DISBURSEMENTS IN WORLD BANK OPERATIONS. Loan Closing Issues. The World Bank

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1 DISBURSEMENTS IN WORLD BANK OPERATIONS Loan Closing Issues

2 Important considerations: Outstanding commitments Closing date Grace period Payment of audit and retention Return of unutilized funds Closure of loan account Project completion reporting

3 Objectives Understand DA documentation (recovery) process Understand options available for payment of final audit fees and retention money Understand steps required to close the loan and when these should be taken 3

4 Documentation (Recovery) of Designated Accounts (1) Purpose: To gradually reduce deposits to the designated account so that it is fully depleted by the loan closing date or, at the latest, by the disbursement deadline date (final date for receipt of withdrawal applications and supporting documentation or end of grace period). 4

5 Documentation (Recovery) of Designated Accounts(2) Timing: Documentation of DA (recovery) usually begins when closing date is less than six months away; Documentation continues until the DA balance is fully documented or only unused DA balance is left (which will be refunded to the WB); Submission of the final DA documentation application is needed even when the loan has already been fully disbursed. 5

6 Documentation (Recovery) Practical Example DA Balance Balance brought forward 1000 Pay eligible expenses of USD$ Submit claim for USD$400 Bank recovers half, pays half Pay eligible expenses of USD$ Submit claim for USD$300 Bank documents half, pays half

7 Documentation (Recovery) Practical Example (continued) Recovery vs Deduction: Documentation of DA (recovery) is gradual reduction of the available balance on the DA, done by reduction of the payment amounts claimed with applications. Deduction is when expenditures documented with an application are not approved in their total amount due to various reasons (such as: missing prior review contract(s), missing records, incorrect percentage claimed, etc.).

8 Documentation (Recovery) of Designated Accounts(3) When interim financial reports are used for disbursement: Documentation (Recovery) should be automatic Advances should get smaller and less frequent towards the end of project Balance in designated account should gradually be reduced to zero by end of grace period This should also happen any time forecasts are used as the basis for advances 8

9 Special Procedures Payment of the Final Audit Fee (1) Final audit fee is eligible for financing from loan proceeds Reflects change/exception in Bank policy May require special procedures if audit cannot be completed and paid before disbursement deadline date Special procedures apply only to audit fee and not any other costs (i.e., n/a for PIU salaries) 9

10 Special Procedures Payment of the Final Audit Fee (2) Special procedure = escrow account Definition: An account into which funds are deposited and held to pay for specific contracts, fees, or expenditures. Two parties: account owner (borrower) and escrow agent (normally a commercial bank) 10

11 Special Procedures Payment of the Final Audit Fee (3) Requirements for financing the final audit fee through escrow account: Fixed fee contract with auditor, requiring completion of audit within 6 months, signed before the closing date Letter of agreement between borrower and escrow agent Deposit of agreed amount from the DA into an escrow account by borrower or direct payment by the Bank into an escrow account (at borrower s request) 11

12 Special Procedures Payment of the Final Audit Fee (4) Requirements (cont d): Application for withdrawal accompanied by audit contract must be received by Bank at latest by disbursement deadline date: In case of deposit from DA to an escrow account, audit fees need to be included into the very next DA documentation application Commercial bank makes payment to the auditor upon completion of the audit and the borrower s acceptance of the audit Borrower maintains copy of invoice and receipt provided by auditor 12

13 Special Procedures Payment of the Final Audit Fee (5) Requirements (cont d): Any amount unutilized in escrow account is refunded to borrower and borrower refunds the same amount to the Bank If audit report not received within the time stipulated, Bank may request a refund of the funds Other Bank remedies may also apply 13

14 Special Procedures Payment of Retention Money (1) Retention money: Definition: Funds withheld from a contractor by the borrower pending successful completion of the contract warranty period or until another specified date (e.g., one year from the date of the original invoice). Performance security 14

15 Special Procedures Payment of Retention Money (2) Eligibility for disbursement when warranty period goes beyond closing date: Contract for works completed AND works provisionally accepted by closing date Contract provides for option of replacing retention money with on-demand bank guarantee or other suitable performance security 15

16 Special Procedures Payment of Retention Money (3) Procedures for claiming retention money: Borrower obtains bank guarantee Borrower sends application for withdrawal with a copy of bank guarantee and evidence of provisional acceptance Upon completion of defect liability period, borrower retains copy of project manager s certification Borrower refunds any amount withdrawn that exceeds amount of eligible expenditures Extension of closing date may be considered to allow time for securing bank guarantee 16

17 Ensuring Orderly Closing of Loan Account (1) Borrower responsibilities before the closing date: Ensure grace period is provided for in the disbursement letter or that the Bank has sent a notice allowing for a period of up to 4 months, if needed and requested Manage documentation (recovery) of the designated account If audit fees are being financed from the loan proceeds, ensure that fixed price contract is in place for final audit and appropriate arrangements are made for payment 17

18 Ensuring Orderly Closing of Loan Account (2) Borrower responsibilities before the closing date (cont d): Ensure appropriate arrangements are made for payment of retention money under warranties that go beyond the closing date Resolve all contract issues Inform task team and us of any major unresolved contract issues 18

19 Ensuring Orderly Closing of Loan Account (3) Borrower responsibilities before the disbursement deadline date: Ensure complete documentation (recovery) of designated account Ensure that the expenditures claimed are eligible (services rendered, goods shipped by the closing date) Ensure all applications for withdrawal, including supporting documentation are received by the Bank by the disbursement deadline date Ensure that any unutilized amount in the designated account is refunded by the disbursement deadline date 19

20 Ensuring Orderly Closing of Loan Account (4) Borrower responsibilities within 2 months after the disbursement deadline date: Refund any remaining undocumented balance in the designated account to the World Bank as soon as possible To extent possible, ensure audit is completed and final fee is paid 20

21 Review Objectives Understand documentation (recovery) process Understand options available for payment of final audit fees and retention money Understand steps required to close the loan and when these should be taken 21