Audit Report (Local Bodies) for the year ended 31 March 2006

1.1 PANCHAYAT RAJ INSTITUTIONS

1.1.1 Introduction

In conformity with the 73rd Constitutional Amendment Act, the Andhra Pradesh
Panchayat Raj (APPR) Act was enacted in 1994 repealing all existing Acts, to
establish a three tier system at the Gram Panchayat, Mandal Parishad and Zilla
Parishad level. As per the 2001 census, the total population of Andhra Pradesh
was 7.57 crore, of which 5.52 crore (72.92 per cent) lived in rural areas. As on
31 March 2006, there were 23084 Panchayat Raj Institutions (PRIs) in the
State which consisted of 22 Zilla Parishads (ZP's), 1119 Mandal Parishads
(MPs) and 21943 Gram Panchayats (GPs). Elections to the PRIs were
conducted in the months of July and August 2006 and newly elected members
took charge in October 2006.

1.1.2 Organizational set up

The organizational set up of PRIs in the state is as under:

PRINCIPAL SECRETARY
PANCHAYAT RAJ DEPARTMENT

COMMISSIONER
PANCHAYAT RAJ &
RURAL EMPLOYMENT

CHIEF EXECUTIVE DISTRICT

OFFICER, PANCHAYAT OFFICER
ZILLA PARISHAD

MANDAL PARISHAD DIVISIONAL PANCHAYAT

DEVELOPMENT OFFICER OFFICER

EXTENSION OFFICER PANCHAYAT SECRETARY

(PR & RD) GRAM PANCHAYAT

2
 Chapter I – Finances of Local Bodies

Gram Panchayat: The Government may by notification and in accordance

with the rules in this behalf declare any revenue Village or Hamlet thereof or
any part of a Mandal to be a Village for the purpose of the APPR Act, 1994
and specify the name of the Village. For every village the State Government
shall constitute a Gram Panchayat. Every village shall have a Gram Saba (GS)
consisting of persons registered in the electoral rolls pertaining to the area of
the village. The structure of the Gram Saba is given below:

GRAM SABHA Panchayat Secretary

[All voters of GP]
Other Staff

GRAM PANCHAYAT

Sarpanch
Upa-Sarpanch

MEMBERS

Mandal Parishad: A district may be divided into Mandals1 comprising of

such contiguous villages as may be specified in the notification by the State
Government, and for every Mandal there is a Mandal Parishad which is
divided into many territorial constituencies having a population between three
and four thousand. One member shall be elected to the Mandal Parishad from
each territorial constituency. The structure of the Mandal Parishad is depicted
below:

PRESIDENT MPDO
VICE-PRESIDENT

Mandal Educational Officer

Mandal Engineering Officer
MEMBERS Extension Officer (PR&RD)
Superintendent & Other Staff

1
The Blocks as a unit of development is obliterated and in its place the Mandal has emerged.
332 Panchayat Samities constituted earlier were replaced by 1119 Mandal Parishads
3
Audit Report (Local Bodies) for the year ended 31 March 2006

Zilla Parishad: The ZP consists of one elected member from each Mandal
besides Member of Legislative Assembly (MLA) of the State representing the
constituency, Member of House of People (MP) representing a constituency,
Member of the Council of State (MLC), who is a registered voter in the
district concerned and two co-opted members belonging to minorities. Each
ZP has seven Standing Committees (Planning and Finance, Rural Development,
Agriculture, Education and Medical Services, Women Welfare, Social
Welfare and Works) and the Chairperson is the Ex-officio member of all
standing committees. The District Collector, who is a permanent invitee, shall
be entitled to participate in all the standing committee meetings without right
to vote. The structure of a ZP is depicted below:

Chairperson CEO
Vice-Chairperson Dy.CEO
Standing
Committee

Parishad Educational Officer

Accounts Officer
MEMBERS
Superintendent & Other Staff

1.1.3 Funding of Panchayat Raj Institutions

The State and Central Government funded the PRIs through Grants-in-aid for
general administration and development activities. The Gram Panchayats
generate tax revenue from property and water taxes and non tax revenue from
various fees such as tap connection fee, rent from properties, etc. The Mandal
Parishad and Zilla Parishad do not generate any tax revenue and depend
mainly on Grants-in-aid. The funds are utilized by the PRIs for providing
civic amenities and welfare measures. Though the accounts are prepared by
the PRIs individually, there is no system in place to consolidate the revenue
and expenditure figures under various heads of accounts of all the PRIs, due to
which effective monitoring of the finances was not possible and an overall
picture of finances of PRIs could not emerge. With the available information
and figures furnished by the Director of State Audit, the following financial
analysis has been made.

Overall Financial Position of PRIs

Rs in Crore
8000
7000
6000
5000
4000
3000
2000
1000
0
2002-03 2003-04 2004-05

Opening balance Receipts Expenditure Closing balance

4
 Chapter I – Finances of Local Bodies

Financial Position of the PRIs: The receipt and expenditure of PRIs from
2002-03 to 2004-05, as furnished by the State Audit department, is detailed in
the table below.

