Financial Management Assessment

Shanxi Inclusive Agricultural Value Chain Development Project (RRP PRC 48358)

FINANCIAL MANAGEMENT ASSESSMENT

A. Executive Summary

1. The financial management assessment (FMA) was conducted in accordance with the Asian Development Bank’s (ADB) Guidelines.1 The FMA considered the financial management capacity of the Shanxi Provincial Government (SPG), the executing agency (EA); the 17 project county governments, the implementing agencies (IAs); and the 19 project agribusiness companies and cooperative (PACs), the project implementation units (PIUs). The assessment covered funds flow arrangements, staffing, accounting and financial reporting systems, internal and external auditing arrangements, and financial information systems.

2. The Shanxi Provincial Finance Department (PFD), particularly its international division, as the project imprest account holder, has sufficient financial management experience for donor- funded projects, including ADB project loans. The PFD has disbursed over $1 billion of the ADB loans involving the sectors of transport, agriculture, power, and environment to date. The FMA identified the main financial management risks at the level of the implementing agencies and PIUs.

3. The FMA identified the main financial management risks as follows: (i) implementation risk—the IAs’ and the PIUs’ lack of familiarity with ADB’s disbursement procedures and requirements which could delay project implementation; (ii) compliance risk—the IAs’ and the PIUs’ lack of familiarity with ADB’s financial management requirements, particularly on accounting, reporting, and auditing which may delay project reporting and derail identification of issues on the use of loan proceeds; (iii) foreign exchange risk—the IAs’ lack of experience in managing foreign exchange that might increase the financial burden to the potential depreciation of Chinese yuan. The overall financial management risk rating of the project before considering mitigating measures is moderate.

4. The identified financial management risks will be closely monitored during project implementation. The financial management action plan is as follows:

Table 1: Proposed Action Plan for Financial Management Action Agency Timing Recruitment of experienced consultant EA Upon the loan effectiveness Development of financial management manual(s) EA, consultant 2 months after the loan effectiveness Training on ADB’s financial management requirements, ADB, EA, 3 month after the loan including accounting and auditing, loan disbursement, and consultant effectiveness foreign exchange risk management to the IAs and the PIUs ADB = Asian Development Bank, EA = executing agency, IA = implementing agency, PIU = project implementation unit. Source: Asian Development Bank.

5. The EA and the IAs will enhance their coordination and capabilities by (i) setting clear institutional arrangements; (ii) recruiting a financial management consultant; (iii) undertaking training on ADB’s disbursement and financial management requirements for all financial management staff; (iv) developing uniform financial management handbook(s) for the budgeting, accounting, internal controls, reporting, and auditing arrangements in line with project activities; (v) streamlining of approval processes of the use of the loan proceeds; and (vi) close monitoring of loan covenants and compliance status during project implementation. With these appropriate mitigation measures, the project financial management arrangements are considered satisfactory.

1 ADB. 2005. Financial Management and Analysis of Projects. Manila; ADB. 2009. Financial Due Diligence: A Methodology Note. Manila; and ADB. 2015. Financial Management Technical Guidance Note: Financial Management Assessment. Manila. 2

B. Methodology Being Used for the Assessment

6. The FMA was conducted in accordance with ADB’s Guidelines on the Financial Management and Analysis of Projects 2 and the Financial Management Due Diligence: Methodology Note.3 The FMA questionnaire (FMAQ) was used as a tool to collect necessary information for the FMA from the EA, the IAs, and the PIUs. The responses to the FMAQs were reviewed; and the financial staff of the EA, the IAs, and the PIUs were interviewed to ensure that the FMAQs had been correctly understood and responded. The conclusions of the FMA were drawn based on the corrected responses to the FMAQs.

C. Financial Risk Assessment

Table 2: Financial Management and Internal Control Risk Assessment Risk Risk Type Assessment Risk Description Mitigation Measures Inherent Risk Assessment Country specific M The lack of capacity at municipal Reinforce currently ongoing support risk and county level may both hamper in assessing and strengthening the effective financial control and public financial management constrain the shift of focus from capacity at subprovincial level controlling inputs to managing through skills training, knowledge results. sharing, and organizational reviews

Entity specific risk M Financial management and internal The EA to provide assurance that control in place, but there may be a necessary control will be in place delay in withdrawal application for and ensure proper coordination the ADB loan. mechanism to enhance processing of ADB’s disbursement Control Risk Assessment Implementing M Some IAs do not have experience The EA will develop a set of Agency with the ADB loan and financial management regulations management of foreign currency specifically for the project before risks. the effectiveness of the project. Training and assistance from the EA will be provided to mitigate the foreign currency risk. Funds Flow L The IAs’ and the PIUs’ lack of Training will be conducted before familiarity with ADB’s disbursement loan effectiveness to ensure that requirements and procedures the IA and the PIU staff acquire the required knowledge. Staffing L Staff are in place and are Training provided by ADB and the adequately qualified; but most of project management consultant them, except staff from the EA and team support in capacity building a few IAs, have previous and development, especially in experience in financial procurement, disbursement, and management and are familiar with project monitoring and reporting ADB’s guidelines and policies. requirements. Accounting and L None An accounting policy and Reporting procedures manual for the PIUs will be drafted, covering the national accounting standards and the requirements of ADB. Internal Audit L None Develop the financial management manual

2 ADB. 2005. Financial Management and Analysis of Projects. Manila. 3 ADB. 2009. Financial Due Diligence: A Methodology Note. Manila.

Risk Risk Type Assessment Risk Description Mitigation Measures External Audit L The IAs are audited by the Consolidated financial statements Provincial Audit Offices every year. will be audited by the Shanxi Provincial Audit Office, which has rich experiences with the ADB projects. Reporting and L Financial reports are prepared Prepare financial reports in monitoring using cash-based accounting accordance with accrual-based systems. accounting system established by the requirements of ADB and the Ministry of Finance. Training will be provided for the accrual-based accounting system. Information L Financial reports are generated by The EA and the IAs will use stand- Systems the computer system. Imprest alone computerized accounting account will be generated system. Control mechanism will be manually. provided on imprest account reconciliation. Overall Risk M ADB = Asian Development Bank, EA = executing agency, H = high, IA = implementing agency, L = low, M = moderate, PIU = project implementation unit, S = substantial. Source: Asian Development Bank.

D. Summary of Strengths and Weaknesses identified and their related risk mitigations

7. Overall, the organization structure, experience, and number of qualified accountants of the EA and the IAs are appropriate for the project management. The accounting policies and procedures, budgeting, and audit arrangements applied to the project by the EA, the IAs, and the PIUs are in place. The project can rely on the prevailing structure and system for its fiduciary arrangements in required quality with necessary mitigation actions taken to address identified weaknesses.

8. Although SPG and its agencies has implemented and is currently implementing a number of foreign-funded projects, some of the IAs and all PIUs do not have experience in managing foreign-funded projects. Currently SPG, the Shanxi Provincial Finance Department (PFD), and the Shanxi Poverty Alleviation and Development Office (SPADO) have limited staff to financially manage the project given the significant number of the IAs and the PIUs. It was suggested to hire a qualified external financial management consultant to assist and support the EA, the IAs, and the PIUs to provide the necessary financial management capacity, especially on disbursement, project monitoring, and reporting requirements. There are existing accounting policies and procedures, and the financial management system and controls are in place in the EA and the IAs. However, the IA and the PIU staff need proper guidance on ADB’s requirements; thus, it is recommended that the EA will develop a financial management manual based on the requirements of ADB and the Ministry of Finance (MOF) on project accounting and financial reporting, including appropriate internal control and coordination mechanism.

