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Financial Management Manual

                       For

  Madhya Pradesh Urban Local Bodies




          Madhya Pradesh
Urban Administration and Development




                "Project Utthan"
    Madhya Pradesh Urban Services for the Poor
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh




Preface
As the urban population is growing at a fast pace and larger share of GDP comes from urban areas,
Urban Governance and Development has become the focus of increased attention in the last decade by
central and state governments and other stakeholders across India. Consequently, Urban Local Bodies,
being at the fulcrum of urban management, have received more attention in terms of legal powers and
autonomy, financial resources, technical assistance and capacity building inputs to assist urban reform
processes under various government schemes including JNNURM.

Madhya Pradesh Government is at the forefront of the process of improving urban governance and
achieving urban development by pursuing a wide variety of innovative urban reforms facilitated by the
Madhya Pradesh Urban Services for the Poor (MPUSP) programme. The MPUSP programme, which is
an outcome of a partnership between the GoMP and the Department for International Development
(DFID) of the United Kingdom, is a major initiative of the GoMP towards implementing municipal reforms
and strengthening of Urban Local Bodies (ULBs) in MP.

A core area of focus for MPUSP funded reforms has been to improve the financial management of ULBs
which often faced difficulties in implementing prudent and optimal financial management practices in the
areas such as: budgeting, costing, expenditure management, receivables management, cash
management and other areas of financial management.

This Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh was conceived by
the Urban Administration and Development Department (UADD) , Government of Madhya Pradesh
(GoMP) as a direct response to these issues. The Manual is probably the first initiative of its kind in India
and will not only serve the ULBs of Madhya Pradesh but it will also be useful to all ULBs across the
country.

The manual beside defining financial management and explaining how it can be applied to ULBs, has
covered theoretical and practical aspects of financial management tools/techniques such as: financial
analysis, operating budget, capital budget, cash, receivables, payables and debt management, assets
management, financial information system, internal control etc.

It is expected that the ULBs of the MP will adopt and implement these good financial management
practices which will improve their financial performance and overall financial status. It is envisaged that
the manual will may be revised in the light of emerging learning and lessons to ensure that it is a useful
living document. Finally it is hoped that it will pave way to make ULBs financially efficient and
sustainable.
                                                                       Commissioner
                                                             Urban Administration and Development

Bhopal

Dt. 08/11/2011



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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh




Contents


1     INTRODUCTION ................................................................................................................................. 10


1.1        Purpose of this manual .................................................................................................................. 10


1.2        Target group of users ..................................................................................................................... 10


1.3        How to use this manual .................................................................................................................. 10


1.4        Structure of this manual ................................................................................................................. 10



2     INTRODUCTION TO FINANCIAL MANAGEMENT ........................................................................... 12


2.1        Defining financial management...................................................................................................... 12


2.2        Need for financial management in ULBs ....................................................................................... 12


2.3        Financial management process ..................................................................................................... 13



3     BUDGETING PRACTICES ................................................................................................................. 15


3.1        Concepts ........................................................................................................................................ 15


3.2        Good practices of budgeting .......................................................................................................... 28


3.3        Policies recommended for adoption............................................................................................... 31


3.4        Procedures ..................................................................................................................................... 34


3.5        Case study: Budgetary reforms at Vadodara Municipal Corporation ............................................ 46



4     CAPITAL IMPROVEMENT PROGRAM AND CAPITAL BUDGETING ............................................. 52


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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


4.1       Concepts ........................................................................................................................................ 52


4.2       Good practices of CIP .................................................................................................................... 53


4.3       Policies recommended for adoption .............................................................................................. 53


4.4       Procedures ..................................................................................................................................... 54


4.5       Case study: CIP of Pune Municipal Corporation (PMC) ................................................................ 68



5     CASH MANAGEMENT........................................................................................................................ 74


5.1       Concepts ........................................................................................................................................ 74


5.2       Good practices of cash management ............................................................................................ 75


5.3       Policies ........................................................................................................................................... 76


5.4       Procedures ..................................................................................................................................... 78



6     RECEIVABLE AND PAYABLE MANAGEMENT ............................................................................... 89


6.1       Concepts ........................................................................................................................................ 89


6.2       Good practices of receivables and payable management ............................................................. 89


6.3       Policies ........................................................................................................................................... 90


6.4       Procedures ..................................................................................................................................... 91



7     DEBT MANAGEMENT ........................................................................................................................ 97


7.1       Concepts ........................................................................................................................................ 97




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


7.2        Good practices of debt management ............................................................................................. 98


7.3        Policies ........................................................................................................................................... 98


7.4        Procedures ................................................................................................................................... 100


7.5        Case Study: Debt management strategy of Vadodara Municiapal Corporation .......................... 106



8      ASSET MANAGEMENT .................................................................................................................... 107


8.1        Concepts ...................................................................................................................................... 107


8.2        Good practices of asset management ......................................................................................... 109


8.3        Policies ......................................................................................................................................... 109


8.4        Procedures ................................................................................................................................... 110



9      EXPENDITURE MANAGEMENT ...................................................................................................... 115



10 COSTING PRACTICES ..................................................................................................................... 118


10.1       Concepts ...................................................................................................................................... 118


10.2       Policies ......................................................................................................................................... 122


10.3       Procedures ................................................................................................................................... 123



11 INTERNAL CONTROLS.................................................................................................................... 132


11.1       Concepts ...................................................................................................................................... 132


11.2       Good practices of internal controls .............................................................................................. 135




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


11.3       Policies ......................................................................................................................................... 135


11.4       Procedures ................................................................................................................................... 136



12 FINANCIAL MANAGEMENT INFORMATION SYSTEMS ............................................................... 145


12.1       Concepts ...................................................................................................................................... 145


12.2       Policies ......................................................................................................................................... 147


12.3       Procedures ................................................................................................................................... 148



13 FINANCIAL ANALYSIS .................................................................................................................... 151


13.1       Concepts ...................................................................................................................................... 151


13.2       Good practices of financial analysis ............................................................................................. 166


13.3       Policies ......................................................................................................................................... 166


13.4       Procedures ................................................................................................................................... 167



14 PROCUREMENT ............................................................................................................................... 170



ANNEXURE 1: FORMATS FOR BUDGETING........................................................................................ 171



ANNEXURE 2: FORMAT FOR ASSET MANAGEMENT ........................................................................ 179



ANNEXURE 3: FORMATS FOR FMIS ..................................................................................................... 180



ANNEXURE 4: TOR CHECK LIST .......................................................................................................... 190




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh




List of Tables

Table 1: Structure of the Financial Management Manual ........................................................................... 11

Table 2: Example of line-item budget for a ULB ......................................................................................... 17

Table 3: Advantages and disadvantages of line-item budgeting ................................................................ 18

Table 4: Advantages and disadvantages of programme budgeting ........................................................... 21

Table 5: Example of zero-base budgeting .................................................................................................. 22

Table 6: Advantages and disadvantages of zero-base budgeting .............................................................. 23

Table 7: Sample performance measures .................................................................................................... 24

Table 8: Advantages and disadvantages of performance budgeting ......................................................... 25

Table 9: Forms prescribed in MPMAM for budget layout ........................................................................... 33

Table 10: Sample format for listing and linking proposed capital investment works to budget allocations 36

Table 11: Format of CIP prepared by PMC ................................................................................................ 72

Table 12: Sources of information for Cash Flow forecast ........................................................................... 81

Table 13: Format for gathering data for trend analysis ............................................................................... 84

Table 14: Illustration on judicious use of investments ................................................................................ 87

Table 15: Decision matrix for choosing among long-term financing alternatives ..................................... 105

Table 16: Illustration on cost savings through outsourcing ....................................................................... 121

Table 17: Illustration showing apportionment of indirect expenses .......................................................... 126

Table 18: Physical parameters for costing ................................................................................................ 126

Table 19: A typical cost sheet of Water Works Department ..................................................................... 127

Table 20 : Format for calculating budget requirements for electricity charges for streetlight service....... 171

Table 21: Format for calculating budget requirement for O&M of streetlight service ............................... 172

Table 22: Format for calculating budget requirement for fuel expenses for vehicles & other machinery . 174



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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


Table 23 : Format for calculating budget requirement for purchase of tyres for vehicles ......................... 175

Table 24: BIDS for listing spill over works and for estimating their budget liability ................................... 178




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh




LIST OF FIGURES

Figure 1: Financial management process ................................................................................................... 14

Figure 2: Sample budget calendar .............................................................................................................. 35

Figure 3: Decision making process for O& M expenditure ......................................................................... 40

Figure 4: Identification of capital works and formulation of capital budget ................................................. 44

Figure 5: Summary of budget preparation process ................................................................................... 45

Figure 6: Capital investment decision making process ............................................................................... 54

Figure 7: Procedure followed by PMC for preparing CIP ............................................................................ 68

Figure 8: Linkages of cash budget .............................................................................................................. 86

Figure 9: Relationship between AMP and Budget .................................................................................... 114

Table 10: Function and functionary codes for Cost Object - Water Supply .............................................. 124

Figure 11: Internal control system ............................................................................................................. 133

Figure 12: Format for collecting information on ULB assets ..................................................................... 179

Figure 13: Format for monthly financial position ....................................................................................... 180

Figure 14: Format for statement showing actual receipts against budgeted receipts .............................. 181

Figure 15: Format for statement showing actual expenditure against budgeted expenditure .................. 182

Figure 16: Format for statement showing investments in bank fixed deposits ......................................... 183

Figure 17: Format for statement on returned/ dishonoured cheques ....................................................... 184

Figure 18: Format for summarised status report on returned/ dishonoured cheques .............................. 185

Figure 19: Format for unadjusted advances status report ........................................................................ 186

Figure 20: Format for outstanding loans/ liability statement ..................................................................... 187

Figure 21: Format for projected monthly cash flow statement .................................................................. 188

Figure 22: Format for status report on examination of accounts .............................................................. 189


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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh




1 INTRODUCTION


1.1 Purpose of this manual
The primary purpose of this manual is to explain the concepts and define the policies and procedures
about good practices of financial management for ULBs of M.P. A secondary purpose of the manual is to
develop the capacity of Urban Administration Development Department (UADD) and the ULBs to adopt
and implement these policies and procedures.

1.2 Target group of users
This manual is intended for all municipal employees involved in financial management of a ULB.
Particularly, these may include:
1. Senior decision makers including senior administrative officers such as the Commissioners/ Chief
   Officers, department heads, elected representatives, as well as the Mayor-in-Council (MIC).
2. Accounts officers, municipal engineers and administrative officers who are the key people involved in
   many of the processes related to financial management of a ULB.
3. UADD of GoMP who would be involved primarily in monitoring, supervision and facilitating financial
   management process in ULBs.

1.3 How to use this manual
This manual does not give detailed instructions on the course of action to be taken in every situation
arising due to financial management. Instead, it outlines the basic policies, principles, procedures and
good practices observed in Indian or non-indian ULBs based on which decisions should be made.

The manual is intended to act as a guide which will facilitate the municipal employees to successfully
understand and implement the best practices on financial management.

1.4 Structure of this manual
The manual is structured into two parts.

•   Managing financial framework – Budget (formulation, implementation & evaluation) is the most
    important tool for managing financial framework and all other systems are aligned to it. It is most
    effectively managed by having a system of short-term and long-term financial management. Short-
    term financial management mainly includes cash management, receivables and payables
    management and short-term debt management, whereas, long-term financial management consists
    of formation of capital investment plan and long-term debt management.




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh



•   Performance enablers - Apart from this there are certain systems that act as performance enablers
    for managing the finance framework. These include Asset Management, Costing, Procurement,
    Internal Control and Financial Management Information Systems.

The chapters of this manual have been framed keeping in the mind the above mentioned structure. The
following table provides the sequence of chapters in the manual.

Table 1: Structure of the Financial Management Manual

 Number             Name                                                  Category

 Chapter 3          Budgeting

 Chapter 4          Capital Improvement Plan/Capital Budgeting

 Chapter 5          Cash Management                                       Managing Financial Framework

 Chapter 6          Receivables and Payables Management

 Chapter 7          Debt Management

 Chapter 8          Asset Management

 Chapter 9          Expenditure Management

 Chapter 10         Costing

 Chapter 11         Internal Control                                      Performance Enablers

 Chapter 12         Financial Management Information Systems

 Chapter 13         Financial Analysis

 Chapter 14         Procurement


Apart from the above, a set of Annexures are appended to this manual, which provide formats for some of
the areas of financial management. These include:

•   Annexure 1: Formats for budgeting

•   Annexure 2: Formats for asset management

•   Annexure 3: Formats for FMIS




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh




2 INTRODUCTION TO FINANCIAL MANAGEMENT


Finance has a unique and important place in personal, public, institutional and social walks of life. In order
to be successful in these walks of life, all of us need to augment and utilise financial resources efficiently
and in a sustainable way to ensure future flow of resources. Therefore, all decision-makers need to know
how to manage finances of their institutions/ organisations.

Financial management attempts at optimising output from the given input of funds. In a country like India
where resources are scarce and there is enormous demand for funds, proper financial management is of
utmost importance.

2.1 Defining financial management
Financial management in simple terms means the entire gamut of managerial efforts devoted to the
management of finance (both its sources and uses) of an enterprise (organisation/ institution/ public body
etc.). It is the management of the finances of a business/ organisation in order to achieve its financial
objectives. Taking a business as the most common structure, the key objectives of financial management
would be to:

•   Create wealth for the business,

•   Generate cash, and

•   Provide a return on investment keeping in mind the risks that the business is taking and the resources
    invested.

It can be observed that traditionally, the basic objectives of Financial Management were the maintenance
of liquid assets and maximisation of the profitability of the organisation. But now it has undergone a
change. Today, the ultimate objective of financial management is maximisation of wealth.

The objective of wealth maximisation holds good for public bodies’ financial management also. Public
bodies or any governmental form of organisation exists not for ‘profit maximisation’ but for ’wealth
maximisation.' In order to improve the overall standard of living of people or society, the government
needs to maximise wealth and then to ensure equal distribution of the wealth generated. Thus, public
bodies are expected to attain the objective of wealth maximisation through judicious allocation and
utilisation of resources. In order to achieve this objective, public bodies must run their finance function as
per modern financial management methods, as the discipline of financial management strives for ’wealth
maximisation'.

2.2 Need for financial management in ULBs
In the past two decades, India has witnessed a phase of rapid urbanization. This has resulted in most
urban settlements facing shortfalls in provision of urban services such as, housing, water supply,


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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


sewerage and urban transportation systems. In addition to the growth in demand for urban services, poor
functioning of municipal bodies has made the problem even more acute.

In order to meet these and other growing challenges, the Government of India (GoI) introduced special
purpose schemes such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) that intend
to enable municipal bodies to meet these challenges by providing a fresh impetus to urban reforms. As
the infusion of funds from these schemes is expected to increase municipal budgets, it is important that
ULBs have sound financial management systems and procedures in place to ensure that these public
funds are used efficiently and transparently.

