RRP: Financial Management Assessment: Ministry of Agriculture, … · 2018. 10. 31. · has a shortage of skills in general management, financial management, financial analysis, and

Horticulture Value Chain Development Sector Project (RRP AFG 51039)

Supplementary Document 17:

Financial Management Assessment: Ministry of Agriculture, Irrigation and Livestock

http://www.adb.org/Documents/RRPs/?id=51039-002-2

TABLE OF CONTENTS

I. EXECUTIVE SUMMARY ........................................................................................... 1

II. INTRODUCTION ....................................................................................................... 1

III. BRIEF PROJECT DESCRIPTION ............................................................................. 2

IV. COUNTRY AND SECTOR FINANCIAL MANAGEMENT ISSUES ............................ 3 A. Country Level Issues ........................................................................................ 3 B. Public Financial Management Arrangements .................................................... 4 C. Management Skills and Staff Capacity .............................................................. 5

V. PROJECT FINANCIAL MANAGEMENT SYSTEM ................................................... 5 A. Overview of the Executing Agency, Implementing Agency, Financial

Management System, and Institutional Context ................................................ 6 B. Strengths and Weaknesses .............................................................................. 6 C. Personnel, Accounting Policies and Procedures, Internal and External Audit ... 7

VI. RISK DESCRIPTION AND RATING ....................................................................... 11 A. Inherent Risk .................................................................................................. 11 B. Control Risk .................................................................................................... 13

VII. SUGGESTED ACTION PLAN ................................................................................. 15

APPENDICES

Appendix 1: Financial Management Assessment Questionnaire ..................................... 16 Appendix 2: Supplementary FMA Questionnaire for FAAD ............................................. 32 Appendix 3: Supplementary FM Questionnaire for CPMO ............................................... 36

ABBREVIATIONS

ABE – Agro-Business Enterprise

ADB – Asian Development Bank

ADF – Asian Development Fund

AFMIS – Afghanistan Financial Management Information System

CPMO – Central Program Management Office

DAIL – Department of Agriculture, Irrigation and Livestock

FAAD – Finance and Administration Directorate

FMA – financial management assessment

HVCDSP – Horticulture Value Chain Development Sector Project

MAIL – Ministry of Agriculture, Irrigation and Livestock

MOF – Ministry of Finance

PFM – project financial management

PIU – project implementation unit (regional)

PMU – Project Management Unit

SDU – special disbursement unit

SOE – statement of expenditure

I. EXECUTIVE SUMMARY 1. A financial management assessment (FMA) was prepared as part of the due diligence for the proposed Horticulture Value Chain Development Sector Project (HVCDSP) in accordance with Asian Development Bank’s (ADB’s) “Guidelines for the Financial Management and Analysis of Projects”1 and took notice of instructions from the “Financial Due Diligence: A Methodology Note (January 2009), Technical Guidance Note on Financial Management Assessment (May 2015),” and updated findings from a recent FMA conducted for the Panj-Amu River Basin Sector Project. The FMA considered the role of the Ministry of Agriculture, Irrigation and Livestock (MAIL) as the implementing agency and reviewed the benefits of consolidating the project management unit (PMU) under the Central Program Management Office (CPMO) already established in MAIL for development partner financed projects. 2. Despite the significant development achieved since public financial management (PFM) reform were initiated by the Afghan Government in 2002, the ADB’s country partnership strategy,

2017–2021 cited poor governance to be directly linked with institutional capacities. The Afghanistan Public Financial Management and Accountability Assessment2 had a high-risk level rating for the public financial management environment. The Public Expenditure and Financial Accountability Report noted that MAIL had significant arrears as of end-SY1391 (December 2012). 3. Inherent and control risks exist but are both considered only moderate. With risk mitigation measures, the project will be implemented in a financially sound manner. 4. MAIL has previously implemented ADB-funded development projects and is currently implementing the Water Resources Development Investment Project Tranche 1 and the Panj-Amu River Basin Development Sector Project. Implementation of the former began in 2010 and to date, the general conclusions from external audit reports has shown no material qualifications. The CPMO has been incorporating measures to improve the efficiency of financial management systems, which will be critical in supporting the project in setting up their own systems under the CPMO’s guidance. In spite of recent positive developments in financial management, MAIL still recognizes the need for further improvement. The proposed financial management arrangements for this project are considered acceptable. II. INTRODUCTION

5. This FMA was conducted to (i) assess the capacity of MAIL to implement the HVCDSP and its various components, and (ii) propose ways and means to strengthen the capacity of MAIL to oversee subproject investments for agro-business enterprises (ABEs) and on-farm enhancements for affiliated farmers. A particular objective is to enhance competence levels to achieve the government’s goals of institutional development. The assessment outlines the financial environment of MAIL and the financial risks that may affect the project impact and sustainability. 6. This assessment is an update from that prepared for MAIL under the Panj-Amu River Basin Development Sector Project in August 2016, and reflects subsequent developments,

1 ADB. 2005. Guidelines for the Financial Management and Analysis of Projects. Manila. 2 World Bank. Report No. 80996‐AF (Afghanistan Public Financial Management & Accountability Assessment, Aug

2013). Washington, DC.

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agreements, and changes. Updating activities included reviewing documents, interviewing counterparts and consultants, and discussing issues with stakeholders. Most of the mitigating measures proposed were developed together with counterparts. III. BRIEF PROJECT DESCRIPTION

7. The proposed HVCDSP will increase value addition for horticultural commodities produced in eleven provinces in Central, South, and East Afghanistan.3 It will support the government’s strategy4 that aims to increase per capita income and reduce poverty among rural communities. The project will also improve food security, substitute imports of fresh and processed fruit and vegetables, improve self-sufficiency, and expand exports of high-value fruit, vegetables and nuts in which the country has a comparative advantage. The project will support the development of ABEs by investing in processing and marketing equipment and facilities whilst for farmers, it will support on-farm investments in modernizing production through planting material, trellising, green houses, and on-farm water efficient application systems. The project will also create more economic opportunities for agri-business development, strengthen alliances between farmers and traders and/or processors, and contribute to greater on-farm productivity.5 8. The envisaged financing amount for the project is $75 million. ADB financing (by way of grant) will be provided from the Asian Development Fund (ADF). The period of implementation

will be six years (2019–2024). The project will finance development investments of ABEs, on-farm enhancements for affiliated farmers, equipment and goods, capacity development, consulting services, and operational expenses. The executing agency for the project will be the Ministry of Finance (MOF) and the implementing agency will be MAIL. 9. The project funds flow is presented in Figure 1.

3 Project provinces include Bamyan, Ghazni, Kabul, Khost, Kunar, Laghman, Logar, Nangahar, Paktika, Paktya, and

Wardak. They were identified based on the statistics of existing horticulture crop production for both import substitution and export expansion that were concurred by the government during the project design. Together, these provinces account for 26% of the national planted area of fruit and 21% of the national area of vegetables or 22% of horticultural production.

4 Government of Afghanistan, Ministry of Agriculture, Irrigation and Livestock. 2016. National Comprehensive Agriculture Development Program (2017–2020). Kabul.

5 ADB. 2017. Technical Assistance to Islamic Republic of Afghanistan for Preparing the Horticulture Value Chain Development Sector Project. Manila.

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Figure 1: Fund Flow and Processing

Source: Asian Development Bank.

IV. COUNTRY AND SECTOR FINANCIAL MANAGEMENT ISSUES

A. Country Level Issues

10. Country-level issues identified were based on the World Bank’s Public Financial Management and Accountability Assessment (PFMAA) and ADB’s Country Assistance Program Evaluation.6 These issues have the potential to impact project financial management which includes fragile PFM environment, management skills, and staff capacity issues. 11. ADB’s country partnership strategy, 2017–2021 noted key challenges in development. “Insurgency in Afghanistan continues to shape the country’s development trajectory and adversely affects all aspects of life in Afghanistan. Economic growth has slowed considerably since 2014 and is not high enough to counter the country’s rapidly growing population, resulting in increased poverty. Afghanistan is also grappling with high numbers of internally displaced

6 ADB. 2012. Country Assistance Program Evaluation (Islamic Republic of Afghanistan). Manila.

Agri-business Enterprises

Withdrawal Application

Grant Agreement

MAIL Implementing Agency

ADB Asian Development

Fund (ADF) grant ADB

Advance Account

MOF

Executing Agency

Project Staff

Implementation Support Consultants

(Company)

On-Farm Investments Suppliers/ Affiliated

Farmers

Invoic

e

Contr

act

Invoic

e

Advance/Replenishment

Direct Payment

Invoic

e

Invoic

e

Contr

act

Pa

yment

Requ

ests

Payment Instructions

Loca

l P

aym

en

ts

Budg

et

Allo

cation

Invoic

e

Suppliers of Goods (Equipment), Works, and Services

Invoic

e

Facilitation Partners (NGO – international

and local)

