Emergency Assistance for Fighting the COVID-19 Pandemic (RRP PAK 54181-001)
Financial Management Assessment of National Disaster Risk Management Fund Project Number: 54181-001 April 2020
Pakistan: Emergency Assistance for Fighting the COVID – 19 Pandemic
CURRENCY EQUIVALENTS
(as of 12 April 2020)
Currency unit – Pakistan Rupee (PKR)
PKR 1.00 = US$0.006 US$1.00 = PKR 166.4779
ABBREVIATIONS
ADB Asian Development Bank AoA Articles of Association AEFSs Audited Entity Financial Statements APFSs Audited Project Financial Statements BISP Benazir Income Support Program CPS Country Partnership Strategy DRF Disaster Risk Financing EPC Engineering, procurement and construction FIPs Fund Implementing Partners FMA Financial Management Assessment GoP Government of Pakistan GRAMP IED ISAs
Governance Risk Assessment and Management Plan Independent Evaluation Department International Standards on Auditing
IFRSs International Financial Reporting Standards IT Information Technology LFIS Loan and Grant Financial Information Services NDRMF National Disaster Risk Management Fund PAM Project Administration Manual PEFA Public Expenditure and Financial Accountability PFM PMU
Public Financial Management Project Management Unit
PPP Public-Private Partnership
Emergency Assistance for Fighting the COVID-19 Pandemic (RRP PAK 54181-001)
CONTENTS
I. EXECUTIVE SUMMARY ....................................................................................................... 4
II. INTRODUCTION ................................................................................................................... 4
III. PROJECT DESCRIPTION ................................................................................................. 5
IV. COUNTRY AND SECTORAL FINANCIAL MANAGEMENT ISSUES .............................. 5
V. ENTITY LEVEL FINANCIAL MANAGEMENT SYSTEMS .................................................... 7
VI. INTERNAL CONTROLS ASSESSMENT ........................................................................ 11
VII. PROPOSED FUNDS FLOW AND DISBURSEMENT ARRANGEMENTS ...................... 12
VIII. RISK ASSESSMENT ....................................................................................................... 13
IX. PROPOSED FINANCIAL MANAGEMENT ACTION PLAN (FMAP) .............................. 17
X. PROPOSED FINANCIAL MANAGEMENT COVENANTS ................................................. 18
Emergency Assistance for Fighting the COVID-19 Pandemic (RRP PAK 54181-001)
FINANCIAL MANAGEMENT ASSESSMENT NATIONAL DISASTER RISK MANAGEMENT FUND
April 2020
I. EXECUTIVE SUMMARY
1. The Asian Development Bank (ADB) is contemplating to support the Government of Pakistan (GoP) to address the outbreak of coronavirus disease 2019 (COVID-19) in Pakistan. In this respect, ADB is assessing the feasibility of Pakistan Emergency Assistance Project: 54181-001 (the Project). The Project will be implemented through two implementing agencies, the National Disaster Risk Management Fund (NDRMF) and Benazir Income Support Program (BISP), using the existing arrangements for National Disaster Risk Management Fund Project and Social Protection Development Project, respectively. This financial management assessment report (the Report) provides findings and conclusions related to the financial management assessment (FMA) carried out on NDRMF, proposed to be the implementing agency (IA) of Output 1 of the Project, as explained in section III of the Report. 2. NDRMF was assessed to possess sufficient financial management capacity and systems, however, it is inherently reliant upon the Fund Implementing Partners (FIPs) for efficient and effective utilization of ADB’s resources, the Internal Audit department is not adequately staffed, governance structure is not fully functional and the emergent nature of the Project activities poses significant risks to ADB funds, the overall pre-mitigation Financial Management Risk was assessed as substantial. 3. NDRMF has demonstrated strong FM performance during the implementation of on-going ADB project, and the governance and management teams have implemented a strong accountability and controls framework complying with international best practice and financial reporting standards. While noting these strengths, the capacity to effectively manage the FIPs is not yet evidenced due to limited timeframe since the implementation of on-going ADB project, the Internal Audit function is not adequately staffed and governed, reflect certain weaknesses within the governance and financial management systems.
II. INTRODUCTION 7. The FMA was performed in accordance with ADB’s Guidelines for the Financial Management Technical Guidance Note for the Financial Management Assessment – 2015 (the Guidelines). The FMA was performed during April 2020, to assess the sufficiency and appropriateness of NDRMF’s financial management capacity in the context of ADB’s requirements for the financial management of the Project. 8. The principal objective of the FMA was to evaluate the suitability of the IA’s systems and capacities to effectively managing risks to ADB’s project funds and to ensure that the Project funds are used economically and efficiently for the purposes intended. This FMA focused at assessing the design and effectiveness of NDRMF’s financial management and related governance systems including planning, budgeting, accounting, internal control, corporate governance, financial reporting, internal audit, and external audit. The FMA also assessed the financial management capacity of the NDRMF with reference to the proposed funds flow arrangement and selected disbursement procedures for the Project.
9. This assessment is based on: (i) the results of the FMA questionnaire; (ii) discussions with financial management staff of NDRMF; (iii) information available through various reports, manuals, regulations, annual financial statements and audit reports; and (iv) ADB’s prior experience with the IA in terms of compliance with financial management requirements of the on-going project (please refer section V for further details).
