Republic of Vanuatu: Energy Access Project

Transcription

1 Energy Access Project (FFP VAN 49450) Project Administration Manual Project Number: September 2017 Republic of Vanuatu: Energy Access Project

2 Contents ABBREVIATIONS 4 I. PROJECT DESCRIPTION 1 II. IMPLEMENTATION PLANS 2 A. Project Readiness Activities 2 B. Overall Project Implementation Plan 3 III. PROJECT MANAGEMENT ARRANGEMENTS 4 A. Project Implementation Organizations Roles and Responsibilities 4 B. Key Persons Involved in Implementation 5 C. Project Organization Structure 5 IV. COSTS AND FINANCING 6 A. Detailed Cost Estimates by Expenditure Category 8 B. Allocation and Withdrawal of Loan Proceeds 9 C. Allocation and Withdrawal of Grant Proceeds 9 D. Detailed Cost Estimates by Financier 10 E. Detailed Cost Estimates by Outputs/Components 11 F. Detailed Cost Estimates by Year 12 A. Project S-Curve 13 B. Fund Flow Diagram 13 V. FINANCIAL MANAGEMENT ASSESSMENT 14 A. Country Issues 14 B. Disbursement 16 C. Entity Specific Issues 19 D. Risk Analysis 21 VI. PROCUREMENT AND CONSULTING SERVICES 26 A. Advance Contracting 26 B. Procurement of Goods, Works and Consulting Services 26 C. Procurement Plan 26 D. Consultant's Terms of Reference 28 VII. SAFEGUARDS 32 VIII. PERFORMANCE MONITORING, EVALUATION, REPORTING AND COMMUNICATION 34 A. Project Design and Monitoring Framework 34 B. Monitoring 35 C. Stakeholder Communication Strategy 42 IX. GENDER AND SOCIAL DIMENSIONS 47 X. ANTICORRUPTION POLICY 48 XI. ACCOUNTABILITY MECHANISM 48 XII. RECORD OF PAM CHANGES 49

3 Project Administration Manual Purpose and Process The project administration manual (PAM) describes the essential administrative and management requirements to implement the project on time, within budget, and in accordance with Government and Asian Development Bank (ADB) policies and procedures. The PAM should include references to all available templates and instructions either through linkages to relevant URLs or directly incorporated in the PAM. The Ministry of Climate Change Adaptation, Meteorology, Geo-Hazards, Environment, Energy and Disaster Management (MOCC) are wholly responsible for the implementation of ADB financed projects, as agreed jointly between the Beneficiary and ADB, and in accordance with Government and ADB s policies and procedures. ADB staff is responsible to support implementation including compliance by MOCC of their obligations and responsibilities for project implementation in accordance with ADB s policies and procedures. At Loan Negotiations the Beneficiary and ADB shall agree to the PAM and ensure consistency with the Financing and Grant Agreements. Such agreement shall be reflected in the minutes of the Financing Negotiations. In the event of any discrepancy or contradiction between the PAM and the Financing and Grant Agreements, the provisions of the Loan and Grant Agreement shall prevail. After ADB Board approval of the project's report and recommendations of the President (RRP) changes in implementation arrangements are subject to agreement and approval pursuant to relevant Government and ADB administrative procedures (including the Project Administration Instructions) and upon such approval they will be subsequently incorporated in the PAM.

4 Abbreviations ADB Asian Development Bank ADF Asian Development Fund AFS audited financial statements DMF design and monitoring framework EIA environmental impact assessment EMP environmental management plan GDP gross domestic product ICB international competitive bidding IEE initial environmental examination IPP indigenous people plan LAR land acquisition and resettlement LIBOR London interbank offered rate MFEM Ministry of Finance and Economic Management MOCC Ministry of Climate Change Adaptation, Meteorology, Geo-Hazards, Environment, Energy and Disaster Management NCB national competitive bidding PAI project administration instructions PAM project administration manual PIU project implementation unit QCBS quality- and cost based selection RRP report and recommendation of the President to the Board SBD standard bidding documents SCF Strategic Climate Fund SOE statement of expenditure SPS Safeguard Policy Statement SPRSS summary poverty reduction and social strategy TOR terms of reference

5 I. PROJECT DESCRIPTION 1. The project will increase energy access and renewable energy generation in the two islands of Espiritu Santo and Malekula being second and third largest population centers after Efate. The project will assist Vanuatu install hydropower generation to replace diesel generation in Malekula and will extend the distribution grid in both Malekula and Espiritu Santo. The project is aligned with the following impact: improved livelihoods of households in Malekula and Espiritu Santo in alignment with the National Sustainable Development Plan 2016 to The project will have the following outcome: increased supply of clean renewable electricity to households in Malekula and Espiritu Santos The outputs of the project are as follows: (i) (ii) (iii) (iv) Distribution grid extension. This includes extending the grid to an estimated additional 1,050 households. This will increase the grid access rate from 8% to 14% in Malekula and from 22% to 29% in Espiritu Santo. The project will finance distribution lines, step-down transformers and poles. Brenwe Hydropower Plant. This involves constructing a 400-kilowatt (kw) runof-river hydropower plant, including (a) a total of 2-kilometers (km) of access roads, (b) a 21 km transmission line (20 kilovolts), (c) an intake structure, (d) a 1.0 km headrace canal, (e) a 190-meter steel penstock, and (f) a powerhouse. The Brenwe hydropower plant will provide in excess of 90% of the total generated energy for the Malekula grid through to Capacity building. This consists of training newly connected households on options for electricity-based income generation, electricity safety, and household budget management. Efficient project management services. This involves establishing a project management unit (PMU) that will provide efficient technical design, management, and supervision services. 1 The Design and Monitoring Framework is in Appendix 1 2 Backup diesel generation will be maintained (in case of disruptions to the hydropower supply or during periods of low river flow), and will also operate periodically for maintenance purposes and unplanned outages.