E. Country and Sector Financial Management Issues

9. The country partnership strategy (CPS) for the People’s Republic of China (PRC), 2016– 20204 included a governance risk assessment. The assessment concluded that the PRC has strong financial management legislation, structures, and systems in place, which have been further reinforced in recent years and aligned with international standards. Major risks remain only

4 ADB. 2016. Transforming Partnership: People’s Republic of China and Asian Development Bank, 2016–2020. Manila. 4

where subprovincial levels are lagging behind in the implementation of reforms in core functional areas of financial management, i.e., accounting and reporting, accrual accounting and risk-based control, and internal audit. The lack of capacity at subprovincial level may both hamper effective financial control and constrain the shift of focus from controlling inputs to managing results.

10. The centralized payment processing system and the standardized budgetary system are examples of major improvements in expenditure management. Important initiatives already implemented include the strengthening of information management systems, the adoption of medium-term expenditure frameworks, performance budgeting, and the tightening of cash management through the development of the treasury single account system.

11. The CPS assessment required that ADB should reinforce ongoing support in assessing and strengthening public financial management capacity at subprovincial levels, e.g., through promoting skills training (accounting and reporting), knowledge sharing (accrual accounting and risk-based internal control), and organizational reviews (internal audit). ADB should provide technical assistance and support training activities to finance staff in local authorities and project officers and extend support in strengthening the use, quantity, and quality of financial management through policy advice and technical assistance.

F. Assessment of Executing Agency

1. Summary of Findings

12. Following the project implementing arrangements, the PFD will be responsible for financial management of the project, particularly ADB’s loan disbursement. The FMA of the EA was therefore conducted on the PFD. Based on the responses to the FMAQ given by the PFD and interview with its officials, it is concluded that the PFD satisfies ADB’s financial management requirements. The only weakness is that PFD does not have sufficient finance staff, comparing to the big number of the IAs and the PIUs to be involved in the project. A financial consultant is needed during the implementation of the project to help PFD provide training to and supervision on the IAs and the PIUs. More detailed assessments were given in the following sections:

2. Institutional Set-up

13. The PFD is one of agencies of SPG. Following the management system in the PRC, one of the PFD’s responsibilities is the overall management of international financial institution loans and grants. The PFD has various experiences in the managing the ADB and the World Bank loans. To date, the PFD has disbursed about US$1,015 million of the ADB loans involving the sectors of transport, agriculture, power, and environment; and US$1,237 million of the World Bank loans involving the sectors of education, health, environment, irrigation, transport, forestry, and power.

14. Specifically, the International Division of the PFD is responsible for the management of the ADB and the World Bank loans; while the Treasury Division of the PFD is responsible for the bank account management and accounting. There is proper segregation of duties and internal control between these two divisions.

3. Funds Flow

15. The subprojects under the project will be jointly financed by the ADB loan and equity from the PACs. Most of the ADB loan will be disbursed from the imprest account managed by the PFD, following ADB’s disbursement requirements. The ADB loan of the project will be disbursed

through the imprest account either directly to the project counties for those under the direct management of the PFD, or indirectly to the project counties via the municipal finance bureaus (MFBs) for those under the direct management of the municipal governments. Figure 1 shows the fund flow diagram of the project.

4. Staffing

16. The officials of the International Division of the PFD have experience in managing the ADB loans, including operating the imprest account; withdrawing loans from ADB; and reviewing application for the ADB loans submitted by the IAs and the PIUs. The officials of the Treasury Division of the PFD have professional background and are competent to the management of bank account and accounting for several years. However, comparing to the big number of the PIUs to be involved in the project, the PFD does not have sufficient finance staff to provide training to and supervision on the PIUs for project financial management. A financial consultant is needed to be employed during the implementation of the project to assist in training the financial management staff in the IAs and the PIUs.

5. Accounting Policies and Procedures

17. The PFD applies the accounting policies and procedures for government fiscal revenues and expenditures issued by the MOF in 2015. This accounting system will be used to comply with ADB’s requirements on imprest account. To fully reflect its rights and liabilities, the PFD also applies the Accounting System for Onlending International Financial Institutes Loans issued by the MOF in 1999.

6. Internal Audit

18. The PFD has the Supervision and Inspection Division. One of its responsibilities is internal auditing. This division reviews the financial records made by the International Division once a year. To date, accountability issues have not been identified.

7. External Audit

19. External auditing of the project will be conducted by the Shanxi Provincial Audit Office (SPAO). Among others, the imprest accounts of the ADB loans were audited; and the findings were reflected in relevant project audit reports. To date, accountability issues have not been identified by the audit reports.

8. Reporting and Monitoring

20. Although the PFD prepares the financial statements of fiscal revenues and expenditures every 10 days; and only the annual statements are audited, the imprest account statements of the ADB-financed projects are only prepared and audited annually, which is part of project financial report and submitted to ADB on time. 9. Information Systems

21. Computerized accounting system is used by the PFD. All financial statements are generated by the system. However, the imprest account statements are prepared manually.

G. Assessment of Implementing Agencies

1. Summary Findings 6

22. The IAs are governments of 17 project counties in 6 municipalities. These IAs are classified into two groups: (i) counties under the direct management of the PFD, and (ii) counties under the management of their respective MFBs. These IAs are listed in Table 2.

Table 2: List of Implementing Agencies County under the Direct Management of County under the Management of the Municipal Municipality the Shanxi Provincial Finance Department Government I Changzhi 1 Qin County Government II Datong 2 Guangling County Government 3 Datong County Government III Jinzhong 4 Taigu County Government 5 Heshun County Government IV Linfeng 6 Fenxi County Government 7 Fushan County Government 8 Quwo County Government 9 Xiangning County Government 10 Yaodu District Government V Lvliang 11 Liulin County Government 12 Shilou County Government VI Yuncheng 13 Ruicheng County Government 14 Yanhu District Government 15 Xinjiang County Government 16 Yuanqu County Government 17 Jishan County Government

23. Following the project implementing arrangements, the county finance bureaus (CFBs), the county agricultural commissions, and the county poverty alleviation and development offices will be involved in the project implementation. Only the CFBs have the responsibility for project financial management. Therefore, the FMAs of the IAs were conducted on the CFBs. Based on their responses to the FMAQs and interview with their officials, it is concluded that the CFBs satisfy ADB’s financial management requirements.

2. Institutional Set-Up

24. The institutional set-ups for project financial management vary from the IA to the IA.

(i) Except the IAs in Linfen and Yuncheng municipalities, the CFBs play the role of financial management. Each CFB has two sections involved in the project financial management. One is the agricultural finance section, the other is the treasury section. The first one focuses on the overall project financial management, while the second one manages the bank account which will be opened for receiving the ADB loan from the PFD.

(ii) In the IAs in Linfen and Yuncheng municipalities, separate financial management bureaus have been set up by an ADB-financed project—the Shanxi Integrated Agricultural Development Project, which was just closed in 2016.5 In the IAs in the Linfen Municipality, these bureaus are the management bureaus for international funds; while in the IAs in the Yuncheng Municipality, these bureaus are the management bureaus for international financial institution loans. These bureaus play the role of project financial management which is the role played by the CFBs in other IAs. However, some of the bank accounts are managed by the CFBs; and some are managed by these separate financial management bureaus.

3. Fund Flow

5 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Grants to the People’s Republic of China for the Shanxi Integrated Agricultural Development Project. Manila.

25. The subprojects under the project will be jointly financed by the ADB loan and equity of the PACs. Most of the ADB loan will be disbursed from the imprest account managed by the PFD, following ADB’s disbursement requirements. The ADB loan of the project will be disbursed through the imprest account either directly to project counties for those under the direct management of the PFD, or indirectly to project counties via the MFBs for those under the direct management of the municipal governments. Figure 1 above shows the fund flow diagram of the project.