III. PROJECT DESCRIPTION 10. The Project is being processed in response to the GoP’s request to ADB, made on 25 March 2020, for addressing the outbreak of COVID-19 in Pakistan. The Project is structured to provide immediate and flexible financing to help the government quickly respond to the crisis, which comprises two outputs: Output 1: a health and community component to support COVID-19 emergency preparedness and response; and Output 2: a social protection component to provide swift financial support to overcome basic needs of vulnerable and poor segments of the society and to stimulate the economy. The Project is estimated to cost $305.3 million. The Project is proposed to be implemented by two implementing agencies namely NDRMF and Benazir Income Support Program (BISP).
IV. COUNTRY AND SECTORAL FINANCIAL MANAGEMENT ISSUES 11. ADB’s Pakistan Country Partnership Strategy (CPS) for 2020-2024 is currently under development stages. In support of the draft CPS, a draft Governance Risk Assessment and Management Plan (GRAMP) 2020 has been developed by the Independent Evaluation Department (IED) of ADB and is currently in draft form. The draft GRAMP notes that Pakistan’s extensive legal and institutional framework for Public Financial Management (PFM) is evolving. The GRAMP also notes improvements in the credibility of federal budgets, while highlighting that the effectiveness of the legislature’s review is reduced by two factors: (i) insufficient time for a parliamentary review of the budget; and (ii) the subsequent reallocations and expansion of expenditure, without prior approval of the legislature. The draft GRAMP has identified certain key policy actions with respect to PFM i.e. (i) preparation of the first fiscal risk statement; (ii) finalization of the budget manual; and (iii) development of a PFM reform strategy. 12. The 2015-2019 CPS noted inadequate public financial management systems, vulnerability to corruption, and lack of capacity in government entities—particularly with decentralization—could pose a risk to CPS implementation. To this end, ADB’s policy-based operations and technical assistance (TA) initiatives directly address some of these risks by supporting reforms and capacity development to improve the financial soundness and performance in the public sector. ADB is providing TAs to improve the government’s procedures and systems on procurement and safeguards. Measures were designed and incorporated in ADB projects to address sector-specific risks and help improve integrity and accountability. 13. A sector assessment of Pakistan’s Disaster Risk Management, conducted in 2016 highlighted challenges related to: (i) resource constraints at federal and provincial levels emanating from budgetary shortfalls and excessive demands on public resources which hinder the effective execution of disaster risk management activities, (ii) limited integration of disaster risk management into development planning and investment due to gaps in disaster risk assessment, (iii) inadequate disaster risk financing arrangements in the Federal and provincial governments, whereby contingency funding for response to emergencies or disasters is limited,
and reliance on post-disaster budgetary reallocations to fund response efforts or on international assistance, and (iv) weak governance and accountability in terms of inefficient coordination and coherent disaster risk management across provinces and government levels.
14. A Country Diagnostics Assessment for disaster risk financing in Pakistan was performed during January 2019 which proposed a risk-layered structure for the stimulation, development, and implementation of financially sustainable and scalable Disaster Risk Financing (DRF) strategies and solutions in Pakistan. 15. The project team referred to publicly available independent assessments on country’s PFM systems. Since the results of public expenditure and financial accountability (PEFA) assessment on Pakistan performed in 2019 have not been made public, the PEFA 2012 was considered relevant for the purposes of this FMA. The latest report indicates that overall, only 13 indicators, about 42 percent of total indicators for PFM system of Pakistan, score well as shown in Table 1.
16. PEFA on Federal level indicated strong performance by the federal government in terms of comprehensiveness (performance indicators 5–6), transparency (performance indicators 8 and 10), policy-based budgeting (performance indicators 11–12), moderate performance in revenue administration (performance indicators 13–15) and budget execution, and cash/debt management (performance indicators 16–17). Performance in the areas of credibility of budget (performance indicators 1–4) is improving. Weak areas included overall internal control (performance indicators 18-21); accounting, recording and reporting (performance indicators 22–25); and external scrutiny and audit (performance indicators 27–28).
17. As per PEFA 2012 report, budget execution remained the most troubled area, although since the previous PEFA report, the predictability of aggregate federal government expenditure has improved considerably; there were similar improvements in the predictability of the federal government’s tax revenue, mainly due to tax reforms and increased collection.
