to financial management staffs of 17 municipalities

Virtual Workshop on Financial Management

To Financial Management Staffs of 17 Municipalities

Implementing Urban Development Grant

Government of Nepal

Ministry of Urban Development

Department of Urban Development and Building Construction

Nepal Urban Governance and Infrastructure Project (NUGIP)

Babarmahal, Kathmandu

21 April, 2021

World Bank Policies and GuidelinesThe Bank’s Articles of Agreement require that proceeds of the loans be usedeconomically, efficiently and only for the purposes for which the financing isprovided as described in the loan agreement.

The Bank:

• Requires borrower to ensure that financial management and accountingsystems are adequate to generate timely and reliable financial information.

• Reviews periodic financial reports submitted regularly for each lendingoperation, and

• Requires verification of such financial reports via regular audits.

Financial Management (FM) activities at Project Preparation

• Each project should have adequate FM system,

• Bank assesses the current FM system for the project,

• If the FM system not adequate, the Project should develop anAction Plan for remedial action,

• If there is no FM system in place, FM system design and itsimplementation timeline should be agreed with.

Financial Management (FM) activities at Project Implementation

• Project Implementing Entity should maintain a sound FM system and practice,

• Appropriate audit arrangement should be made and provide audited Project Financial Statements on timely basis,

• FM system should be monitored through out implementation process.

Project Information

I- NUGIP Brief description

II- Project Components

III- Component No 1 UDG

IV- Implementing Municipalities

V- Budget Allocation

VI- Significant Dates

Project Information Government of Nepal has received loan from the International

Development Association ("World Bank") for Nepal UrbanGovernance and Infrastructure Project (NUGIP) implementedunder the Ministry of Urban Development

MoUD is primary implementing agency and will bear thecomplete responsibility of project implementation, management,supervision and coordination

Project Components Component 1: Urban Development Grants(UDGs) (US$115 million)

in 17 municipalities, for strategic urban infrastructure and servicedelivery

Component 2: Institutional strengthening support of US$7 million for

17+4 municipalities

Component 3: COVID‐19 Response and Recovery (US$20 million)through Labour Intensive Public Works in 12 Municipalities

Component 4: Contingent Emergency Response (US$0) on the requestof GoN in the event of an eligible disaster, including climate-relatedevents and pandemics.

Component 5: Project management and coordination (US$8 million)

Component 1: Urban Development Grants (UDGs)

Objective: To strengthen the institutional and fiscal capacities ofparticipating municipalities for strategic municipal infrastructure andservice delivery• Focuses exclusively on strategic municipal infrastructure and service delivery

improvement at the local level

• This component will finance strategic urban infrastructure and service delivery through sub-projects in the 17 selected municipalities, which will be implemented by the municipalities themselves; Citizen engagement and participation is a critical element of this component to ensure that infrastructure subprojects identified by municipalities reflect local needs and priorities;

• For financing strategic municipal infrastructure subprojects focusing on, among others, rehabilitation and improvements of municipal roads, drainage, drinking water supply, and onsite sanitation as well as associated design and supervision costs.

Municipalities and Budget Allocation

Significant Dates

Board Approval Date: September 28, 2020

Signing of Financing Agreement: November 18, 2020

Effectiveness Date: December 1, 2020

Project Closing Date: July 15, 2025

Project Financial Management

I- Legal Framework

II- Main Elements of Financial Management

III- Planning and Budgeting

IV- Funds Flow

V- Accounting

VI- Financial Reporting

VII- Internal Control

VIII- Audit

Legal FrameworkThe Financial Management (FM) of the Urban DevelopmentGrant (UDG) is guided by the provisions of:

(i) Local Government Operations Act (2015),

(ii) Intergovernmental Fiscal Arrangement Act (IFAA, 2017),

(iii) Fiscal Procedures and Financial Accountability Act (FPFA,2019),

(iv) Financial Procedures Acts adopted by the LocalAssemblies.

Legal Framework• Operationalization of all NUGIP components is guided by

the NUGIP-Project Implementation Manual in general.

• The specific requirements for UDG implementation at theparticipating municipalities will also be guided by theParticipation Agreement between the MoUD and therespective participating municipalities.

Project Financial Management• Project financial management is a process which brings together

planning, budgeting, accounting, financial reporting, internal control,internal and external auditing, procurement, disbursement and thephysical performance of the project. The aim of financialmanagement is to manage project resources properly and achievethe project’s development objectives efficiently.

