like Medical, Public Health and Family Welfare, Water Supply, Agriculture and Allied Activities, Industry, Education, Arts and Culture etc. Boththe documents make extensive use o f graphs and charts for enhanced reader friendliness. Additionally, GoR brings out an Economic and Purpose Classification of the State Government Budget. The `Economic Classification' shows in the aggregate the revenue receipts and expenditure of GoR by their economic character enabling to depict the capital formation out o f budgetary resources, savings o f the State Government, and the generation o f the State Domestic Product etc. The `Purpose Classification' deals with the classification of the Government expenditure according to the different types o f services provided directly or financed by the GoR through current and capital transfer Page 62 Annexure I11 Statement of Comparisonof GoR Accountswith IFAC Standard The International Federation of Accountants, Public Sector Committee (IFAC-PSC) has recently issued a standard for Governments keeping their accounts on a cash basis.70This applies to the general-purpose annual financial statements o f all public sector entities except Government business enterprises (public enterprises) for years beginning after 1 January 2004. Financial statements may not be described as complying with the standard unless they comply with &l requirements o f Part 1. Part 2 sets out additional disclosures that IFAC the encourages Governments to make. It also encourages Governments to progress to the accrual basis o f accounting, for which different standards apply. The box below shows the major features o f the standard and how GoR accounts relate to them. Comparisonof Governmentof I; jasthan Accounts with IFAC Standard IFAC-PSC: CashBasis Standard Part 1 GOR (Per FinanceAccounts 2003-2004> - Statement o f receipts, payments and cash Provided in Statement No. 1 balances Disclosure o f accountingpolicies Some explanation o f items and summaries o f results, but no statement o f accounting policies Separate annual financial statements for No separate statements for lower level entities. GoR each Department and other entity, and only, and some entities under Government control consolidated statements for GoR omitted Statements understandable, relevant to users Appropriation Accounts understandable, but and presentedwithin six months o f end o f Finance Accounts not so user-friendly. The year, reliable, and complete deficiency is made up by the document `Accounts at a Glance'. Accounts sent to Governor in September 2004 within six months o f the close o fthe financial year but became public only in March 2005. Accounts are believed to be reliable and complete, Statements to show date o f issue, and who Yes, in C A G certificate has authorized them for issue Information about the entity - its operations, Not shown controlling legislation, and departments and other entities included Any cash balances that are subject to Not shown restrictions on their use, and undrawn borrowing facilities Comparative information for the previous Shown year ' OIFAC Public Sector Committee (2003) Cash Basis IPSAS: Financial Reporting under the Cash Basis of Accounting. Available on IFAC website www.ifac.org Page 63 Additional DisclosuresEncouraged under Part 2 Assessment whether entity i s a going concern (in Not applicable the case ofa lower-level entity) Extraordinary items (such as disaster relief) Not identified, ifany Classification of payments by function and/or Yes. Payments are classified by nature of payment, and receipts by type function, and by standardobject within function. Receipts classified by type Proceeds from borrowing, by type and source Shown Assets and liabilities o f the entity Only financial assets and liabilities listed, no physical assets Comparisonwith budgets Yes, for revenue and expenditure only (inAppropriation accounts) Proportion o f ownership interest incontrolled N o definition of controlled entities entities Ifintendingto convertto accrual accounting, Not done classification o f cash flows into operating, investmentand financing activities Page 64 Annexure IV LIST OFDOCUMENTSREVIEWED The following documentswere studiedduring the course ofthe study: 1. A Battle Half Won, by Neelabh Mishra Combat Law, Special Issue, Feb 2003. 