Table 1: Public Expenditure and Financial Accountability Assessment
Indicators Dimension PEFA Score
Risk Rating
A. BUDGET CREDIBILITY PI-1 Aggregate expenditure out-turn compared to original approved budget B Moderate PI-2 Composition of expenditure out-turn compared to original approved budget C+ Substantial PI-3 Aggregate revenue out-turn compared to original approved budget B Moderate PI-4 Stock and monitoring of expenditure payment arrears NA
B. COMPREHENSIVENESS AND TRANSPARENCY PI-5 Classification of the budget A Low PI-6 Comprehensiveness of information included in budget documentation A Low PI-7 Extent of unreported government operations C+ Substantial PI-8 Transparency of inter-governmental fiscal relations A Low PI-9 Oversight of aggregate fiscal risk from other public-sector entities. C+ Substantial
PI-10 Public access to key fiscal information B Moderate C. POLICY-BASED BUDGETING
Indicators Dimension PEFA Score
Risk Rating
PI-11 Orderliness and participation in the annual budget process A Low PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting B+ Moderate
D. PREDICTABILITY AND CONTROL IN BUDGET EXECUTION
PI-13 Transparency of taxpayer obligations and liabilities B Moderate PI-14 Effectiveness of measures for taxpayer registration and tax assessment C+ Substantial
PI-15 Effectiveness in collection of tax payments D+ High PI-16 Predictability in the availability of funds for commitment of expenditures C+ Substantial PI-17 Recording and management of cash balances, debt and guarantees B+ Moderate PI-18 Effectiveness of payroll controls B+ Moderate PI-19 Transparency, competition and complaints mechanisms in procurement D+ High PI-20 Effectiveness of internal controls for non-salary expenditure C+ Substantial PI-21 Effectiveness of internal audit D High
E. ACCOUNTING, RECORDING AND REPORTING PI-22 Timeliness and regularity of accounts reconciliation D+ High PI-23 Availability of information on resources received by service delivery units NA PI-24 Quality and timeliness of in-year budget reports C+ Substantial PI-25 Quality and timeliness of annual financial statements C+ Substantial
F. EXTERNAL SCRUTINY AND AUDIT PI-26 Scope, nature and follow-up of external audit B Moderate PI-27 Legislative scrutiny of the annual budget law C+ Substantial PI-28 Legislative scrutiny of external audit reports D+ High
G. Donor Practices D-1 Predictability of Direct Budget Support A Low
D-2 Financial information provided by donors for budgeting and reporting on project and program aid C Substantial
D-3 Proportion of aid that is managed by use of national procedures D High
V. ENTITY LEVEL FINANCIAL MANAGEMENT SYSTEMS 18. Performance under existing ADB funded project: NDRMF is currently implementing two loans and a grant facility from ADB. ADB committed the initial financing of NDRMF through a loan of US$ 200 million on 2 Dec 2016. Grants of US$ 3.4 million by the Government of Australia and US$ 1.5 million by the Swiss Agency for Development and Cooperation (SDC)1 have been provided to NDRMF in an effort to reduce the socio-economic and fiscal vulnerability of Pakistan towards natural hazards by prioritizing and financing investments in disaster risk reduction and preparedness that have high economic benefits, taking into account climate change, as well as disaster risks and their impacts. The on-going project is envisaged to make Pakistan more disaster resilient, with reduced socio-economic and fiscal vulnerability to natural hazards and climate variability and change (National Disaster Management Plan (2013-2022) and Draft
1 ADB approved administration of the SDC grant of US$ 1.5 million for NDRMF on 7 January 2019
National Flood Protection Plan IV (2016-2026). NDRMF has been in compliance with the FM requirements of ADB under the on-going project. 19. Legal and Governance Structure: NDRMF is a public sector not-for-profit institution formed under Section 42 of the Companies Act, 2017, as a non-banking financial institution with a corporate structure aiming at providing funding for structural and non-structural interventions to be carried out by the United Nation Agencies, International and/or National Non-Governmental Organizations as well as Public Sector Entities with respect to disaster risk reduction activities. Please refer Appendix 1 for entity’s organogram. 20. NDRMF is governed and operated by a three-tiered structure which comprises General Body, Board of Directors (BoD) and Management team headed by the Chief Executive Officer. Under the articles of association (AoA), the General Body and BoD shall comprise a mix of public and private sector officials and are responsible for overall strategic guidance and direction of the organization. However, the Government has not yet notified the full members of General Body and Board of Directors as required under the AOA. The third tier of management transforms the strategic direction into operational strategy for the four functions of NDRMF which comprise of the following;
(i) Projects and Operations Group (P&OG): It focuses on the core business areas of the Fund
including Disaster Risk Reduction (DRR), preparedness (early warning, contingency planning), early recovery and Disaster Risk Financing (DRF). P&OG establishes financing partnerships, conducts technical reviews of potential investments and is also responsible for sound relationship management with grant recipients or Fund Implementing Partners (FIPs).
(ii) Quality Assurance Group (QAG): It looks after monitoring and evaluation, management
information systems, safeguards, and gender functions.
(iii) Financial Management Group (FMG): It manages finance, accounts and treasury function of the organization.
(iv) Support Services Group (SSG): The unit supports human resources management, administration, procurement, information technology, media and communication and legal activities of the Fund.
21. Organization and Staffing of FMG: The FMG is headed by the Chief Financial Officer (CFO) who is an experienced Fellow Chartered Accountant. The team comprise of well trained and professionally qualified Finance Manager, two Assistant Finance Managers and support staff assisting the core team. During the three years of operations, there has been negligible staff turnover in FMG staff. Please refer Appendix 2 to the Report for summary profiles of FM staff. NDRMF’s accounting and finance staff have sufficient experience and knowledge of ADB’s financial management and disbursement procedures, having executed ADB-funded project since last three years. The accounting and finance staff also received training from ADB relating to ADB’s disbursement and financial management requirements and are well-trained to prepare withdrawal applications and maintain supporting documents. FM staff are experienced in preparing project financial statements and entity financial statements compliant with the latest applicable International Financial Reporting Standards (IFRSs) and ADB’s FM policies and
guidelines. The finance team has successfully facilitated audits from commercial auditors and the Auditor General of Pakistan (AGP) since last three years. 22. Policies and procedures: NDRMF has developed a set of documented policies and procedural guidance to govern and execute its FM activities, embodied in a Financial Management Manual, which lays out the principles and procedures for the finance and accounting function. Other relevant policies and procedural documentation include: a) Disbursement Manual; b) Limit of Authority Manual; and c) Investment guidelines. An anti-corruption policy and code of conduct is also in effect. Please refer Appendix 3 for summaries of relevant manuals. 23. Accounting and Reporting Framework: NDRMF’s uses International Financial Reporting Standards (IFRSs) for the preparation of its financial statements. Monthly accounts are prepared and are submitted to BoD on a quarterly basis. A well-defined chart of accounts is in place.