6 2 II. IMPLEMENTATION PLANS A. Project Readiness Activities 2017 DSC contracting Sep Oct Nov Dec Responsibility MOCC-DOE VPMU/ADB Establish project implementation arrangements MOCC-DOE VPMU ADB President approval ADB Loan/Grant signing MFEM/ADB Government legal opinion provided AG Office Loan/grant effectiveness MFEM/ADB ADB = Asian Development Bank, AG = Attorney General, DSC = design and supervision consultants, DOE = Department of Energy, MFEM = Ministry of Finance and Economic Management, MOCC = Ministry of Climate Change Adaptation, Meteorology, Geo-Hazards, Environment, Energy and Disaster Management, VPMU = Vanuatu Project Management Unit

7 3 B. Overall Project Implementation Plan SP-1 ID Task Name Duration 1 Loan Effective Milestone Wet Wet Wet Wet Wet Wet Wet 2 DS Consultant procurement (Advance) 6 months 3 ICS Consultant 24 months f f f f f f f f f f f f f f f f f f f f f f f f 4 Design and Supervsion Consultant (DSC) - Intermittent f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f 5 Land procurement f f f f f f f f f f f f 6 Warrenty Period (Performance Guarantee) 12 months f f f f f f f f f f f f 7 ADB Project Closure 6 Months f f f f f f Transmission & Grid Extension - Malekula 10 DSC: design, planning, BOQ, tech specs, bid docs 6 months f f f f f f 11 DSC: Bid, Evaluation Plant & Materials, Contracts Awarded 6 months f f f f f f 12 Plant and Materials Delivery 8 months f f f f f f f f f 13 Installation Works bid docs, Bids and Contract Award 6 months f f f f f f 14 20kV Transmisison Lines 6 months f f f f f f kV SWER Grid Ext construction 6 months f f f f f f 16 Progressive Commissioning 3 months f f f SP-2 Transmission Upgrade & Grid Extensions - Espiritu Santo 20 DSC: design, planning, BOQ, tech specs, bid docs 6 months f f f f f f 21 DSC: Bid, Evaluation Plant & Materials, Contracts Awarded 6 months f f f f f f 22 Plant and Materials Delivery 8 months f f f f f f f f 23 Installation Works bid docs, Bids and Contract Award 6 months f f f f f f 24 20kV TML Upgrade 6 months f f f f f f 25 3-Phase and 12.7kV SWER Grid Ext construction 6 months f f f f f f 26 Progressive Commissioning 4 months f f f SP-3 Brenwe Hydro Power Station (400 kw new) 30 DSC: Design, ICB Docs Preparation and Approval 6 months f f f f f f Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 31 DSC: Tendering Process and Contract Award 6 months f f f f f f Q1 Q2 Q3 Q4 31 Access Roads 6 months f f f f f f 32 Contractor design 10 months f f f f f f f f f f 32 Equipment Procurement 12 months f f f f f f f f f f f f 33 Civil Works 31 months f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f 34 Power Plant and Substation Works 10 months f f f f f f f f f f 35 Commissioning/Acceptance 1 month f 2020 Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q4

8 4 III. PROJECT MANAGEMENT ARRANGEMENTS A. Project Implementation Organizations Roles and Responsibilities MFEM - Executing agency Project Steering Committee Oversee implementation of the project. Responsible for overall management of the project. Support institutional strengthening and capacity building programs under the project. VPMU Steering Committee Oversee implementation of the project. Monitor progress of the project. Rectify issues hindering progress of the project. Guide the executing agency and the implementing agency. Meet at least once each quarter. MOCC-DOE Oversee implementation of the project by the VPMU Overall interagency coordination; VPMU Implement the infrastructure components of the project. Coordination of steering committee meetings. Establish a Project Management Unit which will be responsible for day to day implementation of the projects, including: preparation of an overall implementation plan and annual budgets; recruitment of the Project Management Consultants and award procurement and consulting contracts, management of the bidding process, management of capacity development activities, project safeguards document preparation and safeguard plans implementation; project financial management; consolidation, review, and submission of regular progress and financial reports to MFEM, including the annual audit report and financial statements; monitoring and evaluation of project outputs; preparation of withdrawal applications for MFEM ADB Conduct regular loan/grant review missions Procure design and supervision consultants Review draft tender documents in accordance with Procurement Plan Overall coordination and advisory support

