errp ia report dec 2012

Final Internal Audit Report

Emergency Roads Recovery Project

For the period

Inception to December 2012

2

Glossary of terms

ACE Associated Consulting Engineers Ltd

AGPR Accountant General Pakistan Revenues

C&W Communications & Works

CWDP Central Working Development Party

DD Deputy Director

DG Director General

ENV Environment

ERRP Emergency Roads Recovery Project

FATA Federally Administered Tribal Areas

FHA Frontier Highways Authority

GoKP Government of Khyber Pakhtunkhwa

GoP Government of Pakistan

GSP Governance Support Project

IPC’s Interim Payment Certificates

KAC Khattak Allied Company

KP Khyber Pakhtunkhwa

MDTF Multi-Donor Trust Fund

PC-1 Planning Commission – 1 Document

PCNA Post Crisis Need Assessment

PKHA Pakhtunkhwa Highway Authority

PARRSA Provincial Reconstruction, Rehabilitation and Settlement Authority

PRM Portfolio review meeting

PSC Provincial steering committee

P&D Planning & Development Department

SOP Standard Operating Procedure

ToRs Terms of References

VO Variation Order

WB World Bank

3

Table of contents

Page

Introduction 4

■ Project background 5

■ Project structure 6

■ Project Snapshot 7

■ Scope of Work and Approach to Internal Audit 8

Internal Audit findings 9

■ Summary of Internal Audit Findings 10

■ Risk matrix 14

■ Project governance and control environment 17

■ Hiring of consultants and contractors 21

■ Financial management and reporting 32

■ Procurement management 38

■ Human resource management 41

Annexures 45

■ A – Risk rating criteria 46

■ B – Increase in total project cost 47

■ C – Delayed payment of withholding tax 48

■ D – Employees with salary greater than tax threshold 49

Introduction

5

Introduction Project Background

1. Introduction to the Emergency Roads Recovery Project

■ The Emergency Roads Recovery Project (“the Project”, or “ERRP”) is one project, of a larger portfolio of projects funded by a Multi-Donor Trust Fund (“MDTF”) created for the provinces/areas of Khyber Pakhtunkhwa, FATA and Baluchistan. The MDTF is funded by numerous international donors and is administered by the World Bank.

■ Broadly, the MDTF provides funding for projects that are in line with the Post Crisis Needs Assessment report (“PCNA”); a report that was developed by the Government of Khyber Pakthunkhwa (“GoKP”) with assistance from various donor bodies including the Asian Development Bank, the World Bank (“WB”), the United Nations and the European Commission. The report identified key crisis drivers in the province, and identified areas in need of development in order to achieve the objectives defined by the authors.

■ The ERRP was established for the construction of a single 10.65 kilometer section of the S-3B provincial highway from the village of Sharifabad to the township of Kanju in the district of Swat, KP. The project was designed to be in line with Strategic Objective 3 of the PCNA: “Ensure the delivery of basic services”

■ The project is implemented by the ERRP Project Directorate of the Frontier Highway Authority (later renamed as the “Pakhtunkhwa Highway Authority”, or “PKHA”), which is responsible for overall project implementation, managing project funds, and for reporting expenditure to both the GoKP and the World Bank.

■ The project was given administrative approval on October 11, 2011 by the Secretary C&W department.

■ The directorate is located at the PKHA office in Peshawar, and is headed by the Project Director.

2. Grant Agreement with the MDTF/World Bank

■ The project is financed in its entirety by the MDTF, vide grant agreement TF010112-PK, dated 23 August 2011, signed by the representatives of the World Bank and the Economic Affairs Division of the Government of Pakistan.

■ The grant agreement provides for maximum funding of US$ 8 million, subject to the availability of funds in the MDTF account maintained with the World Bank.

■ Amongst other requirements, the grant agreement sets out various operational and programmatic requirements, and defines areas of expenditure that require prior approval of the World Bank.

6

Introduction Project Structure

1. Project structure

■ The operating structure of the project is reflected in the approved Organogram document established by the project’s senior management.

■ Operating within the overall PKHA structure, the Project Directorate is headed by the Project Director who is ultimately responsible to the Managing Director of the PKHA.

■ Reporting to the Project Director are the two Deputy Directors, the project Accountant, and the Administration Officer.

■ As at December 31 2012, three positions remained vacant in the total sanctioned position for the project.

■ The current Program Director is Mr. Muhammad Aslam, who previously served as a Government Officer.

■ Primarily, project implementation activities are carried out by two firms:

■ Project monitoring is carried out by M/s Associated Consulting Engineers Pvt. Ltd.

■ Construction and civil works is carried out by M/s Khattak Allied Company Ltd.

Managing Director PKHA

Project Director

Deputy Director (Envir. &

Restt)

Deputy Director

(Contracts) Accountant Admin

Officer

Accounts Clerk

Office Assistant

(2)

Junior Clerk

Computer Operator

(2)

Driver (2)

Naib Qasid (3)

Vacant Position

Filled Position

7

Introduction Project Snapshot

SNAP SHOT

Emergency Road Recovery Project

Sponsoring authority The World BankTotal Grant Agreement USD 8 millionEstimated cost as per PC 1 (Rs. In million) 680.33 Amount after approval of VO No.1 PKR mil 636.87 Amount after approval of VO No.2 PKR mil 680.33 Amount after approval of VO No.3 PKR mil 729.50 Total Road Length as per PC 1 10.65 kmRevised Road Length 14.65 kmName of Executing Department Frontier Highw ay AuthorityName of Consultant Associated Consulting Engineers (Pvt) Ltd.Project Initiation Date 15-Sep-11Project Completion Date 14-Sep-11Key Project Activities Construction of Sharifabad to Kanju RoadConstruction ActivitiesName of Contractor Khattal Allied Construction Company Original Contract PKR 439,980,990 Net effect of VO 1 on Contract Cost PKR (1,131,883) Net effect of VO 2 on Contract Cost PKR 119,408,615 Net effect of VO 3 on Contract Cost PKR 11,754,130 Revised Contract Amount PKR 570,011,852 Description of VO 1 Change in Alignment & ProfileDescription of VO 2 Extension of 3 Km RoadDescription of VO 3 Extension of 1 Km RoadFinancial OverviewFunds Received till 31 Dec 2012 PKR 583.139 millionActual funds utilization till 31 Dec 2012 PKR 463.165 millionBalance availabl at hand PKR 119.975 million