Hence ULBs require sound financial management systems to ensure that funds are effectively managed
and efficiently utilised.

2.3 Financial management process
The whole financial management process can be viewed from three angles:

•   Creating financial framework

•   Managing financial framework

•   Performance enablers

The creation of financial framework basically deals with three aspects namely financial policies, financial
analysis and financial planning. These three aspects form the core of financial framework for any ULB.

After the creation of financial framework, the second most important aspect is managing this framework.
Budget (formulation, implementation and evaluation) is the most important tool for managing financial
framework and all other systems are aligned to it. Short-term financial management mainly includes cash
management, receivables and payables management and short term debt management. Long-term
financial management consists of formation of capital investment plan and long-term debt management.

Apart from this there are certain systems which act as performance enablers for managing the finance
framework. These include Asset Management, Costing, Procurement, Internal Control and Financial
Management Information Systems.

The following figure depicts the financial management process.




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh



Figure 1: Financial management process

                                                   Enabling Performance

                        Creating Financial                  Managing Financial Framework
                        Framework

                                             Short term financial
                                             management
                                                                                           BUDGETING
 Financial Management
 Financial Management
  Information System




                        Financial Policies   •Cash Management




                                                                                                                  Internal Control
                                             •Receivables and
                                             payables management                        Operating Budget
                        Financial Analysis   •Short term debt
                                             management
                                             Long term financial
                                                                                                  +
                                             management
                        Financial Planning   •Capital Improvement
                                             Plan                                         Capital Budget
                                             •Long term debt
                                             management

                        Asset Management                Costing                                Procurement




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh




3 BUDGETING PRACTICES


This section of the manual discusses various concepts, principles, techniques associated with budgeting,
and provides the policies related to budgeting, the budget preparation process followed by the budget
review mechanism.

3.1 Concepts
Budgeting is a statutory activity for all urban local bodies (ULBs) in India. It acts as a powerful tool to
allocate limited resources among competing priorities. It is a local government’s plan to allocate its
financial resources for a specified period including all planned revenues and expenses.

A ULB budget typically includes:

•   Planned activities, projects, and services;

•   Estimates of the resources or revenues available; and

•   Estimates of public expenditure necessary to finance planned activities.

3.1.1 Definitions

Operating/ revenue budget: It is a plan for the on-going day-to-day operational expenditures of the ULB
and the proposed means of financing for a specific period (usually one year).

Capital budget: It is a plan of proposed capital improvements and the means of financing them, usually
based on the first year of a multi-year capital improvement programme and typically enacted as part
of the complete annual budget, which includes both operating and capital outlays.

Extraordinary budget: It is a part of the capital budget, but contains receipts and payments which do not
amount to income and expenditure for the ULBs. For example, deposit receipts and payments, advances
given and adjusted, etc.

Poor budget: It is a budget which is sensitive to the needs of poor people or which tries to correct its bias
in resource allocation for the alleviation of poverty by stipulating a certain percentage of resources for the
poor. For example, in normal practice, a budget fails to show sensitivity towards the needs of the urban
poor in resource allocation and special needs of the poor get neglected.

Gender-based budget: It is a budget which is sensitive towards gender or which tries to correct gender
bias in resource allocation by stipulating a certain percentage of resources for one gender. For example,
in normal practice, a budget fails to show sensitivity towards the needs of women in resource allocation
and special needs of women get neglected.




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


Participatory Budgeting: It refers to the adoption of alternative practices for local budget management
aimed at encouraging people’s participation in the allocation of municipal public resources. Such
practices are believed to promote greater efficiency in the allocation of resources by forcing planning and
transparency into decisions on expenditure. Increasingly, municipal bodies all over the world have
introduced such practices and there is increasing global recognition for the significance of such an
approach.

3.1.2 Objectives of a budget

A budget is prepared with the objectives of controlling, managing and planning the financial resources of
an organisation. Each of these objectives are discussed in detail below.
1. Control

As a control document, a budget defines the legal and policy constraints within which the managers of a
ULB can operate. These constraints include determing:

•   Permissible expenditure by each ULB;

•   Purposes for which expenditure can legally be made (such as salaries, maintenance, and loan
    charges); and

•   Collection of tax resources and non-tax resources (i.e., revenue functions).

Control is a significant objective governing the preparation of budgets in ULBs, although its achievement
is drastically impaired by a number of systemic weaknesses. To achieve the objectives of control, the
budget needs to be supported by effective accounting and auditing systems.
2. Management

As a management document, a budget sets targets that ensure the achievement of an efficient and
effective delivery of urban services. To enable the budget to be a fully effective management tool, there
must be a clear relationship between budgetary inputs (such as personnel and equipment) and expected
outputs, defined in ULB performance measures (such as the number of square metres of road to be
repaired, etc.). Such a relationship enables departmental heads to use the budget as a device to manage
their staff.
3. Planning

The preparation of a budget provides a major planning opportunity for a ULB, which wants to address its
growth and development needs through judicious use of its limited financial and personnel resources.
Each year, the budget defines the anticipated revenues of a ULB and outlines the blueprint for its
expenditure.

3.1.3 Constituents of an ideal budget

A ULB's budget should cater to the interests of various users such as politicians, administrators, ULB
managers, employees, representative groups such as NGOs/ CBOs, analysts and the public at large. A


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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


budget should meet the requirements of these varied user groups and yet should not become unyielding,
bulky or ambiguous.

An ideal budget document should be:

•   A policy document: As an operating plan for a local government, the budget document should
    propose, identify and clarify policies. These are generally adopted by the governing body during the
    year and are referred to or summarised in the budget message.

•   A financial plan: The budget process is the primary mechanism for promoting solvency, efficiency
    and rational collective choices regarding the distribution and use of the assets and resources of a
    ULB.

•   An operations guide: The budget provides a framework for operations of a ULB. It must go beyond
    purely financial dimensions to deal with the functions of different parts of the organisation and the
    number and levels of employees.

•   A communication device: A budget is a focal point for residents, taxpayers and constituents, and,
    therefore, should be made plain and simple. Therefore, sufficient efforts should be made to use
    simplistic narratives, charts or graphs to convey the meaning and impact of the budget to people who
    are not familiar with government finances.

•   Scrupulous: A budget should be able to stand up to scrutiny by competing interest groups.

•   Holistic: A budget should be holistic in approach and should not neglect some areas or over or
    under-emphasise others.

3.1.4 Budgeting techniques

A number of budgeting techniques have evolved overtime in order to achieve diverse objectives. These
techniques have met varying degrees of success in different countries. Whereas, some of these
budgeting techniques are more advanced, each budgeting technique offers distinct advantages and has,
at the same time, certain limitations. It is for an organisation to select one or more budgeting techniques
that are appropriate to its activities and budget classification.

3.1.4.1 Line-item budgeting

This method of budgeting is also referred to as incremental budgeting. Under this approach, budgets are
justified on the basis of proposed expenditures by line-item, or object class. The base budget is usually
not justified, but only the additions (or increments) are questioned. It is noteworthy that ULBs in MP
currently develop their budgets on a line-item basis.

A simplified example of line-item budget is presented in the table below.

Table 2: Example of line-item budget for a ULB




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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh



                                                                                       Budget            Request
 Line-item              Base Budget (INR)               Increments (INR)
                                                                                       (INR)

 Salaries                  50,000                       +    6,000                         56,000

 Travel                    25,000                       + 14,000                           39,000

 Equipment                 40,000                       - 10,000                           30,000

 TOTAL                   1,15,000                       + 10,000                         1,25,000


The base budget is equivalent to either:

•   The current year’s budget, including adjustments; or

•   The current year’s actual expenditures, usually estimated to the end of the fiscal year; or

•   The last year’s actual expenditures.

The base budget is different from the current service budget, which is the anticipated cost of continuing a
programme at the present levels, without policy changes or enactment of new laws. Mathematically, the
current services budget (CSB) can be expressed as follows:

CSB = Base Budget + Unavoidable Cost Increases

Increases in unavoidable or fixed costs such as employee costs or dearness allowances may mean that it
will cost more to deliver the same level of services currently being provided. It is important for the budget
office to provide directions to the line departments to enable them to estimate fixed cost increases.

No matter which budget development approach a government uses, its budget is usually translated into a
line-item budget for the purpose of budget execution and control, with allocations to object classes.

Advantages and disadvantages

The primary advantage of the line-item approach is that it is easy. Whereas, the primary disadvantage of
using the line-item approach is that it does not provide essential information.

Table 3: Advantages and disadvantages of line-item budgeting

 Advantages                                                 Disadvantages

 1. It is an efficient way of enhancing the                 1.   It is only concerned with inputs and not
    allocation and control of funds since it mirrors             outputs. Thus, it is difficult for decision-makers
    the accounting system.                                       to find out the results of their allocation
                                                                 decisions and what the public gets for its
                                                                 money in terms of services and outputs.

 2. There is no need for extensive Management               2.   It is difficult to develop a current services


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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh



 Advantages                                              Disadvantages
     Information System (MIS) since information               budget, as the present level of services is not
     pertaining to service levels, unit costs and             known. Decision-makers do not know what
     programme output is not required to develop              they get for their additional resources
     the budget.                                              allocated to a programme: same level of
                                                              service; higher level of service; or, less
                                                              service.

 3. Incremental budgeting is consistent with the         3.   It does not provide any information to
    fact that many programmes are stable and do               decision-makers about alternative ways of
    not change dramatically from year to year.                accomplishing an objective and reveals little
                                                              about a ULB’s priorities.

                                                         4.   It is developed by using the estimates of direct
                                                              costs only and, therefore, indirect costs are
                                                              completely ignored.

                                                         5.   It is characterised by budget control
                                                              techniques, which do not provide sufficient
                                                              flexibility to programme managers to achieve
                                                              results.

                                                         6.   Line-item budgeting is usually accompanied
                                                              by ‘across-the-board’ approach to allocation
                                                              decisions. Budget additions or deductions are
                                                              distributed among all departments on a
                                                              percentage basis, thus, failing to take into
                                                              account the changing needs and priorities of
                                                              the departments.


3.1.4.2 Programme budgeting

Programme budgeting focuses on the decision-making process; particularly on problems of data and
analysis. Its first effort is to introduce a rational ordering of inputs and outputs, in which the initial
emphasis is laid on the identifiable outputs, that is, major objectives of the governmental process. It then
attempts to order the inputs, that is, governmental activities created by manpower, material, real estate,
etc., so that comparisons among wide ranges of alternatives are feasible and meaningful.

Programme budgeting attempts to measure programme effectiveness and programme results in a
quantifiable manner. It starts with clear, quantifiable and measurable programme objectives for all
activities. Programme budgeting can be defined at two levels:
1. The way in which the budget is organised (by programme); and
2. The way it is justified (on the basis of programme results).

This method of budgeting provides a method for organizing activities into programmes (activities or
services with a common goal), identifying alternatives for achieving each goal, determining the costs and
benefits for each alternative, and selecting the right alternative to maximize benefits. Since total cost and



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Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


performance levels are what matter — not the cost of each line item — budgetary allocations can be
provided “lump sum” by programme rather than in traditional department line items. Programme
budgeting is often accompanied by various kinds of performance measures.

On the basis of the above explanation, the following characteristics of programme budgets emerge:

•   It discloses the full cost of a programme regardless of the number of organisational units involved in
    performing the function.

•   It attempts to measure the actual outcomes or programme results of a service or programme.

•   It uses ‘programme elements’ as the basic budgetary classification scheme instead of departments.

•   It provides for consideration of alternate service delivery options.

Programme budgeting is feasible only if measures are quantifiable and specific. Measures utilising terms
such as ‘improve,’ ‘strengthen’, and ‘coordinate’ are impossible to quantify and are too general. Because
of these deficiencies, they do not provide a means of holding agencies or managers accountable for
results. Consider these three possible programme measures for a maternal and child health programme:
3. Measure A: Improves health of infants
4. Measure B: Improves health of infants by 20 percent
5. Measure C: Decreases infant mortality by 10 percent in 3 years

Measure A is not useful because it is not quantifiable, and is, therefore, not measurable. Measure B is
quantifiable but it is not specific as to what is meant by the phrase ‘improves health of infants.’ How would
an improvement in the health of infants be measured; Measure C is the best because it is both
quantifiable and specific. Therefore, in Measure C, it is possible to conclude whether the programme
achieves the desired outcome or fails to achieve it.

Sample programme measures

The following programme measurements may be used:
1. Public Works
    a. Increase in the useful life of the infrastructure; and
    b. Decrease in the average downtime of the government’s equipment.
2. Health Services
    a. Decrease in infant mortality rates;
    b. Decrease in the percentage of children classified as malnourished;
    c.   Decrease in dental diseases; and
    d. Increase in the average lifespan of population.
3. Public Safety



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   a. Number of structures saved from fire;
   b. Decrease in crime rates; and
   c.   Decrease in traffic-related fatalities.
4. Audit
   a. Rupees saved as a result of audits; and
   b. Number of audit findings successfully addressed.
5. Tax and Revenue
   a. Number of tax returns accurately processed; and
   b. Additional revenue from tax compliance programmes.

Advantages and disadvantages

Table 4: Advantages and disadvantages of programme budgeting

 Advantages                                                Disadvantages

 2. It leads to a rational allocation of resources         1. It is inherently difficult to quantify programme
    and is particularly useful in making decisions            results or programme effectiveness. Even if
    about alternative ways of accomplishing an                output and/or programme results can be
    objective.                                                measured, it may not be possible to know
                                                              whether a result was achieved due to the
                                                              programme or because of another factor.

 3. It provides information on the total resources         2. Programme budgeting may ignore the need to
    allocated to programmes (information not                  control      expenditures      by assigning
    available in other budgetary techniques).                 responsibilities to departments.

                                                           3. The costs of trying to measure programme
                                                              effectiveness may outweigh the advantages
                                                              and usefulness of the information.

                                                           4. Information about resources allocated to the
                                                              programmes could only be obtained by
                                                              reorganising government departments in line
                                                              with the programme areas, which is time-
                                                              consuming and not always feasible.

                                                           5. In order to effectively implement programme
                                                              budgeting, budgetary personnel must be
                                                              specially trained and must have the time to
                                                              conduct programme audits, which is a costly
                                                              affair and municipal bodies may not be able to
                                                              afford it.




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3.1.4.3 Zero-based budget (ZBB)

Peter A. Pyhrr at Texas Instruments pioneered the concept of Zero-Base Budgeting (ZBB) in 1969 as a
tool for planning budgeting and controls. In this system of budgeting, organisations do not take budget
allocation in past years for an activity as granted while preparing their budgets and start from zero
allocation. Budget-making under this technique starts from zero instead of treating the current budget as
the base or the starting point. In this system, existing programmes and activities are reviewed and
examined in as much detail as in the case of newly proposed ones.

Definition

In the words of Peter Pyhrr, ZBB is “an operating, planning and budgeting process, which requires each
manager to justify his entire budget requisites in detail from scratch (hence zero basis). Each manager
states why he should spend any money at all. This approach requires that all activities be identified as
decision packages, which would be evaluated by systematic analysis ranked in order of importance.”

