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P.S.No. 11 - VOLUME 4 - Part V - Projects - REPORT OF THE AUDITOR GENERAL - 2006

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Contents Page No

01. NATIONAL HIGHWAYS SECTOR PROJECT 01

02. SMALL BUSINESS REVIVAL PROGRAMME (SBRP) UNDER THE SRI

LANKA TSUNAMI AFFECTED AREAS RECOVERY AND TAKE-OFF

PROJECT (STAART)

02

03.SUPPLY AND CONSTRUCTION OF PRE- FABRICATED METAL

BRIDGES PROJECT

05

04. ROAD SECTOR DEVELOPMENT PROJECT (PART A - REFORM OF

NATIONAL HIGHWAY COMPONENT)

06

05. COLOMBO KATUNAYAKE EXPRESSWAY PROJECT 10

06. TSUNAMI AFFECTED AREAS REBUILDING PROJECT -

COMPONENT "A" (LEGAL ASSISTANCE, GOVERNANCE AND ANTI

- CORRUPTION)

11

07. INFRASTRUCTURE REHABILITATION PROGRAMME (IRP) UNDER

THE SRI LANKA TSUNAMI AFFECTED AREAS RECOVERY AND

TAKE-OFF PROJECT (STAART)

14

08. ONFLICT AFFECTED AREAS REHABILITATION PROJECT

(COMPONENT AROAD REHABILITATION)

20

09. TSUNAMI AFFECTED AREAS REHABILITATION PROJECT

COMPONENT "E" (SOUTHERN PROVINCE RECONSTRUCTION)

23

10. HEALTH SECTOR DEVELOPMENT PROJECT (FINANCE

COMMISSION PART)

27

11. RURAL FINANCE SECTOR DEVELOPMENT PROJECT 28

12. PROGRAMME FOR STRENGTHENING OF TERTIARY EDUCATION

AND ADMINISTRATIVE INFRASTRUCTURE IN TSUNAMI

AFFECTED AREA

31

13 TSUNAMI-AFFECTED AREAS REBUILDING PROJECT -

(TAARP)(ROAD REHABILITATION AND RECONSTRUCTION)

33


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P.S.No. 11 - VOLUME 4 - Part V - Projects - REPORT OF THE AUDITOR GENERAL - 2006------------------------------------------------------------------------------------------------------------------------------------------------------

1

NATIONAL HIGHWAYS SECTOR PROJECT

1. Opinion

Except for the effects of the adjustments arising from the matters referred to in paragraph 3 of this report, I am

of opinion that,a) the balance sheet as at 31 December 2006 together with the schedules and the other connected

financial statements for the first accounting period then ended had been satisfactorily prepared to

present fairly, in all material respects, the financial position of the Project as at 31 December 2006 andthe financial performance of the Project for the first accounting period then ended, and

b) the funds provided had been utilized for the purposes for which they were provided.2. Financial Statements

2.1 Financial PerformanceAccording to the financial statements presented, the expenditure of the Project for the period 07 April 2006 to31 December 2006 amounted to Rs.1,347,878. The following statement shows a summary of the expenditurefor the period under review.

Category of Expenditure For the first accounting period 07 April 2006to31 December 2006

Rs.(a) Fixed Assets 1,129,469(b) Workinprogress 218,409

--------------1,347,878

2.2 Imprest Fund Account

As the effective date for the Loan was 20 February 2007, the imprest fund account had not been opened forthe first accounting period under review.

3. Audit Observation

Although the Project had been commenced on 07 April 2006 and 07 employees including 03 core staffmembers had been recruited up to 28 February 2007 and remuneration had been paid as specified by theManagement Services Circular No.10 of 26 December 2000, approval for the cadre of the Project had beenobtained only on 13 July 2007.

4. Financial and Physical Performance

4.1 Financing

The Project which was commenced in April 2006 is scheduled to be completed by 31 December 2009, at atotal estimated cost of US $ 208 million equivalent to SLRs.21,181 million

Certain significant statistics relating to the financing of the Project, budgetary provisions made available andthe utilization of funds during the first accounting period ended on 31 December 2006 are shown below.

Amount agreed to be provided in the loanagreement

Budget for theperiod

Utilization of funds duringfirst accounting period

US $ Mn. Rs.Mn Rs.Mn Rs.MnADB 150 15,275 - -

GOSL 58 5,906 10 1.35

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2

Small Business Revival Programme (SBRP) under the Sri Lanka Tsunami Affected Areas

Recovery and Take-off Project (STAART)

1. Opinion

Except for the effects of the adjustments arising from the matters referred to in paragraph 2.4 of this report, I amof the opinion that,

(a) the balance sheet as at 31 December 2006 together with the schedules and the other connectedfinancial statements for the year then ended had been satisfactorily prepared to present fairly in allmaterial respects, the financial position of the Project as at 31 December 2006, and the financialperformance of the Project for the year then ended,

(b) the funds provided had been utilized for the purposes, for which they were provided, and

(c) the withdrawals from and replenishments to the Imprest Account during the year ended 31 December2006 had been truly and fairly disclosed in the books and records maintained by the Project and thebalance as at 31 December 2006 had been satisfactorily reconciled with the accounting records of theCentral Bank of Sri Lanka as at that date.

2. Financial Statements

2.1 Financial Performance

According to the financial statements and information made available, the disbursements of the Project for theyear under review and the previous accounting period and the cumulative expenditure as at 31 December 2006are given below.

Participating Financial Institutions (PFIs) Amount disbursed up to 31December

CumulativeExpenditure as at 31

December 20062006Rs

2005Rs Rs

Development Finance Corporation of Ceylon (DFCC) 218,900,000 125,739,200 344,639,200National Development Bank (NDB) 17,280,000 73,232,349 90,512,349

Bank of Ceylon (BOC) 605,338,682 363,441,321 968,780,003Commercial Bank (CB) 208,590,000 614,501,890 823,091,890Sampath Bank (SB) 63,825,000 116,153,500 179,978,500Ruhunu Development Bank (RDB) 65,405,000 84,462,500 149,867,500Sanasa Development Bank (SDB) 30,736,075

------------------68,760,348

-------------------99,496,423

-------------------Total 1,210,074,757 1,446,291,108 2,656,365,865

2.2 Imprest Account

According to the financial statements and information made available, the operations of the Imprest Accountduring the year under review are given below.

2006

Jap. Yen RsOpening BalanceAdd- ReplenishmentsForeign exchange Loss

220,444,3531,152,833,096

--------------------

190,926,8541,352,279,137(335,105,350)

-------------------

Less: Withdrawals1,373,277,4491,373,277,449

-------------------

1,208,100,6411,208,100,641

-------------------Balance as at 31 December NIL

===========

NIL===========


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2.3 Revolving Fund Account

The Regional Development Department of CBSL had opened a Regional Development Rupee Revolving FundAccount to collect the principal amount of the loan disbursed to Participating Financial Institutions (PFIs) and theinterest thereon. The balance of this account as at 31 December 2006 amounted to Rs 20. .

2.4 Audit observations

Following observations are made.

(i) Accounting Deficiencies(a) A Cash flow Statement for the year ended 31 December 2006 had not been prepared in

accordance with Sri Lanka Accounting Standards 09 (SLAS - 09). Hence cash generated fromoperating activities, investing activities and financing activities and the liquidity position ofthe Project could not be clearly identified.

(b) A difference of Rs 100,000 had been observed between the Financial Statements for the yearunder review and the records maintained by the Ruhunu Development Bank (RDB) withregard to the amount released to the bank during the year under review as given below.

(c) According to the RDB records, the amount released by the CBSL to the RDB was Rs149,067,500 whereas the Notes to the financial statements as at 31 December 2006 show thatamount was Rs 149,867,500. Hence there was a difference of Rs 800,000 between the RDB

records and the Notes to the financial statements as at 31 December 2006 with regards to theamount of refinance released during the Project period up to 31 December 2006.

(d) Audit test check revealed that the remittances amounting to Rs 5,841,839 made by theRuhunu Development Bank had not been accounted by the Central Bank of Sri Lanka.Therefore the outstanding debtor balance as at 31 December 2006 could not be satisfactorilyvouched in audit. It was further observed that the interest remitted by the RuhunuDevelopment Bank amounting to Rs 589,485 had not been accounted. Therefore the interestrecoverable as at 31 December 2006 had been overstated by that amount.