• The Project follows the modality of Investment Project Financing(IPF). This means that loan proceeds are spent under the directsupervision of the World Bank on the basis of an agreed work andprocurement plan and that World Bank financial guidelines andprocedures apply. This means, amongst others, that for allprocurement, the Bank’s Procurement Regulations for IPF Borrowersapply (July 2016; Revised November 2017/August 2018). It alsomeans that the World Bank guidelines for social and environmentalsafeguards apply.

Financial Management Cycle

• Planning and Budgeting

• Funds Flow

• Accounting

• Financial Reporting

• Internal Control

• Audit

• Fiduciary Assessment

Planning and BudgetingPlanning and Budgeting of the Municipalities are generally guided by the provisions made in:

(i) The Constitution of Nepal 2072 Part 19 Clause 230

Estimates of Revenues and Expenditures of Municipality should be present before Municipal Assembly and have adopted annually.

(ii) The Intergovernmental Fiscal Arrangement Act (IFAA, 2017) Clause 21 sub clause 3

Municipal Executive shall submit the estimates of revenues and expenditures of next Fiscal year within the 10th date of the month of Ashadh each year to the concerned Municipal Assembly. Clause 17Local Level shall develop a mid-term expenditures framework along with expenditures projection of next three Fiscal Years.

Planning and Budgeting Contd.(iii) Various Provisions made in Local Government Operations Act 2074

(iv) Directives issued by MOF and Line Ministry.

Besides these provisions UDG implementing Municipalities should adhere the specific provisions made in:

(v) Financing Agreement

(vi) Project Implementation Manual (PIM)

(vii) Participation Agreement (PA)

Planning and Budgeting Contd.I Project Implementation Manual (PIM)

At the beginning of the project, the participating Municipalities will

prepare (or update) the 3-year rolling city-wide urban infrastructure

development plan, with the participation of stakeholders, that reflects

plans for use of the UDG as well as other fiscal resources for capital

investments, such as federal government transfers and own source

revenues.

Planning for the UDG is done once for the 6-year NUGIP period. Year-1, FY

2020/21, is for project identification. Year-2 is for completing the

detailed designs and costings to be reflected in a detailed project report.

Thereafter, there are a maximum of 3 years to procure the contractor and

complete the projects. Most of the projects are expected to have a size

that construction works will span over more than one (1) fiscal year.

Planning and Budgeting Contd.I Project Implementation Manual (PIM)

• Participating Municipalities will be the primary implementingagencies for Component 1, with specific roles for each existingdepartment in the Municipality

• Municipalities will identify, design, and implement identified subprojects in line with the guidelines and procedures outlined in theProject Implementation Manual (PIM).

• ensure the preparation of a 3-year urban infrastructure developmentinvestment plan, based on an inclusive process that includesstakeholder consultations;

• ensure adherence to the Grant Access Conditions for the UrbanInfrastructure Development Grant (UDG);

Planning and Budgeting Contd.I Planning and Budgeting (Cont,d)

Based on data provided by the Municipality, validated by theDUDBC, the MoUD will submit an annual consolidated budgetestimate for the project to MoF through the Line Ministry BudgetInformation System (LMBIS) and the same will be approved byMoF as part of annual federal budgeting process and published inred book.

Planning and Budgeting Contd.I Budget Timeline:• by no later than February 28 of each year (or such later date as the

Association may agree), verify through MoUD against the GAC and finalizequalification results for all of the Participating Municipalities;

• by no later than March 31 of each year (or such later date as the Associationmay agree), submit through MoUD to the MoF the UDG budget estimates ofthe following FY for all the Participating Municipalities that have beenqualified.

• by no later than April 30, of each year (or such later date as the Associationmay agree), finalize the annual budget for the Project and submit to theMoF through the Recipient’s line ministry budget information system;

• transfer funds to the Participating Municipalities on a Fiscal Quadrimesterbasis in accordance with the approved budget;

Planning and Budgeting Contd.

Fiscal year: Fiscal year has been taken as Nepali fiscal year running fromaround July 16th to July 15th the following year. The Fiscal years are subdivided in three quadrimester (periods of 4 months). Quadrimester isused to mean a period of 4 months from, roughly, July 16 to November15; from November 16 to March 15 and from March 15 to July 15.

