THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF

THE ELECTRICITY SECTOR DEVELOPMENT PROJECT

FOR THE FINANCIAL YEAR ENDED 30TH JUNE 2015

OFFICE OF THE AUDITOR GENERAL

UGANDA

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TABLE OF CONTENTS

LIST OF ACRONYMS ............................................................................................................................ iii

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF ........................... iv

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE

ELECTRICITY SECTOR DEVELOPMENT PROJECT FOR THE YEAR ENDED 30TH JUNE, 2015 .. 0

1.0 INTRODUCTION ........................................................................................................................ 0

2.0 BACKGROUND INFORMATION................................................................................................ 0

3.0 PROJECT FINANCING ............................................................................................................... 2

4.0 OBJECTIVE OF ESDP ................................................................................................................ 2

5.0 AUDIT OBJECTIVES .................................................................................................................. 2

6.0 PROCEDURES PERFORMED ..................................................................................................... 3

7.0 FINDINGS................................................................................................................................... 4

7.1 Under-absorption of loan funds………………………………………………………………….…5 7.2 Delayed Implementation of Project activities………………………………………………….5

8.0 STATUS OF PRIOR YEAR AUDIT RECOMMENDATIONS………………………………………………7

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LIST OF ACRONYMS

Acronym

ESDP Electricity Sector Development Project

UETCL Uganda Electricity Transmission Company

SPL Specific Investment Loan

MEMD Ministry of Energy and Mineral Development

RAP Resettlement Action Plan

SDR Special Drawing Rights

USD United States Dollar

UGX Uganda Shillings

GoU Government of Uganda

IDA International Development Association

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REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF

THE ELECTRICITY SECTOR DEVELOPMENT PROJECT,

MINISTRY OF ENERGY AND MINERAL DEVELOPMENT (MEMD)

(IDA CREDIT NO.4988-UG)

FOR THE YEAR ENDED 30TH JUNE, 2015

THE RT. HON. SPEAKER OF PARLIAMENT

I have audited the financial statements of the Electricity Sector Development Project for the

year ended 30th June 2015. These financial statements comprise of the Statement of

Sources & Uses of Funds, the Statement of Fund Balance, and Special Account

Reconciliation statement together with other accompanying statements, notes and

accounting policies.

Management Responsibility for the financial statements

Under Article 164 of the Constitution of the Republic of Uganda, 1995 (as amended) and

Section 45 of the Public Finance Management Act, 2015, the Accounting Officer is

accountable to Parliament for the funds and resources of the ESDP. The Accounting Officer

is also responsible for the preparation of financial statements in accordance with the

requirements of the Government of Uganda, donor regulations and guidelines and for such

internal control as management determines is necessary to enable the preparation of

financial statements that are free from material misstatement whether due to fraud or error.

Auditor’s Responsibility

My responsibility as required by Article 163 of the Constitution of the Republic of Uganda (as

amended) and Sections 13 and 19 of the National Audit Act, 2008 is to audit and express an

opinion on these statements based on my audit. I conducted the audit in accordance with

International Standards on Auditing. Those standards require that I comply with the ethical

requirements and plan and perform the audit to obtain reasonable assurance whether the

financial statements are free from material misstatement.

An audit involves performing audit procedures to obtain evidence about the amounts and

disclosures in the financial statements as well as evidence supporting compliance with

relevant laws and regulations. The procedures selected depend on the Auditor’s judgment

including the assessment of risks of material misstatement of financial statements whether

due to fraud or error. In making those risk assessments, the Auditor considers internal

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control relevant to the entity’s preparation and fair presentation of financial statements in

order to design audit procedures that are appropriate in the circumstances but not for

purposes of expressing an opinion on the effectiveness of the entity’s internal control. An

audit also includes evaluating the appropriateness of accounting policies used and the

reasonableness of accounting estimates made by management as well as evaluating the

overall presentation of the financial statements. I believe that the audit evidence I have

obtained is sufficient and appropriate to provide a basis for my opinion.

