Local public finance management: areas for improvements «

Local public finance management: areas for improvements

Anirudra Neupane

Local governments in Nepal are very strong unit of governance in terms of their constitutional and legal rights coupled with financial resources with them. Let’s take example of Fiscal year 2020/21. In current fiscal year, the federal government has allocated about Rs. 262 Billion for fiscal transfer to local governments including conditional grant of Rs. 161.8 billion and fiscal equalization grant of Rs 90.05 billion. Seven provincial governments in total have allocated about Rs. 25 billion in the similar headings. Special and supplementary grants are also being processed. Moreover, different federal and provincial programs have also transferred to local governments including local government partnership programs popularly known as parliamentary development fund. Revenue sharing among three levels of governments and their own source revenue also adds on local consolidated fund.  They can also take loans from financial institutions and specified fund of federal government.

Though they have strong legal and financial capacity they are not being efficient in in delivering the services and producing the expected development outcomes. This is mainly because they generally do not have strong resource management system. Irrational and discretionary resource allocation and ad-hoc utilization practices are rampant even though there are elected governments.  This article tries to highlight the major improvements needed local budget cycle for sound public finance management so that the strength of local governments can be utilized on best interest of people.   

Ministry of Federal Affairs and General Administration (MoFAGA) prepared and circulated a model budget formulation guideline during the first year of local election to support local governments in planning and budgeting system. The guideline included basic processes to steps to be followed for budget formulation and implementation. Moreover guideline had defied roles and responsibilities of Local budget actors. Local governments in general are completing the formality of 7-step planning/budgeting process, key aspects of participatory budgeting and scientific project prioritization techniques mentioned in the model guidelines have been continuously ignored.

Total and Sectoral budget ceiling determination along with elaborated budgeting directives, medium term expenditure framework development, pre-budget discussions, facilitated community level budget formulation meetings, wider consultations on program prioritization at central (municipal) level, adequate engagement of Rural Municipal/Municipal subjective committees and units, Independent but intensive meetings of budget formulation committees are the major aspects of sound local budget formulation  processes. Most of these components are either neglected or the processes are somehow followed just for formality.  

Resource Estimation and Budget Ceiling Determination Committee, Revenue advisory Committee and Program and Budget Formulation committee are the major budget actors of local governments. Thematic/subjective committees and concerned branches/units are their technical supporting hands. Later can support in situation analysis, resource estimation and budget ceiling determination and annual program and budget prioritization. However, the key budget actors are not fully functional except though they are used to having few annual meetings for a formality. Subjective committees on the other hand are fully inactive in most of the cases. This practice has adversely affected the institutionalization process of local PFM system.

The local governments also need to prepare medium term expenditure framework, develop pre-budget statement and conduct wider pre-budget discussions, prepare and publish total and sectoral budget ceiling before community level budget discussions and insure that there is a time lag between date of announcing annual policies and program and that of budget. Roles and responsibilities of ward committees, municipal subjective committees and departments/units in the budget process should be clearly defined. The most important part of local budgeting is the process of translating longer term policy priorities into annual budget. These all should be guided by local budget law or guidelines.

Practice of pro-rata based budget distribution among the wards still prevails. Current practices of making dozens or even hundreds of projects out of budget distributed equally among wards have undermined the essence of larger local governments. This practice should be replaced with justifiable allocations based on broader central priorities. Projects benefiting people of single wards can be taken as ward level projects but it is not necessary to formulate ward level projects in all cases.

Unlike federal and provincial level, local assembly do not necessarily have opposition except in case, all the ward chairpersons including mayors and deputies get elected from the same political party as ward chairperson automatically became member of municipal executive committee. Unlike other forms of parliament, local budgets are hardly discussed or criticized by ether parties in the local assembly.  However, meaningful budget discussions would be held if comprehensive budget booklets are provided to the assembly members at the time of budget submission and some days are given to members before discussions on the annual allocation.  However, this practice is missing in most of the cased and therefore, Intensive budget discussions are not held at the local level.

There is hardly a system of recording voices raised by assembly members nor are assembly proceedings made public through local media. There remain a chance that annual budget gets approved even without having adequate budgetary information among members of local assembly. This situation should not continue.  

The pleasant aspect of local budget is that there is limited time lag between budget approval and authorization as all units of governments are located at the same office. However, due to absence of detailed procurement plan, local governments are also not being able to start budget execution in time and thus they are also following unacceptable practice of year end development ‘asare bikesh‘. This is evident by the practice of issuing hundreds checks to vendors during the last week of fiscal year.

Federal law makes it mandatory that development projects costing Rs. 10 million or above should be implemented by private contractors selected through competitive process but there are cases of non-adherence to this legal provision as stated in recent report of auditor general. The cost of project should not be the only criteria to decide wheatear go for construction contracts or to give user committees rather this should be tested in terms of nature and complexity of work. This has been ignored by many local governments.    

Some local governments have laws to promote user committee governance including provision to promote transparent and participatory process of committee formation. However, user committee formation process is highly influenced by political parties and leaders. Small group of local bidders competing for construction contracts has also been the limitation of local contacting process. Participatory procurement monitoring tools are not in practice.  The political relation of contractors or user committee office bearers makes it difficult for monitoring committees headed by deputy mayors or ward chairpersons to check and report the facts regarding quality of work before sanctioning the payments. Limited technical capacity of the monitoring committees have also made them provide clean monitoring report.

Revenue aspect of budget implementation have been highly neglected because local governments have upward looking character. Efforts are not placed to improve collections via taxpayers’ education, billing system or any other motivation tools. Most of local governments have been unable to bring house rent into tax net though it would be their attractive revenue source. Land and property taxes are also not collected timely. There are issues regarding revenue estimation on extraction or use of natural resources.  Involvement of concerned experts have been undermined both to insure the environment and disaster related aspects and estimating the quantity and value of resources to be extracted before starting bidding process.  

Thus budget execution process needs to be improved specially in procurement methods, monitoring tools and mechanisms, revenue analysis and revenue improvement at large. Regarding improved accounting and reporting, a national level reform should be initiated to start accrual based accounting for development works, mandatorily prepare bank reconciliation statements and preparation of local balance sheet among others.

Budget oversight is an independent scrutiny of performance and accounts. Local level Account committee of R/Municipal assembly is neither independent nor functional. The practice that account committees are to be headed by opposition member of the Assembly (local parliament) does not exist. Report of Auditor General is also not discussed by the committee in most of the cases. The public oversight in a form of public hearing or public audits are in practice to some extent but these tools are also getting less priority after elected representatives took their office. Thus, oversight component of PFM or budget cycle is almost missing at local level. Thus it should be established.   

Adherence to the basic standards of public financial management are the prerequisite of efficient and effective local governments. Clear understanding of political representatives and other budget actors on Budget cycle management including budget formulation, approval, implementation and oversight coupled with transparent budget processes and institutions are basic requirements of improved local governance.