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EASTERN AND SOUTHERN AFRICAN

MANAGEMENT INSTITUTE (ESAMI)

FINANCIAL MANAGEMENT3rd 28th June 2013

KAMPALA, UGANDA

REPORTING FOR DONOR FUNDED PROJECTS WB

By Mr. John Nandaah Wamukota, PhD (ISM-Reader),MBA (Wales), BA (Hons-MUK), PGC-M&E,PGC-PPM.

+256 772 499 [email protected]

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FINANCIAL MANAGEMENT

FOR WORLD BANK FUNDED PROJECTS

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SESSION OBJECTIVES

This session is meant to provide an outline of

some of the financial management issues

associated with World Bank project financing

and implementation.

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OUTLINE

What is Financial Management?

Objectives of financial management

Why do we need a good Financial Management system?

World Bank Policies and Guidelines on Project FinancialManagement

When should we perform Financial Management activities?

How do we strengthen Financial Management practices?

Recent changes to Project Financial Management

procedures Financial Monitoring Reports (FMRs)

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WHAT IS FINANCIAL MANAGEMENT?

Process of planning and controlling financial resources to

achieve optimum economic and financial benefits from an

investment. The main elements of financial management

system are: Planning and budgeting

Internal control

Accounting system

Financial reporting

Auditing

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OBJECTIVES OF FINANCIAL

MANAGEMENT

Profit maximization.

Maximisation of stakeholder value and interests.

Growth objectives.

Market share maximisation. Product and technological leadership.

Employee welfare.

Customer satisfaction.

Community life improvement.

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DISCUSSION QUESTION

Is profit maximization the same as stakeholder

wealth maximization? Why or why not?

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TEN BASIC PRINCIPLES OF FINANCIAL

MANAGEMENT

The risk-return trade-off.

We wont take an additional risk unless we expect to becompensated with additional return.

Time value of money.

A shilling received today is worth more than a shillingreceived tomorrow.

Cash, not profits, is King.

Incremental cash flows. It is only what changes that counts.

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MANAGEMENT

The curse of competitive markets. Why it is hard to find exceptionally profitable projects. Our role as

finance managers is to create wealth. To do this, we need goodprojects. However, we find it easier to evaluate projects forprofitability than to find them. More effort needed to seek goodprojects.

Efficient capital markets. A market in which securities prices reflect all available

information. The decisions we make are crucial.

The Agency problem Managers wont work for the owners unless it is in their best

interest. There is always a conflict of interest between managersand shareholders. The finance managers role is to ensureresources are available to meet the needs of the manager. He/shemust also protect the resources of the organisation with aneffective internal control system.

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MANAGEMENT

Taxes bias decision making.

The need to focus on the after tax position of our decisions. Taxesaffect the viability or otherwise of our decisions.

All risk is not equal.

Some risks can be diversified away and some cannot. There are somerisks which are not necessary.

Ethics.

Ethical behavior is doing the right thing and ethical dilemmas areeverywhere in finance. What is the right thing? Societys values. A

business error can be forgiven. An ethical error.?

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IMPORTANCE OF A GOOD FINANCIAL MANAGEMENT

SYSTEM

Provides the comfort needed by the lenders, borrower

country and donor community.

Provides information to manage project and monitor project

progress.

Reduces and eliminates frauds and corruptions in project.

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WB POLICIES AND GUIDELINES ON PROJECT


Article Iii, Sec.5(B), of the Banks Articles of

Agreement: The Bank should make arrangements to

ensure that borrowers use loan Proceeds:

Only for the purpose intended

With due attention to economy and efficiency

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Policies and Guidelines to facilitatecompliance with Art.Iii, Sec.5(B):

Operational Policy 10.02 (OP 10.02)

Bank Procedures 10.02 (BP 10.02

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GuidelinesFARAH

LACI Implementation Handbook

The Project Financial Management Manual

Guidelines on Assessment of Financial Management

Arrangement in Bank projects

Guidelines on Assessing and Designing accounting system

and Accounting software.