2. Accounting Standards Framework: Implementation Guide for SAIs: Management Discussion and Analysis of Financial, Performance and Other Information, Internal Control Standards Committee, INTOSAI, October 2001 3. Accounts at a Glance 2001-2002 Government of Rajasthan 4. Accounts at a Glance 2002-2003 Government of Rajasthan 5. Accounts at a Glance 2003-2004 Government of Rajasthan 6. Administrative Reports of the Department of Commercial Taxes, GoR, 2001-2002, 2002-2003,2003-2004 and 2004-05 7. Administrative Reports of the Directorate of Treasury and Accounts, GoR, 2002-2003, 2003-2004 and 2004-05 8. Administrative Report of the Office of the Accountant General (A&E) for the year 2002-2003 9. Administrative Report of the Office of the Accountant General (A&E) for the year 2003-2004 10.Administrative Report of the Office of the Accountant General (Audit) I1for the year 2002-2003. 11. Administrative Report of the Office of the Accountant General (Audit) for the year 2003-2004 12.Administrative Report of the Office of the Principal Accountant General (Audit) for the year 2002-2003 13.Administrative Report of the Office of the Principal Accountant General (Audit) for the year 2003-2004 14.Annual Administrative Report of the Directorate of Evaluation for the year 2003-2004 Government of Rajasthan 15.Annual Administrative Reports of the Directorate of Inspection for the years 2002- 2003 and2003-2004 Government of Rajasthan 16. Annual Progressreport o f the Public Works Department,GoR, 2004-05 17. Approach to the Tenth Five Year Plan (2002-2007) Government of India Planning Commission 18.Appropriation Accounts 2001-2002 Government of Rajasthan 19.Appropriation Accounts 2002-2003 Government of Rajasthan 20. Appropriation Accounts 2003-2004 Government of Rajasthan 21. Budget at a Glance/ Modified Budget at a Glance for the years 2001-2002,2002-2003 and 2003-2004 Government of Rajasthan 22. Budget Documents for the years 2004-2005 and 2005-2006 Government o f Rajasthan 23. Budget Manual Volume IGovernment of Rajasthan 24. Budget Speechof the Honourable Chief Minister of Rajasthan, March23,2005 25. Budget Speechof the Honourable FinanceMinister of India, February 28,2005 26. Budget Study/Modified Budget Study for the years 2001-2002, 2002-2003 and 2003- 2004 Government of Rajasthan Page 65 27. Chasing a Right- Aruna Roy & NikhilRoy. 28. Combating Corruption: Look Before you Leap-Anwar Shah & Mark Schacter. 29. DelhiAuthorities Condone Vicious Attacks, newspaper article. 30. Do you know about referral funds?HindustanTimes, Jaipur April14,2004. 31. E-Governance: Commenting Communities, Dispersing Service, E-Governance Session 1- 14thFeb'O5. 32. Economic and Purpose Classification of the State Government Budget for the year 2003-2004 Government of Rajasthan 33. Exposure Draft 4: Presentation of Financial Reports, Proposed Indian Government Accounting Standard, Government Accounting Standards Advisory Board (GASAB), October 2004 34. Exposure Draft 5: Components of Financial Reports, Proposed Indian Government Accounting Standard, Government Accounting Standards Advisory Board (GASAB), October 2004 35. Finance Accounts 2001-2002 Government o f Rajasthan 36. Finance Accounts 2002-2003 Government of Rajasthan 37. Finance Accounts of 2003-04, Government of Rajasthan 38. Freedom of InformationAct 2002 39. Freedom of Information: Principles for Legislation By Venkat Iyer. 40. General Financial and Accounts RulesVolume IGovernment of Rajasthan 41. General Financial Rules2005 Government of India 42. Good governance, Right to information and Citizens' Charter: The Rajasthan Scenario, by Damodar Sharma. 