audit l'o 0ffice

AUDIT L'O 0FFICE ' V"PAPUA NEW GUINEA

Phone: (+675) 3012200 Fax: (+675) 325 2872 Email: [email protected] Website:www.ago.gov.pg

INDEPENDENT AUDIT REPORT ON THE ACCOUNTS OF THE ROAD MAINTENANCE &REHABILITATION PROJECT II, IDA CREDIT NO: 4931 - PNG & IDA 5404 PNG) FOR THEFISCAL YEAR ENDED 31 DECEMBER 2016.

To the Secretary, Department of Treasury

I have audited the Project Financial Statements of Receipts and Payments., and the accompanying notes ofRoad Maintenance and Rehabilitation Project IL1 IDA Credit No. 4931 - PNG and JDA Credit No, 5404 PNGas at 31 December 2016. The preparation of this Project Financial Statement is the responsibility of theProject Implementation Unit (PIU). My responsibility is to express an opinion on these Financial Statementsbased on my audit.

Responsibility for the Financial Statements

The Departmental Head overseeing the Project Implementation Unit (PIU) at the Department of Works andImplementation is responsible for the preparation of the Financial Statements for the Project which shouldgive a true and fair presentation of the financial position and performance of the Road Maintenance &Rehabilitation Project II and to submit to mie for audit in compliance with Section 63(4) of the PublicFinances (Management) Act, 1995. The Departmental Head is also responsible for the maintenance ofadequate accounting records and internal controls that are designed to prevent and detect fraud and error, andfor the accounting policies and accounting estimates inherent in the financial statements.

Responsibility of the Auditor-General

I have conducted an independent audit in accordance with the Audit Act, 1989 (as amended) in order toexpress an opinion to you. My audit has been planned and performed in accordance with InternationalStandards on Auditing as promulgated by the International Federation oj Accountants to obtain reasonableassurance whether the financial statements are free of material misstatement. The audit procedures includeexamination, on a test basis, of evidence supporting the amounts and disclosures in the Financial Statement.My audit also includes assessing the accounting principles applied and significant accounting estimates madeby management, as well as evaluating the overall statement presentation. I believe that my audit provides areasonable basis for my opinion.

The nature of an audit is influenced by factors such as the use of professional judgment, including theassessment of the risks of material misstatements in the financial statements, whether due to fraud or error. Ihave considered the risks, based on those assessments, on the internal controls relevant to the preparation andfair presentation of the financial statements in designing audit procedures considered appropriate in thecircumstances.

Audit procedures were performed to assess whether, in all material respects, the financial statements presentfairly. in accordance with the Public Finances (Management) Act, 1995, Accounting Standards and othermandatory financial reporting requirements, a view which is consistent with my understanding of theProject's financial position and the policy on the management of the project is to prepare the accompanyingproject financial statement in accordance with International Accounting /standards (IAS) as adopted by theAccounting Standards Board of Papua New Guinea and the requirements of the loan agreement of the RoadMaintenance & Rehabilitation Project II, IDA Credit No. 4931- PNG dated June 9, 2011 and IDA Credit No.5404 PNG dated April 10, 2014 and of its performance as represented by the results of its operations andcash flows,

Level 6 PO Box 423TTqA TnvImnf Haim WAIC.ANT NCfl

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I believe that the audit evidence obtained is sufficient and appropriate to provide a basis for this report.

UNQUALIFIED AUDIT OPINION

In my opinion:-

the Statement of Cash Receipts and Payments were fairly presented, in all material respects, the Statement ofCash Receipts and Payments of the Road Maintenance & Rehabilitation Project 11 for the financial periodending 31 December 2016 are based on proper accounts and records; and in accordance with cash receipts

disbursements basis of accounting.

HILIP NA AAuditor-General

27 June 2017

Department of WorksRoad Maintenance and Rehabilitation Project II

Statement of Cash Receipts and Payments and Statement of Comparison of Budget andActual Amounts

For the year ended 31 December 2016

Table of Contents

Audit Opinion Page ...... ..................... .......... ......... 2

Statement of Cash Receipts and Payments.....................4.... .......... 4

Statement of Comparison of Budget and Actual Amounts - Original Financing . ............ 5

Statement of Comparison of Budget and Actual Amounts - Additional Financing .................... 6

Notes to the Statement of Cash Receipts and Payments and Statement of Comparison ofBudget and Actual Amounts............................. ................ 7

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Department of WorksRoad Maintenance and Rehabilitation Project 11

Notes to the Statement of Cash Receipts and Payments and Statement ofComparison of Budget and Actual Amounts


1 Accounting Policies

1.1 Basis of PreparationThe Project's Statement of Cash Receipts and Payments and Statement of Comparison ofBudget and Actual Amounts have been prepared in accordance with International Public SectorAccounting Standard (IPSAS): Financial Repoffing under the Cash Basis of Accounting. This isalso in line with the Government of Papua New Guinea's accounting conventions. Theaccounting policies have been applied consistently throughout the period.