4. Staffing

26. All IAs’ CFBs, the management bureaus for international financial institution loan, and the management bureaus for international funds are equipped with qualified finance staff. These staff received professional education in the field of accounting. They also work for those bureaus for several years. They are familiar with the regulations of internal control. Some of them have the experience in managing the ADB project through the implementation of the Shanxi Integrated Agricultural Development Project (footnote 5). Some of them experienced the World Bank loan disbursement. Some do not have any experience in the ADB or the World Bank loan disbursement. However, since the CFBs, the management bureaus for international financial institution loan, and the management bureaus for international funds of the IAs are only domestic part of the procedure of ADB’s loan disbursement; and the PFD will provide guidelines and training for them on ADB’s loan disbursement, their lack of experience of ADB’s loan disbursement will not have significant negative impact on the project.

5. Accounting Policies and Procedures

27. The ADB loan received and appropriated by the CFBs, the management bureaus for international financial institution loan, and the management bureaus for international funds of the IAs will be recorded by the CFBs, following the accounting policies and procedures for government fiscal revenues and expenditures issued by the MOF in 2015. These accounting policies and procedures are also used to record and report the receipts and payments of fiscal revenues and expenditures.

6. Internal Audit

28. Every CFB has a Supervision and Inspection Unit. One of their responsibilities is internal auditing. These units review the financial records made for fiscal revenues and expenditures once a year. To date, accountability issues have not been identified.

7. External Audit

29. External auditing received by the CFBs of the IAs will be conducted by the SPAO, mainly for fiscal revenues and expenditures. The ADB loan through the CFBs of the IAs is not audit focus. To date, accountability issues have not been identified by the audit reports.

8. Reporting and Monitoring

30. Although the CFBs of the IAs prepare the financial statements of fiscal revenues and expenditures every 10 days; and only the annual statements are audited, neither specific financial reports will be prepared for the ADB loan received and appropriated; nor the audit on the accounts of the ADB loan. The imprest account statements of the ADB-financed projects are only prepared and audited annually, which is part of project financial report and submitted to ADB on time.

9. Information System

31. Computerized accounting system is used by the CFBs. All financial statements are generated by the system. The staff got enough training to ensure the integrity and availability of the accounting information.

H. Assessment of the Project Implementation Units

1. Summary Findings

32. There are 19 PIUs involved in the project preparation and implementation. The PIUs will be responsible for the routine works of project implementation, including procurement, contract management, financial management, accounting, and reporting, etc. Therefore, the FMAQs were sent to all PIUs. Some of PIUs gave their responses to the FMAQs before the project preparatory TA (PPTA) consultant visited the PIUs. Some did not give their responses to the FMAQs. The PPTA consultant conducted his due diligence. During the due diligence, the responses to the FMAQs were discussed and updated for those who had sent their responses. For those who did not respond to the FMAQs, the consultant discussed the company’s financial management and filled up the FMAQs during its due diligence. The review of the responses to the FMAQs shows that it is the first time for all PIUs to use the ADB loan, and they do not have experience in using the World Bank loans. None of the PIUs have experience in implementing foreign-funded projects. Particularly, none of them are familiar with ADB’s procurement and disbursement procedures. Procurement and financial management consultants hired by the EA will help the PIUs to implement the project following ADB’s procedures.

2. Institutional Set-up

33. Nineteen PIUs are private commercial companies established in accordance with the PRC Company Law, and one PIU is a cooperative established under the PRC Law on Specialized Farmers’ Cooperatives. The following table lists all the PIUs, including their names, location, and year of establishment.

Table 3: List of the Project Implementation Units Location Year S/N Municipality County Enterprise Establishment 1 Changzhi Qinxian Shanxi Qinzhouhuang Millet Group Co., Ltd. 1982 Guangling Kitano Edible Fungus Industrial Development 2 Guangling 2004 Datong Co., Ltd. 3 Datong Shanxi Phoenix Wine Industry Co., Ltd. 2012 Shanxi Juxin Weiye Agricultural and Sci & Tech 4 Taigu 2010 Development Co., Ltd. Jinzhong Heshun Lvhe Ecological Agriculture & Livestock 5 Heshun 2011 Development Co. Ltd. 6 Fenxi Fenxi Hongchang Breeding Co., Ltd. 2009 7 Fushan Fushan Guhuan Husbandry Sci. & Tech. Co., Ltd. 2013 8 Quwo Quwo Lvheng Agricultural Development Co., Ltd. 2013 Linfen 9 Xiangning Shanxi Qierkang Elaeagnus Biological Products Co. 2000 Linfen Zhongde Farming Technology Development Co., 10 Yaodu Dist. 2008 Ltd. 11 Liulin Liulin Fuzhongyuan Livestock Breeding Cooperative 2012 Lvliang 12 Shilou Shilou Shude Jujube industry Co., Ltd. 2002 13 Ruicheng Shanxi Tianzhirun Date Processing Co., Ltd. 2010 14 Xinjiang Hefeng Grain Planting Technology Cooperatives 2013 Yuncheng Xinjiang 15 Shanxi Xinjiang Vegetable Industry Development Co., Ltd. 1992 16 Yanhu Shanxi Kaisheng Fertilizers Group Co., Ltd. 1998

Location Year S/N Municipality County Enterprise Establishment 17 Yuncheng Xinke Taifang Vegetable Trading Co., Ltd. 2013 18 Yuanqu Shanxi Shanlihong Food Co., Ltd. 2000 Shanxi Jinglong Group Jinghua Livestock and Poultry 19 Jishan 2005 Products Development Co., Ltd.

3. Fund Flow

34. The PACs will sign the contracts and make payments to contractors of civil works and suppliers of equipment, materials, and so on following the payment clauses of the contracts. After payments to the contractors, the PACs will request for the ADB loan following the domestic procedures and requirements stipulated by PFD, together with supporting documents such as copies of contracts, invoices, and certificates. These requests and supporting documents will be reviewed and endorsed by the agencies of the IAs, such as the county agricultural commissions, the county poverty alleviation and development offices, the management bureaus for international funds, or the management bureaus for international financial institution loans. Then further review will be made by the CFBs of the IAs. Next review will be made by the agencies of the municipal governments, and the last reviewers are the SPADO and the PFD. When the requests for the ADB loan are reviewed and endorsed by the IAs and the EA, the ADB loan of the project will be appropriated from the imprest account, managed by the PFD either directly for those provincial directly-governed counties, or via the MFBs for those not provincial directly-governed counties, to the CFBs which represent the IAs. Figure 1 above shows the fund flow diagram of the project. A specific handbook for the ADB loan disbursement will be prepared by the PFD, and trainings will be provided as well.

4. Staffing

35. Each PIU has at least two finance staff, an accountant, and a cashier. Due to the small size of the PIUs, their finance staff directly report to the managers of the PIUs. The finance staff has been well educated and receive regular trainings in accounting. They are qualified in fulfilling the PIUs’ jobs on financial reports, payments, and budgets.

36. These finance staff will be involved in the financial management of the project. Unfamiliarity with ADB’s requirements will reduce the quality of project financial management. Trainings and assistance given by consultants can help the finance staff strengthen their capacities.

5. Accounting Policies and Procedures

37. The accounting policies and procedures, such as key accounting elements, accounting subjects and numbering, the format of financial statements, and the notes to the financial statements, adopted by the PIUs follow the requirements by the Accounting Standards for Enterprises stipulated by the MOF. The finance staff of the PIUs is knowledgeable and generally understand how to apply them to practice.

38. However, to strengthen the financial management of projects financed by international financial institutions, the MOF has also promulgated the accounting methods for these projects, including specific chart of accounts for projects, which are different from what applied to the routine business of the PIUs. Following these methods, a detailed accounting methods specifically designed for the project will be prepared by the PFD. Trainings, periodic reviews, and assistance given by consultants will help the finance staff of the PIUs use the accounting methods properly.

6. Segregation of Duties

39. The functional responsibilities of the PIUs, such as approval, ordering, paying for, recording of a transaction, are performed by different persons. This practice will be also applied to the project. A handbook for project financial management will be prepared by the PFD.