Contr

act

Contr

act

Sub

pro

ject

Agre

em

ents

Sub

pro

ject

Agre

em

ents

Bank

Sta

tem

ents

Suppliers of Goods (Vehicles)

Invoic

e

Contr

act

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persons and the millions of refugees returning from neighboring countries, which place a greater strain on the already limited services and capabilities of the government. Insufficient infrastructure limits private sector activity and prevents greater access to basic services. The operating and development budgets are financed mainly by donor assistance because the government has low revenue-generation capacity. Conditions have improved since 2002 in some aspects of health and education, but gender disparity in Afghanistan remains among the highest in the world. Government capacity is improving but needs further support to make development assistance more effective.” 12. Institutional capacities in government ministries and agencies are gradually improving. State institutions generally have limited oversight abilities, technical understanding to develop the appropriate rules and regulations, and capacity to enforce them. Institutional capacities are closely related to poor governance. Afghanistan ranked 169th out of 176 countries with a score of 15 out of 100 in the Corruption Perceptions Index 2016. Corruption deters growth in the licit business sector, fuels insurgency, and drives down popular support for the government. The government has undertaken several initiatives to improve governance, such as the establishment of the Anti-Corruption Justice Center in 2016, the preparation of anticorruption plans by several ministries, and the preparation of a draft anticorruption strategy for the overall government.

B. Public Financial Management Arrangements

13. Although Afghanistan has a relatively well-developed PFM infrastructure for a post-conflict environment, it is still relatively weak and considered to be of high risk. The PFM’s foundation is a comprehensive budget that is presented to the Parliament for approval before the end of the fiscal year. Given the centralized nature of the budget, it practically gives the entire general government sector’s financial position. MOF plays a pivotal role in budget preparation and expenditure control. MOF prepares annual budgets that meet internationally accepted standards of public financial management performance at an acceptable level. A line ministry, such as MAIL as a primary budgetary unit, have well-defined roles in implementing the budget. However, its role in accounting and/or reporting is minimal. 14. Since budget is centrally administered, disbursements are affected only through the Special Disbursement Unit (SDU) under the Treasury Department of MOF. An integrated financial management system, the Afghanistan Financial Management and Information System (AFMIS), originally intended to establish a financial information system has now been expanded to handle auditable transactions for expenditure and budget controls. This system is at the heart of control and reporting functions of the Afghan Government and has been highly rated in various financial management assessments on Afghanistan. 15. The Afghan National Budget7 is the primary tool for implementing the priorities and policies of the government. The budget formulation process is summarized in Figure 2.

7 Excerpt from Afghanistan Pre-Budget Document (Medium Term Budget Framework, 1395–1397), 2015.

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Figure 2: Summary of the Budget Preparation Process

Source: Afghanistan Pre-Budget Document (Medium Term Budget Framework, 1395–1397), 2015.

16. In a difficult post‐conflict environment, Afghanistan has achieved remarkable progress on the fiscal front. Despite pressures, fiscal discipline has been strictly enforced and maintained, and there is significant fiscal transparency. However, budget credibility remains to be one of the major drawbacks in PFM arrangements. MAIL’s year-end deficit in 2014 was significant because, as a primary budgetary unit, it must ensure timely and accurate payment settlement and that, unless determined otherwise, all payments due to creditors must be settled within 30 days from the date of statement. However, MAIL arrears are spread evenly across wages and salaries, goods and services, and acquisition of assets.

C. Management Skills and Staff Capacity

17. Like in many ADB’s developing member countries, the Islamic Republic of Afghanistan has a shortage of skills in general management, financial management, financial analysis, and management accounting. In particular, a good number of accounts staff within finance departments of government agencies, including MAIL, does not possess practical skills beyond bookkeeping. The impact of these skill shortages on government operations is amplified by high demand for financial skills from the private sector and parastatal entities, which pay higher remuneration and, in most cases, provide better incentives. V. PROJECT FINANCIAL MANAGEMENT SYSTEM

18. The project’s proposed financial management will follow the cash-based government accounting framework with CPMO and/or PMU finance staff handling the maintenance of accounts, which is considered adequate. In order to facilitate processing of project financial transactions, the CPMO and/or PMU finance unit was embedded in the Finance and Administration Department of MAIL. This system expedites the payment processes and minimizes risk of delays in the transfer of documentation. In order to ensure project funds are used appropriately, MAIL will secure the services of an external audit firm to conduct audits of project financial statements related to the project fund utilization.

Budget Units

define spending

priorities

MOF creates Pre-

Budget Document

and Budget

Ceilings

Budget Units

prepare Detailed

Budgets

Budget Units

defend Budget to

Budget Committee

Cabinet approves Budget

Parliament approves Budget

President signs off Budget

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A. Overview of the Executing Agency, Implementing Agency, Financial Management System, and Institutional Context

19. The structures envisaged to manage and oversee project implementation included key stakeholder agencies,8 and have been designed to encourage accountability and minimize risks of corruption. MAIL’s CPMO9 and dedicated PMU will manage implementation of the overall project. 20. The approach to implementing the project is to integrate the physical and non-physical components to improve the efficiency of subproject investments and improve on-farm investments for improved productivity. The CPMO will have contracted operational personnel (at National Technical Assistance [NTA] rates) supported by project staff (PMU and/or project implementation unit [PIU]) and by implementation support consultants (ISCs) with international and local consultants. The structure and composition of the CPMO is designed to augment the limited number of qualified staff in MAIL. The staff shortages arise from the difficulty government agencies have in recruiting and retaining qualified staff due to the high demand for engineers and experienced accounts staff in the private sector. 21. To foster sustainability, government procedures and documentation will be used in all implementation stages. In addition to direct implementation roles, consultants will build capacity in key technical and management functions by training young professional staff seconded from both MAIL for the CPMO, and Department of Agriculture, Irrigation and Livestock (DAIL) PIUs regional offices. 22. The financial management system proposed for the project is adequate, except for the need to install accounting software instead of using the Microsoft Excel-based systems. The ISCs will assist the accounting staff of the CPMO in handling the project financial management and accounting. While in general, MAIL uses AFMIS for accounting and reporting reasons, a separate accounting system for the CPMO based on a standard electronic spreadsheet is currently in place. The CPMO retains original accounting documents of the project and provides a copy to the Finance Department of MAIL.

B. Strengths and Weaknesses 23. Strengths and weaknesses of MAIL (in particular, CPMO with its project procurement and financial functions integrated under the Finance and Administration Directorate), are summarized in the Table 1 below:

8 Ministry of Finance; Ministry of Agriculture, Irrigation and Livestock; and Agri-business Enterprises. 9 CPMO was established to assist MAIL in the implementation of all ADB-funded projects in the agriculture and natural

resources sector.

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Table 1: Strengths and Weaknesses Strengths Weaknesses

The main strength of existing PFM (WRDIP Tranche 1 [MAIL]) is that experience in project financial management has been built up over the eight-year period since the project was approved.

This experience has not always translated into effective financial management.

Entity: Entity arrangements do not emphasize the importance of the financial management function or activities. Particular entity weaknesses include:

• staff turnover and a lack of appropriate financial management skills; and

• outdated financial management arrangements in the regional offices.

Integration of core project functions (i.e. finance, procurement, monitoring an M&E, etc.) under the CPMO within MAIL structure will help in building the capacity of public servants to handle development projects.

Reporting: Financial reports are produced but are often based on unreconciled accounts and are provided with delays. As a result:

• expenses and progress of project activities have generally not been properly matched; and

• information is not often generated as soon as needed for sound management decision making.

Process of securing authorizations and approvals from MAIL management had been streamlined.

Internal Controls: Internal audit functions are more focused with operating budget expenses. Projects rely on external audits to identify weaknesses and irregularities, often with significant time lags.

CPMO = Central Program Management Office; MAIL = Ministry of Agriculture, Irrigation and Livestock; M&E = monitoring and evaluation; PFM = project financial management; WRDIP = Water Resources Development Investment Program.

C. Personnel, accounting policies and procedures, internal and external audit

24. Personnel. The CPMO is staffed with senior finance managers and officers, whose duties include maintaining separate project financial statements, preparation of withdrawal applications, monitoring of loan covenants, preparation of project financial reports, coordination with the finance departments of their respective ministries, the treasury department of MOF, and monitor the advance accounts at Da Afghanistan Bank. To overcome potential shortcoming, ISCs will provide support to the CPMO and/or PMU during the initial years of project implementation.