ZBB is a formalised system for deciding whether a programme should be operated at a minimum,
reduced, current or increased level. Priority rankings are assigned to all decision packages from the
highest to the lowest; packages are ranked either in or out of the budget. Decision packages must be
discrete, that is, they must be stand-alone and not rely on the other parts of the budget.

Illustrative example

Assuming that the base budget for the Public Works (Roads Maintenance Division) is INR 24 lakhs, an
example of a budget request prepared using the ZBB format is shown below.

Table 5: Example of zero-base budgeting

 S.N.    Decision Package                                   Cost (INR)                 Total         Budget
                                                                                       (INR)

 1.      Only Maintenance                                   24,00,000

 2.      Resurface 5 kilometres of road                     + 3,00,000                 27,00,000

 3.      Resurface 5 more kilometres                        + 2,50,000                 29,50,000

 4.      Reconstruct bridge on Beach Road                   + 1,75,000                 31,25,000


Decision-makers can choose any, all, or none of the decision packages. If only decision package two is
chosen, then a total of five kilometres of road will be resurfaced. If decision packages two and three are
chosen, a total of 10 kilometres of road will be resurfaced. If all the decision packages are chosen, 10
kilometres of road will be resurfaced and the bridge will be reconstructed.

Advantages and Disadvantages




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Table 6: Advantages and disadvantages of zero-base budgeting

 Advantages                                            Disadvantages

 1. It enables decision-makers to make rational        1. ZBB requires agencies to justify every element
    allocation decisions across programme and             of their budget every year. A good idea in
    organisational lines (for example, is it more         theory, but in practice, this proves to be too
    important to resurface five more kilometres of        cumbersome, time-consuming and involves
    road or build three more classrooms?).                huge paperwork and is easy for managers to
                                                          manipulate. In most places, ZBB has died of its
                                                          own weight.

 2. It has the advantage of being more realistic       2. It is unrealistic and a waste of resources to
    than either performance budgeting or                  justify the existence of programmes every year;
    programme budgeting on its own.                       few programmes are eventually terminated as
                                                          a result of the ZBB process.

 3. ZBB provides a systematic way to consider          3. The process is susceptible to games:
    various alternatives to accomplish an                 departments may put essential services in
    objective.                                            lower-ranked decision packages, knowing that
                                                          decision-makers will put them into the budget.

 4. ZBB offers a systematic mechanism for              4. Decision units may not coincide with the
    deciding on the proper level of a programme.          classification system used by the accounting
    For example, the Public Works budget might            system, making it necessary to carry out
    have three decision packages for resurfacing          complex crosswalks between ZBB and the
    a road.                                               accounting/ appropriation structure.


3.1.4.4 Target-based budgeting

In this type of budget, each department is given a maximum amount or target for budget request for
accomplishing minimum levels of service. Targets are based on revenue estimates for the coming fiscal
year and adjusted for any changes in priorities communicated by governing body members. The more
complex part of target-based budgeting involves estimating each department’s current services budget.
Generally, the current services budget is the department’s current year appropriation plus or minus some
adjustments (i.e., one-time purchases, etc.). Once established, the target is typically set at some
percentage of the current services budget — for example, 95 per cent for lower priorities in the current
year or 105 per cent for higher priorities. Although target-based budgeting includes some elements of
ZBB, it greatly reduces conflict and the use of subjective judgment since departments know up front their
probable level of funding for the next year.

3.1.4.5 Performance budgeting

In India, the first step towards the introduction of performance budgeting was taken by the Estimates
Committee of the first Lok Sabha, as early as in the year 1954. The Administrative Reforms Commission
also recommended a phased introduction of performance budgeting in government bodies. Since then,
the Government has been making efforts to introduce performance budgeting in more and more of its
operations.



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Performance budgets relate the input of resources to the output of goods or services in a quantifiable
format. Under this approach, budgets are based on measures of work and cost necessary to carry out a
certain level of activity. Budgets are based on unit costs and service expectations. At the end of the year,
a performance analysis is conducted to compare actual work performed with budget estimates.
Performance budgets provide information with regard to the efficiency and productivity of public services.
Efficiency is a measure of the cost to provide a unit of service, while productivity is the measure of the
inputs required to produce a unit of service against a cost standard.

In order to make performance budgeting work, the following three conditions are necessary:

•   It must be possible to develop and measure the units of service for governmental activities;

•   The accounting system must provide information about costs; and

•   Management Information Systems (MIS) must provide information about the level of service provided
    by each activity.

Performance measures

At the heart of performance budgets are performance measures. Performance measures reflect output,
i.e., how much service is provided. It is important to understand the distinction between performance
measures and performance standards. While considering performance measures, the key question is:
what is being counted. While considering performance standards, the key question is: how much or how
many should be produced or served per rupee or per employee.

Illustration

Examples of performance measures and corresponding performance standards for various functions of
ULBs are shown in the table below.

Table 7: Sample performance measures

 Performance Measures                              Performance Standards

 Public Works

 Kilometres of road resurfaced                     INR 1,00,000 per kilometre

 MW of electricity delivered                       INR 0.09 per kW

 Health Services

 Number of outpatients treated                     INR 20.0 per patient per day

 Number of Inpatients treated                      INR 100.0 per patient per day

 Public Safety




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 Performance Measures                             Performance Standards

 Number of food samples taken                     10 samples per food inspector per day

 Number of fires fought                           10 fires per fireman

 Environmental Protection Agency

 Number of water quality inspections              INR 65.0 per inspection

 Number of land use permits reviewed              INR 500 per permit reviewed

 Tax Revenue

 Number of tax returns processed                  INR 175 per return processed

 Number of tax audits conducted                   INR 2, 500 per tax audit

 Finance and Accounting

 Number of cheques drawn                          INR 4.5 per cheque

 Number of vouchers processed                     500 documents per vouchers staff per year

Advantages and Disadvantages

Table 8: Advantages and disadvantages of performance budgeting

 Advantages                                            Disadvantages

 1. Facilitates rational allocation decisions in       1. It is difficult to develop performance measures
    accordance with the desired level of service.         for all government services, especially for
    For example, if it costs INR 25 lakhs to re-          government functions which do not provide
    surface one km of road, and decision-makers           services directly to the public such as financial,
    want 5 km of road to be re-surfaced, INR 125          legislative and general administrative functions.
    lakhs must be budgeted in the public works
    function for road re-surfacing.

 2. Makes it possible to hold government officials     2. Developing and maintaining a system of
    and organisations accountable for their               collecting performance data may be costly and
    performance.                                          time-consuming; in some cases, it is not worth
                                                          the expense.

 3. Fosters a cost consciousness among                 3. Performance       budgets     are     generally
    programme        managers,    especially    if        incompatible with existing accounting systems,
    organisations are organised into cost centres         which do not measure cost of service ex ante.
    and as many services as possible are treated          Cost information is usually available only ex
    as direct costs.                                      post (after the costs are incurred), and is not
                                                          always reliable.



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 Advantages                                              Disadvantages

                                                         4. Programme output does not equal programme
                                                            effectiveness. Measurement of service levels
                                                            and work output do not always reveal
                                                            information about programme effectiveness or
                                                            programme results.


3.1.4.6 Outcome Budgeting

Outcome budget is a pre-expenditure instrument, which helps in realizing the performance through clearly
defined outputs/ outcomes, as compared to the current system built around post–expenditure scrutiny.
Outcome budgeting is about clearly articulating outcomes of each and every capital work and linking such
expected outcomes of development works or expenditure to the financial outlays in budget before
undertaking it for implementation. It is a logical extension of performance budgeting and gets facilitated if
there exists performance budgeting in a ULB. Performance budgeting links physical targets to financial
outlay but may or may not provide information about outcomes planned or expected on completion of the
work or expenditure. Typical examples of outcomes are given below:

•   Construction of Elevated Storage Reservoir (2ML) for water supply, will serve a population of 12,000
    @ 170 LPCD with a daily supply 4 hours. The numbers of new connections can be quantifiable
    depending on the pipe network size.

•   Laying of sewerage pipe of diameter 150mm of length covering a particular area, will provide proper
    sanitation facilities for sewer connection for households in that particular area. The number of new
    sewer connections is quantifiable.

•   Construction/ completion of a school building is the output, whereas increase in the literacy rate is the
    final outcome where an increase in enrolment would be an intermediate outcome.

•   Provision of public tap – it can quantifiable with the number of households that could use the service

3.1.4.7 Gender Budgeting

A gender-responsive budget is a budget that acknowledges the gender patterns in society and allocates
money to implement policies and programmes that will change these patterns in a way that moves
towards a more gender equal society. Gender budget initiatives are exercises that aim to move the
country in the direction of a gender-responsive budget.

Gender budget initiatives are known by a range of different names. They have, for example, also been
referred to as ‘women’s budgets’, ‘gender-sensitive budgets’, and ‘applied gender budget analysis’.

Gender Budgeting is based on the modern idea that budgeting is not simply an accounting or
bookkeeping exercise. Instead, budgeting is a key part of the planning and implementation process.




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Gender budgeting is not the only tool that can and must be used if equality and empowerment are to be
realised. Gender Budgeting is, however, an essential tool because, unless sufficient money is allocated to
implement all the other tools and strategies, they will not be effective.



  The Five Step Framework for Gender Budgeting

  Step 1: An analysis of the situation for women and men and girls and boys (and the different sub-
  groups) in a given sector.

  Step 2: An assessment of the extent to which the sector's policy addresses the gender issues and
  gaps described in the first step. This step should include an assessment of the relevant legislation,
  policies, programmes and schemes. It includes an analysis of both the written policy as well as the
  implicit policy reflected in government activities. It should examine the extent to which the above meet
  the socio-economic and other rights of women.

  Step 3: An assessment of the adequacy of budget allocations to implement the gender sensitive
  policies and programmes identified in step 2 above.

  Step 4: Monitoring whether the money was spent as planned, what was delivered and to whom. This
  involves checking both financial performance and the physical deliverables (disaggregated by sex)

  Step 5: An assessment of the impact of the policy / programme / scheme and the extent to which the
  situation described in step 1 has been changed, in the direction of greater gender equality

  Source: UNIFEM-UNFPA Gender Responsive Budgeting and Women's Reproductive Rights:
  Resource Pack


Example of Gender Budgeting -

Gender Budgeting is not about simply dividing government money 50-50 between men and boys on the
one hand and women and girls on the other. A simple 50-50 division may look equal, but it is often not
equitable, or fair, because the needs of women and men and girls and boys may be different. Instead,
Gender Budgeting looks at every part of the government budget to assess how it will address the different
needs of women and men, girls and boys and different groups of women and men, girls and boys. For
example, in the area of health, male and female people will have similar needs in respect to influenza and
malaria. But women will have greater needs than men in terms of reproductive health.

A municipal body to begin with can adopt a policy of reserving 10 to 15 % of its development budget for
welfare of women and illustrative items under this budget could be

    •   Construction of adequate and appropriate toilet block for Girls in all municipal schools;

    •   Construction of adequate and appropriate toilet block for women throughout the city;




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    •   Construction and running Health care centres for women in each area;

    •   Construction and operations of hostels for working women;

    •   Construction and operations of shelter homes for destitute wormen, etc

3.1.4.8 Multi-year planning budgets

Multi-year planning budgeting refers to a process designed to ensure that the long-range consequences
of budget decisions are identified and reflected in budget totals. In practice, this usually means that multi-
year planning estimates for revenue and expenditures are shown for each programme beyond the budget
year.

For some governments, the annual budget is the vehicle for the implementation of multi-year (usually five-
year) strategic plans. In this sense, long-range budgeting means integration of planning and budgeting
processes. Decisions about public investments and programme expansion are made as a part of the
multi-year planning process, and not as a part of the annual budgetary process.

3.1.4.9 Participative budgeting

In India, there is growing awareness about the need to introduce such processes, particularly among civil
society organizations. JNNURM scheme has mandated for State Governments to put in place ‘Citizens
Participation Law’ to facilitate citizens’ participation in urban governance. In light of this, adoption of
participative budgeting by the ULBs has become important.

From a socio-political viewpoint, the process of participatory budgeting is an embodiment of the ideals of
decentralized urban governance, namely transparency, accountability and the participation of the public
at large in identifying their needs and determining how these can be fulfilled. From a managerial or
technical point of view, ‘participatory budgeting’ provides the link between financial planning and the
planning for infrastructure and services in the cities.

3.2 Good practices of budgeting

3.2.1 Preparing a budget
1. Budgeting should be a continuous process: Budgeting is a 365-day activity. As soon as a budget
                        st
   comes into force on 1 April of a particular year and actual figures become available in the month of
   May, a ULB should start the process of budget preparation for the next year. As part of this process, a
   ULB should forecast major revenue and expenditure items for next year’s budget.
2. Budget forecast should be based on stated assumptions and methodology: The forecast along
   with its underlying assumptions and methodology should be clearly stated and made available to
   participants in the budget process. These assumptions and methodologies should also be provided
   as references in the final budget document.




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3. ULB should analyse the variances between previous forecast and actual amounts: The
   variance analysis should identify the factors that influence revenue collections, expenditure levels,
   and forecast assumptions. This will help improve future forecasting.
4. Use of Budget Information Data Sheets (BIDS) for budget preparation: A ULB should use BIDS
   to collect information for preparing its budget. Using BIDS facilitates efficiency and cost audit as
   actual figures can be compared in a disaggregated manner to find out precisely the cost of overrun or
   cost inefficiency. Formats for collecting data in the form of BIDS are provided in Annexure 1. These
   are sample formats and ULBs are encouraged to develop BIDS for each important receipt and
   payment item on these lines.
5. Use of Assets Management Plan (AMP) for budget preparation : Like BIDS a ULB should use
   AMP to assess funds needed for maintenance of the assets on scientific and preventive basis and
   then use financial figures coming out of AMP to formulate it annual maintenance budget. AMP is in a
   generic way one type of Budget Information Data Sheet.
6. The budget document should clearly define the basis of accounting used for budgetary purposes.

3.2.2 Capital budgeting
1. Capital budget should be prepared as part of annual bugeting process: A ULB should prepare
   and adopt a formal capital budget as part of its annual budgeting process.
2. Capital budget should be drawn from the multi-year capital improvement plan: The capital
   budget should flow from the multi-year capital improvement plan. Presentation of capital budget
   should include a summary of the multi-year capital improvement plan.

3.2.3 Budgeting techniques
1. Line-item budgeting should be used for preparation of revenue budget with the conservative
   incremental approach.
2. Performance, participatory and outcome budgeting techniques are recommended for the formulation
   and administration of the capital budget.
3. Budgeting for poor, gender budgeting, functional budgeting, budgeting on geographical basis
   (zone/area-wise budgeting) etc budget techniques should be used for segregation and presentation
   of budget in multi-dimentional manner.

