COVER STORY (Spotlight Weekly)

Whose Job Is It Anyway?

Scarce resources of the country continue to be misused and wasted largely due to systemic inefficiencies, political interference and corruption. On this backdrop, the newly constituted Public Expenditure Review Commission has the daunting task of identifying the ills of public spending in the country and recommending ways to correct them. Will it be able to do so?

By BHAGIRATH YOGI

Of Rs 1.24 billion Rajapur Irrigation Project in mid-western Nepal, the government has already spent Rs 746 million. But not an additional single hectare of land has been irrigated that what is being irrigated in a traditional way. The remuneration for the consultant of the project, however, has been almost doubled from Rs 46 million to 88 million though the Consultant's work is not up to the mark. There is no basis for the sustainability of the facilities developed by the project.

Heavy equipment : Will the investment bring in adequate return ?

The government will have to pay an additional Rs 13.6 million to the consultant of the Modikhola hydropower project due to errors in geological studies. Had the detailed studies been carried out before starting the construction, this sum could have been saved.

The total losses incurred by 21 public enterprises whose auditing was completed till the year 2055/56 B. S. stood at Rs 5.71 billion. This is 110.31 percent of their total capital employed.

These are but a few examples of public expenditure as recorded in the recent annual report published by the Office of the Auditor General (AG). The AG's report chronicles hundreds of such incidences where the scarce public resources have been misused or misappropriated by the concerned authorities and agencies.

Whether it is construction of roads, schools or health posts, low quality and unsustainable structures mark the public works. Services offered from government-run schools and health institutions too are sub-standard. Moreover, nobody is held accountable for such services.

Is it because Nepal's investment in infrastructure development, social sector or general administration is quite low? No, by any account public expenditure made by Nepal is comparable to other countries in the region. But the output from such investments is quite low. Here is an example.

The level of total government spending in Nepal is significantly higher than in Bangladesh, but lower than those of her higher income neighboróIndia, Pakistan and Sri Lanka. Excluding defense, the ratio of other expenditures to GDP (Gross Domestic Product) in Nepal is about the same as in Pakistan and Sri Lanka. According to a World Bank study, on the other hand, Nepal's revenue/GDP ratio, though comparable to Bangladesh, is significantly lower than those in other South Asian countries. For example, Pakistan and Sri Lanka have revenue ratios of 16-18 percent of GDP, while that of Nepal and Bangladesh are around 10-11 percent of GDP.

Chand : Testing times

Nepal is far more dependent on foreign aid than other South Asian countries even to finance her development expenditure. In the case of Nepal, aid financing of the fiscal deficit is about 6 percent of GDP, while the ratio is less than 2 percent of GDP for other South Asian countries. In Nepal, foreign aid finances on average a third of total public spending and over 60 percent of the development budget. In other South Asian countries this ratio is much loweró19 percent for Bangladesh, 6 percent for Pakistan and 8 percent for Sri Lanka.

This indicates that "Nepal's fiscal situation is significantly weaker than those of her neighbors. The low level of revenues combined with relatively high expenditures have led to larger fiscal deficits and heavy aid dependence in Nepal. Even more significant is the fact that over the past few years, all the other countries in the region have taken strong measures to strengthen their fiscal position, particularly through expenditure adjustments, thereby significantly reducing their overall fiscal deficits and aid dependence. Nepal, on the other hand, has moved in the opposition direction," concludes a report entitled "Nepal: Public Expenditure Review (PER)," published by the World Bank in April this year.

So, what is the root of the problem? Deficiencies in budgeting and resource allocation process as well as in delays in project implementation are some of the reasons that undermine the effectiveness of public spending.

On Saturday, the Parliament's Public Accounts Committee (PAC) asked the government to complete Kali Gandaki A hydel project as per schedule and said the project was being carried out at a cost higher than what was estimated in the beginning. The 144 MW project, being developed by Nepal Electricity Authority (NEA) was scheduled to be completed this year. But officials said the project could be completed by 2002 as only 65 percent of the project works have been completed so far. The project's cost, estimated at US $ 330 million three years ago, is expected to cross US$ 400 million upon its completion. "The project's `unfavorable geological conditions' coupled with the inflation of Nepali rupee has led to the rise in the cost of the project," said Dr. Niranjan Kapali, chief of the project.

A rural health post: Poor quality of service

Besides project delays, lack of counterpart funds especially for the donor-assisted projects, political interference and institutional weaknesses are also to be blamed. Lack of ownership has also been identified as an important factor contributing to the weak implementation and ineffectiveness of the public expenditure program in Nepal. Political interference in selecting and executing the projects are no less responsible for misuse of the scarce funds. According to the studies, the number of fully government-financed projects rose from 143 in fiscal year 1995/96 to 409 in FY 1999/00, while the "donor assisted projects" also rose, but less rapidly, from 280 to 361 over the same period.

