Financial Procedures in Public Administration

Concept

Financial procedures refer to the processes, methodologies, and systems adopted for managing public revenue, expenditure, and overall public financial management. These encompass the operation and management of the consolidated fund and other government funds, budget formulation, appropriation and expenditure, accounting of financial transactions, reporting, internal control, auditing, and ensuring a responsible, transparent, result-oriented, and accountable financial management system. They also aim to maintain macroeconomic stability and regulate financial procedures systematically.

With the global development of democratic principles like "No taxation without representation" and "No spending without legislation," financial procedures are constitutionally and legally established to guide and control public revenue and expenditure. In Nepal, financial procedures were initiated through the Constitution of 2007 BS (1951 AD).

Importance of Financial Procedures

Provides necessary resources for public administration.
Ensures disciplined, accountable, and transparent financial transactions.
Supports formulation and implementation of fiscal and monetary policies.
Prioritizes, equitably distributes, and maximizes resource utilization.
Manages public debt, foreign aid, and grants.
Facilitates public expenditure management, accounting, internal control, auditing, evaluation, and reporting.
Evaluates the overall impact of government economic activities.
Serves as an indicator for evaluating public administration performance.
Ensures proper cash flow management.
Enhances effectiveness of financial administration.
Provides reports and feedback for policy-making.
Supports managerial functions (POSDCORB: Planning, Organizing, Staffing, Directing, Coordinating, Reporting, Budgeting).
Harmonizes budget preparation, implementation, monitoring, evaluation, accounting, and reporting across federal, provincial, and local levels through a unified computer system, making financial procedures more systematic and justified.

Constitutional Provisions for Financial Procedures in Nepal

The Constitution of Nepal includes provisions for financial procedures under Part-10 (Federal), Part-16 (Provincial), and Part-19 (Local).

Federal Financial Procedures (Articles 115–125)

No Taxation or Borrowing Without Law: Taxes or loans cannot be imposed without legal provisions.
Federal Consolidated Fund: All revenues, loans, and other funds (except trust funds) are deposited here.
Expenditure from Federal Consolidated Fund: Expenditures are made through Appropriation Acts, Supplementary Estimates, or Advance Expenditure Acts.
Expenditure Chargeable to Consolidated Fund: Includes salaries and benefits for constitutional positions, administrative expenses, debt obligations, court-ordered payments, and legally designated expenditures.
Revenue and Expenditure Estimates: Presented by the Finance Minister on Jestha 15 to both houses of the federal parliament.
Appropriation Act: Authorizes expenditures.
Supplementary Estimates: For additional or new expenditures.
Advance Expenditure: Up to one-third of estimated expenditure during Appropriation Bill consideration.
Supplementary Expenditure: For special circumstances with only expenditure details.
Federal Contingency Fund: For emergency expenditures under government control.
Financial Procedures Act: Financial Procedures and Fiscal Accountability Act, 2076 BS, and Rules, 2077 BS.

Provincial Financial Procedures (Articles 203–213)

Similar to federal provisions, tailored for provinces.

Local Financial Procedures (Articles 228–230)

No taxation or borrowing without law.
Local Consolidated Fund.
Revenue and expenditure estimates for rural and urban municipalities.

Financial procedures streamline government revenue, expenditure, and financial activities, ensuring economic objectives and good governance through systematic implementation.

Policy and Legal Challenges and Solutions

Challenge: Delay in enacting laws for provincial and local financial procedures and shared powers under Article 59, hindering coordination.
Solution: Formulate and implement laws for coordination and collaboration across federal, provincial, and local levels.
Challenge: Position-based clearance of irregularities raises moral accountability issues.
Solution: Make individuals, not positions, accountable.
Challenge: Welfare, relief, and disaster funds not integrated into central fund management.
Solution: Integrate these funds into central fund management.

Structural Challenges and Solutions

Challenge: Ineffective role of Public Accounts Committee in financial oversight.
Solution: Develop time-bound plans to discuss audit reports and ensure accountability.
Challenge: Lack of coordination among federal, provincial, and local consolidated funds.
Solution: Develop a unified electronic system for budget, fund management, accounting, and reporting.
Challenge: Weak internal auditing and control systems.
Solution: Enhance internal auditing, define roles, and develop as a Management Information System.
Challenge: Ineffective final auditing, not performance or result-oriented.
Solution: Make final auditing performance and result-oriented.
Challenge: Weak capacity of central revenue offices causing issues in clearing irregularities.
Solution: Upgrade capacity, digitize irregularity records, ensure adequate manpower and resources.

