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Madhya Pradesh Irrigation Efficiency Improvement Project (RRP IND 45371)
MADHYA PRADESH IRRIGATION EFFICIENCY IMPROVEMENT PROJECT
FINANCIAL MANAGEMENT ASSESSMENT
OF
MADHYA PRADESH WATER RESOURCE DEPARTMENT
OCTOBER 2017
CURRENCY EQUIVALENTS (as of 31 October 2017)
Currency Unit – Indian rupee (₹) ₹1.00 = $0.0154 $1.00 ₹64.861
ABBREVIATIONS
ADB - Asian Development Bank MPIEIP - Madhya Pradesh Irrigation Efficiency Improvement Project PPF - Project Preparatory Facility PFM - Project Financial Management DEA - Department of Economic affairs CAG - Comptroller and auditor general MoF - Ministry of Finance PEFA - public expenditure and financial accountability IFI - International Financial Institution SOE - Statement of Expenditure FMR - Financial Monitoring Report PMU - project management unit MPWSRP - Madhya Pradesh Water Sector Restructuring Project SAC - Senior Account Clerks MMI - major and medium irrigation PMU - project management unit
NOTES
(i) The fiscal year (FY) of Government of India ends on 31 March. “FY” before a year denotes the year in which the fiscal year ends, e.g. FY 2016 ends on March 2016.
(ii) In this report, "$" refers to United States dollars.
Contents
Executive Summary 1 A. Project Description 3 B. Country Issues 4 C. Risk Analysis 6 D. Project System - Strength and Weaknesses 8 E. Implementing Entity 11 F. Fund Flow Mechanism 12 G. Personnel 14 H. Accounting Policies and Procedures 15 I. Internal Audit 16 J. External Audit 17 K. Financial Reporting and Monitoring 18 L. Information Systems 18 M. Procurement Arrangements 19 N. Disbursement Arrangements 19 O. Agreed Action Plan 20 P. Conditions 21 Q. Supervision Plan 21
List of Annexures
Annexure 1: Financial Management Assessment Questionnaire 23 Annexure 2: Proposed Accounts Staff, Including Job Title, Responsibilities etc. 33
List of Tables
Table 1: Results of GoI-Level PFM Performance Assessment (PEFA-based, 2010) 5 Table 2: FM Internal Control and Risk Assessment 6 Table 3: Realization of MPWRD and KIP Budgets 9 Table 4: MPWRD Budgets of Plan and Non-Plan Expenditure 10 Table 5: Weaknesses and Resolutions 10 Table 6: External Audit Schedule 17 Table 7: FM Action Plan 20 List of Figures Figure 1: Organizational Chart of MPWRD ................................................................................ 12 Figure 2: Reimbursement Procedure ........................................................................................ 13 Figure 3: Direct payment procedure .......................................................................................... 14 Figure 4: Organization Chart of PMU Finance and Accounts Department ................................. 15
EXECUTIVE SUMMARY
1. Financial Management Assessment for the Water Resources Department of Government of Madhya Pradesh ( MPWRD), India, the proposed executing agency was setup during (June and July 2016) in accordance with ADB's Guidelines for the Financial Management and Analysis of Projects (2005) and Financial Due Diligence A Methodology Note (2009) and Technical Guidance for Financial Management Assessments (2015) and focuses on fund flows, staffing, accounting policies and procedures, internal controls, financial reporting and monitoring and internal and external audit was reviewed. The objective was to assess MPWRD overall capacity to utilize funds provided for the proposed Madhya Pradesh Irrigation Efficiency Improvement Project (MPIEIP). Accordingly, the assessment was designed to determine whether the executing agency's financial management arrangements are adequate for maintaining adequate internal controls over its activities, and for recording all transactions and balances supporting the preparation of reliable Project Financial Statements (PFSs), which could be subjected to audit to comply with the fiduciary requirements of ADB. This assessment borrows from previous financial management assessments including recent country public sector financial management system assessment for India.1
2. In addition, a detailed Financial Management and Analysis Questionnaire was prepared based on document reviews and interviews with the Chief Engineer, Bhopal (Project Director) and Divisional Accountant at the offices of the Executive Engineer's Offices at Zirapur, Rajgarh (proposed project management unit [PMU]) of MPIEIP multi-disciplinary project unit. Four numbers of transactions undertaken during the years 2015–2016 and monthly accounts submitted to the Accountant General's Offices were reviewed to understand the process of receipt and disbursement of funds, certification of works/invoices for goods and services.
3. These assessments identified a number of weaknesses including (i) capacity of the accounting and internal audit staff, and (ii) financial reporting, oversight and public accountability. Although weaknesses exist, the design of the financial management is such that these will not have a significant impact on the projects financial management. The project preparatory facility (PPF) is primarily for funding consultants to undertake feasibility studies of potential water resources projects. ADB shall also support the project during implementation. Risk mitigation measures have been introduced to partially manage the weaknesses addressed in the financial management systems. The measures include: (i) the project coordination units’ staff will be trained as per ADB’s procurement and consulting service guidelines, and (ii) awareness and explanatory workshops to the financial accountants in the project coordination unit, to ensure that audited project financial statements are more closely aligned with the Audit Terms of Reference agreed between the Comptroller and Auditor General (CAG) and ADB.2
4. MPWRD has experience in managing World Bank-funded Madhya Pradesh Water Sector Restructuring Project. MPWRD has clearly defined responsibilities with accountability allocated among different units at different levels of authority within their institutions. MPWRD has set up a PMU with staff dedicated to the project from within MPWRD. MPWRD shall train the existing accounting staff in handling accounting guideline and procedure of ADB funded projects to be posted at PMU and site offices. Financial reports are prepared according to the Government of India Financial Administration Act.
1 World Bank. 2010. PEFA Assessment. 2 http://finmin.nic.in/the_ministry/dept_eco_affairs/MI/16-TOR.pdf
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5. A 2010 Assessment of the Public Financial Management Performance Measurement Framework identified a well-designed system but with uneven implementation. Strengthening Public Financial Management (PFM) is a key element of the government’s strategy for strengthening governance, optimizing outputs from public resources and for ensuring inclusive and broad-based development. A number of development partners under the leadership of the World Bank are pooling donor resources to provide for strengthening PFM systems, increasing accountability in public expenditure and financial management, and addressing fiduciary and governance weaknesses in the utilization of public resources. Identified country-level public financial management issues are centered around the gaps in implementation of public financial management rules and procedures, compliance with the financial acts, weak internal control, and enforcement due to insufficient human resources, capacities, and enforcement.
6. As part of the risk analysis for the project, inherent risk was assessed as moderate resulting in the decision to require the PMU to include accounting staff to ensure the adequate monitoring of construction activities and preparation of withdrawal applications. Separate project books of accounts will be maintained and project financial statements will be prepared. Control risk was considered moderate partly due to previous experience in implementing donor funded projects. MPWRD will maintain separate books of account for the project finances. MPIEIP will maintain manual books of account, and MPWRD will use its own computerized accounting system. All divisions and circle offices will send monthly statements of accounts to the PMU office. A record of the same, in consolidated form of all such statements, will be kept at the PMU office. Project Financial Statements (PFS) and other project related reportings shall be prepared based on these statements. The PMU will ensure that the annual work plan process begins early enough to identify both counterparts funding and budget allocation requirements for the project, allowing the Ministry of Water Resources to execute necessary budget release in time. The PMU will include adequate level of human resources for technical and financial management, and ensure their orientation and training in handling financial matters specifically ADB / foreign aided projects to understand the government’s and ADB’s rules, procedures and reporting requirements.
7. The assessment indicates that, although the overall risk is assessed as moderate, with the proposed mitigating measures, the financial management arrangements of MPWRD are adequate to implement the project.
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A. Project Description
1. The Madhya Pradesh Irrigation Efficiency Improvement Project (MPIEIP) includes three main components: (i) the 44.5-meter (m) high Kundalia Dam across the Kalisindh River, construction started in May 2015 and being funded by the State Government of Madhya Pradesh; the composite earth and concrete dam will create a 552.75 million cubic meter reservoir; (ii) the Kundalia Irrigation Project (KIP), which is planned as a pressurized pipeline distribution system for 125,000 hectares (ha) cultivable command area, and (iii) the supply of water for potable and industrial use. The piped distribution system including, pumping stations, sub-stations and power supply system, transmission pipelines, valves, controls and associated structures have been planned, with a turnkey contractor engaged to do detailed design and construction, and then manage the scheme operation for an initial period, with support to hand-over the long term management to a newly constituted organization. The indicative cost of MPIEIP is $560 million comprising $392 million of ADB financing and $168 million counterpart funds from the government. Construction will be through a combination of international and national competitive bidding.
