Office of the Auditor General

THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF IMPROVEMENT OF HEALTH SERVICE DELIVERY IN MULAGO HOSPITAL AND IN THE CITY OF KAMPALA PROJECT (MKCCAP) FOR THE YEAR ENDED 30TH JUNE 2015

IDA CREDIT NO. 4531-UG

OFFICE OF THE AUDITOR GENERAL

UGANDA TABLE OF CONTENTS PAGE LIST OF ACROYNMS ...... 3

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF ...... 4

REPORT OF THE AUDITOR GENERAL ON INTERNAL CONTROL STRUCTURE FOR THE ...... 6

(IDA CREDIT .4531-UG) FOR THE YEAR ENDED 30TH JUNE, 2015 ...... 6

REPORT OF THE AUDITOR GENERAL ON INTERNAL CONTROL STRUCTURE FOR THE ...... 8

(IDA CREDIT .4531-UG) FOR THE YEAR ENDED 30TH JUNE, 2015 ...... 8

1.0 INTRODUCTION ...... 10

2.0 BACKGROUND TO THE PROJECT ...... 10

3.0 Project financing ...... 10

4.0 PROJECT OBJECTIVES ...... 11

5.0 AUDIT SCOPE ...... 12

6.0 PROCEDURES PERFORMED ...... 12

7.0 AUDIT FINDINGS ...... 13

LIST OF ACROYNMS

ADB African Development Bank ADF African Development Fund CRMU Compliance Review and Mediation Unit GoU Government of Uganda IAS International Accounting Standards KCCA Kampala City Council Authority LC Letter of Credit MKCCAP Mulago Kampala City Council Authority Project MNRH Mulago National Referral Hospital MoFPED Ministry of Finance Planning and Economic Development MoH Ministry of Health NSSF National Social Security Fund NTF Nigeria Trust Fund TAI Treasury Accounting Instruction UA Unit of Account UGX Uganda Shillings USD United States Dollars

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF IMPROVEMENT OF HEALTH SERVICE DELIVERY IN MULAGO HOSPITAL AND IN THE CITY OF KAMPALA PROJECT (MKCCAP) FOR THE YEAR ENDED 30THJUNE 2015

THE RT. HON. SPEAKER OF PARLIAMENT I have audited the accompanying financial statements of the Improvement of Health Service Delivery in Mulago Hospital and Kampala Capital City Authority (MKCCAP) for the year ended 30th June, 2015. These financial statements comprise of the Statement of Financial Position as at 30th June 2015, Statement of Income and Expenditure, Detailed Schedule of Expenditure by Project Component and Category together with other accompanying statements, notes and accounting policies. Management Responsibility for the financial statement Under Article 164 of the Constitution of the Republic of Uganda, (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 project. The Accounting Officer is also responsible for the preparation of financial statements in accordance with the requirements of the Public Finance Management Act 2015, and the Financial Reporting Guide, 2008,the Project Financial Agreement 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, 1995 (as amended) and Sections 13 and 19 of the National Audit Act, 2008 is to express an opinion on the financial statements based on my audit. I conducted my audit in accordance with the International Standards on Auditing. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing audit procedures to obtain audit 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 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 financial

statements in order to design audit procedures that are appropriate in the circumstances, but not for purpose 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 audit opinion.

Part “A” of my 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 financial statements of Mulago Kampala Capital City Authority for the year ended 30th June, 2015 are prepared, in all material respects in accordance with the Financial Reporting Guide, 2008 and Section 51(1) of the Public Finance Management Act, 2015. Other matter; Without qualifying my opinion, I consider it necessary to communicate the following matter other than those that are presented or disclosed in the financial statements.  Delayed government contribution and payment of VAT The Ministry of Health signed a contract with a local Construction Company for the rehabilitation and upgrading of Mulago Hospital at contract price of USD.29,617,820.64 inclusive of Value added tax of USD.4,517,972.67 in October 2014. However, by the time of audit, government had neither honoured its counterpart funding of USD. 1,358,069.88 nor additional funds for the VAT component of USD.4,517,972,67 yet the project (Through the contractor) had an outstanding VAT obligation with URA.

