PROGRAM FIDUCIARY SYSTEMS ASSESSMENT

Transcription

1 Sustainable Transport Infrastructure Improvement Program (RRP SOL 46499) A. Background and Information Sources PROGRAM FIDUCIARY SYSTEMS ASSESSMENT 1. Under the proposed program, country public financial management (PFM) systems will be used. The assessment of the program financial management and procurement systems is intended to determine how well the Government of Solomon Islands will manage fiduciary risks and provide reasonable assurance that program funds will be used appropriately and in line with the sound procurement principles of competition, economy and efficiency, transparency, and fairness. The fiduciary systems assessment (FSA) was also informed by the extensive experience of the Asian Development Bank (ADB) in supporting the transport sector in Solomon Islands. The detailed financial management assessment was conducted with reference to ADB s Guidelines for the Financial Management and Analysis of Projects 1 and Financial Due Diligence: A Methodology Note. 2 As required by ADB s results-based lending (RBL) policy, the financial management systems assessment emphasizes accountability and transparency. The procurement assessment is based on a detailed review of procurement systems, capacities, and practices of the Solomon Islands Ministry of Infrastructure Development (MID) and Ministry of Finance and Treasury (MOFT). It follows the methodologies prescribed in the program s procurement capacity assessment questionnaires and tools. 2. The FSA focuses on areas that are relevant to the RBL program. It assesses budgeting, financial reporting, internal and external audit, internal control, and information technology systems to determine their strength, relevance, and adequacy for the RBL program. The FSA used (i) the most recent Public Expenditure and Financial Accountability (PEFA) assessment, (ii) the financial management assessment for MOFT as the identified executing agency, (iii) the updated financial management assessment for MID as the implementing agency, and (iv) the report on the joint review of the National Transport Fund (NTF) conducted in September To improve capacity and compliance, action plans that include measures to improve financial management and procurement systems were developed to reduce implementation risks under the program. 3. Country PFM arrangements were assessed in 2012 using the PEFA PFM Performance Measurement Framework. 3 The assessment noted that, compared with the original PEFA assessment conducted in 2008, the repeat assessment in 2012 reveals an overall improvement across most performance indicators with slippage in some areas and no change in the rating for others. 4 However, PEFA noted that the repeat assessment was done in 2012 during a time of transition, when the government was to implement various PFM reforms. The government recognizes that changes and improvements have not been as fast as desired, but progress is nonetheless satisfactory. To strengthen ownership and coordination of PFM reforms, the Solomon Islands cabinet endorsed the PFM Reform Road Map in June The road map draws on all relevant actions to strengthen PFM over a 3-year implementation framework. The key priorities for implementation in the next months include implementation of the PFM Act, systems development, compliance with controls on budget and management of cash flows, and strengthened nontax revenue collection. 1 ADB Guidelines for the Financial Management and Analysis of Projects. Manila. 2 ADB Financial Due Diligence: A Methodology Note. Manila. 3 Under the PEFA framework, performance is assessed in relation to seven dimensions of PFM: (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 development partner practices in country. 4 Government of Solomon Islands PEFA Assessment Final Report. Honiara (11 December).