8

Introduction Scope of work and approach to the Internal Audit

1. Internal Audit Scope of Work

■ As per the defined scope of work, approved on December 19, 2012, the Internal Audit (a term used to refer to the entire Internal Audit team), was tasked to determine whether the Project’s risk management, controls, and compliance processes, are both adequate and functioning. For the purpose of this report, the period of the Audit is from inception to 31 December 2012.

2. Focus Areas

■ During the Internal Audit Planning phase, five (5) focus areas were identified for the Project Audit. These are:

1) Project governance and control environment

2) Hiring of consultants and contractors

3) Financial management and reporting

4) Procurement management

5) Human resource management

3. Approach to the Internal Audit

■ The Internal Audit was carried out using the following approach:

1) Discussions with management and staff;

2) Developing and documenting an understanding of the various processes and systems in place;

3) Selection of a sample of transactions for each focus area;

4) Review of supporting documents for the sample of transactions selected;

5) Testing of transactions initiated during the period to identify level of compliance with established policies and to identify gaps in the design of the systems themselves;

6) Compliance with the applicable rules and regulations of the World Bank and Provincial Government.

Internal Audit Findings

Summary of Internal Audit Findings

11

Summary of Internal Audit Findings Overview

Overview

■ The Internal Audit has identified a total of 21 issues across 5 different focus areas.

■ The issues identified are ranked on a three point scale, from “Low” to “High”. The ranking criteria and the implication of the grade assigned is further clarified in annexure A.

■ Of the total 21 issues, the Internal Audit identified 17 high rank issues, 4 medium rank issues, and no low rank matters. A list of issues is provided on the following page. Detailed findings, with relevant recommendations, management responses and conclusions based on the management responses provided, are provided on pages 17 to 44.

■ Issues identified during the Internal Audit are mapped against the risks identified in the Internal Audit Planning report. For detailed risk mapping please refer to pages 14 to 16.

No. Of Internal Audit Findings Focus Area Wise

Focus Area Low Medium High Total No.

of Findings

■ Project governance and control environment

- 1 2 3

■ Hiring of consultants and contractors

- - 8 8

■ Financial management and reporting

- 1 4 5

■ Procurement management

- 1 1 2

■ Human resource management

- 1 2 3

Total - 4 17 21

12

Sr. No. Findings Rating of Finding Page Reference

Focus Area: Project governance and control environment

1. Lack of oversight by the provincial steering committee High 18

2. Lack of quorum of the PSC meeting High 19

3. Absence of policies and procedures manuals Moderate 20

Focus Area: Hiring of consultants and contractors

4. Conflict of interest checks not performed High 22

5. Potential competitive advantage to successful consultant High 23

6. Insufficient time for submission of bids High 24

7. Selection of contractor and consultants prior to approval of PC-1, Administrative approval and Technical Sanction

High 25

8. Non compliance with requirements of Instruction to Bidders for hiring of contractor High 26

9. Inadequate evaluation of proposals for selection of consultants High 27

10. Payment to contractor prior to approval of variations High 28

11. Significant cost and quantity variations High 30

Summary of Internal Audit Findings Summary of Internal Audit Findings

13

Sr. No. Findings Rating of Finding Page Reference

Focus Area: Financial management and reporting

12. Bank reconciliation statements not prepared Moderate 33

13. Difference in amount as per Variation Order and Technical Sanction High 34

14. Withholding tax not paid within required timelines High 35

15. Withholding tax under-paid High 36

16. No income tax deducted from salaries High 37

Focus Area: Procurement management

17. No insurance of project vehicles Moderate 39

18. Non compliance of the terms of the contract with Environment auditor High 40

Focus Area: Human resource management

19. Key positions remained vacant High 42

20. Discrepancies identified in the attendance register High 43

21. ToRs/ Job descriptions not provided Moderate 44

Summary of Internal Audit Findings Summary of Internal Audit Findings

Risk Matrix

15

Risk Matrix Project Governance and Control Environment

Focus Areas

Risk ID Risk Area / Activity Risk Rating

as per planning

Risk Rating

as per IA

Project governance and control environment

PG1 Governance Forums High High

PG2 Operational and administrative guidance High High

PG 3 Project management and Project management Structure Moderate N/A

Hiring of consultants and contractors

HCC 1 Selection Criteria High High

HCC 2 Selection process High High

HCC 3 Review of bids High High

HCC 4 Revision in the terms of the contract High High

HCC 5 Approval of contracts High High

HCC 6 Financial and programmatic monitoring of progress High N/A

Financial management and reporting

FM 1 Appropriateness of accounting system High N/A

FM 2 Accuracy of financial reporting Moderate Moderate

FM 3 Budget monitoring Moderate High

FM 4 Eligibility and ability to allocate of project expenditure High High

FM 5 Deduction and payment of government taxes and duties Moderate High

Procurement management

PM 1 Competitive and transparent supplier selection High N/A

PM 2 Procurement planning High N/A

Contd..