7. Budgeting System

40. The PIUs prepare their simple budgets, and they are supervised by the managers. The actual expenditures and budgets are compared periodically. If significant variation occurs, explanation will be requested. This practice will be also applied to the project.

8. Cash and Bank

41. All PIUs have effective cash management system. The manager of each PIU is the authorized signature. All receipts are kept well from the beginning. The cash and bank statements are reconciled every month. This practice will be also applied to the proposed project.

9. Internal and External Audit

42. Internal audits are not carried out by all PIUs, taking into account the small size and simple business scope of the PIUs. All PIUs have external audits for their financial statements. All auditors gave their unqualified opinions to the financial statements.

43. The project accounts retained by the PIUs will be audited by the SPAO, following the PRC Audit Law. The SPAO has extensive experience in auditing the ADB-financed projects implemented in Shanxi Province. The audited financial statements together with audit reports will be provided to ADB.

10. Reporting and Information System

44. The financial statements of most PIUs are prepared and presented following the Accounting System for Enterprises. These computerized accounting programs have good after- sale services. The PIUs do not have computerized information systems as their size is small and business scopes are simple. 45. The PFD will develop a specific computerized accounting program for the project following the detailed accounting methods mentioned in subsection E.5.

46. The Project Progress Monitoring System could be a useful information system about the progress of proposed project implementation. This will be done by the EA at the early stage of project implementation.

I. Conditions and Covenants

47. Hiring a financial consultant by the EA should be one of the disbursement conditions for the ADB loan, and the uniform financial management handbook should be prepared and distributed to all finance staff by the EA can be one of the covenants for project financial management before 30 June 2018.

Asian Development Bank (ADB) Lending to the PRC: Loan Agreement LIBOR-based lending rate with 20-year amortization period, People’s Republic of China including 5-year grace peri (Ministry of Finance) od

Onlending to SPG/PFD: Onlending Agreement LIBOR-based lending rate with 20-year amortization period, Shanxi Provincinal Government Prepare the including 5-year grace period (Shanxi Provincial Finance Department WAs and and PPMO) submit to ADB An imprest account will be established and maintained by PFD

Onlending to PCGs/CFBs: Onlending Agreements LIBOR-based lending rate with 20-year amortization period, Consolidate, including 5-year grace period if needed; and 17 Project County Governments (County Finance Bureaus and CPMOs)a review payment requests, and submit to the Onlending to the PACs: PPMO and Onlending Agreements PFD Rates over the policy-lending rate with 5–8 years, including grace period of 2–3 years Prepare 19 Project Agribusiness payment Companies and Cooperative requests, and (PACs) submit to the CPMOs and CFBs

Contractors, Consultants, Suppliers

Loan and onlending arrangements

Indicative funds flow

Repayment

Flow of WAs and payment requests

CFB = county finance bureau, LIBOR = London interbank offered rate, PAC = project agribusiness companies and cooperatives, PCG = project county government, PFD = Shanxi Provincial Finance Department, PMO = project management office, PRC = People’s Republic of China, SPG = Shanxi Provincial Government, WA = withdrawal application.

Figure 1: Fund Flow Diagram a Two county-level districts, namely Yanhu and Yaodu, will go through their municipal governments: Yuncheng and Linfen, respectively, since they are under the management of these municipal governments. Source: Asian Development Bank. 12

FINANCIAL MANAGEMENT ASSESSMENT QUESTIONNAIRE EXECUTING AGENCY

TOPIC RESPONSE 1. Implementing Agency 1.1 What is the entity’s legal status / registration? The executing agency (EA) of the proposed project is the Shanxi Provincial Government. Among others, only two government departments involve in the project preparation and implementation. They are the Shanxi Provincial Finance Department (PFD) and the Shanxi Poverty Alleviation and Development Office (SPADO). 1.2 Has the entity implemented an externally- The EA has implemented many externally- financed project in the past (if so, please provide financed projects over past 30 years. Most of details)? them are the projects financed by the Asian Development Bank (ADB) and the World Bank loans. To date, the EA has disbursed about US$1,015 million of the ADB loans involving the sectors of transport, agriculture, power, and environment; and US$1,237 million of the World Bank loans involving the sectors of education, health, environment, irrigation, transport, forestry, and power. 1.3 What are the statutory reporting requirements for The EA reports to the Shanxi Provincial the entity? People’s Congresses. In addition, the PFD has to report to Ministry of Finance (MOF) and the SPADO has to report to the National Poverty Alleviation and Development Office. 1.4 Is the governing body for the project Yes, the EA is independent. The PFD and the independent? SPADO are also independent from each other. But the internal divisions in charge of the preparation and implementation of the project are not independent. 1.5 Is the organizational structure appropriate for the Yes, the organizational structure of the EA is needs of the project? appropriate for the need of the proposed project. 2. Funds Flow Arrangements 2.1 Describe (proposed) project funds flow The ADB loan will flow to the project arrangements, including a chart and explanation implementation units (PIUs) mainly from the of the flow of funds from ADB, government and imprest account and then paid to the providers other financiers. of civil works, goods and services. The fund flow diagram shows the flow of the ADB loan and counterpart funds, excluding internal cash. The counterpart funds will be given by the PIUs mainly through company’s profits, equity injections, and local commercial bank loans, if necessary, and then paid to the providers of civil works, goods and services through those PIUs’ accounts. 2.2 Are the (proposed) arrangements to transfer the Yes, they are the most proper arrangements proceeds of the loan (from the government and/or under current circumstance, which can help the the MOF) to the entity satisfactory? EA to monitor the use of the ADB loan.

TOPIC RESPONSE 2.3 What have been the major problems in the past Long approval process of withdrawal in receipt of funds by the entity? application for the ADB loan is the universal issue occurred in all ADB-financed projects in the People’s Republic of China (PRC). 2.4 In which bank will the Imprest Account be The imprest account will be opened in a opened? commercial bank located in Taiyuan Municipality, Shanxi Province. 2.5 Does the (proposed) PIUs have experience in the No, none of the PIUs has experience in management of disbursements from ADB? management of disbursements from ADB. 2.7 Does the entity have/need a capacity to manage No, The EA has the capacity to management foreign exchange risks? foreign exchange risks. At least it has resources to hire experts to manage foreign exchange risks. 2.8 How are the counterpart funds accessed? Counterpart funds will be provided following the progress of project implementation. 2.9 How are payments made from the counterpart The counterpart funds will be paid in funds? accordance with the contracts whatever they are entered with contractors of civil works, suppliers of equipment and materials, and providers of services. 2.10 If part of the project is implemented by No part of the proposed project will be communities or nongovernment organizations implemented by communities or NGOs. (NGOs), does the PIU have the necessary reporting and monitoring features built into its systems to track the use of project proceeds by such agencies? 2.11 Are the beneficiaries required to contribute to No individual beneficiaries exist. project costs? If beneficiaries have an option to contribute in kind (in the form of labor), are proper guidelines formulated to record and value the labor contribution? 3. Staffing 3.1 What is the (proposed) organizational structure of The EA has the responsibility to oversee the the accounting department? Attach an use of the ADB loan. The PFD controls all bank organization chart. accounts opened for public finance, including the imrest account. The PFD has accountants and cashiers. 3.2 Identify the (proposed) accounting staff, including The accountants and cashiers of the EA have job title, responsibilities, educational background received professional education in accounting and professional experience. Attach job and have obtained certificates for accounting descriptions and CVs of key accounting staff. job as well. The major responsibilities of accountants are to record all funds receipts and payments. The major responsibilities of cashiers are to manage bank accounts. 3.3 Are the project financial and accounting functions Yes, the existing finance staff of the EA is also staffed adequately? responsible for the imprest account. 3.4 Are the finance and accounting staff adequately Yes, the existing finance and accounting staff qualified and experienced? are qualified and experienced in managing the ADB loan, because they have already obtained experience in managing the loans under other projects financed by ADB and the World Bank. 14