2. MPIEIP will develop 125,000 hectares (ha) of new, highly efficient irrigation networks and productive command area in Rajgargh and Shejahpur districts. Currently irrigation is done mainly during Kharif and in a very small area during rabi season from low yielding over exploited groundwater. To ensure a fast project implementation with the initial commissioning of the dam and irrigation in 2018, it is proposed to develop the irrigation system in two stages. Stage 1 would be around 60,000 ha for which the official clearances are in place followed by stage 2 which will require additional environmental clearance is under process . MPIEIP is designed to help finance this plan and more importantly, to provide advice on developing highly efficient and sustainable model major and medium irrigation (MMI) schemes that will serve as model for future MMI investments. The Asian Development Bank (ADB) is supporting MPIEIP planned to increase irrigation efficiency and water productivity in large irrigation scheme in Madhya Pradesh, India. MPIEIP will finance the development of KIP.
3. Since 2010, Madhya Pradesh has embarked on an irrigation expansion and modernization plan. New developments, infrastructure modernization, and substantial management and operation improvement led to an increase in net irrigation area from 6.892 million ha in 2009–2010 to 8.550 million ha in 2012–2013 These efforts have been rewarded by increase in food grain production from 16.016 million tons to 23.690 million tons for the same period.3 These efforts have been rewarded by record annual agricultural growth of 20% over the last 3 years. The state faced droughts in 2016 in 42 out of 51 districts of Madhya Pradesh. 4 They plan to further increase the total irrigated area by 2 lakh ha annually as proposed in its Vision Document 2018. This will be achieved by maximizing irrigation efficiency and water productivity in existing systems development of pressurized irrigation, adoption of micro-irrigation and of high value crops.
4. The overall allocation for the project is carried out through the annual allocation of budgetary resources. Fund allocation would be through the reimbursement method of seeking funds from ADB and the state government. As of October 2017, cost estimates (including taxes, duties and contingencies) for pumps, pipelines, related infrastructure plus 5 years of MOM is $560 million. The financial work is to be carried out at the PMU level in charge of the Chief Engineer Projects. Accounting of all transactions will be done on cash basis by the Divisional Accountants
3 Government of India. 2016. Statistical Year Book. India. 4 www.indiaenvironmentportal.org.in
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under the supervision of the executive engineer (EE) projects. As the Divisional Accountant is representative of the Accountant General (AG) office5, he would be responsible to verify, and then
account every financial transaction at the PMU level. MPIEIP would be subject to verification by recruitment of an independent auditor for internal audit and external audit through the AG office of the State Government of Madhya Pradesh.
B. Country Issues
5. This section provides an overview of the main characteristics of the Indian public financial management (PFM) system in particular the legislative and institutional frameworks as well as the inter-governmental fiscal transfer system between the Government of India and the states/union territories.
1. Overview of PFM System of India
6. The Ministry of Finance (MoF) has the overall responsibility for expenditure coordination and control, but some financial powers are delegated to ministries. The General Financial Rules (2005) consists of a compendium of general provisions regarding financial management rules and procedures, including for expenditure and payments, budget formulation and implementation, accounts, procurement, contract management, grants and loans, budgeting and accounting for externally-aided projects, and guarantees. The General Financial Rules also apply to the states.
7. The Controller General of Accounts (CGA) within MoF’s Department of Expenditure is responsible for establishing and maintaining the departmentalized accounting system. The accounting set-up of the Government of India and the states/union territories has a similar format prescribed by the Controller General of Accounts.
8. The Comptroller and Auditor General (CAG) is responsible for external audit of the accounts of both government and the states/union territories on behalf of the legislatures, and––as in the case for accounting––the audit set-up is thus unitary. The CAG also audits government companies and statutory corporations. The parliamentary Public Accounts Committee (PAC) examines the government ’s audited Appropriation Accounts and Finance Accounts, the related audit reports, as well as other audit reports prepared by the CAG, including performance audits. For the States, CAG submits audit reports to the Governor (appointed by the President of India) who places them before the Legislative Assembly.
9. While the legal, institutional, and procedural set-up for PFM, thus to a large extent is unitary, and hence similar across the states, the functioning of states and the implementation of programs vary widely due to significant differences in capacities.
2. Country-Level Financial Management Assessment
10. In 2010, the National Institute of Public Finance and Policy prepared a government-level PFM Performance Assessment at the request of the World Bank.6 The assessment was based
5 The Office of the Accountant General is a part of the Indian Audit and Accounts Department functions under the
Comptroller and Auditor General of India. 6 India - Public Expenditure and Financial Accountability, Public Financial Management, Performance Assessment
Report (National Institute of Public Finance and Policy [NIPFP], March 2010). NIPFP undertakes applied research in public finance policy. It is an autonomous entity established in 1976 under the Societies Registration Act (1860), and is overseen by a governing board comprising representatives from the MoF, the Planning Commission and the Reserve Bank of India. NIPFP receives annual grants from GoI and State Governments, which in 2012/13 accounted
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on the Public Expenditure and Financial Accountability (PEFA) framework. While several government officials were interviewed for the assessment and a large number participated in the inauguration workshop, the 2010 assessment was not endorsed or formally accepted by government.7 In 2013, the European Union delegation prepared an annual PFM monitoring report, which assesses progress in improving the government's PFM system, which was analytically broadly based on the PEFA approach.
11. Overall and comparative performance of the gvernment's PFM system. The scores of the individual performance indicators of the government-level 2010 PEFA assessment were computed to estimate averages for the six high-level PFM dimensions as well as the overall score (see Table 1, which also shows corresponding risk ratings). The government's score in the Open Budget Index has increased from 60% in 2008 to 68% in 2012, the highest in the region.8
Table 1: Results of GoI-Level PFM Performance Assessment (PEFA-based, 2010)
PFM Performance Dimension
Calculated Ratings
Numerical Scores
Equivalent PEFA Rating
Risk Rating
Credibility of the budget 2.67 B Medium
Comprehensiveness and transparency 3.58 A Low
Policy-based budgeting 1.75 C High
Predictability and control in budget execution 2.44 C+ High
Accounting, recording and reporting 3.00 B Medium
External scrutiny and audit 2.33 C High
Calculated Overall Score 2.75 B Medium
12. Policy-Based Budgeting. The 2010 PEFA assessment found this to be the weakest of the six PEFA dimensions. While a clear annual budget calendar exists that was generally adhered to and allowed sufficient time, the MoF's budget circular did not contain expenditure ceilings (these were communicated after the submission of the initial round of budget estimates) and the budgets were approved with a delay for two of three fiscal years that were assessed. Furthermore, forecasts of fiscal aggregates were not prepared on a rolling annual basis using main categories of economic and functional or sectoral classifications and the links between multi-year estimates and subsequent setting of annual budget ceilings was weak.
13. Accounting, Recording and Reporting. The 2010 PEFA assessment report found this area to have a mixed performance. Information on resources received by service delivery units (education and health) was fully available, and accounts reconciliation generally timely and done regularly. However, while in-year budget reports were prepared and published monthly and there were no material concerns regarding data accuracy, they captured information only at payment stage and not commitments. Also, while the year-end financial statements were complete, they were available only with a time lag of 8 to 10 months, and the Indian Government Accounting Standards are not fully aligned with the Cash International Public Sector Accounting Standards prescribed by the International Federation of Accountants.
for 37% of its total income.
7 Public Financial Management in India-Proceedings of a June 2010 Workshop (NIPFP, June 2010). 8 India, Open Budget Index for 2008, 2010, and 2012 (International Budget Partnership, undated).
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C. Risk Analysis
14. Find below the risk analysis of both inherent risk and control risk are of moderate nature:
Table 2: FM Internal Control and Risk Assessment
Risk Description Risk
Assessment* Risk Mitigation Measures
INHERENT RISK
1. Entity/Project-Specific Risks: Even though MPWRD has implemented foreign-financed projects, lacks the direct expertise in implementing ADB projects.
M
The investment program requires a detailed procedure manual as well as adequate training on ADB’s policies and guidelines.
M Finance staff at the PMU directly engaged with ADB project needs additional workshops and training programs in handling financial matters on implementing ADB project.
Overall Inherent Risk M
CONTROL RISK
1. Implementing Agency Control Risks: Whether Implementing Agency has prior experience in handling projects financed by International Financial Institutions (IFIs)
M MPWRD has implemented a World Bank-financed project in the recent past and it appears that it has sufficient capacity to implement the proposed investment project.
