Financial Management

1. Overview - FM System and Manual
The Financial Management system for the project is based on the existing RGC Financial Management Manual for Externally Financed Projects and associated documents. The manual was developed in full consultation with donors and there is agreement that the manual will be subject to regular review including a scheduled review in 2008. To meet the specific requirements of the project, either this FM will be customized to
fit with the specific need of the project, or a project specific addendum prepared.

The manual will also be supplemented by additional measures aimed to mitigate specific risks (e.g. procedures to clearly define conflict of interest and related party transactions and provide safeguards to protect the ministry from them). Further details of the specific requirements of the project which will be taken into account in this exercise is given below.

The project will use a common format for all donors for the quarterly report on the physical and financial progress (as set out in Appendix 6). It will have one common set of terms of reference for financial and technical audits. At the end of each fiscal year, each donor will get the same set of audit reports and accompanying management letter.

2. Responsible Agency
The Department of Accounts and Finance (DAF) will be responsible for all FM activities of the project within MPWT. The suggested structure would have amongst other positions: one Chief of Finance, three accountants to handle each source of funds (IDA, ADB, AusAID and Counterpart); and one cashier.

Segregation of Duties. The ToR for the staff assigned to the project will have a clear set of job descriptions and responsibilities outlined amongst the team to run the financial management functions of the project (to ensure that no single person can initiate, verify and authorize payments for a transaction) will be subject to review by donors. Details of the arrangements agreed within MPWT and the TOR for the staff
should be provided in FMM.

The RAMP will support DAF staff through an FM Advisor to be hired for the project whose functions will include training, mentoring and oversight of work undertaken. The FM Advisor shall review the financial management work of the staff and provide guidance to ensure that it is of appropriate standard and quality. At a preliminary stage, the FM Advisor will carry out a financial management training needs assessment, define appropriate levels of training and undertake requisite skills transfer to such staff.

3. Accounting Policies
Cash based (opposed to accrual based) accounting policies will be used for the project, as set out in overall government financial management policies, including the RGC’s Standard Operating Procedures and the FMM.

4. Accounting Software
The DAF does not have a computerized accounting system. Peach Tree software will be installed for use in this project using a chart of accounts developed specifically for the project. This will allow for proper recording of financial transactions, allocation of expenditures in accordance with the respective components and disbursement categories. The timeline for installation of the software and training to staff will be included in the DAF strengthening plan mentioned above. Details of the chart of accounts and the timelines are to be referred to in FMM.

The Government Financial Information System (GFIS) is expected to be implemented in 2009 onwards. Through GFIS government will computerize the entire government wide accounting system. If the horizontal roll out of the preferred system takes place in the next three to four years, MEF may make available through the GFIS accounting software which could cater for the needs of the project. When this happens, the project will migrate from Peach Tree to the GFIS.

If during the life of the project, MEF goes ahead with proposals to merge the current and recurrent budgets, the projects will have to be integrated in its chart of accounts.

5. Budgeting
The development of the Annual Work Plan for use in the project will be coordinated with the annual budget cycle of the RGC. Routine maintenance activities will be funded entirely through the RGC recurrent budget. Although budgets currently prepared in MPWT do not lay down physical and financial targets, they are prepared for all significant activities in sufficient detail to provide a meaningful tool with which to monitor subsequent performance. Expenditures on each cost category will be linked to major milestones achieved in physical implementation to evidence progress during quarterly production of Financial Monitoring Reports (FMRs). (For example, quarterly expenditures reported upon during a quarter will have to be linked to amount of kilometers of road maintained during the quarter and assessed as reasonable.) Actual expenditures are normally compared to the budget every month, quarter and year and explanations obtained for significant variations from budget. Approvals for variations from budget are obtained in advance. The RGC contributions will follow a sliding incremental scale to correspond with the expenditures for routine and periodic maintenance and spot rehabilitation agreed during project preparation of $30 million in year one to $40 million in year 5.