9 5 B. Key Persons Involved in Implementation Implementing Agency Ministry of Climate Change, Adaptation, Meteorology & Geohazards, Energy, Environment and Natural Disaster Management (MOCC) Asian Development Bank Transport, Energy and Natural Resources, Pacific Department Officer's Name: Antony Garafae Position Director, Department of Energy Telephone address Officer's Name: Jesse Benjamin Position Director General, MOCC Telephone address Staff Name Olly Norojono Position Director Telephone No address Mission Leader Staff Name Anthony Maxwell Position Principal Energy Specialist Telephone No address C. Project Organization Structure 3. The Government of Vanuatu will be the Beneficiary, the Ministry of Finance and Economic Management (MFEM) will be the Executing Agency (EA) and the Ministry of Climate Change Adaptation, Meteorology, Geo-Hazards, Environment, Energy and Disaster Management (MOCC) will be the Implementing Agency (IA). MOCC will delegate implementation to the Vanuatu Project Management Unit (VMPU), with oversight by the Department of Energy (DOE). The VPMU will be responsible for procurement under the project. VPMU Project Steering Committee (PSC) Executing Agency (MFEM) Implementing Agency (MOCC) Project Director (Individual Consultant Selection) Vanuatu Project Management Unit Ministry of Infrastructure and Public Utilities (MIPU) Design and Supervision Consultants (DSC) Safeguard Unit (Social and Environment) Hydropower Design and Supervision Transmission and Distribution Design and Supervision Financial Management

10 6 IV. COSTS AND FINANCING 4. The proposed project is estimated to cost $15.1 million. 3 Details are shown in below Tables. The estimated costs will be subject to detailed design and procurement. Table 1: Project Investment Plan ($ million) Item Amount a A. Base Cost b 1. Distribution grid extension Brenwe Hydropower Project management 2.6 Subtotal (A) 12.3 B. Contingencies c 1. Physical Price 1.1 Subtotal (B) 2.6 C. Financing charges during implementation 1. Interest during implementation 0.2 Subtotal (C) 0.2 Total (A+B+C) 15.1 a Includes taxes and duties of $1.8 million to be financed from government resources through exemptions b In mid-2017 prices. c Physical contingencies computed at 13% for civil works, equipment, land acquisition and project management. Price contingencies computed at foreign inflation on foreign exchange costs and local inflation on local currency costs. Source: Asian Development Bank estimates. 5. The government has requested a concessional loan in various currencies equivalent to SDR 1,768,000 ($2.5 million equivalent) 4 from ADB s ordinary capital resources to help finance the project. The loan will have a 32-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions as set forth in the draft loan agreement. The government has also requested a grant not exceeding $2.5 million from ADB s Special Funds resources (Asian Development Fund) to help finance the project. Vanuatu has received in principle approval of $7.0 million grant from the SCF, to assist in financing the project and to be administered by ADB. 5,6 Vanuatu will finance the remainder of the total project cost in the amount of $3.1 million consisting of land acquisition costs, taxes and duties, and distribution of civil works contracts. Since ADB is administering cofinancing resources in the form of grants from the SCF for operations financed by the Asian Development Fund, universal procurement will apply to all procurement packages under the project. 7 3 All financial figures are expressed in US dollars, unless specified otherwise 4 Based on exchange rate of SDR 1= USD on 15 June Government received clearance from the SREP Sub-committee to proceed with project preparation on the basis of $7 million grant availability from SREP. The preferred disbursement arrangement for SCF is cost-sharing. 6 Under the Scaling Up Renewable Energy Program in Low-Income Countries. The loan/grant may finance local transportation and insurance costs. 7 ADB Blanket Waiver of Member Country Procurement Eligibility Restrictions in Cases of Cofinancing for Operations Financed from Asian Development Fund Resources. Manila.

11 7 Table 2: Summary Financing Plan Amount ($ million) Share of Total (%) Source Asian Development Bank Ordinary capital resources (concessional loan) Special Funds resources (Asian Development Fund grant) Strategic Climate Fund (grant) a Government b Total Source: Asian Development Bank. a. Under the Scaling Up Renewable Energy Program in Low-Income Countries financed by the Strategic Climate Fund. Administered by the Asian Development Bank. b. Government financing includes land acquisition costs, taxes and duties, and distribution civil works contracts.

12 8 Item A. Detailed Cost Estimates by Expenditure Category A. Investment Costs VUV (millions) $ (millions) % of Total Base Costs Foreign Local Total Foreign Local Total e Exchange Currency Exchange Currency 1. Civil Works a % 2. Equipment b % 3. Land Acquisition % 4. Project Management % 5. Taxes and Duties % B. Contingencies Subtotal (A) , % 1. Physical c % 2. Price d % Subtotal (B) % C. Financing charges during implementation 1. Interest during implementation % Subtotal (C) % Total Project Cost (A+B+C) , % a Civil works include installation costs b Equipment procurement on the basis of CIP cost (carriage and insurance paid) c Physical contingencies are computed at 13% of base cost d Price Contingencies are computed by expenditure based on annual domestic and foreign inflation e Includes taxes and duties of $1.8 million to be financed from government resources through exemptions.

13 9 B. Allocation and Withdrawal of Loan Proceeds CATEGORY Number Item Total Amount Allocated for ADB Financing (SDR) Percentage and Basis for Withdrawal from the Loan Account 1 Civil Works 1. 1,768, % of total expenditure claimed* * exclusive of taxes & duties imposed within the territory of the Beneficiary 1. allocation for civil works will be utilized after SCF grant financing C. Allocation and Withdrawal of Grant Proceeds CATEGORY Number Item Total Amount Allocated for ADB Grant [$] Percentage and Basis for Withdrawal from the Grant Account 1 Equipment 2,500, % of total expenditure claimed* * exclusive of taxes & duties imposed within the territory of the Beneficiary Item CATEGORY Total Amount Allocated for Strategic Climate Fund Financing [$] Percentage and Basis for Withdrawal from the Grant Account 1 Civil Works 1. 1,300, % of total expenditure claimed* 2 Equipment 2,300, % of total expenditure claimed* 3 Project Management 2,200, % of total expenditure claimed* 4 Unallocated 1,300,000 Total 7,000,000 * exclusive of taxes & duties imposed within the territory of the Beneficiary 1. allocation for civil works will be utilized prior to ADF loan and grant financing

