Public Expenditure & Financial Accountability and Fiduciary Risk Reduction Action Plan

Implementation Period – March 2012 - July 2015

Government of Nepal

Ministry of Local Development

March 2012

Public Expenditure and Financial Accountability and Fiduciary Risk Reduction Action

Plan

Implementation Period:

March 2012-July 2015

Preparation Team:

Dinesh Kumar Thapaliya

Teertha Raj Dhakal

Dhan Bahadur Shrestha

Gopi K Khanal

Bruce Pollock

Raghu Shrestha

This Public Expenditure & Financial Accountability t and Fiduciary Risk Reduction Action

Plan is the product of Ministry of Local Development. The material in this publication is

copyright free.

Government of Nepal

Ministry of Local Development

Planning and Foreign Aid Coordination Division

Tel: 977-1-5536170

Fax: 977-1-5546280

Email: plandiv@mld.gov.np

Web: www.mld.gov.np

i

Foreword

Local governance is a set of institutions, mechanisms and processes through which citizens

can express their interests and needs, mediate differences, and exercise their rights and

obligations at local levels. Local governance includes not only the machinery of state but also

other actors and their interactions with local government institutions. Civil society

organizations, non-government organizations, local bodies, private sectors, international

community and government at the centre have important roles in local governance.

Local bodies are responsible for formulating and executing local policies in partnership with

other local governance actors. They have significant roles in bringing local actors together to

build a common vision of how to respond to concerns raised in a coordinated way. The

modus operandi of local bodies is largely shaped by the institutional mechanisms of public

governance. Among others, sound public financial management and effective mechanisms of

fiduciary governance are two important ingredients of local good governance. This public

expenditure and financial accountability and fiduciary risks reduction action plan is a

concrete and concerted measure to increase the value-for-money of local finance.

Fiduciary risk is the risk that local bodies‟ funds are not used for their intended purpose, do

not achieve value for money, do not produce expected results and are not properly accounted

for. Managing fiduciary risks is sine-qua-non to ensure downward accountability and to

deliver tangible results in local governance.

This plan provides a concrete framework of action for reducing fiduciary risks and for the

implementation of public financial management reform in local bodies.

I would like to thank all officers who devoted their time and energy to prepare this action

plan and also representatives of various development partners who provided their intellectual

supports to prepare the plan in this phase. This action plan is the single blueprint of Ministry

of Local Development to promote fiscal governance at local levels.

Shital Babu Regmee

Secretary

Ministry of Local Development

Lalitpur

ii

Abbreviations

APM All Party Mechanism

ASIP Annual Strategic Implementation Plan

CAC Citizens‟ Awareness Centre

CD Capacity Development

CIAA Commission for the Investigation of Abuse of Authority

DADP District Annual Development Plan

DDC District Development Committee

DDF District Development Fund

DP Development Partners

DSMC District Social Mobilization Committee

DTCO District Treasury Controller‟s Office

DTMP District Transportation Master Plan

EO Executive Officer

FAS Financial Administration Section

FCGO Financial Comptroller General Office

FRRAP Fiduciary Risk Reduction Action Plan

FRM Fiduciary Risk Management

GoN Government of Nepal

HRD Human Resources Development

LB Local Body (refers to all levels of local government)

LBFC Local Bodies Fiscal Commission

LBSS Local Bodies Support Section

LDO Local Development Officer

LGAF Local Governance Accountability Facility

LGCDP Local Governance and Community Development Programme

LSGA Local Self-Governance Act

MADP Municipal Annual Development Plan

M&E Monitoring and Evaluation

MDAC Ministerial Development Action Committee

MDF Municipal Development Fund

MES Monitoring and Evaluation Section

MLD Ministry of Local Development

NGO Non-Governmental Organization

NPC National Planning Commission

NVC National Vigilance Centre

OAG Office of the Auditor General

PEFA Public Expenditure and Financial Accountability

PETS Public Expenditure Tracking Survey

PFMA Public Financial Management and Accountability

PFM Public Financial Management

PPMO Public Procurement Monitoring Office

RF Results Framework

STA Single Treasury Account

SWAp Sector Wide Approach

UG User Group

VADP Village Annual Development Plan

WCF Ward Citizen Forum

VDC Village Development Committee

VDF Village Development Fund

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Table of Contents

Foreword .......................................................................................................................... i

Abbreviations .................................................................................................................. ii

1. Preliminary ................................................................................................................. 1

1. 1. Implementation and Monitoring Responsibility ............................................................................................. 1

1.1.1 Overall Management ................................................................................................................................................. 1

1.1.2 PEFA and FRRAP Implementation Unit in MLD ........................................................................................... 1

1.2.3 PEFA and FRRAP Coordination Unit in Districts .......................................................................................... 1

1.2 Revision History ........................................................................................................................................................ 2

1.3 Statutory Documents for Local Bodies ................................................................................................................ 2

1.4 Reference Documents ................................................................................................................................................ 3

2. Introduction to the Plan .............................................................................................. 4

2.1 Purpose of the Plan ..................................................................................................................................................... 4

2.2 Public Financial Management ................................................................................................................................. 4

2.2.1. Objectives ....................................................................................................................................................................... 4

2.2.2 Strategies ........................................................................................................................................................................ 5

2.3 Expected Results ....................................................................................................................................................... 5

2.4 Fiduciary Risks Reduction ....................................................................................................................................... 6

2.5 Scope ............................................................................................................................................................................... 7

2.5 Key Stakeholders and Institutional Relationships ............................................................................................ 8

2.6 Coordination Management ....................................................................................................................................... 9

2.7 Plan Management Control ........................................................................................................................................ 9

3. Action Plan ............................................................................................................... 10

3.1 PFM cycle and Key Fiduciary Risks Areas ..................................................................................................... 10

3.2 Fiduciary Risks Rating Matrix for Local Bodies ........................................................................................... 10

3.3 Fiduciary Risks at Local Bodies .......................................................................................................................... 11

3.4 Risk Management Plan and Management Tasks ............................................................................................ 14

4. Tasks Management Plan for Key Activities ............................................................... 17

4.1 Task 1 – Planning, Programming and Budgeting ...................................................................................... 17

4.2 Task 2 – Funds Flow............................................................................................................................................ 19

4.3 Task 3 – Implementation including Procurement Management ........................................................ 20

4.4 Task 4 – Internal Accountability ...................................................................................................................... 23

4.5 Task 5 – Auditing and Monitoring and Evaluation ................................................................................... 25

4.6 Task 6 – Revenue Management ........................................................................................................................ 27

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Lists of Tables

Table 1 Revision of History............................................................................................................................... 2

Table 2 Statutory Documents for LBs ............................................................................................................. 2

Table 3 Reference Documents ......................................................................................................................... 3

Table 4 Key Stakeholders ................................................................................................................................ 8

Table 5 Coordination Management ............................................................................................................... 9

Table 6 Plan Management Control .............................................................................................................. 9

Table 7 Risks Rating Table for Local Bodies ............................................................................................... 10

Table 8 Risks Areas and Intensity of Fiduciary Risks .................................................................................. 12

Table 9 Risk Management Tasks ....................................................................................................................14

Annexes

Annex 1: Glossary ................................................................................................................................................ 28

Annex 2: Implementation Schedule .................................................................................................................. 31

Annex 3: Risks Assessment Matrix -Planning and Programming.................................................................. 32

Annex 4: Risks Assessment Matrix- Budget Release and Fund Flow ............................................................ 33

Annex 5: Risks Assessment Matrix -Implementation including Procurement Management ..................... 33

Annex 6: Risks Assessment Matrix -Internal Check and Control .................................................................. 35

Annex 7: Risks Assessment Matrix: Auditing and Monitoring and Evaluation ........................................... 35

Annex 8: Risk’s Assessment Matrix-Internal Revenue Management ............................................................ 37

Annex 9: PFM and Fiduciary Risks Assessment Questionnaires for DDC ................................................... 38

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1. Preliminary

1. 1. Implementation and Monitoring Responsibility

1.1.1 Overall Management

The Ministry of Local Development (MLD) is accountable and responsible for implementing

and monitoring this Public Expenditure and Financial Accountability and Fiduciary Risks

Reduction Action Plan (PEFA-FRRAP). The Ministry will execute this action plan through the

local bodies. The Joint Secretary of the Planning and Foreign Aid Coordination Division in

MLD will coordinate with the stakeholders to execute this plan. At the local level, Local

Development Officers of DDCs, Executive Officers of Municipalities and VDC Secretaries will

be responsible for upholding the provisions of the plan. The Section Chief of MLD‟s Monitoring

and Evaluation Section will track the progress being made in implementing the action plan and

for reporting to the concerned stakeholders as the focal point for the management of the plan.

1.1.2 PEFA and FRRAP Implementation Unit in MLD

The following committees in MLD will assist the Planning and Foreign Aid Coordination

Division in the implementation of PEFA-FRRAP.

Joint Secretary, Planning and Foreign Aid Coordination Division Coordinator

Chief, Planning and Foreign Aid Coordination Section Member

Chief, Monitoring and Evaluation Section Member

Chief, Internal Management and HRD Section Member

Chief, Financial Administration Section Member-Secretary

1.2.3 PEFA and FRRAP Coordination Unit in Districts

The following committee will assist the Local Development Officers, VDC Secretaries and

Executive Officers in implementing the PEFA-FRRAP in local bodies.