2. Funds Flow: MPWRD and the Goverment have undertaken various other IFI-funded projects, mainly through the reimbursement method. The overall allocation for the project is carried out through the annual allocation of budgetary resources. In respect of IFI- funded projects, generally no delays were reported.
M Plan expenditure of the goverment budget allocation encompasses all new capital expenditure including the establishment of expenditure, capital expenditure, all operations and maintenance expenses of the project, including project staff related expenses.
Non-plan expenditure of the budget allocation covers the expenditure incurred on establishment and maintenance of existing assets including salary.
3. Staffing: The present staff at MPWRD are qualified and trained to undertake the accounting function. There are enough resources at the execution and supervisory levels to maintain adequate internal controls and segregation of duties. The head of accounting function is deputed from the Principal Accountant General's office maintaining independence of accounting function. However, the staff at the EEs offices which were subject to review are not trained to handle the reimbursement procedures of Controller of Aid Accounts and
M To address this MPWRD shall allocate resources from the project management unit of MPWSRP (a World Bank-funded project which was closed in November 2015) and train their staff on reimbursement procedure of ADB, as the World Bank Procedures are not similar.
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Audit (CAAA) and ADB.
4. Internal Controls: The internal controls are considered satisfactory as the internal controls are considered satisfactory as the PMU will be staffed at the Project Directorate level. The Divisional Accountant will be posted at the Executive Engineers office as the Division Head. S/he will have the requisite experience and qualifications and will be assigned with the responsibility of financial management of the project during implementation. It is also proposed that the divisional accountants at the EE office will report to the Chief engineer Project / Project Director and will be responsible.
L No mitigation measures suggested
5. Accounting Policies and Procedures: MPWRD follows the Government Accounting System which is based on a cash basis of accounting. Overall financial management system follows the finance and accounting procedures which were used to implement other IFI-funded projects in recent years. There is a centrally established chart of accounts at GoI level which is followed by MPWRD for effective consolidation of the overall financial results. The present staff at the project implementation/monitoring unit level is not trained to provide project financial statements required by ADB.
M MPWRD shall undertake to get such resources on deputation from MPWSRP project or train their personnel at PMU of MPIEIP project.
6. Internal Audit: There is no continuous internal audit system of the expenditure in MPWRD.
M MPWRD should outsource the internal audit function of the project to a qualificed independent charterterd accounting firm. It will report to the MPWRD at least semi-annually, and is expected to be adequately independent, competent, perform risk based internal audit in line with internationally recognized internal auditing principles.
7. External Audit: Delays have been observed in submission of annual audited project financial statements in respect of past Multilateral funded projects
M PMU shall ensure that the unaudited project financial statements are compiled by 30th June, and the AG office of GoMP shall complete the audit of project financial statements by the end of September each year.
PMU shall brief the AG office to ensure that the audit of MPIEIP’s project financial statements is
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included in their work plan.
8. Reporting and Monitoring Control Risk: reporting and monitoring function does not include the ability to track physical progress of projects and link them to financials.
M At present there is adequate process of financial monitoring report on its web portal. However it is recommended to introduce a system to track physical progress of projects and link to financials in quarterly progress reports. This can be done as a training exercise prior to implementation of ADB-financed project.
9. Information Systems: The primary books are maintained on cash basis in a manual system and then later on recorded in a centralized place in a computerized system. This leads to reconciliation required between two sets of records.
M All divisions and circle offices are sending monthly statements of accounts to PMU office. Subsequently, the computerized statement of expenditure and the financial monitoring reports are prepared based on the above manual monthly statement of accounts from the divisional/circle offices. This data is available in public domain.
Overall Control Risk M
Source: TA Consultant (2016) * S: significant; M: moderate; L: low
D. Project System - Strength and Weaknesses
15. MPWRD has already set up a PMU for this specific project. The PMU will be staffed at the Project Directorate level. The Divisional Accountant will be posted at the EE offices as the Division Head. S/he will have the requisite experience and qualifications and will be assigned with the responsibility of financial management of the project during implementation. It is also proposed that the divisional accountants at the EE offices will report to the Chief Engineer Project/Project Director and will be responsible for the following activities: (i) coordination of all financial management requirements of the project, (ii) preparation of project financial statements (iii) preparing financial progress and monitoring reports, (iv) follow up with the state Finance Department for the release of funds, (v) preparation and submission of withdrawal applications to CAAA of the MoF for reimbursement from ADB in coordination with the state Finance Department, (vi) preparation of Management Information System (MIS) based financial management system in the project directorate and field divisions, and (vii) overseeing the work of the internal auditors and coordinating the work of external auditors. It is recommended that the divisional accountant of the EE offices be deputed from the recently completed World Bank financed project, Madhya Pradesh Water Sector Restructuring Project (MPWSRP), as s/he has prior experience in handling the requirements of multilateral funding agencies.
16. MPIEIP will be pre-financed by the State Government of Madhya Pradesh through a dedicated Demand No. 23, major head 4700, sub-major head 84 and minor head 800, identified for Kundalia Irrigation Project. The budget submitted shall include both ADB's share and the state government’s counterpart fund contributions, as agreed to finance approved activities planned
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under the project. Based on the annual estimate of the works to be carried out, the PMU will send a request of budget estimate to be included in the budget estimate of MPWRD. Upon approval of budget by the state legislature, the state Finance Department will release funds under this subhead to the project management to allow these agencies to effect need-based drawdowns of funds to finance approved project activities. The state government would made adequate annual budget allocations for MPIEIP for implementation under the designated budget heads. Comparitive figures of last 5 years of budget allocation and realization is given hereunder:
Table 3: Realization of MPWRD and KIP Budgets (₹ in Billions)
2012/13 2013/14 2014/15 2015/16 2016/17*
MPWRD
Plan budget 30.7 32.6 36.1 53.2 57.3
Realization of plan budget
Establishment expenditure 2.8 3.0 2.9 2.8 0.8
Capital expenditure 27.4 29.2 32.5 49.6 30.4
Total expenditure 30.1 32.1 35.4 52.4 31.2
Actual as % of plan budget 98.04 98.46 98.06 98.5 54.45
Non Plan budget 5.7 5.5 5.9 5.8 7.7
Realization of Non
Plan budget
Establishment expenditure 5.2 5.4 5.9 5.8 1.5
Total expenditure 5.2 5.4 5.9 5.8 1.5
Actual as % of Non plan budget 91.23 98.18 100 100 19.48
KIP
Budgeted expenditure - - .583 1.095 8.0
Actual expenditure - - .583 1.093 6.40
Actual as % of budget - - 100.0 99.8 80.0
Source: Engineer in Chief office through Superintendent Engineer Budget of MPWRD. * Until 30 June 2016
17. Each expenditure head is bifurcated as a “plan” expenditure and “non-plan” expenditure. Planned expenditure is the expenditure that represents current development and investment expenditure that arise due to proposals in the current plan (both at central and state level). Non-planned expenditure refers to the estimated expenditure provided in the budget for spending during the year on routine functioning of the government. Plan and non-plan expenditure include both capital and recurrent expenditure.
18. The year-wise share of the MPWRD expenditure is given in Table 4. While non-plan expenditure (routine expenditure) constitutes the bulk of expenditure, the Planexpenditure component has remained at an almost constant % of total expenditure for the past few years.
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Table 4: MPWRD Budgets of Plan and Non-Plan Expenditure (₹ Billion)
2012/13 2013/14 2014/15 2015/16
Plan 30.7 32.6 36.1 53.2
Non-plan 5.7 5.5 5.9 5.8
Total 36.4 38.1 42.0 59
Increase per year (%) 4.67 10.23 40.48
Plan as % of total 84.5 85.5 86.0 90
Source: Engineer in Chief office through Superintendent Engineer Budget of MPWRD.
19. One of the key areas of evaluation of the sector performance is its ability to utilize its budget allocation. During the twelfth five-year plan (2012–2017), out of total budget allocation of ₹176.14 billion, MPWRD has spent its planned allocation of ₹158.05 billion up to December 2015 and expected to spend ₹57.34 billion in 2016–2017.9 Thus displaying its strength in fully utilizing its budget allocation.
20. MPWRD has fully utilized its planned expenditure allocation of Rs 87.15 billion for the eleventh five-year plan (2007–2012). In the first quarter of fiscal year 2016–2017, MPWRD has incurred a total expenditure of ₹31.17 billion against the total budget provision of ₹57.34 billion.
21. MPWRD ensure that (i) the project is carried out in compliance with all applicable government anticorruption regulations, (ii) all PMU staff actively participate in training on government’s anticorruption regulations, and (iii) a website is developed and maintained to monitor the project progress and procurement activities.