Part “A” of this report sets out my opinion on the financial statements. Part “B” which forms

an integral part of this report presents in detail all the significant audit findings made during

the audit which have been brought to the attention of management and form part of my

Annual Report to Parliament.

PART “A” Opinion

In my opinion, the financial statements of ESDP (MEMD) for the year ended 30th June 2015

are prepared, in all material respects in accordance with the basis of accounting set in Note

1(b) to the financial statements and in conformity with the donor reporting guidelines and

terms and conditions.

Other Matter

Without qualifying my opinion, I consider it necessary to communicate the following matter

other than those presented or disclosed in the financial statements.

Under absorption of loan funds

A review of the loan status revealed that the loan of USD.120 million from IDA, whose

closing date is projected to be 28th February, 2017 has had a low disbursement rate. By

the end of the current financial year, only USD.12,990,465 (10.8%) had been disbursed.

Of the disbursed funds, USD.1,026,987 remained unutilized. Under disbursement and

underutilization of loan funds negatively affects project implementation.

John F.S. Muwanga

AUDITOR GENERAL 25th November, 2015

PART "B"

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS

OF THE ELECTRICITY SECTOR DEVELOPMENT PROJECT FOR THE YEAR ENDED

30TH JUNE, 2015

This Section outlines the detailed audit findings, management responses, and my

recommendations in respect thereof.

1.0 INTRODUCTION

Article 163 (3) of the Constitution of the Republic of Uganda, 1995 (as amended)

requires me to audit and report on the public accounts of Uganda and all public

offices including the courts, the central and local government administrations,

universities, and public institutions of the like nature and any public corporation or

other bodies or organizations established by an Act of Parliament. Accordingly, I

carried out the audit of the ESDP to enable me report to Parliament.

2.0 BACKGROUND INFORMATION

2.1.1 Project Description

The Electricity Sector Development Project (ESDP) is a four year project being

implemented by Ministry of Energy and Mineral Development (MEMD) and Uganda

Electricity Transmission Company (UETCL).

The World Bank approved ESDP as a Specific Investment Loan (SPL) in October 2012

and the implementation commenced in 2013. The objective of the project is to

increase the access to electricity supply in the south western region of Uganda.

The financing plan provides for approximately SDR 74.10 million equivalent to USD

120 million of IDA credit.

2.1.2 Project Components

The Project comprises of three components: Part A: Construction of 220 kV Kawanda

– Masaka Transmission Line and Related Substations, Part B: Technical Assistance to

UETCL and Part C: Community Support Projects and Technical Assistance to MEMD.

The sub components of each are outlined here below.

A) Construction of 220 kV Kawanda – Masaka Transmission Line and

Related Substations

Construction of 137 km of a 220kV double circuit transmission line between

Kawanda and Masaka West substations.

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Upgrading of the existing 132 kV substation at Kawanda to 220 kV to

accommodate incoming lines from Bujagali and outgoing lines to Masaka West

substation.

Construction of a new 220/132 kV substation at Masaka.

Upgrading of the substation at Mbarara and

Implementation of the mitigation measures specified in the RAP dated October

15, 2010, including provision of resettlement support and compensation to

displaced persons.

B) Technical Assistance to UETCL

Provision of technical assistance to support: (a) implementation of Part A of the

Project through the provision of technical advisory services, training, equipment and

operational support as well as through the provision of financial management,

procurement, environmental and social safeguards management, communication,

and monitoring and evaluation services, including the carrying out of financial audits;

(b) capacity building and institutional development of UETCL; and (c) preparation of

the feasibility study, environmental and social impact assessment and resettlement

action plan for the construction (not as part of the project) of a 132 kV Lira-Gulu-

Nebbi-Arua transmission line.

C) Community Support Projects and Technical Assistance to MEMD

Carrying out of: (a) Street and market place lighting in Masaka municipality; (b) Peri

– urban electrification along the Kawanda – Masaka transmission line route; and (c)

establishment of Power Sector Information Center within MEMD.