(Rupees in crore)
Zilla Parishad
Year Opening balance Receipts Total Expenditure Closing balance

2002-03 1118.18 2538.09 3656.27 2560.96 1095.31

2003-04 1095.31 2771.16 3866.47 2842.19 1024.28

2004-05 1028.28 2326.97 3351.25 2396.54 954.71

TOTAL 7636.22 7799.69

Mandal Parishad
Year Opening balance Receipts Total Expenditure Closing balance

2002-03 456.80 2373.77 2830.57 2360.23 470.34

2003-04 470.34 2608.80 3079.14 2616.20 462.94

2004-05 462.94 2317.48 2780.42 2261.97 518.45

TOTAL 7300.05 7238.40

Gram Panchayat
Year Opening balance Receipts Total Expenditure Closing balance

2002-03 6.45 1220.29 1226.74 1177.81 48.93

2003-04 48.93 1406.16 1455.09 1277.53 177.56

2004-05 177.56 2527.99 2705.55 2028.63 676.92

TOTAL 5154.44 4483.97

It would be seen from the above that the receipts of the GPs have increased
considerably during 2004-05 compared to the previous years, while in case of
ZPs and MPs, the same has decreased.

Sources of Funds: The receipts for PRIs from 2002-03 to 2004-05, as

furnished by the State Audit department, is depicted below.

5
 Audit Report (Local Bodies) for the year ended 31 March 2006

(Rupees in crore)

Source of Funds 2002-03 2003-04 2004-05

Gram Panchayats
1. Own Revenue
a. Taxes (House tax, water tax, etc.) 113.68 97.20 203.00
b. Non-taxes (Market rents, rents of shops and other property, auctions, etc) 96.12 90.84 302.61
Total 209.80 188.04 505.61
2. Grants-in-aid
a. Salary Grant 127.01 95.59 151.26
b. Sampoorna Grameena Rozgar Yojana (SGRY) 172.28 208.15 334.18
c. Eleventh Finance Commission (EFC) 118.86 157.57 317.46
d. State Finance Commission (SFC) 0 76.40 192.70
e. Other grants (per capital grant, seinorage charges, profession tax, etc.) 454.16 537.72 740.86
Total 872.31 1075.43 1736.46
3. Deposits and Advances 6.13 9.49 11.24
4. Other Receipts 132.05 133.20 274.68
TOTAL 1220.29 1406.16 2527.99
Mandal Parishads
5.Grants and other receipts including fund accounts
a. General Fund (per capita grants, seinorage charges, profession tax, stamp 110.48 102.48 104.17
duty, own revenue from rents and leases, auction amounts, etc.)
b. Social Welfare 16.76 19.44 16.84
c. Minor Irrigation and rural water supply 1.28 1.59 1.92
d. Roads and bridges maintenance 2.33 4.18 2.92
e. Education 2132.72 2381.49 2085.41
f. SGRY 4.04 31.49 25.18
g. EFC 0 0 1.72
h. Others (Building grant, natural calamity grant, NABARD, MPLADS, 72.21 35.66 62.64
Pension grants, etc)
I. Deposits, Advances and Loans 33.95 32.47 16.68
TOTAL 2373.77 2608.80 2317.48
Zilla Parishads
6.Grants and other receipts including fund accounts
a. General Fund (per capita grants, seinorage charges, profession tax, stamp 175.21 115.92 122.42
duty, own revenue from rents and leases, auction amounts, etc.)
b. Social Welfare 37.90 21.06 27.92
c. Minor Irrigation and rural water supply 91.70 133.15 148.53
d. Roads and bridges maintenance 143.94 236.47 131.57
e. Education 1154.60 1307.28 1099.14
f. SGRY 188.29 380.45 318.26
g. EFC 1.05 9.46 17.07
h. Minimum Needs Programme (MNP) 3.84 4.66 3.07
I. NABARD 18.28 31.36 6.50
j. Others (Building grant, natural calamity grant, MPLADS, Pension grants, etc) 394.95 331.45 206.61
k. Deposits, Advances and Loans 328.33 199.90 245.88
TOTAL 2538.09 2771.16 2326.97
GRAND TOTAL (GP, MP & ZP) 6132.15 6786.12 7172.44

6
 Chapter I – Finances of Local Bodies

The total receipts of PRIs increased from Rs 6132.15 crore in 2002-03 to

Rs 7172.44 crore in 2004-05 i.e. by 16.96 per cent. This was mainly due to
increase in collection of tax and non-tax revenue by GPs in 2004-05 compared
to the previous years. There was also a significant inflow of funds through
EFC grants and assistance under centrally sponsored schemes. Despite the
increase in collection of taxes, it was observed from the Demand, Collection
and Balance particulars furnished by the Commissioner, PR, that there were
huge arrears in collection of tax and non-tax revenue by the GPs. As of March
2006, Rs 109.63 crore was in arrears on these accounts. Recovery of tax
arrears was poor in the districts of Karimnagar, Nizamabad, Krishna and
Warangal2 where the outstanding amounts were to the tune of Rs 29.1 crore.
Similarly, recovery of non-tax arrears was poor in the districts of Karimnagar,
Krishna, East Godavari, West Godavari and Warangal3 where the outstanding
amounts were to the tune of Rs 17.4 crore.