14 10 D. Detailed Cost Estimates by Financier Item ADF Loan % ADF Grant % SCF d Grant % Govern ment A. Investment Costs 1. Civil Works % 0.0 0% % 0.1 3% % 2. Equipment a 0.0 0% % % 0.4 8% % 3. Land Acquisition 0.0 0% 0.0 0% 0.0 0% % 0.2 2% 4. Project Management 0.0 0% 0.0 0% % 0.0 0% % 5. Taxes and Duties 0.0 0% 0.0 0% 0.0 0% % % Subtotal (A) % % % % % % Total Cost % of Total Cost B. Contingencies 1. Physical b % % % % % 2. Price c % % % % % Subtotal (B) % % % % % C. Financing Charges during Implementation Interest during implementation % % 0.0 0% 0.0 0% % Subtotal (C) % % 0.0 0% 0.0 0% 0.2 1% Total Project Cost (A+B+C) % % % % % a Equipment procurement on the basis of CIP cost (carriage and insurance paid) b Physical contingencies are computed at 13% of base cost c Price Contingencies are computed by expenditure based on annual domestic and foreign inflation d Under the Scaling Up Renewable Energy Program in Low-Income Countries financed by the Strategic Climate Fund. Administered by ADB. Includes annual audit costs of $50,000. e Taxes and duties are provided through exemption. f allocation for civil works will be utilized after SCF financing but before ADF loan financing

15 11 E. Detailed Cost Estimates by Outputs/Components Item Total Cost a Amount US $ millions Brenwe HPP Malekula Grid Extension Santo Grid Extension % of Cost Category Amount % of Cost Category Amount % of Cost Category Project Management % of Cost Amount Catego ry A. Investment Costs b 1. Civil Works % 0.1 4% 0.3 8% 0.0 0% 2. Equipment % % % 0.0 0% 3. Land Acquisition % 0.0 0% 0.0 0% 0.0 0% 4. Project Management % 5. Taxes and Duties % 0.1 7% % % Subtotal (A) % 0.8 7% % % B. Contingencies 1. Physical c % 0.1 5% 0.1 8% % 2. Price d % 0.1 7% % % Subtotal (B) % 0.2 6% 0.2 8% % C. Financing Charges During Implementation 1. Interest during implementation % 0.0 0% 0.0 0% 0.0 0% Subtotal (C) % 0.0 0% 0.0 0% 0.0 0% Total Project Cost (A+B+C) % 1.0 6% 1.4 9% % a Includes taxes and duties of $1.8 million to be financed from government resources through exemptions b In mid-2017 prices. c Computed at 13% of costs. d Price Contingencies are computed by expenditure based on annual domestic and foreign inflation Source: ADB Estimate

16 12 F. Detailed Cost Estimates by Year Item a US$ millions Total Cost A. Investment Costs b 1. Civil Works Equipment Land Acquisition Project Management Taxes and Duties Subtotal (A) B. Contingencies 1. Physical c Price d Subtotal (B) C. Financing Charges during Implementation 1. Interest during Implementation Subtotal (C) Total Project Cost (A+B+C) a. Includes taxes and duties of $1.8 million to be financed from government resources through exemptions b. In mid-2017 prices c. Physical contingencies computed at 13% of base costs d. Price Contingencies are computed by expenditure based on annual domestic and foreign inflation

17 13 A. Project S-Curve VAN: Energy Access Project Planned Disbursement (Cumulative) Planned Contract Awards (Cumulative) B. Fund Flow Diagram Asian Development Bank (and co-financiers) Withdrawal Application Direct Payment Ministry of Finance and Economic Management (MFEM) (Executing Agency) Withdrawal Application Vanuatu Project Management Unit (including Imprest Account - SCF only) Government Contribution Invoice Contractors, Consultants DOE = Department of Energy, MOCC = Ministry of Climate Change Adaptation, Meteorology, Geo-Hazards, Environment, Energy and Disaster Management, VPMU = Vanuatu Project Management Unit

