India: Chennai-Kanyakumari Industrial Corridor: Power Sector Investment Project - Financial Management Assessment - Asian Development Bank

 
Financial Management Assessment

Project Number: 51308-001
Loan Number: XXXX
October 2019

India: Chennai-Kanyakumari Industrial Corridor:
Power Sector Investment Project
Asian Development Bank
                       CURRENCY EQUIVALENTS
                          (as of 27 May 2019)

               Currency unit     –    Indian rupee (₹)
                      ₹1.00      =    $.01441
                      $1.00      =    ₹69.37450

                               ABBREVIATIONS

  ADB          –   Asian Development Bank
  ADF          –   Asian Development Fund
  AFS          –   audited financial statements
  APFS         –   audited project financial statements
  ARR          –   aggregate revenue requirement
  CAAA         –   controller of aid accounts and audit
  CAG          –   Comptroller and Auditor General of India
  CERC         –   Central Electricity Regulatory Commission
  CPS          –   country partnership strategy
  CWIP         –   capital works in progress
  DEA          –   Department of Economic Affairs, Ministry of Finance,
                   Government of India
  EA           –   executing agency
  FIRR         –   financial internal rate of return
  FMA          –   financial management assessment
  FMAQ         –   financial management assessment questionnaire
  FY           –   Financial Year
  GCC          –   general construction circle
  GIS          –   gas insulated switchgear
  GOI          –   Government of India
  IA           –   implementing agency
  Ind-AS       –   Indian accounting standards
  LIBOR        –   London interbank offered rate
  PF-I         –   Plan Finance Division of the Department of Expenditure
  PFM          –   public financial management
  PIU          –   project implementation unit
  RBI          –   Reserve Bank of India
  RRP          –   report and recommendation of the President to the Board
  SOE          –   statement of expenditure
  STU          –   state transmission utility
  TA           –   technical assistance
  TANGEDCO         Tamil Nadu Generation and Distribution Corporation Ltd
  TANTRANSCO   –   Tamil Nadu Transmission Corporation Ltd.
  TN           –   Tamil Nadu
TNEB      Tamil Nadu Electricity Board
TNERC   – Tamil Nadu Electricity Regulatory Commission
TOR     – terms of reference
WDV     – written down value
CONTENTS

CURRRENCY EQUIVALENTS………………………………………………………………………….i

I.         INTRODUCTION ................................................................................................................ 1

II.        PROJECT DESCRIPTION .................................................................................................. 1

III. COUNTRY FINANCIAL MANAGEMENT ISSUES .............................................................. 1

IV. PROJECT FINANCIAL MANAGEMENT SYSTEM .............................................................. 3

      A.      OVERVIEW OF TANTRANSCO’S FINANCIAL MANAGEMENT SYSTEM AND INSTITUTIONAL CONTEXT ........ 3
      B.      STRENGTHS ........................................................................................................................................ 3
      C.      W EAKNESSES ..................................................................................................................................... 4
      D.      PERSONNEL, ACCOUNTING POLICIES AND PROCEDURES, INTERNAL CONTROL, INTERNAL AND EXTERNAL .. 4
      E.      DISBURSEMENT ARRANGEMENTS AND FUNDS FLOW MECHANISMS ........................................................ 9
V.         PROPOSED TIME-BOUND ACTION PLAN.......................................................................13
EXECUTIVE SUMMARY

1.     A financial management assessment (FMA) was conducted over the period December
2017 to November 2018 in accordance with ADB’s guidelines.1 The FMA considered the capacity
of the Tamil Nadu Transmission Corporation Limited (TANTRANSCO), including funds-flow
arrangements, staffing, accounting and financial reporting systems, financial information systems,
and internal and external auditing arrangements.
2.     TANTRANSCO’s relative strengths in the area of financial management, identified during
the FMA, include governance by a robust legislative framework, periodic audit by Comptroller and
Auditor General (CAG) of India, its operations and tariffs regulated by state and central electricity
regulatory commissions, and experience with disbursement and procurement processes and
procedures of international development agencies such as Japan International Cooperation
Agency (JICA) and KfW.

3.     The key weaknesses of its existing financial management systems include weak financial
management capacity evidenced by (a) inadequate control over fixed assets due to the lack of a
comprehensive fixed assets register, (b) large unreconciled inter-unit balances, (c) large
unreconciled balances with TANGEDCO, and (d) non-adoption of Indian Accounting Standards
(Ind-AS); and (iii) low levels of computerization and automation.
4.    The overall pre-mitigation financial management risk of TANTRANSCO is assessed as
Substantial and the following financial management action plan is proposed.
                           Table 1: Financial Management Action Plan
    S.No.              Action               Responsibility       Resources                    Timing
     1      Implement the                  GoTN,               GoTN                Completed by 31 March
            comprehensive FRP              TANTRANSCO,                             2024 according to the
            Action Plan outlined in the    TANGEDCO                                timebound action plan
            PAM                                                                    provided in the PAM
     2      TANTRANSCO shall               TANTRANSCO           TANTRANSCO         Engage consultants by
            reconcile all inter-unit                                               [December 2019]; the first
            balances by 31 March                                                   such inter unit
            2020 and such                                                          reconciliation completed
            reconciliation shall                                                   by [31 March 2020] and
            continue to be done on a                                               such reconciliation shall
            quarterly basis in                                                     continue to be done on a
            perpetuity                                                             quarterly basis in
                                                                                   perpetuity
     3      TANTRANSCO shall               TANTRANSCO           ADB TA             Engage consultants by [31
            (i) identify the areas         and TANGEDCO                            December 2020]; the first
            leading to unreconciled                                                such inter company
            balances with TANGEDCO                                                 reconciliation with
            as also ensure elimination                                             TANGEDCO completed by
            of build-up of such                                                    [31 March 2020] and such
            balances by 31 March                                                   reconciliation shall
            2020; and (ii) reconcile all                                           continue to be done on a
            outstanding intercompany                                               quarterly basis in
            account balances with                                                  perpetuity
            TANGEDCO by 31 March

1   ADB. 2005. Financial Management and Analysis of Projects. Manila; ADB. 2015. Financial Management Technical
    Guidance Note – Financial Management Assessment. Manila