John F.S. Muwanga AUDITOR GENERAL

9th December 2015

REPORT OF THE AUDITOR GENERAL ON INTERNAL CONTROL STRUCTURE FOR THE IMPROVEMENT OF HEALTH SERVICE DELIVERY IN MULAGO HOSPITAL KAMPALA CAPITAL CITY PROJECT (MKCCAP) (IDA CREDIT .4531-UG) FOR THE YEAR ENDED 30TH JUNE, 2015

THE RT. HON. SPEAKER OF PARLIAMENT I have audited the financial statements of Improvement of Health Service delivery in Mulago Hospital and Kampala Capital City Authority Project (MKCCAP) (IDA Credit .4531-UG) for the year ended 30th June 2015. In planning and performing the audit, I considered the internal control structure in order to determine the auditing procedures for the purpose of expressing an opinion on the financial statements.

Management Responsibility for the Internal Controls Management is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgment are required to assess the expected benefits and related costs of internal control structure policies and procedures.

Auditor’s Responsibility My examination was made in accordance with International Standards on Auditing (ISA) and accordingly included such tests of the accounting records, verification of assets and liabilities and such other auditing procedures I considered necessary in the circumstances.

For the purpose of this report, I have classified the significant internal control structure policies and procedures in the following categories:

 Control over preparation of withdrawal applications for funds from the Grant account  Bank and cash  Purchases and payments  Monitoring, evaluation and reporting.

For all the internal control structure categories listed above, I obtained an understanding of the design of the relevant policies and procedures and whether they have been placed in operation and I assessed control risk.

Reportable Conditions No material reportable conditions were observed as management had put in place a satisfactory internal control system and measures to ensure proper accountability for all project funds.

John F.S. Muwanga AUDITOR GENERAL

9th December, 2015

The RT. Honourable I have audited the Special Account Statement of Improvement of Health Service delivery in Mulago Hospital and i Kampala Capital City Authority Project (MKCCAP) (IDA Credit .4531- UG) for the year ended 30th June 2015.

Management Responsibility for the Special Account Statement Management is responsible for the preparation and fair presentation of the special account statement on the basis of cash deposits and withdrawals for the purpose of complying with the Loan Agreement and for such internal controls as Management determines is necessary to enable the preparation of the statement that is free from material misstatement whether due to fraud or error.

Auditor’s Responsibility My responsibility is to express an opinion on the Special Account Statement, based on my audit. I carried out the audit in accordance with International Standards on Auditing. Those standards require that I comply with the ethical requirements, plan and perform the audit to obtain reasonable assurance about whether the statement is free from material misstatement.

An audit involves performing audit 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 risks of material misstatement of the financial statements whether due to fraud or error. In making those risk assessments, the Auditor considers internal 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 the purpose 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.

Opinion In my opinion, the receipts were properly accounted for and withdrawals were made for the purposes of the project in accordance with the Loan Agreement. The special account statement and notes thereon fairly present in all material respects the account operations for the year ended 30th June, 2015 in accordance with the basis of accounting described above.

In addition, regarding the Statements of Expenditure, adequate supporting documentation has been maintained to support claims to ADB for the re-imbursements of expenditures incurred and the expenditures eligible for financing under the Loan Agreement.

John F.S. Muwanga AUDITOR GENERAL

9th December, 2015

PART “B”

DETAILED REPORT OF THE AUDITOR GENERALON IMPROVEMENT OF HEALTH SERVICE DELIVERY IN MULAGO HOSPITAL AND KAMPALA CAPITAL CITY AUTHORITY PROJECT (MKCCAP) (IDA CREDIT .4531-UG) FOR THE YEAR ENDED 30TH JUNE, 2015 This section outlines in detail the audit scope, audit findings, my recommendations and management responses 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 Improvement of Health Service Delivery in Mulago Hospital and in the City of Kampala Project (MKCCAP) to enable me report to Parliament

2.0 BACKGROUND TO THE PROJECT MKCCAP is a project designed to increase access to quality and affordable health care services for the population of Kampala Metropolitan Area (which encompasses the City of Kampala and the surrounding Districts). The project cost is estimated at Unit of Account (UA) 56 million, financed by African Development Fund (ADF) Loan of UA 46 million and Nigeria Trust Fund (NTF) Loan of 10 million. The project which is to be implemented in 54 months centers on three broad components namely;

1. Capacity development and systems strengthening; 2. Revitalized referral and counter referral systems and 3. Expanded improved health facilities and services.

