Ministry of Local Government

THE REPUBLIC OF UGANDA

MINISTRY OF LOCAL GOVERNMENT

MARKETS AND AGRICULTURAL TRADE IMPROVEMENT PROJECT I (MATIP-I)

ADB LOAN NO.2100150019294

FINANCIAL STATEMENTS FOR THE YEAR ENDED 3OTH JUNE 2014 TOGETHER WITH THE REPORT AND OPINION THEREON BY THE AUDITOR GENERAL

OFFICE OF THE AUDITOR GENERAL UGANDA TABLE OF CONTENTS

LIST ACRONYMS ...... iii

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2014 ...... iv

REPORT OF THE AUDITOR GENERAL ON THE INTERNAL CONTROL STRUCTURE FOR THE YEAR ENDED 30TH JUNE 2014 ...... vi

REPORT OF THE AUDITOR GENERAL ON THE SPECIAL ACCOUNT OPERATIONS FOR THE YEAR ENDED 30TH JUNE 2014 ...... viii

REPORT OF THE AUDITOR GENERAL ON THE STATEMENTS OF EXPENDITURES FOR THE YEAR ENDED 30TH JUNE 2014 ...... ix

1.0 INTRODUCTION ...... 1

2.0 PROJECT BACKGROUND ...... 1

3.0 PROJECT OBJECTIVES ...... 1

4.0 PROJECT COMPONENTS ...... 2

5.0 AUDIT OBJECTIVES ...... 2

6.0 AUDIT PROCEDURES PERFORMED ...... 2

7.0 COMPLIANCE WITH FINANCING AGREEMENT, GOVERNMENT OF UGANDA FINANCIAL REGULATIONS AND STATUTORY OBLIGATIONS ...... 3

8.0 GENERAL STANDARDS OF ACCOUNTING AND INTERNAL CONTROL ...... 6

9.0 STATUS OF PROJECT IMPLEMENTATION ...... 7

10.0 STATUS OF PRIOR YEAR AUDIT RECOMMENDATIONS ...... 8

FINANCIAL STATEMENTS ...... 9

LIST ACRONYMS

Acronym Meaning

ADB African Development Bank

BADEA Arab Bank for Economic Development in Africa

GOU Government of Uganda

MATIP Markets and Agricultural Improvement Programme

SDR Special Drawing Rights

UA Unit of Account

UG Uganda

SHS Uganda Shillings

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MARKETS AND AGRICULTURAL TRADE IMPROVEMENT PROJECT I (MATIP-I) - ADF LOAN NO.2100150019294

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH JUNE 2014

THE RT. HON. SPEAKER OF PARLIAMENT I have audited the financial statements of Markets and Agricultural Trade Improvement Project 1 (MATIP-I), ADF Loan No.2100150019294 for the year ended 30th June 2014. The financial statements set out on pages 12 to 29 comprise of;  Statement of cash receipts and payments  Statement of comparative budget and actual amounts  Cash flow statement  Special account statement  Notes to the accounts which contain a summary of significant accounting policies.

Management’s Responsibility for the financial Statements Management is responsible for the preparation and fair presentation of the project financial statements in accordance with the loan (ADF) guidelines and the cash basis of accounting as described under section 6 of the financial statements and for such internal controls as management determines is necessary for the preparation and fair presentation of the project financial statements that are free from material misstatements whether due to fraud or error.

Auditor’s Responsibility My responsibility is to express an opinion on the financial statements based on my audit. I conducted the audit in accordance with International Standards on Auditing (ISA). Those standards require that I comply with the ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the Auditor’s judgment, including the assessment of the risks of material misstatements of the financial statements, whether due to fraud or error. In making those risk assessments, the Auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting

iv 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 audit opinion.

Opinion In my opinion, the Project financial statements present fairly in all material respects the cash balances of the Markets and Agricultural Trade Improvement Project I (MATIP -I) as at 30th June 2014 and the receipts and payments for the year then ended in accordance with the accounting policies stated on pages 22 and 23 of the financial statements.