TOPIC RESPONSE 3.5 Are the project accounting and finance staff Yes. trained in ADB’s procedures? 3.6 What is the duration of the contract with the They are permanent staff of the EA. finance and accounting staff? 3.7 Indicate key positions not contracted yet, and the All key positions have been contracted. estimated date of appointment. 3.10 Does the project have written position Not yet. But the EA will develop a set of descriptions that clearly define duties, financial management manual and guidelines responsibilities, lines of supervision, and limits of specifically for the project before the authority for all the officers, managers, and staff? effectiveness of the project. 3.11 At what frequency are personnel transferred? The current personnel are stable. 3.12 What is training policy for the finance and Finance staff must receive at least 5 days to accounting staff? continue education on accounting policies and practice. 4. Accounting Policies and Procedures 4.1 Does the entity have an accounting system that The EA follows the accounting system allows for the proper recording of project financial promulgated by the MOF, which is designed for transactions, including the allocation of public finance. This accounting system will be expenditures in accordance with the respective used to imprest account. But the allocation of components, disbursement categories, and expenditures in accordance with the respective sources of funds? Will the project use the entity components will be done by the PIUs. accounting system? 4.2 Are controls in place concerning the preparation Yes, controls are in place. For instance, all and approval of transactions, ensuring that all applications made by the PIUs for the ADB transactions are correctly made and adequately loan must be first reviewed and approved by explained? the implementing agencies (IAs) before they are submitted to the EA. 4.3 Is the chart of accounts adequate to properly Yes, the chart of accounts can properly record account for and report on project activities and and report the receipts and payments of the disbursement categories? ADB loan. 4.4 Are cost allocations to the various funding No. Cost allocations will be done by the PIUs. sources made accurately and in accordance with established agreements? 4.5 Are the General Ledger and subsidiary ledgers Yes, they are reconciled and in balance. reconciled and in balance? 4.6 Are all accounting and supporting documents Yes, they are retained on a permanent basis, retained on a permanent basis in a defined and only the people getting authorization from system that allows authorized users easy the directors can access the accounting and access? supporting documents. Segregation of Duties 4.7 Are the following functional responsibilities Yes. From the point of view of the EA, the performed by different units or persons: (i) justification of application for the ADB loan will authorization to execute a transaction; (ii) be first reviewed by the IAs. Payments from the recording of the transaction; and (iii) custody of imprest account will be made by the EA. The assets involved in the transaction? custody of assets involved in the transaction will be done by the PIUs. 4.8 Are the functions of ordering, receiving, Yes. The EA has rules to segregate these accounting for, and paying for goods and services functions to different people. appropriately segregated?

TOPIC RESPONSE 4.9 Are bank reconciliations prepared by someone Yes, bank reconciliations are prepared by other than those who make or approve accountants. The approvals of payments are payments? made by directors. Budgeting System 4.10 Do budgets include physical and financial No. Normally the budget only includes financial targets? targets. 4.11 Are budgets prepared for all significant activities Yes. in sufficient detail to provide a meaningful tool with which to monitor subsequent performance? 4.12 Are actual expenditures compared to the budget Yes. In the mid of a year, the budget will be with reasonable frequency, and explanations reviewed and adjusted with explanations. required for significant variations from the budget? 4.13 Are approvals for variations from the budget Yes. They are required in advance. required in advance or after the fact? 4.14 Who is responsible for preparation and approval Sector budgets will be prepared by different of budgets? provincial departments and consolidated by the PFD. The budget of the EA is approved by the Shanxi Provincial People’s Congress. 4.15 Are procedures in place to plan project activities, Yes. Project activities will be prepared by the collect information from the units in charge of the PIUs. The EA will collect information from the different components, and prepare the budgets? different PIUs and then form an overall project budget. 4.16 Are the project plans and budgets of project Current project plans and budgets are activities realistic, based on valid assumptions, prepared by design institute based on design and developed by knowledgeable individuals? norms issued by government. However, these norms do not reflect the market situation. The project budgets are overestimated. More accurate project budgets will be made at the early stage of project implementation. Payments 4.17 Do invoice-processing procedures provide for: (i) These procedures will be adopted during the Copies of purchase orders and receiving reports implementation of the proposed project. to be obtained directly from issuing departments? (ii) Comparison of invoice quantities, prices and terms, with those indicated on the purchase order and with records of goods actually received? (iii) Comparison of invoice quantities with those indicated on the receiving reports? (iv) Checking the accuracy of calculations? 4.18 Are all invoices stamped PAID, dated, reviewed All invoices are stamped PAID. and approved, and clearly marked for account code assignment? 4.19 Do controls exist for the preparation of the payroll No. The salary policies for the EA staff are and are changes to the payroll properly determined by central government. authorized? Policies And Procedures 4.20 What is the basis of accounting (e.g., cash, The cash basis is adopted for accounting. accrual)? 4.21 What accounting standards are followed? Accounting System for Public Finance is followed by the EA. 16

TOPIC RESPONSE 4.22 Does the project have an adequate policies and Not yet, but EA will develop a set of financial procedures manual to guide activities and ensure management regulations specifically for the staff accountability? project before the effectiveness of the project. 4.23 Is the accounting policy and procedure manual No. But an accounting policy and procedure updated for the project activities? will be developed by the EA based on the MOF’s requirement on the project accounting and financial reporting financed by ADB and the World Bank. 4.24 Do procedures exist to ensure that only No. But the accounting principle, policy and authorized persons can alter or establish a new procedures used by the PIUs cannot be accounting principle, policy or procedure to be altered. used by the entity? 4.25 Are there written policies and procedures Yes. The EA will issue a set of financial covering all routine financial management and management regulations in writing, covering related administrative activities? accounting and reporting, the ADB loan disbursement, and project financial management. 4.26 Do policies and procedures clearly define conflict No. But any transactions made by the EA must of interest and related party transactions (real go through public procurement. and apparent) and provide safeguards to protect the organization from them? 4.27 Are manuals distributed to appropriate Not yet. But when it is ready, the project personnel? financial management regulations will be distributed to appropriate personnel, such as finance staff, managers of the PIUs. Cash and Bank 4.28 Indicate names and positions of authorized The director of the PFD. signatories in the bank accounts. 4.29 Does the organization maintain an adequate, up- Yes. The cashbooks are updated from time to to-date cashbook, recording receipts and time when receipts and payments incurred. payments? 4.30 Do controls exist for the collection, timely deposit Yes. But from the point of view of the project, it and recording of receipts at each collection is the responsibility of the PIUs, not the EA. location? 4.31 Are bank and cash reconciled every month? Yes. 4.32 Are all unusual items on the bank reconciliation Yes. The unusual items must be approved by reviewed and approved by a responsible official? director of the PFD. 4.33 Are all receipts deposited on a timely basis? Yes. Safeguard over Assets 4.34 Is there a system of adequate safeguards to Yes. There is a system to protect assets protect assets from fraud, waste and abuse? belonging to the EA. 4.35 Are subsidiary records of fixed assets and stocks Yes. Fixed assets and stocks are kept to date kept up to date and reconciled with control and reconciled with control accounts at the end accounts? of each year. 4.36 Are there periodic physical inventories of fixed Yes. Annually. assets and stocks? 4.37 Are assets sufficiently covered by insurance No. policies? Other Offices and Implementing Entities