3.2.4 Implementing/ administering/ controlling the budget

Having prepared and adopted the budget the next important aspect of budgeting is administering the
budget. Administering the budget is linked with several short term and long-term financial management
aspects. It is linked with cash and working capital management, bills receivables and payables
management, inventory management for short-term financial management and long-term debt
management, assets management and implementation and revision of Capital Investment Plan, etc., for
long-term financial management. Following good practices have been observed for improving budget
implementation.




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1. Budget should be contingent on resource mobilization: In government parlance, budget is a legal
   authorization. As a result, once budget allocations are approved, the departments are free to utilise
   their allocations fully, even if the receipts are not realised as per targets. The expenditure mechanism
   assumes independent existence. Thus, by not making its expenditure contingent to actual receipts,
   ULBs enhance their budgetary deficit. In fact, a local body can control negative aspects of deficit
   financing by judiciously linking and making its expenditure contingent to resource mobilization.

    Instead, ULBs should make their budget expenditure contingent on their actual receipts and accounts
    or the finance officer should issue every month (in the light of actual receipts) a benchmark for
    undertaking expenditure by the departments. For instance, a year opening circular may allow
    departments to spend 10% of the budget in the month of April and cumulatively 20% in the April to
    June quarter. After that, the Finance Officer of ULBs could issue monthly and quarterly expenditure
    benchmarks at the beginning of every month on the basis of actual receipts in the past months. In
    summary, departments should not get automatic clearance to spend budget allocations once they are
    passed and they should be required to seek permission to use full or part of it in the light of actual
    receipts.
2. Departments to obtain prior financial approval before spending budget approved: It would not
   be sufficient to make budget contingent on revenue realised. Its implementation requires a system of
   financial approval before starting procurement process (before administrative approval to the
   expenditure) by a competent authority, and then, after completion of procurement process, but,
   before issuing work order or purchase order. This system is a logical extension of making budget
   contingent on revenue realised. Under this budgetary control system Head of the Department must
   obtain financial approval to expenditure from Accounts/ Finance department of the ULB before
   starting procurement process and then before issuing work or purchase order for all the capital
   expenditure and certain operation and maintenance expenditure (as specified by the Commissioner
   of the ULB). Accounts/ Finance Department should maintain budget control register and uni-number
   system for giving number to approved expenditure files.
3. Budget should be bifurcated into monthly cash and working capital budgets: In order to make
   expenditure contingent upon revenue realised and to implement system of prior financial approval to
   expenditure, annual budget of the ULB should be broken down into monthly cash and working capital
   budgets. At present, budget preparation is viewed as an annual activity. Financial managers need to
   change this mindset. A budget can be for one week or even for a day. For a detailed discussion on
    adopting cash and working capital budget see Chapter 5 of this manual.

4. Budget administration to include management of inventory, assets, receivables and payables:
   The budget administration should include management of inventory, assets, receivables and
   payables. These sub-systems, except receivable management, constitute expenditure system. Like
   expenditure provided in the budget should be contingent on the revenue realised, the operation of
   these expenditure sub-systems should also be contingent on the revenue realised and should not
   work on a stand-alone basis. The Accounts Department of the ULB should decide through a system
   of prior financial approval to expenditure on when and how much inventory should be purchased or
   how much operation and maintenance expenditure should be undertaken or the extent of project
   works expenditure that should be undertaken in the light of revenue realised and availability of funds.




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3.2.5 Monitoring and evaluating the budget

If the above-mentioned good practices are followed rigorously, the need for a formal review mechanism is
reduced. However, the following good practices should be followed for monitoring and evaluating a
budget.
1. Budget should be prepared using a budget coding structure: A ULB budget should be prepared
   using a budget coding structure as prescribed by the government. Adherence to budget coding
   structure would ensure that all the items are properly recorded and classified. This in turn captures all
   types of financial information within a ULB. If the discipline of classifying receipts and payments is not
   adhered to, then the entire database can get distorted and the quality of decision-making, based on
   the data, becomes poor.
2. Budget Variance Report (BVR) to be used as a crucial budgetary control tool: ULBs should also
   prepare a Budget Variance Report that could be used as an important budgetary control tool. BVR
   analyses the positive and negative variances of actual vis-à-vis budgeted receipts and expenditure
   items. In other words, a BVR provides information on fast-moving and slow-moving receipts and
   expenditure items. Positive variance should be analysed for reasons. For instance, a ULB has
   collected more property tax than the budgeted amount in a particular ward. The reasons for the same
   should be analysed and replicated. Negative variance should be analysed for reasons and cost
   control measures should be identified. For instance, the increase in maintenance expenses or finance
   charges would indicate lack of planning or implementation follow-up.
3. Performance benchmarks (standards), indicators and measurement system: For monitoring and
   evaluating budget the ULB should have pre-defined set of performance benchmarks (standards) to
   compare actual performance against budgeted performance, performance indicators to measure
   performance and institutional structure to run performance measurement system. Revised budget
   and next year’s budget should get improved in the light of learning from budgetary monitoring and
   evaluation exercise. Budget performance analysis report should be submitted quarterly to Mayor or
   Chairman in Council for information and discussion and should be released as a public document.

3.3 Policies recommended for adoption

3.3.1 Frequency and timing

Each Municipal Corporation in MP shall prepare and adopt an annual budget of income and expenditure
of the ULB before the last day of February in the preceding accounting year for the next accounting year
in the manner and form as prescribed in Madhya Pradesh Municipal Accounts Manual, July 2007. In this
regard, the Commissioner shall prepare estimates of income and expenditure and present before the
                                          th
Mayor-in-Council, on or before the 30 day of November in the preceding accounting year for
consideration, modification, and approval, as appropriate.

3.3.2 Basis of preparation
1. Each Municipal Corporation in MP shall integrate performance measures and productivity indicators
   with its annual budget. In this regard, Municipal Corporations shall adopt the systems of performance



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    budgeting and outcome budgeting for preparing, and approving estimates of all types of capital
    expenditure except loan repayment in the manner and form as prescribed in MPMAM.
2. Each Municipal Corporation in MP shall adopt system of participating budgeting for preparing,
   estimates of operating and capital expenditure except salary, debt charges, loan repayment and any
   other statutory expenses in the manner and form as prescribed in MPMAM.
3. Each Municipal Corporation in MP shall adopt the systems of Gender Sensitive and Pro-Poor
   Budgeting. For this purpose, a Municipal Corporation shall segregate relevant budget items and
   allocations into two separate main budget heads, viz., (1) ‘Providing Services to Women, Children,
   and Senior Citizens’ (for gender sensitive budget) and (2) ‘Providing Basic Service to Urban Poor’ (for
   pro-poor budget).

3.3.3 Conservatism in revenue estimation

In order to maintain a stable level of services, each Municipal Corporation in MP shall use a conservative,
objective, and analytical approach when preparing revenue estimates. The process shall include analysis
of probable economic changes and their impacts on revenues, historical collection rates, and trends in
revenues. This approach should reduce the likelihood of actual revenues falling short of budget estimates
during the year and should avoid mid-year service reductions.

3.3.4 Fiscal control
1. Each Municipal Corporation in MP shall ensure fiscal stability and the effective and efficient delivery
   of services, through the identification of necessary services, establishment of appropriate service
   levels, and careful administration of the expenditure of available resources.
2. Each Municipal Corporation in MP shall adopt and maintain a balanced budget. For this purpose,
   expenditure deferrals into the following fiscal year, short-term loans, or use of one-time revenue
   sources shall be avoided to balance the budget.
3. Each Municipal Corporation in MP shall operate on a current funding basis. Expenditures shall be
   budgeted and controlled so as not to exceed current revenues plus the planned use of fund balance
   accumulated through prior year savings.
4. Each Municipal Corporation in MP shall project future operating costs associated with new capital
   investments and will include them in the operating budget forecasts.
5. Debt or bond financing shall not be permitted to be used by any Municipal Corporation in MP to
   finance current operating expenditures.

3.3.5 Presentation and formats

3.3.5.1 Budget coding structure

Each Municipal Corporation in MP shall prepare its annual budget using the six-digit coding structure as
prescribed in the Madhya Pradesh Municipal Accounting Manual (MPMAM). The prescribed coding
structure shall have three levels of codification – first level representing function group, second level



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representing function description and the third level representing cost centre. Each level shall have a two-
digit code. The codification structure is described below.
1. First level represents the obligatory and discretionary functions of the ULBs under the Madhya
   Pradesh Municipal Corporation Act, 1956 and the Madhya Pradesh Municipalities Act, 1961. This is
   known as the “Function Group". Functions shall represent the various functions or services carried
   out by the local body. Account Heads shall represent the nature of the income or expenditure.
2. Second level represents the particular type of service under a function, known as "Function
   Description".
3. Third level represents a particular ”Cost Centre” code, which provides the service.

Refer to Annexure 4 of the MPMAM for detailed formats as prescribed in MPMAM on coding structure.

3.3.5.2 Budget categories

The budget of a Municipal Corporation in MP shall be divided in three distinct categories – Revenue
(operating) budget comprising operating income and expenditure; Capital budget comprising capital
income and expenditure including loan repayment and Extra-ordinary budget comprising receipts and
payments on account of deposits from people and advance given and recovered. These three broad
budget types shall then be sub-classified under functions performed by the ULB followed by the sub-
functions or different departments of the ULB.

3.3.5.3 Budget layout

Budget layout refers to the budget forms that will be used for final preparation and presentation of the
budget. Each Municipal Corporation in MP shall follow the method of bottom-up budgeting as prescribed
in the MPMAM. Also, Municipal Corporations shall use the forms prescribed in the MPMAM for presenting
budget information. The table below provides the names and references of these forms as prescribed in
the MPMAM. It is noteworthy that the forms prescribed here relate to the final presentation of the budget
and not initial data collection by various departments.

Table 9: Forms prescribed in MPMAM for budget layout

 Name of the form           Description

 BUD 1                      Summary Budget Estimates

 BUD 2                      Abridged Major Account Head Wise Budget

 BUD 3                      Revenue Income Budget Estimates

 BUD 4                      Revenue Expenditure Budget Estimates

 BUD 5                      Capital Receipts Budget Estimates

 BUD 6                      Capital Expenditure Budget Estimates



                                                                                                               -33-
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh



 Name of the form          Description

 BUD 7                     Detailed Revenue Expenditure (Department-Wise) Budget Estimates

 BUD 8                     Detailed Capital Expenditure (Department-Wise) Budget Estimates


3.3.5.4 Ease of presentation and transparency

While presenting the budget, each Municipal Corporation in MP shall ensure that budget information is
presented in a way that facilitates policy analysis and promotes transparency and accountability.

3.3.6 Closing balance of budget

The budget shall be so prepared as to provide for a closing balance, which each Municipal Corporation in
MP shall maintain at its credit at the end of the year and the amount of which shall be not less than the
limit prescribed in the [MP Municipal Finance and Accounts Rules].

3.3.7 Review and revision
1. The Commissioner of each Municipal Corporation in MP shall perform a mid-year budget review and
   analysis based on actual information for the [first six months] of the accounting year (April to
   September) and prepare revised estimates of income and expenditure of the Municipal Corporation
   for the current year. The analysis of the mid-year budget review shall be submitted to the Council for
   approval.
2. Each Municipal Corporation in MP shall be permitted to revise its budgets only [once] during a
   particular accounting year.
3. Each Municipal Corporation in MP shall prepare a Budget Variance Report (BVR), as prescribed in
   the MPMAM. The BVR shall be prepared by each Municipal Corporation on a [quarterly] basis. A
   copy of the BVR shall be submitted to the Urban Administration and Development Department.

3.3.8 Other policies

Each Municipal Corporation in MP shall project revenues and expenditures for the next [three] years and
shall update the projections annually.

3.4 Procedures
This section provides a detailed step-by-step discussion related to the budget process.

3.4.1 Step 1- Development of budget policies and tools

The Commissioner of the ULB is responsible for developing various budget tools, the set of rules and
principles as well as the forms and guidelines to regulate the budget preparation and implementation




                                                                                                               -34-
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


process. These documents must be circulated within each department of the ULB before starting the
budget preparation process. These documents must include:

•   Policies — Principles or financial policies are needed to guide budget preparation. Department
    managers should be encouraged to use this information to reassess the benefits of current service
    activities as well as justify requirements for any new and/ or expanded services. These policies may
    be formed keeping in mind the expected financial situation in the upcoming financial year.

•   Budget Calendar — A calendar or detailed time/ event schedule that identifies due dates for budget-
    related activities; steps to be taken during budget preparation; the person or group responsible for
    each step; and the date on which each step must be completed. The following figure shows a sample
    budget calendar.

Figure 2: Sample budget calendar

                                Identification of works for next year budget in consultative manner
                                 Identification of works for next year budget in consultative manner
                                Preparation of draft budget by various department heads
                                 Preparation of draft budget by various department heads
          April to
          April to
         September
         September
                                Finalization and Submission of budget by Commissioner to Mayor-in-council
                                Finalization and Submission of budget by Commissioner to Mayor-in-council
         October to
         October to
         November
          November
                                Final adoption of budget estimates and approval by mayor-in-council
                                Final adoption of budget estimates and approval by mayor-in-council
      December-March
      December-March
                                Implementation of Budget by getting administrative approval to each work, tendering,
                                 Implementation of Budget by getting administrative approval to each work, tendering,
                                contracting and implementing them
                                 contracting and implementing them
       Implementation
        Implementation
          year around
          year around



Whereas, the Madhya Pradesh Municipal Corporation Act, 1956 and the Madhya Pradesh and
Chattisgarh Municipalities Act, 1961 provide the dates for submission, approval and adoption of budget of
a ULB, a Budget Calendar should not be confined to these end result dates. Budgeting is a 365-day
                                                      st
activity. As soon as a budget comes into force on 1 April and actual figures become available in the
month of May, the repective ULB should start the process of budget preparation for the next year.

The period between May and September should be used for the identification of major O&M works and
capital works for the next year through consultative process and then preparing design and estimates of
the probable projects. Therefore, by the time primary budget preparation process starts in November, the
ULB would be ready with the list of projects for the next year’s budget.

Similarly, during the period October to December, the ULB should take stock of projects undertaken in the
current year to identify the projects that can be completed before end of current year in March and the
projects that can spill over to next year’s budget. Also, during this period, a revised budget should be
formulated and presented separately. Therefore, when the budget is put together in January, the ULB
clearly knows its revised revenue and expenditure, the expenditure that would spill over to next year and




                                                                                                                    -35-
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh


the works that need to be taken up in the next year’s budget. A similar analysis and implementation
activity should be carried out for the revenue side of the budget.

3.4.2 Step 2 - Application of budgetary techniques

Section 3.1.4 of this manual explains different techniques that could be used by a ULB to prepare a
budget. Each budgeting technique has its distinct advantages and constraints, but no budgeting
technique should be viewed as superior to other budgeting techniques. Each technique has its own
application, depending upon the objectives of preparing a budget as pursued by the ULB. Given below is
an illustrative application of different budgetary techniques.

