Uganda National Roads Authority Road Sector

THE REPUBLIC OF UGANDA

UGANDA NATIONAL ROADS AUTHORITY

ROAD SECTOR SUPPORT PROJECT 3 (RSSP 3)

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 30TH JUNE 2013

OFFICE OF THE AUDITOR GENERAL UGANDA

TABLE OF CONTENTS

Item Page No.

Report of the Auditor General on the financial statements for the year iii-iv ended 30th June 2013

REPORT

1. Introduction 1

2. Project Background 1

3. Project Objectives 2

4. Audit Objectives 2

5. Audit Procedures 3

6. FINDINGS

6.1 Compliance with Financing Agreements and GoU Financial Regulations 4

6.2 General Standard of Accounting and Internal Control 6

6.3 Status of Prior Year Audit Recommendations 7

Appendix 1: Financial Statements

ROAD SECTOR SUPPORT PROJECT 3 (RSSP 3) PROJECT ID NO.P-UG-DB0-020 AND LOAN NO. 2100150020793

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30th JUNE 2013

THE RT. HON. SPEAKER OF PARLIAMENT I have audited the financial statements of Road Sector Support Project 3 (RSSP 3) for the year ended 30th June 2013. The financial statements are set out on pages 17 to 24 in Appendix 1 and comprise of;  Statement of receipts and payments;  Statement of fund balances;  Notes to the financial statements, including a summary of significant accounting policies used.

Project Management’s responsibility for the financial statements The Management of UNRA, (the RSSP-3 implementing agency) are responsible for the preparation of the financial statements. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; 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 Financial Statements, based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that the audit is planned and performed to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

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 misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the Auditor considers the 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, but not for the purposes of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting

iii policies used and the reasonableness of accounting estimate made by management, as well as evaluating the overall presentation of the financial statements. I believe that the audit evidence 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.

PART “A” Opinion In my opinion, the project financial statements and the notes thereon present fairly in all material respects the financial position of Uganda National Roads Authority Road Sector Support Project 3 as at 30th June 2013 and of its receipts and expenditure for the year then ended in accordance with the accounting policies set out under section 10.0 of Appendix 1 and the terms and conditions of ADF funding.

John F.S. Muwanga AUDITOR GENERAL

5th June, 2014

REPORT OF THE AUDITOR GENERAL AND SUPPLEMENTARY INFORMATION

PART "B" This Section outlines the detailed audit findings, management responses, and my recommendations in respect thereof.

1.0 INTRODUCTION Under Article 163 (3) of the Constitution of the Republic of Uganda, and the National Audit Act, 2008, I am required to audit and report to Parliament on the public accounts of Uganda and of 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 appointed M/s Jasper-Semu and Associates, Certified Public Accountants to audit the accounts of the Project on my behalf and report to me so as to enable me report to Parliament.

2.0 BACKGROUND INFORMATION Uganda has a ten year rolling Road Sector Development Programme (RSDP). The programme covering the development and maintenance of national, district, urban and community access roads, guides investment in the sector. The programmes currently in place under the framework are: Road Sector Support Project 1, Road Sector Support Project II, Road Sector Support Project III and Road Sector Support Project IV.

The Road Sector Support Project-3 (RSSP-3) is funded by African Development Bank (AfDB) following a request by the Government of Uganda to finance the upgrading of the Nyakahita-Ibanda-Kamwenge road from gravel to bitumen standard. The loan Agreement for RSSP-3 between the Republic of Uganda and AfDB was signed on 21 April 2010, under Project ID No.P-UG-DB0-020 and Loan No. 2100150020793. Under the Agreement, AfDB committed Eight Hundred Thousand Units of Account (UA 80,000,000) (the credit) equivalent to 277 billion Uganda shillings.

Expected outputs of the project are a 143-kilometre new bitumen road with a six- metre carriage way and 1.5 metres of shoulders on either sides between Nyakahita, Ibanda and Kamwenge. The project was also to produce feasibility and detailed engineering design studies for Kayunga-Galiraaya – 83 kilometres, and Hoima- Butiaba-Wanseko – 111 kilometres.

The Project is implemented by the Uganda National Roads Authority and was expected to be completed by 1st March 2014. 1

3.0 PROJECT OBJECTIVES The objective of the Project is to improve road access in rural areas of Kiruhura, Ibanda and Kamwenge districts and western Uganda in general by upgrading the Nyakahita-Ibanda-Kamwenge road from gravel to bitumen standard. In addition, the project was to assess the feasibility of investing in the Kayunga-Galiraya and Hoima- Butyaba-Wanseko roads.