3.0 Project financing Improvement of Health Service Delivery in Mulago Hospital and of Kampala Capital City Authority was financed by an ADF Loan Amount of UA 56 million (86.8 millions) detailed as below;

African Development Fund Nigeria Trust Fund UA USD UA USD Loan Amount 46,000,000.00 70,423,700.00 10,000,000.00 15,309,500.00

Disbursement to Date 15,153,693.09 22,395,112.46 2,096,533.68 3,026,757.80

Undisbursed Balance 30,846,306.91 48,028,587.54 7,903,466.32 12,282,742.20 % of Loan Disbursed 33 33 21% 21% Average 27%

The total loan utilized by the year end constituted 27% of the total budget estimates over the project life.

4.0 PROJECT OBJECTIVES The project objectives under each broad component include:-

4.1 Capacity development and systems strengthening  Improving management and administration of health services in Mulago Hospital, Ministry of Health and Kampala City Council Authority (KCCA);  Provision of ICT for human resource management and financial management;  Supporting training of staff in leadership and management;  Clinical excellence, ethics and customer care;  Support to medical education and research capacity of Mulago Hospital and Makerere University College of Health Sciences and  Development of hospital governance framework and human resource for health performance tools.

4.2 Revitalized referral and counter referral systems Establishing a well-coordinated referral and counter referral system in Kampala Metropolitan area

4.3 Expanded improved health facilities and services  Development of a master plan for Mulago Hospital to rationalize service delivery and improved efficiency and effectiveness.  Extensive rehabilitation and modernization of lower Mulago Hospital Complex.  Construction of two new general referral hospitals in Kawempe and Makindye (Kiruddu) including staff accommodation for critical staff managing emergencies and maternity services.

 Providing medical equipment and furniture and ICT network, equipment and software for patient, administrative and financial management systems to Mulago, Kiruddu and Kawempe Hospitals.

5.0 AUDIT SCOPE The audit was carried out in accordance with the International Standards on Auditing and accordingly included a review of the accounting records, agreed procedures as was considered necessary. In conducting my reviews, special attention was paid to establish whether:-

a. The Financial Statements for MKCCAP have been prepared in accordance with consistently applied International Accounting Standards (IAS) and that they present fairly the financial performance and position of the project as at 30th June 2014. b. There was a sufficient Internal Control Structure and the internal controls worked as intended throughout the year. c. All necessary supporting documents and records have been maintained and are in agreement with the financial statements presented. d. Goods and services have been procured in accordance with relevant financing agreement and Government of Uganda (GoU) procurement regulations. e. Project funds are managed in compliance with the covenants contained in the financing agreement as well as GoU financial regulations.

6.0 PROCEDURES PERFORMED 1) Revenue/Receipts Obtained schedules of funds provided by the development partners and Government of Uganda and reconciled the amounts to the entity’s cashbooks and bank statements.

2) Expenditure Vouched transactions to establish whether documentation in support of the expenditures agreed with the amounts and descriptions on the vouchers; reviewed and reconciled the bank statement transactions to test for occurrence and whether they were properly controlled and accounted for.

3) Internal Control System Reviewed the internal control system and its operations to establish whether the controls were sound and were applied throughout the period under review.

4) Procurement Reviewed the procurement of goods and services under the Project during the period under review and reconciled with the approved procurement plan.

5) Periodic reports of the project Reviewed the Agreement provisions, operational manual, aide memoires and reports and reconciled them with the Project activities during the period under review.

6) Entity 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.

7.0 AUDIT FINDINGS 7.1 Categorization of audit findings The following system of profiling of the audit findings has been adopted to better prioritize the implementation of audit recommendations.

