India Andhra Pradesh Financial Management Strengthening The proposed project titled - Public Financial Management Strengthening (PFMS) will focus on priority issues that will contribute to sound financial management in the state and complement work already underway.  The main components of the project may be summarized as follows: "   Improving the integrity of the budget "   Improving management of the state's assets and liabilities "   Improving internal controls Purpose of the Grant The objective of the Grant is to assist the Finance Department in the Government of Andhra Pradesh (GoAP) in its efforts to build a strong financial management and public accountability framework, improving the quality of budget preparation, management of assets and liabilities and strengthening internal controls. The activities under the grant are grounded in the findings of the SFAA and represent specific requests from the Finance Department, Government of Andhra Pradesh. Components of the Project To meet this objective, the Grant will support the following components: Key activities to be covered under the project Component 1 Improving the integrity of the budget: Formulation stage: Efficient and effective budget formulation needs to be preceded by forecasting and planning the resources of the state in the form of tax revenue, non-tax Revenue, market borrowings, resources from the Union Government in the form of tax devolutions, plan assistance, grants in aid contributions, additional central assistance for the externally aided projects, share in small savings, etc.  Systematic forecasting and planning, with the participation of all the stakeholders in the process, will contribute to improving the quality of budget formulation. Greater involvement in and ownership of budgets by the line departments at the state level, district level and sub district levels will also bring better results.  Specific actions to improve the integrity of budget will include: 1.   Improved revenue forecasting 2.   Further revision of the budget classification to be simpler and more relevant 3.   Revision of the budget manual and timetable to enable a more interactive and consultative budget process 4.   Development and delivery of training in new budget procedures for line departments 5.   Streamlining budget approval process and file movement through use of technology 6.   Development of software to place the budget online 7.   Participation in study tours and or seminars within India The personnel involved in budget formulation must be trained in forecasting and planning as well as contours of resource raising in federal government set-up. Because developing a budget involves manipulating numbers and requires strong analytical skills, training in financial analysis, statistics and accounting are helpful to the personnel dealing in budgeting exercise. Documentation and dissemination of procedures, terminology and rules would enhance the quality of budget preparation and monitoring. The capacity building exercise will extend to the line departments who are stakeholders in the budget exercise. Under this project, Finance Department will involve line departments in the forecasting, planning and budget formulation process through a series of consultative workshops. This capacity building exercise will be supplemented by interactive formats to be used in the budget formulation process by the line departments and the finance department and training for the line department to effectively use the formats. Line departments will take up the capacity building workshops to all their district and sub-district offices.  Initially it is proposed that four major spending departments - Transport, Roads and Buildings, Irrigation, Education and Health, Medical & Family Welfare must be involved under this project on pilot basis. The capacity of senior team members (in Finance and Line Departments) to lead the development of the improved budget process will be enhanced through exposure to best practice, by means of a study tour and/or participation in seminars organized by leading institutions such as the Indian Institute of Management. Budget Regulation, Accounting and Reporting Success of efficient budget formulation also depends on the proper execution of the budget. It is critical that processes for within year expenditure changes do not provide an avenue to rewriting the budget during execution. The task of Finance Department is to ensure that actual expenditure reflects the budgeted priorities and is carried out in tune with budget regulations. In this connection, SFAA pointed out certain areas that needed improvement such as delay in the release of spending authority to Controlling Officers and Drawing and Disbursing Officers (DDOs). Furthermore the approach to managing cash shortfalls is leading to significant within year changes to budget allocations. Though GoAP has taken several steps to address this issue, there is scope for improvement. Various innovations were introduced in the BRO system, which needs to be assessed with regard to efficacy of the system. In order to assess the execution of the budget, a system for on-line monitoring of budget by finance department is proposed. This will be designed to ensure proper and timely expenditure control using information. Under this project a system requirement will be prepared to meet the needs of finance department, treasury and user departments. The system will be designed keeping in view the structure of state financial system and budgetary processes. Implementation of the project would cut down the time taken for financial transactions thereby providing quicker and more efficient service to the people. The efficiency of delivery mechanism would be enhanced. Automation should significantly reduce the scope for error and fraud.  