24. Budgeting System: FMG staff prepares head-wise draft budget in consultation with the functional teams for the budget period, prior to the commencement of a financial year. The draft budget is endorsed by the CEO which is then submitted to the BoD for approval. The budget is prepared for the annual receipts and expenditures taking into account any potential capital investments and strategic initiatives including partnerships with FIPs. The budgeting activity follows a participative and bottom-up approach which is suited for the Fund’s nature of operations. During each quarterly management review meeting, variance analysis is performed between actual and budgeted amounts and justification is presented to the management and subsequently to the BoD. The budgeting exercise needs improvement for future periods as it was noted from discussion with the Fund’s finance staff that significant variances were observed potentially due to delay in FIP onboarding and mobilization, which warrants the need for more reasonable budgeting. 25. Payments: Transactions are recorded in the computerized accounting software by assigned staff who have limited access to the system. Vouchers are signed by multiple process owners after obtaining endorsements from the functional team lead on the validity of expenditure by signing the invoice before it is authorized for payment by the FMG. All invoices are matched with purchase orders and goods receipt notes. Invoices are marked or stamped paid to ensure that double payment is avoided and follow serial numbering. Adequate internal controls in terms of approving authorities are also specified in the limit authority matrix laid down in the Limit of Authority Manual (please refer Appendix 3 for summary of manual).
26. Cash and Bank: Separate ledger for each bank account is maintained manually and in computerized accounting software. Cash and bank accounts are reconciled monthly. No unreconciled differences were observed during review of the bank reconciliation statements. Dual signatories have been identified and authorized by the BoD, which include the CEO and the CFO, who are regular employees, to operate the bank accounts. Advance accounts and petty cash are also managed by the FMG staff. 27. Segregation of Duties: At an operational level, there is adequate segregation of duties with regard to preparing financial transactions, approving authorities, bank reconciliations and assets monitoring. Segregation of duties and responsibilities are defined and diligently followed as observed during review of sample vouchers.
28. Safeguard over assets: NDRMF has an asset management system whereby all assets are recorded. Assets including office equipment, furniture and fixtures etc. are tagged for identification. Fixed assets physical stock-take is performed annually by the auditors. Fixed asset register is kept updated to present the financial records in a true and fair manner. Items of fixed assets primarily consist of vehicles, office and IT equipment, leasehold building and furniture and fixtures. Assets are covered under an insurance policy.
29. Internal Audit: The internal audit department is headed by the Chief Internal Auditor who leads a team of two internal audit managers, however there is a need to further increase the headcount in this department. The department reports directly to the BoD and is independent of the management. The internal audit charter was approved by the Board. The Internal Audit manual has been developed and to be approved by the BoD. Internal audit charter is coupled with the audit work plan. The scope of Internal Audit includes audits of the ADB funded projects. The overall mandate is considered sufficient as the charter provides adequate independence, authority and responsibility to the Internal Audit function. However, the function needs strengthening as it was noted that the audit committee meetings have not been convened recently since the independent lead of the committee is yet to be replaced and notified. 30. External Audit: NDRMF’s Annual Entity Financial Statements (AEFS) are audited by a commercial auditor (PWC Pakistan) as per the applicable International Standards on Auditing (ISA) and as per the requirements of the Companies Act, 2017, while Annual Project Financial Statement (APFSs) are audited by the Auditor General of Pakistan (AGP), which complies with the requirements of ADB. NDRMF has historically prepared and submitted the audited AEFS in compliance with the covenants of ADB loan agreements.2 The auditors have issued unqualified opinions since first APFSs and AEFSs. NDRMF also obtains independent review from its external auditors on its statement of compliance with the Public Sector Companies (Corporate Governance) Rules, 2013. 31. Reporting and Monitoring: NDRMF complies with the reporting requirements of the EAD and government regulators. NDRMF’s computerized accounting software serves the role of the Financial Management Information System (FMIS) and has the capability to generate the requisite reports on the project components and all financial activities on a periodic basis. These reports are submitted to the management, ADB, EAD, Ministry of Finance, and local regulator (the Securities and Exchange Commission of Pakistan) on a timely basis. These financial records and reports are also used to meet the requirements of the annual financial attest audits by both the state and commercial auditors. The financial records and statements can be drilled-down to transaction level journal entries. 32. NDRMF uses QuickBooks Accounting Software, which is mapped with the chart of accounts and provides comprehensive capability to record and report financial transactions at the project and entity level. However, being an off-the-shelf accounting software, the software has certain access control weaknesses. In addition, general ledger and control ledgers are reconciled on a regular basis. NDRMF is in the process of developing a comprehensive
2 The only exception is the delayed receipt of APFS for FY2017 because, the Supreme Auditing Entity of the country had not conducted the audit because of no disbursement made by EA and the IA. However, upon ADB’s advice the NDRMF got the APFS audited by an external audit firm of chartered accountants. The Audit report was finally received by ADB in March 2019 with the delay of 27 months, and has been reviewed, declared acceptable, and uploaded in the eOp project record, by the ADB.
Enterprise Resource Planning (ERP) solution which shall comprise of a module on Budgeting and Accounting.
33. Records are retained as per the statutory requirements, and are properly and effectively identified, processed, stored and preserved. Supporting documents with vouchers are prepared and retained for capital and operational expenditure. Payroll is generated monthly by NDRMF based on personnel records, and processing involves the FMG and SSG departments, mainly human resources staff. Authorization controls exist for the preparation, revision and disbursement of payroll.