Provision of technical assistance to support: (a) implementation of Part C.1 of the

project through the provision of technical advisory services training, equipment and

operational support as well as through the provision of financial management,

procurement, environmental and social safeguards management, communication,

and monitoring and evaluation services, including the carrying out of financial audits;

(b) the identification, design and construction supervision of activities under Part C.1

of the project; (c) a review of the Recipient’s power sector reform program/ (d) the

Sector Working Group; and (e) training and capacity building for the MEMD staff.

2.1.3 IMPLEMENTATION FRAMEWORK

There are two (2) implementing agencies (MEMD and UETCL) that hold independent

designated accounts. Each agency is responsible for the implementation of its

component of ESDP and is served through its own designated account.

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Institutional Arrangements:

a) MEMD

The Recipient shall ensure that MEMD is maintained at all times during the

implementation of the project with composition mandate, staffing and resources

satisfactory to the Association for the purpose of ensuring the prompt and efficient

overall coordination, implementation, monitoring, reporting and evaluation of the

project.

b) UETCL

Without limitation upon the provisions of paragraph A.1, the Recipient shall ensure

that UETCL is maintained at all times during the implementation of the Project, with

composition, mandate, staffing and resources and appropriate licenses satisfactory to

the Association for the purpose of ensuring the prompt and efficient coordination,

implementation, monitoring, reporting and evaluation of Parts A and B of the project

3.0 PROJECT FINANCING

The project was financed by Grants from Central Government to the tune of

UGX.6,750,169,000, Donor funding and other sources to the tune of

UGX.2,980,000,000 bringing the total revenue to UGX.9,730,169,000. The total

grants revenue of UGX.6,750,169,000 constituted 100 % of its approved budget

estimates of UGX.6,750,169,000

4.0 OBJECTIVE OF ESDP

The objective of ESDP is to increase the access to electricity supply in the south

western region of Uganda.

5.0 AUDIT OBJECTIVES

The audit was carried out in accordance with International Standards on Auditing and

accordingly included a review of the accounting records and agreed procedures as

was considered necessary. In conducting my reviews, special attention was paid to

establish:-

a. Whether the financial statements have been prepared in accordance with

consistently applied accounting Policies and fairly present the revenues and

expenditures for the period and of the financial position as at the end of the

period.

b. Whether all funds were utilized with due attention to economy and efficiency and

only for the purposes for which the funds were provided.

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c. Whether goods and services financed have been procured in accordance with the

Government of Uganda and World Bank Procurement regulations.

d. To evaluate and obtain a sufficient understanding of the internal control structure

of the organization, assess control risk and identify reportable conditions,

including material internal control weaknesses.

e. Whether the management complied with the Government of Uganda and World

Bank financial regulations.

f. Whether all necessary supporting documents, records and accounts have been

kept in respect of all activities, and are in agreement with the financial

statements presented.

6.0 PROCEDURES PERFORMED

The following audit procedures were undertaken:-

(a) Revenue

Obtained schedules of all revenues collected and reconciled the amounts to the

cashbooks and bank statements.

(b) Expenditure

The payment vouchers were examined for proper authorization, eligibility and

budgetary provision, accountability and support documentation.

(c) Internal Control system

Reviewed the internal control system and its operations to establish whether

sound controls were applied throughout the period audited.

(d) Procurement

Reviewed the procurement of goods and services by the project during the

period under review and reconciled with the approved procurement plan.

(e) Fixed Asset Management

Reviewed the use and management of the project assets during the period

under audit.

(f) Financial Statements

Examined on a test basis, evidence supporting the amounts and disclosures in

the financial statements; assessed the accounting principles used and

significant estimates made by management; as well as evaluating the overall

financial statement presentation.

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7.0 FINDINGS

7.1 Categorization of audit findings

The following system of profiling of the audit findings has been adopted to better

prioritise the implementation of audit recommendations.

N

o

Category Description

1 High significance Has a significant / material impact, has a high likelihood of

reoccurrence, and in the opinion of the Auditor General, it

requires urgent remedial action. It is a matter of high risk

or high stakeholder interest.