Government Counterpart Funds – Project Bank Account. The overall budget for counterpart funds will be approved by the GDAP of the MPWT before submission to the MEF. The NT will make available counterpart funds approved and included in the national budget. Such RGC counterpart funds, will be deposited into a project bank account managed by DAF and will be utilized to fund the RGC portion of eligible expenditures. Releases of counterparts funds have been accelerated owing to constant review by MEF and subsequent issuance of two Prakas and one Ministerial Circular/Instruction/Regulation on 30 December 2005 and 5 January 2006, simplifying the process of government counterpart funds release and shortening time spent for a replenishment cycle to less than 22 working days by enforcing service standards in its concerned departments.

6. Payments
The RGC procedures for processing of invoices will be used for the project. Payments in cash will be minimized with most of the payments made by direct payment or by check.

Soft Expenditures. All previous Ministerial decisions and SOP guidance on soft expenditures (fuel, per diems, accommodation, travel, training, workshops, stationary and maintenance) will be consolidated into the FMM. The guidance shall include articulation of payment and accountability principles to be followed on accommodations, per diem, maintenance and stationery costs. It will also include good practices the ministry is already undertaking in:
(a) Fuel: Aside from loading monthly vehicle fuel allocations on a vehicle fuel card that is presented when drawing fuel at any filling station, fuel usage will also be documented in a Log Book of each vehicle and be subject to regular review;
(b) Travel Expenses / Training / Workshops: DAF has introduced minimum requirements in respect of supporting documentation for travel expenses (typically as part of an acquittal of advances). For example, in addition to receipts for items such as transport and per diems, such expenditures will need to be supported by evidence of time spent in the field (including where appropriate sign off from field offices through governor seal). These specific requirements are to be discussed and modified as required once the FM Advisor has been mobilized; and
(c) Travel Allowances: Training and workshop costs will only be within the country and there will be limited overseas training or study tour financed under the Project. The project will adopt MEF Decision Letter No 2000 of April 23, 2007 for Daily Subsistence (DSA) rates for in country travel.

Advance Payments and Retention. DAF will maintain a register of advances (typically made in respect of travel) and retention monies which will be reviewed on a regular basis by management. A summary of the register will be included in the annual financial statements and be subject to audit as part of the financial statements audit. Similarly, DAF will maintain a register of retention monies. Acquittal of previous advances will be a condition before further advances can be made to the same individual/ organization. This is to be monitored in the GGF.

Contract Payments. DAF will maintain a contract register in which payments will be recorded against each contract. This will mitigate duplicate/overpayment and also provide additional controls in respect of retention monies.

Merit Based Performance Incentive (MBPI) Payments. The project will finance performance payments to Civil Servants under a MBPI program. Civil servants will be paid through the RGC payroll and the project will reimburse the performance payments on a sliding scale. In order to be eligible for reimbursement, documentary evidence will be maintained which shows very clearly individual beneficiaries and a calculation of the performance payment (linked to the criteria as set out in the MBPI manual which would include specific measures of performance).

7. Safeguard over Assets
MPWT procedures to safeguard and protect assets from fraud and waste through recording assets in a fixed asset register will be used. Assets bought by the project, such as computers, motorcycles, motor vehicles, photocopiers, printers, desks, tables and chairs, will be covered by the safeguards procedure as set out in the SOP.

8. Allocation of Loan, Grant and Credit Proceeds
The project is being financed by an ADB loan, AusAID grant and an IDA credit. The allocations of the proceeds of these are shown in project documents according to works, goods and services and the percentage amount of each contract to be financed by each donor.

9. Disbursement Arrangements
Disbursements from the ADB loan and the AusAID grant for contracts for consulting services and civil works bid under ICB procedures will be through direct payment procedures defined in ADB’s Loan Disbursement Handbook (2007, as amended from time to time). Arrangements for disbursement of funds made available from the IDA will follow IDA’s procedures, which are similar to those of ADB. Detailed procedures for Disbursement arrangements are outlined in the Financial Management Manual.

10. Auditing Requirements
DGPW will maintain separate records and accounts adequate to identify the goods and services financed from the proceeds of the ADB and AusAID loan and grant and the IDA credit. These accounts will detail funds received, expenditures incurred for the Project, and the use of local funds. Funding from the co-financiers will be subject to the supervision and approval of claims by a construction supervision consultant engaged under the Project, internal audit and independent financial and technical audits. There will be one set of TOR for the financial and technical audits. At the end of each fiscal year, each donor will get the same set of audit reports and accompanying management letter.
Subpages (2): ADB Procedures Manuals