18 14 V. FINANCIAL MANAGEMENT ASSESSMENT 6. The Project Financial Management Assessment was prepared in accordance with the Technical Guidance Note on ADB Project Financial Management Assessment. The assessment concludes that the overall project financial management risk is moderate. A. Country Issues 7. Country issues that impact on the effective financial management of this project are concerned with (i) public financial management, (ii) management and skills capacity, and (iii) country environment. Public Financial Management (PFM) 8. Vanuatu fiscal aggregates have improved significantly since 2000 on the back of better macroeconomic performance, improved fiscal management and strengthened public financial management (PFM) arrangements. The government has adopted both International Public Sector Accounting Standards (IPSAS) and Government Finance Statistics (GFS) 86 standards. The use of program budgeting has increased budget transparency and coverage. Vanuatu PFM arrangements were most recently assessed in 2013 using the PFM Performance Measurement Framework covering period from 2009 to 2011, which found that while budget execution and reporting standards were generally sound, audit, planning, and transparency issues needed further improvement. 8 The following are some key summarized issues of this assessment. 9. Credibility of budget. Reflecting improved macro-fiscal settings and better fiscal management, Vanuatu rated highly on budget credibility with A ratings assigned to three major relevant indicators and with C rating for one indicator. 9 The government has a clear budget calendar which is broadly followed. From 2009 the Office of the Prime Minister and the Ministry of Finance and Economic Management (MFEM) formulate policy priorities and co-ordinate distribution of the Government s financial resources. 10. Comprehensiveness and transparency. As in earlier assessments, in terms of comprehensiveness and transparency, its ability to oversee fiscal risk remains a significant concern to the GoV, as it is unable to have a complete and up-to-date picture of its exposure to contingent liabilities. 11. Accounting, recording and reporting. In 2002, the MFEM established integrated financial management information system (FMIS) that is generic to all government ministries in Vanuatu. The government operates a centralized payments and payroll system using SmartStream financial software. Comprehensive and detailed yearly budget execution reports can be extracted as required by all users, although senior management in line ministries do not always have access 8 C. Pretorius and N. Pretorius. August Republic of Vanuatu. Public Financial Management Performance Report. Birgmingham,. Under the internationally accepted PEFA framework, Vanuatu s performance was assessed in relation to seven dimensions of public financial management: (i) credibility of the budget; (ii) comprehensiveness and transparency; (iii) degree to which the budget is prepared with due regard to government policy; (iv) predictability and control in budget execution; (v) accounting, recording, and reporting; (vi) external scrutiny and audit operations; and (vii) appropriateness of donor practices in the country. 9 The indicators in PFM Performance Measurement Framework are measured between score of A to D, with A score indicating better performance. For more information on scoring guidelines please refer to

19 15 and are sometimes unaware of the information available. Since 2006, bank account reconciliations have been automated/semi-automated for the key treasury managed bank accounts. Financial statements are produced on an accrual basis and have been produced for financial years , within 6 months of year-end. Government has adopted IPSAS voluntarily for some time, but this is now required by law. Detailed breakdowns of parliamentary appropriations (on a modified cash basis) are included in the financial statements to Parliament. 12. External scrutiny and audit. The basic legal framework for external scrutiny and audit is in place, although there are concerns over the true independence of the external audit function. Since 2009, there has been a marked improvement in the external audit function, with the appointment of a new Auditor General and provision of technical assistance. A number of audits have been carried out, opinions issued and reports prepared. Despite the outsourcing of some audits, capacity constraints (both in terms of staffing and expertise) are currently limiting the scope and nature of the work. Impact is undermined by the fact that the Public Accounts Committee (PAC) has not met on a regular basis. 13. The current legal framework for PFM is set out under the following acts and regulations. Constitution 1980 (amended in 1988) provides the basis for sound PFM in Vanuatu. Section 25 sets out the provisions in relation to public finance including the appointment and function of the Auditor-General. Public Finance and Economic Management (PFEM) Act 1998 (amended in 2000 and 2009) designed to ensure effective economic, fiscal, and financial management and responsibility by government. Expenditure Review and Audit (ERA) Act 1998 (amended in 2000 and 2008) provides for a committee to review public expenditure and sets out the objectives, functions and powers of the Office of the Auditor-General (OAG). In particular, it sets out reporting requirements of the auditor-general and the role of the PAC in scrutinizing public finances. The amendment in 2008 changed the auditor general s terms of employment from a permanent position to a 5-year contract. The Government Contracts and Tender Act 1998 (amended in 2001) and its associated regulations set out the process of procurement. 14. Revenue Administration which includes Customs Act, Import Duties Act and the value added tax (VAT) Act set out the mandate of the Customs and Inland Revenue Department and the administration of import duties and VAT respectively. Other Acts such as Business Licenses Act, Casino Act set out other licensing/charging requirements. The Leadership Code Act 1998 makes it a criminal offence for a Leader 10 to fail to disclose a personal interest in the awarding of a government contract. The Archives Act (1992) provides the basic requirements for management and storage of key documents. In support of the various Acts, there are a number of sets of regulations (financial and tender), financial circulars, procedures manuals (e.g. accounting) and operational manuals (e.g. payroll and bank reconciliation). 15. Vanuatu faces many challenges in terms of implementation of PFM reforms. It has a relatively small but widespread population, poor communication infrastructure, and at times political uncertainty. Nevertheless, the Gov t remains committed to the reform process and the need for greater accountability and transparency in the use of public finances. This is illustrated clearly by significant PFM reforms such as amendments of the ERA Act in 2008 as well as PFEM Act in As defined by the Act.