Financial Monitoring Reports-Guidelines to Borrowers

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OP 10.02

Authoritaive source of the Banks project financialmanagement requirements

Describe the minimum FM requirements for everyBank-financed project.

Requires projects to:

maintain adequate financial management systems

prepare annual audited financial statements

have the financial statements audited and submitted tothe Bank

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AUDITED FINANCIAL STATEMENTS

The borrower provide audited financial statements that reflect theactivities of the operation supported by the Bank loan.

The financial statements be prepared in accordance withaccounting standards acceptable to the Bank (IPSAS, IFRS)

The audit be conducted in accordance with auditing standardsacceptable to the Bank (INTOSAI, ISA).

The scope of the audit and the independent auditors who conductit be acceptable to the Bank.

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AUDITED FINANCIAL STATEMENTS

The financial statements be audited annually, andsubmitted no later than 6 months after the end ofthe reporting period.

The Bank may allow an exemption from theserequirements if the borrower has more cost-effective mechanisms that provide the Bank withequivalent assurance that loan proceeds have

been used appropriately. In all such cases, the Bank retains the right to

request an audit

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Describe the remedies available to the Bank inthe event of non-compliance

If the Bank does not receive acceptable audited FS,

audited SAIf the audited FS reveal major deficiencies in

internal controls

If there is inadequate evidence that funds have

been used for eligible expenditure

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BP 10.02

Describe application of OP 10.02 in the project

cycle

Recognize the CFAA as a starting point

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WHEN SHOULD WE PERFORM FINANCIAL

MANAGEMENT ACTIVITIES?

At the stages of Preparation, Appraisal and Approvalof the project.

Each project should have adequate FinancialManagement system

Bank staff will assess the current system of theproject and if not adequate, come up with an ActionPlan for improvement.

If no system is in place should advise on the designand come up with timetable for implementation of anew system.

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WHEN SHOULD WE PERFORM FINANCIAL

MANAGEMENT ACTIVITIES?

At Implementation Stage

Project implementing entity should maintain a

sound FM system.

Appropriate audit arrangement should be madeand provide audited FS on timely basis.

FM system should be monitored throughout

implementation process

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STRENGTHENING FINANCIAL MANAGEMENT SYSTEMS

Planning and budgeting

Should have realistic plan

Should harmonize planning and reporting information

Should have close link between plan and relevantprocesses of project

PIU should monitor timeliness and costs includingprocedures for remedial actions when required

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Internal controls

Suitable authorization procedure

Segregation of duty

Safeguarding of assets

Independent verification

Monitoring

Reconciliation

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Accounting system

Chart of accounts

Accounting policy

Bookkeeping procedure

Accounting software

Supporting document

Financial report system

System interface

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STRENGTHENING FINANCIAL MANAGEMENT

PRACTICES

Financial reporting

Financial reporting for Bank-funded projects: Projectfinancial statement ( audited), periodic financialreports (unaudited).

Financial reporting of implementing entities(audited)

Deadline for receiving audited financial statements (

6 months after the year end).

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STRENGTHENING FINANCIAL MANAGEMENT

PRACTICES

Auditing

Selection process of auditor

Work of auditor: Entity Financial Statements, ProjectFinancial Statements ( FS, SA with cash flow statement,

SOE reliability), Compliance audit, Operation audit.Output of auditor: Financial Statement and Management

Letter.

Follow-up of audit findings.

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RECENT CHANGES IN PROJECT FINANCIAL

MANAGEMENT PROCEDURES

What is Changing

FM Assessments:

More structured, risk-based, approach.

Better linkage to CFAA.

Reporting: FMR replaces PMR

Simpler, more Flexible

Customized to better fit borrower systems and the way projects aremanaged and monitored

Disbursement information only included if disbursements are report-based

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What is NOT Changing?