2 2 4. Accounting and financial reporting. The government has a centralized accounting and financial reporting system. MOFT is tasked with the responsibility of preparing all financial reports for all government line ministries and state enterprises. Financial statements are prepared using cash basis accounting. MOFT is undertaking reforms and developing a framework to move toward the International Public Sector Accounting Standards (IPSAS) cash basis norm. In 2013, the government passed the new PFMA. With full impementation of the act from 1 January 2014, the government is preparing financial statements in accordance with IPSAS. MOFT has been involved in a number of projects funded by development partners and has undertaken the financial management responsibility for these projects. 5. Internal audit. MOFT has an Internal Audit Division (IAD) created under the new PFMA. 5 The IAD is responsible for advising accountable officers of all government ministries on their internal controls. The active involvement of the internal audit division will complement the audits done by the Office of the Auditor General (OAG) and further improve on its anticorruption initiatives. The new PFMA also requires the appointment of an audit committee that will review, appraise, and advise the minister of finance through the permanent secretary of MOFT. However, the audit committee is to be operationalized. IAD can also conduct internal audits at the NTF (para. 11) 6 and, as an added measure, annual fiduciary reviews will be conducted under the program to manage key risks identified through external and/or internal audits and other sources of information. 6. Institutional capacity. As with many developing member countries, Solomon Islands has a shortage of skills in financial management, financial and economic analysis, and procurement. Continuous training on financial management and accounting practices is urgently needed to improve the capacity of the finance and/or accounting staff across all government ministries. 7 However, stiff competition with the private sector for highly qualified and trained individuals makes it difficult for the government to hire and retain more qualified staff for accounting and procurement. But the government is committed to building capacity at all levels, and this is one of the main objectives of the PFM Reform Road Map. 7. Budget. The credibility of the central budget has improved thanks to better forecasting and compliance, compared with the earlier PEFA review, when Solomon Islands was emerging from ethnic conflict. Although variances between budget estimates and actuals remain, these are significantly lower when compared with the earlier PEFA report. Budget comprehensiveness and transparency have also improved with the introduction of the budget strategy and outlook, which gives the public an understanding of the government s fiscal strategy and policy priorities. 8. Information systems. The government started using the financial information system Microsoft Dynamics AX in late 2011, replacing the MAXIMISE software. MOFT shifted to AX because MAXIMISE could no longer be updated to accommodate the proposed changes to the chart of accounts as part of the government reform process. Aside from the new financial management information system, AX, the government also introduced Aurion as its new payroll software and BERT for its budget programming system. 5 Public Finance and Management Act, part 4, clauses PFM Reform Road Map, Matrix 3.6: Audit, legally establishes internal audit functions in line ministries through regulations, and clarifies authority, accountabilities, and reporting lines. The line ministries internal audit will be functionally responsible to the IAD. 7 The PFM Reform Road Map, June 2014 recognizes the major issues that involve human resources, such as (i) building capacity at all levels, (ii) getting the right skills, and (iii) boosting performance through incentives as a priority and one of the guiding principles in the preparation of the PFM Reform Road Map.

3 3 9. External audit. NTF financial statements are audited and prepared in accordance with cash basis IPSAS. The external audit reports of the NTF for 2012 and 2013 are unqualified. However, the audit management letter identifies various internal control weaknesses, which are summarized in Table 1. As part of program risk mitigating actions, MOFT and MID will resolve all external audit observations prior to loan disbursement. The OAG serves as the external auditor of the government, with a duty to report independently and directly to Parliament. The PEFA report notes that the timeliness and quality of annual financial statements is improving over time, and IPSAS cash is now being used. However, in past reports, the OAG found issues across government line ministries, e.g., in relation to missing documentation, lack of internal controls, and non-preparation of financial statements as per a recognized framework. 8 The establishment of an internal audit unit at MOFT as well as the formation of an Audit Committee, under the new PFMA, is expected to help improve the internal control environment. Table 1: Summary of National Transport Fund Management Letter Recommendations Summary of Findings Bank reconciliations from MOFT are not provided to MID or Central Project Implementation Unit on time. Implication The delay will affect the timely and accurate reporting of the financial position of the NTF, as accurate bank reconciliation statements are pivotal to the preparation of NTF financial statements. Remarks MOFT is now providing monthly bank reconciliation statements. However, the 2013 external audit report submitted to the Government of Solomon Islands, the Asian Development Bank, and development partners revealed that there was significant variance between the reconciliations of MOFT and MID (SI$3.8 million). MOFT and MID are to resolve the bank reconciliation issues in accordance with the recommendations of the external auditor, prior to Board submission. Missing original documents at MOFT Non-NTF expenses were paid using NTF funds. Unidentified debits amounting to SI$4.8 million arising from MOFT advices The lack of a proper record-keeping and/or filing system at MOFT causes lack of an audit trail for financial transactions. There was a breakdown in internal control processes at MID and MOFT. Accumulation of unidentified payments or deposits indicates lack of internal controls at MOFT. MOFT requires original documents to process payments but photocopies are maintained by MID/Central Project Implementation Unit. This issue was already identified in the 2010 OAG annual report as prevalent in most line ministries, and remains an issue up to the present. As revealed in the 2013 audit report, a total of SI$9.1 million was paid on behalf of the government. The government has confirmed that the amount will be settled in Up to the time of the issuance of the 2013 audit report, the amount remained outstanding. In 2013, technical assistance support provided for payment validation. Unidentified balance has not yet been cleared as of May MOFT and MID will resolve this issue, in accordance with the recommendations of the external auditor prior to Board submission. MID = Ministry of Infrastructure Development, MOFT = Ministry of Finance and Treasury, NTF = National Transport Fund, OAG = Office of the Auditor General. Source: Asian Development Bank. 10. Funds flow. The National Transport Fund Act established the NTF for the purpose of developing and managing transport infrastructure and services in Solomon Islands. The NTF is only one part of the sector-wide approach to transport infrastructure and services in Solomon 8 Ministry of Finance and Treasury, Government of Solomon Islands, Public Expenditure and Financial Accountability Assessment: Final Report.