"As the revenue or foreign aid has not gone up with the number of projects, the allocation per projects has declined in real terms," says Dr. Shankar Sharma, member of National Planning Commission (NPC). "If we exclude big projects like Kali Gandaki A, the allocation per project has substantially reduced."

The situation is such that there is not a single sector where the government spending, whether through internal resources or by mobilizing foreign aid, may have yield expected results. An independent study of the Basic and Primary Education Project, implemented between 1993 and 1999 at the cost of US$ 261.84 million showed that the national achievement level of Grade III and V could not reach above 50 percent. "Worse, the achievement of students in areas where the project was not implemented was found much better," said Dr. Mana Prasad Wagle, an educationist and researcher. "Not only the level of teachers was found weaker than their own students in certain subjects, even the previous curriculum was found better than the new one."

While there may be room for debate about such outcomes, the government has already signed on an agreement in which a donor consortium will be financing 137 million dollars for BPEP Phase II during 2000-2003. But nobody is sure whether the inflow of loans or grants will actually improve the quality of education across the country.

"Over the last three decades, we have experimenting with one or the other model of education. Now we should say we no more need loans or grants and stop playing with the future of the posterity," said Dr. Wagle.

Schools without teaches and health posts without medicines or health manpower are a common scene in Nepal. Reports say not even 20 percent of the total manpower assigned for health system can be found serving at their offices at a time. Similarly, nearly 60 percent of the teachers are still untrained and those who are trained are rarely seen teaching in their classes.

Total public expenditures on health sector too have increased on an average by 14 percent per annum in real terms between fiscal year 1991/92 and 1998/99. Nevertheless, public expenditures on health, in per capital terms is very low in Nepal, US$ 3.10 per head in fiscal year 1998/99. Only a very few developing countries, all of them in Sub-Saharan Africa, spend less on health in per capita terms than in Nepal. Ironically, despite government's commitment to make available primary health care services to all the allocation on primary health care has declined over the years while that on the government-run hospitals is on the rise.

So, what could be done? One of the ways of ensuring better output for investment would be involving the community in social sectors like education and health, say experts. Officials do agree. "This is basically the problem of management. Such a situation can be improved by developing a mechanism of public intervention," said Dr. Sharma. "By involving local people in managing their sub-health posts and schools, improvement in their services could be brought to great extent."

A recent report, the Nepal Living Standard Survey (NLSS), 1996, concluded that despite sustained increases in public spending and aid inflows over the past two decades, there has been little or no improvement in the poverty situation in Nepal. Nearly half of Nepal's population remains below the poverty line, as was the case in the mid-seventies. "This is a reflection of weak unbalanced economic growth over many years and sustained high population growth which have combined to reduce the rate of per-capita income growth to the lowest in the region. While neighboring countries have made some headway against poverty, Nepal has at best stood still," says the World Bank study. "While the macroeconomic situation is reasonably sound, the main problem in Nepal has been a persistent failure to sustain development activity and utilize substantial public expenditure and donor aid programs effectively to mitigate its widespread poverty."

Of late, the government too looked concerned to reverse this scenario. As promised in this year's budget speech, the government constituted the Public Expenditure Review (PER) Commission on Monday to submit it the report along with professional and expert inputs on its expenditure management endeavor. The five-member Commission, headed by ruling Nepali Congress Member of Parliament Binay Dhoj Chand, will submit its report within the next six months.

The expenditure management endeavor is aimed at enhancing the efficacy of public resource allocations to priority sectors, improving the implementation procedures to gain maximum output of the investment, enhancing the efficacy of resource allocation by controlling unproductive expenditures, maintaining fiscal discipline, speeding up the privatization process, and reducing fiscal deficit. The Commission is free to receive the services of Nepali and foreign consultants while executing its work, the Finance Ministry said

"This is a welcome step," said Dr. Dwarika Nath Dhungel, former Water Resources Secretary. "But the terms of reference of the Commission looks quite broad and time too short. Moreover, it would have been better if the Commission had representation from professional outside the government."

Finance Minister Mahesh Acharya, in his budget speech in May this year, said with the formation of the Commission the (practice of) ad-hocism in allocating scarce resources of the country will come to an end and fiscal discipline will be maintained. From this fiscal year, the government will finance maximum on only those projects that have been recommended by the PER Commission.

A tall order. Given the attitude of politicians, members of Parliaments and power centers calling on members of NPC and other officials till eleventh hour to get their pet projects in the ëRed Book,' it is easier said than done. More than efforts of an individual Minister or the Ministry, it will require attitudinal and behavioral change.

"With serious commitment to development by the government and political parties, behavioral changes, institutional strengthening and appropriate technical reforms, Nepal can significantly improve development results from its public spending," said Para Suriyaarachchi, lead author of the World Bank report. "The donor community can play an important supporting role in this process."

The concept of public resource management is a new concept successfully practiced in New Zealand in the early nineties. They came up with a Fiscal Responsibility Act as the outcome of such an exercise.