•   Revenue Budget: The “Line-item Budgeting” technique should be used for the preparation of the
    revenue budget, with the conservative incremental approach. “Line-item Budgeting” is preferred over
    other budgeting technique for the preparation of revenue budget because it contains numerous
    routine and statutory expenditure items, which can be calculated precisely and objectively. Also, in
    case of these items, control is more important than performance measurement. Moreover, this
    technique is simple and user-friendly. In order to overcome the limitations of Line-item Budgeting and
    excessive use of incremental approach, the system of subsidiary budgeting has been designed,
    which involves the preparation of Budget Information Data Sheets (BIDS). Whereas, participatory
    budgeting technique is not applicable for preparation of the revenue budget, but gender budgeting or
    budgeting for poor concepts can be applied to segregate budget items of revenue budget on the lines
    of gender and poor budgets.

•   Capital Budget: Performance measurement is one of the most important aspects regarding
    development or capital works. Therefore, performance and outcome budgeting techniques are
    suggested for the formulation and administration of the capital budget. Performance budgeting
    requires linking of physical targets to budgetary (financial) allocations made in the capital budget.
    Accordingly, municipal bodies will have to prepare a schedule of capital works linked to each budget
    item                  (allocation)                of                   capital                budget.

    Outcome budgeting requires determining outcome/ results expected out of each capital works
    undertaken by a ULB. Therefore, besides linking physical targets to financial allocations, ULB should
    detail out the outcomes expected out of each of such works and financial allocation. The format for
    preparing schedule regarding capital works detailing physical aspect and outcomes is provided
    below.

Table 10: Sample format for listing and linking proposed capital investment works to
budget allocations
       Budget code                   D55201                                              Budgete
                                                                                         d
                                                                                         Amount

       Particulars      Expected     Budget Item - Erection of Streetlight on Central Divider
                        Outcome




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Financial Management Manual for ULBs of M.P.- English
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Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English

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Financial Management Manual for ULBs of M.P.- English