4 4 Islands. 9 Funds paid into the NTF are provided by the government and development partners. The NTF Act provides for MOFT to make regulations for the establishment of an NTF board to manage the fund. The NTF (Fund Management) Regulations 2010 provide that the National Transport Fund Board (NTFB) shall be responsible for all aspects of the management of the fund and shall ensure that the fund is managed in accordance with any requirements under the NTF Act. 10 The act also provides that the NTFB will be supported by a secretariat, 11 with the personnel coming from the respective ministries, for the proper management and effective operation of the fund. The joint NTF review commissioned by ADB and the Government of Australia s Department of Foreign Affairs and Trade (DFAT) in September 2013 highlighted 12 that due to the structural limitations of the Government of Solomon Islands chart of accounts in 2011, MOFT financial reporting for NTF was restricted to a summary statement of receipts and payments only. This form of reporting lacked sufficient detail and could not meet the NTFB s need for financial reporting. Subsequently, MID s Central Project Implementation Unit (CPIU) was appointed as the NTF secretariat in February 2012 and has taken a number of practical steps to find solutions to overcome these weaknesses, leading to unqualified audit reports on NTF financial statements for 2012 and Financial reporting responsibilities are expected to be discharged in future by MID s Accounting Division. 11. The joint NTF review also highlighted concerns on board governance. However, the NTF remains the most viable funding vehicle to consolidate efforts to fund the transport sector in Solomon Islands, and MID has taken concrete steps in 2014 to improve board governance at the NTF. The NTFB now meets on a regular basis and has appointed a transport policy advisor within the NTFB secretariat who is in charge of preparing the NTF annual work program, based on the National Transport Plan, as well as presenting the status of all NTF-funded projects to the NTFB. The NTFB secretariat is also recruiting two more Solomon Islands nationals to strengthen capacity. 12. The program funds will flow directly to the NTF. The proposed funding arrangement will generally follow the existing procedure for the NTF. The program flow of program funds to the NTF is detailed in the next page. 13. Program accounting and financial reporting. Program accounting and financial reporting will use the NTF financial statements prepared by MID. The NTF financial statements are audited by Deloitte and are prepared in accordance with cash basis IPSAS. However, the preparation of the financial statements is complex and involves both MID and MOFT. The MID CPIU is heavily dependent on MOFT and MID accounting for financial reporting. All supporting documents are subject to a pre-audit by a compliance or financial management advisor. If the compliance review determines that payment requests are for valid NTF projects, these are forwarded to the MOFT payment section, where they undergo another compliance check by an advisor at MOFT. MOFT manages all the bank accounts and also undertakes its own monthly bank reconciliations. 14. Risk management action plans. This assessment proposes the following action plans to mitigate fiduciary risks to the RBL program: (i) conduct of regular internal audits of NTF by MOFT s IAD; 9 Ministry of Finance and Treasury, Government of Solomon Islands, National Transport Fund Act, Honiara. 10 Regulation 4, NTF (Fund Management) Regulations The head of the NTFB Secretariat is the Under Secretary Technical of MID. 12 Appendixes 8 and 9 of the joint review report.