Requirement for all projects to have:

An FM and Procurement Capacity Assessment

Periodic reporting on fiduciary aspects of projectimplementation

Project Audit Policies and Procedures

Choice as to Mode of Disbursement

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How were changes decided?

Based on two Extensive Reviews

Included consultations with:

Bank staff at all levels

Borrowers in many countries

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Timing and Impact of the Changes

Projects appraised:

Pre-July 1998 are not affected

July 1, 1998 December 31, 2001 will have option toconvert to new procedures

After January 1, 2002 required to submit the new FMRs as

agreed at negotiations

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DISCUSSION QUESTION

What challenges do you face in relation to the

financial management of WB funded projects?

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FINANCIAL MONITORING REPORTS (FMR)

Change from PMR to FMR.

Helps to generate reports directly out of projectmanagement information systems rather than separately.

Change reflects two key points:

That they focus on the financial aspects of the project.

The purpose is project monitoring not management.

The FMRs are not the same as the audited financialstatements required annually for each project but theyform the basis of the statements.

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BORROWER AND BANK

RESPONSIBILITY FOR FMR

Borrower will put in place and maintain

adequate financial management ,

procurement and progress monitoring

arrangements for the project in place.

The role of the bank is to ensure that the

arrangements are in place before project

implementation begins and remain in place.

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RESPONSIBILITY OF BORRWER STAFF FOR FMR

Project manager/coordinator must ensure thatcomplete FMR is produced and circulated to allstakeholders in a timely manner.

He/she must provide narrative explanations ofproject progress and deal with problems orexploit opportunities that may be presented inthe FMR.

Project Accountant/Financial Manager preparesfinancial reports and technical Specialist (TS) anProcurement Specialist (PS) prepare physicalprogress procurement reports respectively.

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DISCUSSION QUESTION

Discuss what benefits or opportunities you do

or would derive from the preparation of

FMRs.

What challenges do you face?

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RESPONSIBILITY FOR BANK STAFF FOR

FMR

Project supervision the responsibility of the Task

Team (TT) assigned to the project.

The TT agrees on arrangements for project

supervision with borrower staff The arrangements include formart and content of:

FMR, annual financial statements and audit reports.

Other reports that may be required for project monitoring

and disclosure.

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UNDERLYING PRINCIPLES OF FMRs

FMRs should provide information useful to theborrower as well as for the Bank to establishwhether:

Funds are used for intended purposes Project implementation is on track

Budgeted costs will not be exceeded

Reports aligned with borrower systems as far as possible

PMR-based disbursement is no longer the main overridingobjective of the reports

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UNDERLYING PRINCIPLES

Financial information should be linked with physical

progress and procurement to assure that financial

and physical progress are consistent.

Expenditure is monitored in relation to physical progress toensure that the project is under proper financial control.

Project monitoring by the Bank should be cost

effective from the view point of both the Bank and

borrower.

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DISCUSSION QUESTION

What would you recommend the Bank or

borrower should do in order to make project

monitoring cost effective?

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Content of FMRs

Introductory narrative discussion of developments andprogress

Financial Reports

Sources and Uses of funds (period and cumulative)

Uses of funds by project components (budgeted andactual, period and cumulative)

Format agreed between Project Accountant and the Banks

FMS. Some countries may use common formats acrossprojects

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FINANCIAL REPORTS

Financial reports should include a statement showing

for the period and cumulative (project life or year to-

date) cash receipts by sources and expenditure by

main expenditure classifications. Beginning and ending cash balances of the project.

Supporting schedules comparing actual and planned

expenditures.

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FINANCIAL REPORTS (CONTD)

Line Item Reporting.

This should follow the borrowers chart of

accounts showing significant discreet activities as

determined during negotiations. You need to ensure that reporting is in line with

the disbursement categories as per withdrawal

applications.