(ii) Non-compliance with Laws, Rules and Regulations(a) According to Section 5.7 of the CBSL Operating Instructions No. RDD/2005/1 dated 12

January 2005 and the Loan Agreement, no interest on sub-loans or refinance loans would be

charged during the grace period. However, a sum of Rs.210,646 had been charged by thefollowing PFIs during the grace period as interest.

Source of Records Amount of refinancereleased during the year

RsAs per the financial statements 65,405,000

As per the records of the Ruhunu Development Bank 65,505,000---------------

Difference 100,000

Name of the Bank Amount ChargedRs

Ruhunu Development Bank-Ambalanthota 180,515Bank of ceylon Koggala 6,981Bank of Ceylon Matara 23,150

-----------

Total 210,646


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(b) It was observed in audit that confirmations regarding the damages caused by tsunami had notbeen obtained from the relevant authorities such as Police, Insurance, etc before grantingloans to beneficiaries in ten instances as shown below.

(c) It was observed in audit that in certain instances estimates for damages had not been obtainedbefore approving loans by the banks. When granting loans for the business entities, the Bankshad considered only whether they were affected by the Tsunami. Few examples are givenbelow.

(d) According to Section 11.2 of the CBSL Operating Instructions No. RDD/2005/1 dated 12January 2005, sub-loans for financing the acquisition of assets such as equipment, machinery,tools, raw materials and agricultural inputs should be released direct to the supplier on behalfof the borrower. But, it was observed that there were some instances where sub-loans foracquisition of above mentioned items had been released direct to the borrowers instead ofpayments being made to the supplier directly. Some of such instances are mentioned below.

Name of the Bank No of sub-loans releasedto the borrowers

Amount released to the borrowers instead ofreleasing to the supplier for procurement of goods

RsRDB - Bentota 04 1,135,000BOC - Koggala 02 200,000Sampath Bank -Galle

03-------

7,000,000-------------

09 8,335,000

(e) According to Section 8.3 of the CBSL Operating Instructions, the maximum amount of subloan should be 85 per cent of total estimated restarting cost of the sub-project. But, it wasobserved that nine sub-loans amounting to Rs 218,125 granted by the BOC- Matara hadexceeded the prescribed limit.

(f) There were some cases where the actual amount of loan granted had exceeded the realdamage. Some of such instances are mentioned below, as examples.

Name of the Bank No. of loans releasedwithout obtaining the

Police Reports

Amount of loangranted

RsRDB Ambalantota 06 1,650,000BOC - Matara (Bazaar Branch) 02 1,500,000Sampath Bank - Galle 02

-----2,000,000------------

Total 10 5,150,000

Name of the Bank No of loans releasedwithout obtaining the

estimate of damages

Amount of loangranted

RsRDB Ambalantota 03 1,250,000Sampath Bank Galle 02

--------1,400,000-------------

05 2,650,000

Name of the Bank (PFI) Amount grantedRs

Actual damageRs

BOC- Matara 4,000,000 1,500,000

- Do - 900,000 500,000- Do - 70,000

---------------17,260

--------------

4,970,000 2,017,260


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(iii) Non-performing LoansEven though the financial statements show that the recoveries were 100% correct up to date, thefollowing non-performing loans were observed in the audit test.

Name of the Bank (PFI) Outstanding loan balancesRs

Accrued interestRs

Late interestRs

TotalRs

BOC Koggala 543,410 18,346 10,549 572,305

BOC - Matara 115,247 1,942 1,002 118,191Sampath Bank-Galle 67,957 - - 67,957

RDB - Ambalantota 8,400 - - 8,400

Total-------------

735,014------------

20,288-----------

11,551-----------766,853

(iv) Other ObservationsFollowing other observations are made in audit.(a) Ruhunu Development Bank could not have recovered a sum of Rs 2,039,310 out of Rs

12,213,640 receivable during the year under review the as principal and the interest thereonfor the sub-loans granted.

(b) Due to the lack of supervision of the CBSL, some private banks had used these funds to grantloans to a few of their existing customers in large amounts at this consessional rate of interestinstead of making loans to a large number of small scale enterprises. Comparison of two PFIsas example relating to the above matter is shown below.

Name of the PFI No. of subloans

granted

Total amount ofloans granted

Rs

Averageamount per

loanRs

Total sub-loans as apercentage of

Numbers%

Amount%

Ruhunu Development Bank 205 65,505,000 319,537 89 70Sampath Bank- Galle 25 28,665,000 1,146,600 11 30

Total------

230---------------94,170,000

------------409,435

-----100

-----100

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SUPPLY AND CONSTRUCTION OF PRE- FABRICATED METAL BRIDGESPROJECT

1. Opinion

I am of opinion that ;

(a) the balance sheet as at 31 December 2006 together with the schedules and the other connectedfinancial statements for the year then ended had been satisfactorily prepared to present fairly, in allmaterial respects, the financial position of the Project as at 31 December 2006 and the financialperformance of the Project for the year then ended, and

(b) the funds provided had been utilized for the purposes for which they were provided.2 Financial Statements


According to the financial statements and information made available, the expenditure of the Project for the firstaccounting year ended 31 December 2006 amounted to Rs.194,278,791. The following statement shows asummary of the expenditure for the year under review.


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Category Expenditure for the first accounting year ended31 December 2006

Rs.(a) Work in progress 194,119,696(b) Project preparatory work 159,095

-----------------

194,278,791


3.1 Financial Review

The Project which was commenced in December 2005 is scheduled to be completed by 30 December 2007, atan estimated total cost of Euro 21.627 million equivalent to SLRs.2,888.538 million.

Certain significant statistics relating to the financing of the Project, budgetary provisions made available and theutilization of funds during the first accounting period ended on 31 December 2006 are shown below.

Amount agreed to be providedin the specific agreement

Budget forthe year

Utilization of fundsduring the first

accounting year

Utilization as apercentage of the

total estimatedcostEuro Rs.Mn Rs.Mn Rs.Mn %Spain 21.627 2888.538 150 194.120 6.72

GOSL - 340.0 37.5 0.159 0.047

3.2 Physical Performance

A contract for the construction and supply of 04 bridges had been awarded to a foreign contractor and allocateda sum of Rs.2,888.5 million (equivalent to Euro 21.63 million), whilst a part payment of Rs.194.12 million hadbeen made to the contractor during the year under review, details with regard to physical performance of theconstructions were not made available to audit.

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ROAD SECTOR DEVELOPMENT PROJECT (PART A - REFORM OF NATIONAL

HIGHWAY COMPONENT)

1. Opinion

Except for the effects of the adjustments arising from the matters referred to in paragraph 3 of this report, I amof opinion that,

(a) the balance sheet as at 31 December 2006 together with the schedules and the other connectedfinancial statements for the year then ended had been satisfactorily prepared to present fairly, in allmaterial respects, the financial position of the Project as at 31 December 2006 and the financial

performance of the Project for the year then ended,(b) the funds provided had been utilized for the purposes for which they were provided,(c) the statements of expenditure (SOEs) submitted could be fairly relied upon to support the applications

for reimbursement in accordance with the requirements specified in the Agreement, and

(d) the withdrawals from and replenishments to the Imprest Fund Account during the year ended 31December 2006 had been truly and fairly disclosed in the books and records maintained by the Projectand the balance as at 31 December 2006 had been satisfactorily reconciled with the accounting recordsof the Central Bank of Sri Lanka as at that date.


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2 Financial Statements


According to the financial statements and information made available, the expenditure of the Project for theyear under review amounted to Rs.193,882,072 and the cumulative expenditure as at 31 December 2006amounted to Rs.326,280,769. The following statement shows a summary of the expenditure for the year underreview, the expenditure for the previous year and the cumulative expenditure as at 31 December 2006.

Category of Expenditure Expenditure forthe year under

review

Expenditurefor the year

2005

Cumulativeexpenditure as at31December 2006

Rs. Rs. Rs.Reform consultancy 74,049,551 55,885,379 159,143,071National Highway Development Project - Consultancies 41,838,282 78,734 41,917,017Equipment 68,872,669 6,156,018 88,268,632Training 376,185 9,824,663 10,871,246Project management 8,132,893 7,221,939 22,816,029Project Management Unit Office Equipment and Furniture 597,492 19,250 1,055,437National Highway Sector Project Constructions 15,000 434,500 449,500National Highway Development Project-Feasibility studies - 557,601 1,759,837

------------------ -------------- -----------------193,882,072 80,178,084 326,280,769


According to the financial statements and information made available, the operations of the Imprest FundAccount during the year under review and the balance as at 31 December 2006 are given below.