20 16 Management and Skills Capacity 16. In common with many developing countries, Vanuatu has a shortage of skills in financial management, financial analysis and management accounting. The few qualified and skilled persons available are often lured into private sector employment or into donor funded projects that pay a far higher salary than that paid by the public service. Given this scenario, donor funded projects have often relied on the use of project management units (PMUs) to manage and report on funding of public work programs delivered through the different ministries. In an effort to close the skills gap between finance staff employed by the PMUs and those employed in the mainstream ministries, the donors often include as part of their exit strategies, a training and capacity building component in the funding assistance provided. 17. Progress has recently been made on public sector management with support from the Government of Australia supported Governance for Growth PFM subprogram, which is providing a program of PFM capacity building that is expected to include the establishment of provincial financial controllers as a means to establish greater accountability and oversight, and to facilitate de-concentration of decision making authority. 11 Country Environment 18. ADB past experience. Since 1983, ADB has provided nine loans in Vanuatu, with net loan amount of $49.0 million, of which six were rated successful. The Development Financing Project (completed in 1999) and the Comprehensive Reform Program (CRP) (2002) were rated partly successful, the Urban Infrastructure Project (2003) and the Cyclone Emergency Rehabilitation Project (2003) were rated successful, and the Santo Port Main Project (1991) and the Santo Port Supplementary Project (1999) were rated generally successful. Common issues identified by evaluations include overly ambitious and complex project design, lack of adequate upstream design work, insufficient attention to administration and institutional capacity, and difficulties with tender processes and procurement. B. Disbursement 19. Fund Flow Mechanism. Loan and grant disbursement is a key element in the project cycle. ADB expects that proposed disbursement procedures and fund-flow mechanisms will be suitable for the project. ADB procedures for withdrawal of loan and grant proceeds are standardized to facilitate disbursements under most loans. Loan and grant proceeds from the ADB will be disbursed in accordance with ADB s Loan Disbursement Handbook (2017, as amended from time to time), 12 and detailed arrangements agreed upon between the government, ADB and SREP Secretariat. Online training for project staff on disbursement policies and procedures is available at: Project staff are encouraged to avail of this training to help ensure efficient disbursement and fiduciary control. 20. The Scaling-Up Renewable Energy Program in Low Income Countries (SREP) is a targeted program of the Strategic Climate Fund (SCF), which is one of two funds within the Climate Investment Funds (CIF) framework. ADB will have full administration of SCF grant component under this project. 21. Direct Payment The direct payment procedure is a disbursement procedure where the 11 AusAID and Government of Vanuatu Governance for Growth Program: Design Document. Canberra. 12 Available at:

21 17 ADB at the Beneficiary s request, pays a designated beneficiary (e.g., supplier, contractor, or consultant) directly. Disbursements from the loan proceeds under the civil works contracts will generally be by direct payment procedures. VPMU will prepare the withdrawal applications with complete supporting documents, and submit to ADB through MFEM for processing of payments. 22. ADB Loan Disbursement Handbook (Chapter 7) reflects the requirements of direct payment procedure. A signed withdrawal application (Appendix 7A of Loan Disbursement Handbook) must be submitted to ADB together with a summary sheet (Appendix 7B of Loan Disbursement Handbook or Attachment 3 of PAM) and the required supporting documents. A separate withdrawal application is required for each different currency. To prove the requested disbursement is for eligible project expenditures incurred, the supporting documents listed in the following table must be submitted to ADB together with the withdrawal applications. ADB will return withdrawal applications that do not meet the requirements. Additional supporting documents may be required depending on the transaction involved. Payment for Goods List of Supporting Documentation for Project Expenditures Payment Type Required Supporting Documents Goods One time or installment payment Supplier s invoice, or purchase order (indicating date, amount, and bank account details) Services Advance payment Consultant s or service provider s invoice (indicating amount of advance payment and bank account details) Progress payment Consultant s or service provider s invoice (indicating date, amount, and bank account details) Civil Works Advance payment Contractor s invoice (indicating date, amount, and bank account details) Progress payment Contractor s invoice and interim payment certificate or summary of work progress (indicating period covered, amount, and bank account details) Release of retention money Contractor s invoice (indicating date, amount, and bank account details) and unconditional bank guarantee (if required) 23. In addition, supporting documents summarized in the following table should be retained by the Beneficiary for annual audit of project financial statements and/ or ADB s review. ADB reserves the right to request submission of such documents if deemed necessary. List of Supporting Documentation for annual audit of project financial statements Payment Payment Type Required Supporting Documents for Goods Goods One time or installment payment Bill of lading or delivery receipts, bank guarantee if required under the contract, and other documents as required in the contract Services Advance payment Progress payment Contract terms and conditions which refer to payment of advance and progress payments, breakdown of amount Civil Works Advance payment due, and other documents as required in the contract Contract terms and conditions which refer to payment of advance, bank guarantee if required under the contract, and other documents as required in the contract

22 18 Progress payment Release of retention money Breakdown of amount due and other documents as required in the contract Contract terms and conditions which refer to release of retention money, and other documents as required in the contract 24. Imprest Account. To expedite project implementation through the timely release of funds, the Beneficiary will establish an imprest account for the SCF grant at the Reserve Bank of Vanuatu. MFEM and VPMU will operate, manage, replenish, and liquidate the imprest account in accordance with the ADB's Loan Disbursement Handbook (2017, as amended from time to time). 25. VPMU, acting on behalf of the executing agency MFEM, with the assistance of the project implementation team (consultants for project management and implementation supervision) and project accountant will administer the imprest account. The currency of the imprest account is the U.S. dollar. The imprest account is to be used exclusively for ADB s share of eligible expenditures. VPMU is accountable and responsible for proper use of advances to the imprest account. The total outstanding advance to the imprest account will not at any time exceed the estimated expenditures to be financed through the account for the forthcoming 6 months. The request for initial and additional advances to the imprest account should be accompanied by an Estimate of Expenditure Sheet 13 setting out the estimated expenditures for the forthcoming 6 months of project implementation. For every liquidation and replenishment request of the imprest account, the Beneficiary will furnish to ADB (a) statement of account (bank statement) where the imprest account is maintained, and (b) the imprest account reconciliation statement reconciling the above mentioned bank statement against VPMU s records. 14 VPMU on behalf of MFEM will submit withdrawal applications with relevant supporting documents substantiating eligible expenditures for the replenishment and liquidation of the imprest fund. 26. Before the submission of the first withdrawal application, VPMU will submit to ADB sufficient evidence of the authority of the person(s) who will sign the withdrawal applications on behalf of the Beneficiary, together with the authenticated specimen signatures of each authorized person. The minimum value per withdrawal application is $100,000 equivalent. Individual payments below this amount should be paid by the EA/IA and subsequently claimed from ADB (i) through reimbursement; or (ii) from the imprest account, unless otherwise accepted by ADB. 27. Anticorruption. As has been explained and discussed with the government, ADB will include anticorruption provisions in the loan provisions and the bidding documents of the project, consistent with its commitment to good governance, accountability and transparency. ADB will reserve the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the project. The IA will establish a grievances mechanism and committee to deal with any concerns arising from project implementation. All contracts financed by ADB in connection with the project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the executing agency and all contractors, suppliers, consultants, and other service providers as they relate to the project. 13 Available in Appendix 10B of the Loan Disbursement Handbook. 14 Follow the format provided in Appendix 10C of the Loan Disbursement Handbook. All bank charges in the operation of the imprest account will be financed from the loan.