Application of funds:
The major expenditure of PRIs is on providing and maintaining civic
amenities such as roads, sanitation, water supply, lighting, etc. The
expenditure includes both recurring expenditure on maintenance and
non-recurring expenditure on creation of capital assets. The sector-wise
expenditure and expenditure incurred from the scheme funds such as SGRY,
EFC, etc. were not available with the Commissioner PR. However, based on
the data made available by the Director of State Audit, the expenditure
incurred by PRIs from 2002-03 to 2004-05, is depicted below:
(Rupees in crore)
Application of Funds 2002-03 2003-04 2004-05
Gram Panchayats
Expenditure particulars
a. Salary 136.48 135.92 194.01
b. Works expenditure from grants received under SGRY, EFC, SFC, etc. 812.04 866.09 1306.15
c. Maintenance Expenditure 119.54 133.90 266.04
d. Deposits and Advances 7.24 13.29 17.85
e. Other administrative expenditure 102.51 128.33 244.58
Total 1177.81 1277.53 2028.63
Mandal Parishads
Expenditure particulars
a. Education 2145.85 2389.29 2046.66
b. Social Welfare 11.49 15.22 16.12
c. Minor Irrigation and rural water supply 2.61 2.64 1.33
d. Roads and bridges maintenance 2.50 3.83 4.35
Scheme works such as SGRY, Janmaboomi, other grants and other
e. 66.04 56.75 68.63
programmes expenditure.
f. Expenditure from general funds account 100.60 108.97 105.34
g. Deposits, Advances and Loans 22.94 30.74 14.31
h. Other expenditure 8.20 8.76 5.23
Total 2360.23 2616.20 2261.97

2
Karimnagar: Rs 7.9 crore, Nizamabad: Rs 6.5 crore, Krishna: Rs 5.5 crore and Warangal:
Rs 9.2 crore
3
Karimnagar: Rs 2.8 crore, Krishna: Rs 2.1 crore, Warangal: Rs 2.2 crore, East Godavari:
Rs 2.3 crore, West Godavari: Rs 8 crore
7
 Audit Report (Local Bodies) for the year ended 31 March 2006

Application of Funds 2002-03 2003-04 2004-05

Zilla Parishads
Expenditure particulars
a. Education 1260.46 1290.06 1095.55
b. Social Welfare 35.41 17.61 13.70
c. Minor Irrigation and rural water supply 92.75 132.90 131.06
d. Roads and bridges maintenance 166.22 243.57 95.99
Scheme works such as SGRY, Janmaboomi, other grants and
e. 532.58 759.68 486.42
other programmes expenditure.
f. Expenditure from general funds account 113.64 134.11 132.23
g. Deposits, Advances and Loans 240.85 193.32 154.16
h. Other expenditure 119.05 70.94 287.43
Total 2560.96 2842.19 2396.54

GRAND TOTAL (GP, MP & ZP) 6099.00 6735.92 6687.14

The expenditure incurred on works was 64 per cent to 69 per cent during the
year 2002-03 to 2004-05 in Gram panchayats and more than 90 per cent of the
funds were utilised for the Education sector in Mandal Parishads. In Zilla
Parishads, the expenditure on the Education sector showed a declining trend
i.e. from 49 per cent to 46 per cent during 2002-03 to 2004-05

1.1.4 Accounting arrangements

The PRIs maintain accounts on cash basis. In May 2005, Government of AP

adopted the Budget and Accounting formats prescribed by the C&AG, based
on the EFC’s recommendations. While these formats have been implemented
in ZPs, they have not been implemented in the other two tiers.

1.1.5 Creation of Data base of PRIs

EFC allocated grants of Rs 18.26 crore, for creation of database on finances of

PRIs and as of March 2005, Rs 17.85 crore had been utilized. The work was
entrusted to National Informatics Centre (NIC) by the Commissioner, PR and
is in progress.

1.1.6 Audit arrangements

Director, State Audit is the statutory auditor for PRIs under the A.P. State
Audit Act 1989. C&AG conducts audit of PRIs under Section 14 of C&AG’s
(DPC), Act, 1971. Further, based on the recommendations of EFC, the State
Government entrusted the C&AG with the responsibility of providing
Technical Guidance and Supervision under Section 20 (1) of C&AG (DPC)
Act, for the proper maintenance of accounts and audit of Local Bodies. While
there were no arrears in audit conducted by Director, State Audit in respect of
ZPs, marginal arrears existed in respect of MPs. However, there were huge
arrears in the case of GPs. As of March 2006, audit of 6987 GPs was in
arrears. Out of these, audit of only 71 GPs had been completed by December

8
 Chapter I – Finances of Local Bodies

2006. The Director, State Audit had so far prepared Consolidated State Audit
and Review Reports for the years 1998-99 to 2003-04 and had submitted them
to the Finance Department. Though the State Audit Act prescribes that the
reports should be laid on the table of the Legislative Assembly, the same had
not been done so far by the Government. Some of the major findings by
Director, State Audit related to excess/non-utilization/diversion/mis-utilization
of grants, non-collection of dues, advances pending adjustments, violation of
rules, wasteful expenditure, etc.

1.1.7 District Planning Committees

In terms of Article 243-ZD of the Constitution, District Planning Committees

(DPCs) are to be constituted by the State Governments so as to consolidate the
development plans formulated by the local bodies based on planning at the
grass roots level. However, DPCs were not constituted in the State and the ZPs
and MPs were submitting proposals to the Government thereby defeating the
objective of preparing a consolidated development plan. Further, the
implementation was also not reviewed and monitored at the District level. In
the absence of a DPC, there was no formal mechanism to make
recommendations to the Government for the integrated development of the
districts.

1.1.8 Finance Commissions

Eleventh Finance Commission: The EFC had recommended grants amounting

to Rs 8000 crore to PRIs. The position of grants released under EFC during
2000-2005 in the State was as follows:
(Rupees in lakh)
1. Grants released from the Centre 68421.72
2. Matching contribution provided by
a) Local Bodies 8489.72
b) State Government 10125.00
3. Total (1+2) 87036.44
4. Grants released to Local Bodies 78546.72
5. Utilization of grants by Local Bodies
a) Maintenance of Accounts 1322.04
b) For creation of data base 1785.20
c) For maintenance of Civic Services 83929.20

As per the EFC guidelines, the grants had to be utilized for maintenance of
civic services and the projects should normally have been those that were not
covered under any other schemes of GOI/State Government. The utilization of
EFC grants was test checked in three districts4 covering three ZPs, three DPOs
and Engineering divisions and 16 GPs to whom the funds were released. The
following points were noticed.