                                                        i
S.No.              Action              Responsibility     Resources             Timing
        2021 and such
        reconciliation shall
        continue to be done on a
        quarterly basis in
        perpetuity
 4      TANTRANSCO shall               TANTRANSCO       TANTRANSCO     Engage consultants by [31
        implement and populate a                                       March 2020]; asset
        comprehensive company-                                         registers implemented and
        wide fixed asset register                                      populated by [31 March
        system by 31 March 2020                                        2021]
        This includes
        establishment and
        updating of the register,
        physical verification and
        reconciliation of all assets
        with the register
 5      Provide training to            ADB              ADB            By 31 March 2020
        TANTRANSCO project
        finance and accounting
        staff in ADB disbursement
        and accounting policies
        and procedures
 6      Ensure that                    TANTRANSCO       TANTRANSCO     By 31 December 2019
        TANTRANSCO appoints
        two fulltime, dedicated
        Assistant Accounts
        Officers, one each at
        TANTRANSCO
        Headquarters and GCC
        Madurai
 7      Adopt Ind-AS for entity        TANTRANSCO       ADB TA Grant   TANTRANSCO to adopt
        financial accounts                              proceeds and   Ind-AS from FY2018-2019
                                                        counterpart    (ie. From 1 April 2018)
                                                        resources
 8      Implement online               TANTRANSCO       TANTRANSCO     By 31 March 2020
        computerized
        accounting system
 9      Appoint Independent            GoTN             TANTRANSCO     By 31 March 2020
        Directors on its Board as
        required under the
        Companies Act, 2013
 10     Prepare a Project              ADB /            ADB            By loan effectiveness
        Financial Management           TANTRANSCO
        Manual for the ADB
        Project
 11     Appoint an Internal Auditor    TANTRANSCO       TANTRANSCO     By 31 March 2020
        as required under the
        Companies Act, 2013

                                                 ii
I.       INTRODUCTION

1.      This Financial Management Assessment (FMA) has been prepared in accordance with
ADB’s guidelines2 over the period December 2017 November 2018. It aims to assess whether
Tamil Nadu Transmission Corporation Limited (TANTRANSCO) has adequate capacity to
satisfactorily function as executing agency (EA) and implementing agency (IA) for the proposed
loan, in the areas of planning and budgeting, management and financial accounting, reporting,
auditing, and internal controls. Preparation activities included reviewing documents, interviewing
EA’s officials, and analyzing the EA’s response to the financial management assessment
questionnaire (FMAQ). The FMA also includes a review of proposed disbursement and funds-
flow arrangements and identifies measures for addressing identified deficiencies.

                                        II.        PROJECT DESCRIPTION

2.       The project targets investment in high voltage electricity transmission facilities to relieve
capacity constraints and to evacuate electricity from generating plant to load centers. The project
will also include a component to address the capacity development of TANTRANSCO, which is
serving the dual roles of state’s sole transmission licensee and State Transmission Utility (STU).3

                          III.     COUNTRY FINANCIAL MANAGEMENT ISSUES

3.      The Indian Public Financial Management (PFM) system is very complex, large and has
multiple layers. Relatively few PFM assessments have been prepared for the country in recent
years.

4.      Country level PFM risk assessment from ADB’s country partnership strategy for
India. ADB’s previous (2013‒2017) Country Partnership Strategy (CPS) for India for noted that
PFM at the country level is strong and India manages its financial system well. 4 The CPS
concluded that given that India has robust public financial management systems and strong
procurement, governance, and anticorruption arrangements and monitoring institutions, the risk
to the ADB assistance program in these areas is low.

5.      The risk assessment and risk management plan included in the previous CPS elaborated
that the strength of the PFM system arises from:

          (i) a well-organized and systematic approach to budget formulation;
          (ii) a high level of fiscal transparency;
          (iii) comprehensive recording and management of cash balances, debt, and guarantees
                by the Government of India; and
          (iv) timely external audit by the comptroller and auditor general (CAG) of India of PFM
                systems.

2
    ADB. 2005. Financial Management and Analysis of Projects. Manila; ADB. 2015. Financial Management Technical
    Guidance Note – Financial Management Assessment. Manila.
3   Under the Electricity Act 2003 (a parliamentary act governing the various aspects of generation, distribution,
    transmission, trading, usage and other functions associated with the use of electricity in India), an STU is the entity
    responsible for discharging all functions of planning and co-ordination relating to this system, whereas an intra-state
    transmission licensee is vested with the function of building, owning and operating intra-state transmission assets. A
    state may have multiple licensees but only one STU.
4   ADB. 2012. India – Country Partnership Strategy 2013-2017. Manila.

                                                             1
6.     The current (2018–2022) CPS for India makes limited mention of financial management,
although improving public financial management at the state and urban levels is deemed an
important component of the strategic pillar aimed to provide inclusive infrastructure networks and
services.5 Particular emphasis on improving systems and capacities for procurement, contract
management, and accounting is noted.

7.      Public Financial Management of Tamil Nadu. A state level fiscal analysis for Tamil
Nadu was done as Government of Tamil Nadu (GoTN) is the ultimate owner of TANTRANSCO
(through Tamil Nadu Electricity Board Limited (TNEB) Limited). The CAG’s report on the State
Finances of Tamil Nadu for the year ended March 2017 was also reviewed. A summary of the
fiscal position of GoTN for the year ended March 2018 is given below:

      (i) GoTN, which reported revenue surplus in 2012–13, has reported revenue deficit in all
            subsequent years. In 2017‒2018, revenue deficit stood at ₹184 billion;
      (ii) GoTN, due to its financial discipline, has been successful in containing the fiscal deficit
            within the 3% of Gross State Domestic Product (GSDP) target envisaged under the
            Tamil Nadu Fiscal Responsibility Act. 2003, as also the Medium-Term Fiscal Plan of
            GoTN, in all the years from 2012‒2013 to 2017‒2018, except in 2016‒2017, when it
            reported a fiscal deficit of 4.33% of GSDP. This increase in fiscal deficit in 2016‒2017
            was due to the takeover of TANGEDCO’s deficit of ₹228 billion under the UDAY
            scheme of the Government of India;
      (iii) As per the CAG report referred to above, the maturity profile of GoTN’s debt indicates
            a y-on-y increase in its repayment burden and as the greater portion of repayments
            would happen after 5 years, Tamil Nadu could fall into a debt trap; and
      (iv) Based on its review of the Financial Management and Budgetary Control systems of
            GoTN, CAG has also recommended that GoTN should streamline the process of
            budget estimation to ensure accuracy in budgeting.
      (v)
The major deficit indicators of GoTN are given below:

                   Table 2: Major Fiscal Deficit Indicators (Indian Rupees in Billion)
                                                               Financial Year
                         2012-2013     2013-2014       2014-2015      2015-2016      2016-2017     2017-2018
    Major Fiscal                                                                                     Revised
    Indicators                                              Actual                                  Estimates
    GSDP                    8555           9692             10728        11620            12985      15040
    Revenue Receipts         988           1080             1224         1290             1402        1558
    Revenue
    Expenditure              971           1098             1288         1410             1532        1742
    Revenue
    Surplus/Deficit          17             -18              -64          -120             -130       -184
    Revenue
    Surplus/Deficit
    to GSDP                0.20%          -0.19%            -0.60%      -1.03%            -1.00%     -1.22%