43. Government agrees to provide copy of records on payment of cash, Article from The Hindu, 4thJan2005, 44. Guidance for Reporting on the Effectiveness of Internal Control: SA1Experiences in Implementing and Evaluating Internal Controls, Internal Control Standards Committee INTOSAI, 1997 45. Guidelines for Internal Control Standards for the Public Sector, Internal Control Standards Committee, INTOSAI, June 1992 46. Home (Gr-V) Department NotificationJaipur, Jan 15'01. 47. InReport 6-Access to Information, Government of Canada Published inNov 2001. 48. India - Orissa State Financial Accountability Assessment, Report of the World Bank, May 2004 49. Information: an inviolable right Jan 3,2005, By Nirmala Lakshman. 50. Internal Control: Providing a Foundation for Accountability in Government, Internal Control StandardsCommittee, INTOSAI, 2001 51. International Federation of Accountant, Public Sector Committee Cash Basis Standards 52. Karnataka - Public Financial Management and Accountability Study, Report of the World Bank, April 2004 53. Legislation on Freedom of Information: Trends and Standards-The Development Economics Vice Presidency and Poverty Reduction and Economic Management Network. 54. MediumTerm Fiscal Plan for Karnataka, Finance Department, GoK, 2004 Page 66 55. Note on the Conference of Finance Secretaries to the State Governments, November 2004 56. Open Sesame Looking for the Right to Information in the Commonwealth, CHRI Report 2003. 57. Opening Budgets to Public Understanding and Debate - The International Budget Project. 58. Parliament and Access to Information: Working for Transparent Governance, Conclusions of a CPA-WBI study group on Access to Information, held inpartnership with the Parliament of Ghana, 5-9 July 2004, by Toby Mendel. 59. PeoplesRight to InformationMovement: Lessonsfrom Rajasthanby NeelabhMishra. 60. Performance Budgets Departments of Agriculture, Rural Development, Higher Education, and Public Health Engineering for the year 2004-2005 61. Performance Evaluation of Targeted Public Distribution System, Planning Commission, Government of India 62. Presentationat Saraiby DebashishSankhari, CHRI. 63. Rajasthan-Closing the Development Gap (August 2005) The World Bank 64. Report of the Comptroller and Auditor General of India for the year ended 31 March 2002 (Civil) Government of Rajasthan 65. Report of the Comptroller and Auditor General of India for the year ended 31 March 2003 (Civil) Government of Rajasthan 66. Report of the Comptroller and Auditor General of India for the year ended 31 March 2004 (Civil) Government of Rajasthan 67. Report of the Comptroller and Auditor General of India for the year ended 31 March 2002 (Commercial)) Government of Rajasthan 68. Report of the Comptroller and Auditor General of India for the year ended 31 March 2003 (Commercial)) Government of Rajasthan 69. Report of the Comptroller and Auditor General of India for the year ended 31 March 2004 (Commercial)) Government of Rajasthan 70. Report of the Comptroller and Auditor General of India for the year ended 3 1 March 2002 (Revenue Receipts) Government of Rajasthan 71. Report of the Comptroller and Auditor General of India for the year ended 31 March 2003 (Revenue Receipts)) Government of Rajasthan 72. Report of the Comptroller and Auditor General of India for the year ended 31 March 2004 (Revenue Receipts) Government of Rajasthan 73. Report of the Core Group on Voluntary Disclosure Norms for the State Governments (2001) Reserve Bank of India 74. Report of the Group to Assess the Fiscal Risk o f State Government Guarantees (2002) ReserveBank o f India 75. Report of the Twelfth Finance Commission Government of India 76. Right to InformationAct 2000 (Government of Rajasthan) 77. Right to InformationAct, 2005 (Central Government) 78. Right to Informationas a HumanRight and Developments inIndia. 79. Right to InformationinRural IndiaBy Soumya Kidambi. 