  • 1. Financial Management Manual For Madhya Pradesh Urban Local Bodies Madhya Pradesh Urban Administration and Development "Project Utthan" Madhya Pradesh Urban Services for the Poor
  • 2. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Preface As the urban population is growing at a fast pace and larger share of GDP comes from urban areas, Urban Governance and Development has become the focus of increased attention in the last decade by central and state governments and other stakeholders across India. Consequently, Urban Local Bodies, being at the fulcrum of urban management, have received more attention in terms of legal powers and autonomy, financial resources, technical assistance and capacity building inputs to assist urban reform processes under various government schemes including JNNURM. Madhya Pradesh Government is at the forefront of the process of improving urban governance and achieving urban development by pursuing a wide variety of innovative urban reforms facilitated by the Madhya Pradesh Urban Services for the Poor (MPUSP) programme. The MPUSP programme, which is an outcome of a partnership between the GoMP and the Department for International Development (DFID) of the United Kingdom, is a major initiative of the GoMP towards implementing municipal reforms and strengthening of Urban Local Bodies (ULBs) in MP. A core area of focus for MPUSP funded reforms has been to improve the financial management of ULBs which often faced difficulties in implementing prudent and optimal financial management practices in the areas such as: budgeting, costing, expenditure management, receivables management, cash management and other areas of financial management. This Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh was conceived by the Urban Administration and Development Department (UADD) , Government of Madhya Pradesh (GoMP) as a direct response to these issues. The Manual is probably the first initiative of its kind in India and will not only serve the ULBs of Madhya Pradesh but it will also be useful to all ULBs across the country. The manual beside defining financial management and explaining how it can be applied to ULBs, has covered theoretical and practical aspects of financial management tools/techniques such as: financial analysis, operating budget, capital budget, cash, receivables, payables and debt management, assets management, financial information system, internal control etc. It is expected that the ULBs of the MP will adopt and implement these good financial management practices which will improve their financial performance and overall financial status. It is envisaged that the manual will may be revised in the light of emerging learning and lessons to ensure that it is a useful living document. Finally it is hoped that it will pave way to make ULBs financially efficient and sustainable. Commissioner Urban Administration and Development Bhopal Dt. 08/11/2011 -2-
  • 3. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Contents 1 INTRODUCTION ................................................................................................................................. 10 1.1 Purpose of this manual .................................................................................................................. 10 1.2 Target group of users ..................................................................................................................... 10 1.3 How to use this manual .................................................................................................................. 10 1.4 Structure of this manual ................................................................................................................. 10 2 INTRODUCTION TO FINANCIAL MANAGEMENT ........................................................................... 12 2.1 Defining financial management...................................................................................................... 12 2.2 Need for financial management in ULBs ....................................................................................... 12 2.3 Financial management process ..................................................................................................... 13 3 BUDGETING PRACTICES ................................................................................................................. 15 3.1 Concepts ........................................................................................................................................ 15 3.2 Good practices of budgeting .......................................................................................................... 28 3.3 Policies recommended for adoption............................................................................................... 31 3.4 Procedures ..................................................................................................................................... 34 3.5 Case study: Budgetary reforms at Vadodara Municipal Corporation ............................................ 46 4 CAPITAL IMPROVEMENT PROGRAM AND CAPITAL BUDGETING ............................................. 52 -3-
  • 4. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 4.1 Concepts ........................................................................................................................................ 52 4.2 Good practices of CIP .................................................................................................................... 53 4.3 Policies recommended for adoption .............................................................................................. 53 4.4 Procedures ..................................................................................................................................... 54 4.5 Case study: CIP of Pune Municipal Corporation (PMC) ................................................................ 68 5 CASH MANAGEMENT........................................................................................................................ 74 5.1 Concepts ........................................................................................................................................ 74 5.2 Good practices of cash management ............................................................................................ 75 5.3 Policies ........................................................................................................................................... 76 5.4 Procedures ..................................................................................................................................... 78 6 RECEIVABLE AND PAYABLE MANAGEMENT ............................................................................... 89 6.1 Concepts ........................................................................................................................................ 89 6.2 Good practices of receivables and payable management ............................................................. 89 6.3 Policies ........................................................................................................................................... 90 6.4 Procedures ..................................................................................................................................... 91 7 DEBT MANAGEMENT ........................................................................................................................ 97 7.1 Concepts ........................................................................................................................................ 97 -4-
  • 5. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 7.2 Good practices of debt management ............................................................................................. 98 7.3 Policies ........................................................................................................................................... 98 7.4 Procedures ................................................................................................................................... 100 7.5 Case Study: Debt management strategy of Vadodara Municiapal Corporation .......................... 106 8 ASSET MANAGEMENT .................................................................................................................... 107 8.1 Concepts ...................................................................................................................................... 107 8.2 Good practices of asset management ......................................................................................... 109 8.3 Policies ......................................................................................................................................... 109 8.4 Procedures ................................................................................................................................... 110 9 EXPENDITURE MANAGEMENT ...................................................................................................... 115 10 COSTING PRACTICES ..................................................................................................................... 118 10.1 Concepts ...................................................................................................................................... 118 10.2 Policies ......................................................................................................................................... 122 10.3 Procedures ................................................................................................................................... 123 11 INTERNAL CONTROLS.................................................................................................................... 132 11.1 Concepts ...................................................................................................................................... 132 11.2 Good practices of internal controls .............................................................................................. 135 -5-
  • 6. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 11.3 Policies ......................................................................................................................................... 135 11.4 Procedures ................................................................................................................................... 136 12 FINANCIAL MANAGEMENT INFORMATION SYSTEMS ............................................................... 145 12.1 Concepts ...................................................................................................................................... 145 12.2 Policies ......................................................................................................................................... 147 12.3 Procedures ................................................................................................................................... 148 13 FINANCIAL ANALYSIS .................................................................................................................... 151 13.1 Concepts ...................................................................................................................................... 151 13.2 Good practices of financial analysis ............................................................................................. 166 13.3 Policies ......................................................................................................................................... 166 13.4 Procedures ................................................................................................................................... 167 14 PROCUREMENT ............................................................................................................................... 170 ANNEXURE 1: FORMATS FOR BUDGETING........................................................................................ 171 ANNEXURE 2: FORMAT FOR ASSET MANAGEMENT ........................................................................ 179 ANNEXURE 3: FORMATS FOR FMIS ..................................................................................................... 180 ANNEXURE 4: TOR CHECK LIST .......................................................................................................... 190 -6-
  • 7. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh List of Tables Table 1: Structure of the Financial Management Manual ........................................................................... 11 Table 2: Example of line-item budget for a ULB ......................................................................................... 17 Table 3: Advantages and disadvantages of line-item budgeting ................................................................ 18 Table 4: Advantages and disadvantages of programme budgeting ........................................................... 21 Table 5: Example of zero-base budgeting .................................................................................................. 22 Table 6: Advantages and disadvantages of zero-base budgeting .............................................................. 23 Table 7: Sample performance measures .................................................................................................... 24 Table 8: Advantages and disadvantages of performance budgeting ......................................................... 25 Table 9: Forms prescribed in MPMAM for budget layout ........................................................................... 33 Table 10: Sample format for listing and linking proposed capital investment works to budget allocations 36 Table 11: Format of CIP prepared by PMC ................................................................................................ 72 Table 12: Sources of information for Cash Flow forecast ........................................................................... 81 Table 13: Format for gathering data for trend analysis ............................................................................... 84 Table 14: Illustration on judicious use of investments ................................................................................ 87 Table 15: Decision matrix for choosing among long-term financing alternatives ..................................... 105 Table 16: Illustration on cost savings through outsourcing ....................................................................... 121 Table 17: Illustration showing apportionment of indirect expenses .......................................................... 126 Table 18: Physical parameters for costing ................................................................................................ 126 Table 19: A typical cost sheet of Water Works Department ..................................................................... 127 Table 20 : Format for calculating budget requirements for electricity charges for streetlight service....... 171 Table 21: Format for calculating budget requirement for O&M of streetlight service ............................... 172 Table 22: Format for calculating budget requirement for fuel expenses for vehicles & other machinery . 174 -7-
  • 8. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Table 23 : Format for calculating budget requirement for purchase of tyres for vehicles ......................... 175 Table 24: BIDS for listing spill over works and for estimating their budget liability ................................... 178 -8-
  • 9. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh LIST OF FIGURES Figure 1: Financial management process ................................................................................................... 14 Figure 2: Sample budget calendar .............................................................................................................. 35 Figure 3: Decision making process for O& M expenditure ......................................................................... 40 Figure 4: Identification of capital works and formulation of capital budget ................................................. 44 Figure 5: Summary of budget preparation process ................................................................................... 45 Figure 6: Capital investment decision making process ............................................................................... 54 Figure 7: Procedure followed by PMC for preparing CIP ............................................................................ 68 Figure 8: Linkages of cash budget .............................................................................................................. 86 Figure 9: Relationship between AMP and Budget .................................................................................... 114 Table 10: Function and functionary codes for Cost Object - Water Supply .............................................. 124 Figure 11: Internal control system ............................................................................................................. 133 Figure 12: Format for collecting information on ULB assets ..................................................................... 179 Figure 13: Format for monthly financial position ....................................................................................... 180 Figure 14: Format for statement showing actual receipts against budgeted receipts .............................. 181 Figure 15: Format for statement showing actual expenditure against budgeted expenditure .................. 182 Figure 16: Format for statement showing investments in bank fixed deposits ......................................... 183 Figure 17: Format for statement on returned/ dishonoured cheques ....................................................... 184 Figure 18: Format for summarised status report on returned/ dishonoured cheques .............................. 185 Figure 19: Format for unadjusted advances status report ........................................................................ 186 Figure 20: Format for outstanding loans/ liability statement ..................................................................... 187 Figure 21: Format for projected monthly cash flow statement .................................................................. 188 Figure 22: Format for status report on examination of accounts .............................................................. 189 -9-
  • 10. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 1 INTRODUCTION 1.1 Purpose of this manual The primary purpose of this manual is to explain the concepts and define the policies and procedures about good practices of financial management for ULBs of M.P. A secondary purpose of the manual is to develop the capacity of Urban Administration Development Department (UADD) and the ULBs to adopt and implement these policies and procedures. 1.2 Target group of users This manual is intended for all municipal employees involved in financial management of a ULB. Particularly, these may include: 1. Senior decision makers including senior administrative officers such as the Commissioners/ Chief Officers, department heads, elected representatives, as well as the Mayor-in-Council (MIC). 2. Accounts officers, municipal engineers and administrative officers who are the key people involved in many of the processes related to financial management of a ULB. 3. UADD of GoMP who would be involved primarily in monitoring, supervision and facilitating financial management process in ULBs. 1.3 How to use this manual This manual does not give detailed instructions on the course of action to be taken in every situation arising due to financial management. Instead, it outlines the basic policies, principles, procedures and good practices observed in Indian or non-indian ULBs based on which decisions should be made. The manual is intended to act as a guide which will facilitate the municipal employees to successfully understand and implement the best practices on financial management. 1.4 Structure of this manual The manual is structured into two parts. • Managing financial framework – Budget (formulation, implementation & evaluation) is the most important tool for managing financial framework and all other systems are aligned to it. It is most effectively managed by having a system of short-term and long-term financial management. Short- term financial management mainly includes cash management, receivables and payables management and short-term debt management, whereas, long-term financial management consists of formation of capital investment plan and long-term debt management. -10-
  • 11. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh • Performance enablers - Apart from this there are certain systems that act as performance enablers for managing the finance framework. These include Asset Management, Costing, Procurement, Internal Control and Financial Management Information Systems. The chapters of this manual have been framed keeping in the mind the above mentioned structure. The following table provides the sequence of chapters in the manual. Table 1: Structure of the Financial Management Manual Number Name Category Chapter 3 Budgeting Chapter 4 Capital Improvement Plan/Capital Budgeting Chapter 5 Cash Management Managing Financial Framework Chapter 6 Receivables and Payables Management Chapter 7 Debt Management Chapter 8 Asset Management Chapter 9 Expenditure Management Chapter 10 Costing Chapter 11 Internal Control Performance Enablers Chapter 12 Financial Management Information Systems Chapter 13 Financial Analysis Chapter 14 Procurement Apart from the above, a set of Annexures are appended to this manual, which provide formats for some of the areas of financial management. These include: • Annexure 1: Formats for budgeting • Annexure 2: Formats for asset management • Annexure 3: Formats for FMIS -11-
  • 12. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 2 INTRODUCTION TO FINANCIAL MANAGEMENT Finance has a unique and important place in personal, public, institutional and social walks of life. In order to be successful in these walks of life, all of us need to augment and utilise financial resources efficiently and in a sustainable way to ensure future flow of resources. Therefore, all decision-makers need to know how to manage finances of their institutions/ organisations. Financial management attempts at optimising output from the given input of funds. In a country like India where resources are scarce and there is enormous demand for funds, proper financial management is of utmost importance. 2.1 Defining financial management Financial management in simple terms means the entire gamut of managerial efforts devoted to the management of finance (both its sources and uses) of an enterprise (organisation/ institution/ public body etc.). It is the management of the finances of a business/ organisation in order to achieve its financial objectives. Taking a business as the most common structure, the key objectives of financial management would be to: • Create wealth for the business, • Generate cash, and • Provide a return on investment keeping in mind the risks that the business is taking and the resources invested. It can be observed that traditionally, the basic objectives of Financial Management were the maintenance of liquid assets and maximisation of the profitability of the organisation. But now it has undergone a change. Today, the ultimate objective of financial management is maximisation of wealth. The objective of wealth maximisation holds good for public bodies’ financial management also. Public bodies or any governmental form of organisation exists not for ‘profit maximisation’ but for ’wealth maximisation.' In order to improve the overall standard of living of people or society, the government needs to maximise wealth and then to ensure equal distribution of the wealth generated. Thus, public bodies are expected to attain the objective of wealth maximisation through judicious allocation and utilisation of resources. In order to achieve this objective, public bodies must run their finance function as per modern financial management methods, as the discipline of financial management strives for ’wealth maximisation'. 2.2 Need for financial management in ULBs In the past two decades, India has witnessed a phase of rapid urbanization. This has resulted in most urban settlements facing shortfalls in provision of urban services such as, housing, water supply, -12-
  • 13. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh sewerage and urban transportation systems. In addition to the growth in demand for urban services, poor functioning of municipal bodies has made the problem even more acute. In order to meet these and other growing challenges, the Government of India (GoI) introduced special purpose schemes such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) that intend to enable municipal bodies to meet these challenges by providing a fresh impetus to urban reforms. As the infusion of funds from these schemes is expected to increase municipal budgets, it is important that ULBs have sound financial management systems and procedures in place to ensure that these public funds are used efficiently and transparently. Hence ULBs require sound financial management systems to ensure that funds are effectively managed and efficiently utilised. 2.3 Financial management process The whole financial management process can be viewed from three angles: • Creating financial framework • Managing financial framework • Performance enablers The creation of financial framework basically deals with three aspects namely financial policies, financial analysis and financial planning. These three aspects form the core of financial framework for any ULB. After the creation of financial framework, the second most important aspect is managing this framework. Budget (formulation, implementation and evaluation) is the most important tool for managing financial framework and all other systems are aligned to it. Short-term financial management mainly includes cash management, receivables and payables management and short term debt management. Long-term financial management consists of formation of capital investment plan and long-term debt management. Apart from this there are certain systems which act as performance enablers for managing the finance framework. These include Asset Management, Costing, Procurement, Internal Control and Financial Management Information Systems. The following figure depicts the financial management process. -13-
  • 14. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Figure 1: Financial management process Enabling Performance Creating Financial Managing Financial Framework Framework Short term financial management BUDGETING Financial Management Financial Management Information System Financial Policies •Cash Management Internal Control •Receivables and payables management Operating Budget Financial Analysis •Short term debt management Long term financial + management Financial Planning •Capital Improvement Plan Capital Budget •Long term debt management Asset Management Costing Procurement -14-
