Karnataka Public Financial Management and Accountability Study

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Karnataka Public Financial Management and
Accountability Study

• Launch Presentation
• September 14, 2004

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Background and objective of report

• Examination of Karnatakas public financial
  management and accountability (PFMA) system
• Budget development, execution monitoring
• Accounting and financial reporting
• Internal external controls

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Scope of report

• Core state government (Section 2)
• Other public sector entities (Section 3)
• Rural local governments
• Urban local governments
• Government companies and corporations
• Boards, Authorities and Societies

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The financial management challenge for developing
countries.

• Developing country governments have low resources
  relative to need.
• Development effectiveness depends not only on
  greater revenue mobilization but also increased
  spending efficiency ensuring that spending
  achieves the governments purposes.
• That is the focus of this report

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A. STATE GOVERNMENT
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Karnataka has the foundations of a satisfactory
PFMA system

• Well-established, sound legal framework for PFMA
  in place.
• Robust fiscal policy framework
• Annual budget provides tight controls over most
  areas of spending.
• Annual accounts prepared annually, and in timely
  manner monthly accounts also used.
• Independent external auditor regular, timely and
  useful audits
• Well-established framework for legislative review.

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but faces significant challenges

• Budgets cannot be fully implemented on average,
  revenues only 91 of budgeted level for last 8
  years.
• Departments lack incentives, accountability and
  flexibility to perform.
• Off-budget borrowing circumvents budgetary
  controls.
• Weaknesses in accounting e.g. Public Accounts.
• Internal control weaknesses capital projects,
  power subsidy no commitment controls

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Significant challenges (cont.)

• Audit and legislative review processes need to be
  more effectively used.
• Greater fiscal transparency will generated
  demands for financial performance.

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Though much remains to be done, reforms are
underway

• Fiscal reform showing results
• Budget being shifted towards departmental focus.
• Office of Controller (Accounts Management) has
  been created.
• Computerized, networked treasury system is now
  operational.
• More fiscal information in the public domain.
• Responsiveness to audit reports has improved.

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Nine priorities moving forward

• Strengthening budgetary control and
  effectiveness.
• Preparing more realistic budgets
• Reducing reliance on supplementary budgets
• Eliminating off-budget borrowing

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Priority 2 Shift to Departmental budgeting

• To provide departments with greater flexibility
  and incentives to perform
• Organize the budget around Demands for Grants
  (departments)
• All Departments to complete Departmental MTFPs,
  with performance targets, and should report
  against these targets
• Increased flexibility for Departments to spend to
  achieve their objectives while keeping pressure
  on to reduce administrative costs.
• Shift to program budgeting

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Priority 3 Improving accounting

• Completing the computerization agenda
• Improving Public Account accounting
• Ensuring regularity in basic accounting
  procedures controls
• Improving GoK-CAG collaboration on accounting.

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Priority 4 Strengthening internal controls

• Greater controls over capital projects
• Introduce controls over commitments
• The open-ended power subsidy obligation is the
  biggest threat to the budget, and needs to be
  brought under control through implementation of
  the purchaser-provider model.
• Introduction of internal audit function in
  expenditure departments.
• Modernization of rule books

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Other priorities

• 5. Sustain and expand recent efforts to improve
  audit responsiveness
• 6. Improving information disclosure and
  accessibility
• 7. Strengthening capacity for financial
  management.
• 8. Accelerating procurement reforms.
• 9. Improve fund-flow predictability

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B. OTHER PUBLIC SECTOR ENTITIES
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Outside the State Government, PFMA systems are
less robust

• These entities are important there are large
  numbers of them and they handle significant
  volume of funds
• Weaknesses are especially evident in rural and
  urban local governments, and Boards and
  Authorities.
• PFMA system in government companies and
  corporations performing relatively better.

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Major priorities for these other government
entities

• Improving compliance with core PFMA priorities
  timely and regular accounts, audits, follow-up on
  audits and legislative reports, and transparency.
  
• Strengthening governance of public sector
  entities by creating a Public Enterprises
  Selection Board for all senior appointments.
• Putting strengthening of financial management at
  the center of on-going efforts to strengthen
  rural and urban local governments.
• Improving the PFMA legal and institutional
  framework for some entities.

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CONCLUSION
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Not all reforms can be done at the state level

• Abolishing the Plan/Non-Plan distinction.
• Introducing satisfactory accounting and financial
  reporting standards, and modernizing accounting.
• Modernizing audit.
• Improvements in legislative review processes.

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But a lot can be

• The impression should not be created that there
  is nothing the states can do to improve financial
  management. To the contrary, the states have
  sufficient autonomy and responsibility to
  substantially transform their own financial
  management environment.
• Karnataka is in a good position to take a
  leadership role on the PFMA agenda in India. The
  state is fortunate to have a strong bureaucracy,
  a reforming political leadership, and a demanding
  civil society. It has already taken important
  actions to improve public financial management
  and accountability. Continued progress will
  pay rich dividends for Karnataka by making
  government more effective, accountable and
  responsive.

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3 priority reform areas

1. Strengthen the budget budget realistically and
   restrict new initiatives to the budget.
2. Rebalance financial controls microcontrols can
   be relaxed, but greater controls are needed over
   power subsidy obligations and capital projects
3. Fully implement the states accounting and
   auditing framework.