Driving Integrity in Managing Public Funds

Transition Challenges

Nepal underwent a complex political transition to democracy with a Comprehensive Peace Agreement signed in November 2006, leading to an interim constitution in 2007.

Following the peace agreement in November 2006 after a decade-long conflict, there was an urgent need to put together systems and processes that had been broken in order to revitalize the public institutions, which were not functioning well, particularly at the local government level. There was an absence of elected officials in local bodies, and civil servants were deputed from the center to manage resources and make decisions on public service delivery and overall development work. An all-political-party mechanism was formed to guide those civil servants, but they were not legally accountable to the citizens. There was hence poor accountability besides inefficient planning and management of public funds. Lack of oversight also increased mismanagement of resources and fiduciary risks. These led to disruptions in public service delivery and hindered the overall socioeconomic development, adding to the many reasons for Nepal being one of South Asia’s lowest-performing economies in terms of economic growth.

Following the peace agreement in 2006, ADB, together with other development partners, supported the Government of Nepal in rebuilding public institutions and reforming systems and processes at the local level. This was undertaken through the government’s flagship Local Governance and Community Development Program (LGCDP).

Years of conflict and mismanagement of public resources increased the disconnect between Nepal’s central and local governments.

Partnerships Help Regain Control

ADB provided $160 million grant to this program under the Governance Support Program (GSP), which was implemented from 2008 to 2012. One of the major learnings of LGCDP/GSP was the lack of robust public financial management (PFM) system and mechanisms for accountability and transparency at the local level. Consequently, this brought huge risks for public resources to be misused and unused for socioeconomic development.

The need for efficient and effective management of limited resources and reduction of fiduciary risks were critical in order to improve the quality, accessibility, and inclusiveness of public service, thereby continuing the socioeconomic recovery from the decade-long conflict. As political instability continued, discussions were held at different levels and groups to transform the country from a unitary to a federal system of governance. A constituent assembly was then formed to draft a new constitution to operationalize the federal system, and restructure the public administration to support the federal system of governance. Nepal adopted the new constitution in 2015.

Amid the political instability and discussions over the change of governance system, ADB designed the Strengthening Public Management Program (SPMP) in 2012. The United Kingdom, through the then Department for International Development of the United Kingdom (now the Foreign, Commonwealth and Development Office), and the European Union, cofinanced the program.

The SPMP served as a fundamental intervention to develop and strengthen the weak PFM systems and ensure that financial resources are utilized for their intended purposes, thereby improving public service delivery and infrastructure development at the local government level.

The reforms initiated under the SPMP not only contributed to strengthening the PFM systems at the local level, but also provided important building blocks for fiscal decentralization as the country moved from a unitary to a federal system of governance in 2015, and as public institutions at the local government level assumed higher responsibilities (under the federal system).

ADB and financing partners supported the government in rebuilding the public institutions and reforming systems and processes at the local level.

Integrity in Local Governance

The reform actions and capacity development support provided under the SPMP helped improve the institutional capacity of local governments, and thereby take on the increased delegated responsibilities under the federal system.

The SPMP had 23 policy actions under four outputs.

To improve local government budget and fiscal management, the Local Government Operations Act (2017) and the Local Financial Procedures Act (2017) were developed and implemented under the new federal system.

To enhance local revenue mobilization, the Ministry of Federal Affairs and General Administration (MOFAGA) piloted a web-based resource planning software called the municipal administration and revenue system (MARS) in Kathmandu Metropolitan City (KMC). All thirty-five wards of the KMC took part in the pilot implementation. Additionally, MOFAGA took various measures to implement integrated property tax (IPT), enabling municipalities to objectively valuate houses and land values collectively, and assess taxes based on automated property data. The IPT was introduced in 97 towns in 2016, exceeding the target of 45 municipalities under the SPMP.

Under the SPMP, the government approved and implemented an integrated action plan to strengthen the PFM systems, and reduce fiduciary risks at the local government level. The government issued a guideline for results-based reporting system to monitor capital expenditures at the local level, and approved guidelines for external audits.

These measures promoted transparency and accountability of public expenditures.

Further, MOFAGA rolled out uniform accounting and financial management software to promote financial accountability in 1,352 village development committees (VDCs) covering 51 districts. By 2016, 695 VDCs had functional accounting software, and 2,709 staff in the VDCs management received user training. While these VDCs were later restructured under the federal system, the capacity development support received under the SPMP helped them to continue their job even under the new institutional arrangements.

Under the program, an e-government procurement(e-GP) system was developed and successfully piloted in five major government departments responsible for big infrastructure projects. The e-GP was rolled out nationwide. In addition, the public procurement monitoring office executed e-GP training to 20 ministries and all local bodies with the technical assistance associated with the program.

“SPMP program alone was certainly not enough to strengthen the institutional capacities of local governments,” said Rachana Shrestha, public management specialist and project officer. “But it was fundamental in identifying areas that need to be strengthened, and providing basic tools, systems, and knowledge to manage resources and operations.”