Managerial/Behavioral Challenges and Solutions

Challenge: Off-budget/off-treasury foreign aid distorts consolidated fund status.
Solution: Bring all aid into the budgetary system (on-budget, on-treasury).
Challenge: Delayed financial reporting affects accountability.
Solution: Make reporting time-bound and link to employee performance evaluations.
Challenge: Non-transparent, non-economical, and unaccountable public procurement.
Solution: Ensure transparent, economical, result-oriented, and accountable procurement, enhancing capital expenditure.
Challenge: Year-end bulk appropriations, expenditures, and transfers encourage irregularities.
Solution: Implement timely appropriations, expenditures, and transfers.

Coordination among financial procedures of all government levels is essential to achieve national economic objectives, supported by the proposed policy, structural, and managerial reforms.

Principles of Financial Procedures

Implement democratic principles like "No taxation without representation" and "No spending without legislation."
Effective collection, protection, and utilization of public resources.
Effective service delivery based on public interest, choice, and policy priorities.
Financial discipline, regularity, and accountability.
Macroeconomic stability and balance.
Appropriation and operational efficiency.
Proper use of public funds.
Public rights over public assets.
Political guidance, control, and legal compliance.
Transparency, integrity, and justification in transactions.
Uniformity in government financial transactions, accounting, reporting, and auditing.

Federal Constitutional Financial Procedures

Part-10, Articles 115–125 cover:

No Taxation or Borrowing Without Representation: Taxes and loans require legal backing.
Federal Consolidated Fund: All government revenues, loans (except trust funds) deposited here.
Expenditure: Only through Appropriation, Supplementary, or Advance Expenditure Acts.
Expenditure Chargeable to Consolidated Fund: Includes constitutional salaries, administrative expenses, debt obligations, court-ordered payments, and legally designated funds.
Revenue and Expenditure Estimates: Presented annually by the Finance Minister on Jestha 15.
Appropriation Act: Authorizes expenditures.
Supplementary Estimates: For additional or new expenditures.
Advance Expenditure: Up to one-third of estimates during bill consideration.
Supplementary Expenditure: For special circumstances.
Federal Contingency Fund: For emergency expenditures.
Financial Procedures Act: Financial Procedures and Fiscal Accountability Act, 2076 BS.

Scope of Financial Procedures

Objective-Based Scope

Fiscal and Economic Policy and Law: Provides framework for revenue mobilization, expenditure management, and economic administration.
Financial Accountability: Ensures accountability through planning, budgeting, appropriation, accounting, reporting, internal control, and auditing.
Financial Management: Manages consolidated funds, budget allocation, expenditure, accounting, reporting, internal control, auditing, and macroeconomic stability.

Entity-Based Scope

Central Level: Involves ministries and departments.
Operational Level: Involves offices, projects, or programs.

Geographical and Functional Scope

Internal Scope: Domestic revenue and borrowing.
External Scope: Foreign grants and loans.

Activity-Based Scope

Fiscal policy, law, budget, fund management, accounting, reporting, internal control, auditing, and manpower management.

Policy and Legal Scope

Constitutional provisions, guiding principles, Financial Procedures Act, Public Procurement Act, and related laws.

Organizational Scope

Parliament, judiciary, ministries, departments, offices, constitutional bodies, commissions, and secretariats.

Government Level-Based Scope

Federal, provincial, and local financial procedures.

Objectives of Financial Procedures

Manage fiscal and economic policies, laws, and plans.
Estimate, approve, and collect resources.
Manage budgeting: formulation, approval, implementation, monitoring, and evaluation.
Ensure parliamentary control.
Protect resources appropriately.
Manage public debt, grants, and expenditure: acquisition, use, accounting, reporting, internal control, auditing, and evaluation.
Operate and manage consolidated funds.
Maintain financial discipline and accountability.
Clear irregularities.
Enhance economy and effectiveness.
Manage cash flow.

Legal and Institutional Arrangements

Constitutional Provisions

Federal Financial Procedures (Part-10, Articles 115–125).
Provincial Financial Procedures (Part-16, Articles 203–213).
Local Financial Procedures (Part-19, Articles 228–230).
Division of State Powers (Article 57).
Exercise of Financial Powers (Article 59).
Revenue Sharing (Article 60).

Legal Provisions

Financial Procedures and Fiscal Accountability Act, 2076 BS, and Rules, 2077 BS.
Intergovernmental Fiscal Management Act, 2074 BS.
National Natural Resources and Fiscal Commission Act, 2074 BS.
Public Procurement Act, 2063 BS, and Rules, 2064 BS.
Travel Expense Rules, 2064 BS.
Local Level Planning Guidelines, 2078 BS.
Integrated Economic Indicators and Classification, 2074 BS.
Development Assistance Policy, 2071 BS.

Institutional Arrangements

Federal Parliament, Provincial Assemblies, Municipal/Rural Assemblies.
Public Accounts Committee.
National Natural Resources and Fiscal Commission.
Office of the Auditor General.
Commission for Investigation of Abuse of Authority.
Ministry of Finance and its departments/offices (Internal Revenue Department, Customs Department, Taxpayer Service Office).
Office of the Financial Comptroller General.
Provincial Financial Comptroller Offices.
Nepal Rastra Bank and banks handling government transactions.
Financial administration sections of all offices.