Funds for Component-1 will be conditional grants in the Provincial andLocal Grants Red Book. This is a separate budget document, managedby MoF/Fiscal Federalism Coordination Division in coordination with theconcerned line ministry (MoUD).

Fund Flow, Disbursement Conditions and Reimbursement

• Fund flow and its management:

• The general fund flow mechanism of the GON with the IDA projectwill be followed in this project. For NUGIP/UDG expenditure aseparate account book (vote) will be opened. As expenditure underNUGIP is pre-financed by the Government of Nepal, all UDG fundsmade available to the ULLs follow the government channels andprocedures, and government rules and regulations apply.

• Grants for the first trimester will be released as per the budget, butreleases for the 2nd and 3rd trimester will depend on actualprogress and amounts spent. These two releases will follow MoFprocedures as applicable for all transfers to ULLs under the existingdisbursement procedures. Funds will be made available directlyfrom MoF to the respective ULLs through the respective DistrictTreasury Comptroller Offices (DTCOs).


• Fund flow and its management:

• The own financial contributions from ULLs to the investmentprojects (10% of the total amount received under the grant) shall berecorded in the accounting system in the UDG account book andreported on in the financial reports, by Quadrimester as well ascumulative for the year and the project.

• As soon as the implementation of the sub-projects start, ULLs areexpected to annually contribute some 10% of received grantamount. ULLs are not allowed to defer the own contribution to thelast year(s) of the project.

MoUD verifies the qualification of ULLs against GAC

Qualified ULLs are asked to submit their annual budget estimates for

the project to MoUD

MoUDreviews/consolidates/submits the

annual budget estimate for the project to MOF through LMBIS

Grants are released to ULLs directly by MOF on a trimester

basis through DTCO

ULLs to undertake the annual planned expenditures for sub-

project execution under Component 1

ULLs report physical/financial progress to MoUD along with

fiduciary and safeguards compliance reports

MoUD verifies and collates the progress reports and budget

utilization reports on an annual basis and submits to MOF/World Bank for seeking disbursement

Annual cycle for UDG grants completed and GAC verification initiated by MoUD for next year

Summary of UDG Annual Grant cycle and Fund flow to municipalities

Note: ULL in the above chart, as anywhere else, be replaced by Municipalities.


• Disbursement Conditions

The disbursement of funds to participating municipalities shall,

however, also meet the following conditions (Eligible Expenses):

Participation agreement signed in between PCO and theparticipating municipalities

The municipality for which expenditure is claimed has met theGrant Access conditions

Technical specifications are adhered to during implementation;

World Bank procurement rules have been applied for claimedexpenditure; and

Timely submission of Physical and Financial Progress reports


Withdrawal Conditions; Withdrawal Period

1. No withdrawal shall be made:

(a) for payments made prior to the Signature Date;

(b) under Categories (1) and (2) until and unless regulationssatisfactory to the Association have been furnished to theAssociation showing that the Recipient has implementedreporting procedures to ensure appropriate and timelyreporting by the Participating Municipalities to the FederalGovernment on the use of the proceeds of the Financing fortheir intended purposes; or


• Eligible Expenditure

Eligible expenditure as per the World Bank rules andregulations, which are outlined in the Financing Agreementand Project Appraisal Document (PAD) and in this PIM shallbe reimbursed. As long as participating ULLs follow GoNfinancial rules and regulations and the provisions in this PIMfor use of UDG-funds, the expenditures are bound to beeligible.

In case of doubt whether an activity is eligible, the ULL isadvised to contact the NUGIP unit in the DUDBC/MoUD foradvice.


• Reimbursement

In order for the GoN to be reimbursed for the expendituresmade, they should be ‘eligible’ as per the World Bank rulesand regulations, which are outlined in the FinancingAgreement and Project Appraisal Document (PAD) and in thisPIM.

Accounting

• Accounting :

Participating municipalities will use the software named Sub-National Treasury Regulatory Application (SUTRA) for theiraccounting and financial reporting.

Municipality are responsible and accountable for the use of the funds.

On the basis of the Budget and Annual work plan (AWPB), expenditures are to be incurred for specific purpose under the budget headings.