25. PMU and/or PIUs (with oversight of the CPMO) will manage and coordinate project activities. The CPMO Project Director will be designated as the Project Director for the proposed project and MAIL will nominate a Project Manager with appropriate qualifications and experience, to be endorsed by ADB. The CPMO will assign a finance officer and a finance assistant to be responsible for preparing financial documents for the Project Director. Also, ISCs’ inputs will be provided in agri-business development, subproject screening and implementation, procurement and grants contract supervision, economics, food technology, monitoring and evaluation as well as in other technical areas as required. 26. Staff Procedural Capacity.10 Building the capacity of the government agencies has been a theme in most donor-funded projects. Most of these efforts have been on building the capacity

10 Afghanistan. A Synthesis Paper of Lessons from Ten Years of Aide. 24 January 2013.

https://ieg.worldbankgroup.org/sites/default/files/Data/reports/Afghanistan_Lessons_Ten_Years.pdf.

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of the national government, but some (less well structured) have been on building subnational governments. 27. Accounting Policies and Procedures. MAIL uses cash accounting methods in their regular and project operations. Current accounting policies abide with the national guidelines as issued by MOF, which comply with the International Public-Sector Accounting Standards. Payment data uploaded to AFMIS provides the backbone for the accounting system for report generation. Although the CPMO does not have direct access to AFMIS, electronic spreadsheets are often used for record keeping. 28. CPMO staff with assistance from the ISCs’ financial management specialists will assist in the preparation of supporting documents for expenditure, payment approvals, and submissions to MOF and ADB. 29. Internal and External Audit. Internal audit function is limited to audit of operating budget due to lack of capacity, funding, and staff. In order to minimize potential risks associated with this situation, staffing of the audit department needs to be built up, and its functioning, needs to be closely monitored to ensure that it is an effective internal control mechanism. 30. External auditors for the project financial statements would be recruited following ADB’s procedures for recruitment of consultants. They will carry out an audit following the International Standards of Auditing and provide an opinion on the project financial statements. In addition, they will be required to provide an opinion on the utilization of grant proceeds, and compliance with financial covenants. They will also provide a Management Letter highlighting any weaknesses identified during their audit by them in the internal control systems. 31. CPMO has complied with the covenant regarding submission of audited project financial statements under the ongoing projects.11 Previous audit reports have found no significant irregularities. 32. MAIL, through the CPMO, will prepare and maintain separate accounts for project-related disbursements, which are acceptable to ADB, and in accordance with the provisions of the Grant Agreement. MAIL will prepare separate project financial statements. In addition, MOF12 will prepare a consolidated project financial statements of MAIL in accordance with the government's accounting laws and regulations which are consistent with international accounting principles and practices. After audit, the documents will be submitted to MOF and ADB. An audit review process will be established and commission financial and performance audits of the CPMO and/or PMU by an audit agency in accordance with auditing standards acceptable to ADB. The audit report will include, among others, a separate opinion on the proper use of the advance account and the statement of expenditure procedures. Project accounts of HVCDSP, together with disbursement documents, will be audited annually by independent auditors acceptable to ADB, and will be submitted to ADB in English within three months of the end of each fiscal year. MAIL will be advised of ADB’s requirements for timely submission of audited project accounts and financial statements, and the suspension of disbursements of the ADB grant in case of non-compliance.

11 Including the Water Resources Development Investment Project - Tranche 1 (G0170-AFG [EF] and G0167-AFG

[SF]) 12 A general project coordination unit is currently serving the ADB-financed Water Resources Development Investment

Program. This unit will also undertake the consolidated reporting for this project.

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33. Financial Reporting Systems (Including Use of Information Technology). MAIL, through the CPMO and/or PMU, will submit quarterly and annual progress reports to ADB, indicating progress made, highlighting physical accomplishments and financial progress, problems encountered, and steps taken to remedy the problems, and the program of activities along with expected progress during the remainder of the implementation period. The HVCDSP Project Manager will submit quarterly reports on project activities, in an agreed format to MOF. Reports incorporate project performance monitoring data and relevant financial data and may include such other reports and information relating to the project as ADB may reasonably request. Reports are submitted within one month after the end of the quarter to which they relate. The annual progress report includes an annual benefit monitoring report. 34. Within three months of project completion, MAIL will submit a project completion report to ADB providing detailed evaluation of the project implementation and achievements, consultants’ performance, social and economic impacts, and other details as requested by ADB. The responsibility for preparing these reports, accounts, and statements, and ensuring that they are submitted in accordance with the agreed time frame rests with the Project Director. In general, ADB requires reports listed in Table 2 below to be prepared by CPMO.

Table 2: Summary of Required Financial Reports Report Frequency Basis Duration Due Date

Project expenditures forecast

Semi-annual

Annual Term of project

Every 6 months after commencement of loan project

Operation plan Annual Annual 12 months Start of year

Project expenditures report

Monthly,

Quarterly,

Annually

Monthly,

Quarterly, or

Annually

Monthly,

Quarterly, or

Annually

Monthly

Audited Annual Financial Statements

Annual Annual Annual June 23 of the subsequent year

Program Completion Report

Once Lifespan of the Program

Lifespan of the Program

3 months after the end of the program

Source: Asian Development Bank.

35. Although AFMIS is in place at the line ministry for streamlined processing of payments for development projects, the CPMO does not have direct access to the system. MAIL’s Finance Department updates and uploads data from reports and payment requests submitted by the CPMO. The CPMO prepares project financial statements using an electronic spreadsheet.13 These are then submitted to MOF and then to ADB on a quarterly and annual basis. This system is in place for current projects implemented by MAIL. However, there is a need to implement a more dynamic accounting system so as to easily integrate reports and allow the CPMO to generate timely and more accurate reports. This will enable the CPMO to (i) respond to operational and project-related queries pertaining to specific accounts, and (ii) prepare financial reports on the transactions that occurred in the reporting period. The accounting system must be capable of generating financial reports for both external and internal MOF use. As indicated, the capacity of the CPMO and/or PMU will be strengthened to have the capacity to undertake this role.

13 Microsoft Excel.

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36. Disbursement Arrangement. Grant proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time),14 and detailed arrangements agreed upon between the government and ADB. Online training for project management and implementation staff on disbursement policies and procedures is available.15 Project management and implementation staff are encouraged to avail of this training to help ensure efficient disbursement and fiduciary control. 37. MAIL will be responsible for (i) preparing disbursement projections, (ii) collecting and retaining supporting documents, and (iii) preparing and sending withdrawal applications to ADB. 38. Advance Fund Procedure. MAIL will open one US dollar advance account at a commercial bank acceptable to ADB to facilitate disbursements. The advance account is to be used exclusively for ADB’s share of eligible expenditures. MAIL who administers the advance account is accountable and responsible for proper use of advances to the advance account. MAIL will establish the advance account in its name and shall be accountable and responsible for proper use of advances to the advance account. The outstanding advance to the advance account under MAIL’s name will not exceed MAIL’s estimated six-month budget. The request for initial and additional advances to the advance account should be accompanied by an Estimate of Expenditure Sheet16 setting out the estimated expenditures to be financed through the account for the forthcoming six (6) months. The ADB’s project division (CWER) responsible for project administration will review the reasonableness of the 6-month estimates provided by MAIL. Supporting documents should be submitted to ADB or retained by MAIL in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time) when liquidating or replenishing the advance account. 39. ADB will monitor the project and review its progress to ensure that the grant proceeds are spent as agreed upon. When the grant becomes effective, a grant account will be opened in ADB’s books in the name of the borrower and the grant amount is credited to that account. The grant proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time). 40. Direct Payment. For consulting services, equipment, and civil works following open contract bidding procedure, funds will be disbursed directly by ADB. 41. Reimbursement. For contracts following shopping for goods, works, and services, community participation in procurement (CPP) procedures, and small expenditures related to CPMO and/or PMU and/or PIU reimbursement, advance fund procedures would be applied. 42. The subproject grant recipients will be responsible for implementing the project accordance with the relevant subproject agreements and other implementation arrangements, as described in the PAM.

14 The handbook is available electronically from the ADB website (http://www.adb.org/documents/ loan-disbursement-

handbook 15 Disbursement eLearning. http://wpqr4.adb.org/disbursement_elearning 16 Estimate of Expenditure Sheet is available in Appendix 8A of ADB’s Loan Disbursement Handbook (2017, as

amended from time to time).

http://wpqr4.adb.org/disbursement_elearning

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VI. RISK DESCRIPTION AND RATING

43. A Financial Management Internal Control and Risk Management Assessment was conducted. The risk-assessment approach is based largely on International Standard on Auditing: Risk Assessment, and Internal Control. The following risk assessments are based on existing circumstances, staffing and procedures, and include recommendations for risk mitigation measures.