34. Information Systems: NDRMF has deployed off-the-shelf computerized accounting software which serves the purpose of a Financial Management Information System (FMIS). The software produces regular reports for management decision support and it is also the primary transaction processing system. All financial transactions and journal entries are made in the software. Only the relevant authorized staff can access the data through assigned unique username and password eliminating the risks of information mishandling. Suitable internal control exists on the system to ensure that the journal entries are not reversed and posting of entries or reversal, if any, require appropriate management approvals. However, the current system has certain access control weaknesses, and there are chances of errors in manual posting of the vouchers. NDRMF will switch to a more robust and comprehensive Enterprise Resource Planning (ERP) system in due course. The service provider has been recruited and business process documentation has already been completed. The system will be tailored according to NDRMF needs and thus will take some time before the ERP is completely deployed and replaces the legacy system. 35. Other offices and implementing partners: NDRMF operates through its head office and does not have regional or field presence in other provinces or cities. However, its Fund Implementing Partners (FIPs) have several offices spread across the country that are integral to the implementation of project. The FIPs are expected to have suitable financial and internal controls, however NDRMF’s financial management practices are not applicable on their operations. There are defined procedures for the flow of funds and financial information from FIPs to the NDRMF to ensure accountability, which are explicitly laid out in the grant implementation agreements.
VI. INTERNAL CONTROLS ASSESSMENT 36. An assessment of the internal controls effectiveness at NDRMF and key findings based on the COSO Framework3 are summarized below: 37. Control Environment: The Fund has a suitable organizational structure with the General Body and the BoD steering the organizational strategic outlook and progress. The CEO reports to the Board and the Chief Internal Auditor reports independently to the BoD, which is in line with best practices of corporate governance, thus ensuring independence of this function. Four (4) departments; Financial Management Group (FMG), Quality Assurance Group (QAG), Projects and Operations Group (P&OG) and Support Services Group (SSG) report to the CEO through their respective General Managers (GMs). Staff members are responsible for ensuring that the
3 Committee of Sponsoring Organizations of the Treadway Commission (COSO): Internal Control Integrated Framework, 2013
internal controls are adhered to, whereas the direction and tone of the organization is set by the Board and its importance is reiterated by the CEO. 38. Risk Assessment: The FMG department is adequately staffed with well-qualified and experienced resources who can identify risks and ensure there are no misstatements or errors in the financial statements, however, the internal audit department needs to be further strengthened with additional qualified staff and resources. The existing staff are well-versed in financial management policies of the organization, but additional training on ADB procedures would reinforce existing knowledge. In terms of major identified risks, the Fund is currently using Quickbooks, an off-the-shelf accounting software, which has certain access control weaknesses. These were partly addressed by some policy decisions and restrictions were imposed recently, however there are still chances of errors being rendered in the manual posting of vouchers. To address these concerns, the Fund will deploy a more advanced ERP software. Careful planning of data migration and parallel-running of both new and legacy tools will be required to ensure that integrity of data is preserved. 39. Control Activities: It was noted that suitable controls are in place with regard to the preparation and approval of transactions, ensuring that all transactions are correctly made and adequately recorded. All vouchers are stamped and verified by the relevant staff. The record management of hard and soft files, segregation of duties, cash and bank reconciliations, and mechanisms to ensure safeguard over assets are all reasonably adequate. The Fund has developed and implemented the Financial Management Manual which lays out the procedures and guidelines of financial management and is closely followed by the staff. 40. Information and Communication: The need for reporting of information and timely communication is highlighted the most in case of FIPs. There are adequate reporting and monitoring features built into NDRMF’s systems to track the use of project proceeds by such agencies as it was observed that the physical progress and financial milestones of FIPs are laid out in the Grant Implementation Agreements and these are tracked and verified by Project Appraisal Managers and subsequently due diligence checks are performed by the FMG staff. 41. Monitoring: The internal audit department is functional and effectively independent, and has made progress in ensuring that the internal controls framework is implemented across the organization. The monitoring of internal control effectiveness represented by feedback loops into the internal control mechanism is evident from the discussion with the Chief Internal Auditor. It would be more effective with a functional audit committee. The committee is an integral part of the governance framework, but the Chair of the committee has not been designated as yet. Once the audit committee is functional, we presume that the internal audit department would be in a better position since it would receive strategic direction on the audit work-plan and would be able to submit its findings to an independent forum. Another aspect of monitoring encompasses the budgeting activity. As mentioned earlier, the Fund should adopt a more inclusive and iterative budgeting approach so that minimum slack is built or carried forward in the budget and is more aligned with realistic and achievable estimates.
VII. PROPOSED FUNDS FLOW AND DISBURSEMENT ARRANGEMENTS 42. The loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time), and detailed arrangements agreed between the government and ADB.