16

Risk Matrix Hiring of consultants and contractors

Focus Areas

Risk ID Risk Area / Activity Risk Rating

as per planning

Risk Rating as per IA

Procurement Management (Continued)

PM 3 Contract management and administration High High

Human resource management

HRM 1 Hiring of adequate staff High High

HRM 2 Hiring of appropriate staff High N/A

HRM 3 Employee performance evaluation High N/A

HRM 4 Attendance record High High

HRM 5 Employee records Moderate Moderate

HRM 6 Payroll preparation High High

Project governance and control environment

18

1. Lack of oversight by the Provincial Steering Committee Risk Rating: High

Finding(s) and impact Related Risk ID: PG-1

Findings:

As per Section I-b of Schedule 2 to the Grant Agreement, “the recipient (the Government of Pakistan) shall maintain, throughout project implementation, the provincial steering committee”. Pursuant to the terms of the Grant Agreement, the Provincial Steering Committee (PSC) is entrusted with the responsibility for Project Policy and Strategy Orientation. The Internal Audit noted following inconsistencies during the review of the governance systems:

1. The PSC held one meeting on 12th November 2012 during the Project implementation period till 31st December 2012. The Project was initiated on 23rd August 2011 and no PSC meeting was held during the first year of the Project.

2. A review of the Project progress against targets and utilization of Project funds was not evidenced from the minutes of the PSC meeting held on 12th November 2012.

Impact:

• Pertaining to Points (1) and (2): An independent and rigorous mechanism for Project oversight and governance might not be implemented. The Project activities and variations, if any, might not be timely identified, evaluated and formally approved by the competent forum.

Recommendation(s)

Given the current stage of Project implementation, a meeting of the PSC might be held to comprehensively review the Project progress till date and advice on any issues highlighted.

Agreed management action(s)

The Provincial Government will be requested to convene meeting of the PSC to comprehensively review the upto date progress on the project.

Conclusion

Findings agreed by the Project management.

Responsibility

Project Management (for raising request with Provincial Government and follow up for PSC meetings)

Target date

Immediate

Internal Audit Follow-up

The internal audit will follow up frequency of PSC meetings during subsequent quarterly internal audit

Internal Audit Findings Project Governance and Control Environment – contd.

19

Internal Audit Findings Corporate Governance

2. Quorum of the PSC meeting Risk Rating: High


Findings:

As per Section 1-b of Schedule 2 to the grant agreement, “the Provincial Steering committee shall comprise of the Additional Chief Secretary of KP as chair, Secretary Finance Department, Secretary C&W Department, Commissioner Malakand Division, the DG PaRRSA, Managing Director of the Project Implementing Entity and the Project Director”.

The Internal Audit reviewed the list of participants provided for the meeting held on the 12 November, 2012 and noted that Secretary Finance, Secretary C&W, Commissioner Malakand Division, DG PRRSA and Managing Director FHA/PKHA were not in attendance.

Impact:

The Committee might not be able to exercise effective oversight over the project activities due to non participation of key members of the Committee in the meeting.

Recommendation(s)

Participation of all members of the Committee should be ensured in all PSC meetings to review and discuss the project activities, advise corrective measures where required and grant requisite approvals.


It is for the Provincial Government to ensure the participation of all members of the PSC. We being the subordinate office, cannot impress upon the concerned department to adhere to the quorum requirement.

Conclusion

PSC to ensure participation of all members in the PSC meetings.

Responsibility

Project Steering Committee

Target date

Next PSC meeting


Internal audit to review quorum of subsequent PSC meetings during subsequent quarterly internal audits

20

Internal Audit Findings Project Governance and Control Environment

3. Absence of policies and procedures manuals Risk Rating: Moderate


Finding:

A review of the mechanism of defining authorities and responsibilities, as well as, providing guidance to the Project staff was performed by Internal Audit. It was noted that a comprehensive set of policies and procedures manuals, defining roles and responsibilities of the Project staff, and providing guidance for undertaking the Project management and implementation activities, was not developed.

Impact:

In the absence of policies and procedures manuals, the management might not be able to implement an effective control environment that integrates necessary methods for assigning authority and responsibility. Further, the Project staff might not be able to implement the Project activities in a standardized manner through adequate guidance and protocols.

Recommendation(s)

In view of the current stage of Project implementation, the management shall consider the impact of non compliance of its obligations under the Donor/ GoKP regulations with respect to development of a policies and procedures manual for undertaking Project implementation and management activities.


Regarding development of a manual, as we are at the last two months of our completion period, it would not serve any purpose. However we have noted this for future projects.

Conclusion

-

Responsibility

Not applicable

Target date

Not applicable


Not applicable

Hiring of consultants and contractors

22

Internal Audit Findings Hiring of Consultants and Contractors

4. Conflict of interest checks not performed Risk Rating: High

Finding(s) and impact Related Risk ID: HCC-1

Finding:

The Internal Audit noted that a mechanism was not developed and implemented for identifying and minimizing the risk of Conflict of Interest during the hiring of Consultants and Contractors. The bidding firms were not required to provide a declaration of having “No Conflict of Interest” in the procurement process. Similarly, a declaration to this effect was not obtained from the members of the Procurement Committee formed for the selection of contractor and consultant .

Impact:

The process followed for procuring the services of consultant and contractor is not capable of indentifying any conflict of interest of potential suppliers and the committee members.

Recommendation(s)

The Project management shall ensure that there was no conflict of interest at the time of selection of consultants and contractors. A confirmation to this effect should be obtained from selected consultants and contractor as well as from the personnel involved in the procurement process.


The bidding form for firms is the standard document issued by the World Bank. There was never a conflict of interest, the procedure was scrutinized by the World Bank Procurement Specialist.

Conclusion

A mechanism shall be developed to ensure there are no conflict of interest issues during the hiring process of contractors and consultants.