A. Inherent Risk 44. Inherent risk is the susceptibility of the project financial management system to factors arising from the environment in which it operates, such as country rules and regulations, and entity working environment (assuming absence of any counter checks or internal controls). Inherent risks are outlined in Table 3.

Table 3: Inherent Risks

Risk Type Risk

Assessment Risk Description Risk Mitigation Measures

Country-Specific Risk

H Fragile financial stability and management, including weak accountability.

Ongoing efforts are underway to strengthen PFM arrangements as outlined in the government’s Public Administration Reform and Economic Management Program. Learning from WRDIP experience, consultants will have greater responsibility and accountability in ensuring financial management arrangements are adhered to.

H Management skills and staff capacity are inadequate.

The government is implementing organizational reforms (budget, financial management, and procurement) through a capacity development plan to improve the capacity of IAs, including MAIL. These will be augmented with capacity development plans based on (i) available ADB training resources, (ii) capacity development provision in ongoing and future ADB financed grants and/or loans, and (iii) capacity development opportunities by other development partners.

Entity-Specific Risk

Ministry of Agriculture, Irrigation and Livestock

M Delay in processing payments may be significant due to overlapping procedures, roles, and review steps at the project level, CPMO level, MAIL finance department, and the

Operational and organizational roles will be clearly defined in the IA structure with delineation of finance functions of project personnel involved in financial management. Develop work plans indicating core activities of all project personnel (i.e.

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Risk Type Risk

Assessment Risk Description Risk Mitigation Measures

Treasury Department of the Ministry of Finance.

CPMO project finance staff and FAAD public servants at MAIL).

M Inadequate salaries, aging staff and significant staff turnover.

The government began implementing the National Technical Assistance Remuneration Policy, which should adjust remuneration to competitive levels and attract younger, highly qualified staff.

Project-Specific Risk

M MAIL finance unit may have insufficient capacity to manage project fund flows and ensure proper fund disbursement that could lead to less efficient use of funds for the purposes intended.

CPMO will be assisted by consultants familiar with ADB procedures in the initial years, to help ensure proper fund disbursement. CPMO will employ project staff with previous experience with ADB-funded projects and provide further training in ADB procedures to help mitigate risks. Project finance staff will be adequately trained, at the project startup, in conducting discounted cash flow (DCF) analysis of subproject investment proposals (SIPs) and evaluating financial positions of ABEs.

M Risk of increased staff turnover in the project units (PMU/PIU) because of low government compensation.

Project will be adopting the National Technical Assistance (NTA) Salary Scale which is comparable to market rates to limit turnover.

S The project design in which ABEs will finance 50% of subproject cost and affiliated farmers will finance 20% of subproject cost may entail funding risks.

Procedures are in place for subproject selection, screening, evaluation, approval, monitoring of procurement, invoicing, and verification. External financial auditors will be tasked with checking and confirming the actual beneficiary contributions.

Overall Assessment of Inherent Risk

S

H = high; M = moderate; L = low; S = substantial. ADB = Asian Development Bank; CPMO = Central Project Management Office; FAAD = Finance and Accounting Directorate; IA = implementing agency; MAIL = Ministry of Agriculture, Irrigation and Livestock; NTA = national technical assistance; PFM = project financial management; PIU = project implementation unit; WRDIP = Water Resources Development Investment Project. Source: Asian Development Bank.

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B. Control Risk

45. Control risk is the risk that the project’s accounting and internal control framework are inadequate to ensure project funds are used economically and efficiently and for the purpose intended, and that the use of funds is properly reported. Control risks are outlined in Table 4.

Table 4: Control Risks

Risk Type Risk

Assessment Description Risk Mitigation Measures

Implementing Entity M Non-standardized procedures for financial management in various projects at the CPMO could limit efficiency of the disbursement process and lead to delays in posting of payments.

Implementation support consultants will be hired for the project and will include a financial management specialist to provide support for CPMO. The specialist will assist in standardizing financial management system to conform to internationally accepted standards.

Implementation support consultants will be engaged to strengthen the CPMO and PMU and/or PIU capacity.

Funds Flow M Challenges may be encountered in managing disbursements due to weak internal control which may cause delay in payments (i.e. consultants’ fees, etc.)

Use of direct payment, commitment, and reimbursement procedures for prompt payment of large contracts will mitigate these risks.

Staffing H Staff skills are satisfactory for bookkeeping but may not be effectively suited for project proposed responsibilities. Risks of preparing erroneous documents that could lead to fund misappropriation.

The financial management specialist will assist project finance staff in acquiring higher skills levels in accounting by allowing them to learn by example and through on the job training.

S Significant staff turnover and lack of financial management skills.

Project staff to be remunerated at NTA Remuneration Policy Rates to retain qualified staff and enable recruitment and retention of high caliber skilled staff.

S MAIL finance staff (non-CPMO) are not very familiar with ADB procedures (i.e. Procurement and Disbursements).

Regular training on ADB’s procurement and disbursement processes will be provided.

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Risk Type Risk


Accounting Policies and Procedures

M Accounting system has been implemented (i.e. charts of accounts used for projects and activities). Project budgeting is carried out in some detail but use in performance reports is somewhat limited.

Implementation support consultants will assist in timely preparation of financial reports.

Internal Audit H Internal Audit department’s function has been expanded to include development projects, but staff still require familiarity with audits of donor-funded projects.

MAIL will ensure that the internal audit department be provided with sufficient training and exposure to audits of donor-funded projects.

Effectiveness will be monitored during project implementation.

External Audit S Capacity of external auditors in the country is weak and only applies ISSAI Level 3 principles.

Project financial auditing will be supported through project funds, enabling recruitment of quality external auditors.

Reporting and Monitoring

M Limited financial management skills may result in preparation of financial reports not being completed in a timely manner.

CPMO and PMU/PIU in coordination with the project coordination unit (PCU) at the Ministry of Finance to prepare and submit to the management of ADB quarterly and annual progress reports on project implementation and operation. Compliance with loan covenants, including submission of audit project accounts will be monitored by ADB.

Information Systems H Inadequate information systems may cause discrepancies in records posted for the project.

Rolling out AFMIS software to line ministries will help monitor information uploaded to the central database and minimize discrepancies of records. Integration of CPMO finance team to MAIL finance department will ensure close coordination with AFMIS designated personnel to access and record data.

15

Risk Type Risk


Overall Assessment of Control Risk

S

H = high; M = moderate; L = low; S = substantial. ADB = Asian Development Bank; AFMIS = Afghanistan Financial Management Information System; CPMO = Central Project Management Office; FM = financial management; ISSAI = International Standards of Supreme Audit Institutions; MAIL = Ministry of Agriculture, Irrigation and Livestock; MOF = Ministry of Finance; NTA = national technical assistance; PCU = project coordination unit; PIU = project implementation unit; PMO = project management office; WRDIP = Water Resources Development Investment Project. Source: Asian Development Bank.

46. The overall risk assessment is substantial. Appropriate mitigation measures have been included in the risk mitigation plan for implementation with assistance of the implementation support consultants. VII. SUGGESTED ACTION PLAN

47. In view of the findings of this financial management assessment, it is proposed that the following actions be taken, as outlined in Table 5.

Table 5: Financial Management Action Plan

Actions Complied by

Appoint a project manager to head the PMU, reporting to the CPMO project director.

Q4 2018

Appoint the CPMO Project Finance Manager or Finance Officer as the focal point to handle the project’s financial management and ensure timely preparation and submission of project financial statements.

By Q1 2019 and throughout project implementation period

Mobilize ISCs’ national financial management specialist to assist the CPMO in ensuring that project financial management adhere to sound accounting principles.

By Q2 2019 and throughout project implementation period

Ensure that the project complies with financial covenants and audit recommendations in a timely manner.

throughout project implementation period

CPMO = Central Project Management Office, ISC = implementation support consultant, PMU = project management unit, Q = quarter. Source: Asian Development Bank.

16 Appendix 1

Appendix 1: Financial Management Assessment Questionnaire

Ministry of Agriculture, Irrigation and Livestock (MAIL), 28–29 May 2018

Topic Response Potential Risk Event

1. Implementing Agency

1.1 What is the entity’s legal status/ registration?

Ministry of Agriculture, Irrigation and Livestock (MAIL) is a department of the Islamic Republic of Afghanistan

1.2 How much equity (shareholding) is owned by the Government?

MAIL is a full government entity

1.3 Obtain the list of beneficial owners of major blocks of shares (non-governmental portion), if any.a

Not applicable

1.4 Has the entity implemented an externally-financed project in the past? If yes, please provide details.

Yes. MAIL has been implementing several externally financed projects, of particular note:

1. National Horticulture and Livestock Project funded by the World Bank

2. Enhanced Agricultural Value Chains for Sustainable Livelihood funded by ADB managed Japan Fund for Poverty Reduction

3. Agriculture Market Infrastructure Project funded by ADB

4. Commercial Horticulture and Agricultural marketing Program funded by USAID

1.5 Briefly describe the statutory reporting requirements for the entity.

MAIL prepares on time planning and budgeting documents, procurement and financial plans, financial reports and annual audited financial statements and any other report as required from time to time

1.6 Describe the regulatory or supervisory agency of the entity.

Ministry of Finance (MOF), Supreme Council of Audit (SCA), Office of the President and Parliament provide regulatory oversight.