TOPIC RESPONSE 4.38 Are there any other regional offices or executing Yes. The IAs and the PIUs will participate in the entities participating in implementation? implementation of the project. 4.39 Has the project established controls and Yes. The project will follow the normal practices procedures for flow of funds, financial of controls and procedures for flow of funds, information, accountability, and audits in relation financial information, and accountability. to the other offices or entities? 4.40 Does information among the different offices Yes. An information system will be developed and/or IAs flow in an accurate and timely by the EA before the effectiveness of the fashion? project. 4.41 Are periodic reconciliations performed among the No. different offices and/or IAs? Other 4.42 Has the project advised employees, beneficiaries Not yet. But the EA will develop a set of and other recipients to whom to report if they financial management regulations specifically suspect fraud, waste or misuse of project for the project before the effectiveness of the resources or property? project. 5. Internal Audit 5.1 Is there an internal audit department in the entity? The PFD has the Supervision and Inspection Division, which is responsible for internal auditing. This division reviews the financial records made by the International Division once a year. To date, accountability issues have not been identified. 5.2 What are the qualifications and experience of All staff has experience in public finance. audit department staff? 5.3 To whom does the internal auditor report? Governor of the EA. 5.4 Will the internal audit department include the Yes. The accounts of the ADB loan are part of project in its work program? accounts to be audited. 5.5 Are actions taken on the internal audit findings? Yes. 6. External Audit 6.1 Is the entity financial statement audited regularly External auditing of the entity financial by an independent auditor? Who is the auditor? statement will be conducted by the Shanxi Provincial Audit Office (SPAO). 6.2 Are there any delays in audit of the entity? When No. are the audit reports issued? 6.3 Is the audit of the entity conducted according to No. the International Standards on Auditing? 6.4 Were there any major accountability issues No. brought out in the audit report of the past three years? 6.5 Will the entity auditor audit the project accounts Yes, but the division of the SPAO is different or will another auditor be appointed to audit the from the division which audits the entity project financial statements? financial statement. Among others, the imprest accounts of the ADB loans were audited and the findings were reflected in relevant project audit reports. 6.6 Are there any recommendations made by the No. auditors in prior audit reports or management letters that have not yet been implemented? 18

TOPIC RESPONSE 6.7 Is the project subject to any kind of audit from an Yes. The project will be audited by the SPAO independent governmental entity (e.g., the which has the authorization from the China supreme audit institution) in addition to the National Audit Office, the official auditor of external audit? sovereign debts. 6.8 Has the project prepared acceptable terms of No. The annual project audit is a mandatory reference for an annual project audit? audit. 7. Reporting and Monitoring 7.1 Are financial statements prepared for the entity? Yes. Financial statements are prepared for the In accordance with which accounting standards? EA in accordance with the Accounting System for Public Finance. 7.2 Are financial statements prepared for the No. The EA will not prepare financial implementing unit? statements for the IAs and the PIUs. 7.3 What is the frequency of preparation of financial Every 10 days. statements? Are the reports prepared in a timely fashion so as to useful to management for decision making? 7.4 Does the reporting system need to be adapted to No. The project has its different reporting report on the project components? system. 7.5 Does the reporting system have the capacity to No. The EA’s reporting system only focuses on link the financial information with the project's public finance. physical progress? If separate systems are used to gather and compile physical data, what controls are in place to reduce the risk that the physical data may not synchronize with the financial data? 7.6 Does the project have established financial Not yet, but a set of project financial management reporting responsibilities that management regulations will be developed by specify what reports are to be prepared, what the EA before the effectiveness of the project. they are to contain, and how they are to be used? 7.7 Are financial management reports used by Yes. management? 7.8 Do the financial reports compare actual No. But the project financial reports compare expenditures with budgeted and programmed the actual expenditures with budgeted allocations? allocations. 7.9 Are financial reports prepared directly by the Yes. automated accounting system or are they prepared by spreadsheets or some other means? 8. Information Systems 8.1 Is the financial management system Yes. computerized? 8.2 Can the system produce the necessary project No. The system is not designed for the project. financial reports? 8.3 Is the staff adequately trained to maintain the Yes. system? 8.4 Does the management organization and Yes. processing system safeguard the confidentiality, integrity and availability of the data?

FINANCIAL MANAGEMENT ASSESSMENT QUESTIONNAIRE IMPLEMENTING AGENCIES

TOPIC RESPONSE 1. Implementing Agency 1.1 What is the entity’s legal status / registration? The implementing agencies (IAs) of the proposed project are 18 project county governments. Among others, only two government agencies involve in the project preparation and implementation, in most cases. The agency in charge of financial management is the county finance bureau or county international funds management bureau in Linfen Municipality or county international financial institution (IFI) loan management bureaus in Yuncheng Municipality. 1.2 Has the entity implemented an externally-financed Five IAs in Linfen Municipality and five IAs in project in the past (if so, please provide details)? Yuncheng Municipality have just finished the implementation of one Asian Development Bank (ADB)-financed project. The other nine IAs do not have any externally-financed projects in the past. 1.3 What are the statutory reporting requirements for All IAs report to county people’s congresses. the entity? In addition, the county finance bureau must report to the provincial finance department. 1.4 Is the governing body for the project independent? Yes, all IAs are independent. 1.5 Is the organizational structure appropriate for the Yes, the organizational structures of the IAs needs of the project? are appropriate for the need of the proposed project. 2. Funds Flow Arrangements 2.1 Describe (proposed) project funds flow The ADB loan will flow to the project arrangements, including a chart and explanation implementation units (PIUs) mainly from the of the flow of funds from ADB, government and imprest account and then paid to the providers other financiers. of civil works, goods, and services. The fund flow diagram shows the flow of the ADB loan and counterpart funds, excluding internal cash. The counterpart funds will be given by the PIUs mainly through company’s profits, equity injections, and local commercial bank loans, if necessary; and then paid to the providers of civil works, goods, and services through those PIUs’ accounts. 2.2 Are the (proposed) arrangements to transfer the Yes, they are the most proper arrangements proceeds of the loan (from the government and/or under current circumstance, which can help the Ministry of Finance [MOF]) to the entity the IAs to monitor the use of the ADB loan. satisfactory? 2.3 What have been the major problems in the past in Long approval process of withdrawal receipt of funds by the entity? application for the ADB loan is the universal issue occurred in all ADB-financed projects in the People’s Republic of China (PRC). 20

TOPIC RESPONSE 2.4 In which bank will the Imprest Account be The imprest account will be opened by the opened? executing agency (EA) in a commercial bank located in Taiyuan Municipality, Shanxi Province. 2.5 Does the (proposed) PIUs have experience in the No, none of the PIUs has experience in management of disbursements from ADB? management of disbursements from ADB. 2.7 Does the entity have/need a capacity to manage No, none of the IAs has the capacity to foreign exchange risks? manage foreign exchange risks. 2.8 How are the counterpart funds accessed? Counterpart funds will be provided following the progress of project implementation. 2.9 How are payments made from the counterpart The counterpart funds will be paid in funds? accordance with the contracts whatever they are entered with contractors of civil works, suppliers of equipment and materials, and providers of services. 2.10 If part of the project is implemented by No part of the proposed project will be communities or nongovernment organizations implemented by communities or NGOs. (NGOs), does the PIU have the necessary reporting and monitoring features built into its systems to track the use of project proceeds by such agencies? 2.11 Are the beneficiaries required to contribute to No individual beneficiaries exist. project costs? If beneficiaries have an option to contribute in kind (in the form of labor), are proper guidelines formulated to record and value the labor contribution? 3. Staffing 3.1 What is the (proposed) organizational structure of The IAs have the responsibility to oversee the the accounting department? Attach an ADB loan disbursed by the PIUs. County organization chart. finance bureaus control all bank accounts opened for public finance, including the bank account to be opened for the ADB loan. County finance bureaus have accountants and cashiers. 3.2 Identify the (proposed) accounting staff, including The accountants and cashiers of the IAs have job title, responsibilities, educational background received professional education in accounting and professional experience. Attach job and obtained certificates for accounting jobs descriptions and CVs of key accounting staff. as well. The major responsibilities of accountants are to record all funds receipts and payments. The major responsibilities of cashiers are to manage bank accounts. 3.3 Are the project financial and accounting functions Yes, the existing finance staff of the IAs are staffed adequately? also responsible for the accounting function of ADB’s loan receipts and payments. 3.4 Are the finance and accounting staff adequately Yes, the existing accounting staff is qualified. qualified and experienced? Some of them have experience in managing the ADB loan. 3.5 Are the project accounting and finance staff Not yet. The trainings in ADB’s procedures will trained in ADB procedures? be given by the EA at early stage of project implementation. 3.6 What is the duration of the contract with the The duration of the contracts with accounting finance and accounting staff? staff is permanent.