Chief, District Treasury Office Coordinator

Planning Monitoring and Administrative Officer Member

Representative, District Administrative Office Member

Chief, District Technical Office Member

Chief, Financial Administration Section of DDC Member-secretary

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1.2 Revision History

This action plan will come into effect in March 2012. The Section Chief of the Monitoring and

Evaluation (M&E) Section in MLD will be the contact person for providing clarifications

regarding the provisions of this plan. The revision history of this plan is presented in Table 1.

Any clarification on the authenticity of the document will be obtained from the M&E section.

Table 1 Revision of History

Revision No Revision Date Version Author

1 1 Nov. 2011 Initial draft MLD

2 26 Nov. 2011 Final draft version MLD

3 6 Jan 2012 Revised draft from comments received MLD

4 8 February, 2012 Refine version submitted to MLD for approval NACS, LGCDP

5 23 February, 2012 Revised draft MLD

6 11 March, 2012 Final Draft MLD

7 -- March 2012 Approval of the plan MLD

1.3 Statutory Documents for Local Bodies

This plan is not intended to override any Government of Nepal‟s statutory provisions related to

the public financial management and fiduciary risks reduction of local governance. This plan

prioritizes the key focus areas of public financial management and fiduciary governance that is

targeted mainly at local bodies. The following laws, guidelines and policies of the Government

of Nepal are the key documents that apply to the overall management of local public finance and

fiscal governance. Table 2 lists the key legal documents and policy instruments applicable to

local bodies in this regard.

Table 2 Statutory Documents for LBs

Document Name and Date Author

Civil Service Act 2049 Second Amendment 2064 Nepal Law Books Society

Local Bodies Resource Management Guideline 2011 Ministry of Local Development

Civil Service Regulation2050, Second Amendment 2064 Nepal Law Book Society

Local Bodies Financial Administration Regulation 2064 Nepal Law Books Society

Good Governance (Management and Operation) Act 2064 and Regulation Nepal Law Book Society

Procurement Act 2063 and its regulation Nepal Law Book Society

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Document Name and Date Author

Local Self-Governance Act 2055 Nepal Laws Book Society

Local Self -Governance Regulation, 2056 Nepal Laws Book Society

Government Business Rule Office of Prime minister

1.4 Reference Documents

This plan is based on a wide range of studies and reports on local governance in Nepal that deals

with the issues of public financial management and fiduciary risks. The following documents

were used as sources of information for identifying the requirements addressed by this plan.

Table 3 Reference Documents

Document Name and Date Author

Auditor General Report on - 2011 Auditor General of Nepal

PEFA LG18 September 2006 World Bank

Fiduciary Risks and LGCDP Funding Arrangement January 2011 Nordic Consulting Group

LGCDP Programme Document 2008 Ministry of Local Development

LGCDP Mid-Term Review 2010 Ministry of Local Development

PETS Study, 1 November 2011 Adam Smith International

Assessment of fiduciary risks in Local Bodies and PEFA in Nepal, 2009 NAREC Nepal,

Performance Audit of LGCDP, 2011 OAGN

Gender Equality and Social Inclusion Guidelines 2010 Ministry of Local Development

Social Mobilization Guidelines 2010 Ministry of Local Development

Nepal Governance Risks Assessment Report 2009 Asian Development Bank

Public Audit, Social Audit, Public Hearing Guidelines 2068 MLD

Nepal Public Expenditure and Financial Accountability Report PEFA Secretariat

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2. Introduction to the Plan

This PEFA-FRRAP integrates the many PFM and related fiduciary risks into a comprehensive

action plan. The action plan includes the tasks, priorities, timings, resource estimates,

responsibilities, management controls, reporting procedures, as well as risks to the plan itself.

2.1 Purpose of the Plan

The purpose of the PEFA-FRRAP is to identify the tasks and activities involved in addressing

essential public financial management reform initiatives and in mitigating and minimising the

fiduciary risks associated with local bodies‟ operations. This plan is a continuation of the on-

going reform of local governance and development embarked upon by the MLD with the

support of Local Governance and Community Development Programme (LGCDP). This plan

brings together the key PFM and fiduciary risks reduction measures set out in the block grant

manual, the laws related to local bodies, the manual on Minimum Conditions and Performance

Measures (MCPM) for local bodies and the Annual Strategic Implementation Plan of the

Ministry.

The purpose of this plan is to devise concrete and concerted measures for addressing the issues

and concerns related to public financial management, including public expenditure and fiduciary

risks in local governance in general and in local bodies in particular. This plan is not meant to be

a substitute for all the on-going reform of local governance. Rather, it aims to complement the

GoN‟s initiatives to institute local good governance through improvements in the economy,

efficiency and effectiveness in the management of scarce public resources by local bodies.

2.2 Public Financial Management

A public financial management system is defined here as the systems and processes of planning,

budgeting and implementation, including procurement management, accounting, reporting and

auditing of public funds related to both expenditures and revenues with the aim of improving the

delivery of public services at the local level. The focus of PFM is not only on the technical

processes involved in allocating and managing scarce resources, but also on the roles,

responsibilities, institutional incentives and information required for making the best use of

those resources.

2.2.1. Objectives

The main objective of the PEFA-FRRAP is to strengthen public financial management, reduce

fiduciary risks and to improve the transparency and accountability of public expenditures. Its

specific objectives are as follows:

Maintaining fiscal discipline: Fiscal discipline means having clear targets for public

expenditure and ensuring that these targets are maintained during budget execution. A lack of

fiscal discipline increases the likelihood of unplanned expenditures, which can erode the

achievement of value-for-money. Fiscal discipline demands realistic revenue and expenditure

projections, which in turn require that the organizational capacities and systems are in place for

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setting clear revenue and expenditure targets and for accurately predicting intergovernmental

fiscal transfers. Fiscal discipline also demands that a robust control mechanism is in place for

maintaining expenditure levels within the limits set out in annual plans.

Allocation of resources in strategic priorities: The strategic allocation of scarce resources in

yearly development plans is another key objective of PFM. The underlying principle of local

finance is to address local policy preferences through annual budgetary allocations. Local

budgets should be financial mirrors that reflect the common choices of local citizens. The

periodic plans of local bodies will set the sectoral directions for yearly development plans.

These strategic directions will differ from place to place and from context to context. During

pre-planning workshops, DDCs formulate the broader guidelines for the strategic allocation of

development resources. The prioritization of activities is crucial to the prioritization of local

preferences based on participatory planning processes.

Ensuring value-for-money: Value-for-money is ensured when local bodies are able to provide

cost-effective services to local citizens in an accountable manner. Value-for-money also requires

the provision of inclusive and responsive services to local people. The principles of efficiency,

effectiveness and equity are the fundamental objectives of sound public financial management.

2.2.2 Strategies

The strategies required to meet the objectives of PEFA-FRRAP are to strengthen participatory

planning processes; improve accounting and reporting systems; promote transparency; enhance

capacity; mitigate perceived risks; and strengthen civic oversight to ensure downward

accountability in local bodies. The PEFA-FRRAP will mainly be executed through local bodies.

2.3 Expected Results

The PEFA-FRRAP has six outcomes, which have been broken down into twenty outputs aimed

at achieving immediate results through the implementation of related activities. The expected

outcomes and outputs of the PEFA-FRRAP are given below:

Outcome 1: Improved planning, programming and budgeting

Output 1.1: Strengthened participatory planning processes

Output 1.2: Institutionally reformed VDCs

Output 1.3: Performance based grants for VDCs introduced

Output 1.4: Refined MCPM manual in use

Outcome 2: Improved funds flow

Output 2.1: Budget released to local bodies on time

Output 2.2: Improved transparency in social security payments

Outcome 3: Improved implementation

Output 3.1: LBs‟ procurement processes reformed

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Output 3.2: Strengthened user groups‟ management and improved accountability

Output 3.3: Capacity development plans operationalized (continue with capacity

development activities)

Output 3.4: Improved rural road (and other projects) design & construction

Outcome 4: Improved internal accountability

Output 4.1: Institutionalized results based management at local bodies

Output 4.2: Decision makers and officials made more accountable

Output 4.3: Strengthened accounting system of local bodies

Output 4.4: Strengthened civic oversight

Output 4.5: Improved transparency in local governance

Outcome 5: Improved auditing and monitoring &evaluation

Output 5.1: MLD‟s oversight mechanism strengthened

Output 5.2: Auditing system of local bodies strengthened

Output 5.3: Improved upward reporting system

Output 5.4: Strengthened monitoring of NGOs

Output 5.5 Management audits of selected local bodies carried on

Outcome 6: Improved revenue management

Output 6.1: Strengthened revenue management capacity of local bodies

2.4 Fiduciary Risks Reduction

A risk is probability of an unintended occurrence causing a negative result. Fiduciary risk is the

risk that funds will not be used for their intended purposes, will not achieve value-for-money

and/or will not be properly accounted for. The realization of fiduciary risk can be caused by

variety of factors, including weak control systems, inadequate organizational capacities, staff

incompetence, bureaucratic inefficiency or corruption. Fiduciary risks can result from poor

governance, weak capacities or the lack of an enabling public environment. Any circumstance or

situation that prevents local bodies from managing the funds in their care in an economic,

efficient, effective and equitable manner invites fiduciary risks. Fiduciary risks are the

combination of both process risks and result risks.

