As some of you may recall, the PAISA team spent the better part of last year collecting and analyzing data on fund flows in elementary education finances in the 9 PAISA districts. This effort culminated in the production of the PAISA district studies. The study highlights two major anomalies in the current financial system for education. One, and this is no surprise to anyone familiar with the nuts and bolts of India’s administration, fund flows and planning systems are riddled with process related bottlenecks. As a consequence, even basic things like pushing money through the system takes significantly longer than it ought to. Funds are transferred toward the end of the financial year and spent in a tearing hurry. The second finding points to a larger structural problem in the planning and budgeting system for elementary education. Our findings highlight that the current system is extremely centralized (a trend that is likely to get further entrenched as more and more money for elementary education gets routed through the Sarva Shiksha Abhiyan).  So deep is the tendency to centralize that even school grants, that are meant to be discretionary grants spent on needs identified by school headmasters, are in fact spent based on formal and informal instructions provided by the district administration.

While we can argue the merits and demerits of centralization the fact is that such a centralized system cannot deliver on the Right to Education Act’s (RTE) mandate to build a decentralized bottom up system for elementary education financing. For the un-initiated, sections 21 (1), 21(2), and 22 of the RTE mandate that all government and government aided schools set up School Management Committees (SMCs)’ that are tasked with monitoring the day to day functioning of the school and making annual school development plans.

Echoing this mandate in the implementation guidelines for Sarva Shiksha Abhiyan (SSA), the GOI clearly states that effective implementation of the RTE  requires “… need for creation of capacity within the education system and the school for addressing the diversified learning needs of different groups of children who are now in the schooling system…..planning and implementation for universal access in the rights based approach would require an understanding of community needs and circumstances as well as decentralized decision making for meeting the diversified needs of children[1].”

While the PAISA studies have identified the problem, the one question we are regularly confronted with when we share our findings is about solutions.  How do we build a bottom up financing system that is accountable; that has the capability to plan (we are a nation driven by technocrats and we believe strongly that only ‘technical experts’ know how to plan) and (for the converted – who think decentralization is a good thing) how should we align finances to enable decentralization?

I’ve been thinking about these questions, and went back to fiscal decentralization theories that I studied in graduate school for answers. Here are some of my thoughts on the financial design question. Since this is a work in progress, I hope that this blog will generate some debate amongst readers that will enable us to come up with more nuanced solutions to the problem.

First principles of decentralization argue that a well-designed decentralized system is premised on the alignment of “three Fs”: funds, functions and functionaries. In essence, this means that every level of government must have a clearly delegated set of responsibilities or functions. This process of delegation must be based on the principle of subsidiarity which holds that “functions shall be carried out closest to citizens” at the smallest unit of governance possible and delegated upwards only when the local unit cannot perform the task. Second, funds must follow functions. However, these funds must be devolved in a manner that allows enough flexibility to local bodies to align expenditures to expressed needs and preferences. Third, functionaries must be accountable to the body responsible for delivering that function. Since PAISA in its current avatar is primarily focused on the issue of financial management, my focus on solutions in this blog is primarily concerned with the issue of designing an effective fiscal devolution system or the funds aspect of the 3 Fs.  First principles of fiscal decentralization mandate that funds ought to be devolved in such a manner that the relevant unit of government has flexibility and autonomy over expenditure decision making. Moreover, fund flows must be transparent. Transparency is essential because it can ensure that all levels of government understand their financial entitlements and therefore safeguard against funds being re-appropriated by higher levels of government. Second, transparency can ensure effective monitoring both by higher levels of government and more importantly, by citizens.

If applied to elementary education, implementing these principles would require the following reform solutions (note: my focus here is on the last level of government – the SMCs in this case. The reason is that greater decentralization at the last mile is the hardest and the most hotly contested issue in this country. Thus if we can get this right, building a financial system that facilitates decentralization at the last mile will follow naturally).

4.1 Providing untied block grants to School Management Committees: As revealed by the PAISA 2011 study, the current system of financial transfers to schools is based on specific guidelines that curb flexibility at the school level. The first reform needed is to redesign the transfer system away from this line-item based devolution to an untied block grant system. The district could identify broad areas of expenditure (eg. infrastructure, maintenance) but schools must have the flexibility to spend on activities prioritized by them. Interestingly, the need for freeing school grants from the current norm based approach has been well recognized[2]

4.2 Simplify the transfer system and distribute grants to schools on a per-child basis: Rather than transfer funds on complex criterion such as number of rooms in a school or teachers appointed, finances to schools should be devolved on a per-child enrolled basis. A per-child basis for devolution would both ensure simplicity in the transfer system and thereby facilitate greater transparency. Moreover, it would ensure a greater correspondence with school needs than the current system enables. Finally, a simplified transaction system will also smoothen process related inefficiencies that are often the cause of delays in fund flows.

4.3. Building a real-time management information system that tracks expenditures: A real time management information system (MIS) is critical to enabling transparency. Such a system could be modeled on the current MIS for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) that enables detailed fund tracking all the way to the Gram Panchayat. Transparency will ensure both that district and local bodies have access to data on timing of fund flows (thereby enhancing predictability) and will also enable higher authorities to track the flow of funds regular to identify and unlock process bottlenecks in real time. This can go a long way in ensuring predictability in fund flows.  Crucially, this MIS system must be made publically accessible. This will ensure that citizens and SMCs are informed of financial processes and can go a long way in enhancing transparency and accountability.

4.4 Predictability in fund flows: Apart from measures already described, predictability in grant flows can be enhanced by building in a reward and sanction based incentive structure for fund transfers at the State and district level. This could include penalizing sub-national governments that delay fund transfers by requiring them to pay schools an interest on delays.

4.5 Capacity building for planning: The problem of weak capacity is one of the most frequently offered arguments against greater financial and functional devolution to local governments and SMCs. There is little argument that in their current form, SMCs have almost no planning skill and capacity. In fact many studies on village education committees (the pre-RTE avatar of SMCs) point out that most often members are not even aware of their membership in these bodies. However, this is a chicken and egg argument. Capacity cannot be built in a vacuum. In fact, the absence of finances and powers there are no incentives for SMC members to participate in meetings and make plans. After all, why participate and plan if there is no authority to ensure implementation? Arguably therefore, effective decentralization is the first step to capacity building. However, this does need to be accompanied by a concerted effort by higher levels of government to train and mobilize SMCs and perhaps most important facilitate them in making plans. Consequent to the RTE every district now has a large financial allocation for community training and mobilization. However, this line item is given very low priority and for the most part goes unspent. Placing a greater emphasis and priority on spending these funds and organizing well designed training for SMCs will be an important first step in addressing this capacity deficit.

[1] SSA framework  2010-11

[2] Joint Review Mission, MHRD (2011)