N Category Description o 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 N0 Observation Significance 1 Delaying of VAT Government contribution and payment High 2 Failure to undertake adequate due diligence. moderate 3 Non-Compliance with delivery dates for front loaded High equipment. 4 Un resolved Land dispute at Kawempe Hospital Site High 5 Slow implementation of project activities High

6 Delayed procurements for Goods, Services and Works Low 7 Status of Implementation of Mission Recommendations Low 8 Review of implementation of prior year audit recommendations Low

8.0 DETAILED FINDINGS

8.1 GENERAL STANDARDS OF ACCOUNTING AND INTERNAL CONTROL It was noted that management had in all material respects, put in place a satisfactory internal control system and measures to ensure proper accountability for all project funds.

8.2 COMPLIANCE WITH THE FINANCING AGREEMENT PROVISIONS AND GOVERNMENT OF UGANDA FINANCIAL REGULATIONS The following table shows the profiling of the various audit observations: Management had in all material respects complied with the financing agreement and government of Uganda Financial Regulations except in the following issues which have been brought to the attention of the Accounting Officer.

8.3 Other Unfulfilled agreements between the bank and the GOU 8.3.1 Government contribution and payment of VAT The Ministry of Health signed a contract with a Construction Company for the rehabilitation and upgrading of the Lower Mulago Hospital at contract price of USD.29,617,820.64 inclusive of Value added tax of USD.4,517,972.67 on 17th October 2014. Under the financial agreement, the government of Uganda is to contribute USD.1,358,069.88 (5.4%) to the construction cost and the VAT component of USD.4,517,972.67.

It was noted that GoU through the Ministry has not paid its counterpart funding of 5.4%. Outstanding VAT obligation by the contractor had also not been settled by Government. The outstanding VAT obligation by the contractor with URA which is an

indication that GoU did not honour its contribution to the project. Non contribution by GOU and delays to settle the VAT obligations are likely to delay the project implementation.

The Accounting Officer explained that the Ministry of Health was liaising with the Ministry of Finance Planning and Economic Development to ensure the VAT component of project contracts and the Government of Uganda co-funding to the Mulago contract are incorporated in the sector budget for financial year 2016/17.

I await the outcome of the Accounting Officer’s undertaking with the Ministry of Finance and Economic Development.

8.4 Failure undertake adequate due deligence Section 186 (1b-i-iv) of the PPDA Act requires a bidder to be eligible to participate in public procurement. However, an International firm was procured to supply and install Endoscopy and Urology Equipment at a cost of Euros 836,994 by end of May 2015. An advance payment of Euros 167,398.80 (20%) was paid to the firm but at the time of audit, only 3.3% of equipment worth Euros 27,620.80 had been delivered. Details available show that the supplier was declared bankrupt in April 2015.

Although the advance payment was fully recovered from outstanding payments to the firm and cashing of the performance guarantee, awarding a contract to a non- going concern firm is an indication that no adequate due diligence was done on the firm. As a result, the procurement process had to be re-done leading to loss of time.

I advised the Project Management to always ensure that they undertake adequate due diligence on the firms before they awarded big contracts to avoid a repeat of the above scenario. 8.5 Non-Compliance with delivery dates for front loaded equipment It was noted that Contrary to the provisions of the contracts which specified delivery dates, there were delays in delivery for following procurements;

 Philips Pharmaceutical Ltd/Critical Care Solutions Ltd was procured to supply Intensive Care Unit Equipment at a cost of USD.1,331,864.11 by May 2015. However, by the year end, only 50% worth USD.665, 920 of the equipment had been delivered.

 Global Scientific Supplies Ltd was awarded contract to Supply and Install Physiotherapy and General Medical equipment worth USD.387,837.45. Only 90% worth USD.349,053.70 of the equipment had been delivered.

 Rima (E.A), Ltd was awarded a contract to Supply and Install Workshop Tools (Lot 9- ), at USD.587,062 by May 2015. The firm promptly delivered 95% of the goods worth USD.557,708.90 while items worth USD.29,353.10 (5%) had not been delivered by June 2015.

Non-compliance with the contract terms (delivery dates) by the respective firms amounts to breach of contract.