2 Moderate significance Has a moderate impact, has a likelihood of reoccurrence,

and in the opinion of the Auditor General, it requires

remedial action. It is a matter of medium risk or moderate

stakeholder interest.

3 Low significance Has a low impact, has a remote likelihood of reoccurrence,

and in the opinion of the Auditor General, may not require

much attention, though its remediation may add value to

the entity. It is a matter of low risk or low stakeholder

interest.

7.2 Summary of audit findings

No. Title of finding Significance

1 Under absorption of loan funds High

2 Delayed Implementation of Project activities Moderate

7.3 Under-absorption of loan funds

The Government of Uganda obtained a loan from the International Development

Association equivalent to USD.120 Million for Electricity Sector Development Project

(ESDP) on 2nd September 2011 with the objective of increasing the access of

electricity supply in the south western region of Uganda. A review of the loan status

revealed that the loan whose closing date is projected to be 28th February 2017 has

had a low disbursement rate. Of the loan amount of USD.120 Million, only

USD.12,990,465 (10.83%) had been disbursed by end of the current financial year.

It was also noted that in the year under review, USD.1,026,987 remained unutilized

from the funds already disbursed. The underutilization of funds negatively affects

project implementation. Government also continues to incur unnecessary costs in

commitment fees for any outstanding loan balances.

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Management acknowledged the need to expedite project implementation and

explained that all project Consultants had already been procured and contractors

were being procured for the works that constitute 74% of total project activity costs.

Management anticipated that the actual absorption is projected to greatly improve

when the civil works commence.

I have advised the project management to expedite the implementation of the

outstanding activities so as to improve on funds absorption and thus disbursement

rates, so as to attain the project intended objectives.

7.4 Delayed Implementation of Project activities

Section 20 of the ESDP Project Appraisal Document, states that MEMD will implement

component C of the project which includes installation of a street and market lighting

system in Masaka Municipality, Peri-urban electrification, Establishment of a power

Sector Information Centre, Review of the Power Sector Reforms and support for the

Energy Sector working group.

A review of the five year project work plan revealed that implementation of a

number of activities had delayed, as in the Table 1 below:

Activity Implementation timeline Status as at 30th June

2015

Installation of a street

and Market Lighting

system in Masaka Municipality

This was supposed to be

implemented between 2012

and 2015

Bid evaluation of the

contractor to undertake

the activity.

Review of power sector reforms in Uganda

This was also supposed to be

concluded in September 2014

Procuring a consultant to

undertake the review.

Establishment of a power

sector information centre

This was supposed to be

concluded by April 2014

Contract awaiting

submission to Solicitor General for approval.

There is a risk that the activities may not be completed in the remaining loan period

and therefore funds returned to the Bank without settling all the commitments to the

contractors.

I advised the project management to expedite the implementation of the outstanding

activities so as attain the project objectives.

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8.0 Status of prior year audit recommendations

I reviewed the implementation of the previous year audit recommendations and the

following table summarizes the status of implementation and actions taken by

management;

Issue Recommendation Status

Ineligible Expenditure

(UGX.6,783,760,130)

Restore the diverted funds to

the Project Account for

utilisation on planned activities

and

ensure that all counterpart

funds are deposited on the

project account as required

under the project agreement

Implemented

The refund of the diverted

funds was made.

Under absorption of

funds

Management should strengthen

its internal capacity to

implement the project planned

activities and allow substantial

disbursement of funds by the

bank.

Not Implemented

Manual Financial

Management System

Management was advised to

procure the system to improve

security and accuracy of the

accounting records.

Not Implemented

Lack of internal audit

reviews

The project management was

advised to ensure that internal

audits are carried out and

reports issued on a regular basis

as required in the Project’s

financing agreement.

Implemented

I advised the project management to ensure that all audit recommendations are

implemented for proper accountability and stewardship of the project funds.

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FINANCIAL STATEMENTS