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ISLAMABAD: The Asian Development Bank (ADB) has cautioned the government that if Audited Project Financial Statements (APFS) in default for one year from the due date, it may lead to suspension of the loan, well informed sources told Business Recorder.

A Financial Management (FM) country consultation Mission from the Asian Development Bank (ADB) was held from 27th October to 8th November, 2023. The objectives of the Mission were to discuss: (i) the importance of timely submission of Audited Project Financial Statements (APFS), Audited Entity Financial Statements (AEFS), Financial Covenants (FC) compliance reports and consequences for FM non-compliance; (ii) ADB’s project auditing requirements, issuance of auditor’s report in compliance with the International Standards of Supreme Audit Institutions (ISSAIs), Management Letters’ (ML) observations and the practice of issuing of nil expenditure letters for projects; and (iii) status update on the Financial Management Action Plan (FMAP) for projects under implementation.

The Mission comprised of Musaddiq I Shaikh, Financial Management Officer, PFFM/Mission Leader and following members: Mary Margareth Bernus, Financial Management Officer, PFFM: Muhammad Ali Sheikh, Financial Management Consultant, PRM and Huma Sheikh, Senior Project Assistant, PRM.

ADB delegation meets LDA DG

The Mission met the officials of Economic Affairs Division (EAD), Auditor General of Pakistan (AGP), selected executing and implementing agencies (EA/IAs), and World Bank (WB), Islamic Development Bank (IsDB). The Mission held wrap-up meetings with EAD and AGP. The following aide memoire (AM) summarises the key findings and understandings reached during the Mission.

Pakistan is significant ADB development partner and the largest borrower in Central and West Asia region, with an active portfolio of over $ 9 billion. The Country Partnership Strategy of Pakistan ( 2021-2025) indicates areas for further development of FM and governance, including improving: (i) the performance in governance and tax administration;(ii) policy and regulatory systems and public FM through institutional reforms;(iii) capacity building of government agencies to increase their understanding of FM to help expedite the implementation of projects; (iv) policy-related assistance for FM reforms and sector-specific institution-building; and (v) capacity building programs to professionalize project auditing and accounting in project management offices and EA/IAs.

The ADB argued that timely compliance with various FM requirements, such as submission of APFS, AEFS and auditors’ opinions on compliance with FCs are essential to strengthen the governance of executing agencies and projects. A dedicated FM Mission was fielded to Pakistan to review projects which are reporting delayed compliance and / noncompliance.

The EAD was briefed on the Mission objectives, which included outlining the consequences of delayed submissions of APFS, AEFS, and FC compliance. The EAD was also updated specifically on: (i) pending approval of business plan for National Highway Authority (NHA); (ii) challenges of National Transmission and Dispatch Company Limited (NTDC) in recruiting the independent auditor to provide assurance by 30 June 2O24, on FCs compliance for the outstanding years 2017-2022; and (iii) issues causing delays in submitting the outstanding AEFS, that are related to the suspension of the boards of directors following a change in government in April 2022, and activities requiring endorsement by the boards that could not be performed in the Khyber Pakhtunkhwa Urban Mobility Authority (KPUMA) Water Sanitation and Service Companies (WSSC5) in Peshawar, Mardan and Mingora-Swat.

The Mission also requested EAD’s support in convening the Departmental Accounts Committee (DAC) and the Public Accounts Committee (PAC) meetings to discuss and finalize the MLs for many projects. To facilitate the resolution of key critical issues, the next steps time-bound action plan was discussed and agreed upon with EAD.

According to ADB, lf APFS is delayed by more than six months after the due date stipulated in the legal agreement(s), ADB will withhold, with immediate effect: (i) advances and replenishments to the advance fund, the processing of new reimbursement claims, and issuance of new commitment letters to the agency in default; and (ii) approval of new contract awards for the agency in default. Continued non-submission for 12 months after the due date may lead to suspension of the loan for the agency in default.

Discussions and agreed next step time-bound actions with AGP covered ADB’s project auditing requirements, procedures for auditing Project Financial Statements (PFS), compliance with the ISSAIs, resolution of MLs’ observations, and the certification of nil expenditures/no disbursements by AGP for projects.

ln meetings with EA/IAs, the Mission discussed the project-specific challenges and observations on FM noncompliance. The Mission explained the ADB’s FM-project performance rating methodology and its influence on the FM risk rating and overall Project Performance Rating (PPR). The discussions also covered the consequences of delayed submission of APFS, AEFS, and FCs’ compliance.

To enhance the quality of the PFS, the Mission clarified to EA/IAs that PFS should include all sources of funds, such as ADB financing, government counterpart funds, and ADB-administered co-financing, as applicable. PFS should include (i) cumulative amounts for all project funds in local currency and its USD equivalents, from effectiveness, including retroactive financing, if so provided, in legal documents, (ii) reconciliation with ADB’s Loan Financial Information Systems (LFIs), and (iii) reconciliation of government counterpart financing. All EAJ/ IAs have agreed to present such additional information requirements in the subsequent years’ PFSs.

The resolution of MLs observations was discussed with EA/IAs, especially with NHA, Pakhtunkhwa Highway Authority, TransPeshawar, Jamshoro Power Company Limited and the Project Management Unit (PMU) for the Khyber Pakhtunkhwa Cities Improvement Project. EA, /IAs and PMU clarified that observations mentioned in the MLs are not considered confirmed until reviewed by the DAC and subsequently by the PAC. EA/ IAs and PMU management agreed to immediately formally request their respective authorities and AGP to expedite the convening of DAC and PAC meetings.

The Mission also explained to EA/ IAs that the quarterly and semiannual project progress reports must provide periodic financial information on the use of all project funds, compliance with agreed actions such as FMAP, as provided in project administration manuals, and cost estimates variances monitoring for over/under runs.

The Economic Affairs Division (EAD), has however, agreed to immediately follow up with the relevant federal and provincial ministries to expedite the submission of outstanding audit and Financial Covenants (FCs) compliance reports. EAD also agreed to following up the Ministry of Communications, to expedite the approval of NHA’s Business Plan and update ADB by March 31, 2024.

EAD will request the Ministry of Power to direct immediately NTDC’s Board to hire an auditor to provide an opinion on level of FCs compliance for FYs 2017 to 2022. The opinion needs to be provided to ADB by June 30, 2024.

EAD agreed to immediately follow up with KPUMA to support the extension of AEFS submission of WSSCs in Peshawar, Mardan, Mingora-Swat.

The component managed by the BISP for the project was completed in 2021. The BISP and AGP reconfirmed no disbursements in FY 2022 and informed that the FY 2021 APFS was “final” for the project, the BISP did not notify that FY 2021 is final APFS. The Mission will perform internal due diligence.

Copyright Business Recorder, 2024

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