TOPIC RESPONSE 3.7 Indicate key positions not contracted yet, and the All key positions have been contracted. estimated date of appointment. 3.10 Does the project have written position descriptions No. Up to now, the proposed project has not that clearly define duties, responsibilities, lines of developed any descriptions about the project supervision, and limits of authority for all of the management. This will be done by the officers, managers, and staff? consultant to be hired at early stage of project implementation. 3.11 At what frequency are personnel transferred? The current personnel are stable. 3.12 What is training policy for the finance and Finance staff has to receive at least 5 days accounting staff? trainings on accounting policies and practice. 4. Accounting Policies and Procedures 4.1 Does the entity have an accounting system that The EA follows the accounting system allows for the proper recording of project financial promulgated by the MOF, which is designed transactions, including the allocation of for public finance. This accounting system will expenditures in accordance with the respective be used to imprest account. But the allocation components, disbursement categories, and of expenditures in accordance with the sources of funds? Will the project use the entity respective components will be done by the accounting system? PIUs. 4.2 Are controls in place concerning the preparation Yes, controls are in place. For instance, all and approval of transactions, ensuring that all applications made by the PIUs for the ADB transactions are correctly made and adequately loan must be first reviewed and approved by explained? the IAs before they are submitted to the EA. 4.3 Is the chart of accounts adequate to properly Yes, the chart of accounts can properly record account for and report on project activities and and report the receipts and payments of the disbursement categories? ADB loan. 4.4 Are cost allocations to the various funding sources No. Cost allocations will be done by the PIUs. made accurately and in accordance with established agreements? 4.5 Are the General Ledger and subsidiary ledgers Yes, they are reconciled and in balance. reconciled and in balance? 4.6 Are all accounting and supporting documents Yes, they are retained on a permanent basis, retained on a permanent basis in a defined and only the people getting authorization from system that allows authorized users easy access? the directors can access the accounting and supporting documents. Segregation of Duties 4.7 Are the following functional responsibilities Yes. From the point of view of the IAs, the performed by different units or persons: (i) justification of application for the ADB loan will authorization to execute a transaction; (ii) be first reviewed by the technical agency of recording of the transaction; and (iii) custody of the IAs. Payments of the ADB loan from the assets involved in the transaction? imprest account will be made by county finance bureaus. The custody of assets involved in the transaction will be done by the PIUs. 4.8 Are the functions of ordering, receiving, Yes. The IAs have rules to segregate these accounting for, and paying for goods and services functions to different people. appropriately segregated? 4.9 Are bank reconciliations prepared by someone Yes, bank reconciliations are prepared by other than those who make or approve payments? accountants. The approvals of payments are made by directors. Budgeting System 22

TOPIC RESPONSE 4.10 Do budgets include physical and financial targets? No. Normally the budget only includes financial targets. 4.11 Are budgets prepared for all significant activities in Yes. sufficient detail to provide a meaningful tool with which to monitor subsequent performance? 4.12 Are actual expenditures compared to the budget Yes. In the mid of a year, the budget will be with reasonable frequency, and explanations reviewed and adjusted with explanations. required for significant variations from the budget? 4.13 Are approvals for variations from the budget Yes, they are required in advance. required in advance or after the fact? 4.14 Who is responsible for preparation and approval Sector budgets will be prepared by different of budgets? county bureaus and consolidated by county finance bureaus. The budgets of the IAs are approved by county people’s congresses. 4.15 Are procedures in place to plan project activities, Yes. Project activities will be prepared by the collect information from the units in charge of the PIUs. The IAs will collect information from the different components, and prepare the budgets? different PIUs and then form an overall project budget. 4.16 Are the project plans and budgets of project Current project plans and budgets are activities realistic, based on valid assumptions, prepared by design institutes based on design and developed by knowledgeable individuals? norms issued by government. However, these norms do not reflect the market situation. The project budgets are overestimated. More accurate project budgets will be made at the early stage of project implementation. Payments 4.17 Do invoice-processing procedures provide for: (i) These procedures will be adopted during the Copies of purchase orders and receiving reports implementation of the proposed project. to be obtained directly from issuing departments? (ii) Comparison of invoice quantities, prices and terms, with those indicated on the purchase order and with records of goods actually received? (iii) Comparison of invoice quantities with those indicated on the receiving reports? (iv) Checking the accuracy of calculations? 4.18 Are all invoices stamped PAID, dated, reviewed All invoices are stamped PAID. and approved, and clearly marked for account code assignment? 4.19 Do controls exist for the preparation of the payroll No. The salary policies for the IAs staff are and are changes to the payroll properly determined by central government. authorized? Policies And Procedures 4.20 What is the basis of accounting (e.g., cash, The cash basis is adopted for accounting. accrual)? 4.21 What accounting standards are followed? Accounting System for Public Finance is followed by the IAs. 4.22 Does the project have an adequate policies and Not yet, but the EA will develop a set of procedures manual to guide activities and ensure financial management regulations specifically staff accountability? for the project before the effectiveness of the project.

TOPIC RESPONSE 4.23 Is the accounting policy and procedure manual No. But an accounting policy and procedure updated for the project activities? will be developed by the EA based on the MOF’s requirement on the project accounting and financial reporting financed by ADB and the World Bank. 4.24 Do procedures exist to ensure that only No. The accounting principle, policy and authorized persons can alter or establish a new procedures used by the PIUs cannot be accounting principle, policy or procedure to be altered. used by the entity? 4.25 Are there written policies and procedures covering Yes. The EA will issue a set of financial all routine financial management and related management regulations in writing, covering administrative activities? accounting and reporting, the ADB loan disbursement, and project financial management. 4.26 Do policies and procedures clearly define conflict No. But any transactions made by the IAs of interest and related party transactions (real and have to go through public procurement. apparent) and provide safeguards to protect the organization from them? 4.27 Are manuals distributed to appropriate personnel? Not yet. But when it is ready, the project financial management regulations will be distributed to appropriate personnel, such as finance staff, managers of the PIUs. Cash and Bank 4.28 Indicate names and positions of authorized The directors of county finance bureaus. signatories in the bank accounts. 4.29 Does the organization maintain an adequate, up- Yes. The cashbooks are updated from time to to-date cashbook, recording receipts and time when receipts and payments incurred. payments? 4.30 Do controls exist for the collection, timely deposit Yes. But from the point of view of the project, it and recording of receipts at each collection is not the responsibility of the PIUs, not the location? IAs. 4.31 Are bank and cash reconciled every month? Yes. 4.32 Are all unusual items on the bank reconciliation Yes. The unusual items must be approved by reviewed and approved by a responsible official? directors of county finance bureaus. 4.33 Are all receipts deposited on a timely basis? Yes. Safeguard over Assets 4.34 Is there a system of adequate safeguards to Yes. There is a system to protect assets. protect assets from fraud, waste and abuse? 4.35 Are subsidiary records of fixed assets and stocks Yes. Fixed assets and stocks are kept to date kept up to date and reconciled with control and reconciled with control accounts at the accounts? end of each year. 4.36 Are there periodic physical inventories of fixed Yes. Annually. assets and stocks? 4.37 Are assets sufficiently covered by insurance No. policies? Other Offices and Implementing Entities 4.38 Are there any other regional offices or executing Yes. The PIUs will participate in the entities participating in implementation? implementation of the project. 24

TOPIC RESPONSE 4.39 Has the project established controls and Yes. The project will follow the normal procedures for flow of funds, financial information, practices of controls and procedures for flow accountability, and audits in relation to the other of funds, financial information, and offices or entities? accountability. 4.40 Does information among the different offices Yes. An information system will be developed and/or IAs flow in an accurate and timely fashion? by the EA before the effectiveness of the project. 4.41 Are periodic reconciliations performed among the No. different offices and/or IAs? Other 4.42 Has the project advised employees, beneficiaries Not yet. But the EA will develop a set of and other recipients to whom to report if they financial management regulations specifically suspect fraud, waste or misuse of project for the project before the effectiveness of the resources or property? project. 5. Internal Audit 5.1 Is there an internal audit department in the entity? Every project county finance bureau has a Supervision and Inspection Unit, which is responsible for internal auditing. This unit reviews the financial records made for fiscal revenues and expenditures once a year. To date, accountability issues have not been identified.