John F.S. Muwanga AUDITOR GENERAL KAMPALA

26th November, 2014

MARKETS AND AGRICULTURAL TRADE IMPROVEMENT PROJECT 1 (MATIP-I)- ADF LOAN NO.2100150019294

REPORT OF THE AUDITOR GENERAL ON THE INTERNAL CONTROL STRUCTURE FOR THE YEAR ENDED 30TH JUNE 2014

I have audited the accompanying financial statements of Markets and Agricultural Trade Improvement Project I (MATIP-I), ADF Loan No.2100150019294 for the year ended 30thJune 2014 and reviewed the Internal Control procedures relevant to generation of accounting information presented in the financial statements, and those relevant to control over project finances and the safeguard of its assets. I obtained all the information and explanations I considered necessary for the audit.

Management Responsibility for the Internal Control System Project management is responsible for the designing, establishing and maintaining a control structure that provides management with reasonable assurance that adequate procedures are followed for generation of accounting information for reliable financial statements, and control over finances and safeguarding assets against loss and unauthorized use or disposal. Project management is also responsible for ensuring that conditions provided for in the loan agreement and other legal requirements are observed.

Auditor’s Responsibility My responsibility is to express an opinion on the internal control system based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the internal control mechanisms for generation of accounting information and for the safeguard of assets are adequate. I assessed the control risk in order to confirm that my audit procedures are adequate to express an independent opinion on the control system. I believe that my audit provides a reasonable basis for my qualified opinion.

Some matters relating to the internal control system and its operation were considered reportable conditions and are mentioned under paragraph 8.0

Basis for qualified opinion The following internal control weakness was noted;  Shs.995,300,408 released as GOU counterpart funding was not transferred to Project Accounts but directly spent by the line Ministry contrary to the provisions of the project operations manual.

Opinion In my opinion, except for the possible effects of the matter referred to in the basis for qualified opinion, Project management in all material respects maintained an adequate internal control system for the preparation of reliable financial statements, control over finances and safeguard of the programme assets during the year ended 30th June 2014.

John F.S. Muwanga AUDITOR GENERAL

KAMPALA

26th November, 2014

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MARKETS AND AGRICULTURAL TRADE IMPROVEMENT PROJECT I (MATIP-I) - ADF LOAN NO.2100150019294

REPORT OF THE AUDITOR GENERAL ON THE SPECIAL ACCOUNT OPERATIONS FOR THE YEAR ENDED 30TH JUNE 2014

I have audited the Special Account Statement of the Markets and Agricultural Improvement Project I (MATIP-I), ADF Loan No.2100150019294 for the year ended 30th June 2014 which is set out on page 17 of Appendix 1.

Management Responsibility for the Special Account Statement Project management is responsible for preparation of the special account statement and its fair presentation in accordance with the requirements of the Government of Uganda regulations and loan (ADF) guidelines. Management is also responsible for designing and implementing internal controls relevant to the preparation of the special account statement that is free from material misrepresentation, whether due to fraud or error and selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility My responsibility is to express an opinion on the special account statement based on my audit. I conducted my audit in accordance with International Standards on Auditing and the ADB guidelines on auditing. Those standards and the loan guidelines require that I plan and perform the audit to obtain reasonable assurance about whether the special account statement is free from material misstatement. I believe that the audit evidence I have obtained provides a reasonable basis for my opinion.

Opinion In my opinion, Project management complied in all material respects with loan rules and procedures and the Special Account Statement for the Markets and Agricultural Improvement Project I (MATIP-I), ADF Loan No.2100150019294 presents fairly in all material respects the account transactions and the closing balance as at 30th June 2014.

John F.S. Muwanga AUDITOR GENERAL KAMPALA 26th November, 2014

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MARKETS AND AGRICULTURAL TRADE IMPROVEMENT PROJECT I (MATIP-I) - ADF LOAN NO.2100150019294

REPORT OF THE AUDITOR GENERAL ON THE STATEMENTS OF EXPENDITURES FOR THE YEAR ENDED 30TH JUNE 2014

I have audited the Statements of Expenditures supporting Disbursement requests of Markets and Agricultural Trade Improvement Project 1 (MATIP-I), ADF Loan No.2100150019294 for the year ended 30th June 2014, as summarized in the Statement of Disbursement Request on Page 1 of Appendix 1.

Management is responsible for the preparation and fair presentation of the Statements of Expenditures to support Disbursement Requests in accordance with ADB Funding guidelines.