Responsibility

Not applicable

Target date

Not applicable as the findings relate to non recurring events


None

23

5. Potential competitive advantage to successful consultant Risk Rating: High


Findings:

The internal audit noted that the consulting firm Associated Consulting Engineers (ACE) Ltd, hired for engineering consulting/monitoring purposes was also involved in preparation of the project’s PC-1 document.

Impact:

The consultants hired might have a competitive advantage as being involved in the PC-1 preparation process.

Recommendation(s)

The Project management shall review the impact of noted conditions at the time of bidding.


The process was reviewed and as there were more than one bidder, therefore, the selected consultant had no edge over the others. Moreover, the selected consultants bid was 43% of the next competitive bidder. The procedure was shared and approved by the World Bank Specialist.

Conclusion

Internal audit’s findings related to possible competitive advantage to consultant selected as they were involved in preparation of PC 1 for the Project.

Responsibility

Not applicable

Target date

Not applicable as the findings relate to non recurring events


None

Internal Audit Findings Hiring of consultants and contractors

24

6. Insufficient time for submission of bids Risk Rating: High


Finding:

As per clause i of Annexure to Schedule 2 of the Grant Agreement, “Invitations to bid shall be advertised in at least one national newspaper with a wide circulation, at least thirty days prior to the deadline for the submission of bids.”

The Internal Audit noted that the project had only provided 13 days for prospective bidders to submit their bid. The initial bid advertisement was made on 03 May 2011, whereas bids opening meeting was held on 16 May 2011.

Impact:

Non compliance with grant agreement terms.

Recommendation(s)

Terms and conditions of the grant agreement and the applicable World Bank Guidelines shall be complied with. The prospective bidders should be allowed sufficient time to respond enabling them to submit quality proposals.


The Project being an Emergency Roads Repair Project (ERRP) that is of emergent nature, curtailment of the bid time was approved by the World Bank.

Conclusion

Specific waivers shall be obtained in case of non compliance with a specific term of the Grant Agreement.

Responsibility

Project management

Target date

Not applicable as the finding relates to non recurring event


None


25

7. Selection of contractor and consultants prior to approval of PC-1, Administrative approval and Technical Sanction Risk Rating: High


Finding:

The process of hiring contractor and consultants for the Project was initiated prior to approval of PC-1, administrative approval and technical sanction.

Process of hiring of contractors was initiated in April 2011 and contract was signed with the contractor on 22nd June 2011. The hiring process of consultants was initiated in March 2011 and contract with consultants for the Project was signed on 22nd June 2011. Whereas, the PC-1 was approved by CDWP on 14th June 2011 and administrative approval by C&W department was provided on 11th October 2011. As per the information provided, the technical sanction was provided on 4th February 2013.

Impact:

The Project management entered into contractual obligations with third parties prior to obtaining requisite approvals from competent authorities.

Recommendation(s)

The Project management shall ensure that necessary approvals are obtained prior to initiation of recruitment process.


The Technical Sanction referred to in the observation is the Revised Technical Sanction notified on 04 Feb 2013. Prior to this a Technical Sanction was earlier issued on 06 Aug 2012.

It is however mentioned for information that the Technical Sanction is issued when the quantities against different items of work are to increase against the prescribed quantities given in BOQ. Here in our case the road project was extended by 4 KM. Evidently the quantities of work involved in each item of work exceeded which necessitated the issuance of Revised Technical Sanction. Hence no delay has occurred in getting approval of the competent authority. Moreover issuance of Technical Sanction has nothing to do with the recruitment of Consultants /Civil Works Contractor. We still expect extension by 1 km due to savings in the grant amount. Final Technical Sanction and revised PC 1 will be prepared to cover these amounts.

Conclusion

The Project management has not provided reasons for entering into contractual arrangements with contractor and consultants prior to obtaining administrative approval and technical sanction. The technical sanction dated 6th August 2012, as stated by the project management, and revised approved PC 1 will be obtained and reviewed during subsequent audit.

Responsibility

Project Management

Target date

Not applicable as the findings relate to non recurring event.


Internal audit to obtain and review technical sanction dated 6th August 2012 and revised approved PC 1 during subsequent quarterly internal audit.


26

8. Non compliance with requirements of Instruction to Bidders for hiring of contractor Risk Rating: High


Finding:

As per the requirements of section 2.4.1 (general experience) of instruction to bidders, the contractor must possess registration with Pakistan Engineering Council (PEC) valid upto 31st December 2011. However, PEC registration of the successful contractor, M/s KAC, was valid upto 31st December 2010.

Impact:

Non compliance with the requirements of ITB.

Recommendation(s)

The Project management shall obtain evidence of registration of KAC with PEC valid for the entire Project period.


The registration / renewal of a firm with PEC was not a pre requisite as per section 1 “Clause -11 (documents comprising the Bidding Documents”. However as desired photocopies of M/s KAC’s Registration with PEC for the years 2011, 2012 and 2013 covering the entire project is forwarded with the reply.

Conclusion

At the time of bids opening and evaluation, the contractor does not have a valid PEC registration. Copies of renewals of PEC registration have been provided.

Responsibility

Not applicable

Target date

Not applicable as the findings related to non recurring events


None


27

9. Evaluation of proposals for selection of consultants Risk Rating: High


Findings:

An evaluation committee comprising of Project Director, Deputy Director (Env. & Restt) MDTF FHA, Deputy Director (HQ) FHA and Deputy Director (Fin) FHA was constituted by Managing Director FHA for evaluation of the technical and financial proposals for selection of consultants for the Project. However, it was noted that signatures of Deputy Director (Fin) were missing on the evaluation report prepared for evaluation of proposals for selection of consultants.

Impact:

Adequate evaluation of the financial position and financial proposals might not be carried out.

Recommendation(s)

The Project management shall provide adequate reasoning for the inconsistency noted.