Particulars SLRs SLRs US $Balance as at 01 January 2006 - 8,053,889 78,869Replenishments 37,392,893 - 356,252Gain in exchange rate 370,692

------------37,763,585

------------------

--------------45,817,474 435,121

LessWithdrawals 33,309,424

---------------318,989

-----------Balance as at 31 December 2006 12,508,050 116,132

3. Audit Observations


(a) Except three officers of core staff, other staff of the Project Management Unit had not been recruited interms of Section 4.1 of the Management Services Circular No.10 of 26 December 2000.

(b)

According to the consultancy agreement, services of foreign and local experts should have been obtainedto introduce reforms of the Road Development Authority and 07 engineers should have been recruited toidentify the improvement of the performance in accordance with the action plan of the RoadDevelopment Authority. However, no such recruitments had been made even after 3 years and 6 monthsexpired from the commencement of the Project. Instead, three senior engineers of the RDA had beenengaged in the overall activities of the Project.

(c) Consultancy contract for detailed engineering design for 412 km of National Highways had beenassigned with a foreign company and it was scheduled to be completed in July 2006. Due to followingreasons considerable delays have been occurred for the completion of the activities of the Project.


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i. Due to poor performance of the consultant, Road Development Authority had reduced thescope of work on 24 August 2006 as follows.

Detailed design of 156.9 km of road section Resettlement plans Environmental studies

ii. Even though scope had been reduced and time period of the consultant had been extended by6 months up to 31 December 2006, the design report had not been furnished up to 23 July2007 by the consultant.

iii. Certain data for resettlement plans prepared by the consultants were found incorrect andsurvey had not been done properly.

(d) Physical verification reports relating to fixed assets valued at Rs.65,025,932 as at 31 December 2006had not been furnished to the Auditor General in terms of Section 757 (2) of the Financial Regulation.

(e) A sum of Rs.23,242,700 retained for the payment of custom duties and Value Added Tax (VAT) as at31 December 2006 had been inappropriately shown as fixed assets in the accounts.

4. Financial and Operating Review

4.1 Utilization of Funds

The Project which had been commenced in 2003 and scheduled to be completed by 31 December 2007, at atotal estimated cost of US $ 6.209 million equivalents to SLRs.620.996 million

Certain significant statistics relating to the financing of funds, budgetary provision for the year under reviewand the utilization of funds during the year under review and up to 31 December 2006 are shown below.

Amount agreed for financing in theLoan Agreement

BudgetaryProvision forthe year 2006

Funds Utilizedduring theyear 2006

Funds utilized upto 31 December

2006US $ . (Mn) Rs. (Mn) Rs. (Mn) Rs. (Mn) Rs. (Mn)

ADB 4.219 421.996 161.80 138 245GOSLTotal

1.9906.209

199.000620.996

60.20222.00

56194

91336 *

* This amount had been differed from the amount shown in the paragraph 2.1 due to accrual basis.


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COLOMBO KATUNAYAKE EXPRESSWAY PROJECT1. Opinion


(a) the balance sheet as at 31 December 2006 together with the schedules and the other connectedfinancial statements for the first accounting year then ended had been satisfactorily prepared to presentfairly, in all material respects, the financial position of the Project as at 31 December 2006 and thefinancial performance of the Project for the year then ended, and

(b) the funds provided had been utilized for the purposes for which they were provided.



According to the financial statements presented and information made available, the expenditure of the Projectfor the year ended 31 December 2006 amounted to Rs.247,976,065. The following statement shows a summaryof the expenditure for the year under review.

Category of Expenditure Expenditure for thefirst accounting yearended 31 December 2006

Rs.

(a) Fixed Assets 501,745(b) Work in progress 24,474,320

--------------247,976,065



a) Work-in progress for the construction of the Colombo Katunayake Expressway relating to the period ofOctober 2000 to December 2005 amounting to Rs.5,944 million had not been disclosed in the financialstatements for the year under review.

b) Thirty items of furniture and office equipment handed over to the Project by the Road DevelopmentAuthority had not been valued and brought to accounts.

c) The contract awarded to a Korean contractor for the construction of the CKE in October 2000 by usingGOSL funds had been terminated in January 2003 and action were taken by both parties to terminate thecontract on mutual agreement before 10 months prior to expire of the contract period without consideringalternatives to complete balance work.

At the time of termination a sum of Rs.5,444 million had been paid to the contractor including

compensation out of contract sum amounting to Rs.9,516 million.

Subsequently a Memorandum of Understanding (MOU) had been signed with a company in France tocomplete the balance work at Rs.22,800 million on 27 October 2006.

This attempt was also not successful and RDA is looking for a donor and a contractor to complete thebalance work.

Project would have to be suffered not only financial losses but also deterioration of existing works due todelay in taking timely action over 4 years to make arrangement to finance the Project and award thecontract to a suitable contractor.


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4 Financial and Physical Progress

4.1 Financial Review

The Project Management Unit had commenced to operate the construction of balance work of the Project on 01January 2006.

Certain significant statistics relating to the budgetary provisions and the utilization of funds during the first

accounting year ended on 31 December 2006 are shown below.

Budgetory Provision for the year Utilization of funds during firstaccounting year

Rs. M Rs. MGOSL 524.0 245.7 *

* This excluded a sum of Rs.2.27 million being accrued expenses as at 31 December2006.

4.2 Physical performance

Project activities had been limited to secure of the existing work done and the acquisition of lands for the

proposed Expressway Project. Progress of land acquisition is given below.

No. of lots tobe acquired

No. of lots acquired under38 (a) of Land AcquisitionAct as at 31 December

2006

Payment of compensation to thelands acquired as at 31 December

2006

Payment of interest fordelay

No. of lots Amount ofcompensation paid

Rs.

No. ofLots

Amount ofInterest paid

Rs.1832 1832 527 506,084,153 499 150,767,144

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Tsunami Affected Areas Rebuilding Project - Component "A" (Legal Assistance, Governance

and Anti - corruption)

1. Opinion

Except for the effects of the adjustments arising from the matters referred to in paragraph 2.3 of this report, I amof opinion that,(a) the balance sheet as at 31 December 2006 together with the schedules and other connected financial

statements for the year then ended had been satisfactorily prepared to present fairly in all materialrespects, the financial position of the Project as at 31 December 2006 and the financial performance ofthe Project for the year then ended,

(b) the funds provided had been utilized for the purposes for which they were provided, and(c) the withdrawals from and replenishments to the Imprest Fund Account during the year ended 31

December 2006 had been truly and fairly disclosed in the books and records maintained by the Projectand the balance as at 31 December 2006 had been satisfactorily reconciled with the accounting recordsof the Central Bank of Sri Lanka as at that date.



According to the financial statements and information made available, the Project expenditure for the yearended 31 December 2006 amounted to Rs.30,354,167 as compared with the expenditure of Rs.1,111,518 forthe three months accounting period ended 31 December 2005 and the cumulative expenditure as at 31


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December 2006 amounted to Rs.31,465,685. The following statement shows a summary of the expenditure forthe year under review, the preceding accounting period and the cumulative expenditure as at 31 December2006.

Description Expenditure forthe year ended

31 December 2006

Expenditure for the 03months accounting periodended 31 December 2005

Cumulativeexpenditure as at 31

December 2006Rs. Rs. Rs.

Partitioning of the Project office 316,499 300,000 616,499Equipment 4,029,465 192,855 4,222,320Project activities 7,938,380 152,992 8,091,372Incremental operating cost 18,069,823 465,671 18,535,494

Total------------

30,354,167--------------

1,111,518----------------

31,465,685


According to the books and records maintained by the Project Management Unit and information madeavailable, the operations of the First Generation Imprest Fund Account and Second Generation Imprest FundAccount for the year ended 31 December 2006 are given below.

First Generation Imprest FundAccount

Second GenerationImprest Fund Account

Balance as at 01 January 2006US$111,369

Rs.11,372,727

Rs.7,041,473

Add:Replenishments for the year 2006 101,171 10,783,405 18,473,131Foreign exchange gain -

-----------238,356

-------------- ---------------212,540 22,394,488 25,514,604

Less: Withdrawals 190,293 19,998,326 22,415,787------------ --------------- ----------------

Balance as at 31 December 2006 22,247 2,396,162 3,098,817

2.3 Audit Observations

The following observations are made(a) Accounting Deficiencies

(i) Total expenditure of the Project as at 31 December 2006 as per accounting records maintainedby the Project was Rs.31,862,823 whereas the total expenditure as per the financial statementswas Rs. 31,465,685. However, the difference of Rs.397,138 had not been explained in audit.