4
Kurnool, East Godavari and Ranga Reddy districts
9
Audit Report (Local Bodies) for the year ended 31 March 2006

• In four GPs5, out of EFC grant of Rs 36.93 lakh, Rs 6.65 lakh was diverted
for construction of GP office and market buildings in violation of the
guidelines.
• Similarly, out of Rs13.55 lakh given to Executive Engineer (EE), Kurnool,
Rs 5.86 lakh was diverted for purchase of stationery. The EE, further
released Rs 37.20 lakh to District Primary Education Project (DPEP) for
construction of Upper Primary and High Schools, although the guidelines
stipulated that funds should be released only for primary schools.
• In three GPs6, Rs 6.45 lakh out of total release of Rs 50.47 lakh lapsed due
to non-utilization of the amounts within the stipulated time. Similarly, in
three engineering divisions7 Rs 80.27 lakh out of Rs 1.48 crore lapsed.
• As per the guidelines, the EFC grants had to be released to the PRIs within
three months of their release to Government of Andhra Pradesh (GOAP).
However, it was observed that DPO, Kurnool released funds to GPs after a
delay of seven months.
• GOAP released Rs 4.68 crore (February 2005) and 2.18 crore (July 2005)
to District Panchayat Officer, Ranga Reddy (RR) district, who, in turn,
released the same to 705 GPs in the district for execution of development
activities. Utilisation Certificates for the second instalment of Rs 2.18
crore are yet to be obtained (April 2007).
• An amount of Rs 10.25 crore out of total grant of Rs 111.40 crore received
by ZP, RR district was kept in fixed deposits from March 2003, thereby
depriving the targeted rural population of the intended benefits.
• Similarly, out of Rs 12.80 crore placed with ZP, RR district for
computerization of GPs (March 2004), Rs 6.08 crore was released (Rs 4.18
crore for procurement of hardware and installation to GPs and Rs 1.90
crore was placed with NIC for creation of data base) in August 2004 and
the remaining amount of Rs 6.72 crore was kept in fixed deposits from
March 2004 onwards and is yet to be utilized.

Twelfth Finance Commission:

As per paragraph 6.4 of TFC guidelines, the funds that were released by GOI
have to be transferred to the PRIs within 15 days. In case of delayed transfer
beyond the specified period of 15 days, the State Government should allow
interest at a rate equal to the RBI interest rate, along with the transfer of grants
to the PRIs. During audit of release and utilization of TFC grants, it was
observed that there were delays ranging between 39 and 110 days, in transfer
from Government to the lowest tier in case of three districts test checked.
However, interest was given by the GOAP only for 21 days. Though the
interest on delayed transfers was required to be transferred along with the
release of grants to the PRIs, the interest portion was actually released after a
delay of 44 days in respect of the 1st installment and 121 days in respect of the
2nd installment. Further, there were inordinate delays in transfer of funds to the

5
Golla mamidi, Neelapalli, Annavaram and Kowthalam Gram panchayats
6
Dowaleswaram, Golla Mamidi, Neelapalli GPs
7
EEs, RWS, Kurnool, Adoni and Nandyal
10
 Chapter I – Finances of Local Bodies

MPs and GPs ranging between 11 to 47 days. While the delay in transferring
the interest portion by ZP ranged between 36 to 215 days, in Mahboobnagar
ZP, the interest portion pertaining to Gram Panchayats had not been
released so far.

State Finance Commission:

The First State Finance Commission (SFC) was constituted during 1994. The
Second SFC started functioning from December 1998 and its Report
(2001-05) was placed in the legislative assembly in August 2002. While
reviewing the implementation of the recommendations of the First SFC, the
Second SFC pointed out that 34.5 percent of the recommendations relating to
Local Bodies were not accepted or accepted partially and several
recommendations, though accepted, were not implemented by GOAP.

Out of 63 recommendations made by the Second SFC, 18 recommendations

viz., maintenance of minor irrigation, abolition of land cess, additional grants
to small panchayats, creation of additional posts in Mandal Parishads, etc.,
were deferred and 12 recommendations viz., levy of surcharge on market cess,
adjustment of profession tax, taxes on village products like sugar cane, coffee,
black pepper and special grants for maintenance of civic services, etc., were
pending for further examination. The Second SFC also recommended
immediate transfer of all the functions enlisted in the Eleventh Schedule of the
Constitution to the PRIs. The status of transfer of functions is detailed in
paragraph 1.1.9. The Third State Finance Commission was constituted in
January 2003 and its report is awaited. Test check of utilization of SFC grants
in Zilla Parishad, Nellore and Mandal Parishad Development Office,
Dattirajeru revealed that an amount of Rs 42.69 lakh (ZP, Nellore : Rs 40.64
lakh and MPDO, Dattirajeru : Rs 2.05 lakh) released during 2003-2005 was
neither utilized nor remitted back to Government Account and was lying in
savings bank accounts (February 2007).