1.7 What is the governing body for the project? Is the governing body for the project independent?

Project Steering Committee (MAIL) chaired by the Deputy Minister if required

Decisions delayed with difficulty of convening a PSC meeting

1.8 Obtain current organizational structure and describe key

See MAIL Structure Attached. The structure and governance

Since CPMO are not permanent staff of

Appendix 1 17


management personnel. Is the organizational structure and governance appropriate for the needs of the project?

are adequate for the project. A CPMO was established to provide the capacity and flexibility to handle project operations.

MAIL, there is a risk of not being able to sustain operations once the project closes

1.9 Does the entity have a Code of Ethics in place?

Yes

1.10 Describe (if any) any historical issues, reports of ethics violations involving the entity and management. How were they addressed?

Previous officers of the Entity had been suspected of non-ethical actions. They had been terminated and SCA had filed corresponding legal actions.

Officials may be hesitant to make decisions and may delay implementation of remedial actions

2. Funds Flow Arrangements

2.1 Describe the (proposed) project funds flow arrangements in detail, including a funds flow diagram and explanation of the flow of funds from ADB, government and other financiers, to the government, EA, IA, suppliers, contractors, ultimate beneficiaries, etc. as applicable.

ADB Funds are allocated for the Project. These are managed through the ADF and disbursed as request of payments are presented. See Annex (Flow of Funds)

2.2 Are the (proposed) arrangements to transfer the proceeds of the loan (from the government / Finance Ministry) to the entity and to the end-recipients satisfactory?

Yes. Current modalities in place functions adequately for the transfer of funds from the Finance Ministry to the end-recipients.

2.3 Are the disbursement methods appropriate?

Yes. Current disbursement methods and arrangements complies with ADB Project Disbursement Guidelines

2.4 What have been the major problems in the past involving the receipt, accounting and/or administration of funds by the entity?

Prior to the implementation of the AFMIS, there had been rampant corruption.

(Ref. Afghanistan PFM Case Study, 2011)

2.5 In which bank will the Imprest Account (if applicable) be established?

Imprest or Advance Accounts will be established at Da Afghanistan Bank (DAB)

2.6 Is the bank in which the imprest account is established capable of

• Executing foreign and local currency transactions?

Yes

• Issuing and administering letters of credit (LC)?

Yes

• Handling a large volume of transaction?

Yes

• Issuing detailed monthly bank statements promptly?

Yes

18 Appendix 1


2.7 Is the ceiling for disbursements from the imprest account and SOE appropriate/required?

Yes, ceiling for disbursements and SOE is appropriate and should be required.

Low ceilings may cause difficulty for projects to pay beneficiaries on time

2.8 Does the (proposed) project implementing unit (PIU) have experience in the management of disbursements from ADB?

Yes, the CPMO has adequate experience managing disbursements from ADB.

2.9 Does the PIU have adequate administrative and accounting capacity to manage the imprest 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.

Yes, the CPMO adequate capacity (administrative and accounting) to manage the imprest fund and SOE procedures in accordance with ADB’s LDH.

Difficulty in accessing regular budget oftentimes prompts line ministries to tap development budgets to bridge funding gaps. The ceiling often serves as deterrent for such actions.

2.10 Is the entity exposed to foreign exchange risk? If yes, describe the entity’s policy and arrangements for managing foreign exchange risk.

Yes. Because of significant fluctuations of the local currency, projects are encouraged to use US dollar as basis of payments and contracts

Use of local currency result to contractors receiving less than their original quoted price

2.11 How are the counterpart funds accessed?

Counterpart Funds has limited or no monetary component. Usually in the form of use of facilities and local counterpart services.

Monetization of the use of public facilities does not reflect actual cost contribution from the government

2.12 How are payments made from the counterpart funds?

Payments from counterpart funds are processed through payment requests (M16) processed by the Finance Department of implementing agency counterparts.

2.13 If project funds will flow to communities or NGOs, does 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?

Yes. All payments, irrespective of source, are processed through AFMIS. In this regard, Communities and NGOs are treated as contractors or vendors

If communities and/or NGOs do not have accounts, they will not be able to receive payments. Community Councils are required to be registered as a legal entity.

2.14 Are the beneficiaries required to contribute to project costs? If beneficiaries have an option to contribute in kind (in the form of

Yes. The beneficiaries (farmers) for On-Farm Enhancements are required to cover 20% of the cost through either maintenance

Appendix 1 19


labor or material), are proper guidelines and arrangements formulated to record and value the labor or material contributions at appraisal and during implementation?

and/or labor costs recorded and monitored by the PIO staff.

3. Staffing

3.1 What is the current and/or proposed organizational structure of the accounting department? Attach an organization chart.

MAIL Structure attached as Annex 5.

3.2 Will existing staff be assigned to the project, or will new staff be recruited?

The CPMO will designate a Finance Manager and a Finance Assistant for the project. However, new staff will be required to augment the technical unit (i.e. Deputy Project Director, Food Technologist, etc.)

CPMO might be overextended and function inefficiently if recruitment of qualified project personnel are not recruited on time.

3.3 Describe the existing or proposed project accounting staff, including job title, responsibilities, educational background and professional experience. Attach job descriptions and CVs of key existing accounting staff.

The PMO has a Finance Officer that handles accounting of project funds. The Finance Department then handles payments, recording of documents and update of AFMIS.

3.4 Is the project finance and accounting function staffed adequately?

Yes. The finance and accounting function will be taken over by the CPMO.

3.5 Are the project finance and accounting staff adequately qualified and experienced?

MAIL CPMO personnel are adequately qualified and experienced.

3.6 Are the project finance and accounting staff trained in ADB procedures, including the disbursement guidelines (i.e., LDH)?

Yes, MAIL CPMO personnel were trained and are familiar with ADB procedures.

3.7 What is the duration of the contract with the project finance and accounting staff?

MAIL Finance Department personnel are career civil servants. However, CPMO staff are contracted through the project.

3.8 Identify any key positions of project finance and accounting staff not contracted or filled yet, and the estimated date of appointment.

Once the project is operational, a Deputy Project Director and a Finance Officer needs to be appointed.

Delay in the appointment of key staff may delay project implementation

3.9 For new staff, describe the proposed project finance and accounting staff, including job title, responsibilities, educational

Recruitment is handled by the MAIL HR Department. Potential project personnel are evaluated by a Committee designated by

20 Appendix 1


background and professional experience. Attach job descriptions.

MAIL management, some key positions require an ADB officer to participate in the recruitment process.

3.10 Does the project have written position descriptions that clearly define duties, responsibilities, lines of supervision, and limits of authority for all of the officers, managers, and staff?

Yes. Government staff (tashkeel positions) have clearly defined roles within the government structure. TOR for project officers are clearly detailed in their service agreements.

3.11 What is the turnover rate for finance and accounting personnel (including terminations, resignations, transfers, etc.)?

Turnover had been very minimal because of the CBR Program being implemented at MAIL. Though, changes in national leadership had caused adjustments, mostly vertical realignments. Exact figures are not available at this time.

3.12 What is the training policy for finance and accounting staff?

MAIL follows MOF’s policy to strengthen its Human Resource (HR) management and its ability to develop the capacity of its human capital through the maintenance of a professional Human Resource Management Directorate (HRMD). See MOF HRMD Strategic Plan for Reference.

3.13 Describe the list of training programs attended by finance and accounting staff in the last 3 years.

MAIL finance and accounting staff participated in trainings provided by MOF and from time to time, from ADB. As per MOF HRMD 1396 –1397 Strategic Plan.

4. Accounting Policies and Procedures

4.1 Does the entity have an accounting system that allows for the proper recording of project financial transactions, including the allocation of expenditures in accordance with the respective components, disbursement categories, and sources of funds (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?

Yes. MAIL follows the system outlined in the MOF Accounting Manual ver. 1.6 dated 6th March 2012. As this is adapted in its entirety by the government, this will also apply to this project.

4.2 Are controls in place concerning the preparation and approval of transactions, ensuring that all

Yes. AFMIS provides adequate controls in preparation and processing of transactions, including approvals.

Appendix 1 21


transactions are correctly made and adequately explained?