(ii) Although a sum of Rs. 7,345,651 had been paid by the Project during the year under review inrespect of activities carried out by the Legal Aid Commission, this payment had been shownin the financial statements as Rs. 7,938,380. Therefore, a sum of Rs. 592,729 had been

overstated in the financial statements as payment made to the Legal Aid Commission.

(iii) Eight cheques drawn during the year 2006 in order to settle the project expenditureaggregating Rs.6,863,985 had been kept in the Project Office without handing over to therelevant parties up to 18 October 2007. However, this amount had been brought to theexpenditure account as payments made to settle the liabilities.

(iv) A sum of Rs. 396,530 paid during the year under review as local taxes had not been broughtto accounts.


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(v) A sum of Rs.4,095,644 had been paid for the Project activities during the year under reviewfrom the local funds. However, the Project had not submitted applications to ADB toreimburse this expenditure and it had not been disclosed in the financial statements.

(b) Contract AdministrationThe following observations are made.

A contract at a cost of Rs.1.247 million had been awarded to the University of Colombo to conductRight Based Intervention Programme from 01 November 2006 to 31 December 2006. The followingdeficiencies were observed in this connection.

(i) Advances aggregating Rs.232,306 had been paid in 13 instances up to 31 December 2006instead of granting a mobilization advance for this purpose in terms of Section 5.4.4. of theProcurement Guidelines issued in 2006.

(ii) An officer of the University of Colombo had obtained advances aggregating to Rs.91,250 bycash in 12 instances. Of this, a sum of Rs.26,051 had not been settled by the officer up to 08October 2007.

(c) Irregularities in Granting Advances for Project Activities

Advances aggregating Rs.331,750 had been granted to the Project Officers during the year 2006. Thefollowing observations are made in this connection.(i) Long delays were observed in settlement of advances.(ii) Advances obtained by the officers had not been utilized for the intended purposes.(iii) Forged documents had been utilized for settlement of advances.

(d) Releasing funds to the Legal Aid Commission (LAC) to carryout Project Activities

According to the records maintained by the Project Office, a sum of Rs.9,347,487 had been released tothe Legal Aid Commission to carryout Project activities such as school programmes, awarenessprogrammes for police officers, general public etc. In this connection the following observations are

made.

(i) Very large amount of money had been released to the Legal Aid Commission every month tocarryout the project activities without considering the necessity of funds. For example, totalamount released to the Legal Aid Commission during the month of April 2006 was Rs.2,699,736 whereas total expenditure incurred during that month was Rs.33,590 only. Thispractice had given opportunity to misuse the Project funds.

(ii) According to the records maintained by the Project Office, funds excessively released to theLAC as at 31 December 2006 was Rs.3,374,864. Of this, a sum of Rs. 2,156,987 only hadbeen settled by the LAC on 31 December 2006.

(iii) A petty cash imprest amounting to Rs.40,000 released to the LAC on 15 May 2006 had notbeen settled as at 31 December 2006.

(e) Management Inefficiencies

(i) In terms of Management Services Circular No. 10 of 26 December 2006, project staffs whoare visited to project sites may claim reimbursement of actual cost of accommodation notexceeding Rs.600 per day subject to prior concurrence of the appointing authority. However,several officers had been reimbursed actual cost of accommodation exceeding Rs.600 per day.In an instance one officer had been reimbursed a sum of Rs. 64,788 for his four days visit toproject sites even though he was entitled to claim Rs. 2,400 only. Accordingly, the Project hadoverpaid a sum of Rs.302,431 to its officers during the year under review as reimbursement ofcost of accommodation. In this connection the Secretary, Ministry of Justice and Law


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Reforms had informed me that the project staff had to stay at places where theaccommodation cost could not be covered by the approved rate of Rs. 600 per day as most ofthe places provided cheaper accommodation had been partly or fully destroyed by theTsunami disaster.

(ii) A sum of Rs. 225,000 had been paid as salaries for four officers who were not appointed bythe Project as Project staff. In this connection the Project was unable to furnish the details ofworks performed by those officers.

(f) Performance Review(i) Even though, the main objective of the Project is to rapidly improve the living condition and

well-being of a significant number of people in the Tsunami affected areas, implementation ofProject activities under subcomponents (iv),(v),(vi) and (vii) of the Component - A yet tohave been started.

(ii) It was planned to conduct 253 awareness creation programmes by each Regional Legal AidCommission during the year 2006. However, 132 programmes only had been conductedduring the year under review. In this connection the Secretary, Ministry of Justice and LawReforms had informed me that late opening of 5 Regional Legal Aid Commissions and

difficulty to find competent lawyers were the major reasons for the low progress.

(iii) Total expenditure of the Project up to 31 December 2006 was Rs. 31,465,685. Of this, a sumof Rs. 14,468,347 had been spent for the salaries of the Project staff which represent 46 percent of the total expenditure of the Project.

(iv) A sum of Rs. 90,000,000 had been allocated for the year under review to carry out the Projectactivities. However, a sum of Rs. 30,354,167 only had been utilized by the Project whichrepresents 33.77% of the total allocation.

-------------------------------------------------------------------------------------------------------------------------------------------------

INFRASTRUCTURE REHABILITATION PROGRAMME (IRP) UNDER THE SRI LANKATSUNAMI AFFECTED AREAS RECOVERY AND TAKE-OFF PROJECT (STAART)

1. Opinion

Except for the effects of the adjustments arising from the matters referred to in paragraph 2.3 of this report, I amof the opinion that,

(a) the balance sheet as at 31 December 2006 together with the schedules and the other connectedfinancial statements for the year then ended had been satisfactorily prepared to present fairly in allmaterial respects, the financial position of the Programme as at 31 December 2006, and the financialperformance of the Programme for the year then ended,

(b) the funds provided had been utilized for the purposes, for which they were provided,

(c) the Statements of Expenditure (SOEs) submitted could be fairly relied upon to support the applicationsfor reimbursements in accordance with the requirements specified in the Loan agreement, and

(d) the withdrawals from and replenishments to the Imprest Account during the year ended 31 December2006 had been truly and fairly disclosed in the books and records maintained by the Programme andthe balance as at 31 December 2006, had been satisfactorily reconciled with the accounting records ofthe Central Bank of Sri Lanka as at that date.


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2.1. Financial Performance

According to the financial statements and information made available, the disbursements of the Project for theyear under review and the previous accounting period and the cumulative expenditure as at 31 December 2006are given below.

Implementing Agency AmountAllocated for the

project(Rs.Mn)

Amount Disbursed duringthe year ended 31 December

Cumulativeexpenditure as at

31 December 2006

(Rs.Mn)2006

(Rs.Mn)2005

(Rs.Mn)CEB 2072.0 1434.70 270.84 1705.54RDA 1532.0 693.03 76.95 769.98NWSDB 1308.5 514.98 39.55 554.53DOI 163.0 91.62 12.94 104.56MOPT 220.5 69.20 19.90 89.10Provincial Councils :

- Western 48.4 37.59 6.98 44.57- Southern 205.6 79.73 24.86 104.59

- North-East 366.6---------

133.84----------

134.00--------

267.84----------

Total 5916.6 3054.69 586.02 3640.71

2:2. Imprest Account

According to the financial statements and information made available, the operations of the Imprest Accountduring the year under review are given below.

Japan Yen Rs.Balance as at1st January 2006 1,583,435,900 1,371,413,832Replenishments 2,161,044,845 1,937,323,291Foreign Exchange gain -

-------------------

44,314,363

-------------------3,744,480,745 3,353,051,486Less: Withdrawals (3,469,436,752)

-------------------(3,104,136,673)------------------

Balance as at 31 December 2006 275,043,993 248,914,813

2:3. Audit Observations

The following observations are made.

2.3.1. Accounting Deficiencies

A sum of Rs.52,397,429 spent by the implementing agencies for various types of expenditure during the yearunder review had not been accounted for.