1.2 Project InformationThe World Bank is providing assistance to the Government of Papua New Guinea (GoPNG)through the Road Maintenance and Rehabilitation Project 2 (RIVIRPII) ("the Project") via twoInternational Development financing agreements: 4931-PG for SDR 27.4 million; and 5404-PGfor SOR 82.4 million.

The Project is managed by the GoPNG Department of Works with the assistance of theEmployer's Project Manager which is currently under contract to Cardno Emerging Markets(Australia) Pty Ltd.

1.3 Reporting CurrencyThe Statement of Cash Receipts and Payments and Statement of Comparison of Budget andActual Amounts are prepared in Kina (K), which is the Project's functional and presentationcurrency, All values are rounded off to the nearest Kina, unless otherwise indicated. Funds arereceived into and expenses paid out of the Project's trust accounts. Foreign currency paymentsare recorded at the exchange rate at the date of payment.

2 Other Receipts

The Project requested receipts from the Word Bank during 2016 which had not been receivedat the reporting date. The receipts were for part payment of Withdrawal Application 43 forPGK1,008,351. The funds were received on 22 February 2017.

Interest earned on project bank accounts is recorded in the Project's financial managementsystem as GoPNG contributions. There was PKG 31,819 in interest earned during the reportingperiod and recorded as GoPNG contributions.

3 Authorisation Date

Statement of Cash Receipts and Payments and Statement of Comparison of Budget and ActualAmounts for the 12 months' period ended 31 December 2016 are authorised for issue by theSecretary of Department of Works on the date indicated on Note 9.

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Notes to the Statement of Cash Receipts and Payments andStatement of Comparison of Budget and Actual Amount


4 Comparison of Actual and Budget Amounts

Material variances between actual amounts and the final budget amounts are explained belowin Sections 4.1 and 4.2 below.

4.1 Original Financing Agreement 4391-PG4.1.1 The variation of 6% of actual Original Financing over the final budgeted amount is

because Original Financing was used to partially fund two civil works contracts initiallybudgeted under Additional Financing (Note 4.2.3) This expedited full draw down of theOriginal Financing loan.

4.1.2 Although restructuring of the loan meant counterpart funds were not budgeted for asthey were not required, however GoPNG funds of PGK 5,000,000 were received ofwhich PGK 2,000,000 was allocated to Original Financing. Counterpart funding given byGoPNG for Original Financing in 2015 and interest earned on this fund amounts to PGK15,000,000 and PGK 4,640, respectively.

4.1.3 Two civil works contracts initially budgeted under additional financing (Note 4.2.3) werepartly paid under Original Financing to expedite full draw down of the Original Financingloan.

4.1.4 Employers Project Manager. The EPM consultancy was extended by a further 12months to 31 July 2017 within the same budget ceiling which resulted in an underspendof PGK 4,732,780.

4.1.5 The overspend variation of 12% for the Socio-Economic Survey contract is due to theaccepted bid exceeding the scoped estimate.

4.1.6 Bank Fees were lower than anticipated due, in part, to delays in processing foreigncurrency payments.

4.1.7 Financial Management System (FMS). Expenditure for the FMS software amendmentswas less than the scoped estimate.

4.1.8 The additional Cardno consultancy was not completed in 2016 as anticipated.

4.2 Additional Financing Agreement 5404-PG4.2.1 World Bank Reimbursements were impacted by lower than anticipated expenditure.

There is a direct correlation between contract expenditure and reimbursement withaward of 3 major contracts delayed and hence expenditure delayed. The World BankAdvance was obtained because of the restructuring of the finance agreement wherebythe World Bank now fund 100% of all contracts.

4.2.2 Although restructuring of the loan meant counterpart funds were not budgeted for asthey were not required, however GoPNG funds of PGK 5,000,000 were received ofwhich PGK 3,000,000 plus interest was allocated to Additional Financing. Counterpartfunding given by GoPNG for Additional Financing in 2015 and interest earned on thisfund amounts to PGK 7,000,000 and PGK 6,550, respectively.

4.2.3 Restoration Civil Works. The spend of 11% of final budget was due to a number offactors including:

* Two civil works contracts were partly paid under Original Financing to expedite fulldraw down of the Original Financing loan.

* Two civil works contract commencements were delayed due to problems with theirperformance security bank guarantees.

* The extension of the EPM contract resulted in a delay in full roll out of the worksprogram.

4.2.4 The Performance based maintenance contract was delayed due to ongoing revisions ofthe bid document which delayed the bid and award.

