“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
~ Abraham Lincoln
The Financial Rules, the Treasury Rules/Code, the Accounting Codes and the Civil Services Rules broadly provide internal controls in the Government of India and the state governments. These rules and codes comprise basic checks and balances required in handling government’s receipts and expenditure. They range, as pointed out in earlier columns (Rules of Game), from important to inconsequential; they are largely outdated; and often written in a very abstruse language. While there is a need to rewrite these codes and some State Governments are in the process of doing so, the important question is whether these (even after their revision) would form an adequate framework for internal control. Among the developed nations, Australia has perhaps the most comprehensive public financial management framework, which is worth examining from the point of view of finding our own way forward.
The following legislations / guidelines, among others, govern the Australian PFM:
- Financial Management and Accountability Act, 1997
- Financial Management and Accountability Regulations, 1997
- Governance Arrangement for Australian Governance Bodies, August 2005
- Australian Government Cost Recovery Guidelines, July 2005
- Commonwealth Procurement Guidelines, 2008
- The National Public Private Partnerships (PPP) Policy Framework and National PPP Guidelines, 2009
- Commonwealth Property Management Guidelines, 2009
- Commonwealth Fraud Control Guidelines 2011
The main purpose of the Financial Management and Accountability Act, 1997 is to provide a framework for the proper management of public money and public property. Broadly, the Act covers: the collection, custody, etc. of public money, the accounting, appropriations and payments, the borrowing and investment, the control and management of public property, the special responsibilities of Chief Executives and reporting and auditing.
The most interesting part of the Act is that it provides for penalty (imprisonment) for contravention of the various provisions. For example, Section 10 of the Act requires that an official or Minister who receives public money must bank it as required by the regulations or otherwise deal with it as required by the regulations. The penalty prescribed for contravention is – imprisonment for 2 years. The Note below clarifies that Chapter 2 of the Criminal Code sets out the general principles of criminal responsibility.
The beauty of the Act is that it sets the tone for PFM by setting out the broad principles and listing the responsibilities of various players in clear unambiguous terms. For instance, the Section on Special Responsibilities of Chief Executives (heads of executive agencies who work under the Ministers) puts the ball squarely in their court. They are responsible for proper use of government resources, period. It then sets out a governance arrangement viz. an audit committee, annual financial statements, delegation of powers, etc. that supports it.
The stated aim of ‘Governance Arrangements for Australian Government Bodies’ is to promote consistency in governance arrangements of Australian Government Bodies, while reinforcing the principles set out in the Review of Corporate Governance of Statutory Authorities and Office Holders (the Uhrig Report)’. It is borne out of a policy preference to ‘curb unnecessary proliferation of Government bodies’ and the realization that ‘poor governance structures can threaten good policy outcomes.’ These guidelines provide detailed guidance on when and how to create a new body, what should be its financial framework, the factors that should be borne in mind while deciding its governance arrangements.
This document is quite relevant to the States Governments, where a large number of ‘autonomous’ bodies (also sometimes called as special purpose vehicles) have mushroomed over the years. Many of them are registered as societies under the Societies Registration Act; a few are set up under the separate statutes. These bodies function outside the government rules and regulations such as they are. Given the large number of bodies with equally large variety of governance structures working below the government departments, it would be interesting to do a similar review of their governance arrangements and develop some guidelines for their effective management.
Many of the scams in government involve fraud which is preventable through various deterrent and preventive measures. While there is a lot of discussion in the media and otherwise on corruption, there is very little attention paid to fraud which also results in enormous loss to the government’s exchequer. Countries like the U.K., Australia, USA, etc. have put in place reliable processes and systems to combat fraud – particularly in benefit payments and procurement. Considering that the Union and the State Governments between them spend thousands of crores of rupees on benefit payments (subsidies, welfare pensions, etc.) surprisingly there is very little by way of managing the risk of fraud in present rule books. Guidelines for Fraud Control ensure that not only is the public money and property protected against theft but also the integrity and reputation of government agencies is well guarded.
Many of the services provided by the state government directly and more so by the local governments have a scope for recovery of costs at least partially through user charges. Given the enormous burden on the government of providing public and merit goods free of cost, it makes sense to efficiently recover costs on goods / services where they can, such as treated water, power, certain municipal services, higher / technical education, etc. The Guidelines on Cost Recovery set out the principles and processes for initial policy review, design and implementation of cost recovery, cost recovery impact assessment, and so on. Thus, these guidelines help the Government manage its public finances efficiently. Such guidelines would really be useful for the State Governments and urban local bodies, particularly the major corporations, to rationalize the fees and user charges.
The procurement guidelines establish the core procurement policy framework and articulate the Government’s expectations for all departments and agencies and their officials, when performing duties in relation to procurement. Procurement is the major source of collusive corruption as well as fraud. To deal with this while the GOI’s General Financial Rules have just a chapter detailing the procedures, the state governments’ financial codes have nothing. On the positive side, Karnataka and Tamil Nadu have enacted procurement laws. There are, of course, a large number of guidelines issued by the Central Vigilance Commission from time to time; however, these have not been codified.
Next to procurement, government property is most vulnerable to corrupt practices; and losses, when such malpractices do take place, can be enormous, as evident in discretionary allotment of Housing Development sites at a fraction of market value, denotification of government acquired land and encroachments of public property. The Commonwealth Property Management Guidelines seek to assist government agencies in the efficient, effective and ethical management of Commonwealth property. There is nothing in the Indian codes and manuals about property management. None of the governments maintain even a rudimentary asset register of government properties. When there is no record of assets their proper upkeep, protection appears to be a far cry.
With Governments now entering into different financing arrangements under public private partnerships in infrastructure projects, there is an urgent need for guidance in these matters. The National Public Private Partnerships (PPP) Policy Framework and National PPP Guidelines of Australia comprises Procurement Options Analysis,: Practitioners Guide; Commercial Principles for Social infrastructure; Public Sector Comparator Guidance; Discount Rate Methodology; Jurisdictional Requirements; etc.
The Public Financial Management framework in Australia covers the entire ground, leaving nothing to chance or arbitrary treatment. In contrast, we have codes and manuals that are far past their expiry date. While having Lok Pal is important, it is important that we also look at how well we have defined our rules of the game.