1.1.9 Devolution of funds, functions and functionaries to PRIs

The 73rd Amendment of the Constitution identified 29 functions to be

devolved to the Panchayat Raj Institutions (PRIs) and the same were
incorporated in the Eleventh Schedule of the Constitution. All the 29 functions
listed under the Eleventh Schedule of the Constitution were provided in the
Andhra Pradesh Panchayat Raj (APPR) Act8 1994. However, the envisaged
functions, functionaries and funds were not devolved to PRIs even after a
decade of issue of the APPR Act 1994. The Second Finance Commission
(SFC) observed that some of the 17 functions devolved from time to time
(June 1998 to November 2000) were actually partial transfers without
corresponding functionaries and the funds being transferred. SFC also
recommended (from June 1998 to November 2000) immediate transfer of the
remaining functions along with funds and functionaries. However, most of
these transfers were only on paper as functionaries and funds had not been actually

8
Amendment Act No. 5 of 1995 Schedule 1 read with Sections 46, 161 and 192
11
Audit Report (Local Bodies) for the year ended 31 March 2006

transferred along with the functions even as of January 2007 as per the status
indicated in Appendix- 1.

A task force constituted by the Union Ministry of Rural Development had

suggested (August 2001), an Activity Mapping Matrix for effective devolution
of functions to PRIs. This involves identification of activities related to
devolved functions and assignment of appropriate activity to the appropriate
level of PRI. Activity Mapping is being done only in respect of 10 out of the
29 matters listed in the Eleventh Schedule of the Constitution. Government
Orders for operationalizing Activity Mapping in respect of these 10 matters9
have been prepared.

Andhra Pradesh has undertaken to complete Activity Mapping and issue

necessary notifications transferring schemes based on Activity Mapping,
during the first half of the financial year 2006-07. It is expected that Andhra
Pradesh will commence Activity Mapping in respect of the remaining 19
matters during the next financial year. The Joint Secretary, Panchayat Raj and
Rural Development Department stated (January 2007), that the devolution of
funds, functions and functionaries to the PRIs in Andhra Pradesh, was
patterned on the activity mapping. The effective devolution of powers to PRIs
had been achieved by linking Functions, Functionaries and Funds and that the
prioritization of nine important subjects for devolution was under active
consideration of the Government.

Non-release of funds through PRIs:

As per Para 6.2 of the Eleventh Finance Commission guidelines issued by the
Ministry of Finance, GOI, budget estimates of the State Government
(Demand 31) pertaining to Panchayat Raj, under Major Head 2515 - Other
Rural Development Programmes and other related Major Heads, (as well as
provisions for release of funds), were to be made as grants-in-aid under Minor
Head 196 – Assistance to Zilla Parishads for schemes, minor works, work
charges, maintenance of rural roads, RWS and other schemes. Similarly,
assistance to Mandal Parishads and Gram Panchayats was to be shown under
Minor Heads 197 and 198 respectively. Although the State Government’s
budget depicts the release of funds as assistance to PRIs under these
designated Minor Heads, not all the funds are directly released to the PRI
concerned. This was seen in case of schemes like ARWS, PMGSY, PWS,
RIDF10, etc., where the funds were being released to Executive Engineers
concerned through PAO by LOC system. The Executive Engineers of PR
Engineering and RWS divisions were in turn accountable to Engineer-in-
Chief, PR, who is the administrative authority for EEs and hence PRIs do not
have any effective control over execution of works.

9
Agriculture, Animal Husbandry, Social welfare, Fisheries, Backward classes welfare, Health,
Rural development, Tribal Welfare, Rural Water supply, Women and Child welfare.
10
Rural Infrastructure Development Fund (RIDF).
12
 Chapter I – Finances of Local Bodies

1.1.10 Conclusion:

The Commissioner, Panchayat Raj did not consolidate the receipts and
expenditure accounts of PRIs reflecting poor monitoring of finances. Recovery
of tax and non-tax arrears was poor in GPs. The Budget and Accounts formats
for PRIs were implemented only in ZPs. These were implemented partially in
Mandals and were yet to be implemented in GPs. District Planning
Committees were not constituted in the State. Several deviations from the
guidelines and diversion of funds were noticed in utilization of Eleventh and
Twelfth Finance Commission grants. The State Finance Commission’s
recommendations were either not implemented or were partially implemented.
Although, the EFC had recommended devolution of 29 functions to PRIs, only
17 functions were devolved from time to time without corresponding transfer
of functionaries and funds.

1.1.11 Recommendations:
¾ The PRIs should make efforts to improve performance of collection of
arrear taxes and non-taxes and also utilize the available funds in a time
bound manner.
¾ The Audit Reports of Director, State Audit need to be laid on the table of
the Legislature as stipulated in the Act.
¾ District Planning Committees need to be set up without delay. Grants
should be utilized within a stipulated time to avoid lapse of funds.
¾ New accounting formats should be implemented at MPs & GPs level at an
early date.
¾ The State Government should expedite devolution of the three ‘Fs’ i.e.
Functions, Functionaries and Funds in respect of all the 29 subjects listed
in the Eleventh Schedule/Schedule I of APPR Act, 1994, for achieving the
objective of decentralization and grass-roots democracy in rural areas, as
laid down in the Constitution.
¾ To exercise effective control over execution of works, etc. by the PR
Engineering and RWS divisions, all the allocated funds should be routed
through PRIs.
¾ The recommendations of the State Finance Commissions should be
implemented.