Deputy Director (Fin) PKHA was not readily available on the date of opening of bids i.e. 16 May 2011. Since the opening could not be delayed hence the bids opened in the presence of three (3) members of the Tender Procurement Committee.

In our view the bids opened in the presence of the 3 Members of Bid Opening and Evaluation Committee as well as the bidder is authenticated enough for the audit point of view.

Conclusion

Internal audit’s findings related to adequate evaluation of the financial position and financial proposals in the absence of finance specialist. The Project management has not responded to findings.

Responsibility

Not applicable

Target date

Not applicable as the findings related to non recurring events


None


28

10. Payment to contractor prior to approval of variations Risk Rating: High


Findings:

Significant variations were noted in material quantities as invoiced by the contractor through IPCs. The internal audit noted following inconsistencies in this regard:

1. Under the IPC-3, total material quantity utilized for “Formation of Embankment from Borrow excavation in common material including compaction by Power Roller (Pay Item No. 03-61-c)” was 43,429 m3 at a total amount of PKR 22,545,083. Total budgeted quantity for this item in the BOQ submitted and approved was 15,795 m3 at a total amount of PKR 11,530,350. The monitoring consultants approved the IPC-3 n 9th April 2011, whereas, notification for approval by the Project Director of Variation Order number 1 (which included approval of quantity and amount variation in the subject item) was issued 11th April 2011.

2. As per the approved BOQ and variation order number 1, Item No. 06-40-j in Bill No. 5 “Lean Concrete Pay - Drainage and Erosions Control Works” was not included in the construction works. The subject item was approved by the Project Director through Variation Order No.2. However, payments to the contractor amounting to PKR 301,225 were made prior to No Objection Letter (NOL) from the World Bank.

3. Payments aggregating to PKR 1.1 million were made to contractor prior to Variation Order number 1 for item “Random Rubble masonry in foundation & plinth in cement, sand and Mortar” through IPC- 3.

Impact:

Approval of IPCs and payments to contractor prior to issuance of Variation Orders and NOL from the World Bank indicate weaknesses in effective monitoring and supervision of the Project.

Recommendation(s)

The Project management shall review the monitoring and approval mechanism and ensure that no payments are made prior to obtaining required approvals.


Formation of Embankment from borrow excavation in common material including compaction by power roller (pay item number 03-61-C)

In this regard kindly refer to GCC clause 36.1 (a&b) “changes in the contract price” where in it is stated that no variation order is required when the variation is equal to or less then 15% (Annex-5). Relevant clauses are reproduced hereunder:

36-a " if the final quantity of the work done differs from the quantity in the bill of Quantities for the particular item by more than 25 percent, provided the change exceeds 1 percent of the Initial Contract Price, the Project Manager shall adjust the rate to allow for the change.

36-b The Project Manager shall not adjust rates from changes in quantities if thereby the Initial Contract Price is exceeded by more than 15 percent, except with the prior approval of the Employer,

It is further stated that the original estimate in the BOQ was prepared on the generally observed soil condition.


29

10. Payment to contractor prior to approval of variations (Contd.) Risk Rating: High

Agreed management action(s) (Contd.)

Also during excavation of the embankment it was observed through laboratory tests that the soil was not suitable for formation of embankment as it was slushy because of unlined irrigation channels. It was therefore necessary that fresh soil be brought from borrow areas. Laboratory tests of unsuitable soil together with pictures are available as record.

The V.O No.II and approved Technical Sanction for these changed quantities were prepared. The Audit objection that excess payment has been made has been justified in the V.Os and Technical Sanction.

Attached please find laboratory tests of unsuitable soil and copies of V.O and Technical Sanction and quantity matrix.

Lean Concrete (Item No.06-40-i) - Bill No.5

The Audit party has observed that the quantity of stone masonry and lean concrete are not covered in the BOQ. The consultants had provided upon the Contractor request an alternative design in stone masonry as he had problem getting quantity bricks locally which the security people refused to let brick loaded trucks on the steel bridges.

The contractors quoted prices for brick and stone masonry are the same that is Rs. 3200/m3 while the section of wall is more, payment is being made on the original volume for bricks stated in the drawing.

Attached please find revised drawing and approval. These changes have been covered in Technical Sanction.

Conclusion

The internal audit’s findings related to inconsistencies in approval of IPCs by the consultants as well as payments to contractor prior to approval of variation orders. Internal audit has mentioned that variation orders in respect of changes in design and quantities etc were covered through variation orders, however, deficiencies in approval by consultants and payments prior to approval of variation orders were highlighted.

Responsibility

Project Management

Target date

Immediate for subsequent IPC approvals and payments


Internal audit to review subsequent IPCs and their approval by the consultants as well as payments made by the Project management


S.No. Description Units Qty in BOQ Qty in V.O.I Qty in TS & V.O.2

Qty Paid upto date in IPC

1 Roadw ay Excavation in Surplus / Unsuitable Common Material Cu.m 1,000 18,500 33,590 18,499

2Formation of Embankment from Borrow Excavation in Common Material including compaction by pow er roller Cu.m 15.795 73,046 135,939 71,474

30

11. Significant cost and quantity variations Risk Rating: High


Findings:

Total project cost was increased from approved PC-1 cost of PKR 680.33 to PKR 729.5 million through three variation orders till December 2012. The increase in cost is mainly due to extension of road by 4 km. The Internal Audit noted following inconsistencies in this regard:

– The variation orders were approved by the Project Director, whereas, the PC-1 of the Project was signed by Additional Chief Secretary Govt. of Khyber Pakhthunkhwa, Secretary C&W, MD FHA and approved by CDWP;

– The variation orders were not evidenced for date of issuance and approval;

– Revised PC-1 for the project has not been approved by the competent authority.

Pease refer annex B for comparison of quantities and costs as per the PC-1, contract with the contractor and the Variation Orders.

