India: Chennai-Kanyakumari Industrial Corridor: Power Sector Investment Project - Financial Management Assessment - Asian Development Bank
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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 NaduTNEB 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.......................................................................13EXECUTIVE 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
iS.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
iiI. 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.
16. 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.
2Financial 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.
3and 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.
415. 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
5shortcomings 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
6Department, 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
7assets;
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.
838. 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”).
9Table 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.
103. 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
11being 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
12outcomes 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.
13Appendix 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
14Appendix 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
15Appendix 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?
16Topic 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
17Topic 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.
18Topic 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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