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Relationship between FMRs and annualfinancial statements

In drawing from the project managementsystem, the cumulative FMRs over the projectcan be used as the projects annual financialstatement.

This may be more cost effective.

Review of FMRs by the auditor may be seen asan interim audit and hence save on cost.

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Avoiding parallel or duplicative systems:

As much as possible, borrower financial system

should be used for project management reporting.

This should be discussed with the Bank atappraisal.

If not possible, use any separate internal project

management system to produce FMRs. The idea is

to avoid development of a new system not linked

to project management.

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PHYSICAL PROGRESS REPORTS

Linkage of financial information with Outputindicators or contract status for key activities

Outcome indicators generally not reported in FMRs

Narrative information may complement or evensubstitute tabular information.

Format should be agreed between project

management, task team leader, and financial

management specialist prior to negotiations

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PROCUREMENT REPORTS

Provide information on the procurement of goods, work and

related services, selection of consultants and on compliance

with agreed procurement methods.

Generally for contracts not subject to prior review but above a

certain threshold.

Contains information on all authorised contract variattions.

Format more standardized than other reports based on

procurement process.

Bank Task Team Leader or Procurement staff should agree

with borrower as to range of contracts to be reported

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SCOPE AND FREQUENCY OF THE FMR

FMR encompasses total project as described

in the PAD.

Not limited to use of Bank funds only.

It reflects all project activities, financing and

expenditure.

In kind contributions should be valued

appropriately.

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SCOPE AND FREQUENCY OF FMR

If information is not available, the FMR should not be

delayed and instead, a note to this effect is attached

to the FMR and the information provided in

subsequent FMRs Currency of FMRs normally in the currency used

for maintaining books of accounts

Frequency flexible, normally quarterly. At least

semi-annually

Submission within 45 days

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FMRs and Project Preparation Project Appraisal Bank, borrower, determine format and

content of FMRs

Negotiations Bank, borrower agree the format and

content of FMRs Ability to produce FMRs should be in place by

effectiveness

First FMR produced after first full period

NO standardized formats for FMRs.

Borrowers to agree with the Bank on format and content

that is consistent with the FMR Guidelines

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ACCOUNTING POLICIES

The government uses both cash and accrual accounting.

They differ in when they record or recognize transactions.

For non-revenue earning activities, the cash basis isacceptable.

Where management of liabilities requires specificattention and full cost information is needed, accrualmethod is appropriate.

The full accrual approach for all commercial entities

receiving Bank funds. Accounting policies should be agreed at negotiations and

disclosed in a note to the FMR.

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Disbursement and Audit Issues

Borrower choice of disbursement mode-Bank must agree

Disbursement information only included if disbursementsare report-based

FMRs not the same as audited annual financial statements(FMRs are NOT audited).

But financial reports in FMRs should have similar formatand content to annual audited financial statements

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Documentation Requirements For Report-BasedDisbursement FMRs

Source of supply information

Breakdown of aggregate disbursements by legal disb.category and disb. percentage

SA reconciliation statement

SA bank statement

Forecast of expenditures for the next two FMRreporting periods.

Calculation of disbursement request based on aboveinformation.

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THE ROLE THE COUNTRY FINANCIAL

ACCOUNTABILITY ASSESSMENT (CFAAs)

CFAAs provide for a review of the private andpublic sector financial management systems ofthe country and regulatory framework.

Objectives:

Identify specific country financial capacity buildingneeds.

A mechanism for building appropriate technical

assistance into the lending portfolio. Provide a framework in which the requirements of

project financial management can be betterunderstood.

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Scope.

Each CFAA is undertaken with the agreement of

the borrower.

Identifies major issues affecting financialmanagement in the country and any departures

from international standards.

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Contents.

The strength of the local accounting profession.

The nature of accounting and auditing standards.

The capacity of the supreme audit institution. The quality and reliability of government accounting.

These details provide a basis for assessing the

countrys project financial management systems.

FM ESAMI 1

Documents

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