In Nepal, the Reform Agenda for improving public resource management comprises a whole range of issues. According to the World Bank study, it includes redefining the role of the public sector to ensuring good governance and transparency. It also takes into account the role of political parties and government leadership, controlling corruption and leakages, promoting ownership and participation, institutional development, civil service reform and decentralization. Technical aspects of the reforms, improvements in budget allocations, role of external assistance and phasing of reforms are equally important.

The efforts to improve public resource management in Nepal must begin with a re-examination of the role of public sector in the economy, say studies. The Administration Reform Commission, 1991, said the role of the government should be identified and redefined. In principle, there is no need for the government to poke its nose where the private sector can deliver better services at competitive prices. In practice, the government has largely failed to expedite the process of transferring the management of the ailing enterprises to private hands or improving their performance over the last five to six years. Consequently, according to the Ministry of Finance, the total operating profits of the entire public enterprise sector was only Rs 1.3 billion in the year 1998/99 as against a net loss of Rs 2.1 billion incurred by 39 enterprises.

Upon assuming office in April this year, Prime Minister Girija Prasad Koirala said maintaining law and order, controlling corruption and good governance will be top priorities of his government. While he has already initiated civil service reform agenda, the government is working on an anti-corruption bill. As in many countries, corruption is pervasive in Nepal at many levels. To be effective, any anti-corruption program will have to be supported by strong political commitment from the top to its implementation. Strengthening the legal and judicial machinery and involving civil society will be crucial in checking corruption.

Public accountability for the allocation and use of resources is clearly the best safeguard against corruption and leakages and for ensuring that public spending actually leads to provision of outputs and services demanded by the community at not only local but also at central levels, says the WB report. At the local level, this would call for greater efforts to promote community mobilization and empowerment, particularly of the poorer and under-privileged groups in the community.

With poverty reduction as its overriding objective, the Ninth Plan (1997-2002) aims at accelerating economic growth to 6 percent per annum during the plan period and over 7 percent in the following decade and half. However, given the past record of public resource management, achieving such development results remain a major challenge. "It will require major improvements in the budget planning, resource allocation and expenditure management process to ensure that limited public resources are channeled to, and are effectively utilized in those areas which can have a significant impact on poverty development," said the WB report. "Besides improved governance and transparency, there needs to be greater local ownership of and participation in the public resource management process."

The recently constituted Public Expenditure Review Commission has the all-important job of identifying ills in Nepal's public spending system and recommending ways to improve the situation. Of course, its test lies on implementation. "The success of the Commission will depend on to what degree the government implements its report as and when it is presented," says Dr. Dhungel. Otherwise, people will forget it as one more Commission formed by the government. And, the misuse and wastage of scarce resources of one of the poorest countries in the world will continue as before.

`There Is a Need to Streamline the Projects'

— DR. SHANKAR SHARMA

Member of National Planning Commission, DR. SHANKAR SHARMA, has also been appointed as member of the Public Expenditure Review Commission. He spoke on the need of and challenges before the newly constituted Commission. Excerpts:

What led the government to constitute the PER Comission?

The number of development projects have gone up in the last few years while the revenue and foreign aid has not. This has resulted into decline of allocation per project in real terms. Excluding big projects like Kali Gandaki A, the allocation to these projects has declined substantially. Most of these projects are not completed in time and their rate of return is very low or even negative. So, there is a need of streamlining all the on-going projects.

What will be the main role of this Commission?

The main role of this Commission will be to identify redundant projects and recommend the government to scrap them. Similarly, it will also review staff positions and administrative expenses in order to enhance their efficiency. This will also help restructure the budget formulating process.

How do you see coordination between the NPC and Ministries?

The role of NPC has reduced. Now the NPC will mainly focus on prioritization and monitoring of the projects while the concerned Ministries will be responsible for implementation, supervision and monitoring of the projects. Once the Ministries develop framework for the implementation of projects, it will help improve transparency.

The government still looks confused about the role of the public sector.

It is widely accepted that the government will work in the infrastructure development, social sector and poverty reduction programs whereas private sector will be promoted in the rest of the areas. But still there are some gray areas. The public sector is still strong in telecom, airlines and financial sector. Similarly, the role of private sector at local level is yet to be worked out. Since it will take some time to introduce competitive environment and unbundle public enterprises of monopolistic nature, the government will have to move forward in a gradual manner.

Then why is the privatization process slow and ineffective?

Though the process has remained quite slow, the government is committed toward it. NPC has started review of performance of selected public enterprises from this month. We will identify their problems and recommend necessary action at the highest level. But this will not be the substitute of the privatization program.

Is the government serious about poor quality of services in the government-run schools and health posts?

This is basically a management problem. There is still shortage of manpower in the health sector whereas number of trained teacher is still low in the education sector. Now the government is working on to hand over the management and supervision of these institutions to local community. So, we can anticipate positive changes in the next four to five years.