Auditor’s Responsibility My responsibility is to express an opinion on the statements of expenditure based on my audit. I conducted the audit in accordance with International Standards on Auditing (ISA) and ADB Financial Reporting Guidelines. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether Statements of Expenditure are adequate to support the claims for reimbursements of expenditure for the year. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

Opinion In my opinion, adequate documentation has been maintained to support the claims for reimbursement of expenditures incurred as provided in the Statements of Expenditures and the expenditures are eligible under the financing agreement.

John F.S. Muwanga AUDITOR GENERAL

KAMPALA

26th November, 2014

REPORT OF THE AUDITOR GENERAL AND SUPPLEMENTARY INFORMATION

PART “B” DETAILED REPORT OF THE AUDITOR GENERAL 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 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 above Project to enable me report to Parliament.

2.0 PROJECT BACKGROUND

The Markets and Agricultural Improvement Project I (MATIP-I), ADF Loan No.2100150019294 is a Project which is being implemented over five years with a total cost of USD 74 million. Of this amount, USD 57 million is a loan from ADF, USD 10 million is a loan from BADEA and GOU contribution is USD 7 million.

The project is implemented in the 19 Urban Councils of Busia, Jinja, Tororo, Mbale, Soroti, Lugazi, Masaka, Mbarara, Fort Portal, Kasese, Hoima, Gulu, Lira, Kitgum, Arua, Moroto, Entebbe, Kampala and Kabale.

3.0 PROJECT OBJECTIVES

The Project has the following objectives;  Reconstruction of markets including economic infrastructure like lockups, stalls, meat/fish units, cold storage units and restaurants.  Construction of service infrastructure like paved pitches, vehicle parking areas, water supply, washrooms, solid waste bays, drainage, fire-fighting system and day care centres.  Provision of detailed design and supervision services.  Establishment of management and market information systems, providing market management and enhancing leadership skills through training.  Assisting the Municipal Councils to facilitate implementation, by providing supplementary support through the Project Facilitation team (PFT) in the Ministry of Local Government (MoLG) to strengthen timely output delivery.

4.0 PROJECT COMPONENTS

The Project has one core field component and two service components which are being implemented over a five year period. These are;  Market infrastructure development  Market management and agricultural trade enhancement  Project management coordination

5.0 AUDIT OBJECTIVES

The audit was conducted in accordance with International Standards on Auditing and included a review of the accounting records, accounting policies used and agreed procedures as was considered necessary. The audit was carried out with regard to the following objectives; a. To express an opinion on whether the financial statements for the year ended 30th June 2014 present fairly in all material respect the receipt and payments of the project as well as the cash position and are in conformity with generally accepted accounting principles. b. To establish whether the special account has been maintained in accordance with the provisions of the loan agreements c. To evaluate and obtain a sufficient understanding of the Internal control structure of the project, assess control risk and identify reportable conditions, including material internal control weaknesses. d. To establish whether project managers are managing the project in compliance with the covenants contained in the loan agreements as well as Government of Uganda financial regulations. e. To establish whether all procurements of goods and services under the project have been undertaken in accordance with the loan agreements and GOU procurement guidelines and procedures specified in the PPDA Act 2003. f. To establish whether all necessary supporting documents, accounting records as well as books of account have been kept in respect of all project activities. g. Whether project activities have been implemented as stated in the work plans and budgets.

6.0 AUDIT PROCEDURES PERFORMED

a. Revenue/Receipts Obtained a schedule of all project funds provided by ADF, BADEA and Government of Uganda and reconciled the amounts to the project’s cash books and bank statements. 2

b. Expenditure Reviewed the Project funding agreements to ascertain agreed budget line activities for the ADF, BADEA and GOU funding and checked whether funds had been utilized in accordance with the approved work plan;

Vouched transactions of the programme in particular funding received and expenditures incurred during the period covered by the audit in order to establish that documentation in support of expenditure agreed with the amount and description on the payment vouchers and or applications, bank statements and was properly controlled and accounted for.

c. Internal control system Reviewed the internal control system and its operations to establish whether sound controls were applied throughout the period.

d. Procurement Reviewed procurement of goods and services for the project and reconciled with the approved procurement plan.

e. Fixed assets management Reviewed use and management of project assets during the period.

f. Periodic reports about project activities Reviewed the project agreement provisions, and reconciled it to the project activities.

g. Project Financial Statements Examined on a test basis, evidence supporting the amounts and disclosures in the project financial statements; assessed the accounting principles used and significant estimates made by project management as well as evaluating the overall financial statement presentation.