2.3.2. Performance

(a) Postal Sector - Department of Post(i) According to the Project Agreement, sums of Rs. 123 million and Rs.126 million had been

allocated for 2005 and 2006 respectively with regard to the construction of post officebuildings and procure necessary equipment. However, sums of Rs. 87.8 million and Rs.154.2million had only been estimated in this regard for the years 2005 and 2006 respectively.Accordingly total expenditure expected to be incurred as at 31 December 2006 was Rs. 242


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million. However, actual expenditure incurred as at 31 December 2006 was Rs. 89.1 millionthus indicating that the achievement of financial progress was only 37% due to variousinstitutional problems. Following further observations are made with regard to theconstruction of Post Offices.

(ii) A sum of Rs. 2,539,160 had been paid during the year 2006 to a consultancy firm to prepareestimates for repairs and rehabilitations of the Post Offices affected by the Tsunami tidalwaves and supervision of the related works. However, there were significant differences

observed between the contract prices awarded and the estimated costs made by the firm. Inaddition, the supervision of the works had not been carried out satisfactorily. Preparation ofestimates and plans and supervision made by the said company was not satisfactory and theestimates were not comparable with the market rates or provincial rates as given below. The estimated cost for the construction of Post Office at Weligama was Rs. 4.4

million even though the value of the construction work was Rs. 5.8 million thusindicating that the awarded price was increased by 32 % than the estimate.

It was observed that the construction of the building for the Post Office at Matarahad been done without proper supervision. It was revealed that the quality of thebuilding was not satisfactory due to the usage of inferior building materials asobserved and adverse comments had been made by the Engineer who had visitedwith the audit teem at Matara post office on 13 December 2006. However, a sum of

Rs. 5.3 million (full contract value was Rs. 15 million) had been paid to thecontractor without considering the conditions of the building. Although a specialcertificate was issued in support of the contract payment the requirement laid downin FR 237 was not fulfilled. In addition, a sum of Rs. 195,000 had been paid to clearthe building site, however, it was not done.

Although the engineering estimate for the construction of Dikwella Post Office wasRs. 13.8 million, the tender for the value of Rs. 16.4 million had been awarded to aprivate contactor. However, it was decided to shift the building to a land which wasfar away from the city limit. A mobilization advance amounting to Rs. 2.9 millionhad been paid even though the ownership of the land had not been vested in theDepartment of Posts. According to the initial plan, the construction should have beencompleted before 31 December 2006. However, the date of completion and the

location were revised under the new contract and allowed to be completed before 18June 2007. According to the physical observations made on 20 July 2007, theconstruction had not been fully completed.

Following observations are made with regard to the repairs affected to the PostOffice at Weligama.

A sum of Rs. 770,505 had been paid for the work done exceeding theapproved B.O.Q.

Over payments amounting to Rs. 902,940 had been made in 07 instances forthe work not performed by the contractor. Details are given below.

Item No. asper B.O.Q.

Details Paymentsmade

erroneouslyRs.

01 Provisions of Water, Electricity and Other Facilities. 70,00012 Fixing a door and a counter 40,00019 Repairs of roof 622,28020 Fixing gutters 62,70021 Fixing Lines for Drainage Systems 25,08036 Landscaping 60,00041 Fixing grills for windows 22,880

----------Total 902,940


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According to the initial estimate for item No. 19, the estimated cost was Rs.125,000. However, it was increased up to Rs. 900,000 representing 620%of the initial estimate at the time of awarding the contract. In addition, theinitial estimate of Rs. 100,000 for item No. 34 (Construction of a CycleShed) had been increased significantly by 400% up to Rs.500,000.However, it was observed that the specifications of the works done had notbeen increased accordingly.

Following observations are made in connection with the sample audit carried outrelating to the payment of Rs. 4,988,298 for the repairs of building of theHambantota Post Office which was affected by the Tsunami.

6 items valued at Rs. 262,975 included in the initial estimate had beenremoved subsequently.

Initial estimate of Rs. 250,000 for the item 01 of the B.O.Q. had beenincreased by 70% up to Rs. 425,000 when awarding the contract.

A sum of Rs. 218,485 had been over paid in 05 instances for works notperformed by the contractor. Although a special certificate was issued insupport of the contract payment, the requirements laid down in FR 237 werenot fulfilled. Details are given below.

Item No. asper B.O.Q.

Details Over paymentmade

Rs.2.25 Repairs to roof 150,0002.26 Fixing door pipes and down pipes 39,7002.30 Fixing iron grills for windows 28,785

----------Total 218,485

A sum of Rs. 1,171,770 had been paid for 15 items in B.O.Q. for workswhich was exceeded the authorized limits.

An overpayment amounting to Rs. 75,000 had been made for fixing 5 doorsunder item No. 2.20 of the B.O.Q.

(iii) Following observations are made in a test checks carried out on procurement of officeequipment for post offices affected by Tsunami tidal waves.

A sum of Rs. 23 million had been incurred on procurements, exceeding therequirements by Rs. 1.9 million.

Materials valued at Rs. 1,713,820 had been purchased without followingtender/procurement procedure.

Office Furniture, Equipment etc. valued at Rs. 25.4 million purchased exceeding therequirements, had been remained at the stores as at 15 June 2007.

( b). National Roads - Road Development Authority

(i) It was observed that 26 contracts had been awarded to construct internal roads of the villagesmade to resettle the persons affected by the Tsunami tidal waves. However, Action had notbeen taken to recover the mobilization advances amounting to Rs.5,253,000 made on 17contracts, even after lapse of 1 1/2 years of the due dates of completion.


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(ii) Following observations are made in the audit inspection carried out in September 2007 onrehabilitation of Colombo Galle Hambantota Wellawaya Road and Weligama RailwayStation Road.

Although the construction works should be completed on or before 14 February2007, only 20% had been completed as at the date of inspection. A mobilizationadvance amounting to Rs. 14.6 million had been made and adequate quantum of theconstruction had not been done even at the date to be completed. The period for the

warrantee and the period of the construction had not been extended and liquidateddamages amounting to Rs. 6.3 million for the delays in completion of the work bythe agreed date, had not been recovered. However, a sum of Rs. 2 millionrepresenting 81% of the preliminaries had been paid to the contractor up toSeptember 2007.

It was observed that Asphalt Layer for the Binder Course had not been used in termsof the conditions laid down in the agreement and recognized standards.

A qualified officer had not been employed as a manager in charge for the Project sitein terms of the conditions laid down in the agreement.

The drainage line had been made with inferior quality. Goods Received Notes (GRNN) had not been prepared by a responsible officer;

instead a note prepared by the agent of the supplier had been accepted and thepayments had been effected accordingly. There was no evidence made availablewhether the material supplied were match with the standard specifications. Forexample asphalt purchased during the year as observed at sample check carried out,revealed that there were no quality certificates issued by the authorized officer.

(iii) Instances of awarding contracts for rehabilitation of roads to the default contractors wereobserved in audit as mentioned below.

Contracts valued at Rs. 594.6 million which were under STAART Project and SmallScale Infrastructure Rehabilitation and Upgrading Project (SIRUP) had been

awarded to a contractor listed as a failed contractor exceeding the limitationsimposed by the ICTAD. It was observed that the rehabilitation works under theProject was not satisfactory. According to the test audit check, physical progress ofthe four contracts had remained within 70% even after lapse of 6 months period ofthe due date of completion. Details are given below.

Project Works to becompleted on

Progress as at 15September 2007

%C,G,H,W road from 140+98 to 143+900 and Station road 07 February 2007 42Galle - Baddegama Road 10 February 2007 70Kahawa - Batapola Road 09 February 2007 0Walasmulla- Katuwana Road (SIRUP) 15 March 2007 50

A Qualified Officer had not been employed by the Contractor as a Site Manager interms of the contract agreement.

(iv) Even though the rehabilitation of Kahawa Batapola Road (0 - 3+000) to be completed on orbefore 15 April 2007, the rehabilitation work had not been commenced even as at 14September 2007.

(c) Power

(i) According to the audit test checks carried out in September 2007, with regard to the Tsunamiaffected Digital Communication System of Ceylon Electricity Board (CEB), followingobservations were made.


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A loss of Rs.9.2 million had been sustained by the Board pertaining to the purchase oftwo vehicles (4WD Jeeps) in the year 2006, as independently confirmed by the localagent as shown below.