Although the Accounting Officer explained that all the outstanding items had been delivered by the respective suppliers, non-delivery within the agreed timelines can lead to delays in the implementation of the project, increases the costs of inspection at delivery and can lead to supply of incompatible items especially where the equipment has to work as a unit.

I advised the project management to ensure that that the contract terms on delivery dates are complied with to avoid unforeseen financial losses due to delayed deliveries.

8.6 Un resolved Land dispute at Kawempe Hospital Site A review of the Aide Memoire dated for March 2015 and other project documents revealed that the General Referral Hospital at Kawempe was constructed on two disputed pieces of land comprised on plots 3883 and 1305. Details arising from the records of meeting between various stakeholders show that plot 3883 had an extra 10 decimals in excess of the size of the plot while plot 1035 had not been sold to KCCA. As a result, the family members and owners of the disputed land were threatening to sue KCCA.

If the land ownership issues are not solved, the implementation of the project is likely to be affected and the development could be a waste of government resources. The Accounting Officer explained that the land matter was being handled amicably with the claimant in order to resolve it so as not to halt the hospital construction works already on going. He also indicated that the Ministry of Lands had provided

documents from the Land Registry that clearly showed KCCA as the rightful owner of the Land on which the hospital was being constructed.

I advised the Accounting officer to ensure the land disputes are resolved urgently to avoid loss of government investments.

8.7 Slow implementation of project activities 8.7.1 General activities implementation level The financing agreement signed between Government of Uganda and ADB stipulated the overall project start and end dates and various timelines within which specific activities were to be implemented. A review of the progress reports on the implementation status per project expenditure component and categories according to the mission report of 23rd to 27th March 2015, showed that implementation was at an average of 30%. This is relatively low compared to the remaining implementation period. Slow activity implementation rates may result in inability to achieve the project targets and objects.

I advised the accounting officer to enhance monitoring and supervision so that the planned activities are implemented in the stipulated project period.

8.8 Delayed procurements for Goods, Services and Works Although the procurement processes for most of the Civil Works, Goods and Services had been concluded at the time of audit, various activities were still in progress. Some of these had implementation completion dates scheduled between December 2014 and December 2015 but had either delayed or were still on-going. The delays could have been mostly due to procurement procedures. The Accounting Officer explained that management was to expedite implementation of all project activities that were on-going so as to achieve the project objectives within the project implementation time frame.

I await the outcome of the accounting Officer’s undertaking to avoid project time overruns.

8.9 Status of Implementation of Mission Recommendations A review of the aide memoire for 23rd -27th March 2015 showed that a number of recommendations were agreed upon for implementation by the implementing agency. These include among others; Ambulance service management. However by

the time of audit (September 2015), some of the recommendations had not been implemented.

The failure to act upon the recommendations of the mission in a timely manner may have a negative impact on attainment of the overall project objectives.

The Accounting Officer indicated that management will always endeavor to implement all the recommendations arising out of Bank Supervision missions. The recommendations from the Aid Memoir of March 27th 2015 have all now been implemented.

I advised management is to implement the recommendations of the Bank Supervision mission in a timely manner for better project implementation.

9.0 Review of implementation of Prior year audit recommendations A review of the status of implementation of prior year’s audit recommendations revealed that some of them had not been implemented as shown in the table below. This may be indicative of management’s failure to appreciate the importance of audit recommendations in the improvement of governance and project management challenge.

Audit issue Recommendation Audit status 1.1 Disbursement of Funds I advise The management to disbursement Disbursement status in November 2013 was UA review the rate has 723,708.39 (USD.1, 110,270.00), 1.57% of the progress of improved to total expected funding of UA 56 million implementation of 27% by end of the various project FY components with a view of Slightly expediting the addressed implementation rate.

1.2 Delayed activity implementation I advise A lot of project management to lost time noted. Implementation of project activities was slow in expedite the a number of activities implementation of Partly the delayed addressed activities

The project management team and the Accounting Officer undertook to implement all pending audit recommendations.

I advised the Accounting officer to always implement all the audit recommendations so as to ensure enhanced accountability, better stewardship of the project resources and improved implementation of the project’s planned activities.

FINANCIAL STATEMENTS