43. To facilitate project implementation through timely release of loan proceeds, especially considering the prevailing circumstances and the nature of the project, the NDRMF will establish an advance account promptly after loan effectiveness at a commercial bank acceptable to ADB. The advance account shall be used exclusively for the ADB’s share of eligible expenditures. The currency of the advance account shall be the US Dollar. NDRMF will be accountable and responsible for proper use of advances to the advance account. The request for initial and additional advances to the respective advance account should be based on Estimate of Expenditure Sheet setting out the estimated expenditures for the forthcoming six months of project implementation. Supporting documents should be submitted to ADB in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time) when liquidating or replenishing the advance account. 44. The statement of expenditure (SOE) procedure may be allowed for reimbursement of eligible expenditures or liquidation of advances to the advance account(s) with no pre-defined ceiling in accordance with the provisions of ADB Loan Disbursement Handbook. The Fund has demonstrated its ability to maintain supporting documents and records for the expenditures claimed under the SOE and have made these readily available for review by ADB's disbursement and review missions, and for independent audit. 45. NDRMF will be responsible for: (i) preparing disbursement projections, (ii) requesting budgetary allocations for counterpart funds, (iii) collecting supporting documents, and (iv) preparing and sending withdrawal applications to ADB. Before the submission of the first withdrawal application, the government shall submit to ADB sufficient evidence of the authority of the person(s) who will sign the withdrawal applications on behalf of the borrower, together with the authenticated specimen signatures of each authorized person. 46. The minimum value per withdrawal application is stipulated in the Loan Disbursement Handbook (2017, as amended from time to time) and is defined as $200,000 or 1% of loan proceeds, whichever is lower. Individual payments below such amount should be paid: (i) by the NDRMF and subsequently claimed to ADB through reimbursement, or (ii) through the advance fund procedure, unless otherwise agreed by ADB. The Fund should ensure sufficient category and contract balances before requesting disbursements. The Fund has demonstrable experience in using ADB’s Client Portal for Disbursements system for submission of withdrawal applications to ADB. 4 47. All disbursements under government financing will be carried out in accordance with regulations of the Islamic Republic of Pakistan relevant to the projects financed by the multilateral financing organizations.
VIII. RISK ASSESSMENT 48. The financial management risks include: (i) inherent risks, and (ii) Project (control) risks. Inherent risk is the susceptibility to factors arising from the project’s environment, such as
4 The Client Portal for Disbursements facilitates online submission of WA to ADB, resulting in
faster disbursement. The forms to be completed by the Borrower are available online at https://www.adb.org/documents/client-portal-disbursements-guide.
country rules and regulations and entity working environment. Project (or control) risk is the susceptibility that the Project’s accounting and internal controls framework will be inadequate to ensure Project funds are used economically and efficiently and for the purpose intended, and that the use of funds is properly reported. 49. While NDRMF has sufficient FM capacity, considering that it is significantly dependent upon the FIPs for actual utilization of ADB’s resources, the Internal Audit department is not adequately staffed, governance structure is not fully implemented and the emergent nature of the Project activities, the overall pre-mitigation Financial Management Risk is “Substantial”. 50. The risks identified are explained hereafter in the Financial Management, Internal Control and Risk Assessment (FMICRA) and appropriate risk mitigation measures have been advised within relevant paragraphs. Financial management risks and associated risk mitigation measures need to be considered and updated throughout the life of the Project.
Table 2: Financial Management, Internal Controls and Risk Assessment (FMICRA) A. Inherent Risks
Risk Type Risk Assessment
Risk Description Mitigating Measure
Country specific
Substantial As detailed under Section IV of the Report, the Project funds are susceptible to substantial risks due to fiscal challenges to the government and gaps in budgetary mechanisms.
ADB will continue to provide technical support and undertake policy-level initiatives to address systemic PFM issues to strengthen PFM system and procedures. Ministry of Finance and NDRMF will ensure the timely release of counterpart funds, proper recording of financial transactions, timely payments and facilitate annual audit of financial statements.
Entity Specific
Substantial NDRMF’s ability to effectively monitor the utilization of ADB’s resources for intended purposes shall depend upon the design and operating effectiveness of FIPs’ systems and the quality of monitoring and validation performed by NDRMF.
The existing FIP mandates are at initial stages of their mandates and thus NDRMF’s capacity to effectively monitor and manage the FIP contracts is not validated.
A pre-audit of the selection and disbursement(s) to FIPs shall be performed by the Internal Audit. The Internal Audit team shall also perform periodic validation of the FIPs’ utilization of funds and resources under the Project.
Moderate NDRMF’s treasury arrangements might not be sufficiently robust to ensure accelerated availability and tracking of funds for the Project.
A dedicated bank account shall be opened and maintained with a commercial bank acceptable to ADB, for managing the Project funds. NDRMF shall ensure that
funds are timely released and made available for the Project activities. The draft Tripartite agreement for the use of Endowment Fund shall be finalized to regulate the use of the endowment funds and the profits accrued till date.
Overall Assessment
Substantial Rationale and Mitigation: NDRMF has sufficient FM capacity, however, it is significantly dependent upon the FIPs for actual utilization of ADB’s resources, and the efficiency of Country’s treasury systems for timely availability of sufficient funds. The Project team will ensure through integration of appropriate controls within the funds flow and validation mechanisms that ADB’s funds are efficiently and effectively utilized for the intended purposes.
B. Controls Risks
Risk Type Risk
Assessment Risk Description Mitigating Measure
Implementing entity
Moderate NDRMF’s governance structure is not fully operational due to delays in completion of the BoD and appointment of Chair of Audit Committee. While there are structures in place to govern the organization, the absence of key personnel might affect the quality of oversight function on the entity and thus the Project activities.
EAD/MOF and NDRMF to complete appointments at vacant directors’ positions. EAD/MOF and NDRMF to expedite the process of appointment/ nomination of an independent director as Chair of the Audit Committee.
Funds Flow Low The Project funds might not be timely available for the Project, and trackable to validate their utilization for intended purposes.
NDRMF has sufficient treasury controls to track and monitor the funds flow, with assigned staff roles and documented policies and procedures. However, as a further mitigating measure, a dedicated bank account shall be opened and maintained with a commercial bank acceptable to ADB, for managing the Project funds. NDRMF shall ensure that funds are timely released and made available for the Project activities.