Rs.Price increase in CIF value 1,876,000Price increase in Duties and Taxes 7,311,598

------------

Total loss 9,187,598

The main objective of the project was to re-establish the communication network asit was in before Tsunami. But, this objective could not be achieved due to temporarydisconnection of the Hambantota terminal

Even though the objective of the Microwave Communication System (MCS) is toreduce telephone bills of SLT telephones of the Board within the main locationssituated in several areas of the country and to carry out uninterrupted communicationsupply between power stations and the central control unit, it was observed that theMCS was not effective to reduce the telephone expenses when compared with thetelephone charges accounted through the prior system. Further, Samanalawewa andUdawalawe power stations had continuously been in operation with Central Control

Room through power line carrier system even after the damage of the earlier networksystem. Hence, replacing with a new line under this Project would be treated as anuneconomic transaction.

(ii) At a test check carried out on the expenditure met by the Ceylon Electricity Board it wasobserved the following deficiencies. Even though 4,524 of concrete poles required for the rehabilitation work of Southern

Province, 6,800 concrete poles had been purchased. Therefore at an additional costof Rs.11.8 million had been incurred to purchase 2,276 concrete poles which wereexpected to be used for other development activities other than the Project activities.

Quotations had been called for to purchase 21,000 and 3,400 wooden poles with thelength of 9 metres and 10 metres respectively. The tender had been awarded to a

South African Firm which was the second lowest bidder, without considering thelowest quotation furnished by the State Timber Corporation, stating that theCorporation was not in a capacity to supply a large stock without a valid reason.However, only 10,500 poles with the length of 9 metres and 1,700 poles with thelength of 10 metres were purchased. Further, out of the 2,363 poles supplied to theSouthern Province only 73 poles had been used. Therefore, the State TimberCorporation could have fulfilled the requirement, if the actual requirement wasconsidered at the initial stage. It was observed that a loss amounting to Rs.79.5million had been sustained in this regard.

(d) Provincial Roads - Road Development Authority - Southern Province

Following shortcomings were revealed in the test checks carried out on roads rehabilitated by theSouthern Province Road Development Authority.

(i) An over payment amounting to Rs. 3 million had been made on rehabilitation of 9 roads.(ii) Cracks and patches etc. had been occurred due to unsatisfactory condition of work done with

regard to followings.

Name of the Road Length (Km)Kivula - Kalamatiya Road 4.0Hungama Kalametiya Road 4.0Ambantota Vadirippuwa Road 1.6Ranna Kahandamodara Road 5.5Ambalantota Thavaluvila Beligalgoda Road 2.4


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Weligatta Bundala Road 2.0Gandara Circular Road 2.2Bentota Circular Road 5.2

(iii) According to the agreement made to rehabilitate the Polwatte Batapola Road, 4+200 kmshould be rehabilitated. However, the actual distance completed was 3+389 km only.Additionally, 2+060 km of the rehabilitated road had been excavated further for water drainagesystem. Therefore, a sum of Rs. 8.6 million had been incurred uneconomically and additional

cost of Rs. 18.4 million had been estimated to be incurred due to the absence of propercoordination between the related institutions for further rehabilitation of the road.

(iv) Out of the Aggregate Base Course (ABC) expected to be used for the rehabilitation ofWeligatta Bundala Road, 183.59 square meters of ABC had been issued to a privatecompany, thus incurring a loss of Rs.441,240 to the Project. In this connection the ProjectDirector replied that the Hon. Minister of Transport requested Provincial Road DevelopmentAuthority (PRDA) to carry out the access road at Weerawila Airport due to the visit of HisExcellency the President. 183.59 m3 ABC was used for this purpose.

(v) Although the rehabilitation work of Gandara Circular Road should have been completed on orbefore 10 March 2006, it was not completed even up to June 2007. Advances amounting toRs.1,386,104 made to the respective contractor had not been recovered yet.

------------------------------------------------------------------------------------------------------------------------------------------------

CONFLICT AFFECTED AREAS REHABILITATION PROJECT (COMPONENT A

ROAD REHABILITATION)

1. Opinion


(a) the balance sheet as at 31 December 2006 together with the schedules and the other connectedfinancial statements for the year then ended had been satisfactorily prepared to present fairly, in allmaterial respects, the financial position of the Project as at 31 December 2006 and the financialperformance of the Project for the year then ended,

(b) the funds provided had been utilized for the purposes for which they were provided,(c) the Statements of Expenditure (SOEs) submitted could be fairly relied upon to support the applications

for reimbursement in accordance with the requirements specified in the Agreement, and

(d) the withdrawals from and replenishments to the Imprest Fund Account during the year ended 31December 2006 had been truly and fairly disclosed in the books and records maintained by the Projectand the balance as at 31 December 2006 had been satisfactorily reconciled with the accounting recordsof the Central Bank of Sri Lanka as at that date.


2.1 Financial PerformanceAccording to the financial statements presented, the expenditure of the Project for the year under review

amounted to Rs.415,817,784 and the cumulative expenditure as at 31 December 2006 amounted to

Rs.586,753,297. The following statement shows a summary of the expenditure for the year under review, theexpenditure for the previous year and the cumulative expenditure as at 31 December 2006.


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Category of Expenditure

Expenditure for the year ended 31 December Cumulative expenditureas at 31 December 20062006 2005

Rs Rs RsFixed Assets 50,183,035 4,990,560 48,555,450Work in progress 310,327,462 144,788,746 456,204,797Consultancy Services 55,307,287 26,535,763 81,843,050Management Services - 150,000 150,000

---------------- ------------------- -----------------

415,817,784 176,465,069 586,753,297


According to the financial statements and information made available, the operations of the Imprest FundAccount during the year under review and the balance as at 31 December 2006 are given below.

SLRs SLRs US $Balance as at 01 January 2006 154,033,518 1,508,399Replenishments 215,464,416 2,048,458Foreign Exchange Gain 7,415,902

---------------222,880,318

-------------------

----------------Less 376,913,836 3,556,857

Withdrawals 196,493,137 1,881,729

Balance as at 31 December 2006---------------180,420,699

----------------1,675,128



(a) Project Management Unit staff had not been recruited in accordance with Section 4.1 of theManagement Services Circular No.10 of 26 December 2000.

(b) 4 vehicles valued at Rs.21,388,000 procured by using Project funds had been exchanged with 4 RoadDevelopment Authority vehicles for the use of RDA and the Ministry staff instead of being utilized for

the activities of the Project.


4.1 Utilization of Funds

The Project which was commenced in 2004 and scheduled to be completed by 31 December 2007, at a totalestimated cost of US $ 71.2 million equivalent to SLRs.7,120 million

Certain significant statistics relating to the financing, budgetary provisions and the utilization of funds as at 31December 2006 are shown below.

Amount agreed to be providedin the Loan Agreement Budgetaryprovision for theyear 2006

Funds releasedduring the year2006

Funds utilized up to 31December 2006

US $ Mn Rs. Mn Rs. Mn Rs. Mn Rs. MnADBLoan No. 2043 25.24 2,524Loan No. 2044 27.88 2,788 476 206.64 502.37GOSL 18.08

71.201,8087,120

9451,421

215.27421.91

252.92755.29 *

* This amount had been differed from the amount shown in the paragraph 2.1 due toaccrual basis.


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4.2 Performance of the Project

4.2.1 According to the performance report prepared by the Project, financial and physical performance in respect ofthe eighteen civil work contracts as at 31 December 2006 is given below.

Description Original

contract Sum

Expected target as at31

December 2006

Actual as at 31

December 2006

Financial Physical Financial Physical

Rs. % Rs. %

1stStage

Paranthan Poonakary (14.0 16.0 km) 41,729,892 47,400,000 88 7,954,619 20




Trincomalee - Pulmodai (0.0 7.5 km) 101,666,957 96,000,000 100 8,107,991 27

Trincomalee - Pulmodai (47.5 55.23 km) 102,222,386 97,500,000 95 11,920,750 25

Akkaraipattu Sagamam (0.0 5.0 km) 128,020,714 115,900,000 75 26,522,086 25



Ambilanthurai Weeramunai (0.0 8.0 km) 205,303,704 185,000,000 79 23,910,242 26

Ambilanthurai Weeramunai (8.010.0 km) 60,226,564 62,000,000 85 6,208,743 21

AmbilanthuraiWeeramunai (10.012.0 km) 45,803,867 50,400,000 75 5,960,264 29




Description Originalcontract Sum

Expected target as at31December 2006

Actual as at 31December 2006

Financial Physical Financial PhysicalRs. % Rs. %

2nd StageKandy Jaffna (176.0 185km) 246,267,142 86,000,000 Not

mentioned

7,054,878 Not

mentionedParanthan Poonakary (0.0 4.0 km) 118,405,956 Notmentioned

- do - Notmentioned

- do -

AmbilanthuraiWeeramunai(18.5 21.0km) 57,848,713 - do - - do - - do - - do -


(a) 15 contracts had been awarded under stage I of the Project and physical progress of those contracts asat 31 December 2006 was not satisfactory. Although contract period of 4 contracts had been expired asat 31 December 2006, the physical progress of those contracts was ranging from 5% - 44% andphysical targets and actual physical performance of balance 11 contracts as at 31 December 2006 wereranging from 80% - 94% and 19% to 29% respectively.