5   ADB. 2012. India, 2018–2022—Accelerating Inclusive Economic Transformation. Manila.

                                                        2
Financial Year
    Total Revenue
    and Non-Debt
    Capital Receipts           999         1,087             1,238         1,297           1,438           1,558
    Total Expenditure
    plus
    Disbursement of
    Loans and
    Advances                  1,164        1,292             1,510         1,623           2,000           1,966
    Fiscal
    Surplus/Deficit           (165)        (205)             (272)         (326)           (562)            (408)
    Fiscal Deficit to
    GSDP                      -1.93%      -2.12%             -2.54%       -2.81%          -4.33%           -2.71%
Source: 1. Report of the Comptroller and Auditor General of India on State Finances for the year ended March 2017
(https://cag.gov.in/content/report-no6-2017-state-finances-government-tamil-nadu) and 2. State Finances – A Study of
Budgets of 2017-18 and 2018-19 by Reserve Bank of India, July 2018

                        IV.      PROJECT FINANCIAL MANAGEMENT SYSTEM

A.         Overview of TANTRANSCO’s Financial Management System and Institutional
           Context

8.     TANTRANSCO was formed with the October 2008 re-organization of the erstwhile Tamil
Nadu Electricity Board (TNEB) as a subsidiary of TNEB Limited, which is state government
company.6 TANTRANSCO was incorporated on 15 June 2009 and started functioning with effect
from 1 November 2010, when the state government transferred the functions, undertakings,
assets, properties, rights, liabilities, obligations, proceedings and personnel of TNEB to various
successor entities. The company is 100% owned by the Tamil Nadu state government.

9.     In general, this assessment finds the company’s financial management systems are
inadequate and reflect neither accepted practice nor legal requirements. There is evidence of
non-compliance with the Indian Accounting Standards (Ind-AS), lack of effective internal audit
arrangements, and low levels of computerization. In addition, most staff are on deputation from
TANGEDCO, corporate management is weak and there are no independent directors on the
board (in violation of provisions of the Companies Act). Adjustments will be required to meet
ADB’s project financial management requirements and substantial capacity and resource
improvements are warranted over time to build a financial management system reflecting the size
and turnover of the company.

B.         Strengths

10.       TANTRANSCO’s relative strengths in financial management are as follows:
          (i) Financial management of TANTRANSCO, like other public sector companies in India
               is governed by a robust legislative framework. Its accounts are also audited by the
               Comptroller and Auditor General (CAG), the supreme audit institution of India. CAG’s
               independence is established and protected by the Constitution of India;
          (ii) TANTRANSCO operates in a regulated environment, where tariffs for its intra-state

6   TNEB Limited, the holding company has two subsidiary companies: Tamil Nadu Transmission Corporation Limited
    (TANTRANSCO) and Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO), with a stipulation
    that these companies shall be fully owned by the state government.

                                                         3
and inter-state assets are approved by Tamil Nadu Electricity Regulatory Commission
                 (TNERC) and Central Electricity Regulatory Commission (CERC) respectively, after a
                 detailed scrutiny of its financial and operational performance;
           (iii) The tariff-setting process includes a comprehensive public consultation process where
                 general public and other stakeholders (including sector and financial experts) can
                 highlight issues linked to its performance and financial management. The public
                 comments are formally documented and considered by the regulators for tariff setting;
                 and
           (iv) The company has some experience with disbursement and procurement processes
                 and procedures in relation to loans from development finance institutions.

C.         Weaknesses

11.     The identified weaknesses in its financial management processes and procedure are as
follows:
        (i) TANTRANSCO financial viability as a going concern is questionable due to allocation
              of disproportionate share of liabilities of TNEB to TANTRANSCO under the Transfer
              Scheme of 2015 which are not supported by the regulated transmission tariff,
              inadequate equity injections to finance capital expenditure, accumulation of additional
              liabilities to bridge the resultant cash deficit;
        (ii) The current arrangement of deputation of staff from TANGEDCO to TANTRANSCO
              implies overwhelming external control by TANGEDCO on matters relating to its human
              resource policies. Some of the functions like planning are common, and some circle
              offices have overlapping staff. Only the Managing Director, Director (Finance) and
              other executive directors responsible for operations, though they are on the payroll of
              TANGEDCO, are assigned exclusively to TANTRANSCO;
        (iii) Although accounts have been separated since 2011 from TANGEDCO, the cash flows
              were separated only in April 2017. Until then, TANGEDCO controlled all cash flow for
              TANTRANSCO and TANTRANSCO’s revenues were recognized only for accounting
              purposes. Doubts remain over the management, accounting and financial
              independence of TANTRANSCO from TADGEDCO. The financial accounts of the two
              companies are still substantially entangled; and
        (iv) Low levels of computerization and no clear roadmap for automation of finance and
              accounting functions.

D.         Personnel, accounting policies and procedures, internal control, internal and
           external

12.    Personnel. TANTRANSCO’s Finance Division is headed by a Director (Finance)
supported by a Financial Controller. Organization charts for the overall company and for the
finance and accounting function are provided in Appendix A.

13.   Although staff appear to be conversant with accounting and control aspects of financial
management, this arrangement is far from ideal, as it poses the risk of knowledge and skill loss
to TANTRANSCO should these personnel return to their parent organization.7

14.    This FMA was not authorized to access staffing details necessary to carry out a detailed
analysis of their staffing arrangement with TANGEDCO.

7   The personnel on deputation can be recalled by the parent organization, or the personnel can seek repatriation in
     their own interest.

                                                           4
15.     The final and permanent transfer of staff from TANGEDCO to TANTRASCO has been
under discussion between Government of Tamil Nadu and employee unions for the last 9 years.
Ultimately, the transfer of staff will require a tripartite agreement between TANTRANSCO, the
state government and employee unions. The primary impediment is creation of corpus for meeting
pension liability. At the time of preparation of this FMA, no indicative timeframe for notification of
the final transfer scheme was available.

16.     Director Finance reported that getting new positions sanctioned is possible, however new
staff would continue to be recruited by TANGEDCO and deputed to TANTRANSCO. Positions
with total remuneration of up to Rs2.5 million can be approved by the Chairman and Managing
Director, however positions with higher remuneration would need to be approved by the board of
directors (but this could occur in a matter of a few weeks if recruitment was urgently required).