22. The Finance Department at the PMU will be headed by finance management expert who would be a senior officer in the rank of Joint Director Finance. He would be assisted by other officers in the rank of Joint Director Finance and Assistant Director Finance. All would be on deputation from the Madhya Pradesh Finance Department.
23. The Divisional Accountant will be posted at the EE offices as the division head that would be on deputation from the AG office. S/he will have the requisite experience and qualifications, and will be assigned with the responsibility of financial management of the project during implementation.
24. MPWRD will outsource the internal audit to a qualified chartered accounting firm, and the AG office of GoMP will conduct the external audit of the annual project financial statements (APFS).
25. MPWRD has adequate reporting and monitoring systems and procedures which are available on the department’s website and also on Madhya Pradesh Finance Department’s website.
Table 5: Weaknesses and Resolutions
Significant Weakness Resolution
1. The staff at PMU which was subject to MPWRD shall organize to take on deputation,
9 The source of figures quoted and this paragraph and the next is: Department Administrative Report 2015-2016.
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Significant Weakness Resolution
review is not trained to handle the reimbursement procedures of CAAA and ADB.
resources from the Project Management Unit of MPWSRP (a World Bank funded project which was closed in November 2015) or train their staff on procedures of ADB guidelines.
2. There is no internal audit system of the expenditure in Rajgarh division MPWRD.
MPWRD will outsource the internal audit to a qualified chartered accounting firm.
3. Reporting and monitoring function does not include the ability to track physical progress of projects and link them to financials.
MPWRD shall introduce a system to track physical progress of projects and link to financials in monthly, quarterly and semi-annual reports. This can be done through sufficient training of responsible staff prior to implementation of MPIEIP.
Source: TA Consultant (2016)
E. Implementing Entity
26. MPWRD at apex level and the field units have well-defined processes in respect of receipt of funds, approved expenditure for the procurement of works, goods and services, accounting, reporting, and statutory audit by the Controller and Auditor General of India. MPWRD have prior experience in handling IFI funded projects and implementing a World Bank-funded project the MPWSRP. MPIEIP implementation units are within the control of MPWRD regional office at Rajgarh.
27. The PMU will be staffed at the Project Directorate level. The Divisional Accountant will be posted at the EE offices at the Division. S/he will have the requisite experience and qualifications, who will be assigned with the responsibility of financial management of the project during implementation. It is also proposed that the divisional accountants at the EE offices will report to the Chief Engineer Project / Project Director and will be responsible for the following activities: (i) coordination of all financial management requirements of the project, (ii) preparation of project financial statements (iii) preparing financial progress and monitoring reports, (iv) follow up with the state Finance Departmentdepartment for the release of funds, (v) preparation and submission of withdrawal applications to CAAA of the MoF for reimbursement from ADB in coordination with the state Finance Department, (vi) preparation of MIS based financial management system in the project directorate and field divisions, and (vii) overseeing the work of the internal auditors and coordinating the work of external auditors. It is recommended that the Divisional Accountant of the EE office be deputed from the recently completed World Bank-financed project, MPWSRP, as s/he has prior experience in handling the requirements of multilateral funding agencies.
28. The PMU consists of a financial management expert (equivalent to Joint Director, Finance Department), a finance manager (equivalent to Deputy Director, Finance Department) and a finance officer (equivalent to Assistant Director, Finance Department) supported by junior account officers (Madhya Pradesh Subordinate Accounts Services). In respect of function sufficient capacity and capability is available at the PMU. Project financial statements and reports prepared by the PMU based on requirements of the funding agency. However, the accounting staff at PMU does not have experience in the ADB’s statement of expenditures (SOE).
29. The Divisional Office of the EEs is staffed by Divisional Accountant and Senior Account Clerks (SAC) who are supported by accounting staff. Account statements are prepared by Divisional Office of the EEs based on Central Public Works Accounts (CPWA) Code and
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government orders issued from time to time and ADB guidelines as well. The day to day accounting function at the PMU organization chart is provided.
Figure 1: Organizational Chart of MPWRD
Source: official website of MPWRD & from Superintendent Engineer Office, Bhopal
F. Fund Flow Mechanism
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30. The fund-flow arrangements for the project will be on reimbursement basis and direct payment loan procedure. For the reimbursement procedure, the state government will incur the expenditure and claim reimbursement from ADB through the Department of Economic Affairs (DEA) Government of India. The requirement of funds for this project is assessed and provided for in the annual budget estimates of the State Government of Madhya Pradesh. Only the share of ADB is claimed thereafter by the state government on a reimbursement basis. Hence counterpart funds are fully provided for. Direct payment procedure will be used for payment in foreign currencies to contractors and consultants. At the request of the PMU, ADB will pay eligible expenditures to the designated beneficiary.
31. On reimbursement basis what is claimed is only the ADB’s share and hence full payments are made for from the budgeted funds (which includes reimbursable and counterpart fund). Annual audit certification by the Office of the Accountant General is done and the same is also conveyed to ADB.
Figure 2: Reimbursement Procedure
Source: TA Consultant.
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Figure 3: Direct payment procedure
32. The PMU will send a request of budget estimate to be included in the budget estimate of the MPWRD. Once the budget estimates are approved by the state legislature, necessary sanctions are provided to the Divisional Office of the EEs to execute the works and make payments.
33. Based on actual payments made the Divisional Office of EEs (who is the drawing and disbursing officer) prepares the the SOEs and submits them to the PMU.
34. SOEs are utilized along with the withdrawal applications by the PMU for reimbursement claim as per category-wise reimbursable percentage from ADB.
G. Personnel
35. MPWRD is staffed with personnel in engineering, administration, and accounting functions. However, the divisional accountants (head of accounting functions at the office of PMU) are deputed from the Madhya Pradesh Finance Department by the Accountant General's (Accounts and Establishment) offices. The Accountant General's office is the dedicated arm of the GoI which does the accounting functions of all the units of the government (both the central and state governments). The divisional accountants functionally report to the Accountant General.
36. The finance staffs are permanent positions on deputation from the MP Finance Department. The head of the division (Divisional Accountant) are deputed from the Office of Accountant General which has the requisite expertise to maintain books of accounts of the GoMP.
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37. The organization structure at the PMU consists of a financial management expert (equivalent to Joint Director, Finance Departmentdepartment), a finance manager (equivalent to Deputy Director, Finance Departmentdepartment) and a finance officer (equivalent to Assistant Director, Finance Departmentdepartment) supported by Junior Account Officers (Madhya Pradesh Subordinate Accounts Services). The implementation unit i.e. Divisional Office of the EEs are staffed by Divisional Accountant and SAC who are supported by accounting staff. The Divisional Accountant will be posted at the EEs office at the Division. S/he will be responsible for the following activities: (i) coordination of all financial management requirements of the project, (ii) preparation of project financial statements (iii) preparing financial progress and monitoring reports, (iv) preparation of MIS based financial management system in the project directorate and field divisions.
38. Financial management expert at the PMU needs to be filled on deputation basis from MP Finance Department. The staff is being trained on a regular basis at RCVP Noronha Academy of Administration and Management which is the apex and nodal training institute of MP.
39. Duties and responsibilities are clearly defined. Authority levels are defined through various government orders. The day-to-day accounting function at the PMU proposed organization chart is provided.
Figure 4: Organization Chart of PMU Finance and Accounts Department
H. Accounting Policies and Procedures
40. MPWRD follows the government accounting system and maintenance books of accounts on a cash basis accounting per Madhya Pradesh financial account code. The overall financial
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management system follows the finance and accounting procedures used to implement other externally aided projects in the recent years. These actions are based on policies and procedures drawn from CPWA account code and government orders issued from time to time. MPWRD does have adequate policies and procedures through the Madhya Pradesh Fiscal Responsibilities and Budget Management Act of 2005 and its Rules, Madhya Pradesh Financial Code and CPW A Code. The same will be applied to MPIEIP. The accounting records (the “cash book”) are maintained manually in the PMU. Government accounting standards are followed (Receipt and Payment account).
41. The accounting records at the Principle Accountant General's offices are maintained in a computerized system. There is no separate accounting policy and procedure manual only for this project activity and the standard process as applicable to other activities of the department will be followed for this project. Since only cash basis accounting is followed no change in principle policy or procedure have occurred during the recent past. There are written policies and procedures through various government orders issued covering the routine financial management functions and administrative functions.