(b)

Although two contracts had been awarded in July and balance in November 2006 and work orders hadbeen issued to the contractors under 2nd Stage of the Project, the construction works had not beencommenced by the contractor up to end of the year under review.

--------------------------------------------------------------------------------------------------------------------------------------------


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Tsunami Affected Areas Rehabilitation Project Component "E"

(Southern Province Reconstruction)

1. Opinion

Except for the effects of the adjustments arising from the matters referred to in paragraph 2.3 of this report, I amof opinion that,

(a)

the balance sheet as at 31 December 2006 together with the schedules and other connected financialstatements for the year then ended had been satisfactorily prepared to present fairly in all materialrespects, the financial position of the Project as at 31 December 2006 and the financial performance ofthe Project for the year then ended,

(b) the funds provided had been utilized for the purposes for which they were provided,(c) the statement of expenditure (SOEs) submitted could be fairly relied upon to support the applications for

reimbursement in accordance with the requirements specified in the Grant agreement, and

(d) the withdrawals from and replenishments to the Imprest Fund Account during the year ended 31December 2006 had been truly and fairly disclosed in the books and records maintained by the Projectand the balance as at 31 December 2006 had been satisfactorily reconciled with the accounting records ofthe CBSL as at that date.


2:1 Financial Performance

According to the financial statements and information made available the Project expenditure for the year ended31 December 2006 amounting to Rs. 404,904,045. The fallowing statement shows a summary of theexpenditure for the year under review and the previous year and the cumulative expenditure as at 31 December2006.

Description Expenditure for the year ended CumulativeExpenditure as at 31

December 2006Rs.

31 December 2006

Rs.

31 December

2005Rs.

Equipment 1,373,268 3,173,390 4,546,658

Civil Works 138,936,364 - 138,936,364

Community Based Infrastructure Development 230,439,997 - 230,439,997Incremental Operation Cost 21,925,719 4,377,780 26,303,499Consultancy Services 12,228,697 744,944 12,973,641

-------------- ------------ ---------------Total 404,904,045 8,296,114 413,200,159

2.2 Imprest Fund Account (Sub ledger accounts No. 106 and 118)

According to the financial statements and information made available, the operations of the imprest fundaccounts during the year under review are given below.

US$ Rs

Sub ledger account No. 106

Balance as at 01 January 2006 1,705,912.63 174,203,021Add: Replenishments 1,615,862.12 169,332,331

Foreign Exchange Gain - 5,181,440

----------------3,321,774.75

---------------348,716,792


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Less: Withdrawals 3,003,363.42----------------

314,422,109---------------

Balance as at 31 December 2006 318,411.33 34,294,683

Sub ledger account No. 118

Initial Deposit 1,000,000.00 104,140,900Add: Foreign Exchange Gain -

----------------3,918,714

----------------

1,000,000.00 108,059,614Less: Withdrawals 932,597.60

----------------100,799,998---------------

Balance as at 31 December 2006 67,402.40 7,259,616

2.3 Audit Observations

The following observations are made.

(a) Foreign exchange gain amounting to Rs. 3,139,900 in respect of sub ledger account No.118 had notbeen disclosed in the accounts.

(b)

Expenditure amounting to Rs. 2,716,618 (US$ 26,622.45) relating to two applications forreimbursement made in October 2006 had not been reimbursed by the ADB due to erroneousclassification of expenditure items. The error had not been rectified even up to 31 December 2006.

(c) A difference of Rs. 76,620,002 had been observed between the bank records and the recordsmaintained by the Project with regards to the grants released to beneficiaries as shown below andwhich was not explained in audit.

Rs.Amount receivable from the Project as per the banks records 84,555,000Amount payable to the banks as per the Project records 7,934,998

--------------Difference 76,620,002

(d) A sum of Rs. 95,370,000 which was given to 1,279 beneficiaries to construct houses had not beendisclosed in the accounts.

2.4 Performance Review


(a) Even though the ADB had approved 753 sub projects for a cost of Rs. 3,055 million, the project hadimplemented only 204 sub projects at a cost of Rs. 634 million as at the end of the year. The Projecthad not prepared priority list for these sub projects. Therefore some important sub projects had beeneliminated from the project plan.

(b) According to the progress report provided by the Project, 35 roads, 14 buildings and otherconstructions at a cost of Rs. 40.82 million and Rs. 88.92 million respectively were scheduled to beconstructed in Galle District during the year under review. But, only 15 roads and 2 buildings andother constructions at a cost of Rs. 14.09 million and Rs. 37.37 million respectively had beencompleted during the year. Also, 69 roads and 29 buildings and other constructions at a cost of Rs.85.35 million and Rs. 85.5 million respectively were scheduled to be constructed in Matara Districtduring the year under review. But, only 7 roads and 7 buildings and other constructions at a cost of Rs.16.78 million and Rs. 41.56 million respectively had been completed during the year.

(c) The Project had paid a sum of Rs. 1,128,434 which was 25% of the monthly basic salary of theemployees who were attached to the Ministry and the Southern Provincial Council for the workscarried out relating to the project activities without obtaining the approval of the Management Services


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Project name Progress as at 30October 2007

Contraction of Tangalle market 60%Construction of New children ward in Hambantota Base hospital 35%

(k) Following observations are made in test checks carried out on sub projects conducted in AndagalaWella Roadin Hambantota District.

(i) Thecontract had been awarded at a cost of Rs. 37.1 million on 22 January 2007 with a set outtarget to complete it by 22 July 2007. The contractor had not completed the works within thestipulated period and the liquidated damages of Rs. 760,983 had not been charged from thecontractor. Further it was observed that the construction progress was approximately 40 %.

(ii) The total length of the road was 8 km and out of that 3 km were primary coated and another 3km were put up by using ABC mixture without being compacted. The rest was abandoned andthe materials allocated for the said component had been used to construct another by-roadwithout proper authority.

(iii) According to the quality control report, the ABC mixture used in this road was in inferiorquality.

(iv) At the sample audit tests carried out at five occasions on physical construction of the road, itwas observed that the thickness of the road was not matched with the specifications and alsothe shoulders of the road were not properly constructed.

(l) The progress of funds released by the Peoples Bank and the Bank of Ceylon relating to housing grantsfor construction of houses under this Project as at 31 December 2006 were as follows.

Name of the bank Fully damagedhouses

Fundsreleased

Partly damagedhouses

Fundsreleased

Nos. Rs. '000 Nos. Rs. '000Bank of Ceylon 338 21,060 1,118 26,000Peoples Bank 2,092

--------

128,910

---------

3,582

---------

179,000

-----------Total 2,430 149,970 4,700 205,100

Following observations are made in this regard.

(i) No reasons were made available to audit relating to the difference of Rs. 225,430,000between the records maintained by the Southern Provincial Council and the Banks recordspertaining to the payments for construction of partly and fully damaged houses.

(ii) Housing grants released to the beneficiaries was amounting to Rs. 230,439,997 as per theProject records whereas the reimbursed amount was Rs. 317,134,998 as per the bank records.An over reimbursement of Rs. 86,695,001 had been observed in this regard.

(iii) Due to lack of supervision, 189 beneficiaries had misused the funds amounting to Rs.9,450,000 which was given for housing constructions.

(iv) A sum of Rs. 1.6 million had been granted to the Tsunami victims as grants to constructdamaged houses without obtaining the proof for the ownership of these properties, violatinginstructions of the Circular No. NBD/TH/01 dated 14 July 2005.

(v) A sum of Rs. 760,000 had been paid to 05 beneficiaries without obtaining clear titles for landsand without the authority from the Urban Development Authority for construction. Further,these constructions were dropped by the Authority subsequently.


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(vi) Allowances amounting to Rs. 600,000 including two fully damaged houses and one partlydamaged house had been paid to a person instead of paying for one fully damaged house inGalle.