23 19 C. Entity Specific Issues 28. The Republic of Vanuatu will be the Beneficiary, the MFEM will be the Executing Agency (EA) and the Ministry of Ministry of Climate Change Adaptation, Meteorology, Geo-Hazards, Environment, Energy and Disaster Management (MOCC) will be the Implementing Agency (IA). MOCC will delegate implementation responsibilities to the Vanuatu Project Management Unit (VMPU), with oversight by the Department of Energy (DOE). The VPMU will be responsible for engaging all consulting services and contracts under the project. 29. The $65.69 million Millennium Challenge Compact with the Government signed in 2006 supported Vanuatu in rehabilitating roads on Efate and Santo Islands. As the Vanuatu Compact came to close in 2010, the GOV has taken up steps to ensure that the broad management experience gained by MCA-Vanuatu over the life of the compact is retained. As a result, the Council of Ministers approved establishment of the VPMU on 1 November 2010, supplemented by Council decision of the 25 of August It acts as an EA of the GOV to oversee and manage major development projects. 30. The VPMU, an entity within the Prime Minister s Portfolio with its Steering Committee has dual reporting responsibilities to the Prime Minister s Office (PMO) and the MFEM. VPMU currently oversees three major projects - Inter-island Shipping Project (funded by ADB and New Zealand GOV), Port Vila Urban Development Project (funded by ADB and Australian GOV), and Port-Vila Lapetasi International Multi-Purpose Wharf Project (JICA). 31. The governing body of VPMU is a Steering Committee comprised of the Director Generals of the Office of the Prime Minister, MFEM, the Ministry of Infrastructure and Public Utilities, the Ministry of Foreign Affairs, the Director of Department of Finance and Treasury, the Director of the Department of Strategic Policy and Planning, the Secretary General of the Public Service Commission. The Steering Committee provides oversight into the overall implementation of all development projects and the performance of the VPMU. 32. Design and Supervision Consultants (DSC) will be embedded within the VPMU to assist in implementing the project. VPMU has an experienced financial management specialist and is currently engaging another financial management specialist, thus has acceptable capacity to manage fund flow for the proposed project. The MOCC-DOE consists of Director, Program Manager, technical staff and support staff such as Finance and Procurement Officer and Finance Administrator. MOCC-DOE has the capacity to handle only simple bookkeeping transactions, such as raising the vouchers. Therefore, it does not have sufficient capacity to handle complex financial management tasks needed for project implementation. 33. The project will be implemented through existing institutions and using country systems as much as possible. In addition, the FMA for the proposed project will be significantly stronger than those for previous projects. Specific measures will include capacity building support and provision of independent accounting support, if needed, to ensure, among other things, timely and rigorous reconciliations, orderly record keeping, and strict adherence to financial management policies and internal controls. 34. Asset management and planning. There is a need for a comprehensive and accurate Asset Register for all assets purchased or constructed under the project. This register must identify the useful life of the separate significant components of the infrastructure assets in accordance with International Public Sector Accounting Standards IPSAS 17: Property Plant and Equipment. The asset register is required to be maintained, updated and reported quarterly

24 20 as part of project reporting requirements during construction, and will be audited annually. An Asset Management Plan specifying the technical requirements and resourcing to carry out the ongoing maintenance and ultimate replacement of each asset or asset component at the end of its useful life will be prepared by the VPMU. Auditing 35. Internal Auditing. Neither VPMU nor MOCC-DOE have internal auditors. To mitigate any risks arising from the absence of an internal audit function within VPMU, it will be ensured during planning stage that the internal control environment within the proposed VPMU office is strong. In addition, VPMU s Steering Committee will be consulted, and chartered accounting firm will be recruited to carry out internal audit functions, particularly focusing on effective operations of internal controls (including review of bank reconciliations). The internal audit reports, to be provided on quarterly basis, will be reviewed by the VPMU s Steering Committee and actions taken to address the findings. 36. External Auditing. VPMU will subject the detailed consolidated project financial statements to be audited in accordance with International Standards on Auditing by an auditor acceptable to ADB. The audited project financial statements will be submitted in the English language to ADB within 6 months of the end of the fiscal year by VPMU. VPMU will appoint the external auditors to review the project financial statements. 37. ADB s guidelines require that the Beneficiary and the project executing agency have the required financial statements for each year prepared under an acceptable financial reporting framework audited by an independent auditor acceptable to ADB and that the audit be conducted in accordance with auditing standards that are also acceptable to ADB. 38. To ensure that ADB is provided with reliable, comprehensive, and timely information, the following is required on an annual basis: (i) (ii) Audited Project Financial Statements (APFS) Specific additional audit opinions on: a. Use of project financing - to confirm whether the Beneficiary or executing agency has utilized all proceeds of the project financing only for purposes of the project. b. Compliance with financial 15 covenants (where applicable) - to confirm or otherwise, that the Beneficiary or executing agency was in compliance with the financial covenants of the financing or grant agreement. (iii) (iv) Management Letter Audited Financial Statements (AFS), at the entity level, in cases, where (i) the executing (EA) or implementing agencies (IA) are separate legal entities whose annual financial statements are subject to audit under the DMC s statutory or 15 The auditors are expected to opine solely on financial covenants (for example debt service coverage rate, selffinancing ratio, debt:equity ratio), in other words, only when the overall aspects of compliance relate to accounting and financial matters within the scope of the auditor s professional competence.

