If it is broke, fix it!

They say ‘if it ain’t broke, don’t fix it’, meaning leave alone anything that is working fine. But if something is broken, it would be unwise not to fix it. Unlike in the west, we do not have a throw-away culture; from Apple Macs and Blackberrys to mixer grinders and umbrellas, everything is repaired. But in the government it is a different story.

Institutions form an important building block of governance. If there is a problem with any of them, it is necessary to fix it rather than find a way around it as has been the tendency lately.

Increasingly the central government is using societies for implementation of programs / delivery of services. The central government has released about Rs 393,796 crore to the state governments on thirteen Centrally Sponsored Schemes during the period 2008-09 to 2010-11.

Releases - 2008-09 to 2010-11

Most of the expenditure on CSS is incurred through societies. There are two reasons for this. One, the funds transferred for a particular program were prone to be diverted by the state governments to meet their own commitments such as payment of salaries. This was mostly true in late 1990s when most state governments survived on overdrafts from RBI. The second reason that is often cited as a justification for bypassing the state government is that the flow of funds through the state government to the final implementing agency is chronically slow, which is indeed true.

Approval of Appropriation Bill by the legislature does not mean that the line departments can incur expenditure. Most state governments, with some variation, follow a procedure of authorizations that flow from one level to lower level i.e. from head of department to the lowest level at which the funds are actually spent and simultaneously  from Finance Department / Director Treasury to sub treasury which makes the payment. The time taken in the communication passing from the top level to the bottom could some times be as long as a couple of months. In a study (Report on Financial Management and Accountability Processes in Health, Medical & Family Welfare Department, 2007, Centre for Good Governance, Hyderabad) it was found that District Medical & Health Office and lower formations in Visakhapatnam and Mahaboobnagar districts of Andhra Pradesh, received the first quarter releases in the month of August / September, 2007. A large amount of under spending in Health Department was seen to be due to delayed receipt of budget releases – sometimes as late as last week of March for the last quarter.

The reason why a control is sought to be exercised over the expenditure through authorizations is due to the mismatch between cash inflows and outflows. While the availability of funds depends on the stream of revenues which are generally not smooth or even, the expenditure kicks in from day one and has to be met one way or the other. Cash management is, thus, a major challenge in the government.

There is a third reason why the society mode is preferred. There are many limitations, imaginary and real, in working as a government department. This is the reason why even state governments prefer using special purpose vehicles to implement projects or deliver services. Hiring personnel on contractual basis and the whole procurement and expenditure management is ‘easy’ in society mode. The departments are also constrained by budgetary control which is exercised at individual line item – such as travel, petrol, stationary, etc. Typically a payment could take anything between two to three months due to long winded procedures for authorizations at various levels and the physical file having to move from one office to another. Thus apart from the funds being diverted or reaching with delay, the ease of spending is seen as a major issue.

Surely none of the above problems is insurmountable if the government puts its mind to do something about it. As mentioned already, the problem of diversion of funds by the state governments is a thing of past with most of them being in comfortable position with respect to availability of cash. As for cash management, many state governments supplement their revenue receipts with short term market borrowings. However, some control over expenditure might still be required in the interest of efficient expenditure management. The nature and quality of these controls could be such that they do not create undue delays in delivery of services or in execution of projects. Application of IT in this respect has resulted in speeding up the process with beneficial effects on the outcomes.

The last part of supposed disabilities of a department is the tricky one as it requires complete overhaul of public financial management system starting from rewriting the basic texts such as financial rules, treasury codes, etc. that govern it. It would also involve detailed mapping of processes and reengineering them to cut out unnecessary processes and multiple levels of authorizations. Adequate empowerment of lower level functionaries and automation of business processes is something that must be accorded high priority.

Rejecting an institutional mechanism because of some perceived disadvantages is like throwing the baby with the bath water. Additionally, the alternative is not without its downside. If in a case correcting the existing system is not a possibility, the proper course of action would be to evaluate the trade offs between the two alternatives before deciding on one of them.

                                                                             Srinivas Kumar Alamuru
Advisor

[Disclaimer: Views expressed are those of the author and do not represent the views of CBPS.]

0 thoughts on “If it is broke, fix it!

  1. Rahul A. Shastri

    There is also a danger of developing an alternative power centre. Societies tend to be hydra headed.
    What is the solution to the problem of diversion in societies. Societies have greater ability to corrupt monitoring agencies than government departments. Is not there a possibility of sharing the spoils?
    Government money has a tendency to corrupt, and once societies are corrupted by easy inflow of money, what then happens to social reform?

    Reply
    1. Srinivas

      Yes, I agree. Accountability is a major issue with society mode of operation. They are very often outside the purview of CAG Audit with CAs certifying their accounts. There is also the issue of release of funds to society being treated as expenditure in the books of the government without a rupee being actually spent. The functioning of the societies is on the whole less transparent.

      To mitigate the various risks associated with operating in society mode, we need some sort of ‘governance arrangements for government bodies’ as the Australian Government has. Even so, the society mode should be resorted to in the most unavoidable cases.

      Reply

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