Accounting

Accounting :

• use the funds within the eligible expenditure areas, with duediligence and efficiency, and in accordance with soundtechnical, economic, financial, managerial, environmental andsocial safeguard practices;

• ensure that the goods, works and services financed from theproceeds of the Urban Infrastructure Development Grant(UDG) shall be procured under the provisions stipulated inFinancing agreement signed for the project between IDA andthe Government of Nepal in accordance with the World Bankprocurement Regulations for IPF Borrowers, July 2016 (RevisedNovember 2017 and August 2018) and the procurementprocedures established by law in Nepal with applicable caveatsas specified in PPSD;

Accounting

Accounting :

• maintain adequate records in accordance with applicable financialregulations and accounting standards along with proper chart ofaccounts of the revenues, expenditure, assets, and liabilities of theoperations;

• The Municipalities shall use Chart of accounts and accounting formsapproved by Office of the Auditor General for Accounting andfinancial reporting.

• Bank reconciliation shall be made regularly.

Accounting

Accounting :

Unspent amount at the end of year

• At the end of every fiscal year, any unspent balances will haveto be returned by ULLs to the MoF and these amounts will beadjusted in the subsequent allocations based on actualexpenditures and upcoming requirements, notably through thetrimestral cash flow requests. As much as possible, MoF willensure that ULGs have the required funds to honor contractualobligations and will hence apply flexible provisions for budgetreprogramming.

Financial Reporting

• Financial reporting :

Municipality will use the software named Sub-National TreasuryRegulatory Application (SUTRA) for their accounting and financialreporting.

In addition to the regular financial reporting through thegovernment’s SuTRA system, ULLs must submit quadrimestral (4months period) physical and financial progress reports related tothe use of the fund to MoUD/DUDBC, in the prescribed format.

These progress reports should be received by DUDBC within onemonth of the end of each quadrimestral for DUDBC to be able toprepare a consolidated (IUFR) report for the World Bank within 45days after the end of each quadrimestral.

Financial Reporting

• Financial reporting :

regularly and timely report to MOUD/DUDBC on the utilization offunds from the grant;

ensure that all financial reporting as well as physical progressreports are compiled and submitted to the DUDBC as per thetimelines and guidelines provided in the NUGIP ProjectImplementation Manual (PIM),

Likewise the internal audit report will have to be submitted withina month after the end of each quadrimester.

Financial Reporting• Financial reporting :

Participating municipalities are obliged to submit financial reporting and physical progress report.

# Type of Report Deadline Submitted to

Municipalities

1

.

Quadrimester physical and

financial progress reports

Within 1 month after end of the

quadrimesterPCO/DUDBC

2

.

Sutra generated Regular

Financial Reporting AGO Form

No 109,110,111,112 & 113

Within 7 days after end of the

monthPCO/DUDBC

3

.Internal audit reports

Within 60 days after end of the

quadrimesterPCO/DUDBC

4

.

Public Audit Report Annex 14

POMFor Each Completed Projects PCO/DUDBC

Internal Control

• Internal Control:

Clause 78 of Local Government Operations Act 2074 clearly sets the guidelines and scope of Internal Control system.

Local bodies to initiate and implement Internal control system that help to conduct its business economically, efficiently, effectively and only for the purposes for which the financing is provided.

Internal Control system should address risk associated with the activity, control environment, communication, monitoring and evaluation process.

AuditThe Municipal statements of expenditure are subject to both internal and external audits.

Internal Audit: The Participating municipalities are independentfor arranging or making law regarding internal audit. Under theFPFA (Section 34) and the LGOA (section 77) The Participatingmunicipalities shall make their own arrangements for internalaudit. However, for the UDG funds, the Participatingmunicipalities are expected to coordinate with the DTCO for timelyaudit, to be done every Quadrimester.

Internal audit reports shall be submitted to PCO within 30 daysmonths after the audit is completed and will be shared with theWorld Bank by 15 days thereafter.

Audit

External Audit:

The use of funds will be audited by the Office of the Auditor General and report produced accordingly. The report for each year of project implementation including the audit opinion on UDG to be submitted within nine months from the end of each fiscal year to the World Bank through MoUD.

Participating Municipality will coordinate with the Office of the Auditor General (OAG) for timely completion of external audit of the grants used.

The audited annual financial statement shall be submitted to the MOUD/ DUDBC on time as specified in PIM and publish the audit report in its website within 7 days after received from the auditor.

Audit

External Audit:

The municipality shall maintain a record of audit arrears along withresolving action plan; provide MoUD/DUDBC access, at all times, toinspect, by itself or jointly with IDA, if IDA shall so request, the goods,works and sites of activities funded with the UDG.

to financial management staffs of 17 municipalities

Documents