4.3 Is the chart of accounts adequate to properly account for and report on project activities and disbursement categories? Obtain a copy of the chart of accounts.

Yes. A copy of the Chart of Accounts is available at MOF Website www.treasury.gov.af/en

4.4 Are cost allocations to the various funding sources made accurately and in accordance with established agreements?

Yes. Though there had been instances of wrong entry, these were amended accordingly.

4.5 Are the General Ledger and subsidiary ledgers reconciled monthly? Are actions taken to resolve reconciliation differences?

Yes. The Ministry of Finance through the Treasury Department regularly reconciles GLs and subsidiary ledgers.

4.6 Describe the EA’s policy for retention of accounting records including supporting documents (e.g. ADB’s 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?

CPMO retains records for at least two years from project closing date, whereas the Finance Department of the Line Ministry maintain their records for up to seven years after the loan closing date. AFMIS System retains all records of all transactions.

4.7 Describe any previous audit findings that have not been addressed.

Segregation of Duties

4.8 Are the following functional responsibilities performed by different units or persons:

Yes.

(i) authorization to execute a transaction;

Authorized Officer as per approved limits

(ii) recording of the transaction; PMO Finance Officer

(iii) custody of assets involved in the transaction;

Custodian

(iv) reconciliation of bank accounts and subsidiary ledgers?

Finance Department

4.9 Are the functions of ordering, receiving, accounting for, and paying for goods and services appropriately segregated?

Yes, all functions stated are segregated accordingly.

22 Appendix 1


Budgeting System

4.10 Do budgets include physical and financial targets?

Yes

4.11 Are budgets prepared for all significant activities in sufficient detail to allow meaningful monitoring of subsequent performance?

Yes. This is done accordingly.

4.12 Are actual expenditures compared to the budget with reasonable frequency? Are explanations required for significant variations against the budget?

Yes. This is done through AFMIS.

4.13 Are approvals for variations from the budget required (i) in advance, or (ii) after the fact?

Approval for variations is required in advance.

4.14 Is there a ceiling, up to which variations from the budget may be incurred without obtaining prior approval?

A fluctuation of about 1.0% is workable within the system, however all variations beyond this limit requires prior approval.

4.15 Who is responsible for preparation, approval and oversight/monitoring of budgets?

Budget Department under the Office of Deputy Minister of Finance and Administration

4.16 Describe the budget process. Are procedures in place to plan project activities, collect information from the units in charge of the different components, and prepare the budgets?

The World Bank’s Report on Afghanistan – Public Financial Management and Accountability Assessment provides a detailed analysis of the budget process.

4.17 Are the project plans and budgets of project activities realistic, based on valid assumptions, and developed by knowledgeable individuals?

See above.

Is there evidence of significant mid-year revisions, inadequate fund releases against allocations, or inability of the EA to absorb/spend released funds?

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 purchase

(i) Yes

Appendix 1 23


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 accuracy of calculations? (v) Checking authenticity of invoices and supporting documents?

(ii) Yes

(iii) Yes

(iv) Yes

(v) Yes

4.19 Are all invoices stamped PAID, dated, reviewed and approved, recorded/entered into the system correctly, and clearly marked for account code assignment?

Yes

4.20 Do controls exist for the preparation of the payroll? Are changes (additions/ deductions/ modifications) to the payroll properly authorized?

Yes

Policies and Procedures

4.21 What is the basis of accounting (e.g., cash, accrual) followed (i) by the entity? (ii) By the project?

(i) Cash

(ii) Cash

4.22 What accounting standards are followed (International Financial Reporting Standards, International Public-Sector Accounting Standards – cash or accrual, or National Accounting Standards (specify) or other?

Cash Basis of Accounting following a National Accounting Standards (Afghanistan)

4.23 Does the project have adequate policies and procedures manual(s) to guide activities and ensure staff accountability?

Yes, the project will adopt policies and procedures from ADB funded projects under implementation

4.24 Is the accounting policy and procedure manual updated regularly and for the project activities?

Yes. The manual is updated regularly

4.25 Do procedures exist to ensure that only authorized persons can alter or establish a new accounting policy or procedure to be used by the entity?

Yes

4.26 Are there written policies and procedures covering all routine financial management and related administrative activities?

Yes

24 Appendix 1


4.27 Do policies and procedures clearly define conflict of interest and related party transactions (real and apparent) and provide safeguards to protect the organization from them?

Yes, but there is no explicit policy in place

4.28 Are manuals distributed to appropriate personnel?

Yes

4.29 Describe how compliance with policies and procedures are verified and monitored.

An Internal Audit Department reporting directly to the Minister holds regular audit of policies and procedures

Cash and Bank

4.30 Indicate names and positions of authorized signatories for bank accounts. Include those persons who have custody over bank passwords, USB keys, or equivalent for online transactions.

Only MOF can hold an account at Da Afghanistan Bank for First Generation Imprest Accounts. MOF designated officials have authorization to sign payments according to pre-approved thresholds

4.31 Does the organization maintain an adequate and up-to-date cashbook recording receipts and payments?

Yes

4.32 Describe the collection process and cash handling procedures. Do controls exist for the collection, timely deposit and recording of receipts at each collection location?

Payment requests are received at the Reception Desk where it is properly received and recorded. The SDU (Special Disbursement Unit) then reviews and process the payments. Controls are in place to monitor payments

4.33 Are bank accounts reconciled on a monthly basis? Or more often?

Is cash on hand physically verified, and reconciled with the cashbooks? With what frequency is this done?

Yes, on a monthly basis.

Yes, cash on hand are physically verified. Though not done monthly, impromptu checks are done regularly

4.34 Are all reconciling items approved and recorded?

Yes

4.35 Are all unusual items on the bank reconciliation reviewed and approved by a responsible official?

Yes

4.36 Are there any persistent/non-moving reconciling items?

Sometimes, i.e. liquidation of advances from the field are oftentimes delayed because of inaccessibility of remote regional units

4.37 Are there appropriate controls in safekeeping of unused cheques, USB keys and passwords, official receipts and invoices?

Yes, but since all cheques are with Da Afghanistan Bank, it is rarely required

Appendix 1 25


4.38 Are any large cash balances maintained at the head office or field offices? If so, for what purpose?

No

4.39 For online transactions, how many persons possess USB keys (or equivalent), and passwords? Describe the security rules on password and access controls.

This is only done at Da Afghanistan Bank and not at the Ministry of Finance.

Safeguard over Assets

4.40 What policies and procedures are in place to adequately safeguard or protect assets from fraud, waste and abuse?

An Asset Registry is in place to monitor and safeguard assets

4.41 Does the entity maintain a Fixed Assets Register? Is the register updated monthly? Does the register record ownership of assets, any assets under lien or encumbered, or have been pledged?

Yes, it is updated regularly. The registry includes information on ownership, encumbrances, etc.

4.42 Are subsidiary records of fixed assets, inventories and stocks kept up to date and reconciled with control accounts?

Yes

4.43 Are there periodic physical inventories of fixed assets, inventories and stocks? Are fixed assets, inventories and stocks appropriately labeled?

Yes. Inventories and Socks are appropriately labeled.

4.44 Are the physical inventory of fixed assets and stocks reconciled with the respective fixed assets and stock registers, and discrepancies analyzed and resolved?

Yes

4.45 Describe the policies and procedures in disposal of assets. Is the disposal of each asset appropriately approved and recorded? Are steps immediately taken to locate lost, or repair broken assets?

Policies for asset disposal is not entirely in place. Still require update.

4.46 Are assets sufficiently covered by insurance policies?

No

4.47 Describe the policies and procedures in identifying and maintaining fully depreciated assets from active assets.

Policies for asset depreciation is not entirely in effect. Still require update.

Other Offices and Implementing Entities

26 Appendix 1


4.48 Describe any other regional offices or executing entities participating in implementation.

MAIL will be the Implementing Agencies and would be supported by the CPMO and PIUs at the DAILs.

4.49 Describe the staff, their roles and responsibilities in performing accounting and financial management functions of such offices as they relate to the project.

DAILs will be involved in planning and budgeting of provincial proposed projects, executing payments of salaries, per diem, fuel at site (Limit - AFN 500,000 as per procurement law).

4.50 Has the project established segregation of duties, controls and procedures for flow of funds and financial information, accountability, and reporting and audits in relation to the other offices or entities?

Yes. But this would have to be developed further as the project progresses.

4.51 Does information among the different offices/implementing agencies flow in an accurate and timely fashion? In particular, do the offices other than the head office use the same accounting and reporting system?

Yes. All payments are processed through the CPMO of the Line Ministry and then to the Ministry of Finance. Close monitoring of Imprest Account balances has to be done to prevent incorrect entries

4.52 Are periodic reconciliations performed among the different offices/implementing agencies? Describe the project reporting and auditing arrangements between these offices and the main executing/implementing agencies.