Managing fiduciary risks includes understanding: (i) the fiduciary risk environment; (ii) the

appropriate processes for mitigating the risks associated with the proper use of funds; and

(iii) the procedures for monitoring performance on an on-going basis. Fiduciary risks can have

both macro and micro level causes. The FRRAP recognizes that both types influences local

body financial management. From a mitigation perspective, FRRAP tries to balance potential

benefits of selected actions with the various options, priorities and circumstances of local body

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operating environments. From a monitoring perspective, the FRRAP seeks to proactively

manage fiduciary risks as well to be better positioned to spot new or changing risks.

The aim of public expenditure financial accountability is to strengthen the financial management

and accountability functions of government. It is a tool or process for conducting assessments of

the public financial management system. It consists of prioritized actions centred on a set of

mutually supportive measures that are feasible, realistic and sustainable and that can generate

substantial improvements in PFM performance on a year over year basis.

2.5 Scope

Pubic financial management, in its broadest sense, links public resources with citizens‟ choices.

A PFM system should focus on strengthening the accountability of a government‟s financial

performance to its citizens. PFM is a system through which financial resources are planned,

directed and controlled in order to enable and influence the efficient and effective delivery of

public service objectives. The scope of PFM includes not only the downstream PFM activities

of resource mobilization, programme prioritization, budget execution and control, accounting,

auditing, reporting, monitoring and evaluation, but also effectiveness of all of these processes in

improving the well-being citizens through inclusive service delivery.

As such this document, which integrates both PFM & FRRAP, takes into account: (i) the needs

and observations of the Office of the Auditor General of Nepal (OAGN); (ii) relevant PFM

documents such as those produced in periodic PEFA exercises; (iii) the Public Expenditure

Tracking System (PETS) study; (iv) GoN fiduciary risk reviews; (v) internal audit reports; and

(vi) mid-term programme reviews. The primary purpose of this action plan is to reform LB

public financial management in order to reduce fiduciary risks at the local level. Thus, this

action plan‟s scope includes:

1) Local Finance: This includes the generation, management and expenditure all of the

funds in District Development Fund (DDFs), Municipal Development Funds (MDFs)

and Village Development Funds (VDF). These funds consist of locally sourced

revenues, all types of inter-governmental fiscal transfers including revenues from cost

sharing arrangements, funds received directly from development partners, inter-local

governmental transfers and any other funds managed by local bodies.

2) PFM Process: The action plan covers all the PFM processes like planning, budgeting,

making payments, accounting auditing, reporting, monitoring, and evaluating used in the

management of public finance including local body audit compliance.

3) Programme Management: This action covers all aspects of programme management

whether they relate to programme activities funded by Development Partners, by the

GoN or from locally generated revenue sources. In short, the scope of this action plan

encompasses:

1. Funds received by DDFs, VDFs, and MDFs;

2. Public financial management processes in LBs; and

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3. All donor funded programmes implemented under MLD in the districts.

In general, the scope of the PEFA-FRRAP excludes:

1. Devolved sectors‟ budget in the DDCs

2. The action of constitutional bodies related to LBs;

3. The macro PFM risks which are beyond the control of LBs; and

4. The funds directly provided to local NGOs by donors.

Although these areas are not strictly included under the plan, it is desirable that they also follow

PFM norms and processes.

2.5 Key Stakeholders and Institutional Relationships

The key stakeholders and institutional relationships related to the PFM & FRRAP are noted

below. At central level, the relationships already established between MLD and agencies such as

the Commission for the Investigation of Abuse of Authority (CIAA), the OAGN, the Financial

Controllers General‟s Office (FCGO), the National Planning Commission (NPC) and the Central

Vigilance Centre (CVC) will continue to be enhanced in order to provide policy guidance and

sanctions where required. LBs at both district and tertiary levels are clearly major stakeholders

in the FRRAP and are involved in all five of its main components. Civil society also has a key

role to play in managing fiduciary risk where the media, local civil society organizations, NGOs

and development partners can all provide oversight over local body actions with the objectives

of improving local body transparency and reducing local body fiduciary risk.

Table 4 Key Stakeholders

Name Key Role

Office of the Prime Minister and Council of Ministers Supervision

National Planning Commission Monitoring

Office of Auditor General Final Audit

Commission of Investigation of Abuse of Authority Corruption control

Financial Comptroller General Office Fund flow

National Vigilance Centre Prevention of corruption

Public Accounts Committee Parliamentary Oversight

Ministry of Local Development Implementation, monitoring and capacity building

Development Partners Funding & monitoring

Local Bodies‟ Associations Advocacy

Local Bodies Implementation

Civil Society Civic oversight

PEFA Secretariat Coordination

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2.6 Coordination Management

The following table is a schedule for meetings, reviews, and reporting required implementing

this action plan. This document will be circulated to all relevant stakeholders and also be placed

on MLD's website.

Table 5 Coordination Management

Stakeholder Method of Communication Frequency of Communication

Monitoring &Supervision Unit Formal meeting Monthly

Good Governance Unit,1 MLD Formal Meeting Bi-Monthly

Joint MLD-DP2 Meeting Presentation on Status Trimester

Planning and Foreign Aid Coordination Division Informal Meeting Monthly

Media at Centre and District Level Media Briefing Trimester

2.7 Plan Management Control

Controlling quality in the execution of this plan will involve the following control function:

version control, quality control, progress control, and operational control. The head of MLD‟s

Planning and Foreign Aid Coordination Division will oversee the overall quality of the results

being achieved through plan implementation. The progress made in implementing the plan will

be tracked and monitored by Section Chief of MLD‟s Monitoring and Evaluation Section

(MES). No changes or revision to the plan will be made without the approval of the Secretary

MLD. The Section Chief of the MES who will operate under the overall guidance of his

immediate superior will handle operational issues and enquiries related to this plan. Table 6

presents the plan‟s management control responsibilities.

Table 6 Plan Management Control

Control Name Responsibility

Version Control Secretary

Quality Control Joint Secretary: Planning and Foreign Aid Coordination Division

Progress Control Under Secretary: Monitoring and Evaluation Section

Operational Control Section Officer: Monitoring and Evaluation Section

1 Good Governance Units were established in many Ministries in 2006 by a Directive from the CIAA. In MLD the

unit is chaired by the Secretary and comprises joint secretary of General Administration Division and relevant under-secretaries as members.

2 This will also include DPs that are funding other MLD programmes as well as LGCDP’s DPs.

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3. Action Plan

3.1 PFM cycle and Key Fiduciary Risks Areas

Fiduciary risks manifest themselves in the management of programming inputs, institutional

processes and results achievement. A fundamental characteristic of the public sector is that it

has to produce its required results without compromising due process of law. In this context,

both process risks – the risk of failing to achieve an expected result while complying with the

rules - and results risks – risk of failing to improve the livelihood and wellbeing of people - are

equally important. Managing fiscal resources efficiently, effectively and equitably are the

hallmarks of good local governance. The following are the key areas requiring fiduciary risk

reduction reform at the local level:

1. Planning, programming and budgeting;

2. Funds flow, including budget release

3. Implementation, including procurement management;

4. Internal accountability;

5. External auditing, reporting and monitoring and evaluation; and

6. Revenue management.

Crosscutting all of these areas are institutional issues such as human resource capacity.

3.2 Fiduciary Risks Rating Matrix for Local Bodies

The local body system in Nepal is made up of 75 DDCs, 58 Municipalities and 3,915 VDCs.

This action plan ranks the risks associated with local body fiduciary risk on a three-point scale:

high, medium and low. For the purpose of this plan risk these levels of risk are defined as

follows:

Table 7 Risks Rating Table for Local Bodies

Risk Rating Detail

L Low risk - Represents a situation where there is basic compliance with existing rules

of LBs of Nepal, although coverage may not be 100%

M Medium Risk - Indicates there are some significant weaknesses in compliance or that

procedures need to be changed

H High Risk - Indicates substantial failure to comply or that the system will require

substantial upgrading to meet the standard

The rating of risks will be done by MLD using inputs from other actors with activities being

rated for: (i) process related risks – the extent to which the conceptualization, design and

implementation of a programme is relevant to its expected results; (ii) results related risks –

the extent to which expected programme outputs, outcomes and impacts are being achieved; and

(iii) corruption related risks – the extent to which corruption can be identified.

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3.3 Fiduciary Risks at Local Bodies

Fiduciary risks in local bodies have been classified into process, results and corruption related

risks depending on the nature and level of the activity. One of main risks associated with local

body performance is that there are many instances where local bodies bypassed the due process

of law. In such cases, there is a mismatch between authority and responsibility. Compliance

with due process of law is crucial, not only for ensuring compliance with legal provisions but

also for institutionalising justice and fairness. Corruption occurs when the compliance rate is

low. Results risks are entrenched in public governance for lack of result framework. The

traditional approach to measure the success of a government programme in terms of the level of

spending is major factor behind the high incidence of results risks. Corruption is related to both

process and results risks.

Corruption is prevalent in local governance because the level of perceived risks is very low.

The basic presumption here is that any development interventions and its activities financed

with public fund lies on an input-process-output-outcome-impact continuum. Based on the

findings of a number of external reviews of various aspects of LGCDP‟s performance and on the

findings of MLD‟s own internal monitoring and evaluation system, a number of risks to MLD

performance have been identified and are set out in Table 8 below. The main documents used to

identify these risks were the PETS study, the OAGN Performance Report on LGCDP and

LGCDP‟s Mid-Term Review.