13
 Audit Report (Local Bodies) for the year ended 31 March 2006

1.2 URBAN LOCAL BODIES

1.2.1 Introduction

The 74th Constitutional Amendment identified 18 functions for Urban Local

Bodies (ULBs) as listed in the Twelfth Schedule of the Constitution. The
Andhra Pradesh Municipal Corporations Act, 1994 was enacted
(Act 25 of 1994) to provide for the establishment of Municipal Corporations
in Andhra Pradesh and for matters connected therewith or incidental thereto.
However, save as otherwise expressly provided, all the provisions of
Hyderabad Municipal Corporation Act, 1955 including the provisions relating
to the levy and collection of any tax or fee were extended to Visakhapatnam,
Vijayawada and all other Municipal Corporations also. Thus, the provisions of
the Hyderabad Municipal Corporation Act, 1955 as amended from time to
time and the rules framed thereunder are followed by Corporations in the
State. The Municipalities are governed by the Andhra Pradesh Municipalities
Act, 1965.

As per the 2001 census, the total population of Andhra Pradesh was 7.57
crore, of which 2.05 crore reside in urban areas (27.08 per cent). As on 31
March 2006, 134 Urban Local Bodies (ULBs) existed in the State. Out of
these, 120 were Municipalities and 14 were Municipal Corporations. The State
Election Commission conducted elections to the ULBs in the month of
September 2005.

1.2.2 Organizational set-up

All the ULBs consist of such number of elected members

(Corporators/Councilors) as may be notified from time to time by the
Government. The Municipal Council in respect of Municipalities is headed by
the Chairperson and by Mayor in Corporations. The organizational setup of
ULBs in the state is depicted below:

PRINCIPAL SECRETARY
MUNICIPAL ADMINISTRATION

MUNICIPAL COMMISSIONER &

DIRECTOR OF MUNICIPAL MUNICIPAL
CORPORATIONS ITIES
ADMINISTRATION

14
 Chapter I – Finances of Local Bodies

MUNICIPAL CORPORATION

MAYOR COMMISSIONER
DY. MAYOR
Standing
Committee Additional/Deputy
Commissioners
Ward
Committees

City Engineer
MEMBERS
Medical Officer of Health

Town Planning Officer

Municipal Examiner of Accounts

Municipal Secretary
Other Staff

MUNICIPAL COUNCIL

CHAIRPERSON Commissioner, Municipality

DY. Chairperson
Manager
WARD
COMMITTEES Municipal Engineer
Municipal Health officer

Municipal Town Planning Officer

Municipal Educational Officer

MEMBERS
Other Staff

The Municipal Council and the Corporations transact their business as per the
provisions of the Act concerned. There is a Standing Committee consisting of
the Chairpersons of all the Ward Committees in a Corporation. There are
Ward Committees in Municipalities. The Standings Committees and Ward
Committees shall meet for the transaction of business in the
Corporation/Municipalities from time to time; make such regulations with
respect to such meetings and with respect to the scrutiny of the municipal
accounts. The functions of the ward committee include maintenance of
sanitation, water supply and drainage, street lighting, roads, market places and
play grounds and school buildings and review of the revenue collections,
preparation of the Annual Budget and forwarding of the same to the Municipal
Council and sanctioning of works and schemes. The day-to-day administration

15
 Audit Report (Local Bodies) for the year ended 31 March 2006

rests with the Commissioner and his/her staff. Below the Commissioner there
are Additional/Deputy/Assistant Commissioners, Municipal Engineer, Medical
Officer, Examiner of Accounts, Town Planning Officer and other staff.

1.2.3 Funding of ULBs:

Resources by volume and sources

The resources of ULBs consist of grants and assistance from Government of

India (GOI) and State Government under various schemes, loans from
Financial Institutions (HUDCO etc.,) and own revenue generated through
various tax and non-tax collections. The tax revenue mainly accrues from
property tax and taxes on advertisement, while non-tax revenue comes from
water charges, encroachment fee, developmental charges, buildings fee, etc.
Figures given in the following tables furnished by Commissioner and Director
of Municipal Administration (CDMA), are not certified figures, as the audit of
ULBs is in arrears ranging up to 20 years of accounts in most of the ULBs as
detailed in para 1.2.5
Position of overall receipts during 2003-06 is depicted below:
(Rupees in crore)
Source of Funds 2003-04 2004-05 2005-06
Own Revenues
a. Taxes
i) Property tax 490.75 584.24 520.41
ii) Other Tax revenue (Advertisement tax, taxes on 13.60 18.07 20.03
animals and taxes on carriages and carts)
Total Tax revenue 504.35 602.31 540.44
b. Non-Taxes
i) Water charges 104.15 104.69 119.91
ii) Encroachment fee 24.17 1.65 84.90
iii) Betterment/Development charges 40.52 50.46 59.83
iv) Building license fee 32.38 37.04 42.73
v) Others (Water supply donations, market fee, slaughter 70.36 92.35 107.78
house fee, shops rent, trade license fee, etc.)
Total Non-Tax revenue 271.58 286.19 415.15
Assigned Revenue
i) Entertainment tax 63.98 61.72 46.52
ii) Surcharge on stamp duty 266.76 292.30 282.83
iii) Profession tax 89.53 91.07 111.65
Total Assigned Revenue 420.27 445.09 441.00
Non-Plan Grants 291.63 201.95 198.99

Plan Grants 188.64 138.03 120.28

Loans 46.11 54.14 10.99

Other Income 407.12 293.02 290.65

Grand Total 2129.70 2020.73 2017.50

16
 Chapter I – Finances of Local Bodies

The tax revenue comprising Property Tax trend from 2003-04 to 2005-06
mainly of property tax R upees in
increased sharply from Rs cro re 584.24
600
504.35 crore in 2003-04 to 580
560
Rs 602.31 crore in 540
520.41
2004-05. This was due to 520 490.75
the Government’s decision 500
480
(October 2004) to waive 460
interest on payment of 440
2003-04 2004-05 2005-06
arrears of property tax.
The non-tax revenue Property Tax
increased from Rs 271.58
crore in 2003-04 to Rs
415.15 crore in 2005-06. Water charges (Rs 119.91 crore) and encroachment
fee (Rs 84.90 crore) were the major contributors to non-tax revenue.
As of March 2006, the tax and non-tax revenue pending collection amounted
to Rs 284.85 crore and Rs 208.00 crore respectively.