Yes. There would be internal audits of project accounts. But, annual external audits are also conducted with the same audit firm conducting audits for all components regardless of implementing agency

4.53 If any sub-accounts (under the Imprest Account) will be maintained, describe the results of the assessment of the financial management capacity of the administrator of such sub-accounts.

Not Applicable. MOF has limited the use of secondary imprest accounts and generally encourage projects to utilize mustofiats or on-line payment system

Contract Management and Accounting

4.54 Does the agency maintain contract-wise accounting records to indicate gross value of contract, and any amendments, variations and escalations, payments made, and undisbursed balances? Are the records consistent with physical outputs/ deliverables of the contract?

Yes, this is done with the assistance of the Contracts Management Unit under the Procurement Department of the Line Ministry. Yes, records are consistent with physical outputs

4.55 If contract records are maintained, does the agency reconcile them regularly with the contractor?

Yes, this is done through Supervision Consultants (3rd party)

Other

Appendix 1 27


4.56 Describe project arrangements for reporting fraud, corruption, waste and misuse of project resources. Has the project advised employees, beneficiaries and other recipients to whom to report if they suspect fraud, waste or misuse of project resources or property?

Fraud, corruption, waste and misuse of project resources may be reported to the Anti-Corruption Commission under the Office of the President

5. Internal Audit

5.1 Is there an internal audit department (IAD) in the entity?

Yes

5.2 What are the qualifications and experience of the IA staff?

The Staff had been adequately trained under a World Bank funded project. Auditors had undergone ample trainings, both on the job and in classrooms.

5.3 To whom does the head of the internal audit report?

IAD reports to the office of the minister

5.4 Will the internal audit department include the project in its annual work program?

Yes

5.5 Are actions taken on the internal audit findings?

Yes

5.6 What is the scope of the internal audit program? How was it developed?

The IAD conducts Process and Finance Audits. They were developed with the assistance of a World Bank funded project that assisted in the development of an Audit Manual.

5.7 Is the IA department independent? Yes

5.8 Do they perform pre-audit of transactions?

Not yet

5.9 Who approves the internal audit program?

The IA Unit of MAIL abides by the National Audit Guidelines

5.10 What standards guide the internal audit program?

See Annex 2.

5.11 How are audit deficiencies tracked? See Annex 2.

5.12 How long have the internal audit staff members been with the organization?

See Annex 2.

5.13 Does any of the internal audit staff have an IT background?

See Annex 2.

5.14 How frequently does the internal auditor meet with the audit committee without the presence of management?

IAD is relatively new and still building capacity

5.15 Has the internal auditor identified / reported any issue with reference

IAD is relatively new and still building capacity

28 Appendix 1


to availability and completeness of records?

5.16 Does the internal auditor have sufficient knowledge and understanding of ADB’s guidelines and procedures, including the disbursement guidelines and procedures (i.e., LDH)?

No yet, IAD is relatively new and still building capacity

6. External Audit – entity level

6.1 Is the entity financial statement audited regularly by an independent auditor? Who is the auditor?

Yes. The Auditor General from the Supreme Audit Office and the Council of Ministers conducts the Audit

6.2 Are there any delays in audit of the entity? When are the audit reports issued?

None, Audit is done within the first quarter of the next fiscal period

6.3 Is the audit of the entity conducted in accordance with the International Standards on Auditing, or the International Standards for Supreme Audit Institutions, or national auditing standards?

No, but the process is on the way to make the process compliant to International Standards on Auditing

6.4 Were there any major accountability issues noted in the audit report for the past three years?

Yes, “Control and Monitoring Risks” was highlighted in the “Summary of Result of Compliance Audit for ARTF IP Benchmark 1393 Report”

6.5 Does the external auditor meet with the audit committee without the presence of management?

Yes

6.6 Has the entity engaged the external audit firm for any non-audit engagements (e.g., consulting)? If yes, what is the total value of non-audit engagements, relative to the value of audit services?

No

6.7 Has the external auditor expressed any issues on the availability of complete records and supporting documents?

No

6.8 Does the external auditor have sufficient knowledge and understanding of ADB’s guidelines and procedures, including the disbursement guidelines and procedures (i.e., LDH)?

Yes

6.9 Are there any material issues noted during the review of the audited entity financial statements that were not reported in the external audit report?

None

Appendix 1 29


External Audit – Project Level

6.10 Will the entity auditor audit the project accounts, or will another auditor be appointed to audit the project financial statements?

Project accounts and project financial statements are audited by a separate audit firm

6.11 Are there any recommendations made by the auditors in prior project audit reports or management letters that have not yet been implemented?

Prior audit recommendations were reviewed and implemented accordingly

6.12 Is the project subject to any kind of audit from an independent governmental entity (e.g. the supreme audit institution) in addition to the external audit?

Yes, the Supreme Audit Office also conduct audits of projects accounts as mandated by law

6.13 Has the project prepared acceptable terms of reference for an annual project audit? Have these been agreed and discussed with the EA and the auditor?

Yes. The CPMO had previously done an Annual Project Audit TOR

6.14 Has the project auditor identified any issues with the availability and completeness of records and supporting documents?

No

6.15 Does the external auditor have sufficient knowledge and understanding of ADB’s guidelines and procedures, including the disbursement guidelines and procedures (i.e., LDH)?

Yes

6.16 Are there any recommendations made by the auditors in prior audit reports or management letters that have not yet been implemented?

No

[For second or subsequent projects]

6.17 Were past audit reports complete, and did they fully address the obligations under the loan agreements? Were there any material issues noted during the review of the audited project financial statements and related audit report that have remained unaddressed?

Not Applicable

6. Reporting and Monitoring

7.1 Are financial statements and reports prepared for the entity?

Yes

30 Appendix 1


7.2 Are financial statements and reports prepared for the implementing unit(s)?

Yes

7.3 What is the frequency of preparation of financial statements and reports? Are the reports prepared in a timely fashion so as to be useful to management for decision making?

As necessitated by agreements and covenants (i.e. monthly, quarterly, annually)

7.4 Does the entity reporting system need to be adapted for project reporting?

Yes, as this is required by Law, however the project may maintain a simple system for record and reporting

7.5 Has the project established financial management reporting responsibilities that specify the types of reports to be prepared, the report content, and purpose of the reports?

The Project may adapt similar arrangements as other ADB funded projects under implementation

7.6 Are financial management reports used by management?

Yes, primarily for budget purposes

7.7 Do the financial reports compare actual expenditures with budgeted and programmed allocations?

Yes

7.8 How are financial reports prepared? Are financial reports prepared directly by the automated accounting system or are they prepared by spreadsheets or some other means?

CPMO prepares FS Reports from local record. The Executing Agency prepares expenditure reports from the AFMIS system

7.9 Does the financial system have the capacity to link the financial information with the project's physical progress? If separate systems are used to gather and compile physical data, what controls are in place to reduce the risk that the physical data may not synchronize with the financial data?

Yes. However, roll out to line ministries had not been completed and the CPMO relies on manual update of physical progress monitoring.

7.10 Does the entity have experience in implementing projects of any other donors, co-financiers, or development partners?

Yes

8. Information Systems

8.1 Is the financial accounting and reporting system computerized?

Yes

8.2 If computerized, is the software off-the-shelf, or customized?

It is a customized software.

Appendix 1 31


8.3 Is the computerized software standalone, or integrated and used by all departments in the headquarters and field units using modules?

It is integrated for use by MOF and at the Finance Department of the Implementing Agencies

8.4 How are the project financial data integrated with the entity financial data? Is it done through a module in the enterprise financial system with automatic data transfer, or does it entail manual entry?

There is only one main database and project data is imbedded in this system and accessed through callouts

8.5 Is the computerized software used for directly generating periodic financial statements, or does it require manual intervention and use of Excel or similar spreadsheet software?

The system generates standard FS report for the EA, but Specific Project Reports needs manual intervention with spreadsheet programs

8.6 Can the system automatically produce the necessary project financial reports?

Yes

8.7 Is the staff adequately trained to maintain the computerized system?

Yes, the system is adequately staffed with trained personnel

8.8 Do the management, organization and processes and systems safeguard the confidentiality, integrity and availability of the data?

Yes

8.9 Are there back-up procedures in place?

Yes

8.10 Describe the backup procedures – online storage, offsite storage, offshore storage, fire, earthquake and calamity protection for backups.

The AFMIS System follows stringent back-up systems maintained by the Special Disbursement Unit (SDU)

a In such cases, consult OAI on the need for integrity due diligence on nongovernment beneficial owners.