5 5 (ii) provision of rigorous training on financial management and accounting procedures to upgrade staff capacity in MOFT and MID, as outlined in the PFM Reform Road Map; Proposed National Transport Fund Flow SIG Budget DFAT Grant ADB Loan Contractor/ SIG CBSI NTF CBSI NTF DLI Yes CBSI NTF NTF Requisition Form Sends MID Finance with NTF CBSI NTF MID/ MOFT Issues MOFT Payment Section with NTF Compliance NTF Operating Account SBD MOFT A ADB = Asian Development Bank, ANZ = Australia and New Zealand Banking Group Limited, CBSI = Central Bank of Solomon Islands, DFAT = Department of Foreign Affairs and Trade, DLI = disbursement-linked indicator, NTF = National Transport Fund, SBD= Solomon Islands dollar, SIG=Solomon Islands government. Source: Asian Development Bank. (iii) development of a financial management manual for MID accounting staff involved in NTF finanical reporting to strengthen accounting and internal control processes, and provision of guidance for the preparation of NTF financial statements (based on NTF finanical management needs to be reflected in the NTF procedural guidelines and as considered and approved by the NTF board); 13 (iv) outsourcing of the conduct of an annual fiduciary review, 14 which will include review and follow-up audit recommendations and compliance with internal controls processes; (v) continued review by NTF financial management advisor(s); (vi) complete recruitement of the NTFB secretariat staff; 13 The Transport Sector Development Project (TSDP) supports the formulation of the financial management manual. 14 A fiduciary review is more focused on the internal control environment and procedures. The previous year s audit reports have identified various internal control weaknesses.

6 6 (vii) (viii) (ix) resolution by MOFT and MID of all external audit observations, including, importantly, the issues pertaining to bank reconcilations and unidentified debits prior to loan disbursement, in accordance with auditor recommendations; preparation of the NTF annual plan with requisite financial data (investment earnings, receipts from donors, approved expenditures, and monthly cash-flow forecasts) in accoridance with the NTF Fund Management Regulations 2010; and regular external audit of NTF financial statements. B. Procurement Systems 15. Country procurement systems. The Public Finance Management Act (PFMA) 2014 provides the framework for the public procurement regulations, while a Procurement and Contract Administration Manual 2013; associated standard bidding documents for the procurement of works, goods, and services; and sample bid evaluation reports constitute the documentation. 16. Program procurement profile. The procurement aspects under the proposed program involve (i) annual routine maintenance and localized repair of 700 kilometers (km) of roads, 130 bridges and 81 wharves; (ii) rehabilitation of 10 km of roads and reconstruction of four wharves; and (iii) corresponding consulting services for feasibility studies, design, and work supervision, as well as technical assistance. The program will support meeting NTP targets and will transition seamlessly with ongoing ADB, DFAT, and government-funded efforts to strengthen country systems and capacity to implement the NTF work program. Procurement of all goods, works, and consulting services will be conducted using country procurement systems. These follow national procurement regulations which are in line with sound procurement principles of open competition, economy and efficiency, and transparency and fairness. 17. Key findings of recent procurement assessments. The procurement functions will be carried out by MID through its CPIU, following national procurement regulations set out by MOFT. Therefore, a procurement assessment based on a detailed review of procurement systems, capacities, and practices at MID and MOFT was carried out in accordance with methodologies prescribed in ADB s Procurement Capacity Assessment and Procurement Review for Effective Implementation questionnaires and tools. The assessment also benefited from two procurement assessments conducted in the recent past. 15 Overall the PFMA instructions and associated procurement documentation have been found adequate to conduct the procurement of works, goods, and services successfully in MID, provided certain actions and risk mitigation measures are taken under the proposed program, as shown in Table 2. Details on the Procurement Assessment can be found in the supplementary document Program Procurement Systems Assessment World Bank Solomon Islands Operational Procurement Review. Central Operations Service Unit, East Asia and Pacific Region Report No SB and Australian Department of Foreign Affairs and Trade Joint Review of the Solomon Islands National Transport Fund Section 6: Key Findings and Recommendations Procurement, November Accessible from the list of linked documents in Appendix 2 of the main text.