Application of funds

The expenditure of ULBs comprises recurring expenditure like pay and

allowances to staff maintenance of capital assets etc., and non-recurring
expenditure like creation of capital assets. There was a decline of 9.78 per
cent in the total expenditure during 2005-06 (Rs 2037.91 crore) over the
previous year (Rs 2258.71 crore). The details of expenditure by ULBs in the
past three years as furnished by CDMA are depicted below:
(Rupees in crore)
Application of Funds 2003-04 2004-05 2005-06
Non- Recurring Total Non- Recurring Total Non- Recurring Total
Recurring Recurring Recurring
a. Roads 207.98 52.24 260.22 257.51 63.80 321.31 208.08 70.15 278.23
b. Drains and 65.38 11.69 77.07 76.50 12.36 88.86 71.75 12.89 84.64
Culverts
c. Buildings 19.24 5.93 25.17 26.16 7.67 33.83 26.97 6.74 33.71
d. Public Health and 22.23 63.69 85.92 21.70 114.40 136.10 17.17 195.89 213.06
sanitation
e. Water supply 76.57 100.30 176.87 153.46 89.71 243.17 94.48 81.32 175.80
f. Lighting 36.66 142.06 178.72 27.29 89.74 117.03 27.51 68.60 96.11
g. Remunerative 12.27 4.97 17.24 13.63 7.36 20.99 17.70 7.74 25.44
enterprises
Total 440.33 380.88 821.21 576.25 385.04 961.29 463.66 443.33 906.99
h. Pay and 383.01 383.01 370.47 370.47 370.42 370.42
allowances
i. Loans Repayment 58.50 58.50 65.89 65.89 38.83 38.83

j. Other expenditure 424.16 424.16 861.06 861.06 721.67 721.67

(town planning,
land acquisition
management
expenses, etc.)

Total 865.67 865.67 1297.42 1297.42 1130.92 1130.92

GRAND TOTAL 440.33 1246.55 1686.88 576.25 1682.46 2258.71 463.66 1574.25 2037.91

17
 Audit Report (Local Bodies) for the year ended 31 March 2006

Expenditure on pay and allowance during 2005-06 was 18.36 per cent of total
receipts and 18.18 per cent of total expenditure. The expenditure on Public
Health and Sanitation showed an increasing trend from 2004-05 to 2005-06.
The expenditure on various civic amenities in the last three years is depicted
below:
Expenditure on civic amenities both Capital and O&M

2003-04 2004-05 2005-06

Rs. in crore
350
300
250
200
150
100
50
0
Roads Drains and Buildings Public Water Lighting
Culverts Health and supply
sanitation

Based on the details of sources and application of funds over three years, it
was noticed that the percentage of recurring expenditure to that of receipts
increased from 58.53 percent in 2003-04 to 78.03 percent in 2005-06. The
comparison of receipts and expenditure for 2005-06 is depicted through pie
charts below.

Receipts in 2005-06 from various sources Expenditure in 2005-06 on various activities

(Rs in Crore)
(Rs. in crore)

290.65 278.23
Roads
540.44 84.64 Drains and Culverts
Tax Revenue 10.99
721.67 Buildings
Non-Tax Revenue 33.71
198.99 Public Health and sanit ation
Assigned Revenue
Water supply
Plan grants 213.06
Light ing
Non-Plan Grants 120.28
Remunerative ent erprises
Loans
Pay and allowances
Other income 175.8
415.15 38.83 Loans Repayment
96.11
441 Other expenditure
370.42
25.44

1.2.4 Accounting arrangements

Accounts of ULBs are being maintained on cash basis. However, Municipal

Corporation of Hyderabad had adopted the double entry system for
maintaining its accounts since 2002-03. Compilations of accounts by ULBs
are in arrears since 1986. Therefore, the Director of State Audit could not
carry out audit and certify the accounts in time. Ministry of Urban
Development and Poverty Alleviation, GOI and C&AG had formulated a

18
 Chapter I – Finances of Local Bodies

National Municipal Accounts Manual (NMAM) with double entry system, for
greater transparency and control over finances, and requested the States to
adopt the same with appropriate modifications to meet States specific
requirements. Accordingly, a Steering Committee was constituted by GOAP
and the Andhra Pradesh Municipal Accounts Manual (APMAM) was
developed during 2006-07. The APMAM is now being implemented by the
State Government.

1.2.5 Audit

Director, State Audit is the statutory auditor for ULBs under the A.P. State
Audit Act 1989. C&AG conducts audit of the ULBs under Section 14 of
C&AG’s (DPC) Act, 1971. Based on the recommendations of EFC, GOAP
entrusted the C&AG with provisions of technical guidance and supervision for
audit and accounts of Local Bodies under Section 20(1) of C&AG (DPC), Act.