17.     Accounting Policies and Procedures. TANTRANSCO prepares its financial statements
under the historical cost convention on an accrual basis, and its financial year runs from 1 April
to 31 March. The company has been following the accounting rules laid out in the Commercial
Accounting System for State Electricity Boards – Electricity (supply) (annual accounts) Rules
1985 (ESAAR). The company’s external auditors have qualified the annual audited financial
statements for the last 3 years due to non-adoption of Ind-AS as required by the Companies Act,
2013. While TANTRANSCO has indicated that Ind-AS will be adopted from 1 April 2018, the
company however is currently reviewing the requirements of the Ind-AS for adoption. Subsequent
to the adoption of Ind-AS, TANTRANSCO is required to carry out all necessary adjustments to its
financial accounts, as required. The company prepares consolidated financial statements
including income statement, balance sheet and cash flow statement. The company’s Chart of
Accounts is also adopted from the ESAAR. This Chart of Accounts is dated and reflects the needs
of a vertically integrated utility rather than an unbundled transmission entity and would need
appropriate modifications. The adoption of Ind-AS will also require significant staff training.

18.     TANTRANSCO’s accounting manual was prepared in the 1990s and is spread over
multiple volumes. However, revisions will be required now that the company will be adopting Ind-
AS, and the company has confirmed that the relevant changes will be made in the accounting
manual in due course.

19.    TANTRANSCO reports that it will maintain separate project accounts and records by
funding source for all expenditures incurred on the ADB-assisted project.

20.      Financial statements are prepared on an annual basis (only). No periodic management
accounts are prepared during the year. Project accounts are prepared using the same accounting
system and on the same basis, however circle accounts are not consolidated. Each General
Construction Circle (GCC) prepares and submits a monthly statement of account to head office.
This report is automatically generated by the “Foxpro” accounting package used in the company.
However, because consolidation of these statements is required to be undertaken manually (that
is, outside of Foxpro), consolidation only occurs annually using Excel. The extent to which these
monthly statements of accounts are actually used (beyond project reporting) is unclear; the
impression of this assessment is that the statements are generated because the Foxpro software
facilitates this process, rather than because the statements are an important management tool.
However, the Finance and Administration Department reports that it reviews accounts for circle
offices in September and December in each year.

21.    Safeguard over assets. External audit reports have consistently highlighted

                                                  5
shortcomings in the company’s fixed asset register (discussed further below). Fixed asset
registers are decentralized and maintained at the general construction circle level, but they are
not updated regularly and in systematic manner; according to the company, the fixed asset
registers in some GCCs have not been updated for 2‒3 years. Consolidation of the GCC registers
is also not undertaken regularly as it is a cumbersome, manual process. TANTRANSCO reports
that an update to fixed asset registers is underway and that the progress is mixed, but at the same
time the company has requested ADB’s support for the update process to ensure that can be
completed in a reasonable timeframe (in the face of significant staff shortages within the
organization). Terms of reference for a full update and consolidation of the fixed asset registers
are included in this FMA.

22.     The auditor has also indicated that the process followed for accounting for inventory and
their periodical verification is inadequate. The auditors have also indicated that reconciliation
between value of inventories as per stock registers and accounts are not carried out and in their
opinion systems and procedures in the maintenance of stores ledger/records and their valuation
needs strengthening.

23.    The company does not insure operating assets. An insurance reserve account is
maintained, but it is unfunded (that is, it is an accounting reserve but not a cash reserve).

24.      Asset Capitalization. Once assets are commissioned, the concerned GCC issues a
certificate to the relevant operations circle. The operations circle then passes on the information
to Transmission Wing at corporate headquarters. This information is reviewed by the
Transmission Wing and then passed to the Finance and Accounts Department who, in turn,
instructs its finance counterparts at the concerned GCC office, to capitalize the assets. The
company reports that this process is reliable, and that capitalization of assets takes place in a
reasonable time after asset commissioning, and in most cases before the end of the financial year.
To monitor capital expenditure, TANTRANSCO has indicated that it prepares scheme-wise and
project-wise capital works reports, detailing works in progress and capitalization of assets. These
reports are maintained by the Superintending Engineer (Projects) and are made available to the
Finance and Accounts Department as required (a hard copy of one such report was viewed by
this FMA. However, the auditor has pointed out a number of issues regarding the company’s
accounting of CWIP and fixed assets and has also indicated that the Company has not maintained
proper records showing full particulars including quantitative details and location of fixed assets.

25.    TANTRANSCO reports that, as of 1 April 2018, its IT division has implemented a new
inventory management system that tracks all work. This is expected to simplify fixed asset
accounting procedures.

26.     Commercial. The company’s Tariff Cell is responsible for tariff filings and other periodic
and ad hoc petitions to the Tamil Nadu Electricity Regulatory Commission. The head of this cell
reports to the Chief Financial Controller.

27.     Payments. All payments are recorded manually. To record the payments, TANTRANSCO
uses a voucher system for every payment. Vouchers are created and maintained along with the
supporting documents. As of date, these documents including vouchers are not digitized.
Payments systems appear to be broadly satisfactory. Clear protocols around payments exist and
appear to be followed, with adequate arithmetic and physical cross-checking of goods and
services delivered. All steps in the preparation of the payrolls were noted as sound and reflective
of internal control requirements.
28.     Budgeting. The annual budgeting process is led by the Finance and Accounts

                                                 6
Department, with inputs on network capital and operational expenditure provided by the
Transmission Wing. The draft budget is submitted to the Board of Directors for approval by
January and the final budget is always approved by the start of each fiscal year. Quarterly budget
reviews and monthly monitoring reports of capital expenditure are provided to TNERC and to the
state government, but there does not appear to be any formal internal process for monitoring
actual revenue and expenditure against budgets. No inter-year performance analysis appears to
be undertaken. Approvals for variations from the budget are generally required in advance of
expenditure and are typically attained by way of submission of revised expenditure estimates. No
ceiling is applied to variations from budget. Project expenditure budgets are prepared by the
superintending engineers assigned to manage each project.

29.    TANTRANSCO states that its budgets include financial and physical targets, but this could
not be verified.

Process for counterpart funds. TANTRANSCO plans to raise its counterpart funds either
through equity from State Government or through debt. When Government of Tamil Nadu
provides funds to TANTRANSCO, an allocation is made in the state budget based on a 12‒month
expenditure forecast provided by TANTRANSCO. Once approved, cash is released to
TANTRANSCO as required, typically to cover 3‒4 months of expenditure. The company reports
no particular issues with this process, however given that the company has only recently started
managing its own cash flows, loan assurances or covenants around budgeting for and release of
funds are considered prudent.