7 7 Table 2: Procurement Constraints and Mitigation Measures Constraint Actions Responsibility 1. Inadequate staffing and weak 1 2 procurement staff appointed; procurement MID and Public Service procurement capacity and capacity building training to be provided Commission 2. Protracted preparation of Technical specialist to guide and train MID MID technical specification for bid project engineers documents 3. Actual cost of works often Tighten contract management and oversight of MID exceeds contract price outsourced work supervision 4. Weak contract management Procurement and Administration TA to set up a contract management monitoring system and provide relevant training MID 5. Lack of procurement performance monitoring Procurement expert to set up a procurement performance monitoring system CPIU director to implement it MID MOFT 6. Grievance mechanism lacks independency and transparency Reform the grievance mechanism as per the PFM Reform Road Map 7. Quality of works is uneven Outsource work supervision with effective MID oversight from CPIU 8. Inefficient contract packaging Enlarge the size of labor-based contracts MID CPIU=central program implementation unit, MID=Ministry of Infrastructure and Development, MOFT=Ministry of Finance and Treasury, PFM=public financial management. 18. Key Risks. While MID s procurement system was found to be adequate, the assessment determined the risks to the implementation of the results-based program and the necessary mitigation measures, as shown in Table 3. Key Risk Areas Lack of qualified procurement staff and dependence on technical assistance Weak supervision of works leading to poor quality and cost increase Weak procurement compliance monitoring Lack of independence and transparency of the grievance mechanism Lack of independency of the Risk Type H S S S S Table 3: Procurement Risks Mitigation Measures Appointment of 1 2 procurement staff from the 2015 cohort of MID staff; and qualified TA with in-line and capacity building responsibility Outsourced work supervision combined to tighter oversight and improved contract management Procurement performance monitoring system, on-going partner programs monitoring compliance to remain in place, planned enhancement of compliance monitoring in the PFM Road Map Planned enhancement of grievance mechanism in the PFM Road Map Planned modification of the MTB and CTB membership in the PFM Road Map MTB and CTB CTB=Central Tender Board, H=high, MID=Ministry of Infrastructure and Development, MTB=Ministerial Tender Board, PFM=public financial management, S=Substantial. C. Anticorruption Systems 19. OAG plays a crucial role in the framework of public accountability. It serves as the external auditor of the government and has the duty to report independently and directly to Parliament on the results of the audits performed, which ensures government transparency and accountability to the public through the Parliament. However, OAG is understaffed and the

8 8 current staff members are lacking in experience. Furthermore, OAG also recognizes that many government entities are unable to produce auditable financial statements and that internal controls are weak. Submission of financial statements is also delayed. No statistics are available, but OAG recognizes that corruption is an issue in public sector procurement Conclusion. With the currently limited auditing capacity of OAG, the risk is substantial that corruption will be a major concern under the program. To improve anticorruption mitigation, the following measures will be undertaken under the program: (i) Include a procurement review as part of the scope of the annual fiduciary review. This audit will determine if the established procurement procedures were followed and also compare if the actual works conducted and materials used are those specified in the approved contracts. (ii) Define and establish threshold limits for the bid price that go beyond the engineering estimate to deter against overpricing. (iii) (iv) Establish and strictly enforce time limits in conducting bid evaluations. Continue the conduct of annual external audits of the NTF by an internationally reputable accounting and audit firm. 21. With these mitigation measures in place, the risks will be manageable. 17 Corporate plan , Office of the Auditor General of Solomon Islands.