Though, Director, State Audit conducts audit periodically, the audit of

accounts of ULBs for the past several years was pending, as the accounts were
yet to be compiled by the ULBs. The arrears ranged up to 20 years in some
Municipal Corporations11. The District wise arrears position in respect of
Municipalities furnished by Director, State Audit ranged between four to 42
years. The Director, State Audit had, so far, submitted the Consolidated State
Audit and Review Reports for the years 1998-99 to 2003-04 to the Finance
department. Though the State Audit Act prescribes that the reports should be
laid on the table of the Legislative Assembly, the same was not done by
GOAP. Some of the major areas commented on by Director, State Audit are
excess/non-utilization/diversion/mis-utilization of grants, non-collection of
dues, advances pending adjustments, violation of rules, wasteful expenditure, etc.

1.2.6 District Planning Committees

District Planning Committees are to to be constituted in terms of Article

243-ZD of Constitution of India to discharge the functions of the State
Government as detailed in para 1.1.7. However, due to non-constitution of the
District Planning Committees as commented upon earlier, the objective of
preparation of a consolidated development plan for integrated development of
the district was not achieved.

1.2.7 Finance Commissions

Eleventh Finance Commission:

The EFC had recommended Grants amounting to Rs 2000 crore to ULBs. The
position of grants released under EFC during 2000-2005 in the State is as
follows:

11
Vishakhapatnam: 20 years, Hyderabad: 12 years, Rajahmundry: seven years, Kurnool:
six years
19
Audit Report (Local Bodies) for the year ended 31 March 2006

(Rupees in lakh)
1. Grants released from the Centre 16465.70
2. Matching contribution provided by
a) Urban Local Bodies 7126.16
b) State Government --
3. Total (1+2) 23591.86
4. Grants released to Urban Local Bodies 16465.00
5. Utilization of grants by Urban Local Bodies
a) Maintenance of Accounts 0
b) For creation of data base 21.86
c) For maintenance of Civic Services 23570.00

As per the EFC guidelines, the grants had to be utilized for maintenance of
civic services. However, it was observed that out of EFC grants of Rs 164.65
crore, Rs 54.41 crore (33.05 per cent) was utilized for payment of outstanding
electricity consumption dues in violation of the guidelines. Rs 29.91 crore was
utilized in 2001-02 itself for payment of outstanding dues of previous years.
As per the guidelines, the funds were not permitted to be diverted for any
other purpose than for which released. However, the GOAP adjusted the
pending electricity charges of the ULBs directly, while releasing the grant by
settling with APTRANSCO. The guidelines also stipulated that only works not
covered under other schemes of GOI/State Government could be taken up.
However, GOAP released Rs 14.09 crore to ULBs for ‘Chief Minister’s
Assurances’ scheme. In Chittoor Municipality, an amount of Rs 1.95 crore
intended for improvement of water supply was diverted for payment of
salaries, office expenses, etc. Instances of parking of funds in fixed deposits
were also noticed in Kurnool Municipal Corporation which have been
highlighted separately in Para 3.2.5 of this Report.

Twelfth Finance Commission:

As per TFC guidelines, the funds released by the GOI have to be transferred to
the ULBs within 15 days. However, there were delays ranging from 41 days
to 94 days in transferring the TFC funds to ULBs. Further, the delay was
calculated only up to the date on which the CDMA issued proceedings
transferring the funds, instead of taking the actual date of receipt by the ULBs.
The interest on delayed transfers was released after a delay of another 110
days in respect of 1st installment and the amounts were still lying (January
2007) with the CDMA and were yet to be transferred to ULBs. The interest
portion for the second installment was yet to be released by GOAP.
Moreover, GOAP was yet to make available (January 2007), the records and
information to take up audit of utilization of TFC grants.

State Finance Commissions:

The Second SFC had made 39 recommendations pertaining to financial

devolutions and structural reforms covering nine major sectors in ULBs. Out
of these, 14 recommendations such as providing additional amounts to
20
 Chapter I – Finances of Local Bodies

Municipalities for civic amenities, grants linked to the performance of Local

Bodies and transfer of schools to Municipalities/Corporation in Urban areas of
Telangana Region, etc., were pending further examination. The Third SFC
was constituted in January 2003; its report is awaited.

1.2.8 Conclusion

The collection of property tax, which is the major source of tax revenue in
ULBs, revealed fluctuations. There were substantial amounts of tax and
non-tax revenue pending collection in ULBs. The Andhra Pradesh Municipal
Accounts Manual adopted by the State Government is yet to be implemented.
There were huge arrears in audit of ULBs by the Director, State Audit,
primarily due to non-compilation of accounts. District Planning Committees
have not been constituted so far in the State. Several deviations to the
prescribed guidelines and diversion of funds were noticed in utilization of
Eleventh and Twelfth Finance Commission grants.

1.2.9 Recommendations

¾ The ULBs should take steps to improve collection of arrear tax and non-
tax revenue.
¾ ULBs should compile annual accounts that are in arrears in order to enable
audit by Director, State Audit and thereby ensure greater transparency and
accountability. As stipulated in the Act, Government should place the
Audit Reports of the Director, State Audit in the Legislature.
¾ Government should ensure that District Planning Committees are set up at
the earliest to ensure that district plans are approved only after proper
appraisal by the DPCs.
¾ Diversion of grants should be avoided and timely release of grants to the
ULBs be ensured for utilization for the purposes for which released. The
recommendations of State Finance Commissions need to be implemented
in time.

21