Impact:

Requisite approvals from the competent authority not available.

Recommendation(s)

The Project management shall incorporate a comprehensive mechanism to identify, deliberate and obtain approvals from competent forum on any material variances in Project quantities and costs.


In case of Variation Orders, Project Director of a Project holds full authority for approval. However when the variation in quantities exceeds more than 15%, in that case approval of the World Bank is required.

However, since the cost of Variation Orders No.2 & 3 exceeded more than 15%, hence these V.Os were referred to World Bank, approval to which was conveyed vide e-mails dated 01-08-12 & 14 Dec 2012 respectively (Annex 6&7 )

The revised PC-1 has been delayed simply because the scope of work increased due to savings from other items.


31

11. Significant cost and quantity variations Risk Rating: High

Agreed management action(s) (Contd.) Related Risk ID: HCC-6

As we are expecting to increase the road length by another 1 KM bringing it to 15.5 KM, we shall prepare the revised PC-1 and revised T.S. on those quantities.

Conclusion

The internal audit’s findings related to absence of approvals from competent authority. The revised PC 1 was not prepared and approved by the competent forum. Deficiencies noted in variation orders were not responded by the project management

Responsibility

Project Management

Target date

Not provided by the Project management


Internal audit to review the status of revised PC 1 and its approval from competent forum


Financial management and reporting

33

Internal Audit Findings Financial management and reporting

12. Bank reconciliation statements not prepared Risk Rating: Moderate

Finding(s) and impact Related Risk ID: FMR-2

Findings:

We noted that bank reconciliations were not prepared for the first six months of the project.

Impact:

The management might not be able to exercise effective financial management.

Recommendation(s)

Bank reconciliations should be prepared for all bank accounts and should be dated for evidence of preparation on a timely basis


Bank Reconciliation statements were prepared copies of which were provided to the Auditors. The Auditors however observed that these statements are not according to the prescribed / prevalent pattern. It was promised that in future the requisite Reconciliation statements (duly dated) would be prepared according to the desired pattern.

Conclusion

Follow up will be made in the subsequent period audit and Bank Reconciliation Statement for the subsequent period will be checked.

Responsibility

Project management

Target date

Immediate on monthly basis


Internal audit to review bank reconciliation statements during the subsequent quarterly audits

34

13. Difference in amount as per Variation Order and Technical Sanction Risk Rating: High


Findings:

Technical sanction for the Project was provided on 4th February 2013. The internal audit noted that for Bill No 1 and Bill No. 7, the amounts approved in the technical sanction do not reconcile with the amounts as per Variation Order number 3. The total amount approved as per technical sanction for Bill No. 1 and Bill No. 7 were PKR. 156.389 million and PKR 14.438 million respectively, however, the corresponding amounts for these items as per the Variation Order number 3 were PKR 142.82 million and 14.338 million.

Impact:

Variances in amounts approved as per the technical sanction and variation orders might indicate ineffective monitoring of the Project.

Recommendation(s)

The Project management might consider revision in the variation order or technical sanction to rectify the differences.


As a result of saving due to parity of PKR to US$, it was proposed to the World Bank to construct additional 4 KM road remaining within the allocation of MDTF grant of US$ 8 Million. Receiving approval of World Bank to Variation Orders No.2&3 (3 +1=4KM) the construction of the road in the extended portion was started. During construction it was observed that the quantities involved in Bill No.1 (earthwork) are greater than that estimated in the V.Os.

It is however mentioned for information that the figures given in the V.Os were based on estimates whereas during actual construction it can be decreased / increased. So the increase of qualities is a natural phenomenon and cannot be termed as "inefficient monitoring of the Project". The work in the extended portion is still under progress and it can be increased further. So we will still have to prepare another Technical Sanction and a revision in the approved PC-1.

It may please be noted that the changes in quantities and cost is a continuous process and the purpose of Variation Order is to bring it at par with actual work performed. The World Bank approval is for the purpose of rationalizing these costs and quantities.

Conclusion

Revised Technical Sanction and Variation Orders will be checked in the subsequent audits to ensure that all revised amount and estimates are duly incorporated.

Responsibility

Project management

Target date

Immediate


Revised technical sanction and variation orders to be reviewed.


35


14. Withholding tax not paid within required timelines Risk Rating: High


Findings:

As per the Income Tax Ordinance 2001, the Project is required to deposit tax withheld from supplier payments within 15 days of the deduction. The Internal audit noted several instances where tax withheld was not deposited within the stipulated timelines.

Please refer to annexure C for instances.

Impact:

Non compliance with the applicable taxation rules can result in penalties.

Recommendation(s)

Tax payment should be made within the stipulated time to avoid any penalties from the tax authorities.


All the Tax due against the Civil Works Contractor, Consultants and Project staff has been paid to the Income Tax Department up to June 2013 and no tax is outstanding. However in future Payment of tax will be made in the prescribed time.

Conclusion

Internal audit’s findings related to delays in deposit of withholding tax.

Responsibility

Project management

Target date

Immediate


Internal audit to review withholding tax deposit in subsequent quarterly audits

36


15. Withholding tax under-paid Risk Rating: High


Findings:

The internal audit noted that withholding tax deducted in case of IPC-10 amounted to PKR 4,181,045, however, the Project deposited PKR 3,484,203 with the taxation authorities.

Impact:

Underpayment of tax deducted from contractor payment amounting to PKR 696,840 might result in penalties from taxation authorities.

Recommendation(s)

The amount of PKR 696,840 should be deposited with the taxation authorities. The Project management should ensure timely and accurate deposit of tax deducted from payments in future to avoid penalties.


Due to oversight retention money has been taken as Tax. The difference of Rs 696,842/- in the amount of tax has been deposited and paid to the Income Tax department through Cheque No.3550737 dated 28-06-2013, Copy of letter No.743 dated 28-06-2013 is enclosed (Annex-9) in this regard.