30.     Internal Audit. The company does not have a comprehensive internal audit mechanism
in place. However, an internal audit department headed by a Senior Deputy Chief Officer exists,
but currently only performs transaction audits (and for this reason, audit staff are stationed at
GCCs where most transactions occur). The department head reports directly to the Chairman.
Although the company claims that audit reports are issued, requests to view reports were
unsuccessful. Other that “principles and policies laid down by the Board from time to time”, there
are no apparent written terms of reference or scope of work to guide the department’s activities.
The absence of a functioning internal audit department has been consistently highlighted by the
company’s external auditors. The auditor has indicated that the internal control systems of the
company were not operating effectively, and the company needs to strengthen implementation of
financial controls and financial reporting framework. The statutory auditor has also indicated that
the company’s internal auditor does not meet the requirements of the Companies Act. 2013 and
that the company needs to appoint an Internal Auditor meeting the requirements of the
Companies Act. 2013.

31.     External audit. TANTRANSCO is audited annually by a statutory auditor appointed by
the CAG. The CAG provides official comments on external audits, and company’s board of
directors consider these comments, together with the audit reports and notes to accounts, before
annual accounts are endorsed.

32.     The most recent external audit report available is for FY2017‒2018. The auditor’s major
comments in audit report for FY2017-2018 are as follows. TANTRANSCO’s responses to the
auditor’s comment typically indicate that issues are being addressed, however most comments
have been repeated over a number of years.

   a) Fixed asset register. The auditor notes that the company has not maintained proper
      records showing full particulars including quantitative details and physical location of fixed

                                                7
assets;
   b) Land title deeds. There are no registers or records to support the value of land belonging
      to the company and in respect of land purchased by TANTRANSCO for establishment of
      substations and transmission lines. The auditor notes that in many cases title deeds
      relating to the same are registered in the name of TANGEDCO/TNEB and not in the name
      of TANTRANSCO;
   c) Inventory accounting and verification. The auditor’s opinion is that the process for
      verifying and followed for accounting of inventory and periodical verification is inadequate;
   d) Internal audit function. The external auditor notes that no internal auditors were
      appointed in the manner required under the Companies Act 2013;
   e) Cash book for TANTRANSCO. No separate cash book is maintained for TANTRANSCO
      (other than in nodal circles where separate bank accounts are operated);
   f) Appointment of independent director. The company has not appointed any
      independent directors as is required under the Companies Act 2013.

33.      Foreign exchange risk management. TANTRANSCO does not have any policy
regarding foreign exchange risk management. Foreign exchange exposure is indicated as a pass-
through in the state’s tariff regulations and so in principle the company’s exposure to foreign
exchange risk is limited to accounting only and in this context foreign currency risk management
is not a priority for the company. The exact regulatory mechanism by which increases (decreases)
in principal repayments on foreign currency loans are adjusted for depreciation (appreciation) of
the rupee against the loan currency is unclear, however the regulation does explicitly state that
the company is insulated from this risk.

34.      Cash and bank. The company’s banking is largely decentralized and is handled by circle
heads (superintending engineers) with delegation of power as necessary to officers in finance
and accounts. One of a deputy financial controller and a superintending engineer, along with an
accounts officer or assistant accounts officer are required signatories for bank transactions. The
company does not collect cash from customers. According to the company, cash books are
maintained at the GCC level and at headquarters however it is noted that the external auditor
questions whether there is truly a cash book at headquarters. Cash on hand is reconciled daily
with cash books and bank accounts are reconciled monthly. TANTRANSCO states that it is
carrying-out bank account reconciliations at regular intervals. Generally, bank reconciliations take
up to three months to complete (for example, the reconciliation for January would be completed
by March or April). However, reconciliations for March are finalized by April or May so as to
facilitate the process of annual account preparation.

35.  Online payments are only permitted for tax remittances (for which it is mandatory); all other
payments are made by cheque.

36.    Computerization. Computerization is very limited within the company. Foxpro software
was used exclusively until very recently at the GCC level for general and subsidiary ledgers. This
software is capable of generating trial balances and some customized reports, however as noted
above all consolidation between GCCs has to be undertaken manually. This is reported to be a
time-consuming and error-prone process. All consolidated reporting is done using Microsoft Excel.
The process of transferring data from Foxpro to Excel is entirely manual, and Excel is used for
presentation purposes only (that is, it is not used as an analytical tool). Foxpro in inflexible, is no
longer supported and is considered by TANTRANSCO to be substantially out of date.

37.    Foxpro is not used for accounting and reporting under JICA and KfW projects; Excel is
used exclusively.

                                                  8
38.      TANTRANSCO’s in-house IT division has recently developed an online, integrated
accounting software package and this is apparently effective from 1 April 2018. TANTRANSCO
has indicated that accounts for FY2019–2020 will be prepared through this software (although it
will not be fully implemented and functional until the start of the subsequent financial year). This
system allows for online entry of all transactions, and these transactions can be viewed and
verified by HQ staff. This is a significant improvement over the previous process that required
manual re-entry of all circle-level financial information in summary form, with details not accessible
at all except physically in the circle offices. Based on the description provided and assuming
effective implementation plus the creation of sub-codes in the chart-of-accounts to enable capture
of expenditure related to ADB project., this software should be sufficient for ADB’s project
accounting requirements.

E.     Disbursement Arrangements and Funds Flow Mechanisms

39.     TANTRANSCO typically executes and manages its large capital projects at the GCC level
(projects are general allocated to the GCC within which the project falls geographically).
Superintending engineers heading these GCCs are designated as project managers and are
delegated power to ensure that they can efficiently and effectively execute the projects. Oversight
is provided by two chief engineers, based in head office. Contract award, final payment approval
and payments are made at head office, but all other aspects of projects are executed at the GCC
level. Typically, each GCC has a Deputy Financial Controller provide accounting and finance
oversight, but projects are not assigned a fulltime accountant. According to the company, a
concurrent audit of payments is conducted at the GCC level by Internal Audit staff.

Loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook 2017,
as amended from time to time), and detailed arrangements agreed upon between the Government
and ADB. The funds will be provided to India as an Ordinary Capital Resources Loan (OCR). The
loan will be on lent through the state government to TANTRANSCO in foreign currency with the
same interest rate, commitment charges, and tenor as the ADB loan to India.

40.    The proposed fund flow mechanism is described in detail in the PAM.

F.     Risk Description and Rating – Including the Financial Management and Internal
       Control and Risk Assessment

41.      A Financial Management Internal Control and Risk Management Assessment was
conducted (Table 3). The overall pre-mitigation risk is assessed as “substantial” (and close to
“high”).