The project starts at Kazo located approximately 201 Km from Kampala, capital of Uganda, along the Nyakahita – Ibanda road. The project ends at Kamwenge town, district chief town. The Kazo - Kamwenge road traverses the districts of Kiruhura, Ibanda and Kamwenge, all located in the South Western part of Uganda. The Project consists of the following Sections:

LOT1: Nyakahita – Kazo (68 km) The Kazo- Kamwenge with a length of 68 km, contracted to China Communications Construction Company Limited (CCCC) supervised by J. Barrow. Lot 1 starts at approximately 201km away from Kampala – Mbarara Road at Nyakahita traversing through Kiruhura district and finally reaches Kazo. The existing gravel road, designated as a link road, was constructed to the standards of Class B gravel road. The project road is categorized as a Class II Bitumen road.

LOT2: Kazo- Kamwenge (75 km) The Kazo- Kamwenge with a length of 75 km, contracted to China Railway Seventh Group (CRSG) Limited supervised by SNC- Lavalin. Lot 2 starts from 68 km away from Nyakahita traversing through Ibanda and finally reaches Kamwenge. The existing gravel road, designated as a link road, was constructed to the standards of Class B gravel road. The project road is categorized as a Class II Bitumen road.

4.0 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 as to whether the financial statements for the year ended 30th June 2013 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. 2

b. To establish whether the special account has been maintained in accordance with the provisions of the loan and grant 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 financing 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 GOU procurement guidelines and procedures as 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.

5.0 AUDIT PROCEDURES PERFORMED a. Revenue/Receipts Obtained a schedule of all project funds provided by ADF and Government of Uganda and reconciled the amounts to the project’s cash books and bank statements. b. Expenditure Reviewed the Project funding agreements to ascertain agreed budget line activities for the ADF and GOU funding and checked whether funds had been utilized in accordance with the approved work plan.

Vouched transactions of the project 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 under review. f. Periodic Reports about project Activities Reviewed the project agreement provisions, and reconciled it to the project activities during the period under review. 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.

6.0 AUDIT FINDINGS 6.1 COMPLIANCE WITH THE FINANCING AGREEMENT AND GOU FINANCIAL REGULATIONS A review was carried out on the project compliance with the credit agreement provisions and GoU financial regulations and it was noted that the project complied in all material respects with the provisions in the agreement and applied GoU regulations except in the following matters:

6.1.1 Kazo – Kamwenge performance rating below average I noted that the contractor of lot-2 (Kazo – Kamwenge) section did not perform to the expectations by the reporting period and on agreed upon rating. The contractor performed at 47.25% which was below average as indicated in the table below: Activity Expectation Total Score Work progress 40 24.26 Environmental Management 20 8.10 Accommodation of traffic 10 2.70 Engineer’s facilities 5 3.30 Camp-site/ contractor’s establishment 10 3.60 Contractor’s workers’ welfare 10 4.09 Public Relations 5 1.20 Total 100 47.25

There is a risk that the contractor may not complete the work on the agreed time and undesired quality of work could be delivered.

Management responded that the Contractor later increased his resources and works were substantiality completed. They also explained that the quality of the constructed woks was good.

I advised Management that explicit intervention and remediation actions should be taken by the technical team at both UNRA and the consultants (project supervisor) to minimize deficiencies in performance on future undertakings.

6.1.2 Project Funding The following were observed regarding the RSSP-3 funding: a. The Government of Uganda share on the project was agreed at 27.45% and the Bank at 72.55%. However, during the audit, I noted that the Government made payments of Ushs.27,018,723,587 on Lot 1 which was 17% and UShs.14,743,421,917 which was 18% on Lot 2, out of the agreed 27.45%. b. It was also noted that by the reporting period 30th June 2013, the overall progress of work was at 98% and 67% completed for Lot 1 and Lot 2 respectively. However, payments for the work done for lot1 totalled to Ushs.28,433,861,682 above completion percentage, and payments for lot 2 amounted to Ushs.28,664,511,351 below the completion percentage. The table below refers.

