Operational risk assessment of public financial management reform in Nepal: a review of challenges and opportunities Philipp Krause, Stephanie Sweet, Edward Hedger, and Bhola Chalise August 2013 1 Contents List of figures, boxes, and tables................................................................................................................... 4 Acknowledgements ....................................................................................................................................... 5 Acronyms and abbreviations ......................................................................................................................... 6 Executive summary ....................................................................................................................................... 9 1. Introduction ............................................................................................................................................. 14 1.1 Objectives ...................................................................................................................................... 14 1.2 Approach and methods .................................................................................................................. 15 2. The environment of public finances ........................................................................................................ 18 2.1 Economic context .......................................................................................................................... 18 2.2 Donor engagement in PFM............................................................................................................ 20 2.3 Political context ............................................................................................................................. 22 3. Institutional arrangements for PFM ........................................................................................................ 28 3.1 Central ministries ........................................................................................................................... 28 3.2 Spending ministries ....................................................................................................................... 31 3.3 Local government bodies............................................................................................................... 35 3.4 External control and oversight bodies ........................................................................................... 37 4. Policy framework and development planning ........................................................................................ 40 4.1 National development planning frameworks ................................................................................. 40 4.2 Local planning and budget preparation ......................................................................................... 40 4.3 Sector planning: health and roads .................................................................................................. 41 5. Budget formulation ................................................................................................................................. 44 5.1 Forecasting and planning ............................................................................................................... 44 5.2 Budget preparation process ........................................................................................................... 46 6. Budget execution .................................................................................................................................... 49 6.1 Institutions and processes .............................................................................................................. 49 6.2 Sectoral and local budget execution: roads and health .................................................................. 54 7. Accounting, reporting, and audit............................................................................................................. 56 7.1 In-year budget monitoring and reporting ....................................................................................... 56 7.2 Annual reporting and financial statements .................................................................................... 57 7.3 Internal control and audit ............................................................................................................... 57 7.4 External audit ................................................................................................................................. 58 7.5 Parliamentary scrutiny and audit follow-up .................................................................................. 59 8. Diagnosis: interpreting the evidence ....................................................................................................... 60 8.1 Strengths and challenges ............................................................................................................... 60 8.2 Problem analysis ............................................................................................................................ 64 9. The way forward ..................................................................................................................................... 69 9.1 Entry points ................................................................................................................................... 71 9.2 PFM reform and implications for service delivery ....................................................................... 78 9.3 Options for external engagement and joint monitoring of progress ............................................. 80 Appendix A: Mapping of donor support to national and local PFM reforms ............................................. 84 Appendix B: List of people interviewed ..................................................................................................... 88 Appendix C: Summary matrix of challenges, entry points, and recommendations .................................... 91 Notes ........................................................................................................................................................... 92 References…………………………………………………………………………………………………91 2 3 List of figures, boxes, and tables Figure 1: GDP and inflation in Nepal, 2006/07 to 2012/13 ........................................................................ 18 Figure 2: Public debt and deficits, 2006/07 to 2012/13 (percentage of GDP) ............................................ 19 Figure 3: Revenue and expenditures, 2006/07 to 2012/13 (percentage of GDP) ....................................... 19 Figure 4: Expenditure composition, 2007/08 to 2011/12 (percentage of total expenditures and GDP) ..... 20 Figure 5: Nepal district spending per capita (NRs) ..................................................................................... 23 Figure 6: Nepal’s accountability and budget cycle ..................................................................................... 25 Figure 7: Professionalism and impartiality of the bureaucracy in Nepal .................................................... 27 Figure 8: Line management structure of the MoHP in Nepal ..................................................................... 33 Figure 9: Management structure of the government roads sector in Nepal ................................................ 35 Figure 10: Central to local level organogram ............................................................................................. 37 Figure 11: Comparison of Nepal with a “typical” budget calendar ............................................................ 48 Figure 12: Timing of capital expenditures for different government ministries, 2009 to 2012 .................. 51 Figure 13: Variance in budgeted and actual expenditure, 2007/08 to 2011/12........................................... 52 Figure 14: Fishbone diagram of public spending problems ........................................................................ 65 Box 1: PFM assessments 2002 to 2012 ...................................................................................................... 21 Box 2: The 14-step planning process .......................................................................................................... 41 Box 3: Treasury Single Account introduction ............................................................................................ 50 Box 4: PFM reform trends in post-conflict countries ................................................................................. 63 Box 5: Potential PFM improvement monitoring indicators ........................................................................ 82 Table 1: Conditions for strong budget authority in Nepal .......................................................................... 26 Table 2: List of ministers of finance, 2003 to 2013 .................................................................................... 29 Table 3: MTEF vs. Red Book budget ceilings (for selected ministries) ..................................................... 45 Table 4: Budget calendar in Nepal .............................................................................................................. 46 Table 5: Budget approval dates ..................................................................................................................