Figure 1: Component of Fiduciary Risks

Process Risk Corruption Risk Fiduciary

Risk

Result Risk

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Table 8 Risks Areas and Intensity of Fiduciary Risks

Source of Risks Causes Risk Rating Implications

1. Planning, programming and budgeting

1. Non-compliance with

participatory planning

processes: -

Unallocated budget

Prioritization issues

LBs‟ capacity constraints

Benefits not appreciated by

local decision makers.

Manipulation of priority setting

processes by vested interests

Process -H

Results - M

Corrup‟n -M

Most needy recipients not

benefitting from inclusive

planning

Priority investments not

identified

2. Diversion of resources to

rural road projects and other

distributive types of projects

Failure to enforce standards and

norms set for rural roads

Lack of transparency

Ad hoc allocation of budget in

non-significant projects

Process -H

Results - M

Corrup‟n -H

Resource constraints for

other key sectors

Leakages of the public

fund

Negative environmental

impact

3. Abuse of authority in local

development decision

making

No clear definition of political

and administrative

accountability

Political interference in users‟

committees

Code of conduct of decision

makers in LBs

Process - H

Results - H

Corrup‟n- H

Neglect of the most needy

beneficiaries

Focus on large contracts

User groups not perceived

as beneficiaries

4. Poor design & budgeting of

projects

Limited technical capacity at

local level to design projects.

Norms and standards not

updated to reflect current costs

Process -M

Results - H

Corrup‟n –M

Poor quality of project

design and construction

Sustainability issues

2 Funds flow

5. Delay in budget release

from the central level & in

funding from DTCO to

projects

Late approval of budget &

delay in providing authority

Uncertainty of resources on

donor funded programmes

Late fund release by DTCOs

Poor upwards reporting

Planning constrained by

financial rules

Process - L

Results - M

Corrup‟n – M

Delays and poor quality in

project implementation

due to need to complete

expenditure before the

end of the financial year.

6. Payments of social security

allowances

Lack of MIS

Lack of security marked

certificates

Process - H

Results - M

Corrup‟n- H

Increase hardship for the

poor

High administrative

costs

3 Implementation including procurement management

7. Weak procurement

including insufficient

technical backstopping

Inadequate procurement plans

Budgets and specifications

not aligned with actual needs

Collusion among contractors

Technical capacity at local

level (LB & UG)

Process - H

Results - H

Corrup‟n - H

Delays in project

implementation

Low quality results

Inefficient use of funds

8. Weak Performance

Management of executive

staff in LBs.

Non-compliance of Civil

Service Act and LSGA /R

administrative provisions

Processes prioritised over

results

Weak performance based

incentive structure

Process - L

Results - H

Corrup‟n - L

Delay in project

implementation

Negative impact on result

achievements

Weak accountability for

poor performance

13

Source of Risks Causes Risk Rating Implications

4.Internal checks and control as well as accounting & reporting

9. Weak accounting, VDCs lack accountants

Process - H

Results - L

Corrup‟n - H

Misuse of funds

10. Poor reporting Absence of simple reporting

systems

Process - H

Results - L

Corrup‟n - H

Weak financial reporting

accountability

11. Poor internal control Internal audit systems

Process - H

Results - L

Corrup‟n - H

Misuse of funds

5 Auditing, external scrutiny and M&E

12. Weak oversight from the

central and civil society and

credibility issues of audit

system

Inadequate M&E

Poor enforcement of audit

recommendations

Coordination among

oversight bodies & LBs

Lack of awareness of the

roles of UGs & WCFs

Low perceived risk among

local decision makers for

misusing funds

Process - M

Results - H

Corrup‟n- H

Poor results

Increased indiscipline in

governance

Centre-local

coordination

Poor public perception

of LBs

6 Internal revenue management

13. Inadequate local financial

resource mobilisation

Limited revenue assignment

Weak LBs‟ absorptive

capacity – inability to spend

GoN grants, reduced

motivation to generate own-

source revenue

Poor data on revenue sources

Lack of hard budget

constraints

Process - H

Results - H

Corrup‟n- M

Dependence on central

grants

Insufficient local

resources for planned

implementation

14. Poor revenue management

at local level

Dependency on central revenue

due to low level of local

resource generations.

Capacity constraints in local

revenue mobilization at LBs

Lack of ownership regarding

revenue use

Weak capacity to mobilize

revenue

Poor accounting / reporting

Lack of standardized process for

collection and allocation

Process - L

Results - M

Corrup‟n - M

Budgets not aligned or

prioritised to match

revenue

Difficulties in projecting

revenue, planning and

fund flow

14

3.4 Risk Management Plan and Management Tasks

Management of risk is an integral part of good project management. Learning how to manage

risks effectively enables public sector managers to improve programme outcomes by identifying

and analysing a wider range of issues and taking a systematic approach to making informed

decisions. A structured approach to risk management also enhances and encourages the

identification of opportunities for continuous improvement in organizational performance

through innovation. The risk management process requires consideration of the context followed

by the identification, analysis, evaluation and treatment of risks. Risk management (as annexed)

is an iterative process of continuous improvement that needs to be embedded in existing

practices or business processes. Risks management matrices are set out in Annexes 3 to 8.

Table 9 below presents the list of tasks identified to minimise and mitigate the sources of risks

contained in Table 8 above. They were identified by the core group that prepared this FRRAP.

Each task is broken down into a series of mitigation measures that are actions to be taken to

achieve the goal of each task. Section 4 contains details of each task, including deadlines,

responsibilities and milestones for each.

Some parts of these tasks are already being addressed by LGCDP, while other tasks, particularly

those proposed for the longer term, are new proposals that may also require resources.

Table 9 Risk Management Tasks

Task Addresses

Risk Priority

Risk Area 1 - Planning, programming and budgeting

1. Strengthen participatory planning process by July 2013

Objective: To ensure LBs‟ annual planning process is fully participatory

Benefits: Democratization of local development through the participation of citizens and

ensuring targeting of disadvantaged groups

1 M

2. Institutional reform of VDCs by July 2015

Objective: To create effective VDCs by ensuring adequate staffing

Benefits: VDCs better able to respond to demands for improved services

7 M

3. Introduce performance based grants for VDCs by July 2015

Objective: To introduce Minimum Conditions for VDCs

Benefits: Improvement of VDCs‟ governance, operations & service delivery

1, 7 & 8 M

4. Refine MCPM manual

Objective: To update indicators to reflect performance improvements and link the

MCPMs more closely to fiduciary risk

Benefits: Improved application of MCPMs

1, 7 & 8 M

Risk Area 2 - Funds’ flow

5. Ensure timely budget release from FCGO & from DTCOs to LBs

Objective: To allow LBs to spend according to their plans

Benefits: More timely project completion with better quality

5 M

6. Maintaining transparency in social security allowance

Objective: To maintain transparency in social security

6 L

15

Task Addresses

Risk Priority

Risk Area 3 - Implementation including procurement management

7. Reform of Procurement Management by July 2013

Objective: Strict adherence to the procurement plans

Benefit: Fiduciary risks within procurement will be reduced

7 H

8. Strengthen User Group management and accountability by July 2014

Objective: To improve the effectiveness of UGs in project implementation

Benefits: Reduction in fiduciary risks in UGs with improved service delivery

4 & 12 H

9. Continue capacity development of local bodies by July 2015

Objective: Build individual and institutional capacity of local civil servants

Benefits: Local staff will be equipped with necessary skills and knowledge to deliver

services to the people

4,7,8 & 14 M

10. Improve rural road and distributive type of projects‟ design & construction by July 2013

Objective: Compliance of technical and environmental norms for the design and

construction of rural roads and other major projects

Benefits: Construction of environmentally friendly and sustainable projects

2 & 4 L

Risk Area 4 - Internal accountability

11. Introduce Results Based Management in LBs by July 2015

Objective: To transform process oriented LBs to results-oriented institutions

Benefits: results-based organizational culture will be established

3 & 8 M

12. Improve accountability of local decision makers 3 M

13. Strengthening LBs‟ accounting systems by July 2015

Objective: To establish credible accounting system at local bodies

Benefits: Ensuring LBs‟ financial accountability and transparency

9 H

14. Improving civic oversight in local governance by July 2015

Objective: To strengthen civic oversight to ensure downward accountability

Benefits: More responsive LBs and reduced fiduciary risks

12 & 1 M

15. Promoting transparency in local governance by July 2013

Objective: To ensure that LBs‟ decisions are known and reflect agreed priorities

Benefits: Ensuring downward accountability of LBs

13 & 1 H

Risk Area 5 - Auditing and M&E

16. Increase oversight from MLD – by July 2014

Aim: To strengthen monitoring and increase the perceived risks at local level

Benefits: Reduction in fiduciary risk

12 M

17. Strengthening Auditing System of LBs by July 2013

Objective: To increase value for money by ensuring financial accountability through

credible auditing

Benefits: Reduction in fiduciary risks at local level

9 H

18. Improve upward reporting system by July 2015

Objective: Improve the accuracy and timeliness of LBs‟ upward reporting

Benefits: Provide improved information on financial and physical progress

9, 5 H

19. Strengthen monitoring of NGOs by July 2014

Objective: To reduce fiduciary risks in NGOs –executed programs

Benefits: Better NGO programmes that are integrated with LBs participatory plans

12 L

20. Management Audit of Local Bodies

Objective: To make LB management functional

11 L

Risk Area 6 - Management of internal revenue

21. Strengthening revenue mobilization capacity of Local Bodies by July 2015 Objective:

To increase revenue generating capacity of local bodies and to reduce fiduciary risks

associated with revenue generation

14 L

17

4. Tasks Management Plan for Key Activities

4.1 Task 1 – Planning, Programming and Budgeting

Outcome/Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 1: Improved planning, programming and budgeting 1. Output 1.1

