Strengthen Public Finance Management


The Kathmandu Metropolitan Corporation (KMC) has been described to be in poor shape from the financial management point of view. It is yet to be seen whether or not new Mayor Balendra Shah would work sincerely to improve the governance profile of this metropolis. This may be discerned and noticed in the Office of the Auditor General (OAG)’s report for the upcoming years. However, report of the OAG for the previous fiscal year 2077/78 B.S. portrays the sorry state of internal financial control system in KMC. According to the report, KMC lacks an effective project prioritisation, selection and monitoring system. Many of the projects are of the pork barrel type. They are entrusted to user groups and contractors for implementation. But these are found not completed in time. 

Moreover, they are poor in quality and durability indicating that the technical standardisation of the projects, stipulated terms and conditions of execution are found severely compromised. Tracking and monitoring of project implementation, requiring progress update and reporting is also very poor. Coordination between Wards and KMC itself is not effective. It shows that KMC spends a huge amount of fiscal resources without taking due cognizance of financial diligence stipulated in the laws, rules and regulations. It is expected that the new and energetic Mayor shall look into the matter sans frustration and disillusionment.   

Corrupt practices

It is not KMC alone but a good number of local governments– municipalities and rural municipalities-- across the country are also alleged to be susceptible to corrupt practices and irregularities. Reports of the Commission for Investigation of Abuse of Authority (CIAA) reports corroborate it. Though CIAA observations can be well contested and dismissed as exaggerated and inflated, its report for this year too shows that municipalities and rural municipalities are infested with corrupt practices.

Thousands of complaints ascribed to local governments directly or indirectly have been registered in the anti-graft agency. The CIAA report indicates that governance at the local level is bleaker even after the country adopted federal system to ensure that people get services at their doorsteps effectively without any hassles. The government has held democratic local elections twice in 2017 and 2022 in succession. It is, therefore, largely expected that elected representatives would be accountable to the people and governance would improve in a meaningful way. But the growing incidences of irregularities seem not declining and poor governance at the local level has not improved. Elected representatives at the local level 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. Recent news reports published in the newspapers especially in Rupendehi and many other districts provides the details about the cases as to how corrupt practices are allowed to occur with impunity.   

Furthermore, quite a number of   local governments have been reported to be spending money in projects which have not been discussed and endorsed by the local assembly. Not only the equalisation grants but conditional grants provided by the federal government have also been misused at many local levels Local governments have been found 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 kickbacks and fraudulent benefits from contractors. However, some of these allegations leveled 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. They argue that the issue of irregularities has been largely 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. The financial laws and regulations enacted to enforce fiscal discipline are not fully complied and followed. Again, the annual reports of the OAG during  the last few fiscal years have reported widespread financial irregularities and indiscipline, such as high cost  variances in project estimate and haphazard use and expenditure of capital expenditure. 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 listed under priority projects are considered more on political grounds than on need-based importance. Moreover, poor internal control and weak enforcement of corrective measures against irregularities constitute challenges that have increased fiduciary and corruption risks at the local level.  

Critical review

Given the substantial number of public finance management related challenges and risks at the local level, a critical review needs to be conducted with regard to institutional arrangements and capabilities of the subnational level. This will provide relevant information on the implementation of the reform measures towards mitigation of public finance management-related risks. There is also a need to make local governments formulate medium term expenditure framework, linking it with multi-year budgeting and allocations. This will increase the allocation efficiency. 

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.

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

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