Staffing Moderate The Project might not have sufficient and adequately qualified FM and Accountability staff, thus affecting the implementation of segregation
The FM function is adequately staff with experienced and qualified professional staff. Although there has been low staff turnover within the FMG, a severance might affect
controls and timely completion of FM and accountability activities.
the segregation of duties and workload management. The FM activities are not expected to significantly increase due to the addition of the Project. The Internal Audit team is not considered to be adequately staffed. With the addition of the Project, the Internal Audit team might not have sufficient absorptive capacity. The project team shall require the entity’s management to ensure that adequate and sufficiently qualified staff shall remain allocated over the Project activities.
Planning and budgeting
Moderate The Project budgets might not be adequately monitored, resulting in adverse variances which might limit budget availability for key activities of the Project.
The organizational budgeting processes are not adequate which often result in significant variances. The Project estimates will be reviewed prior to the Project Implementation and will be further refined during the Project implementation stage.
Financial reporting and external audits
Low The Project might not have adequate accounting and reporting systems and controls to ensure timely and accurate recording of the Project financial transactions, and generation of timely and reliable financial reports to provide true and fair view of the Project’s financial performance and position.
The entity and project level financial statements are prepared using IFRSs. Bank reconciliation statements of all bank accounts are timely prepared, reviewed and authorized. Dedicated bank accounts are used for management of project funds. The accounting system is capable of preparing and maintaining project wise separate books of account. Internal and external audit arrangements are in place. External audits are performed by a Big 4 (PWC) audit firm and the AGP. Historically, the external auditors have provided Unqualified audit opinions on entity and project level financial statements. While noting the above, the Project team will ensure that the submission of entity and project level financial statements is included as a covenant in the loan/ project
agreement, pursuant to requirements of OM – J7.
Internal audit Substantial The Project might not be subject to sufficient and appropriate internal audit arrangements.
An independent internal audit function is in place which reports directly to the BoD, however, as noted above, the staffing of the function is not adequate. At the governance level, the Chair of Audit Committee has not yet been appointed. Further, the Internal Audit Manual has not yet been approved by the BoD. In addition to the proposed staffing arrangements discussed above (refer Staffing), the Project team shall reiterate the need for the appointment of the Chair of Audit Committee and approval of the Internal Audit manual.
Information systems
Moderate The information systems might not be sufficient to ensure accurate recording and reporting of the Project’s financial transactions.
An off-the-shelf is currently in place. The external auditors have not raised observation on the suitability of the existing software. However, the organization is in the process of developing an ERP package which will include Planning and Budgeting, and Accounting and Reporting modules.
Overall Assessment
Moderate Rationale and mitigation: The overall controls risk is assessed as Moderate, in view of strong history of compliance with ADB’s FM requirements under the existing loans, satisfactory governance, financial reporting and accountability arrangements. However, the Project’s emergent nature and involvement of FIPs enhance the risk profile of the project. NDRMF’s monitoring mechanisms over the FIPs are considered critical for ensuring that funds are efficiently utilized for intended purposes.
L = low, M = moderate, S = Substantial, H = high Source: Asian Development Bank.
IX. PROPOSED FINANCIAL MANAGEMENT ACTION PLAN (FMAP)
51. Based on the identified risks and proposed mitigation measures, a time-bound financial management action plan is given below:
Table 3: Financial Management Action Plan (FMAP) Action Plan Responsibility Timing
A pre-audit of the selection and disbursement(s) to FIPs shall be performed by NDRMF’s Internal Audit. The Internal Audit team shall also perform periodic validation of the FIPs’ utilization of funds and resources under the Project. In respect of the Project activities till 31 December 2020, the IA shall ensure that the Internal Audit report provides a comprehensive validation of the FIP’s selection process and a verification of the funds management and utilization of resources procured by the FIPs from the Project funds. Depending upon the results of such validation, the ADB may require further continuation of such exercises on a periodic basis.
Head of Internal Audit
Not later than 31 March 2021;
A dedicated bank account shall be opened and maintained with a commercial bank acceptable to ADB, for managing the Project funds.
NDRMF, EAD/MOF
Within 2 weeks after effectiveness
EAD/MOF and NDRMF shall complete the process of appointments at vacant directors’ positions.
NDRMF, EAD/MOF
Not later than 31 December 2020
EAD/MOF and NDRMF to expedite the process of appointment of an independent director as Chair of the Audit Committee.
NDRMF, EAD/MOF
Not later than 31 December 2020
The Project estimates shall be reviewed prior to the Project Implementation and will be further refined during the Project implementation stage.
CFO – NDRMF Prior to commencement of Project Implementation
The Fund should coordinate activities with the selected vendor to ensure that ERP is tailored according to the Fund’s needs and deployed for all business functions.
NDRMF Not later than 30 June 2021
The NDRMF’s management shall ensure that adequate and sufficiently qualified staff shall remain allocated over the Financial Management and Internal Audit functions, related to the Project activities.
NDRMF During the Project Implementation
The draft Tripartite agreement for the use of Endowment Fund shall be finalized to regulate the use of the endowment funds and the profits accrued till date.