42. The Madhya Pradesh Civil Services Conduct Rules, 1965 (revised 2000) comprehensively details out the conflict of interest and related party transactions which safeguards the organization from any possible conflict of interest issues.10
43. Divisional Office of the Executive Engineer(s) does not earn any revenue. There are only statutory deductions from the invoices which are appropriately recorded. Cash book is reconciled once in a month when their copies along with vouchers are submitted to controlling office as well as the office of Accountant General. No bank accounts are held. State Treasury and Accounts is involved in obtaining the bank statements and undertaking reconciliation. Control Accounts/Subsidiary accounts concept is not followed. An annual physical verification of fixed assets is carried out. No stocks are maintained by the department. Adequate safeguards to protect assets from fraud, waste and abuse are provided for in the Irrigation Act of 1931 and amendments from time to time. The present safeguards are not adequate and it is suggested to maintain up-to-date record of fixed assets and stocks and open for periodical physical verification and further can be strengthen by monitoring assets and stocks through MIS system.
44. The accounting policies and procedures followed by MPWRD seem adequate as MPWRD has prior experience in implementation IFI-funded projects (through the MPWSRP Multi-Disciplinary Project Monitoring Unit). The PMU for this project will be having a similar organizational structure, personnel, skills financial management system and procedures. In particular, the accountants assigned for this project in the PMU shall be proposed to provide training on financial matters of ADB disbursement procedures.
I. Internal Audit
45. There is no system of internal audit at MPWRD. Internal audit function will be outsourced to a qualificed independent charterterd accounting firm. It will report to MPWRD at least semi-annually, and is expected to be adequately independent, competent, perform risk based internal audit in line with internationally recognized internal auditing principles..
46. The objective of the internal audit is to strengthen the internal control framework and provide project management with timely fiduciary assurance that: (i) the financial management,
10 See: http://www.gad.mp.gov.in, http://www.finance.mp.gov.in/, and http://www.mpwrd.gov.in/.
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the procurement systems and the internal control procedures as applicable to the activities under the project are being adhered to by the PMU and the support entities, and (ii) the financial information being submitted to and by the PMU is in agreement with the financial records, and can be relied upon to support the disbursements made by ADB as reimbursement of eligible expenditures.
J. External Audit
47. The statutory audit of MPWRD is conducted by the CAG through their offices in Bhopal. The CAG is a constitutional body and are independent of the executive. Based on publicly available information the audit of the accounts for the state of MP has been completed for the year ended on 2014-2015.
48. The CAG (the AG office of GoMP) will also conduct the external audit of APFS in accordance with the International Standards of Supreme Audit Institutions. As appropriate, the guidelines and procedures set out by CAG of India supplemented by the terms of reference for the external audit of ADB funded projects which have been agreed to between the CAG and ADB in September 2013. The annual audit report will include audit opinions on (i) whether the project financial statements present a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, (ii) whether loan and grant proceeds were used only for the purposes of the project or not, (iii) the level of compliance for each financial covenant contained in the legal agreements for the project, and (iv) the use of the statement of expenditure procedure certifying to the eligibility of those expenditures claimed under SOE procedures, and proper use of the SOE procedures in accordance with ADB's Loan Disbursement Handbook and the project documents. If the auditor identifies any internal control weaknesses, a management letter shall also be issued.
49. The experience from the MPWSRP indicates that the CAG (the AG office of the state government) can complete the external audit of APFS within 180 days from the completion of the accounting year as per ADB requirement. The external audit of the World Bank-Funded MPWSRP which was closed on 15 October 2015 was completed by CAG on 30 October 2015. There are no overdue audit reports or outstanding issues.
50. To ensure the timely submission of audited project financial statements, MPWRD shall formally request CAG to include this project audits in their annual work plan through DEA, at the time of loan negotiations. In addition, unaudited project financial statements should be submitted for audit within 3 months of the end of fiscal year.
Table 6: External Audit Schedule
Audit Report Due Date
FY 2017-2018 30 September 2018
FY 2018-2019 30 September 2019
FY 2019-2020 30 September 2020
FY 2020-2021 30 September 2021
FY 2021-2022 30 September 2022
FY 2022-2023 30 September 2023
FY 2023-2024 30 September 2024
FY 2024-2025 30 September 2025
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K. Financial Reporting and Monitoring
51. Currently, MPWRD does not prepare any other report except the annual expenditure statement for submission to the state government. There is an urgent need to formalize the monitoring systems of MPWRD in the form of reports for periodic review and action. Also, MPWRD needs to submit reports regarding progress of work periodically to ADB. ADB will provide support in building capacity in Madhya Pradesh to undertake these tasks.
52. The Department of Treasuries and Accounts website is fairly comprehensive and also discloses sufficient financial information relating to budget, allocations and expenditures.
53. Financial statements are prepared for the State Government of Madhya Pradesh, based on prevailing Government Accounting Standards. In case of externally aided projects such as MPWSRP, a financial monitoring report (FMR) is prepared as required by the office of Commissioner, Institutional Finance of Madhya Pradesh Finance Department and the same shall also be prepared for MPIEIP.
54. FMR is prepared on a monthly basis. However, no decision making is based on the financial statements as it is just receipts and payments account. FMRs are also prepared in a timely manner to ensure their usefulness to the management for effective decision making.
55. Though the reporting system is financial in nature and separate reports are maintained to measure physical progress, integration of financial and physical progress is possible.
56. The audited accounts are presented to the state legislature and the Public Accounts Committee (PAC, a committee of the state legislature appointed specifically for this purpose) who undertake a review of the financial management reports.
L. Information Systems
57. At the field level, accounting records are manually prepared, on cash basis, and the summary statements are prepared using MS-Excel. At the state level, accounting information systems are computerized.
58. The project financial statements (PFS) will be independently prepared, and the overall expenditures per the computerized accounting system are matched with the PFS before they are submitted to the the AG office of the state government for the external audit.
59. The PMU has to implement two separate computerized information systems: the CASH accounting system and MIS. While CASH pertains entirely to fund management and accounting, MIS deals with various other information requirements. The CASH system is based on the government’s existing system of single-entry cash accounting and can only generate reports on this system. The system would need modification based on the additional requirements relating to project accounting.
60. MIS are to be web-based systems with access control. Limited access is provided based on the requirement of the personnel to either input data or access information. Consequently, the systems have the necessary security features to ensure proper protection of data.
61. Financial information on budget allocation, expenditure and balance is available on the website of department of Treasuries and Accounts online.
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62. The MIS system at the PMU would need modification based on the additional requirements relating to project reporting.
M. Procurement Arrangements
63. As a part of the project preparation due diligence, a procurement capacity assessment was carried out using the standard templates. The assessment identified risks from: (i) absence of detailed guidelines or manual to implement the Public Procurement Act (PPA) 2015, (ii) lack of human resources for procurement, (iii) low capacity in procuring consulting services. Mitigation measures include: (i) use of ADB’s guidelines for procurement and use of consultants, (ii) establishment of the PMU with dedicated staff to deal with procurement, (iii) training of the PMU staff in government and ADB rules and procedures for procurement, (iv) inclusion of a procurement specialist in the implementation support consultant, and (v) annual fiduciary review including post procurement audit (spot checks). All consultants will be recruited according to ADB’s Guidelines on the Use of Consultants as identified in the project administration manual.
64. The PMU would be responsible for all procurement arrangements of MPIEIP. It shall follow the principle of economy and efficiency in project implementation, including procuring goods and works and transparency in procurement to achieve economy and efficiency and to combat fraud and corruption and will follow ADB procurement arrangements.
N. Disbursement Arrangements
65. Disbursement of loan proceeds under the project will be in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time), and the detailed arrangements agreed upon between the State Government of Madhya Pradesh and ADB.
66. The project will have its own account in Controller of Aid Accounts and Audit (CAAA), DEA, and MOF. The State Government of Madhya Pradesh has opted to pre-finance the expenditure under the project and to seek reimbursement of eligible expenditure from ADB (for details, see https://www.adb.org/documents/loan-disbursement-handbook).
67. Required actions prior to submission of withdrawal application are:
(i) Authorized signatory letter from the state government authorizing signatories and authentication of their signatures addressed to DEA, CAAA and ADB, and
(ii) Submission of Treasury Account details to DEA and CAAA for transfer of reimbursements from ADB to the state government against eligible expenditures under the project.
68. The SOE procedure will be used to reimburse or liquidate eligible expenditures. The documented claim procedure will be followed. Withdrawal applications for payments made to contractors or consultants in currencies other than Indian Rupees will be submitted for reimbursement to CAAA. Claims in the SOE sheets must carry on the corresponding procurement contract summary sheet number provided for each contract under the program. SOE records should be maintained and made readily available for review by ADB’s disbursement and review missions or upon ADB’s request for submission of supporting documents on a sampling basis, and independent audit.