                                                  9
Table 3: Financial Management Internal Control and Risk Assessment (FMICRA)
Risk Description                           Risk Assessment   Risk Mitigation Measures
Inherent Risk
1. Country specific risks
1. Country Specific                        Moderate          No particular mitigation measures are
   Strong public financial                                   proposed.
   management (PFM) is one of the
   key elements of the Government
   of India’s strategy for
   strengthening governance,
   optimizing outputs from public
   resources and ensuring inclusive
   and broad-based development.
   The 2010 Public Financial
   Management Performance
   Assessment Report for India
   identified that the public financial
   management system is well
   structured but unevenly
   implemented.

   ADB’s 2018-2022 Country
   Partnership Strategy for India
   notes that public financial
   management at the state level
   needs to be improved to facilitate
   the strategic pillar of providing
   inclusive network infrastructure
   and services.
2. Entity-specific risks
1. TANTRANSCO financial viability          Substantial       A comprehensive FRP has been
   as a going concern is                                     developed and agreed as part of the
   questionable due to allocation of                         loan preparation. The implementation
   disproportionate share of liabilities                     of FRP which includes (i) equity
   of TNEB to TANTRANSCO under                               injection to settle the unsustainable
   the Transfer Scheme of 2015                               liabilities; (ii) reallocation of legacy
   which are not supported by the                            liabilities mistakenly allocated to
   regulated transmission tariff,                            TANTRANSCO and TANGEDCO
   inadequate equity injections to                           through an adjustment to the
   finance capital expenditure,                              intercompany balance; (iii) cap on
   accumulation of additional                                annual capital expenditure with a
   liabilities to bridge the resultant                       requirement of 30% of equity financing;
   cash deficit.                                             (iv) rescheduling of remaining liabilities
                                                             and (v) annual tariff filing will mitigate
                                                             this risk.
2. Presence of large amount of             Substantial
   unreconciled intercompany and                             TANTRANSCO is in the process of
   interunit account balances the                            appointment of consultants to enable
   accounts of TANTRANSCO.                                   reconciliation of intercompany
                                                             balances between TANTRANSCO and
                                                             TANGEDCO as also the reconciliation
                                                             of inter unit balances within
                                                             TANTRANSCO. Reconciliation of
                                                             these accounts will be supported
                                                             through the proposed TA.

                                                      10
3. Absence of fixed asset registry.      Substantial     TANTRANSCO is required to mobilize
   TNERC has not fully recognized                        consultants to prepare a fixed asset
   the revaluation of fixed assets                       registry and establish a system for
   undertaken in 2015.                                   regular updating of fixed asset registry.
Overall Inherent Risk                    Substantial
Project Risk
1. Implementing Entity.                  Substantial     TANTRANSCO is committed to
   TANTRANSCO has initiated the                          maintain accounts as per Companies
   process of finalization of accounts                   Act 2013 and also adopt Ind-AS
   as per Companies Act, 2013 and                        accounting standards effective current
   adopt Ind-AS accounting                               financial year (2018-19). It will also be
   standards. It has decided to adopt                    required under the Loan Agreement to
   Ind-AS for finalization of accounts                   implement an integrated computerized
   for the financial year commencing                     accounting software both for
   1 April 2018. The accounts are                        preparation of entity financial
   also currently maintained by using                    statements as also project financial
   the outdated Foxpro software.                         statements.
2. Funds Flow.                           Moderate        The use of Advance Account
   The central government has ruled                      procedure would mitigate this risk.
   out the use of the direct payment
   modality for disbursement of loan
   proceeds to Indian contactors for
   Indian Rupee payments. The use
   of an advance account for
   disbursement of loan proceeds is
   considered as the preferred
   mechanism of disbursement.
3. Staffing.                             Substantial     The Loan Agreement will include an
   While TANTRANSCO has                                  assurance requiring appointment of
   adequate staff at senior levels in                    two fulltime, dedicated accounts
   its finance and accounts                              officers, one assigned to the EA’s
   department with accounting                            headquarters, and the other to the
   professionals manning the senior                      Madurai General Construction Circle
   positions, it continues to share                      (GCC). Training in ADB’s accounting
   accounting staff with TANGEDCO                        and reporting requirements would be
   at many of its field offices. Also,                   provided to TANTRANSCO’s
   as the company has not                                accounting staff to mitigate this risk.
   implemented any multilateral
   funded project until now, its
   capacity to meet ADB’s reporting
   requirement is inadequate.
4. Accounting Policies and               Substantial     TANTRANSCO’s decision to adopt
    Procedures.                                          Ind-AS for finalization of accounts for
   The company’s ongoing use of                          the financial year commencing 1 April
   the Commercial Accounting                             2018 would mitigate this risk.
   System for State Electricity
   Boards – Electricity (supply)                         ADB support will be made available for
   (annual accounts) Rules 1985                          a one-time Fixed asset Register
   ESAAR rather than Indian                              preparation and verification and
   Accounting Standards (Ind-AS)                         impairment assessment.
   rules for entity-level financial
   reporting has presented the risk
   of project financial statements

                                                    11
being substantially different to
   entity level statements.
5. Internal Audit.                        Substantial     Terms of reference for internal audit
   The company’s internal audit                           will be provided to TANTRANSCO and
   scope is currently limited to                          assurance will be included to ensure
   concurrent audit of large                              that, over time, the internal audit
   payments. A much broader-based                         function will be strengthened to meet
   internal audit scope is required to                    the company’s legal and statutory
   ensure integrity and improve                           requirements. TANTRANSCO has
   efficiency across the company                          committed to initiate steps to meet the
   (and to meet statutory                                 requirements of the Companies Act,
   requirements). From the project’s                      2013 with regard to the appointment of
   perspective, no reliance can be                        the Internal Auditor.
   placed on internal audit. The
   external auditor has also
   indicated that the company has to
   improve its internal control
   systems and also that the
   company has not appointed an
   Internal Auditor as required under
   the Companies Act 2013.
6. External Audit                         Moderate        Statement of Audit Needs are provided
   TANTRANSCO is currently                                in this PAM indicating additional audit
   subject to annual auditing                             assurances required and time frame
   conducted by a chartered                               for submission of Annual Project
   accounting firm appointed by                           Financial Statements (APFS).
   India’s Comptroller and Auditor
   General (CAG). During the last                         ADB will monitor timeliness of EA’s
   few years, the company has been                        submissions and take early actions in
   able to get its financial statements                   case of delays.
   audited by September/October of
   the concerned year, indicating its
   ability to finalise its accounts
   within a reasonable time period.
   The audit report for FY2018 (and
   the earlier audit reports included)
   is a qualified report with a number
   of audit observations including
   TANTRANSCO’s non adherence
   to the Companies Act, 2013 (i.e.
   not preparing financial statements
   in accordance with Ind-AS
   accounting standards), huge
   unreconciled balances between
   TANTRANSCO and TANGEDCO,
   absence of a Fixed Assets
   Register, etc.
7. Reporting and Monitoring               Substantial     Project financial reports will be
   No consolidated in-year financial                      generated on a quarterly basis and
   reporting is provided by the                           project budget figures will be
   company, even though monthly                           compared with actual in each quarterly
   “statements of account” are                            report. Annual audited project
   generated at the GCC level. Only                       accounts will be submitted within 6
   ad-hoc project financial reporting                     months after the close of each financial
   is undertaken, mostly                                  year to ADB.
   concentrating on physical