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4.2.5 Bank fees were impacted by payments continuing to be made from Original Financingand thus not incurred from Additional Financing.

4.2.6 Financial Management System (FMS). The budget for FMS software amendments forAdditional Financing 2 (AF2) was not required as AF2 has not commenced.

4.2.7 Audit fees were impacted by payments continuing to be made from Original financingand thus not incurred from Additional Financing.

There were no other material differences.

5 Additional Disclosures

The Bank of Papua New Guinea has imposed restrictions on foreign currency payments due tolow reserves. Until November 2016 the restriction was a daily threshold limit of PGK 25,000 perday. In November 2016 the Bank of South Pacific (BSP) advised the restriction has changed toa prioritisation basis determined by BSP's Treasury Department. This change has furtherslowed the processing of foreign payments.

At the end of the reporting period the Employers Project Management Consultancy wasimpacted by these currency restrictions. Expenditure would have been higher in 2016 if allforeign payment requests submitted to the bank had been processed. At reporting date thefollowing had been submitted to the BSP and remained unpaid:

PayableSubmitted to BSP AUD Amount PGK Amount* Cormmnts

29-August-2016 89,092.81 204,022.53 Unpaid1 0-October-2016 80,867.01 185,185.45 Unpaid14-October-2016 34,118.24 78,130.77 Paid 9/03/201714-October-2016 11,941.41 29,349.49 Paid 25/01/2017

Total 216,019.47 496,688.25

'The PGK Amount for unprocessed payables has been estimated using the World Bankexchange rate at 31 December 2016 of AUD1.00 = PGK 2,29

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6 External Assistance

6.1 External AssistanceExternal assistance was received in the form of loans from the World Bank via two InternationalDevelopment financing agreements: 4931-PG for SDR 27.4 million; and 5404-PG for SDR 82.4million. The following amounts received in 2016 are as follows:

2016Amount

Local currency Equivalent in Equivalent inReceipt (PGK) (SDR) (US$)

IDA Credit Number 4931-PGJanuary 1,921,501 468,043 648,506February 1,668,376 406,794 565,204April 5,003,196 1,156,822 1,629,499May 2,958,231 675.467 949,592June 2,668,655 605.026 856,638July 2,933,134 675,459 941,536August 3,490,048 800,538 1,118,560September 5,082,293 1,127,905 1,578,052October 1,786,551 416,874 572,590November 1,770,307 413,783 567,383December 8,223,110 1,945,061 2,631,395Total 37,505,400 8,691,774 12,058,956

IDA Credit Number 5404-PGAugust 31,000,000 7,089,594 9,935,500Grand Total 68,505,400 15,781,368 21,994,4 z

2015Amrount

Local currency Equivalent in Equivalent inReceipt (PGK) (SDR) (US$)

IDA Credit Number 4931-PGMarch 1,475,235 407,888 565,753April 2,450,607 668,544 925,104May 2,625,591 692,210 983,284June 2,399,193 634.648 891,300July 2,421,604 636,972 889,939August 2,337,276 614,020 854,274September 2,537.491 653,648 917,303October 1,990,734 496,460 700,738November 2.461,122 611,744 850,318Total 20,698,853 5,416,134 7,578,013

IDACredit Number 5404-PG

Grand Total 20,698,853 5,416,134 7,578,013

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6.2 Undrawn External Assistance

Undrawn external assistance loans at the reporting date are amounts specified in financingagreements which relate to funding for projects currently under development, where conditionshave been satisfied, and their ongoing satisfaction is highly likely, and the project is anticipatedto continue to completion.

The undrawn closing balance in the currency of the financing agreements in Special DrawingRights (SDR) as at 31 December 2016 was:

IDA Loan 2016 (SDR) 2015 (SDR)4931 - PG 255,816 8,947,5905404 - PG 75,269,275 82,358,870

Total 75,525,091 91,306,460

7 Available Funds for the Year

Details of available funds for the years is as follow:

2016 2015(PGK) (PGK)

Cash balance as at 1 January 32,932,470 19,915,876Movement during the yearNet surplus 5,338,408 13,016,594

Cash balance as at 31December 38,270,878 32,932,470

The Project's cash in banks earn interest based on the banks' average deposit rates. Interestincome earned during 2016 and 2015 amounted to K31,818 and Ki1,190, respectively.

8 Subsequent Events

From 31 December 2016 to the date on which this report was authorised for issue, there wereno material subsequent events.

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9 Authorisation

The Annual Statement of Cash Receipts and Payments aid Statement of Comparison ofBudget and Actual Amounts of the Project for the year ended 31 December 2016 areaulhorised for issue as follows

Laim MosesProject Director (World Bank Projects), Department of Works

06/06/2017

David WerhSecretary, Department of Works

06/0612017

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