80. S.R. Maheshwari, Theories and Concepts inPublic Administration. Page 67 81. Sample formats from the Departmentof Treasury and Accounts showing: + Major Head-wise revenue receipt # Major Head-wise expenditure booked # Statement showing major head-wiserevenue receipt # Statement showing major head-wiseExpenditure + Monthly Statement of RevenueReceipts 82. Sample formats of the following from the Departmentof Commercial Taxes: ++ Statement with dealer registration details, DCT, GoR Statement of monthly tax collection and redentry details, DCT, GoR # Yearly statement of status of current andpast demand # Statement of dealers who have depositedmore than Rs. 1Lakh intax # Classification of dealers # Status of refundcases # EntryTax details # Statement of loss of revenue due to tax-exempt movies and revenues from video parlours/cable operators + Daily revenuereceipt register 83. Sample Monthly Account of the PWD 84. Sample Monthly Expenditure Report, Police Department, GoR 85. Sample statement from the AG's office showing Controlling Officer-wise monthly Expenditure with Budget provision 86. State Development RajasthanReport 2003 by Social Policy ResearchInstitute 87. Statistical Abstract of the Commercial Taxes department, GoR, 2001-02 and2002-03 88. Study by Centre for Media Studies, June 30,2005 89. Study on Conceptual Framework of Government Accounting System inIndia 90. Submission of Mr. Chitta Behera Orissa on the RTI Bill 2004 to the standing Committee and Committee on Petitions. 91. The Comptroller andAuditor General's (Duties, Powers and Conditions of Service) Act, 1971 92. The Constitution of India 93. The Freedom of Information Bill 2002-A comparative perspective by Deepika Mogilishetty-Farias, Commonwealth HumanRights Initiative. 94. The Movement for Right to Information in India: People's Power for the Control of Corruption By HarshMander & Abha Singhal Joshi. 95. The RajasthanFiscal Responsibilities and Budget Management Act, 2005; 96. The relevance o f a freedom of Information Act by Chusrow Irani. 97. The Right to Information Law inIndia--- A Comparative Picture by Rani Advani. 98. Turning Right to information Law into a living reality, Access to information and the imperative of effective implementation by Richard Colland, Executive Director, The Open Democracy Advice Centre, Cape Town, South Africa. 99. Website of the Comptroller and Auditor General of India Page 68 Annexure V LIST OF OFFICIALS MET (A) Government of Raiasthan 1. Dr.Rajeev MehrishiPrincipal Secretary, Finance Department. 2. Dr.Govind Sharma (Former) Secretary Finance Department 3. Dr. Shyam Aggarwal (Former) Secretary Finance Department 4. Secretary Departmentof Planning, Institutional Finance, 20 Point Programme and Project Planning Department 5. Commissioner Commercial Taxes Department 6. Mr.Vinod PandyaDirector FinanceDepartment 7. Mr.S. K.Mittal Director FinanceDepartment 8. Mr.K.K. Gadioek Deputy Secretary Finance Department 9. Mr.M.K.Jain Deputy Secretary Finance Department 10. Mr.0.P. SharmaDirector of Treasuries and Accounts 11. Additional Director of Treasuries and Accounts 12. Mr.HarphoolSingh Director of Inspection 13. Mr.Prashar Director Evaluation 14.Mr.Ashok PradhanFinancial Controller RajasthanCouncil for Primary Education 15. Finance Secretary (Expenditure) 16. Principal Secretary, Education 17.Director, Elementary Education, 18. Principal Secretary, PWD 19. Chief Engineer cum Additional Secretary, PWD 20. Accounts officers, PWD 21. Additional Chief Secretary, Home 22. Additional Director General of Police (ADGP), Jaipur 23. ChiefAccounts Officer, Police Department, Jaipur 24. Director, Pension 25. Director, Quality Control 26. Secretary, Energy Department 27. Additional Commissioner (IT and Weights and Measures), DCT fB) Centrefor Good Governance 28. Dr.RakeshHooja Principal Secretary and Director 29. Mr.Arvind Mayaram (Former) Principal Secretary and Director 30. Mr.Dhariwal Additional Director 31. Mr.P.K. Jain 32. Mr.Ojha Page 69 (C)Secretariat of theRaiasthan StateLeaislativeAssembly 33. Secretary 34. Special Secretary fD)Officers of the ComptrollerandAuditor General of India atRaiasthan* 35. Mr.B. R. Mandal Principal Accountant General (Audit) 36. Mr.D.S.Nehra (Former) Accountant General (Audit) I1 37. Ms. Saroj Punhani Accountant general (Audit) I1 38. Mr.Chandra La1Accountant General (A&E) *Pointed to the relevant literature available inthe public domain Page 70