Strengthening

participatory

planning process

by incorporating it

in LB Resource

Manual

Responsible

For DDCs: LBSS

For VDCs: LBSS

For Muns: MMS

1) Amend LBs‟ Resource Mobilization

Guidelines

2) Provide orientation to LBs officials including

VDC secretaries and other local stakeholders

3) Enforce 35 % earmarking from unconditional

capital expenditure pool of LBs to women

children and disadvantage groups

4) Introduce & institutionalize

DDC/Municipality planning guidelines 2068

5) Strengthen capacity of Integrated Planning

Committee of VDCs and municipalities

6) LBs will address the demand of most

vulnerable and extreme poor communities

residing in geographically most remote areas

through yearly development plan

1) Dec 2012

2) Jan 2013

3) Jul 2013

4) Jul 2013

5) Jul 2013

1. At least 1/3 of projects in annual

plans must come through WCFs in

all VDCs and all Socially-mobilized

municipalities

2. At least 2/3 of the projects in

District annual plans must come

through Ilaka-level workshop

3. All projects in annual plans must be

recommended by IPC

4. All projects other than disaster

related (decided by District Disaster

Committees) reflected in council

approved annual plans

5. All LBs spend budgets on women,

children, and disadvantaged

communities as per the provision

Spot inspections of

Annual Plan by MoLD

and CCUs (5 DDCs, 5

Municipalities, 75 VDCs-

one VDC per district on

sample basis)

Sanctions: Reduce by

65% GoN unconditional

capital grant in case of

non-compliance

2. Output 1.2

Institutional

reform of VDCs

Responsible: DWPIS

1) Classify VDCs into 4 categories based on their

level of development and potential own source

revenue

2) Develop an organogram for each category of

VDCs and depute staff with clear-cut job

descriptions.

3) Depute and retain VDC Secretary in each VDC

and operationalize the VDC Office in its

location

1) Jul 2013

2) Jul 2013

3) Jul 2013

1. LSGR amended and VDCs

classified

2. VDCs‟ organogram and job-

descriptions of VDCs staffs prepared

3. Orientation to VDC secretaries on

their roles and responsibilities

4. All VDCs with minimum level of

staff and having their own building

5. At most one VDC Secretary in

charge of no more than two VDCs

DWPIS will monitor at

least one district of each

development region on

trimester basis to track the

progress

[Cooperation from

MoGA, MoF and PSC

required]

18

Outcome/Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 1: Improved planning, programming and budgeting 3. Output 1.3

Performance

based grants for

VDCs

Responsible:

LBFC Secretariat

1) Introduce MCs in GoN block grant to VDCs

2) Refine VDCs‟ MC manual to include PMs

3) Pilot VDC MCPM manual in 5 VDCs of each

development region

1) Jul 2013

2) Oct 2013

3) Dec 2013

1. VDCs grants aligned with MCPM

assessments from FY 2014/15

2. MCPM assessment manual for

VDCs approved and piloted

Quality assurance from

LBFC secretariat

[Cooperation from MoF]

4. Output 1.4:

Refined MCPM

manual

Responsibility: LBFC

1) Revise MCPM manual of LBs based on lessons

learned focusing on fiduciary risk

2) Approve and implement the revised manual

3) Orient stakeholders on MCPM manual

1) Jul 2012

2) Jul 2012

3) On-going

MCPM manual of LBs revised and

implemented

LBFC to monitor

19

4.2 Task 2 – Funds Flow

Outcome/Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 2: Improved funds flow 5. Output 2.1 Ensure

timely budget

release to LBs

Responsible: FAS

1) LBs prepare and submit budgets on time

at local level

2) MLD submits budget on time to MoF

3) MoF approves yearly plan and budget in

time

4) Request for budget release by MLD and

LBs in time

5) Issue of expenditure authority by MLD to

LBs in time

6) Release and reimburse the fund by DPs to

MLD in time

7) Coordinate with FCGO to instruct

DTCO to release the budget release.

8) Establish treasury single account in all

districts

9) Improve linkages between revenue,

expenditure and budget through

introduction of Medium-Term Budget

Framework in DDC and Municipalities

with 3 years expenditure and revenue

forecasts

1) From FY 2012/013

2) From FY 2012/013

3) From FY 2012/013

4) From FY 2012/013

5) From FY 2012/013

6) From FY 2012/013

7) By FY 2014/015

8) From FY 2014/015

9) By FY 2014/015

1. Budgets submitted and approved on

time

2. Fund release on time by DTCOs

3. MLD issues expenditure authorities

4. Timely release of tranche and

reimbursement by DPs

5. TSA fully operationalized in all

districts

6. MTEF manual formulated for LBs

and operationalized

Trimester Monitoring by

MLD

[Cooperation from MOF/

FCGO is required for

single treasury system and

MTBF]

Sanction: Reduce by 65%

GoN unconditional capital

grant for LBs not

preparing annual plan as

per LSGA provision

20

Outcome/Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 2: Improved funds flow 6. Output 7:

Maintaining

transparency in

social security

Responsible:

VERS

1) Introduce security marked certificates of

social security allowance

2) Develop Management Information

System in social security

3) Introduce banking system to pay social

security allowances to citizens

4) Publish the name of citizens receiving

social security allowances in DDCs

homepage

5) Mobilize WCF/CAC/ CSOs on the

monitoring of distribution of social

security allowances to citizens in

respective wards

1) Jul 2013

2) Jul 2013

3) Jul 2012

4) Jul 2013

5) Jul 2012

1) Hologram certificate distributed to

receivers of social security

allowance

2) MIS system in place in MLD and in

DDCs in social security

3) Banking System introduced to pay

social security allowances

4) Information disclosed through

homepage of DDC in social security

allowances

5) WCF/CAC/CSO facilitated to help

citizens to get social security

allowances from FY 2012/013

VERS will carry on field

monitoring of at least 5

DDCs in each region on

the allocation social

security on yearly basis

4.3 Task 3 – Implementation including Procurement Management

Outcome / Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 3: Improved implementation including procurement management 7. Output 3.3:

Reform of

procurement

management of

LBs

Responsible:

GAD

DG of DoLIDAR

1) Operationalize Procurement Unit in DDCs and

municipalities

2) Develop LBs‟ annual procurement plan

3) Prepare and implement Procurement Master

Plan for Municipalities and DDC

4) Develop standard bidding document in Nepali

for all types of procurement at VDC level

5) Install and operationalize procurement

software & train DDCs‟ and Municipalities‟

procurement staff

1) Oct 2012

2) Sep 2013

3) Nov 2013

4) Nov 2013

5) From Dec

2013

1. Annual procurement plan prepared by

DDCs & municipalities enforced

2. Procurement Master Plan of DDCs

and municipalities prepared

3. Procurement software operationalized

in all DDCs & municipalities

4. Standard biding document in Nepali

approved

5. Software installed and training

commenced.

CCU to Monitor

procurement plans

District Technical Office

in the district will monitor

VDC procurement

[Cooperation from PPMO]

21

Outcome / Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 3: Improved implementation including procurement management 8. Output 3.4

Strengthening

User Group

management and

improving their

accountability

Responsible Section:

PFACD

1) Update UGs‟ Manual and Project Book by

MLD for LBs.

2) Make public audit mandatory before and after

implementation of projects at LBs

3) Develop UGs training manual and

institutionalize mandatory training to UGs in

project implementation and operations

4) Operationalize UG‟s manual

5) Make compulsory cash contribution by UGs‟

in all projects other than that of targeted for

women, children and disadvantage groups in at

least metropolitan and sub-metropolitan level

1) October

2012

2) Jul 2013

3) Jul 2013

4) Jul 2012

5) December

2012

1. Use of UGs‟ Manual and Project

Book being enforced

2. Public audit fully institutionalized

3. Mandatory training to UGs‟ before the

release of first instalment

4. Cash contribution by UGs in non-

targeted projects in municipalities

PFACD inspect at least 10

user-implemented projects

each year in each

development region.

Planning, Monitoring and

Admin Officer inspect at

least user-implemented 20

projects in the district

9. Output 3.5:

Update and

operationalize

capacity

development plan

Responsible:

HRIMS

1) Develop and operationalize three year HRD

plan of MLD

2) Update comprehensive CD plan of DDCs and

Municipalities

3) Develop and operationalize CD plan of 500

VDCs

1) Jul 2013

2) On-going

3) Jul 2014

1. MLD HRD Plan prepared

2. Updated DDCs & Muns‟ CD plan

updated and operationalized

3. Capacity development plan of 500

VDCs prepared

HRIM Section of MLD

monitor human resource

development CD activities

22

Outcome / Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 3: Improved implementation including procurement management 10. Output 3.6:

Improved rural

road and other

project design &

construction

Responsible:

DoLIDAR and CCUs

1) Prepare MTMP of metropolitan and sub-

metropolitan cities

2) Update DTMP of all districts

3) Develop rural road planning and construction

manual to include environment norms as to

road construction methodologies.