Conclusion

The documents will be reviewed in the follow up to the audit.

Responsibility

Not applicable

Target date

Not applicable as the deficiency has been rectified


None

37

Internal Audit Findings Human resource management

16. No income tax deducted from salaries Risk Rating: High


Findings:

We noted certain instances where income tax was not deducted from the salary of employees. Under section 149 of Income Tax Ordinance every employer paying salary to an employee shall, at the time of payment, deduct tax from the amount paid at the rate as specified in section 149(2).

Please refer to annexure D for a list of employees whose salaries exceeded the tax threshold and tax was not deducted.

Impact:

Non compliance with applicable rules and regulations can result in imposition of penalties to the Project.

Recommendation(s)

Income tax should be deducted at the time of the payment of salaries and should be deposited with the concerned authority within 15 days of deduction as specified in Rule 42 of Income Tax Rules 2002.


Copies of Pay roles showing the deduction of Income tax from project staff (listed below) have already been provided to the Auditors. The outstanding tax amounting of Rs 54,641/- has recently been deposited with the Income Tax Department through cheque No.3550738 dated 28-06-2013. (Annex 10)

Conclusion

All the relevant documents will be reviewed in the follow up to the audit.

Responsibility

Project management

Target date

Immediate


Internal audit to check compliance status for subsequent periods in subsequent quarterly audits

1 Mr. Muhammad Aslam Khan. Project Director,2 Mr. Shahzad Afzal Khan Dy.Dir (Env./Resett)3 Mr. Gul Habib. Admn Officer.4 Mr. Sakhi Muhammad Accountant.

Procurement management

39

Internal Audit Findings Procurement management

17. No insurance of project vehicles Risk Rating: Moderate

Finding(s) and impact Related Risk ID: General

Findings:

We observed that insurance cover was not obtained for the project vehicles. As per the information provided, the two vehicles of the Project Honda Civic and a motorcycle with a total cost of around PKR million was not insured.

Impact:

In the absence of adequate insurance cover, the Project assets are exposed to risk of theft and damage.

Recommendation(s)

Assets of the project shall be insured to avoid any loss.


Insurance will be made for the said vehicles.

Conclusion

Insurance policy documents will reviewed in the follow up of the audit.

Responsibility

Project management

Target date

Immediate


Internal audit to check insurance status in subsequent quarterly audits

40

18. Non compliance of the terms of the contract with Environment auditor Risk Rating: High

Finding(s) and impact Related Risk ID: PM-3

Findings:

As per the payment schedule attached to the contract between the Project and Muzaffar Aziz (the Environmental Auditor), total contract value was set at PKR 450,000 to be paid in three installments as per the following payment plan:

■ 10% Mobilization advance (PKR 45,000)

■ 40% on submission of the draft environmental audit report (PKR 180,000)

■ 50% on submission of the final environmental audit report (PKR 225,000)

We noted that the payment was made in lump sum at the end of the contract.

It was also noted that schedule for completion of the environmental audit was four weeks from the date of contract signing, however, the audit was finalized in around seven months. The contract was signed on the 10 April 2012 and the environmental audit report was finalized in November 2012 resulting in a delay of 6 months.

Impact:

Significant delays in completion of environmental audit might adversely impact Project completion.

Recommendation(s)

Responsibilities should be assigned to Project staff to monitor compliance with the terms of the contracts entered with different parties.


According to SOP, the consultant/contractor has to prepare and submit a request for payment. As Interim Payment Certificates were not submitted by the consultant, therefore the payment was made in lump sum at the end of the contract.

The World Bank can always request improvement, Updation or modification in the submitted report. The submission and re-examination of the report by the donor's environmental expert may take several weeks. Hence the report finalization was completed in longer than expected time.

Environmental Audit does not interfere with the progress of the project which is evident from the fact that the progress of project is ahead of schedule.

Conclusion

The project management shall ensure that terms of the contracts are duly complied with.

Responsibility

Project management

Target date

Continuous


Internal audit to check compliance with terms and conditions of Project agreements with third parties


Human resource management

42


19. Key positions remained vacant Risk Rating: High

Finding(s) and impact Related Risk ID: HRM-1

Findings:

We noted that three project positions remained vacant, for the entirety of the project period from grant inception to December 2012.

These positions include:

■ Deputy Director Contracts

■ Accounts Clerk

■ Junior Clerk

Impact:

Non availability of staff at key positions might impact the Project adversely.

Recommendation(s)

The positions should be filled in to ensure that envisaged activities are carried out accordingly, to reduce the risks of delays and operational inefficiency. Alternatively, the roles assigned to these positions should be formally assigned to other project staff members to ensure that all planned activities are carried out.


As the Project being of low magnitude, the post of Dy. Director (Contract) was therefore kept vacant to exercise economy. The work of Contract Management was looked after by Dy. Director (Env/Reset) and the ACE Consultants.

Similarly the posts of Accounts Clerk and J/Clerk were also kept vacant as the 2 Assistants were capable of doing this job. No vacuum was felt keeping these posts vacant.

The saving on this account has been converted to civil work contract.

Conclusion

Sanctioned Positions shall be filled in with staff of adequate ability to ensure that the project objectives are achieved.

Responsibility

[To be provided by management]

Target date



[To be decided upon receipt of management response]

43


20. Discrepancies identified in the attendance register Risk Rating: High


Findings:

Internal audit observed the following discrepancies in attendance register:

■ The attendance register is maintained by the Admin Officer, however, no verification or review is made by any competent authority. It was noted that no other controls existed to ensure collusion between employees does not occur;

■ Time In and Time out of employees is not stated in Attendance register;

■ No summary of leaves is prepared in attendance register.