Systemic Arrangements

Fund Management: CGAS (Computerized Government Account System), SuTRA (Sub-National Treasury Regulatory Application).
Budget Management: LMBIS (Line Ministry Budgetary Information System), PLMBIS (Provincial).
Expenditure and Payment: TSA (Treasury Single Account), EFT (Electronic Fund Transfer).
Revenue: RMIS (Revenue Management Information System), SuTRA Revenue Module.
Customs: ASYCUDA, NECAS (Nepal Customs Automation System).
Public Asset Management: PAMS (Public Assets Management System).

Importance and Necessity of Financial Procedures

Regulates and systematizes government financial management.
Ensures government financial transactions adhere to legal boundaries, promoting limited government.
Ensures public interest in financial management and effective fund protection.
Establishes the foundation and process for budget management.
Prevents misuse and misappropriation in financial management.
Implements "No taxation without representation."
Promotes good governance in public resource management.
Ensures parliamentary control over financial management.
Strengthens government legitimacy and public trust.
Enhances predictability and accountability in economic activities.
Promotes economy and effectiveness in fund mobilization.
Maintains financial discipline in the public sector.
Systematizes financial transaction information management and dissemination.

Weaknesses in Nepal’s Financial Procedures

Lack of honest and effective implementation of existing legal provisions.
Insufficient policies, standards, and laws for shared powers under Article 59.
Weak governance hindering objective implementation.
Inability to fully integrate foreign aid into financial procedures.
Persistent arbitrary transfers and unjustified expenditures.
Year-end bulk expenditure and payment practices.
Inability to control corruption and irregularities (per CIAA and Transparency International reports).
Ineffective budget implementation leading to frozen funds.
Weak internal revenue mobilization and high revenue leakage.
Failure to replace resource allocation with outcome-based systems.
Continued reliance on foreign aid.
Inability to control non-budgetary expenditures.
Failure to reduce recurrent expenditure and increase capital expenditure.
Inability to establish timely expenditure of allocated budgets.
High loan share in budgets and failure to receive committed aid.

Suggestions for Improvement

Ensure effective implementation of existing legal provisions.
Urgently formulate necessary policies and standards for provinces and local levels.
Strengthen anti-corruption measures and promote good governance.
Implement reward-punishment systems to control arbitrary transfers and expenditures.
Integrate all foreign aid into financial procedures.
Enhance institutional capacity and performance for effective budget implementation.
Control revenue leakage and reduce dependency on foreign aid and loans.
Adopt zero-tolerance policies and effective plans to control corruption and impunity.
Enhance outcome-based expenditure systems to discourage year-end spending.
Restructure offices and tasks to reduce recurrent expenditure.
Implement development activities and payments from the start of the fiscal year.
Allocate resources to priority areas based on objective criteria.

Additional Materials

Financial Accountability

Financial accountability involves verifying whether government funds are spent as intended and ensuring stakeholders are answerable for their actions.

Financial Procedures and Fiscal Accountability Act, 2076 BS

Regulates fund management, budget formulation, appropriation, expenditure, accounting, reporting, internal control, auditing, and ensures responsible, transparent, result-oriented, and accountable financial systems across all government levels.

Operation and accounting of the federal consolidated fund by the Financial Comptroller General Office.
Defined processes for budget preparation, appropriation, expenditure, transfers, and control.
Mandatory mid-term expenditure framework.
Budget and program principles and priorities presented 15 days before the Appropriation Bill.
Defined responsibilities and procedures for budget implementation, monitoring, and evaluation.
Procedures for accounting, auditing, and irregularity clearance.

Financial Procedures and Fiscal Accountability Rules, 2077 BS

Regulates federal consolidated fund usage and procedures.
Defines accounting, budget formulation, and account operation procedures.
Establishes revenue deposit and accounting procedures.
Defines budget appropriation, expenditure, and control procedures.
Establishes budget and resource estimation committees and their responsibilities.
Defines responsibilities of various entities and officials.
Sets timelines and procedures for financial statements and reports.
Regulates internal control, auditing, and related matters.

Intergovernmental Fiscal Management Act, 2074 BS

Manages revenue rights, revenue sharing, grants, loans, budget management, public expenditure, and financial discipline across federal, provincial, and local levels.

Regulates revenue rights and sharing among government levels.
Defines procedures for grants, foreign aid, and domestic loans.
Manages public expenditure and revenue/expenditure estimates.
Ensures financial discipline through legal provisions.

Public Procurement Act, 2063 BS, and Rules, 2064 BS

Ensures open, transparent, objective, and reliable procurement processes, promoting competition, integrity, accountability, and cost-effectiveness for maximum returns on public expenditure.

2.1 Financial Procedures