(vii) A sum of Rs. 29,300,000 had been paid to 269 persons whose applications had been rejectedby the "Damage Assessment Team" and the Regional Committee. Therefore it was notpossible to ascertain the correctness of this expenditure in audit.

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HEALTH SECTOR DEVELOPMENT PROJECT (FINANCE COMMISSION PART)

1. Opinion

Except for the effects of the adjustments arising from the matters referred to in paragraph 3 of this report, I amof opinion that;

(a) the financial management reports for the four quarters of the year ended 31 December 2006 had beensatisfactorily prepared to present fairly in all material respects, the financial performance of theProject for the year ended 31 December 2006,

(b) the funds provided had been utilized for the purposes for which they were provided, and

(c) the withdrawals from and replenishments to the Special (Dollar) Account during the year underreview had been truly and fairly disclosed in the books and records maintained by the Project and thebalance as at 31 December 2006 had been satisfactorily reconciled with the accounting records of theCentral Bank of Sri Lanka as at that date.



According to the financial statements presented and information made available, the expenditure of the Projectfor the year ended 31 December 2006 amounted to Rs. 14,769,747. The following statements shows a summaryof expenditure for the year under review.

Category Expenditure for the year ended 31December 2006

Rs.Capital:Office equipment 1,249,370Furniture and Fittings 64,000

Recurrent:Consultancy 840,000

Incremental Operation Cost 1,693,948Training 10,922,429---------------

Total Project Cost 14,769,747

2.2 Special (Dollar) Account Sub Ledger A/C No. 126

According to the books and records maintained by the Project and information made available, the operations ofthe Special (Dollar) Account maintained at the Central Bank of Sri Lanka during the year ended 31 December2006 are given below.


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(a) Use of Project funds for vehicle expenditureA sum of Rs.130,285 had been paid as insurance premium for the period 30 June 2006 to 29 June 2007and a sum of Rs.52,400 had been spent for purchase of 4 tyres for a vehicle registered under theMinistry of Health Care and Nutrition.

(b) Payment of an allowance to Deputy Director (Finance)The Deputy Director (Finance) had been paid an allowance of 50% of his basic salary out of theProject funds contrary to the provision in the Management Service circular No 10. However, he hadnot been fully released from the Finance Commission to the Project.

(c) Other IncomeThe reimbursement amounting to Rs. 53,619 received for a foreign workshop had been accounted asmiscellaneous income instead of being setoff against the expenditure.

(d) Lack of Evidence for Audit(i) A sum of Rs.8,345,569 had been shown under Special (Dollar) Account as "Amountwithdrawn not claimed up to end of 31 December 2005"

The above item shown in the accounts could not be satisfactorily vouched or accepted in auditdue to the absence of required evidence.

(ii) A sum of Rs. 13,616 had been paid on account of fuel for four vehicles belonging to theFinance Commission. No evidence were made available to ensure whether these vehicles hadbeen utilized for the purposes of the Project activities.

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RURAL FINANCE SECTOR DEVELOPMENT PROJECT

1. Opinion

Except for the effects of the adjustments arising from the matters referred to in paragraph 3 of this report, I amof opinion that;

(a) the balance sheet as at 31 December 2006 together with the schedules and the other connectedfinancial statements for the year then ended had been satisfactorily prepared to present fairly in allmaterial respects the financial position of the Project as at 31 December 2006 and the financialperformance of the Project for the year then ended;

(b) the funds provided had been utilized for the purposes for which they were provided ;

Descriptions For the year ended31 December 2006

US$ Rs.Initial Advance

Add: ReplenishmentsForeign Exchange Gain

100,00081,004

-------------

10,397,5908,692,091

398,014----------------

181,004 19,487,695Less: Withdrawals 81,004

-----------8,717,135

---------------Balance as at 31 December 2006 100,000 10,770,560


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(c) the statement of expenditure (SOEs) submitted could be fairly relied upon to support the applicationsfor reimbursement in accordance with the requirements specified in the agreement ; and

(d) the withdrawals from and replenishments to the Imprest Fund Account for the year ended 31December 2006 had been truly and fairly disclosed in the books and records maintained by the Projectand the balance as at 31 December 2006 had been satisfactorily reconciled with the accounting recordsof the Central Bank of Sri Lanka as at that date.



According to the financial statements presented, the expenditure of the Project for the year ended 31 December2006 amounted to Rs. 73,949,561 as compared with the expenditure of Rs.118,024,764 for the previousaccounting period. The following statement shows a summary of the expenditure during the year under reviewand the previous year and the cumulative expenditure as at 31 December 2006.

Description Expenditure during the Cumulative expenditureas at 31 December

2006

Rs.

year ended 31December 2006

Rs.

year ended31 December 2005

Rs.Fixed Assets:Office equipment 7,742,579 57,489,853* 65,276,708Incremental Operational Cost 10,182,843 3,422,441** 14,453,861Consultancy 49,750,088 55,887,114 105,637,202Training and Workshops 4,829,403 258,091 5,087,494ADB Charges 1,444,648

----------------73,949,561

967,265-----------------

118,024,764

2,411,913----------------192,867,178

* The expenditure aggregating Rs.33,489,933 made on fixed assets and Rs.1,000,000 being Projectimplementation expenses made during the year ended 31 December 2005 out of the local fundsprovided by the Government of Sri Lanka (GOSL) which was not reflected in the financial statements

of the previous year had been adjusted during the year under review.

** Cash balance at the Centre of Banking Studies as at 31 December 2004 amounting to Rs. 269,197which was charged to expenditure of that year had been adjusted during the year under review.


According to the books and records maintained by the Project and information made available, the operations ofthe Imprest Fund Account maintained at the Central Bank of Sri Lanka during the year ended 31 December2006 and in the previous year are summarized below.

For the year ended 31December 2006

For the year ended 31 December2005

US$ Rs. US$ Rs.

Balance as at beginning of the year 695,730 71,045,965 985,430 103,080,881Add: Replenishments 141,974 15,294,345 - -Foreign Exchange Gain/(Loss) -

------------837,704

3,118,571-----------------

89,458,881

-------------

985,430

( 2,939,977)-----------------

100,140,904Less: Withdrawals 196,441

------------20,391,322

-----------------289,700

-------------29,094,939

---------------Balance as at 31 December 641,263 69,067,559 695,730 71,045,965


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(a) Accounting DeficienciesFollowing Accounting Deficiencies were observed.

(i) Fixed assets had not been properly categorized and shown in the financial statements, insteadall the fixed assets had been shown as Office equipment. The Project Director had informedthat, they would take necessary action to locate those items under fixed assets.

(ii) Expenditure amounting to Rs. 2,000,000 incurred for the repairs of Co-operative Rural Banksbuilding which should be accounted as Project Implementation expenses had been shownunder office equipment.

(iii) Cash balance of Rs. 75,224 as at 31 December 2006 had been shown under expenditure.

(b) Though it was disclosed in the title of account, that the basis of accounting was cash, it was notdisclosed in the financial statements as an accounting policy.

(c) At a test audit examination carried out, it was observed that, the payment of local taxes amounting toRs. 1,253,986 had been made out of the ADB funds, contrary to Section 2 of Schedule 3 of the LoanAgreement.

(d) Non Compliance with Laws, Rules & Regulations and Management Decisions

The following instances of non compliance were observed.

Reference to the Laws, Rules,Regulations etc.

Details

Financial RegulationsF.R.758 Reports relating to the annual verification of assetsbelonging to the Project had not been furnished toaudit.

Management Service Circular No:10of 26 December 2000

Allowances had been paid to the staff of theProject Implementation unit, based on theManagement Service Circular which is applicable forProject Monitoring Unit.

Inland Revenue Act No.38 of 2000 -Section: 131

Withholding Tax (WT) had not been deducted onpayments made for certain purchases and services.

(e) Lack of Documentary Evidence for Audit.Following expenditure could not be vouched in audit due to lack of documentary evidence indicated againstthem.

Item of Expenditure AmountRs.

Documentary evidence Not made available

Expenditure and Advances paid forthe translation work.

301,400 (i) Basis of selection of service providers.

(ii) Information regarding documents translated.(iii) Invoices and references to the files.(iv) Basis of settlement of advances.


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P.S.No. 11 - VOLUME 4 - Part V - Projects - REPORT OF THE AUDITOR GENERAL - 2006--------------------------------------------------------------------------------------------------

2006 4 v foreign funded projects english

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