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69. Before the submission of the first withdrawal application, the government or the MPWRD should submit to ADB sufficient evidence of the authority of the person(s) who will sign the withdrawal applications on behalf of the borrower, together with the authenticated specimen signatures of each authorized person.
70. Withdrawal applications along with the SOEs and supporting documents will demonstrate, among other things that goods or services originated from ADB member countries, and are eligible for ADB financing. Similar eligibility conditions will be detailed in the SOE should civil work contracts if awarded to a foreign contractors or joint ventures.
71. For payment in foreign currency th direct payment procedure may be used subject to approval from the Government of India. In such case request for direct payment will be channeled to ADB through CAAA.
72. All disbursements under government financing will be carried out in accordance with regulations of Government of India relevant to co-financing of the projects financed by IFIs.
O. Agreed Action Plan
73. During the discussion with subdivisional officer, Mohanpura Project and Finance officer, the PMU designated for discussion by the Chief Engineer, Projects, MPWRD agreed to address issues identified by this FMA:
Table 7: FM Action Plan
Agreed Action Responsible
Person Agreed
Completion Date
An experienced Financial Manager will be recruited to head the accounts functions at the PMU.
Chief Engineer Projects, MPWRD
October 2017
Staff to be trained in handling ADB accounting procedures.
Chief Engineer Projects, MPWRD
October 2017
The Accountant General (Audit) office of GoMP has agreed to undertake timely annual audit of MPIEP’s annual project financial statements and has committed to completing the audit for the current fiscal year within 6 months after the end of fiscal year.
Chief Engineer Projects, MPWRD
September 2018
Internal audit function of the project will be oursourced to a qualificed independent chartered accounting firm. It will report to the MPWRD at least semi-annually, and is expected to be adequately independent, competent, perform risk based internal audit in line with internationally recognized internal auditing principles.
Chief Engineer Projects, MPWRD
April/May 2018
Present safeguards for physical inventory record / monitoring assets could be strengthened through MIS system
Chief Engineer Projects, MPWRD
Approved, ready for
implementastion
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MPWRD (or the PMU) shall prepare a separate Project Administration Manual (PAM) for MPIEIP
Chief Engineer Projects, MPWRD
Prepared (under approval)
P. Conditions
74. MPWRD will ensure that the following conditions are met:
(i) The PMU shall separately prepare and submit audited project financial statements to ADB in the English language within 6 months of the end of the fiscal year.
(ii) Project financial statements shall include at a minimum, a statement of receipts and payments with accompanying notes and schedules. These shall be prepared to ensure maximum alignment to international accounting standards and GoI financial regulations.
(iii) Prepare and submit to ADB, annual contract awards and disbursement projections at least one month before the start of each calendar year.
(iv) Record in a transparent manner all funds received from the state government GoMP and ADB.
(v) Covenant adequacy and timeliness of budget allocation, and counterpart funding in the loan agreement. Budget allocations to MPWRD for the Project are to be monitored as part of regular performance reporting.
(vi) Transfer the key PMU staff under previous World Bank funded MPWSRP having significant understanding of the state government Financial Regulations as well as requirements for externally aided projects, to MPWRD (PMU) in implementing the Project.
(vii) Fund-flow mechanism to be documented in MPWRD financial accounting manuals.
(viii) Prepare an annual budget for submission to the state government based on the project implementation plan for the next year, as well as a rolling three-year budget. Periodical review of achievements also needs to be undertaken together with capacity building, if necessary.
(ix) First set of the audited APFS for FY2017–2018 shall be submitted by 30 September 2018.
Q. Supervision Plan
75. ADB and the State Government of Madhya Pradesh will jointly undertake reviews of the project at least twice a year. These reviews will include a review of the financial management and procurement arrangements. The reviews are to assess progress in each component, identify issues and constraints, and determine necessary remedial actions and adjustments. A mid-term review will be conducted during the third year of implementation. The mid-term review will (i) review the scope, design and implementation arrangements and identify adjustments required, (ii) assess progress of the project implementation against performance indicators, and (iii) recommend changes in the design or implementation arrangements, if necessary.
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Annexure 1: Financial Management Assessment Questionnaire
TOPIC RESPONSE
Implementing Agency
1.1 What is the entity’s legal status/registration
Water Resources Department, State Government of Madhya Pradesh (MPWRD).
1.2 Has the entity implemented an externally financed project in the past (if so, provide details)
Yes, MPWRD has implemented the World Bank funded Madhya Pradesh Water Sector Restructuring Project
(MPWSRP) through a dedicated multi-disciplinary project unit (PMU). The total project cost was $387 million (₹ 25.0 billion). The loan agreement was executed in Nov 2004 and the project was effective from Jan 2005 till June 2015. The share of the state government in the total project cost $443.0 million was $55.6 million. The entire project fund amounting to ₹25.0 billion has been disbursed.
1.3 What are the statutory reporting required for the entity
The Annual Report of the State Government of Madhya Pradesh audited by the Controller and Auditor General of India is presented to the State Legislature.
1.4 Is the governing body for the project independent
No, it is part of the Water Resources Department of the Government of Madhya Pradesh. The governing body i.e. the PMU in respect of MPWSRP was considered as quasi-independent. The said structure was considered necessary in MPWSRP as it involved multiple departments (WRD, Agriculture, Horticulture, Animal Husbandry, Fisheries, and Agricultural Universities etc.) and as the schemes were geographically the spread across the state of Madhya Pradesh in 6 river basins. In the case of the current project, the work is restricted to MPWRD and within Divisional Office(s) for Kundalia. Hence, PMU/ Chief Engineer (Project) is being located within MPWRD.
1.5 Is the organizational structure appropriate for the needs of the project?
Yes. The existing PMU/ Chief Engineer (Project) is being suggested for the organizational structure.
Funds Flow Arrangements
2.1 Describe (proposed) project funds flow arrangements, including a chart and explanation of the flow of funds from ADB, government and other financiers.
It is envisaged that the project will work on reimbursement basis based on previous experience of MPWSRP funded by World Bank. Under the proposed arrangements the State Government of Madhya Pradesh will incur the expenditure and claim reimbursement from ADB through the Department of Economic Affairs Government of India. The flow of funds from the State Government of Madhya Pradesh to the project implementing unit is described below.
Based on the annual estimate of the works to be carried out, PMU/ Chief Engineer (Projects) will send a request of budget estimate to be included in the budget estimate of the Water Resources Department. Once the budget estimates are approved by the state legislature necessary sanctions are provided to the Divisional Office of the Executive Engineer(s) to execute the works and make payments. Based on actual payments made the
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Divisional Office of Executive Engineer (who is the drawing and disbursing officer) prepares the accounts including grants and expenditure statement, statement of expenditure and submits them to the PMU/ Chief Engineer (Projects). The same are utilized for reimbursement claim as per category-wise reimbursable percentage. Annual audit certification by the Office of the Accountant General is done and the same is also conveyed to the World Bank/ ADB.
2.2 Are the (Proposed) arrangements to transfer the proceeds of the loan (from the government/Finance Ministry) to the entity satisfactory
Yes; based on the past experience of the MPWSRP which was funded by World Bank the same is considered satisfactory.
2.3 What have been the major problems in the past in receipt of funds by the entity
No problems have been experienced.
2.4 In which bank will the Imprest Account be opened?
Not applicable since the loan will be operated on a reimbursement basis.
2.5 Does the (proposed) project implementing unit have experience in the management of disbursements from ADB
Yes. PMU has performed similar management of disbur-sement in World Bank funded MPWSRP. The Divisional office of Executive Engineer(s) office of Kundalia project which is project implementing unit does not have experience in World Bank/ADB projects. However various Executive Engineer’s offices under the control of Project Director of PMU have experience in handling World Bank projects in recent past.
2.7 Does the entity have/need a capacity to manage foreign exchange risks?
No. The foreign exchange risks are not managed by the entity. It is managed by the CAAA (Controller of Aid Accounts and Audit) in the Ministry of Economic Affairs, Government of India
2.8 How are the counterpart funds accessed
Pursuant to above, it is reiterated that the requirement of funds for this project is assessed and provided for in the annual budget estimates of the Government of Madhya Pradesh. Only the share of the Bank is claimed thereafter by the State Government of Madhya Pradesh on a reimbursement basis. Hence counterpart funds are fully provided for.
2.9 How are payments made from the counterpart funds?
Since the project is working on reimbursement basis what is claimed is only the Bank’s share and hence full payments are made for from the budgeted funds (which includes reimbursable and counterpart fund) and only reimbursable are claimed after actual expenditure.