7.0 COMPLIANCE WITH FINANCING AGREEMENT, GOVERNMENT OF UGANDA FINANCIAL REGULATIONS AND STATUTORY OBLIGATIONS

7.1 Under-Performing Loan from Arab Bank for Economic Development in Africa (BADEA) - US$ 10,000,000 According to the loan agreement signed on 16th July 2009 between Government of Uganda and the Arab Bank for Economic Development in Africa (BADEA), the loan amount of USD 10million was for construction of five markets at Kasubi, Busega, Kansanga (Kampala City), Kimaka (Jinja District) and Nyendo (Masaka District). 3

The executing Agency was required to acquire land for construction of the markets in the above mentioned locations before disbursement of funds. The agreement indicated that the borrower shall pay interest at the rate of one per cent (1%) per annum on the principal amount of the loan withdrawn and outstanding from time to time. The loan was declared effective on 21st January 2010 with the last disbursement expected on 30th March 2013. It was however noted that only Shs.112,428,671 was disbursed during the year under review.

The funds were spent on consultancy services for developing architectural designs and supervision of the construction of the five markets. The commitment fees and interest that has accrued on this loan account since its effective date is estimated at US$500,000. Under-utilization of the loan may result into a financial loss to Government. Delays in accessing funds have a negative effect on service delivery to communities as the period for the construction of the above five markets has since overlapped the agreed date of last disbursement of 30th March 2013.

Management explained that the performance of the loan was mainly affected by lack of evidence of ownership of land in Kansanga, Kimaka and Kasubi, a major condition for the design of the markets of the town councils. However following the confirmation of availability of land for Nyendo and Busega, detailed designs were completed and submitted to BADEA and approved. To date, the bids for the construction of Busega and Masaka markets have been evaluated and sent to BADEA for approval after which construction will commence for the two markets.

I advised management to acquire land in Kansanga, Kimaka and Kasubi as required to enable the smooth utilization of the loan fund.

7.2 Budget Performance-Low Absorption Capacity The approved Project expenditure estimates for the financial year amounted to Shs.61,349,873,640. However, only Shs.40,449,178,104 was spent during the year, indicating absorption capacity of 66%.

Low absorption capacity denies the beneficiary communities services which would have improved their livelihood. There is a risk that Management may not meet project objectives within the agreed project period.

Management explained that the shortfall in absorption capacity was mainly due to the failure of Government to contribute towards the tax component which affected the performance. However, communication had been made to Ministry of Finance, Planning and Economic Development, and the taxes are expected to be cleared in the 2014/15 financial year.

I await the outcome of management’s efforts.

7.3 Counterpart funding According to the Provisions of the Loan Agreement, GOU is required to contribute funds towards the implementation of Programme activities. A review of the project budget revealed that a total of Shs.10,395,482,191 was budgeted as GOU counterpart funding, however according to the Project’s records, only Shs.1,273,934,149 was released for Project activities resulting into a shortfall of Shs.9,121,548,042 (88%). Failure to provide counterpart funding as budgeted for is in violation of the project Financing Agreement. Besides, underfunding hinders the smooth implementation of the project activities.

Management explained that the Ministry was aware of the constraints caused by inadequate funding and had already communicated to the Ministry of Finance, Planning and Economic Development to ensure sufficient releases are made in the financial year 2014/15.

I advised management to continue liaising with the Ministry of Finance, Planning and Economic Development to ensure all budgeted funds are released to allow smooth implementation of the project activities.

7.4 Outstanding VAT on certified works and consultancy The contract agreements signed between the Line Ministry and the contractors for civil works for the construction of markets quoted the prices inclusive of Value Added Tax (VAT). The project had VAT payable and accumulated interest of Shs.12,767,665,608 at the close of the financial year. It was noted that the contractors for civil works at the seven sites were threatening to sue Ministry of Local Government for the unpaid VAT including interest. The delayed payments may result in to a nugatory expenditure in terms of legal costs to the Project.

Management explained that VAT was not paid to a number of service providers due to insufficient Government counterpart funding. Management further stated that

supplementary funding was sought to cover the outstanding amounts which will be catered for in the financial year 2014/2015.