32 Appendix 2

Appendix 2: Supplementary FMA Questionnaire for FAAD

MAIL – Finance and Accounting Directorate (FAAD)

Topic Response Potential Risk

Event 1. Implementation Unit

1.1 Has the entity implemented an externally financed project in the past? If yes, please provide details.

MAIL/FAAD is involved in the financial aspects of implementation of various externally financed projects, both discretionary and non-discretionary core budget of Afghanistan (i.e. On-farm (OFWMP) funded by WB (non-discretionary), NVDA funded by ADB (non-discretionary), Border Project funded by India (non-discretionary). This includes execution of allotments and payments of contractors, salaries, operating cost, travel, training, etc.

1.2 Obtain current organizational structure and describe key management personnel. Is the organizational structure and governance appropriate for the needs of the project?

See NRMGD, MAIL questionnaire

2 Fund Flow Arrangements


• Delays in implementation and disbursements (i.e. Payment was rejected 3-4 times and then sent to the governor for approval. Total Budget was USD 1.8 million for FY1394 but no expense was incurred because of such delays)

• No Expenditure on record because of delays from procurement

• Lengthy payment processes – payments takes at least 20 days to process

• The Project Finance Units provide wrong/incomplete documentation.

• Recording is done manually in an electronic spreadsheet, which is oftentimes problematic and time consuming.

• Checks are not completed in one process. Once an error is identified, checks are put on hold until next submission. As such, a payment can be rejected 3-4 times. The mistakes are common on special account, fund code, vendor, supporting docs, etc.

Note: It depends to internal coordination and capacity. If filled and submitted correctly then no problem is created.

Appendix 2 33


Event 2.2 If project funds will flow to

communities or NGOs, does 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?

See NRBGD, MAIL questionnaire

3 Staffing


See Attached Org Chart for MAIL FAAD.


Yes. The existing staff will be assigned for the project.


Talk with FAAD director.

3.4 Is the project finance and accounting function staffed adequately?

Yes. Based on public accounting standards all are adequately staffed.


Qualifications and Experiences of staffs are adequate. Each staff has at least 10 years of experience in their field


The staff has not received ADB Finance and Accounting training of ADB procedures. However, some PMO staff had received preliminary training.


Project Finance Officer assigned to the FAAD. This should be hired once the PMO is established.


All staff has TORs that defines their responsibilities, lines of supervision and limits of authority for the manager, officers and other staff.


Turnover rate is minimal. During the last 6 years only 1 post has been transferred from this department to other FAAD department.

3.10 What is training policy for the finance and accounting staff?

FAAD has no written policy for training.

3.11 Describe the list of training programs attended by finance

• Financial Management – in Thailand for 10 days – 1 person from NRM-FAAD

34 Appendix 2


Event and accounting staff in the last 3 years.

• Financial Management and Computer by Institutional Reform Commission – 1 person from NRM-FAAD

4 Accounting Policies and Procedures


The M20 (General Ledger) is reconciled on a monthly basis. Variances are immediately remediated once identified.




(i) Award authority according to the ceiling: FAAD director up to AFN 100,000, Deputy Ministers up to AFN 30 million and then minister. No other director has authority.

(ii) recording of the transaction; (ii) AFMIS unit has the responsibility of recording

(iii) custody of assets involved in the transaction;

(iii) Inventory Unit of Procurement Directorate


(iv) Reporting Department of FAAD

Budgeting System


Yes


Yes


1. Technical directorates prepare budgets while the Budget Department-FAAD gives advice and consolidates

2. Internal Budget Committee (IBC) reviews and Award Authority approves according to their ceiling

3. Reporting Department-FAAD monitors the implementation of budgets

Payments 4.6 Do controls exist for the

preparation of the payroll? Are changes (additions/ deductions/ modifications) to the payroll properly authorized?

Yes. Controls are in place for the preparation of the payroll. Payroll changes (modification, adjustments, deductions) are verified by relevant the Program Department-FAAD manager and before approval of the FAAD director. The Deputy Minister authorizes the payment. This is checked by a controller prior to submission to MOF for processing


4.7 Does the project have adequate policies and procedures

See NRBGD, MAIL questionnaire

Appendix 2 35


Event manual(s) to guide activities and ensure staff accountability?


Yes. Fixed Assets are labeled accordingly.


Yes.



No

Other Offices and Implementing Entities 4.12 Describe any other regional

offices or executing entities participating in implementation.

DAILs and Agriculture District Officers (ADOs) participate in implementation of projects. They also provide technical support in monitoring and supervision.

5 Internal Audit

5.1 Is there an internal audit (IA) department in the entity?

Yes. MAIL has an Internal Audit Department.


IA Team members are trained to audit and review operating budget. The IA team has limited experience auditing development budget

6 External Audit – Entity Level


MAIL is audited annually by external auditors such as Supreme Audit Office, General Attorney, and the High Council of Anti-Corruption

7 External Audit – Project Level


Audit of Project Financial Audits are conducted by a separate team of independent auditors.

36 Appendix 3

Appendix 3: Supplementary FM Questionnaire for CPMO

MAIL Central Project Management Office (CPMO)


Event 1. Implementation Unit

1.1 Has the entity implemented an externally financed project in the past? If yes, please provide details.

The CPMO is a consolidated body established from PMOs from different projects implemented by MAIL. They have been involved in implementation of many externally financed projects such as the Multi-Tranche Financing Facility - Water Resources Development Investment Project (WRDIP), the

1.2 Obtain current organizational structure and describe key management personnel. Is the organizational structure and governance appropriate for the needs of the project?

A Project Manager heads the CPMO. Technical staff comprise implementation units under the CPMO umbrella with procurement and finance functions integrated within the Finance and Admin Directorate of MAIL. Qualified personnel have the technical capabilities and skills to execute procurement and financial management tasks.

2 Fund Flow Arrangements


Refer to FMQ for MAIL-FAAD

2.2 If project funds will flow to communities or NGOs, does 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?

MAIL has an M&E Directorate responsible for all on-going projects. The unit will work closely with CPMO/ PIUs to closely monitor project proceeds.

3 Staffing




The CPMO will be comprised of existing staff, whilst the PIU will be established and new staff will be recruited.



Appendix 3 37


Event 3.4 Is the project finance and

accounting function staffed adequately?



Refer to FMQ for MAIL-FAAD.


Refer to FMQ for MAIL-FAAD. CPMO finance and accounting staff has implemented several ADB funded project and most senior staff has previously participated in ADB workshops and trainings.


Refer to FMQ for MAIL-FAAD.


All CPMO and PIU positions have a TOR. There is no conflict or misunderstanding in between staff in regard to jobs and duties.


Though CPMO and PIU staff work on a contractual basis, turnover of project staff had been minimal during the project life. Vertical re-alignments of Civil Servants had been significantly reduced with the implementation of CBR rates.

3.10 What is training policy for the finance and accounting staff?

CPMO has no formal policy for training. Training is provided to nominated candidates when opportunity for training is made available. Projects implemented by the CPMO oftentimes provide trainings for MAIL/ DAIL Civil Servants.

3.11 Describe the list of training programs attended by finance and accounting staff in the last 3 years.

• Capacity Building Programs had been running within the ministry for several years. However, detailed list of trainings was not available.

4 Accounting Policies and Procedures


The FAAD handles all accounting and financial activities of the project. Refer to FMQ for MAIL-FAAD



The FAAD handles all accounting and financial activities of the project.



(ii) recording of the transaction;

38 Appendix 3


Event (iii) custody of assets involved in the

transaction;


Budgeting System


Yes.


Yes.


1. Technical departments plan their activities and prepare their annual corresponding budget. MAIL Planning and Budgeting Department consolidates and forward to respective directorates.

2. Each director and head of department monitors the budget.

Payments

4.6 Do controls exist for the preparation of the payroll? Are changes (additions/ deductions/ modifications) to the payroll properly authorized?

Yes.


4.7 Does the project have adequate policies and procedures manual(s) to guide activities and ensure staff accountability?

Yes.


Yes.


Yes.




No

Other Offices and Implementing Entities

Appendix 3 39


Event 4.12 Describe any other regional offices

or executing entities participating in implementation.

PIUs will be established at DAIL Regional Offices and will be the actual implementation units. CPMO only prepares policies, regulations and proposals, as well as provides technical assistance and feedback. DAILs select the location, implement the project and does the daily supervising and monitoring while CPMO reviews the reports, conducts periodic monitoring and performs final evaluations.

5 Internal Audit

5.1 Is there an internal audit (IA) department in the entity?

Yes. MAIL has an Internal Audit Department.



6 External Audit – Entity Level



7 External Audit – Project Level


No. The Project Financial Statements will be reviewed, and Audited by an Independent Auditor hired by the project.