4) Update Technical Specifications and Works

Norms Manual of local infrastructures

5) Orient DDCs and Municipalities on the

manuals

6) Prepare standard design for selected projects

7) Use contractor to construct all black topped

unless there is a cash contribution form user

committees

8) Introduce third party monitoring on the quality

of selected infrastructure projects

9) Enforce effective project management system

at LBs

10) Involve technical staffs as supervisors for

infrastructure projects

11) Involve external technical human resources in

contract in the technical design and supervision

of the infrastructure projects

12) Outsource technical works in infrastructure

projects in case of shortage of technical staffs

13) Engage supervisors with at least sub-overseer

level technical qualifications infrastructure

projects

14) Involve technicians at least twice to supervise

all infrastructures related projects in filed

15) Establish Quality Monitoring Lab in DoLIDAR

1) Jul 2013

2) Jul 2013

3) Jul 2013

4) Jul 2014

5) Jul 2014

6) Jul 2014

7) Jul 2012

8) Jul 2012

9) Jul 2012

10) Jul 2012

11) Jul 2012

12) Jul 2012

13) Jul 2012

14) Jul 2012

15) Jul 213

1. All new roads reflected in the

DTMP/MTMP and no road

constructed by LBs that are not

reflected in DTMP/MTMP

2. Rural Road Construction Manual

being used

3. Technical Specifications and Works

Norms Manual of local

infrastructures updated

4. LBs staffs oriented on how to use

manuals

5. Standards documents for design for

key infrastructure projects developed

6. Contractors involved in constructing

blacked topped roads

7. Independent third party involved to

inspect the quality of key

infrastructure -related projects

implemented by DDCs and

municipalities

8. Timely estimate, procurement and

signing of contract of projects being

made

9. All project implemented with cost

estimate

10. All infrastructures projects

implemented only after the approval

of design and estimate of those

projects

11. Infrastructure projects agreement

signed before Chaitra of Nepal

Calendar

Spot inspections of

Annual Development Plan

by Cluster Coordination

Offices (5 DDCs, 5

Municipalities, 50 VDCs

on sample basis) in

support of DoLIDAR

DoLIDAR will inspect

quality of the biggest

infrastructure projects of

each region and submit

report to Good Governance

Unit

CCU will inspect quality

of at least one key

infrastructure project in

DDC and municipalities

Third party will inspect the

quality of at least one key

infrastructure project in

each development region

Suspend all capital grants

in case of non-compliance

Departmental Action to

Staffs and reimbursement

from user or contractors

if found guilty in quality

23

4.4 Task 4 – Internal Accountability

Outcome/Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 4: - Improved internal accountability 11. Output 4.1:

Institutionalize

RBM at LBs

(DDCs &

Mun‟palities)

Responsible:

PFACD

1) Develop and approve of model RF for LBs by

MLD.

2) Orient on RF to LDOs and EOs.

3) Develop RF for sample DDCs and

municipalities

4) Introduce Annual Performance Plan for

executive LBs officials

5) Introduce performance –based incentive

schemes in LBs

1) Jul 2013

2) Oct 2013

3) Jul 2014

4) Dec 2014

5) From FY

2013/014

1. LBs‟ model RF prepared

2. All 75 LDOs and 58 EOs oriented on

RF

3. RF for 10 DDCs and 5 municipalities

prepared

4. Annual Performance Plan for LB

official adopted

5. Performance-based incentive

introduced

MLD link performance

with incentive and

sanction

[Support of NPC]

12. Output 4.2

Decision makers

made more

accountable

1) Develop code of conduct for decision makers

2) Delineate clear-cut responsibility

1) Jul 2012

2) Jul 2012

1) Code of conduct for local decision

makers approved.

2) Code of conduct for LBs‟ officials

approved

MLD to monitor the

application of code of

conduct

13. Output 4.3

Strengthening

LBs‟ accounting

systems

Responsible: FAS

1) Pilot accrual accounting for Municipalities

2) Introduce modified cash based accounting

system in DDCs

3) Develop software for VDCs accounting system

and install in at least 1,000 VDCs

4) Provide training to VDC secretary and DDC

account staff on accounting system

5) Computerize accounting transactions in all

DDCs and municipalities

1) Jul 2012

2) Dec 2013

3) Dec 2013

4) Dec 2013

5) Dec 2014

1. Accrual accounting used in

Municipalities - underway

2. Modified cash based accounting

system used in all DDCs

3. Accounting software installed and

operationalized in 1000 VDCs

4. At least 1,000 LBs staff trained in

accounting

5. Computerized accounting system

introduced in all DDCs and

Municipalities

FAS supported by FCGO

to monitor activities

[Support of FCGO]

24

Outcome/Output &

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 4: - Improved internal accountability 14. Output 4.4

Strengthening

civic oversight

Responsible:

LSGD

1) Develop long-term operational modality of

LGAF based on independent review

2) Handover LGAF Implementing Agency role

to LB Associations from FY 2012/013

3) Provide support to CSOs for strengthening

civic oversight

4) Use CSOs finding to refocus target areas and

take necessary reform in MLD and LBs

5) Strengthen capacity of WCF/CAC to oversight

local governance activities

6) Adopt public hearing, public audit, and social

audit guidelines at LBs

1) May 2012

2) Jul 2012

3) Annually

4) On-going

5) On-going

6) Jul 2012

1. Operational Modality of LGAF

approved

2. LGAF handover to LB Associations

3. CSOs supported for civic oversight

4. CSOs findings being used in local

governance reform

5. WCF/CAC members trained

LBAs & CCUs monitor

CSOs quality in their

functioning to promote

downward accountability

15. Output 4.5:

Promoting

transparency in

local governance

Responsible:

PFACD

1) Organize press briefing by DDCs and

Municipalities on trimester basis

2) Organize public audit in prior implementation

and in final payment also in presence of WCF

representatives

3) Develop and update websites in all DDCs and

Municipalities

4) Develop websites in at least 1,000 VDCs

5) Modify the hoarding board to show unit costs

in DDC and municipalities

6) Disclose monthly public expenditures and

revenue of LBs to local citizens by

disaggregating the information

1) October 2012

2) Jul 2013

3) Jul 2014

4) Jul 2014

5) Jul 2012

6) Jul 2012

1. Press briefing by DDCs and

municipalities in place

2. Public audit made mandatory

3. DDCs and municipalities established

homepage

4. 1,000 VDCs established homepage

5. Modified hoarding boards

6. Monthly disclosures of public

expenditures by LBs through notice

boards and other relevant means in

place

Monitoring by IPDS of

MLD

25

4.5 Task 5 – Auditing and Monitoring and Evaluation

Outcome/Output &

Responsible Party

Mitigation Measures Timeline Milestones Monitoring – Sanctions –

Dependency

Outcome 5- Improved auditing and M&E 16. Output 5.1

Strengthening

MLD‟s oversight

mechanism

Responsible:

PFACD

[Regular Activity]

1) Refine M&E/PEFA and FRRAP checklists and

work plan for LBs

2) Develop M&E/ PEFA and FRRAP work plan

for MLD

3) Develop ToR and work plan and calendar for

MLD‟s Good Governance Unit

4) Categorize DDCs and Municipalities into

normal, moderate and high risk, based on

criteria such as MCPM results, audit results

and others

5) Develop the Sample PEFA/FRRAP for local

bodies

6) Localize PEFA and FRRAP in 10 DDCs and

all metropolitan and sub-metropolitan cities

1) Jul 2012

2) Aug 2012

3) Jul 2012

4) Jul, 2012

5) Jul 2012

6) Jul 2013

1. M&E /Fiduciary Risk checklists

prepared

2. ToR and Annual Work plan and

Calendar of Good Governance Unit

prepared

3. LBs categorized on the basis of

intensity of fiduciary risk

4. Templates of PEFA and FRRAP for

LBs prepared

5. PEFA and FRRAP of DDCs and

municipalities prepared and

operationalized

MLD to monitor & assess

risk in at least 5 DDCs, 5

muns and 25 VDCs

annually.

Good Governance Unit

hold regular monthly

meetings and make action

taken to corruption cases

public

17. Output 5.2

Strengthening

auditing system of

Local Bodies

Responsible:

FAS

1) Develop auditing guidelines for LBs

2) Execute external audit procedures including

risk-based performance audit in consultation

with OAG

3) Involve OAG in external audit of Muns and

VDCs through the amendment of LSGA

4) Develop audit clearance tracking system in

MLD for DDCs and Municipalities and in

DDCs for VDCs

5) Develop concept for improving internal audit

system in LBs and Capacity Building of

Internal Audit Section in DDCs

6) Publish audit report of DDCs and Municipality

in website

7) Capacitate registered auditors for VDCs and

municipalities

1) Jul 2012

2) Jul 2013

3) Jul 2013

4) Oct 2013

5) Jun 2014

6) Feb 2014

7) Jul 2013

1. Auditing Guidelines for LBs

approved

2. OAG involved in external audit of

VDCs and Municipalities

3. Risk based performance audit in 5

DDCs, 5 Muns and 50 VDCs each

year conducted

4. Audit tracking system in MLD and

DDCs introduced and action

initiated in case of corruption

5. Regular internal audit of every

VDCs and DDCs carried on

6. DDCs and Muns audit report

published in website

7. Training to registered auditors

provided

Monitoring from FAS

MLD investigates audit

report and provide reward

to best performing 5 DDCs

/Municipalities

DDCs investigate audit

report and provide reward

at least 5 best performing

VDCs in each district

MLD take action against

cases as per audit

objection

DDC take action to VDC

secretaries against cases as

per audit objection

26

Outcome/Output &

Responsible Party

Mitigation Measures Timeline Milestones Monitoring – Sanctions –

Dependency

Outcome 5- Improved auditing and M&E 18. Output 5.3 Improve

upward reporting

system

Responsible:

FAS

1) Institutionalize simple result-based reporting

system for LBs

2) Operationalize MLD‟s Financial Management

Information system by linking with DDCs &

Municipalities

3) Introduce web-based reporting system at LBs

1) Jul 2012

2) Jul 2013

3) Nov 2012

1 Simplified results based system in

place.