2.10 If part of the project is implemented by communities or NGOs, does the PIU have the necessary reporting and monitoring features built into its systems to track the use of project proceeds by such agencies?
Not envisaged
2.11 Are the beneficiaries required to contribute to project cost? If beneficiaries have an option to
Not envisaged
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contribute in kind (in the form of labor), are proper guidelines formulated to record and value the labor contribution
Staffing
3.1 What is the (proposed organizational structure of the accounting department? Attach an organization chart
The organization structure at the PMU consists of a Financial Management Expert (equivalent to Joint Director, Finance Department), a Finance Manager (equivalent to Deputy Director, Finance Department) and a Finance Officer (equivalent to Assistant Director, Finance Department) supported by Junior Account Officers (Madhya Pradesh Subordinate Accounts Services).
The implementation unit i.e. Divisional Office of the Executive Engineer(s) are staffed by Divisional Accountant and Senior Account Clerks (SAC) who are supported by accounting staff.
3.2 Identify the (proposed) accounts staff, including job title, responsibili-ties, educational background and professional experience. Attach job descriptions and CVs of key accounting staff.
As per Annexure 2
3.3 Is the project finance and accounting function staffed adequately
The Divisional Office of Executive Engineer(s) is staffed adequately for accounting and payment function. In respect of Finance function sufficient capacity and capability is available at the PMU/ Chief Engineer (Projects).
3.4 Is the finance and accounts staff adequately qualified and experienced
Yes. However, the position of Financial Management Expert at the PMU needs to be filled on deputation basis from Madhya Pradesh Finance Department.
3.5 Are the project accounts and finance staff trained in ADB procedures?
The staffs have experience of World Bank procedures but needs to be trained in ADB procedures.
3.6 What is the duration of the contract with the finance and accounts staff?
The finance staffs are permanent positions on deputation from the Finance Department. The Head of the Division (Divisional Accountant) are on deputation from the Office of Accountant General which has the requisite expertise (agency responsible for maintenance of books of accounts of the Government of Madhya Pradesh)
3.7 Indicate key positions not contracted yet, and the estimated date of appointment
Financial Management Expert at the PMU needs to be filled on deputation basis from Madhya Pradesh Finance Department.
3.10 Does the project have written posi-tion description that clearly defines duties responsibilities, lines of supervision and limits of authority for all the officers, managers and staff?
Yes, duties and responsibilities are clearly defined. Authority levels are defined through various government orders.
3.11 At what frequency are personnel transferred?
The normal period is 3 years.
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3.12 What is training policy for the finance and accounting staff?
The policy is need based and staffs are trained on a regular basis at RCVP Noronha Academy of Administration.
Accounting Policies and Procedures
4.1 Does the entity have an accounting system that allows for the proper recording of project financial transactions, including the allocation of expenditures in accordance with the respective components, disbursement categories and sources of funds? Will the project use the entity accounting system
The present accounting system captures overall spending under expenditure heads of account but not individual expenditure by disbursement category. Account statements are prepared by Divisional Office of the Executive Engineer(s) based on CPWA Accounts Code and government orders issued from time to time.
Project financial statements and reports are prepared by the PMU based on requirements of the funding agency.
4.2 Are controls in place concerning the preparation and approval of transactions, ensuring that all transactions are correctly made and adequately explained?
Yes; there are appropriate controls for preparation and approval of transactions and that they are correctly made and adequately explained.
4.3 Is the chart of accounts adequate to properly account for and report on project activities and disbursement categories?
Yes; A separate head of account is identified for specific externally aided projects (EAP) under which budgetary allocations are provided and accounted for.
4.4 Are cost allocations to the various funding sources made accurately and in accordance with established agreements
Since the project is proposed to work on reimbursement basis the allocation of costs to funding sources will not be required. The claim will be only in respect of the Bank share.
4.5 Are General Ledger and subsidiary ledgers reconciled and in balance
Not applicable since the concept of General Ledger and Subsidiary ledgers is not applicable in the Government Accounting system.
4.6 Are all accounting and supporting documents retained on a permanent basis in a defined system and allows authorized uses easy access?
The original invoices/bills with copies of cash book are sent to the Accountant General’s Offices at the state level for accounting/record keeping. The cash book which is retained at the implementation unit level i.e. Divisional Office of the Executive Engineer(s) is properly stored.
Segregation of Duties
4.7 Are the following functional responsibilities performed by different units or persons (i) authorization to execute a transaction ii) recording of the transaction and (iii) custody of assets involved in the transaction?
Yes: Authorization of transactions is carried out by persons other than those who execute the transactions. The recording is done by other than those who execute the transactions. The custody of assets is with persons other than those who authorize and execute the transactions.
4.8 Are the functions of ordering, receiving, accounting for, and paying for goods and services appropriately segregated?
Yes: Ordering is carried out by the Technical Branch of the Organization, receiving is done at field levels, paying are carried out by the Finance Department (Treasury) and accounting is carried out by the Accountant General’s office at the state level and hence appropriately segregated.
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4.9 Are bank reconciliation prepared by someone other than those who make or approve payment
Bank reconciliation is not required as the Department does not hold any bank account and all payment are made out of budgetary provisions electronically through the State Treasury (Finance Department).
Budgeting System
4.10 Do budgets include physical and financial targets?
Yes, based on the State Government of Madhya Pradesh Rules and Regulations relating to the Budget Estimates.
4.11 Are budgets prepared for all significant activities in sufficient details to provide a meaningful tool with which to monitor subsequent performance?
Yes
4.12 Are actual expenditures compared to the budget with reasonable frequency, and explanations required for significant variations from the budget?
Through a concept of budget estimates and revised estimate there is a system for comparison of budgeted, intermediary and final costs. The exercise is carried out during various quarters of the financial year.
4.13 Are approvals for variations from the budget required in advance or after the fact?
No expenditure can be incurred beyond the approved budget. Any variance, howsoever small, requires administrative approval with the concurrence of the State Finance Department in advance.
4.14 Who is responsible for preparation and approval of budgets?
It is followed by a bottom up approach wherein the field units prepare a budget and through the various supervisory levels of approvals is sent to the controlling office and consolidated at the Department of Water Resources. The Budget is approved by the State Legislature.
4.15 Are the procedures in place to plan project activities, collect information from the units in charge of the different components and prepare the budgets?
Yes. As explained above the field units prepare the detailed budget.
4.16 Are the project plans and budgets of project activities realistic, based on valid assumptions, and developed by knowledgeable individuals?
Yes, it is based on detailed assumptions /estimates developed by competent personnel
Payments
4.17 Do invoice-processing procedures provide for: (i) Copies of purchase orders and receiving reports to be obtained directly from issuing departments? (ii) Comparisons of invoice quantities, prices and terms, with those indicated on the purchase order and with records of goods actually received? (iii) Comparison of invoice quantities with those indicated on the receiving reports? (iv)Checking the accuracy of calculations?
Yes. Copies of orders are provided to the accounts section by the implementation agency. There is no document named receiving report, but there is a concept of measurement book where all the activities carried out are recorded and signed. Comparison between the measurement book and invoice, contract/purchase order and invoice is carried out by the accounts section before processing the invoice. The accounts section carries out the check on accuracy of calculations.
4.18 Are all invoices stamped PAID, Yes, all the invoices are stamped paid with cheque No
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dated, reviewed and approved and clearly marked for account code assignment
/date. Since only one head of account is used the same is not mentioned on the invoice.
4.19 Do controls exist for the preparation of the payroll and are changes to payroll properly authorized?
The payroll system is an online centralized electronic system of the Finance Department (Treasury) for all government departments. The centralized repository contains the sanctioned strength; scale of pay etc. payroll is processed and paid through this central disbursement mechanism at state level.
Policies and Procedures
4.20 What is the basis of accounting (e.g. cash, accrual)?
Cash Basis of Accounting as per the Madhya Pradesh Financial Code.
4.21 What Accounting Standards are followed?
Government accounting standards are followed. (Receipts and Payments Account)
4.22 Does the project have an adequate policies and procedures manual to guide activities and ensure staff accountability?
The Department does have adequate policies and procedures through the Madhya Pradesh Fiscal Responsibilities and Budget Management Act of 2005 and its Rules, Madhya Pradesh Financial Code and PWD Accounting Code. The same will be applied to the project.
4.23 Is the accounting policy and procedure manual updated for the project activities?
There is no separate accounting policy and procedure manual only for this project activity and the standard process as applicable to other activities of the department will be followed for this project.
4.24 Do procedures exist to ensure that only authorized persons can alter or establish a new accounting principle, policy or procedure to be used by the entity?