Lot 1 Lot 2 Nature of contract: Admeasured contract Nature of contract: Admeasured contract Contract amount: 134,385,576,794.65 Contract amount: 167,458,031,180 ADF share: 72.55% ADF share: UGX 72.55% GoU share: 27.45% GoU share: UGX 27.45% China China Railway Name of firm: Communications Name of firm: Seventh Group Co. Construction Co. Ltd Ltd Nationality: China Nationality: China Headquarter: Beijing, China Headquarter: Henan, China

Overall estimated Overall estimated progress 98% progress 67% Payments: Payments: Donor 133,113,003,354 83% Donor 68,788,947,622 82% GoU 27,018,723,587 17% Gou 14,743,421,917 18% 160,131,726,941 83,532,369,539

Expected payment as of 30 June 2013 131,697,865,259 112,196,880,891 Computed difference 28,433,861,682 (28,664,511,351)

Funding inconsistencies may negatively impact on contract performance.

Management explained that Government’s failure to fully meet its contribution to the project was due to an inadequate budget. However, all the outstanding payments are now being settled.

Management further explained that the observed increases were a result of cost for variation of price (VoP) that due to inflation, increased beyond the amount that was originally estimated in the contract. At contract signature, VoP costs were estimated at 10% of the value of the works but at the time of audit, the proportion had increased to 26% of value of the works arising out of increases in values due to price indices that are applied to the price adjustment formula. Management also indicated that an addendum that is subject to the Bank’s approval has been prepared to revise the amount for variation of price and increase the contract price accordingly.

I await the results of management action on the variation of price.

6.1.3 Inter-Project transfers At the start of the year under review, the project had a net payables position of Shs.14,444,650,464. During the year, the project borrowed additional Shs.24,391,784,285 from other Projects and also transferred Shs.5,524,288,068 to other projects creating an overall payables position of Shs.33,312,146,681 at the end of the financial year.

The inter project borrowings may negatively affect implementation arrangement of the project.

I advised management to minimize the inter project transfers as these could disrupt the implementation of project activities.

6.2 GENERAL STANDARD OF ACCOUNTING AND INTERNAL CONTROL A review was carried out on the financial management system of the project and it was noted that management had put in place adequate controls to manage project resources.

6.3 STATUS OF PREVIOUS YEAR AUDIT RECOMEDATIONS I reviewed the audit issues identified during the prior year to verify implementation of recommendations therein. My comments on the status of implementation on each of the issues are set out below:

No Matters raised previously Comment on Status Action/Implementation progress

1 Non-Compliance with Auditor’s final comment Not Income Tax Act Cap 340 in was; resolved respect to Withholding Tax Notwithstanding the (WHT) explanations by management It was noted in the audit for that WHT may not apply to 2012 that UNRA did not comply some development contractors, with the Income Tax Act in failure to withhold taxes from respect to Withholding Tax. contractors who were not on WHT is at 15% on invoiced the exemption list that year is amounts and the audit noted still a questionable tax that at this 15% rate, Shs compliance issue. 21,890,429,190 shillings was The Audit advised management not deducted and withheld. to seek final written The amount was not deducted determination on this matter nor remitted to URA in respect from URA. to contractors who were not on the URA exemption list.

2 Land and Property Compensation has been done Partially Compensation for all properties affected by the resolved It was noted that 100% RSSP 3 road works at design stage. earthworks was completed However, during actual however, over 17% the land construction, some properties and property owners were not were injuriously affected as compensated prior to result of extra land take, commencement of the especially in sections of deep construction work as per the cuts and high fills. UNRA is Resettlement Action Plan (RAP) currently handling these cases and will have them settled soon.

It was further noted that over 2.1billion shillings of land and property compensation related to Lot 3 (Kamwenge-Fort Portal) and management agreed to the finding and proposed the adjustment to be made in the accounts for the year ending 30 June 2013.

No Matters raised previously Comment on Status Action/Implementation progress

3 Inter-Project Transfers The audit recommended that Not During my audit, I noted inter- management should minimise resolved project transfers. RSSP3 had the inter-project transfers. borrowings of However, no action was taken Ushs.10,557,355,156 and by management as by the end receivables of of the fiscal year 2013, RSSP3 Ushs.9,976,813,707 from other had a net outstanding balance projects at the start of the year. payable of Inter-project During the year, RSSP3 transfers standing at borrowed Ushs.19,401,143,149 Ushs.33,312,146,681 with from other projects and Shs.14,444,650,464 being net transferred Ushs.4,956,492,685 payable from the previous year, to other projects from UShs.5,524,288,068 being Government of Uganda funding. lending out to other projects Management indicated that and Ushs.24,391,784,285 being they obtained authorization for borrowings from other projects the transfers form the Ministry during the year. of Finance.

APPENDIX 1

FINANCIAL STATEMENTS