  • 15. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 3 BUDGETING PRACTICES This section of the manual discusses various concepts, principles, techniques associated with budgeting, and provides the policies related to budgeting, the budget preparation process followed by the budget review mechanism. 3.1 Concepts Budgeting is a statutory activity for all urban local bodies (ULBs) in India. It acts as a powerful tool to allocate limited resources among competing priorities. It is a local government’s plan to allocate its financial resources for a specified period including all planned revenues and expenses. A ULB budget typically includes: • Planned activities, projects, and services; • Estimates of the resources or revenues available; and • Estimates of public expenditure necessary to finance planned activities. 3.1.1 Definitions Operating/ revenue budget: It is a plan for the on-going day-to-day operational expenditures of the ULB and the proposed means of financing for a specific period (usually one year). Capital budget: It is a plan of proposed capital improvements and the means of financing them, usually based on the first year of a multi-year capital improvement programme and typically enacted as part of the complete annual budget, which includes both operating and capital outlays. Extraordinary budget: It is a part of the capital budget, but contains receipts and payments which do not amount to income and expenditure for the ULBs. For example, deposit receipts and payments, advances given and adjusted, etc. Poor budget: It is a budget which is sensitive to the needs of poor people or which tries to correct its bias in resource allocation for the alleviation of poverty by stipulating a certain percentage of resources for the poor. For example, in normal practice, a budget fails to show sensitivity towards the needs of the urban poor in resource allocation and special needs of the poor get neglected. Gender-based budget: It is a budget which is sensitive towards gender or which tries to correct gender bias in resource allocation by stipulating a certain percentage of resources for one gender. For example, in normal practice, a budget fails to show sensitivity towards the needs of women in resource allocation and special needs of women get neglected. -15-
  • 16. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Participatory Budgeting: It refers to the adoption of alternative practices for local budget management aimed at encouraging people’s participation in the allocation of municipal public resources. Such practices are believed to promote greater efficiency in the allocation of resources by forcing planning and transparency into decisions on expenditure. Increasingly, municipal bodies all over the world have introduced such practices and there is increasing global recognition for the significance of such an approach. 3.1.2 Objectives of a budget A budget is prepared with the objectives of controlling, managing and planning the financial resources of an organisation. Each of these objectives are discussed in detail below. 1. Control As a control document, a budget defines the legal and policy constraints within which the managers of a ULB can operate. These constraints include determing: • Permissible expenditure by each ULB; • Purposes for which expenditure can legally be made (such as salaries, maintenance, and loan charges); and • Collection of tax resources and non-tax resources (i.e., revenue functions). Control is a significant objective governing the preparation of budgets in ULBs, although its achievement is drastically impaired by a number of systemic weaknesses. To achieve the objectives of control, the budget needs to be supported by effective accounting and auditing systems. 2. Management As a management document, a budget sets targets that ensure the achievement of an efficient and effective delivery of urban services. To enable the budget to be a fully effective management tool, there must be a clear relationship between budgetary inputs (such as personnel and equipment) and expected outputs, defined in ULB performance measures (such as the number of square metres of road to be repaired, etc.). Such a relationship enables departmental heads to use the budget as a device to manage their staff. 3. Planning The preparation of a budget provides a major planning opportunity for a ULB, which wants to address its growth and development needs through judicious use of its limited financial and personnel resources. Each year, the budget defines the anticipated revenues of a ULB and outlines the blueprint for its expenditure. 3.1.3 Constituents of an ideal budget A ULB's budget should cater to the interests of various users such as politicians, administrators, ULB managers, employees, representative groups such as NGOs/ CBOs, analysts and the public at large. A -16-
  • 17. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh budget should meet the requirements of these varied user groups and yet should not become unyielding, bulky or ambiguous. An ideal budget document should be: • A policy document: As an operating plan for a local government, the budget document should propose, identify and clarify policies. These are generally adopted by the governing body during the year and are referred to or summarised in the budget message. • A financial plan: The budget process is the primary mechanism for promoting solvency, efficiency and rational collective choices regarding the distribution and use of the assets and resources of a ULB. • An operations guide: The budget provides a framework for operations of a ULB. It must go beyond purely financial dimensions to deal with the functions of different parts of the organisation and the number and levels of employees. • A communication device: A budget is a focal point for residents, taxpayers and constituents, and, therefore, should be made plain and simple. Therefore, sufficient efforts should be made to use simplistic narratives, charts or graphs to convey the meaning and impact of the budget to people who are not familiar with government finances. • Scrupulous: A budget should be able to stand up to scrutiny by competing interest groups. • Holistic: A budget should be holistic in approach and should not neglect some areas or over or under-emphasise others. 3.1.4 Budgeting techniques A number of budgeting techniques have evolved overtime in order to achieve diverse objectives. These techniques have met varying degrees of success in different countries. Whereas, some of these budgeting techniques are more advanced, each budgeting technique offers distinct advantages and has, at the same time, certain limitations. It is for an organisation to select one or more budgeting techniques that are appropriate to its activities and budget classification. 3.1.4.1 Line-item budgeting This method of budgeting is also referred to as incremental budgeting. Under this approach, budgets are justified on the basis of proposed expenditures by line-item, or object class. The base budget is usually not justified, but only the additions (or increments) are questioned. It is noteworthy that ULBs in MP currently develop their budgets on a line-item basis. A simplified example of line-item budget is presented in the table below. Table 2: Example of line-item budget for a ULB -17-
  • 18. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Budget Request Line-item Base Budget (INR) Increments (INR) (INR) Salaries 50,000 + 6,000 56,000 Travel 25,000 + 14,000 39,000 Equipment 40,000 - 10,000 30,000 TOTAL 1,15,000 + 10,000 1,25,000 The base budget is equivalent to either: • The current year’s budget, including adjustments; or • The current year’s actual expenditures, usually estimated to the end of the fiscal year; or • The last year’s actual expenditures. The base budget is different from the current service budget, which is the anticipated cost of continuing a programme at the present levels, without policy changes or enactment of new laws. Mathematically, the current services budget (CSB) can be expressed as follows: CSB = Base Budget + Unavoidable Cost Increases Increases in unavoidable or fixed costs such as employee costs or dearness allowances may mean that it will cost more to deliver the same level of services currently being provided. It is important for the budget office to provide directions to the line departments to enable them to estimate fixed cost increases. No matter which budget development approach a government uses, its budget is usually translated into a line-item budget for the purpose of budget execution and control, with allocations to object classes. Advantages and disadvantages The primary advantage of the line-item approach is that it is easy. Whereas, the primary disadvantage of using the line-item approach is that it does not provide essential information. Table 3: Advantages and disadvantages of line-item budgeting Advantages Disadvantages 1. It is an efficient way of enhancing the 1. It is only concerned with inputs and not allocation and control of funds since it mirrors outputs. Thus, it is difficult for decision-makers the accounting system. to find out the results of their allocation decisions and what the public gets for its money in terms of services and outputs. 2. There is no need for extensive Management 2. It is difficult to develop a current services -18-
  • 19. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Advantages Disadvantages Information System (MIS) since information budget, as the present level of services is not pertaining to service levels, unit costs and known. Decision-makers do not know what programme output is not required to develop they get for their additional resources the budget. allocated to a programme: same level of service; higher level of service; or, less service. 3. Incremental budgeting is consistent with the 3. It does not provide any information to fact that many programmes are stable and do decision-makers about alternative ways of not change dramatically from year to year. accomplishing an objective and reveals little about a ULB’s priorities. 4. It is developed by using the estimates of direct costs only and, therefore, indirect costs are completely ignored. 5. It is characterised by budget control techniques, which do not provide sufficient flexibility to programme managers to achieve results. 6. Line-item budgeting is usually accompanied by ‘across-the-board’ approach to allocation decisions. Budget additions or deductions are distributed among all departments on a percentage basis, thus, failing to take into account the changing needs and priorities of the departments. 3.1.4.2 Programme budgeting Programme budgeting focuses on the decision-making process; particularly on problems of data and analysis. Its first effort is to introduce a rational ordering of inputs and outputs, in which the initial emphasis is laid on the identifiable outputs, that is, major objectives of the governmental process. It then attempts to order the inputs, that is, governmental activities created by manpower, material, real estate, etc., so that comparisons among wide ranges of alternatives are feasible and meaningful. Programme budgeting attempts to measure programme effectiveness and programme results in a quantifiable manner. It starts with clear, quantifiable and measurable programme objectives for all activities. Programme budgeting can be defined at two levels: 1. The way in which the budget is organised (by programme); and 2. The way it is justified (on the basis of programme results). This method of budgeting provides a method for organizing activities into programmes (activities or services with a common goal), identifying alternatives for achieving each goal, determining the costs and benefits for each alternative, and selecting the right alternative to maximize benefits. Since total cost and -19-
  • 20. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh performance levels are what matter — not the cost of each line item — budgetary allocations can be provided “lump sum” by programme rather than in traditional department line items. Programme budgeting is often accompanied by various kinds of performance measures. On the basis of the above explanation, the following characteristics of programme budgets emerge: • It discloses the full cost of a programme regardless of the number of organisational units involved in performing the function. • It attempts to measure the actual outcomes or programme results of a service or programme. • It uses ‘programme elements’ as the basic budgetary classification scheme instead of departments. • It provides for consideration of alternate service delivery options. Programme budgeting is feasible only if measures are quantifiable and specific. Measures utilising terms such as ‘improve,’ ‘strengthen’, and ‘coordinate’ are impossible to quantify and are too general. Because of these deficiencies, they do not provide a means of holding agencies or managers accountable for results. Consider these three possible programme measures for a maternal and child health programme: 3. Measure A: Improves health of infants 4. Measure B: Improves health of infants by 20 percent 5. Measure C: Decreases infant mortality by 10 percent in 3 years Measure A is not useful because it is not quantifiable, and is, therefore, not measurable. Measure B is quantifiable but it is not specific as to what is meant by the phrase ‘improves health of infants.’ How would an improvement in the health of infants be measured; Measure C is the best because it is both quantifiable and specific. Therefore, in Measure C, it is possible to conclude whether the programme achieves the desired outcome or fails to achieve it. Sample programme measures The following programme measurements may be used: 1. Public Works a. Increase in the useful life of the infrastructure; and b. Decrease in the average downtime of the government’s equipment. 2. Health Services a. Decrease in infant mortality rates; b. Decrease in the percentage of children classified as malnourished; c. Decrease in dental diseases; and d. Increase in the average lifespan of population. 3. Public Safety -20-
  • 21. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh a. Number of structures saved from fire; b. Decrease in crime rates; and c. Decrease in traffic-related fatalities. 4. Audit a. Rupees saved as a result of audits; and b. Number of audit findings successfully addressed. 5. Tax and Revenue a. Number of tax returns accurately processed; and b. Additional revenue from tax compliance programmes. Advantages and disadvantages Table 4: Advantages and disadvantages of programme budgeting Advantages Disadvantages 2. It leads to a rational allocation of resources 1. It is inherently difficult to quantify programme and is particularly useful in making decisions results or programme effectiveness. Even if about alternative ways of accomplishing an output and/or programme results can be objective. measured, it may not be possible to know whether a result was achieved due to the programme or because of another factor. 3. It provides information on the total resources 2. Programme budgeting may ignore the need to allocated to programmes (information not control expenditures by assigning available in other budgetary techniques). responsibilities to departments. 3. The costs of trying to measure programme effectiveness may outweigh the advantages and usefulness of the information. 4. Information about resources allocated to the programmes could only be obtained by reorganising government departments in line with the programme areas, which is time- consuming and not always feasible. 5. In order to effectively implement programme budgeting, budgetary personnel must be specially trained and must have the time to conduct programme audits, which is a costly affair and municipal bodies may not be able to afford it. -21-
  • 22. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 3.1.4.3 Zero-based budget (ZBB) Peter A. Pyhrr at Texas Instruments pioneered the concept of Zero-Base Budgeting (ZBB) in 1969 as a tool for planning budgeting and controls. In this system of budgeting, organisations do not take budget allocation in past years for an activity as granted while preparing their budgets and start from zero allocation. Budget-making under this technique starts from zero instead of treating the current budget as the base or the starting point. In this system, existing programmes and activities are reviewed and examined in as much detail as in the case of newly proposed ones. Definition In the words of Peter Pyhrr, ZBB is “an operating, planning and budgeting process, which requires each manager to justify his entire budget requisites in detail from scratch (hence zero basis). Each manager states why he should spend any money at all. This approach requires that all activities be identified as decision packages, which would be evaluated by systematic analysis ranked in order of importance.” ZBB is a formalised system for deciding whether a programme should be operated at a minimum, reduced, current or increased level. Priority rankings are assigned to all decision packages from the highest to the lowest; packages are ranked either in or out of the budget. Decision packages must be discrete, that is, they must be stand-alone and not rely on the other parts of the budget. Illustrative example Assuming that the base budget for the Public Works (Roads Maintenance Division) is INR 24 lakhs, an example of a budget request prepared using the ZBB format is shown below. Table 5: Example of zero-base budgeting S.N. Decision Package Cost (INR) Total Budget (INR) 1. Only Maintenance 24,00,000 2. Resurface 5 kilometres of road + 3,00,000 27,00,000 3. Resurface 5 more kilometres + 2,50,000 29,50,000 4. Reconstruct bridge on Beach Road + 1,75,000 31,25,000 Decision-makers can choose any, all, or none of the decision packages. If only decision package two is chosen, then a total of five kilometres of road will be resurfaced. If decision packages two and three are chosen, a total of 10 kilometres of road will be resurfaced. If all the decision packages are chosen, 10 kilometres of road will be resurfaced and the bridge will be reconstructed. Advantages and Disadvantages -22-
  • 23. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Table 6: Advantages and disadvantages of zero-base budgeting Advantages Disadvantages 1. It enables decision-makers to make rational 1. ZBB requires agencies to justify every element allocation decisions across programme and of their budget every year. A good idea in organisational lines (for example, is it more theory, but in practice, this proves to be too important to resurface five more kilometres of cumbersome, time-consuming and involves road or build three more classrooms?). huge paperwork and is easy for managers to manipulate. In most places, ZBB has died of its own weight. 2. It has the advantage of being more realistic 2. It is unrealistic and a waste of resources to than either performance budgeting or justify the existence of programmes every year; programme budgeting on its own. few programmes are eventually terminated as a result of the ZBB process. 3. ZBB provides a systematic way to consider 3. The process is susceptible to games: various alternatives to accomplish an departments may put essential services in objective. lower-ranked decision packages, knowing that decision-makers will put them into the budget. 4. ZBB offers a systematic mechanism for 4. Decision units may not coincide with the deciding on the proper level of a programme. classification system used by the accounting For example, the Public Works budget might system, making it necessary to carry out have three decision packages for resurfacing complex crosswalks between ZBB and the a road. accounting/ appropriation structure. 3.1.4.4 Target-based budgeting In this type of budget, each department is given a maximum amount or target for budget request for accomplishing minimum levels of service. Targets are based on revenue estimates for the coming fiscal year and adjusted for any changes in priorities communicated by governing body members. The more complex part of target-based budgeting involves estimating each department’s current services budget. Generally, the current services budget is the department’s current year appropriation plus or minus some adjustments (i.e., one-time purchases, etc.). Once established, the target is typically set at some percentage of the current services budget — for example, 95 per cent for lower priorities in the current year or 105 per cent for higher priorities. Although target-based budgeting includes some elements of ZBB, it greatly reduces conflict and the use of subjective judgment since departments know up front their probable level of funding for the next year. 3.1.4.5 Performance budgeting In India, the first step towards the introduction of performance budgeting was taken by the Estimates Committee of the first Lok Sabha, as early as in the year 1954. The Administrative Reforms Commission also recommended a phased introduction of performance budgeting in government bodies. Since then, the Government has been making efforts to introduce performance budgeting in more and more of its operations. -23-
  • 24. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Performance budgets relate the input of resources to the output of goods or services in a quantifiable format. Under this approach, budgets are based on measures of work and cost necessary to carry out a certain level of activity. Budgets are based on unit costs and service expectations. At the end of the year, a performance analysis is conducted to compare actual work performed with budget estimates. Performance budgets provide information with regard to the efficiency and productivity of public services. Efficiency is a measure of the cost to provide a unit of service, while productivity is the measure of the inputs required to produce a unit of service against a cost standard. In order to make performance budgeting work, the following three conditions are necessary: • It must be possible to develop and measure the units of service for governmental activities; • The accounting system must provide information about costs; and • Management Information Systems (MIS) must provide information about the level of service provided by each activity. Performance measures At the heart of performance budgets are performance measures. Performance measures reflect output, i.e., how much service is provided. It is important to understand the distinction between performance measures and performance standards. While considering performance measures, the key question is: what is being counted. While considering performance standards, the key question is: how much or how many should be produced or served per rupee or per employee. Illustration Examples of performance measures and corresponding performance standards for various functions of ULBs are shown in the table below. Table 7: Sample performance measures Performance Measures Performance Standards Public Works Kilometres of road resurfaced INR 1,00,000 per kilometre MW of electricity delivered INR 0.09 per kW Health Services Number of outpatients treated INR 20.0 per patient per day Number of Inpatients treated INR 100.0 per patient per day Public Safety -24-
  • 25. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Performance Measures Performance Standards Number of food samples taken 10 samples per food inspector per day Number of fires fought 10 fires per fireman Environmental Protection Agency Number of water quality inspections INR 65.0 per inspection Number of land use permits reviewed INR 500 per permit reviewed Tax Revenue Number of tax returns processed INR 175 per return processed Number of tax audits conducted INR 2, 500 per tax audit Finance and Accounting Number of cheques drawn INR 4.5 per cheque Number of vouchers processed 500 documents per vouchers staff per year Advantages and Disadvantages Table 8: Advantages and disadvantages of performance budgeting Advantages Disadvantages 1. Facilitates rational allocation decisions in 1. It is difficult to develop performance measures accordance with the desired level of service. for all government services, especially for For example, if it costs INR 25 lakhs to re- government functions which do not provide surface one km of road, and decision-makers services directly to the public such as financial, want 5 km of road to be re-surfaced, INR 125 legislative and general administrative functions. lakhs must be budgeted in the public works function for road re-surfacing. 2. Makes it possible to hold government officials 2. Developing and maintaining a system of and organisations accountable for their collecting performance data may be costly and performance. time-consuming; in some cases, it is not worth the expense. 3. Fosters a cost consciousness among 3. Performance budgets are generally programme managers, especially if incompatible with existing accounting systems, organisations are organised into cost centres which do not measure cost of service ex ante. and as many services as possible are treated Cost information is usually available only ex as direct costs. post (after the costs are incurred), and is not always reliable. -25-
  • 26. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Advantages Disadvantages 4. Programme output does not equal programme effectiveness. Measurement of service levels and work output do not always reveal information about programme effectiveness or programme results. 3.1.4.6 Outcome Budgeting Outcome budget is a pre-expenditure instrument, which helps in realizing the performance through clearly defined outputs/ outcomes, as compared to the current system built around post–expenditure scrutiny. Outcome budgeting is about clearly articulating outcomes of each and every capital work and linking such expected outcomes of development works or expenditure to the financial outlays in budget before undertaking it for implementation. It is a logical extension of performance budgeting and gets facilitated if there exists performance budgeting in a ULB. Performance budgeting links physical targets to financial outlay but may or may not provide information about outcomes planned or expected on completion of the work or expenditure. Typical examples of outcomes are given below: • Construction of Elevated Storage Reservoir (2ML) for water supply, will serve a population of 12,000 @ 170 LPCD with a daily supply 4 hours. The numbers of new connections can be quantifiable depending on the pipe network size. • Laying of sewerage pipe of diameter 150mm of length covering a particular area, will provide proper sanitation facilities for sewer connection for households in that particular area. The number of new sewer connections is quantifiable. • Construction/ completion of a school building is the output, whereas increase in the literacy rate is the final outcome where an increase in enrolment would be an intermediate outcome. • Provision of public tap – it can quantifiable with the number of households that could use the service 3.1.4.7 Gender Budgeting A gender-responsive budget is a budget that acknowledges the gender patterns in society and allocates money to implement policies and programmes that will change these patterns in a way that moves towards a more gender equal society. Gender budget initiatives are exercises that aim to move the country in the direction of a gender-responsive budget. Gender budget initiatives are known by a range of different names. They have, for example, also been referred to as ‘women’s budgets’, ‘gender-sensitive budgets’, and ‘applied gender budget analysis’. Gender Budgeting is based on the modern idea that budgeting is not simply an accounting or bookkeeping exercise. Instead, budgeting is a key part of the planning and implementation process. -26-