2 FMIS System fully operationalized

3 Web-based reporting system in LBs

introduced

MDAC reviews the

system on trimester basis

Sanctions: Reduce by

65% GoN capital grant in

case of non-compliance

19. Output 5.4

Strengthening

monitoring of

NGOs

Responsible:

LSGD

1) NGOs submit annual plan to LBs on

mandatory basis

2) NGOs submit, annual plan to LBs by Local

NGOs to get renewal recommendations from

DDCs

3) Establish/ strengthen NGO desk /unit in all

DDCs

4) Mobilize NGOs in local development by

entering into Memorandum of Understanding

between NGOs and LBs

1) Jul 2013

2) Jul 2014

3) Nov 2012

4) Jul 2012

1. Renewal tied up with programme

submission in council meeting

2. NGO desk in DDCs established and

functional

3. MoU between NGOs and LBs for

local development signed

NGO desk in DDCs to

monitor and report

progress.

Publish list of non-

complying NGOs in

websites

Rewards to best

performing NGOs by

DDCs through council

meeting

20. Output 5.5:

Improved auditing

of LBs

1) Conduct management audit of LBs From FY

2012/013

1. Conduct management audit of in 5

DDCs, 5 Muns and 50 VDCs each

year

[Cooperation from MoGA

Required)

27

4.6 Task 6 – Revenue Management

Outcome/Output&

Responsible Party Mitigation Measures Timeline Milestones

Monitoring – Sanctions –

Dependency

Outcome 6- Improved revenue management 21. Output 6.1:

Strengthening

revenue

management

capacity of local

bodies

Responsible:

LBFCS, DWPIS and

MMS

1) Enforce revenue projection system in all DDC

and municipality

2) Introduce revenue projection system in VDC

having internal revenue more than Rs 2 million

per year

3) Amend LSGR to male IPT mandatory

4) Institutionalize IPT in municipalities

5) Introduce computer-based revenue collection

system in all municipalities

6) Refine clear cut procedures and guidelines for

local revenue collection for DDCs, VDCs

7) Develop simplified and more understandable

revenue collection system with computerised

data base for municipal taxpayers and organize

orientation programme for educating municipal

tax payers

8) Introduce reward system for regular tax payers

at municipal level

9) Introduce penalty system in non-compliance at

municipality

10) Prohibit the rebate practices in internal revenue

contracts at LBs

1) Jul 2013

2) Jul 2013

3) Jul 2014

4) Jul 2014

5) Jul 2014

6) Jul 2013

7) Jul 2013

8) Jul 2013

9) Jul 2013

10) Jul 2014

1) DDCs and Muns forecasted their

revenue based on projections

2) VDC exceeding internal revenue of

Rs 2 million forecasted revenue

based on revenue projection system

3) Integrated property tax introduced in

all municipalities

4) Computerised revenue collection

system introduced in at least one-

third of the municipalities

5) Local revenue operational manual

refined and operationalized in LBs

6) Municipal taxpayers oriented and

data-base prepared

7) Best performing taxpayers rewarded

8) Penalty system in place for non-

compliance on municipal tax system

LBFCS will monitor at

least one DDC and

Municipality of each

region on the quality of

revenue projection

MMS will monitor the

progress on IPT in support

of CCUs

28

Annex 1: Glossary

Term Meaning

Capacity Capacity is the ability of people, organizations, and society as a whole to manage their

affairs successfully.

Capacity

Development

Capacity development is the process by which people, organization and society as a

whole unleash, strengthen, create, adapt and maintain capacity over time.

Corruption The misuse and abuse of entrusted power for private gain. Corruption occurs at policy

level, process level and at operational level. From the perspective of PFM corruption

takes place both at expenditure and revenue generation. The former increase additional

costs for services and lattes decrease the size of public revenue.

Corruption risk

The likelihood of corruption occurring, as opposed to the other factors (lack of capacity,

inefficiency etc.), which determine fiduciary risk.

Fiduciary Risk Fiduciary risk is the risk is that local governance funds are used for intended purpose, do

not achieve value-for-money, do not produce expected results and are not properly

accounted for.

Public Financial

Management

Public financial management is a system by which financial resources are planned

directed and controlled to enable and influence the efficient and effective delivery of

public services to people.

Plan A road map to guide the future activity.

PEFA The Public Expenditure Financial Accountability Programme - an international

Programme aimed at strengthening public financial management and accountability

systems in partner countries.

Internal

Control

Internal control is a process designed to provide reasonable assurance regarding the

achievement of objectives in the effectiveness and efficiency of operations, reliability of

reporting, and compliance with applicable laws and regulations.

29

Internal

Control

Component #1

Control

environment

The control environment is commonly referred to as the “tone at the top”. In other words

the attitude and behaviour of management and staff can have a significant effect on the

effectiveness of an internal control structure. One of the myths of internal control is that

„internal control starts with strong policies and procedures’. In fact, internal control starts

with a strong and ever-improving control environment as detailed policies and procedures

without a positive and ever-improving tone at the top are often compromised.

Internal

Control

Component #2

Risk assessment

Every entity faces a variety of risks from external and internal sources that must be

assessed. A precondition to risk assessment is establishment of objectives, linked at

different levels and internally consistent. Risk assessment is the identification and

analysis of relevant risks to achievement of the objectives, forming a basis for

determining how the risks should be managed. Because economic, industry, regulatory

and operating conditions will continue to change, mechanisms are needed to identify and

deal with the special risks associated with change.

Internal

Control

Component #3

Control activity

Control activities are the policies and procedures that help ensure management directives

are carried out. They help ensure that necessary actions are taken to address risks to

achievement of the entity's objectives. Control activities occur throughout the

organization, at all levels and in all functions. They include a range of activities as diverse

as approvals, authorizations, verifications, reconciliations, reviews of operating

performance, security of assets and segregation of duties.

Internal

Control

Component #4

Information &

Communication

Pertinent information must be identified, captured and communicated in a form and

timeframe that enables people to carry out their responsibilities. Information systems

produce reports, containing operational, financial and compliance-related information,

that make it possible to run and control LBs. They deal not only with internally generated

data, but also information about external events, activities and conditions necessary to

informed LB decision-making and external reporting. Effective communication also must

occur in a broader sense, flowing down, across and up the organization. All personnel

must receive a clear message from top management that control responsibilities must be

taken seriously. They must understand their own role in the internal control system, as

well as how individual activities relate to the work of others. They must have a means of

communicating significant information upstream.

30

Internal

Control

Component #5

Monitoring

Internal control systems need to be monitored -- a process that assesses the quality of the

system's performance over time. This is accomplished through on-going monitoring

activities, separate evaluations or a combination of the two. On-going monitoring occurs

in the course of operations. It includes regular management and supervisory activities,

and other actions personnel take in performing their duties. The scope and frequency of

separate evaluations will depend primarily on an assessment of risks and the effectiveness

of on-going monitoring procedures. Internal control deficiencies should be reported

upstream, with serious matters reported to top management

Decentralization Decentralization is a process of dispersing decision-making from the centre to a point

closer to the service delivery or action. It involves the restructuring the authority into a

system of co-responsibility among governance institutions at the central, regional and

local levels according to the principle of subsidiarity-the principle that decision should be

taken at the lowest possible level capable of completing them.

Institutional

strengthening

The process of strengthening the capacity of institutions to perform their functions

efficiently and effectively

Local

Governance

Local governance is a set of institutions, mechanisms, and processes through which

citizen can express their interests and needs, mediate differences and exercise their rights

and obligations at local level. Local governance includes not only the machinery of

government but also other actors and their interactions with local bodies.

Reform The action or process of changing the institutions and their practices for bringing positive

and tangible results that benefits to the people

31

Annex 2: Implementation Schedule

Task Responsible Party (MLD Section

Head)

Due Date

Preparation & Orientation

Prepare PFM & FRRAP in Nepali Monitoring & Evaluation (MES) April 2012

Approval of PEFA & FRRAP MLD March 2012

Print PFM & FRRAP & distribute to stakeholders Information Publication &

Documentation (IPDS)

March 2012

Prepare PFM & FRRAP training material in Nepali for

orientation targeting LDOs & EOs

MES April 2012

Assess required resources for delivery of FRRAP

MES with Human Resources

Development Section (HRDS)

April2012

Organize 3 days Training of Trainers for orientation on

PFM & FRRAP to LDOs & EOs

April 2012

Organize the regional 3-days‟ Orientation programme

targeting LDOs & EOs.