I wait the outcome of management’s efforts on the matter.

8.0 GENERAL STANDARDS OF ACCOUNTING AND INTERNAL CONTROL

8.1 Spending at source Project Operations Manual PART two Paragraph 3.1 (sub-sections 111 Flow of funds) requires all project funds including GoU counterpart funding to be deposited to special account held with Bank of Uganda.

A review of the Ministry of Local Government development expenditure records revealed that GoU contribution amounting to Shs.995,300,408 released by Ministry of Finance, Planning and Economic Development to the project through the Ministry of Local Government Treasury General Account, was spent by the Ministry on behalf of the Project on non project activities which was contrary to the Project’s operations manual.

Spending Project funds by the Ministry does not only deny Project Management control over the funds but also poses a risk of diverting the funds to activities outside the project.

Management explained that with the migration of Government accounting system to the IFMS system, all the GOU project accounts were closed hence counterpart funds for the project were transferred to the Ministry General account.

I advised management to ensure strict adherence to controls of project accounts such as authorization and purpose of the expenditure for proper monitoring and control.

8.2 Vacant post of Financial Management Specialist The project’s approved organization structure requires the project to employ a Financial Management Specialist who is responsible for establishing and maintaining a financial management system which is in line with the GoU regulations and Donor procedures and ensuring that sound internal controls are in place.

However, it was noted that the project operated without a Financial Management Specialist for over a year. Absence of a financial management specialist may hinder proper and prompt implementation of project activities. 6

Management explained that the recruitment process for the post was initiated and the successful candidate name was submitted to African Development Bank for approval.

I await the outcome of the recruitment process.

9.0 STATUS OF PROJECT IMPLEMENTATION

9.1 Delayed implementation of project activities A review of the project implementation plan and progress reports revealed that the project had not achieved planned targets in the agreed timeframe. The following activities should have been undertaken by the end of the year under review;

Component Activity Progress as at 30th June 2014  Complete and handover all the  Works are still ongoing on all the 4 remaining 4 markets namely; markets. Lira, Jinja, Gulu and Hoima.  The Progress of work was affected by delayed VAT payment to contractors and civil works consultants. Market  Complete designs of Busega  Detailed designs were produced, Infrastructure and Nyendo markets under reviewed and approved by Development. BADEA loan. relevant authorities, including urban authorities and the funding agency (BADEA).  Initiate procurement of  Construction of the Busega and contractors for Nyendo and Nyendo markets is currently under Busega markets under the procurement with bid closure BADEA loan slated for 1st September 2014.  Complete the re-location of  The process of resettling vendors vendors back to the completed in Mbale and Hoima markets is still markets on-going. A total of 1,753 vendors had already resettled in Mpanga and Wandegeya markets. Registered vendors are given first priority in the allocation process and any other remaining facilities will be given out on a competitive Market Management and basis as per the laws that govern Trade Procurement and Disposal of Enhancement Public Assets. However there is need to carry out sensitization of market vendors in Hoima, Gulu, Jinja and Lira markets regarding market facilities management guidelines in order to enable sustainability of project objectives.  Complete the establishment of  The process of establishing the the Market and Management Market Management and

Component Activity Progress as at 30th June 2014 Information System Information System is still ongoing.  Undertake monitoring and  The construction work continues supervision to be supervised by respective consultants with oversight Programme guidance from the Programme Management and Facilitation Team (PFT) of the Coordination Ministry.  Conduct a progress review  No review workshop was held workshop during the reporting period.

Delay in implementation of activities denies beneficiaries the benefits of the project, besides, project objectives may not be achieved due to the delays.

Management explained that the project is in its fourth year of implementation and is expected to close in 2015. By then, the indicated project milestones will have been achieved.

Management is advised to expedite the planned project activities in order to meet project objectives within the agreed time frame.

10.0 STATUS OF PRIOR YEAR AUDIT RECOMMENDATIONS

The status of implementation of prior year audit observations is summarized below: Issue raised Remarks 2 Non performing BADEA loan Repeated 3 Non-payment of VAT on certified works Repeated 4 Un-remitted Statutory deductions Not Repeated 5 Failure to deduct 6% withholding tax Not repeated 6 Delayed completion of markets Not Repeated

APPENDIX 1

FINANCIAL STATEMENTS