Impact:

Controls over employees’ attendance and punctuality might not be effective.

Recommendation(s)

■ The attendance register should be reviewed by the project director, or another competent authority, on a daily basis to reduce the risk of errors and collusion.

■ Time in and time out shall be specified in attendance register for each individual employee.

■ A monthly summary of the number of leaves should be separately maintained in attendance register.


The Attendance Register is maintained by the Admn. Officer. The staff fully observes the office timings. In case of 5 days working in a week, the office timing is 0800 -1600 hrs. The Attendance Register is put up to the Project Director when he so desires or when there is a need to make the staff punctual in attendance.

The staff is locally employed and they seldom need casual leave. They prefer to cope with their emergencies taking short leaves.

Conclusion

Internal audit to check compliance in subsequent audits

Responsibility


Target date



[To be decided upon receipt of management response]

44


21. ToRs/ Job descriptions not provided Risk Rating: Moderate


Findings:

We were not provided with job descriptions/ TORs for the project employees.

Impact:

In the absence of formally documented job descriptions, the employees might not be clear on their roles and responsibilities.

Recommendation(s)

Job descriptions for each position shall be developed for each approved staff position as shall serve as the basis for assigning roles and responsibilities.


The project staff was introduced to the World Bank team when it arrived at Peshawar. The Project Director and Dy. Director were interviewed by the World Bank and subsequently by the Secretary (P&D) and ACS before approval was given.

Conclusion

Internal audit’s findings related to absence of job descriptions and TORs of the project employees which are necessary for providing clear guidance on roles and responsibilities of each employee as well as tracking performance. The Project management has not responded to internal audit findings.

Responsibility

Project management

Target date

Immediate


Annexure

46

Annexure Annexure A: Risk rating criteria

Rating Particulars

High The nature and size of the underlying transaction/ activity is such that a control deviation might result in significant exposure of Project implementation and funds utilization to major consequences and issues.

Medium The nature and size of the underlying transaction/ activity is such that a control deviation might result in exposure of Project implementation and funds utilization to major consequences and issues.

Low The nature and size of the underlying transaction/ activity is such that a control deviation might result in exposure of Project implementation and funds utilization to manageable consequences and issues.

47

Annexure Annexure B: Increase in Total Project Cost

Bill No. Description

Allocation as per PC-1

(Aug-2011)

Amount as per Approved (VO

No.1)

Amount as per Approved (VO

No.2)

Amount as per Actual (VO No.3) Difference

1 Earthwork 33 73 133 143 110 2 Road Works (Sub Base and Base Course 141 129 151 157 16 3 Surfacing 102 118 127 142 40

4 (a) Culverts, causeway ,retaining wall and breast walls 33 32 55 56 23 4 (b) Bridges 26 14 7 6 (20)

5 Drainage and Errosion Control works 111 55 66 49 (62) 6 Ancillary Works 8 3 4 3 (5) 7 General Items 26 14 14 14 (12)

Total Construction (A) 480 439 558 570 90 B Price Adjustment 35 35 36 49 14 C Consultancy charges @ 5 % of the Construction Cost 24 22 28 29 5 D Bonus Payment Due to Completion of Project Before Schedule Time Period as Per GCOC Clau - - 21 21

Total Civil Works (A+B+C) 539 496 623 669 130 E Overhead Chargesa Increamental/operational cost of the project directorate 24 24 24 24 0 b Ressettlement cost

b(i) Removal charges/compensation for shopes/houses/boundry walls 65 65 10 9 (56) b(ii) Compensation for trees 3 3 1 1 (2) b(iii) Land Acquistion 24 24 10 1 (23) b(iv) Compensation cost for squatters 1 1 - - (1) b(v) Compensation cost for crops 0 0 0 0 -

Total Resettlement cost 93 93 20 11 (82) c Shifting/relocation of high tension poles /telephone cables/poles 20 20 5 4 (16)

d(i) Cost of independent Environment Consultants (IEMC) 5 5 6 6 2 d(ii) Third party validation (Social Safeguards) - - 1 2 2 d(iii) Third party validation (Environment) - - 1 1 1 d(iv) Re-Plantation - - 1 - -

Total overheads 141 141 58 47 (94) Total Cost of Project 680 637 680 716 36

48

Annexure Annexure C: Delayed payment of withholding tax

Delayed payment of withholding tax

Name of the Firm Cheque

Numbers of Payments

Date of Deduction of

Taxes

Date of Payment of Taxes to Government

Treasury

Date taxes should have been submitted

by Excess days

Khattak Allied Company 6320471 11-October-2012 21-December-2012 26-Oct-12 56 Days

Khattak Allied Company 6320478 25-October-2012 21-December-2012 9-November-12 42 Days

ACE 6320470 1-October-2012 21-December-2012 16-October-12 66 Days

ACE 6320475 22-October-2012 21-December-2012 6-December-12 15 Days

ACE 0965305 8-December-2011 31-March-2012 23-December-11 99 Days

ACE 0965346 11-January-2012 31-March-2012 26-January-12 65 Days

ACE 0965361 25-January-2012 31-March-2012 9-Feb-12 51 Days

ACE 0965348 27-January-2012 31-March-2012 11-Feb-12 49 Days

Partners In Development 0965305 3-December-2011 31-March-2012 18-December-11 104 Days

Partners In Development 6320482 20-July-2012 21-December-2012 4-August-12 139 Days

49

Annexure Annexure D: Employees with salary greater than tax threshold

Employees with salary greater than tax threshold

Name of Employee Designation of Employees

Salary of Employee (Monthly)

M. Aslam Khan Project Director 150,000

Shahzad Khan Deputy Director ( Environmental and Resettlement) 120,876

Gul Habib Admin Officer 40,000

Sakhi Muhammad Accountant 40,000