MES & CCUs Mar 2012

Launch and Operations

Fix milestones with indicators & means of verification MES with support of FAS Mar 2012

Develop & approve the implementation work plan MES with CCUs Mar 2012

Plan Launch MES with support of FAS Apr 2012

Update the PFM & FRRAP MES Section & FAS Every Dec

Monitoring, Review and Evaluation

Monitor implementation status of FRRAP MES with CCU support – will be

combined with much of MLD's

monitoring

On-going

Review the outcomes of the FRRAP MES with CCU support Every Nov

Mid-term evaluation MES & FAS Jan 2014

Impact evaluation MES & FAS Jan 2016

32

Annex 3: Risks Assessment Matrix -Planning and Programming A

reas

of

Ris

ks

Ris

ks

Lev

el

Ris

ks

Occ

urr

ence

Cen

tral

/DD

C/V

DC

/

Munic

ipal

ity

Imp

act

of

Ris

ks

Ris

ks

Tre

atm

ent

Tim

ing

Res

pon

sibil

ity

Likelihood Consequences Severity

Weak Participatory

Planning Process

High LBs 4 4 3 Strengthen

participatory

planning process

Quart

erly

MLD

Institutional Reform

of VDCs

High

VDC 5 5 3 Institutional

Reform

July

2013

MLD

Weak transparency M LBs 4 4 Low Refine guidelines

& manuals

July

2013

MLD,

LBFC

L = Likelihood (5= Almost certain, 4= Likely, 3= Possible, 2= Unlikely, 1= Rare)

C = Consequence (5= Severe, 4= Major, 3= Moderate, 2 = Minor, 1= Negligible)

R = Risk level (3= High, 2= Medium, 1= Low)

S= Severity (3== High, 2+ Medium, 1= Low)

33

Annex 4: Risks Assessment Matrix- Budget Release and Fund Flow A

reas

of

Ris

ks

Ris

ks

Lev

el

Ris

ks

Occ

urr

ence

Cen

tral

/DD

C/V

DC

/

Munic

ipal

ity

Imp

act

of

Ris

ks

Ris

ks

Tre

atm

ent

Tim

ing

Res

pon

sibil

ity

Likelihood Consequences Severity

Delay in budget

release from

FCGO and

DTCOs to LBs

High DDC/Munici

pality/VDC

4 4 2 Prepare and submit

budget on time

By

Febru

ary of

each

year

DDC/Mu

nicipality/

VDC

Treasury account Medium

DDC/Munici

pality/VDC

4 4 2 Establish single

treasury account in

all districts

May

2014

MLD

L = Likelihood (5= Almost certain, 4= Likely, 3= Possible, 2= Unlikely, 1= Rare)

C = Consequence (5= Severe, 4= Major, 3= Moderate, 2 = Minor, 1= Negligible)

R = Risk level (3= High, 2= Medium, 1= Low)

S= Severity (3== High, 2+ Medium, 1= Low)

Annex 5: Risks Assessment Matrix -Implementation including Procurement Management

Are

as o

f R

isk

s

Ris

ks

Lev

el

Ris

ks

Occ

urr

ence

Cen

tral

/DD

C/V

DC

/

Munic

ipal

ity

Imp

act

of

Ris

ks

Ris

ks

Tre

atm

ent

Tim

ing

Res

pon

sibil

ity

Likelihood Consequences Severity

Capital grants to

VDCs

High VDC 5 5 3 Refine VDCs' MC

manual to include

PMs

July

2013

LBFC

Procurement

management of

local bodies

Medium

DDC/Munici

pality

4 4 2 Introduce e-

procurement in

DDC &

Municipality

July

2013

MLD

User‟s group

management

Medium DDC/Munici

pality/VDC

4 4 2 Develop UGs'

manual and project

book

July

2012

MLD

Capacity of local Medium DDC/Munici 4 4 2 Update CD plan of

DDCs &

July HRD

section of

34

Are

as o

f R

isk

s

Ris

ks

Lev

el

Ris

ks

Occ

urr

ence

Cen

tral

/DD

C/V

DC

/

Munic

ipal

ity

Imp

act

of

Ris

ks

Ris

ks

Tre

atm

ent

Tim

ing

Res

pon

sibil

ity

Likelihood Consequences Severity

bodies pality/VDC Municipalities and

CD plan of 500

VDCs

2014 MLD

Design of rural road High DDC/Munici

pality/VDC

5 5 3 Prepare standard

design for rural

road

July

2014

DoLIDA

R

L = Likelihood (5= Almost certain, 4= Likely, 3= Possible, 2= Unlikely, 1= Rare)

C = Consequence (5= Severe, 4= Major, 3= Moderate, 2 = Minor, 1= Negligible)

R= Risk level (3= High, 2= Medium, 1= Low)

S= Severity (3== High, 2+ Medium, 1= Low)

35

Annex 6: Risks Assessment Matrix -Internal Check and Control A

reas

of

Ris

ks

Ris

ks

Lev

el

Ris

ks

Occ

urr

ence

Cen

tral

/DD

C/V

DC

/

Munic

ipal

ity

Imp

act

of

Ris

ks

Ris

ks

Tre

atm

ent

Tim

ing

Res

pon

sibil

ity

Likelihood Consequences Severity

LBs‟ accounting

system

High DDC/Munici

pality/VDC

5 5 3 Computerized

accounts in LBs

Dece

mber

2014

FAS of

MLD

Civic oversight Medium

DDC/municip

ality/VDC

4 4 2 Develop long term

operational

modality of LGAF

July

2012

LBSS of

MLD

L = Likelihood (5= Almost certain, 4= Likely, 3= Possible, 2= Unlikely, 1= Rare)

C = Consequence (5= Severe, 4= Major, 3= Moderate, 2 = Minor, 1= Negligible)

R = Risk level (3= High, 2= Medium, 1= Low)

S= Severity (3== High, 2+ Medium, 1= Low)

Annex 7: Risks Assessment Matrix: Auditing and Monitoring and Evaluation

Are

as o

f R

isk

s

Ris

ks

Lev

el

Ris

ks

Occ

urr

ence

Cen

tral

/DD

C/V

DC

/

Munic

ipal

ity

Imp

act

of

Ris

ks

Ris

ks

Tre

atm

ent

Tim

ing

Res

pon

sibil

ity

Likelihood Consequences Severity

Auditing system of

local bodies

High DDC/Munici

pality/VDC

5 5 3 Develop auditing

guidelines for LBS

July

2012

FAS of

MLD

Oversight

mechanism of MLD

Medium

LBs 4 4 2 Refine FRRM

checklists for LBs

Dece

mber

2012

MES of

MLD

Reporting system Medium LBs 4 4 2 Institutionalize

simple result based

reporting system in

LBs

July

2012

MES of

MLD

Monitoring of

NGOs

Medium NGOs 3 3 1 Strengthen NGO

desk in DDCs

July

2013

LBSS of

MLD

L = Likelihood (5= Almost certain, 4= Likely, 3= Possible, 2= Unlikely, 1= Rare)

C = Consequence (5= Severe, 4= Major, 3= Moderate, 2 = Minor, 1= Negligible)

R = Risk level (3= High, 2= Medium, 1= Low)

36

S= Severity (3== High, 2+ Medium, 1= Low)

37

Annex 8: Risk’s Assessment Matrix-Internal Revenue Management A

reas

of

Ris

ks

Ris

k's

‟ L

evel

Ris

ks‟

Occ

urr

ence

Cen

tral

/DD

C/V

DC

/Mun

ici

pal

ity

Imp

act

of

Ris

ks

Ris

ks‟

Tre

atm

ent

Tim

ing

Res

pon

sibil

ity

Likelihood Consequences Severity

Revenue projection

system of DDCs

and Municipalities

High DDC/Munici

pality

4 4 2 Enforcement of

revenue projection

system

July

2013

LBSS of

MLD

Revenue collection

system

High

Municipality 4 4 2 Introduce

computerised

revenue collection

system in

municipalities

July

2014

MMS of

MLD

Revenue projection

system of VDCs

High VDC 4 4 2 Forecast VDCs

revenue exceeding

Rs 2 million

July

2013

LBSS of

MLD

L = Likelihood (5= Almost certain, 4= Likely, 3= Possible, 2= Unlikely, 1= Rare)

C = Consequence (5= Severe, 4= Major, 3= Moderate, 2 = Minor, 1= Negligible)

R = Risk level (3= High, 2= Medium, 1= Low)

S= Severity (3== High, 2+ Medium, 1= Low)

38

Annex 9: PFM and Fiduciary Risks Assessment Questionnaires for DDC

S.No Question Response

Yes No Partial

1. Are all the projects reflected in the annual plan approved by IPC

2. Are at least 1/3 of projects included in the annual plan identified through WCF

3. Has DDC spent annual budget on women, children and backward communities

as per the provision of the blended grant guidelines

4. Has DDC prepared the budget in time

5. Has DDC received the funds in time from DTCO

6. Is procurement planning software operationalized in DDC

7. Is e-bidding system operationalized in DDC

8. Has DDC prepared procurement master plan

9. Has DDC updated CD plan

10. Has DDC updated the District Transport Master Plan

11. Are all new roads reflected in DTMP

12. Has DDC adopted a cash based accounting system

13. Has DDC adopted a computerized accounting system

14. Is the audit tracking system institutionalized in DDC

15. Is results- based reporting system adopted by DDC

16. Has DDC adopted a system of revenue forecasting