Yes: since only cash basis accounting is followed no change in principle policy or procedure have occurred during the recent past.
4.25 Are there written policies and procedures covering all routine financial management and related administrative activities?
Yes- through various Government Orders issued covering the routine financial management functions and administrative functions.
4.26 Do policies and procedures clearly define conflict of interest and related party transactions (real and apparent) and provide safeguard to protect the organization from them?
The Madhya Pradesh Civil Services Conduct Rules, 1965 (revised 2000) comprehensively details out the conflict of interest and related party transactions which safeguards the organization from any possible conflict of interest issues.
4.27 Are the manuals distributed to appropriate personnel?
It is made available on http://www.gad.mp.gov.in, http://www.finance.mp.gov.in/, http://www.mpwrd.gov.in/
Cash and Bank
4.28 Indicate names and positions of authorized signatories in the bank accounts.
No bank accounts are held.
4.29 Does the organization maintain an adequate up-to-date cashbook, recording receipts and payments?
Yes
4.30 Do controls exist for the collection, timely deposit and recording of receipts at each collection location?
Yes; Divisional Office of the Executive Engineer(s) do not earn any revenue and hence this is not applicable. There are only statutory deductions from the invoices which are
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appropriately recorded.
4.31 Are banks and cash reconciled on a monthly basis?
Yes; cash book is reconciled once in a month when their copies along with vouchers are submitted to controlling office as well as the office of Accountant General.
4.32 Are all unusual items on the bank reconciliation reviewed and approved by a responsible official?
Yes; State Treasury and Accounts is involved in obtaining the bank statements and undertaking reconciliation.
4.33 Are all receipts deposited on a timely basis?
Yes.
Safeguards over Assets
4.34 Is there a system of adequate safeguards to protect assets from fraud, waste and abuse
Yes. The safeguards are provided for in the Irrigation Act of 1931 and amendments from time to time.
4.35 Are subsidiary records of fixed assets and stocks kept up to date and reconciled with control accounts?
Control Accounts/Subsidiary accounts concept is not followed.
4.36 Are there period physical inventories of fixed assets and stocks
Yes, an annual physical verification of fixed assets is carried out. No stocks are maintained by the Department.
Other Offices and implementing entities
4.38 Are there any other regional offices or executing entities participating in implementation?
Yes; The sub-divisional offices are involved in the implementation of the project under the Executive Engineers’ offices at Zirapur, Rajgarh in the project implementation unit.
4.39 Has the project established controls and procedures for flow of funds, financial information, accountability and audits in relation to the other offices or entities?
Yes; there is an effective control and procedure for flow of funds, financial information, accountability and audits in relation to these offices.
4.40 Does information among the different offices/implementing agencies flow in an accurate and timely fashion?
Yes.
4.41 Are periodic reconciliation performed among the different offices/implementing agencies.
Yes; periodic reconciliation is carried out among the offices.
4.42 Has the project advised employees, beneficiaries and other recipients to whom to report if they suspect fraud, waste or misuse of project resources or property?
A separate department under the state government namely Public Grievance Redressal Department addresses grievances, fraud, waste, misuse of resources. The redressal system is available online at http://samadhan.mp.gov.in. This is apart from the regular vigilance and redressal system of the Water Resources Department.
5. Internal Audit
5.1 Is there an internal audit department in the entity?
There is no concept of Independent Internal Audit in the Water Resources Department.
5.2 What are the qualifications and Not applicable since there is no such department. All
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experience of audit department staff?
audits are essentially independent and external.
5.3 To whom does the internal auditor report?
Not applicable.
5.4 Will the internal audit department include the project in its work program?
Not applicable.
5.5 Are actions taken on the internal audit findings?
Not applicable.
6. External Audit
6.1 Is the entity financial statement audited regularly by an independent auditor? Who is the auditor?
The Audit of the Water Resources Department is carried out by the Controller and Auditor General of India. The auditor is independent entity as provided under the Constitution of India.
6.2 Are there any delays in audit of the entity? When is the audit reports issued?
At times there are delays. In case of MPWSRP (World Bank funded) the reports have been issued by September for the year ending in March of the year. In case of delays, the Department requested the external audit to hold special camps for early issue of audit certificates.
6.3 Is the audit of the entity conducted according to the international Standards on Auditing?
The Controller and Auditor General of India do follow its own standards at par with international standards. The auditing standards may be viewed at http://www.cag.gov.in/content/cag-auditing-standards
6.4 Were there any major accountability issues brought out in the audit report of the past three years?
In case of MPWSRP (World Bank funded), no major issues arose.
6.5 Will the entity auditor audit the project accounts or will another auditor be appointed to audit the project financial statements?
The Controller and Auditor General of India will be the auditor for project financial statements.
6.6 Are there any recommendations made by the auditors in prior audit reports or management letters that have not yet been implemented?
None.
6.7 Is the project subject to any kind of audit from an independent governmental entity (e.g. the supreme audit institution) in addition to the external audit?
The audit is conducted by the Controller and Auditor General of India which is the supreme audit institution in India.
6.8 Has the project prepared acceptable terms of reference for an annual project audit?
The Terms of Reference between ADB and Controller and Auditor General of India have been agreed based on the letter dated 16th August 2013
7. Reporting and Monitoring
7.1 Are financial statements prepared for the entity? In accordance with which accounting standards
Financial Statements are prepared for the Government of Madhya Pradesh. It is based on Government Accounting Standards. In case of externally aided projects like erstwhile MPWSRP, Financial Monitoring Report (FMR) is prepared as required by the office of Commissioner Institutional Finance of MP Finance Department.
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7.2 Are financial statements prepared for the implementing unit?
No it is part of the overall accounts of the Government of Madhya Pradesh. FMR aggregates the financial reporting for implementing units.
7.3 What is the frequency of preparation of financial statements? Are the reports prepared in a timely fashion so as to useful to management for decision making?
Yes it is prepared on a monthly basis. However, no decision making is based on the financial statements as it is just receipts and payments account.
FMR are also prepared in a timely manner to ensure their usefulness to the management for effective decision making.
7.4 Does the reporting system need to be adapted to report on the project components?
No, FMR shall be prepared conforming to the standards harmonized for externally aided projects.
7.5 Does the reporting system have the capacity to link the financial information with the project’s physical progress? If separate systems are used to gather and compile physical progress? If separate systems are used to gather and compile physical data, what controls are in place to reduce the risk that the physical data may not synchronies with the financial data?
Yes. Though the reporting system is financial in nature and separate reports are maintained to measure physical progress, integration of financial and physical progress is possible.
7.6 Does the project have established financial management reporting responsibilities that specify what reports are to be prepared what they are to contain, and how they are to be used?
Yes. The project will prepare FMR based in the same way it has done for MPWSRP and other externally aided projects.
7.7 Are financial management reports used by management?
The Audited Accounts are presented to the State Legislature and the Public Accounts Committee (a committee of the state legislature appointed specifically for this purpose) who undertake a review of the financial management reports.
FMRs are reviewed at portfolio level by the office of Commissioner Institutional Finance.
7.8 Do the financial reports compare actual expenditures with budgeted and programmed allocations?
Yes, the financial reports compared actual expenditure with budgeted allocations.
7.9 Are financial reports prepared directly by the automated accounting system or are they prepared by spreadsheets or some other means?
We understand that the financial statements are prepared by spreadsheets.
8. Information Systems
8.1 Is the financial management system computerized?
At the field level it is entirely manual accounting records supported by Excel Statements. At the state level it is computerized.
8.2 Can the system produce the No; the project financial statements will be independently
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necessary project financial reports? prepared and the overall expenditure as per the computerized management is matched with the same before the same is given to the auditors for audit.
8.3 Is the staffs adequately trained to maintain the system?
Yes
8.4 Does the management organization and processing system safeguard the confidentiality, integrity and availability of the data?
Yes
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Annexure 2: Proposed Accounts Staff, Including Job Title, Responsibilities etc.
Title Cadre Responsibilities
Financial Management
Expert
Joint Director of Treasuries
and Accounts Department of
GoMP
General Financial Management
Oversight and monitoring of Divisional Accounts
Receiving records and reports of expenditures
Receiving G&E and SoE
Ensuring adequate budgetary provision
Preparing and sending reimbursement claims to
ADB
Reporting on audits to ADB
Finance Manager
Deputy Director of
Treasuries and Accounts
Department of GoMP
Finance Officer
A senior experienced officer
from the State Finance
Department
Junior Accounts
Officers
Experienced staff from the
MP Subordinate Accounts
Services.