Tuesday, 23 July, 2024

Unchecked Fiduciary Risks At Local Level

Unchecked Fiduciary Risks At Local Level

Mukti Rijal

A national daily disclosed last week to indicate that the state of governance and public finance management in the Kathmandu Metropolitan City (KMC) is highly problematic. If the substance contained in the news item is to be believed, KMC misappropriates and spends a huge amount of fiscal resources without taking due cognizance of financial diligence, rules and regulations. However, it is not for the first time that KMC's poor financial management has been subjected to tougher scrutiny and critically splashed on media spotlight.

Poor governance
KMC's lacklustre response to fight COVID-19 has also been placed into the public scrutiny. It is criticised that the KMC actions to fight COVID-19 have been ineffective and inadequate. Moreover, the local level’s history of poor governance and contested financial management is not new. It had even failed time and again in the Minimum Conditions Performance Monitoring (MCPM) tests conducted during the previous decades when local bodies’ working was assessed using a set of indicators developed by the government.
It is not KMC alone but some other local governments – municipalities and rural municipalities - across the country are also alleged to be susceptible to corrupt practices and irregularities. A study conducted by the Commission for Investigation of Abuse of Authority (CIAA) almost three years ago mentions that municipalities and rural municipalities are one of the corrupt agencies in the country. Though the findings can be well contested and dismissed as exaggerated and unreal, the CIAA survey report shows that municipalities and rural municipalities are plagued with corruption after land revenue offices in the country.
As many as 2,566 complaints related to local governments directly or indirectly were registered with the CIAA in the Fiscal Year 2017-2018. This number did not decrease during the succeeding years as well. The CIAA report shows that governance at the local level is bleaker even after the country adopted federal system to ensure that people get services at their doorsteps conveniently and effectively without any hassles.
After the local elections held in 2017 after a gap of around 20 years, it was largely expected that elected representatives would be accountable to the people and governance would improve in a meaningful way. But the spate of the cases of irregularities seems not declining and poor governance at the local level has not improved. It is alleged that elected representatives at the local levels have been so dominant and errant that there is a tendency to breach laws and rules with impunity perhaps in complicity of the government officials. Some local governments have been reported to be spending money in projects which have not been discussed and endorsed by the local assembly. Not only have the equalisation grants, conditional grants provided by the Centre also been misused at many local governments.
Local governments have been caught allocating budget in areas where the law does not allow them to do so. A tendency prevails among a number of local governments to make cost estimate of projects in such a way that contract could be awarded at a lower amount in return for kickback from contractors. However, these allegations levelled against the local governments are brushed aside by the local government authorities contending that local people are generally satisfied with the services delivered by local governments. The issue of irregularities has been hugely generalised to show all local governments have not performed better under elected representatives.
But it must be admitted that there are several public finance management-related challenges and risks, including fiscal indiscipline, at the local level. Though financial laws and regulations are enacted to enforce fiscal disciplines, they are not fully complied and followed. The annual reports of the Office of the Auditor General in the last few fiscal years have reported widespread financial irregularities and indiscipline, such as high variances up to 21 times and spending of capital expenditure up to 70 per cent at the end of the fiscal year. This increases the risk of poor financial mismanagement, and poor quality infrastructure.
An analysis of the budget data shows poor prioritisation of projects and programmes leading to spending in non-prioritised areas and sectors. Also, several projects are listed under priority projects and are considered more on political grounds than on strategic importance. Moreover, poor internal control and weak enforcement of corrective measures against irregularities constitute other challenges that have increased fiduciary and corruption risks at the local level.
Reform measures
Given the substantial number of public finance management related challenges and risks at the local level, an evaluation needs to be conducted with regard to institutional arrangements especially at local government level. This will provide relevant information on the implementation of the reform measures towards mitigation of public finance management related risks. There is also need to establish project bank including sector categorisation and prioritisation of the projects based on objectively defined criteria followed by and linking multi-year budgeting with the project bank.
Moreover, internal control and internal audit should be strengthened in line with the provisions of the law concerned. Likewise, there is a need for digitisation of the public finance management system, including the information and asset management systems to reduce the risks of irregularities and wasteful expenditure of resources. Moreover, this also requires robust plans and strategies for institutionalisation of capacity development plan to address the local needs. In addition to it, local citizens should also have a meaningful space to engage with local government to set local development agenda and seek accountability from the local authorities.

(The author is presently associated with Policy Research Institute (PRI) as a senior research fellow.  rijalmukti@gmail.com)