                                                     12
outcomes of major capital
     projects.
 8. Information Systems.                   High           An assurance will be provided through
     Computerization of the company’s                     the Loan Agreement that requires the
     finance and accounting function is                   EA to utilize a common software
     very limited and significant                         package or on-line system across its
     manual intervention is required to                   business units to adequately record,
     transfer information from the                        process and report on financial
     accounting software (Foxpro) to                      transactions for the Project. It is
     the reporting software (Excel).                      proposed to stipulate that
     Neither Foxpro nor Excel are                         TANTRANSCO implement its in-house
     suitable for financial reporting.                    accounting system to replace Foxpro
     However, TANTRANSCO is in the                        by loan effectiveness.
     process of implementing an in-
     house accounting system that
     would allow online recording of all
     transactions, substantially
     reducing the need for data re-
     entry. This system is not yet fully
     developed and implemented but
     is expected to be adequate for
     ADB project accounting purposes.
 Overall Project Risk                      Substantial
 Overall (Combined) Risk                   Substantial

                         V.       PROPOSED TIME-BOUND ACTION PLAN

42.     Based on the risk assessment and proposed risk mitigation measures, the proposed risk
action plan is provided as shown in Table 1 in the executive summary.

                                                     13
Appendix A: Current Organizational Structure of TANTRANSCO

                                   Chairman

                                Managing
                            Director and Joint
                                Managing
                                 Director

  Director
                        Director                                 Company
Transmission                              Director Finance
                       Operation                                 secretary
  projects

        Chief           Chief Engineer/
                                               Chief Financial
  Engineer/Transmi      Protection and
                                                 Controller
        ssion           Communication

       Chief
                        Chief Engineer/
 Engineer/Civil/Tra
                        Grid Operation
     nsmission

         Chief          Chief Engineer/
  Engineer/Transmi          System
   ssion Projects-     Operation/Chenn
      I/Chennai                ai

   Chief Engineer/      Chief Engineer/
    Transmission            System
  Projects-II/Trichy   Operation/Trichy

                                     14
Appendix B: Current Organizational Structure of TANTRANSCO Finance Department

                                                                  Director (Finance)

                                                              Chief Financial Controller
   Class-I

             Financial Controller                        Financial Controller
                 (Finance &                                  (Revenue &
                  Accounts)                                  Purchases)

                                                                                             Deputy        Deputy            Deputy            Deputy        Deputy
                   Deputy                                      Deputy                       Financial     Financial         Financial         Financial     Financial
                  Financial                                   Financial                     Controller:   Controller:       Controller:       Controller:   Controller:
                                                                                              GCC#-        GCC#-             GCC#-             GCC#-         GCC#-
                  Controller                                  Controller                                                    Tiruchirappal     Coimbator
                                                                                             Chennai       Salem                  li
                                                                                                                                                             Madurai
                                                                                                                                                  e

     Accounts                    Accounts                     Accounts
      Officer                     Officer*                     Officer                      Assistant     Assistant          Assistant        Assistant     Assistant
                                                                                            Accounts      Accounts           Accounts         Accounts      Accounts
                                                                                Class-II
                                                                                             Officer       Officer            Officer          Officer       Officer

     Assistant                   Assistant                    Assistant
     Accounts                    Accounts                     Accounts
      Officer                     Officer*                     Officer

                               Class-III employees                                                                      Class-III employees

                 Structure at head office/corporate office                                                  Structure at general construction circles

*Long-term vacancy
# General construction circles
                                                                                       15
Appendix C: Financial Management Assessment Questionnaire
                             Topic                                                   Response

1. Executing / Implementing Agency
1.1 What is the entity’s legal status / registration?             Company registered under Companies Act.
1.2 How much equity (shareholding) is owned by the                99.99% shares held by TNEB Ltd whose
      Government?                                                 99.99% shares are held by GoTN.

1.3   List of beneficial owners of major blocks of shares (non-   Statement enclosed
      governmental portion), if any

1.4   Has the entity implemented an externally-financed project   Is implementing certain schemes with loan
      in the past? If yes, please provide details.                assistance from JICA, Japan and KfW,
                                                                  Germany
1.5   Briefly describe the statutory reporting requirements for   Annual report certified by External Auditor
      the entity.                                                 appointed by CAG and supplemental audit by
                                                                  CAG
1.6   Describe the regulatory or supervisory agency of the        For intra-state transactions regulated by
      entity.                                                     Hon’ble    TNERC      and    for    Inter-state
                                                                  transactions regulated by Hon’ble CERC
1.7   What is the governing body for the project? Is the          Governing body for the Project is the Board of
      governing body for the project independent?                 TANTRANSCO
1.8   Obtain current organizational structure and describe key    Organization structure for Accounts wing
      management personnel. Is the organizational structure       enclosed
      and governance appropriate for the needs of the project?
1.9   Does the entity have a Code of Ethics in place?             Yes

1.10 Describe (if any) any historical issues report of ethics     No such violations
     violations involving the entity and management. How
     were they addressed?

2. Funds Flow Arrangements
2.1 Describe the (proposed) project funds flow arrangements       Fund flow will go to GoTN and from GoTN to
      in detail, including a funds flow diagram and explanation   TANTRANSCO.
      of the flow of funds from ADB, government and other
      financiers, to the government, EA, IA, suppliers,
      contractors, ultimate beneficiaries, etc. as applicable.
2.2 Are the (proposed) arrangements to transfer the               Yes satisfactory
      proceeds of the loan (from the government / Finance
      Ministry) to the entity and to the end-recipients
      satisfactory?
2.3 Are the disbursement methods appropriate?                     Yes appropriate
2.4   What have been the major problems in the past involving     Nil
      the receipt, accounting and/or administration of funds by
      the entity?
2.5   In which bank will the Advance Account (if applicable) be
      established?
2.6   Is the bank in which the advance account is established
      capable of:
      • Executing foreign and local currency transactions?
      • Issuing and administering letters of credit (LC)?
      • Handling a large volume of transaction?