  • 27. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Gender budgeting is not the only tool that can and must be used if equality and empowerment are to be realised. Gender Budgeting is, however, an essential tool because, unless sufficient money is allocated to implement all the other tools and strategies, they will not be effective. The Five Step Framework for Gender Budgeting Step 1: An analysis of the situation for women and men and girls and boys (and the different sub- groups) in a given sector. Step 2: An assessment of the extent to which the sector's policy addresses the gender issues and gaps described in the first step. This step should include an assessment of the relevant legislation, policies, programmes and schemes. It includes an analysis of both the written policy as well as the implicit policy reflected in government activities. It should examine the extent to which the above meet the socio-economic and other rights of women. Step 3: An assessment of the adequacy of budget allocations to implement the gender sensitive policies and programmes identified in step 2 above. Step 4: Monitoring whether the money was spent as planned, what was delivered and to whom. This involves checking both financial performance and the physical deliverables (disaggregated by sex) Step 5: An assessment of the impact of the policy / programme / scheme and the extent to which the situation described in step 1 has been changed, in the direction of greater gender equality Source: UNIFEM-UNFPA Gender Responsive Budgeting and Women's Reproductive Rights: Resource Pack Example of Gender Budgeting - Gender Budgeting is not about simply dividing government money 50-50 between men and boys on the one hand and women and girls on the other. A simple 50-50 division may look equal, but it is often not equitable, or fair, because the needs of women and men and girls and boys may be different. Instead, Gender Budgeting looks at every part of the government budget to assess how it will address the different needs of women and men, girls and boys and different groups of women and men, girls and boys. For example, in the area of health, male and female people will have similar needs in respect to influenza and malaria. But women will have greater needs than men in terms of reproductive health. A municipal body to begin with can adopt a policy of reserving 10 to 15 % of its development budget for welfare of women and illustrative items under this budget could be • Construction of adequate and appropriate toilet block for Girls in all municipal schools; • Construction of adequate and appropriate toilet block for women throughout the city; -27-
  • 28. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh • Construction and running Health care centres for women in each area; • Construction and operations of hostels for working women; • Construction and operations of shelter homes for destitute wormen, etc 3.1.4.8 Multi-year planning budgets Multi-year planning budgeting refers to a process designed to ensure that the long-range consequences of budget decisions are identified and reflected in budget totals. In practice, this usually means that multi- year planning estimates for revenue and expenditures are shown for each programme beyond the budget year. For some governments, the annual budget is the vehicle for the implementation of multi-year (usually five- year) strategic plans. In this sense, long-range budgeting means integration of planning and budgeting processes. Decisions about public investments and programme expansion are made as a part of the multi-year planning process, and not as a part of the annual budgetary process. 3.1.4.9 Participative budgeting In India, there is growing awareness about the need to introduce such processes, particularly among civil society organizations. JNNURM scheme has mandated for State Governments to put in place ‘Citizens Participation Law’ to facilitate citizens’ participation in urban governance. In light of this, adoption of participative budgeting by the ULBs has become important. From a socio-political viewpoint, the process of participatory budgeting is an embodiment of the ideals of decentralized urban governance, namely transparency, accountability and the participation of the public at large in identifying their needs and determining how these can be fulfilled. From a managerial or technical point of view, ‘participatory budgeting’ provides the link between financial planning and the planning for infrastructure and services in the cities. 3.2 Good practices of budgeting 3.2.1 Preparing a budget 1. Budgeting should be a continuous process: Budgeting is a 365-day activity. As soon as a budget st comes into force on 1 April of a particular year and actual figures become available in the month of May, a ULB should start the process of budget preparation for the next year. As part of this process, a ULB should forecast major revenue and expenditure items for next year’s budget. 2. Budget forecast should be based on stated assumptions and methodology: The forecast along with its underlying assumptions and methodology should be clearly stated and made available to participants in the budget process. These assumptions and methodologies should also be provided as references in the final budget document. -28-
  • 29. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 3. ULB should analyse the variances between previous forecast and actual amounts: The variance analysis should identify the factors that influence revenue collections, expenditure levels, and forecast assumptions. This will help improve future forecasting. 4. Use of Budget Information Data Sheets (BIDS) for budget preparation: A ULB should use BIDS to collect information for preparing its budget. Using BIDS facilitates efficiency and cost audit as actual figures can be compared in a disaggregated manner to find out precisely the cost of overrun or cost inefficiency. Formats for collecting data in the form of BIDS are provided in Annexure 1. These are sample formats and ULBs are encouraged to develop BIDS for each important receipt and payment item on these lines. 5. Use of Assets Management Plan (AMP) for budget preparation : Like BIDS a ULB should use AMP to assess funds needed for maintenance of the assets on scientific and preventive basis and then use financial figures coming out of AMP to formulate it annual maintenance budget. AMP is in a generic way one type of Budget Information Data Sheet. 6. The budget document should clearly define the basis of accounting used for budgetary purposes. 3.2.2 Capital budgeting 1. Capital budget should be prepared as part of annual bugeting process: A ULB should prepare and adopt a formal capital budget as part of its annual budgeting process. 2. Capital budget should be drawn from the multi-year capital improvement plan: The capital budget should flow from the multi-year capital improvement plan. Presentation of capital budget should include a summary of the multi-year capital improvement plan. 3.2.3 Budgeting techniques 1. Line-item budgeting should be used for preparation of revenue budget with the conservative incremental approach. 2. Performance, participatory and outcome budgeting techniques are recommended for the formulation and administration of the capital budget. 3. Budgeting for poor, gender budgeting, functional budgeting, budgeting on geographical basis (zone/area-wise budgeting) etc budget techniques should be used for segregation and presentation of budget in multi-dimentional manner. 3.2.4 Implementing/ administering/ controlling the budget Having prepared and adopted the budget the next important aspect of budgeting is administering the budget. Administering the budget is linked with several short term and long-term financial management aspects. It is linked with cash and working capital management, bills receivables and payables management, inventory management for short-term financial management and long-term debt management, assets management and implementation and revision of Capital Investment Plan, etc., for long-term financial management. Following good practices have been observed for improving budget implementation. -29-
  • 30. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 1. Budget should be contingent on resource mobilization: In government parlance, budget is a legal authorization. As a result, once budget allocations are approved, the departments are free to utilise their allocations fully, even if the receipts are not realised as per targets. The expenditure mechanism assumes independent existence. Thus, by not making its expenditure contingent to actual receipts, ULBs enhance their budgetary deficit. In fact, a local body can control negative aspects of deficit financing by judiciously linking and making its expenditure contingent to resource mobilization. Instead, ULBs should make their budget expenditure contingent on their actual receipts and accounts or the finance officer should issue every month (in the light of actual receipts) a benchmark for undertaking expenditure by the departments. For instance, a year opening circular may allow departments to spend 10% of the budget in the month of April and cumulatively 20% in the April to June quarter. After that, the Finance Officer of ULBs could issue monthly and quarterly expenditure benchmarks at the beginning of every month on the basis of actual receipts in the past months. In summary, departments should not get automatic clearance to spend budget allocations once they are passed and they should be required to seek permission to use full or part of it in the light of actual receipts. 2. Departments to obtain prior financial approval before spending budget approved: It would not be sufficient to make budget contingent on revenue realised. Its implementation requires a system of financial approval before starting procurement process (before administrative approval to the expenditure) by a competent authority, and then, after completion of procurement process, but, before issuing work order or purchase order. This system is a logical extension of making budget contingent on revenue realised. Under this budgetary control system Head of the Department must obtain financial approval to expenditure from Accounts/ Finance department of the ULB before starting procurement process and then before issuing work or purchase order for all the capital expenditure and certain operation and maintenance expenditure (as specified by the Commissioner of the ULB). Accounts/ Finance Department should maintain budget control register and uni-number system for giving number to approved expenditure files. 3. Budget should be bifurcated into monthly cash and working capital budgets: In order to make expenditure contingent upon revenue realised and to implement system of prior financial approval to expenditure, annual budget of the ULB should be broken down into monthly cash and working capital budgets. At present, budget preparation is viewed as an annual activity. Financial managers need to change this mindset. A budget can be for one week or even for a day. For a detailed discussion on adopting cash and working capital budget see Chapter 5 of this manual. 4. Budget administration to include management of inventory, assets, receivables and payables: The budget administration should include management of inventory, assets, receivables and payables. These sub-systems, except receivable management, constitute expenditure system. Like expenditure provided in the budget should be contingent on the revenue realised, the operation of these expenditure sub-systems should also be contingent on the revenue realised and should not work on a stand-alone basis. The Accounts Department of the ULB should decide through a system of prior financial approval to expenditure on when and how much inventory should be purchased or how much operation and maintenance expenditure should be undertaken or the extent of project works expenditure that should be undertaken in the light of revenue realised and availability of funds. -30-
  • 31. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh 3.2.5 Monitoring and evaluating the budget If the above-mentioned good practices are followed rigorously, the need for a formal review mechanism is reduced. However, the following good practices should be followed for monitoring and evaluating a budget. 1. Budget should be prepared using a budget coding structure: A ULB budget should be prepared using a budget coding structure as prescribed by the government. Adherence to budget coding structure would ensure that all the items are properly recorded and classified. This in turn captures all types of financial information within a ULB. If the discipline of classifying receipts and payments is not adhered to, then the entire database can get distorted and the quality of decision-making, based on the data, becomes poor. 2. Budget Variance Report (BVR) to be used as a crucial budgetary control tool: ULBs should also prepare a Budget Variance Report that could be used as an important budgetary control tool. BVR analyses the positive and negative variances of actual vis-à-vis budgeted receipts and expenditure items. In other words, a BVR provides information on fast-moving and slow-moving receipts and expenditure items. Positive variance should be analysed for reasons. For instance, a ULB has collected more property tax than the budgeted amount in a particular ward. The reasons for the same should be analysed and replicated. Negative variance should be analysed for reasons and cost control measures should be identified. For instance, the increase in maintenance expenses or finance charges would indicate lack of planning or implementation follow-up. 3. Performance benchmarks (standards), indicators and measurement system: For monitoring and evaluating budget the ULB should have pre-defined set of performance benchmarks (standards) to compare actual performance against budgeted performance, performance indicators to measure performance and institutional structure to run performance measurement system. Revised budget and next year’s budget should get improved in the light of learning from budgetary monitoring and evaluation exercise. Budget performance analysis report should be submitted quarterly to Mayor or Chairman in Council for information and discussion and should be released as a public document. 3.3 Policies recommended for adoption 3.3.1 Frequency and timing Each Municipal Corporation in MP shall prepare and adopt an annual budget of income and expenditure of the ULB before the last day of February in the preceding accounting year for the next accounting year in the manner and form as prescribed in Madhya Pradesh Municipal Accounts Manual, July 2007. In this regard, the Commissioner shall prepare estimates of income and expenditure and present before the th Mayor-in-Council, on or before the 30 day of November in the preceding accounting year for consideration, modification, and approval, as appropriate. 3.3.2 Basis of preparation 1. Each Municipal Corporation in MP shall integrate performance measures and productivity indicators with its annual budget. In this regard, Municipal Corporations shall adopt the systems of performance -31-
  • 32. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh budgeting and outcome budgeting for preparing, and approving estimates of all types of capital expenditure except loan repayment in the manner and form as prescribed in MPMAM. 2. Each Municipal Corporation in MP shall adopt system of participating budgeting for preparing, estimates of operating and capital expenditure except salary, debt charges, loan repayment and any other statutory expenses in the manner and form as prescribed in MPMAM. 3. Each Municipal Corporation in MP shall adopt the systems of Gender Sensitive and Pro-Poor Budgeting. For this purpose, a Municipal Corporation shall segregate relevant budget items and allocations into two separate main budget heads, viz., (1) ‘Providing Services to Women, Children, and Senior Citizens’ (for gender sensitive budget) and (2) ‘Providing Basic Service to Urban Poor’ (for pro-poor budget). 3.3.3 Conservatism in revenue estimation In order to maintain a stable level of services, each Municipal Corporation in MP shall use a conservative, objective, and analytical approach when preparing revenue estimates. The process shall include analysis of probable economic changes and their impacts on revenues, historical collection rates, and trends in revenues. This approach should reduce the likelihood of actual revenues falling short of budget estimates during the year and should avoid mid-year service reductions. 3.3.4 Fiscal control 1. Each Municipal Corporation in MP shall ensure fiscal stability and the effective and efficient delivery of services, through the identification of necessary services, establishment of appropriate service levels, and careful administration of the expenditure of available resources. 2. Each Municipal Corporation in MP shall adopt and maintain a balanced budget. For this purpose, expenditure deferrals into the following fiscal year, short-term loans, or use of one-time revenue sources shall be avoided to balance the budget. 3. Each Municipal Corporation in MP shall operate on a current funding basis. Expenditures shall be budgeted and controlled so as not to exceed current revenues plus the planned use of fund balance accumulated through prior year savings. 4. Each Municipal Corporation in MP shall project future operating costs associated with new capital investments and will include them in the operating budget forecasts. 5. Debt or bond financing shall not be permitted to be used by any Municipal Corporation in MP to finance current operating expenditures. 3.3.5 Presentation and formats 3.3.5.1 Budget coding structure Each Municipal Corporation in MP shall prepare its annual budget using the six-digit coding structure as prescribed in the Madhya Pradesh Municipal Accounting Manual (MPMAM). The prescribed coding structure shall have three levels of codification – first level representing function group, second level -32-
  • 33. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh representing function description and the third level representing cost centre. Each level shall have a two- digit code. The codification structure is described below. 1. First level represents the obligatory and discretionary functions of the ULBs under the Madhya Pradesh Municipal Corporation Act, 1956 and the Madhya Pradesh Municipalities Act, 1961. This is known as the “Function Group". Functions shall represent the various functions or services carried out by the local body. Account Heads shall represent the nature of the income or expenditure. 2. Second level represents the particular type of service under a function, known as "Function Description". 3. Third level represents a particular ”Cost Centre” code, which provides the service. Refer to Annexure 4 of the MPMAM for detailed formats as prescribed in MPMAM on coding structure. 3.3.5.2 Budget categories The budget of a Municipal Corporation in MP shall be divided in three distinct categories – Revenue (operating) budget comprising operating income and expenditure; Capital budget comprising capital income and expenditure including loan repayment and Extra-ordinary budget comprising receipts and payments on account of deposits from people and advance given and recovered. These three broad budget types shall then be sub-classified under functions performed by the ULB followed by the sub- functions or different departments of the ULB. 3.3.5.3 Budget layout Budget layout refers to the budget forms that will be used for final preparation and presentation of the budget. Each Municipal Corporation in MP shall follow the method of bottom-up budgeting as prescribed in the MPMAM. Also, Municipal Corporations shall use the forms prescribed in the MPMAM for presenting budget information. The table below provides the names and references of these forms as prescribed in the MPMAM. It is noteworthy that the forms prescribed here relate to the final presentation of the budget and not initial data collection by various departments. Table 9: Forms prescribed in MPMAM for budget layout Name of the form Description BUD 1 Summary Budget Estimates BUD 2 Abridged Major Account Head Wise Budget BUD 3 Revenue Income Budget Estimates BUD 4 Revenue Expenditure Budget Estimates BUD 5 Capital Receipts Budget Estimates BUD 6 Capital Expenditure Budget Estimates -33-
  • 34. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Name of the form Description BUD 7 Detailed Revenue Expenditure (Department-Wise) Budget Estimates BUD 8 Detailed Capital Expenditure (Department-Wise) Budget Estimates 3.3.5.4 Ease of presentation and transparency While presenting the budget, each Municipal Corporation in MP shall ensure that budget information is presented in a way that facilitates policy analysis and promotes transparency and accountability. 3.3.6 Closing balance of budget The budget shall be so prepared as to provide for a closing balance, which each Municipal Corporation in MP shall maintain at its credit at the end of the year and the amount of which shall be not less than the limit prescribed in the [MP Municipal Finance and Accounts Rules]. 3.3.7 Review and revision 1. The Commissioner of each Municipal Corporation in MP shall perform a mid-year budget review and analysis based on actual information for the [first six months] of the accounting year (April to September) and prepare revised estimates of income and expenditure of the Municipal Corporation for the current year. The analysis of the mid-year budget review shall be submitted to the Council for approval. 2. Each Municipal Corporation in MP shall be permitted to revise its budgets only [once] during a particular accounting year. 3. Each Municipal Corporation in MP shall prepare a Budget Variance Report (BVR), as prescribed in the MPMAM. The BVR shall be prepared by each Municipal Corporation on a [quarterly] basis. A copy of the BVR shall be submitted to the Urban Administration and Development Department. 3.3.8 Other policies Each Municipal Corporation in MP shall project revenues and expenditures for the next [three] years and shall update the projections annually. 3.4 Procedures This section provides a detailed step-by-step discussion related to the budget process. 3.4.1 Step 1- Development of budget policies and tools The Commissioner of the ULB is responsible for developing various budget tools, the set of rules and principles as well as the forms and guidelines to regulate the budget preparation and implementation -34-
  • 35. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh process. These documents must be circulated within each department of the ULB before starting the budget preparation process. These documents must include: • Policies — Principles or financial policies are needed to guide budget preparation. Department managers should be encouraged to use this information to reassess the benefits of current service activities as well as justify requirements for any new and/ or expanded services. These policies may be formed keeping in mind the expected financial situation in the upcoming financial year. • Budget Calendar — A calendar or detailed time/ event schedule that identifies due dates for budget- related activities; steps to be taken during budget preparation; the person or group responsible for each step; and the date on which each step must be completed. The following figure shows a sample budget calendar. Figure 2: Sample budget calendar Identification of works for next year budget in consultative manner Identification of works for next year budget in consultative manner Preparation of draft budget by various department heads Preparation of draft budget by various department heads April to April to September September Finalization and Submission of budget by Commissioner to Mayor-in-council Finalization and Submission of budget by Commissioner to Mayor-in-council October to October to November November Final adoption of budget estimates and approval by mayor-in-council Final adoption of budget estimates and approval by mayor-in-council December-March December-March Implementation of Budget by getting administrative approval to each work, tendering, Implementation of Budget by getting administrative approval to each work, tendering, contracting and implementing them contracting and implementing them Implementation Implementation year around year around Whereas, the Madhya Pradesh Municipal Corporation Act, 1956 and the Madhya Pradesh and Chattisgarh Municipalities Act, 1961 provide the dates for submission, approval and adoption of budget of a ULB, a Budget Calendar should not be confined to these end result dates. Budgeting is a 365-day st activity. As soon as a budget comes into force on 1 April and actual figures become available in the month of May, the repective ULB should start the process of budget preparation for the next year. The period between May and September should be used for the identification of major O&M works and capital works for the next year through consultative process and then preparing design and estimates of the probable projects. Therefore, by the time primary budget preparation process starts in November, the ULB would be ready with the list of projects for the next year’s budget. Similarly, during the period October to December, the ULB should take stock of projects undertaken in the current year to identify the projects that can be completed before end of current year in March and the projects that can spill over to next year’s budget. Also, during this period, a revised budget should be formulated and presented separately. Therefore, when the budget is put together in January, the ULB clearly knows its revised revenue and expenditure, the expenditure that would spill over to next year and -35-
  • 36. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh the works that need to be taken up in the next year’s budget. A similar analysis and implementation activity should be carried out for the revenue side of the budget. 3.4.2 Step 2 - Application of budgetary techniques Section 3.1.4 of this manual explains different techniques that could be used by a ULB to prepare a budget. Each budgeting technique has its distinct advantages and constraints, but no budgeting technique should be viewed as superior to other budgeting techniques. Each technique has its own application, depending upon the objectives of preparing a budget as pursued by the ULB. Given below is an illustrative application of different budgetary techniques. • Revenue Budget: The “Line-item Budgeting” technique should be used for the preparation of the revenue budget, with the conservative incremental approach. “Line-item Budgeting” is preferred over other budgeting technique for the preparation of revenue budget because it contains numerous routine and statutory expenditure items, which can be calculated precisely and objectively. Also, in case of these items, control is more important than performance measurement. Moreover, this technique is simple and user-friendly. In order to overcome the limitations of Line-item Budgeting and excessive use of incremental approach, the system of subsidiary budgeting has been designed, which involves the preparation of Budget Information Data Sheets (BIDS). Whereas, participatory budgeting technique is not applicable for preparation of the revenue budget, but gender budgeting or budgeting for poor concepts can be applied to segregate budget items of revenue budget on the lines of gender and poor budgets. • Capital Budget: Performance measurement is one of the most important aspects regarding development or capital works. Therefore, performance and outcome budgeting techniques are suggested for the formulation and administration of the capital budget. Performance budgeting requires linking of physical targets to budgetary (financial) allocations made in the capital budget. Accordingly, municipal bodies will have to prepare a schedule of capital works linked to each budget item (allocation) of capital budget. Outcome budgeting requires determining outcome/ results expected out of each capital works undertaken by a ULB. Therefore, besides linking physical targets to financial allocations, ULB should detail out the outcomes expected out of each of such works and financial allocation. The format for preparing schedule regarding capital works detailing physical aspect and outcomes is provided below. Table 10: Sample format for listing and linking proposed capital investment works to budget allocations Budget code D55201 Budgete d Amount Particulars Expected Budget Item - Erection of Streetlight on Central Divider Outcome -36-