25 21 regulatory requirements, and (ii) there is a policy basis for requiring these audited financial statements, provided that the expected benefits of such submission will exceed the associated administrative costs. 39. ADB requires the audit opinions, financial statements and management letter be provided in English. The VPMU 16 is responsible for the preparation and fair presentation of the project financial statements and for maintaining sufficient internal control, as determined necessary, to ensure that the financial statements are free from material misstatement, whether due to fraud or error. In addition, the VPMU is responsible for ensuring (i) that project financing is used only for the purposes intended, (ii) that the project is compliant with loan/grant covenants, and (iii) ensuring that effective internal controls, including over the procurement process, are maintained. Therefore, the VPMU must include the following in its Letter of Representation submitted to the auditor (where applicable): (i) (ii) (iii) (iv) That project financial statements are free from material misstatement, including omissions and errors and are fairly presented. That the Beneficiary or executing agency has utilized all proceeds of the project financing only for purposes of the project. That the Beneficiary or executing agency was in compliance with the financial covenants of the financing agreement. That effective internal control, including over the procurement process, was maintained. 40. The government has been made aware of ADB s policy on delayed submission, and the requirements for satisfactory and acceptable quality of the audited accounts. ADB reserves the right to verify the project's financial accounts to confirm that the share of ADB s financing is used in accordance with ADB s policies and procedures. Compliance with financial reporting and auditing requirements will be monitored by review missions and during normal program supervision, and followed up regularly with all concerned, including the external auditor. 41. Public Disclosure. Public disclosure of the project financial statements, including the audit report on the project financial statements, will be guided by ADB s Public Communications Policy (2011). 17 After review, ADB will disclose the project financial statements for the project and the opinion of the auditors on the financial statements within 14 days of ADB s confirmation of their acceptability. The Audit Management Letter will not be disclosed. D. Risk Analysis 42. The following assessment of risks is based on the existing public financial management environment in the country and assessment of DOE and VPMU s financial management capacity. The risk-mitigation assessment considers the factors which will significantly reduce or eliminate the risks identified. 16 Project Management refers to the project management unit (PMU), or to the specific unit within the EA or IA tasked with the preparation and audit of annual financial statements. 17 Available from

26 22 Risk Type Inherent Risks 1. Country- Specific Risks Risk Assess ment* Risk Description M Weak Financial Management Environment while budget execution and reporting standards are generally sound, audit, planning, and transparency issues need further improvement Management and skill capacity issues in common with many developing countries, Vanuatu has a shortage of skills in financial management, financial analysis and management accounting. Mitigation Measures Vanuatu has recently started to reform its legal framework such as updating the PFMA Act in 2009 and the ERA Act in 2008 with the new Auditor-General being appointed in late Vanuatu will continue to reform its legal framework and ensure that the new legislations are enforced. Development partners initiatives on improving financial management environment and promoting good governance will also be continuously implemented in the country. Various donor funded projects include an element of training and capacity building in their project activities which is directed towards upgrading, improving and strengthening the performance of public servants holding key finance positions in the Ministries. This proposed project is no exception. The implementation consultants will assist VPMU with the day-to-day implementation of this project and training and capacity building. 2. Entity- Specific Risks M Corruption allegations of corruption and malfeasance have characterized some aspects of infrastructure development in Vanuatu. Lack of Ni-Vanuatu project championship the MOCC- DOE has never implemented ADB funded projects in Vanuatu so has never been in direct charge of the financial management, accounting, financial reporting and auditing arrangements. The department s financial management, accounting and reporting capacity is therefore limited only to servicing the requirements of the government financial instructions and thus unable ADB will include anticorruption provisions in the grant provisions and the bidding documents of the project, consistent with its commitment to good governance, accountability and transparency. ADB will reserve the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the project. VPMU will establish a grievances mechanism and committee to deal with any concerns arising from project implementation. MOCC will delegate implementation responsibilities to the Vanuatu Project Management Unit (VMPU), with oversight by the Department of Energy (DOE). The VPMU will be responsible for engaging all consulting services and contracts under the project. Clear Organisational structure will be prepared; specific terms of reference will be developed for VPMU staff and the design and supervision of consultants. The consulting firm will assist and train VPMU to ensure that a good financial management system is instituted and that proficient and skilled staff is engaged on the project. They will also