Personnel will be trained to use the system to generate reports and monitor exceptions leading to better control. Component 2 Improving Asset-Liability Management GoAP needs to strengthen its asset and liability management systems to ensure proper accountability and more efficient use of resources. The Government of Andhra Pradesh spends a substantial proportion of the budget on creating assets, both physical and financial. Although Government has a huge stock of such assets, many valuable assets are either under utilized or completely unused. The AP Financial Code, AP Accounts Code and District Office Manuals are the core texts for asset management but at present there is no comprehensive system to register and keep track of them, especially physical assets.  Assets are scattered across the state and there is little information available on the actual costs incurred, type of asset, date of acquisition, location, condition etc. To safeguard the assets of government departments the project will first establish a dedicated unit to facilitate recording and management of assets and to develop policies and procedures for acquisition, registration, utilization and disposal of assets. The Finance Department will also develop an asset database for recording and monitoring asset utilization.  The system will be developed to capture the details of these assets linked to the actual amounts spent on various schemes recorded in the budget and accounts.  To decentralize asset management, it is proposed to develop asset management cells on a pilot basis in four line departments; Revenue, Irrigation, Transport and Roads and Buildings. Associated capacity building activities will include specialized training for staff in the asset management unit, consultation workshops with line departments to explain the need for effective asset management systems and to develop appropriate policies and procedures, and training in the use of the new fixed asset register. The capability of the senior team members to provide technical leadership will be enhanced through exposure to best practices in  debt and fixed assets management, by means of a study tour, and or participation in seminars and training events organized by leading Indian institutions such as the Reserve Bank of India and the Indian Institute of Management. The main advantages expected to accrue from such an exercise are: better accounting for government assets, a single inventory of all the assets available at one place, better security and control over assets and better economic utilization of the assets. On the liability side a separate debt management unit has been created within the Finance Department to manage the debt portfolio of the state.  This unit will be strengthened to enable it to provide critical information to the Finance Department on the debt portfolio, debt servicing, debt ceilings, potential debt swap opportunities, risks etc. The focus of training activities will be on developing officers' understanding of the principles of debt management, including understanding of key economic concepts and their application in debt management, tools and techniques of debt management, and risk profiling of PSU's and other entities for which the state provides loan guarantees. The project deliverables include sound institutional arrangements for management of debt; adoption of tools and techniques for capturing information, forecasting debt repayments, monitoring short-term debt levels and assessing impact of fiscal policies on the debt levels and comprehensive and transparent reporting on debt. A key objective of strengthening debt management will be for the state to meet fiscal correction targets agreed with Government of India and thereby qualify for debt consolidation and write off. Component 3  Improved Monitoring of Internal Controls The State Financial Accountability Assessment highlighted that there has been widespread failure to comply with financial rules and procedures.  GoAP has taken significant steps to strengthen accountability through the issue of a series of Government Orders and guidance material on financial accountability. In this context the Finance Department needs an effective modern internal audit function to monitor compliance with financial rules and procedures, to analyse weaknesses in the design of internal controls and recommend improvements.  Consistent with the recommendations of the SFAA an internal audit unit has recently been set up within the Finance Department.  This unit is responsible for guiding the work of internal audit units in the line departments.  Although key staff have been appointed the unit is not yet fully staffed and is in the process of developing a new methodology and work program. The project will support the development of the Internal Audit Unit in the Finance Department, and develop a training program to strengthen the internal audit units in line departments.  To achieve this the following activities will be undertaken in the project: Â¢   Specialized training for the internal audit unit within the Finance Department Â¢   Development of an internal audit methodology and audit plan/work program Â¢   Development  of a training program for internal auditors Â¢   Training of Drawing & Disbursing Officers in internal control functions on a pilot basis. Capacity of the senior team members to lead the strengthening of internal audit will be developed through exposure to international best practice through participation in study tours, seminars and training events organized by leading institutions such as the Institute of Internal audit and the Indian Institute of Management. The short term outcome of these actions will be to conduct high quality internal audits in major spending departments, applying modern techniques.  The longer term impact of these changes should be higher levels of compliance with financial accountability norms and regular monitoring of the same.