                                                       16
Topic                                                     Response
      • Issuing detailed monthly bank statements promptly?
2.7   Is the ceiling for disbursements from the advance             Not required
      account and SOE appropriate/required?
2.8  Does the (proposed) project implementing unit (PIU)            This is the first instance
     have experience in the management of disbursements
     from ADB?
2.9 Does the PIU have adequate administrative and                   Not applicable
     accounting capacity to manage the advance fund and
     statement of expenditure (SOE) procedures in
     accordance with ADB’s Loan Disbursement Handbook
     (LDH)? Identify any concern or uncertainty about the
     PIU’s administrative and accounting capability which
     would support the establishment of a ceiling on the use of
     the SOE procedure.
2.10 Is the entity exposed to foreign exchange risk? If yes,        Yes
     describe the entity’s policy and arrangements for
     managing foreign exchange risk.
2.11 How are the counterpart funds accessed?                        GoTN will be addressed

2.12 How are payments made from the counterpart funds?              Through holding company

2.13 If project funds will flow to communities or NGOs, does        NA
     the PIU have the necessary reporting and monitoring
     arrangements and features built into its systems to track
     the use of project proceeds by such entities?
2.14 Are the beneficiaries required to contribute to project        NA
     costs? If beneficiaries have an option to contribute in kind
     (in the form of labor or material), are proper guidelines
     and arrangements formulated to record and value the
     labor or material contributions at appraisal and during
     implementation?

3. Staffing
3.1 What is the current and/or proposed organizational              Proposed organization chart attached.
      structure of the accounting department? Attach an
      organization chart.
3.2 Will existing staff be assigned to the project, or will new     Existing staff will be assigned to the project
      staff be recruited?
3.3   Describe the existing or proposed project accounting          To be furnished by CE/Transmission
      staff, including job title, responsibilities, educational
      background and professional experience. Attach job
      descriptions and CVs of key existing accounting staff.
3.4   Is the project finance and accounting function staffed        Yes
      adequately?
3.5   Are the project finance and accounting staff adequately       Yes
      qualified and experienced?
3.6   Are the project finance and accounting staff trained in       No
      ADB procedures, including the disbursement guidelines
      (i.e., LDH)?
3.7   What is the duration of the contract with the project         Permanent employees of the Corporation with
      finance and accounting staff?                                 Superannuation age of 58 years

                                                       17
Topic                                                    Response
3.8    Identify any key positions of project finance and                No
       accounting staff not contracted or filled yet, and the
       estimated date of appointment.
3.9    For new staff, describe the proposed project finance and         The project finance will be handled by the
       accounting staff, including job title, responsibilities,         existing staff
       educational background and professional experience.
       Attach job descriptions.
3.10   Does the project have written position descriptions that         Yes
       clearly define duties, responsibilities, lines of supervision,
       and limits of authority for all of the officers, managers,
       and staff?
3.11   What is the turnover rate for finance and accounting             In accordance with the situation and policies
       personnel (including terminations, resignations, transfers,      thereof
       etc.)?
3.12   What is training policy for the finance and accounting           There is an exclusive training wing
       staff?
3.13   Describe the list of training programs attended by finance       Every employee is given training on rotation
       and accounting staff in the last 3 years.                        basis at least once in three years.

4. Accounting Policies and Procedures
4.1 Does the entity have an accounting system that allows for           Yes
      the proper recording of project financial transactions,
      including the allocation of expenditures in accordance
      with the respective components, disbursement
      categories, and sources of funds (in particular, the legal
      agreements with ADB)? Will the project use the entity
      accounting system? If not, what accounting system will
      be used for the project?
4.2 Are controls in place concerning the preparation and                Yes
      approval of transactions, ensuring that all transactions
      are correctly made and adequately explained?
4.3 Is the chart of accounts adequate to properly account for           Chart of accounts already provided
      and report on project activities and disbursement
      categories? Obtain a copy of the chart of accounts.
4.4 Are cost allocations to the various funding sources made            Yes
      accurately and in accordance with established
      agreements?
4.5 Are the General Ledger and subsidiary ledgers                       Ledgers maintained
      reconciled monthly? Are actions taken to resolve
      reconciliation differences?
4.6 Describe the EA’s policy for retention of accounting                Accounting records are maintained for a
      records including supporting documents (e.g., ADB’s               minimum period of 8 years.
      policy requires that all documents should be retained for
      at least 1 year after ADB receives the audited project
      financial statements for the final accounting period of
      implementation, or 2 years after the loan closing date,
      whichever is later). Are all accounting and supporting
      documents retained in a defined system that allows
      authorized users easy access?
4.7 Describe any previous audit findings that have not been             Nil
      addressed.

                                                          18
Topic                                                    Response
Segregation of Duties
4.8 Are the following functional responsibilities performed by        Yes
     different units or persons: (i) authorization to execute a
     transaction; (ii) recording of the transaction; (iii) custody
     of assets involved in the transaction; and (iv)
     reconciliation of bank accounts and subsidiary ledgers?
4.9 Are the functions of ordering, receiving, accounting for,         Yes
     and paying for goods and services appropriately
     segregated?
Budgeting System
4.10 Do budgets include physical and financial targets?               Yes
4.11 Are budgets prepared for all significant activities in           Yes
     sufficient detail to allow meaningful monitoring of
     subsequent performance?
4.12 Are actual expenditures compared to the budget with              Yes
     reasonable frequency? Are explanations required for
     significant variations against the budget?
4.13 Are approvals for variations from the budget required (i)        Generally, in advance. Depending upon the
     in advance, or (ii) after the fact?                              urgency of the work., sometimes ratification
                                                                      obtained after execution of the work.
4.14 Is there a ceiling, up to which variations from the budget       No
     may be incurred without obtaining prior approval?
4.15 Who is responsible for preparation, approval and                 Both technical and finance wing
     oversight/monitoring of budgets?
4.16 Describe the budget process. Are procedures in place to          Yes
     plan project activities, collect information from the units in
     charge of the different components, and prepare the
     budgets?
4.17 Are the project plans and budgets of project activities          Yes
     realistic, based on valid assumptions, and developed by
     knowledgeable individuals?

Is there evidence of significant mid-year revisions, inadequate
       fund releases against allocations, or inability of the EA to
       absorb/spend released funds?                                   No

      Is there evidence that government counterpart funding is
      not made available adequately or on a timely basis in
      prior projects?

     What is the extent of over- or under-budgeting of major
     heads over the last 3 years? Is there a consistent trend
     either way?
Payments
4.18 Do invoice-processing procedures require: (i) Copies of          Yes
     purchase orders and receiving reports to be obtained
     directly from issuing departments; (ii) Comparison 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

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