ADB/ NDRMF Not later than 31 December 2020
X. PROPOSED FINANCIAL MANAGEMENT COVENANTS
52. The following is proposed as FM covenants for the Project:
a. The Fund shall (i) maintain separate accounts and records for the Project; (ii) prepare annual project financial statements (APFS) in accordance with accounting principles acceptable to ADB; (iii) have such statements audited annually by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB, in accordance with auditing standards acceptable to ADB; (iv) as part of each such audit, have the auditors prepare a report, which includes the auditors' opinion on the financial
statements and the use of the proceeds under the Project, and a management letter (which sets out the deficiencies in the internal control of the Project that were identified in the course of the audit, if any); and (v) furnish to ADB, no later than 6 months after the close of the fiscal year to which they relate, copies of such audited financial statements, audit report and management letter, all in the English language, and such other information concerning these documents and the audit thereof as ADB shall from time to time reasonably request;
b. ADB shall disclose the APFS and the opinion of the auditors on the financial statements
within 14 days of the date of ADB's confirmation of their acceptability by posting them on ADB's website;
c. In addition to the APFS, the Fund shall (i) provide its annual entity financial statements
(AEFS) prepared in accordance with financial reporting standards acceptable to ADB; (ii) have its entity financial statements audited annually by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB, in accordance with auditing standards acceptable to ADB; (iii) as part of each such audit, have the auditors prepare the auditors' opinion on the financial statements and compliance with the financial covenants of the Loan Agreement; and (iv) furnish to ADB, no later than 1 month after approval by the relevant authority, copies of such audited financial statements and auditors' opinion, all in the English language, and such other information concerning these documents and the audit thereof as ADB shall from time to time reasonably request.
d. The Fund shall enable ADB, upon ADB’s request, to discuss the financial statements for
the Project and the Fund’s financial affairs where they relate to the Project with the auditors appointed, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB. This is provided that such discussions shall be conducted only in the presence of authorized officer of the Fund, unless the Fund shall otherwise agree.
e. In addition, the fund shall also submit annually independent auditor’s opinion on the statement of compliance with Public Sector Entities (Corporate Governance) Rules, 2013.
Appendix 1 97
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Appendix 2
Financial Management Group Staff
Name Designation Date of Joining
Exp* (Yr)
Qualification Responsibilities**
Syed Rashid Ali
Chief Financial Officer
26 Dec 2017 26 FCA Responsible for overall financial management of Organization
Asma Noman
Finance Manager
4 Dec 2017 22 FCMA Review and submission of APFS and AEFS. Coordination with external and internal auditors.
Abid Khan Assistant Manager
1 Oct 2018 14 MBA (Finance)
Implementation of Accounting Software and ensuring compliance with loan covenants.
Sajjad Hussain
Assistant Manager
24 Sep 2018 10 FCMA Preparation of Monthly bank reconciliation statements of ADB Loan 3473-PAK, 3474-PAK, Grant 0519 and NIDA Account
Sabir Hussain
FM Specialist 27 Feb 2019 21 MBA (Finance)
Preparation of budget analysis reports, cash flow projections and submit disbursement reports on monthly basis.
Syed Ali Imran
FMG Specialist
8 April 2019 10 MBA (Finance)
Maintenance of books of accounts and pre-audit of withdrawal applications.
Waseem Iqbal
FMG Coordinator
6 May 2019 4 MBA (Finance)
Vouching, tax challans, bills processing etc
Sabba Rasheed
Project Accountant
10 Oct 2019 0.5 MSc Economics
Data Entry Operations
Internal Audit Team
Name Designation Date of Joining Qualification
Muhammed Mubeen Chief Internal Officer 27 Feb 2019 FCMA, CIA
Musa Hayat Assistant Manager Internal Audit 1 Oct 2018 ACA
Mubarak Shah Assistant Internal Audit 28 Feb 2019 MA Political Science
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Appendix 3
Brief about key manuals at NDRMF
Financial Management Manual: It serves as a basic framework to ensure (i) consistent accounting and financial management policies and procedures across NDRMF, and (ii) effective internal control over accounting and financial reporting.
Internal Audit Manual: It sets out the internal audit policies of NDRMF and covers the activities of the Internal Audit Department. It contains the policies that are necessary in defining the independence, responsibilities, authorities, organizational structure and the human resource of the Internal Audit Department.
Disbursement Manual: Its purpose is to ensure that there is a set of clear and unambiguous directions and flows in the matters of submission, verification, certification, maintenance of bank account and disbursement of funds to Funds Implementation Partner (FIP).
Limit of Authority Manual: It specifies the management/ administrative and financial authority to make decisions and incur expenditures as per approved budget and policies, by the Board of Directors (hereinafter referred to as “Board”) and delegated by the Board to the Chief Executive Officer of the Company.
Operational Manual: Operational Manual is the consolidation of all the approved policies of company and will help management in (i) reduced learning curve/training time for new employees, (ii) ensuring business continuity, (iii) standardizing procedures, (iv) delegating tasks (v) readiness for future Growth, (vi) simplify performance management, (viii) protect from knowledge loss, and (ix) saving on Training Costs.
Human Resource Manual: It provides specific guidelines for the management in daily HR procedures and administration within NDRMF. The HRM Manual is a central reference to employee related policies. Each policy is a guideline to be used with discretion and understanding by management in the spirit in which the policy is written.
Other manual/ guidelines/ criteria / policies and codes includes: (i) investment guidelines for surplus funds and working balance, (ii) accreditation criteria for non-government entities, (iii) proposal submission guidelines, (iv) gender policies, (iv) environmental and social management system manual, (v) Procurement manual, (vi) proposal evaluation criteria, (vii) anti-corruption policy, (viii) grievance redressal and disciplinary policy, (ix) whistle blower policy, (x) monitoring and evaluation manual, (xi) performance management system for NDRMF employees, and (xii) code of conduct.
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Appendix 4
Fund Flow Diagram