5.2 What are the qualifications and experience of All staff have experience in public finance. audit department staff? 5.3 To whom does the internal auditor report? Directors of the IAs. 5.4 Will the internal audit department include the Yes. The accounts of the ADB loan are part of project in its work program? accounts to be audited. 5.5 Are actions taken on the internal audit findings? Yes. 6. External Audit 6.1 Is the entity financial statement audited regularly The only external auditing received by the IAs’ by an independent auditor? Who is the auditor? county finance bureaus will be conducted by the provincial, municipal, and county government audit offices, mainly for fiscal revenues and expenditures. The ADB loan through the county finance bureaus of the IAs are not audit focus. 6.2 Are there any delays in audit of the entity? When No. are the audit reports issued? 6.3 Is the audit of the entity conducted according to Yes. The project will be audited by the Shanxi the International Standards on Auditing? Provincial Audit Office which has the authorization from the China National Audit Office, the official auditor of sovereign debts. 6.4 Were there any major accountability issues No. brought out in the audit report of the past three years? 6.5 Will the entity auditor audit the project accounts or Yes, if necessary, but the division of the will another auditor be appointed to audit the Shanxi Provincial Audit Office is different from project financial statements? the division which audits the entity financial statement.

TOPIC RESPONSE 6.6 Are there any recommendations made by the No. auditors in prior audit reports or management letters that have not yet been implemented? 6.7 Is the project subject to any kind of audit from an Yes. The project will be audited by the China independent governmental entity (e.g., the National Audit Office. supreme audit institution) in addition to the external audit? 6.8 Has the project prepared acceptable terms of No. The annual project audit is a mandatory reference for an annual project audit? audit. 7. Reporting and Monitoring 7.1 Are financial statements prepared for the entity? No. Financial statements are prepared for the In accordance with which accounting standards? IAs in accordance with the Accounting System for Public Finance. 7.2 Are financial statements prepared for the No. The IAs will not prepare financial implementing unit? statements for the PIUs. 7.3 What is the frequency of preparation of financial Every 10 days. statements? Are the reports prepared in a timely fashion so as to useful to management for decision making? 7.4 Does the reporting system need to be adapted to No. The project has its different reporting report on the project components? system. 7.5 Does the reporting system have the capacity to No. The IAs’ reporting systems only focuses link the financial information with the project's on public finance. physical progress? If separate systems are used to gather and compile physical data, what controls are in place to reduce the risk that the physical data may not synchronize with the financial data? 7.6 Does the project have established financial Not yet, but a set of project financial management reporting responsibilities that specify management regulations will be developed by what reports are to be prepared, what they are to the EA before the effectiveness of the project. contain, and how they are to be used? 7.7 Are financial management reports used by Yes. management? 7.8 Do the financial reports compare actual No. The financial reports of the IAs compare expenditures with budgeted and programmed the actual expenditures with budgeted allocations? allocations. 7.9 Are financial reports prepared directly by the Yes. automated accounting system or are they prepared by spreadsheets or some other means? 8. Information Systems 8.1 Is the financial management system Yes. computerized? 8.2 Can the system produce the necessary project No. The system is not designed for the project. financial reports? 8.3 Is the staff adequately trained to maintain the Yes. system? 8.4 Does the management organization and Yes. processing system safeguard the confidentiality, integrity and availability of the data?

FINANCIAL MANAGEMENT ASSESSMENT QUESTIONNAIRE PROJECT IMPLEMENTATION UNITS

TOPIC RESPONSE 1. Project Implementing Units 1.1 What is the entity’s legal status / registration? The proposed project will be implemented by 19 agribusiness companies and cooperative (PACs). These PACs are commercial companies and cooperative. 1.2 Has the entity implemented an externally-financed All PACs have never implemented any project in the past (if so, please provide details)? externally-financed project in the past. 1.3 What are the statutory reporting requirements for All PACs prepare and submit their financial the entity? statements to their shareholders, but not necessary to have them audited. 1.4 Is the governing body for the project independent? Yes, all PACs are independent legally and financially. 1.5 Is the organizational structure appropriate for the Yes, the organizational structures of all PACs needs of the project? are appropriate for the need of the proposed project. 2. Funds Flow Arrangements 2.1 Describe (proposed) project funds flow The ADB loan will flow to the project arrangements, including a chart and explanation implementation units (PIUs) mainly from the of the flow of funds from the Asian Development imprest account and then paid to the providers Bank (ADB), the government, and other of civil works, goods, and services. The fund financiers. flow diagram shows the flow of the ADB loan and counterpart funds, excluding internal cash. The counterpart funds will be given by the PIUs mainly through company’s profits, equity injections, and local commercial bank loans, if necessary; and then paid to the providers of civil works, goods, and services through those PIUs’ accounts. 2.2 Are the (proposed) arrangements to transfer the Yes, they are the most proper arrangements proceeds of the loan (from the government and/or under current circumstance. the Ministry of Finance [MOF]) to the entity satisfactory? 2.3 What have been the major problems in the past in Long approval process of withdrawal receipt of funds by the entity? application for the ADB loan is the universal issue occurred in all ADB-financed project in the People’s Republic of China (PRC). 2.4 In which bank will the Imprest Account be The imprest account will be opened by the opened? executing agency (EA) in a commercial bank located in Taiyuan Municipality, Shanxi Province. 2.5 Does the (proposed) PIUs have experience in the None of the PIUs has experience in management of disbursements from ADB? management of disbursements from ADB. 2.7 Does the entity have/need a capacity to manage No, they do not need the capacity to manage foreign exchange risks? foreign exchange risks since the risks will be borne by the IAs. 27

TOPIC RESPONSE 2.8 How are the counterpart funds accessed? Counterpart funds will be provided following the progress of project implementation. 2.9 How are payments made from the counterpart The counterpart funds will be paid in funds? accordance with the contracts whatever they are entered into with contractors of civil works, suppliers of equipment and materials, and providers of services. 2.10 If part of the project is implemented by No part of the proposed project will be communities or nongovernment organizations implemented by communities or NGOs. (NGOs), does the PIU have the necessary reporting and monitoring features built into its systems to track the use of project proceeds by such agencies? 2.11 Are the beneficiaries required to contribute to No individual beneficiaries exist. project costs? If beneficiaries have an option to contribute in kind (in the form of labor), are proper guidelines formulated to record and value the labor contribution? 3. Staffing 3.1 What is the (proposed) organizational structure of All PACs have one accountant and one the accounting department? Attach an cashier. A few of them have finance organization chart. managers. But it is not necessary to have accounting departments. The accountants directly report to the managers of the PIUs, if they do not have finance managers. 3.2 Identify the (proposed) accounting staff, including All accountants of the PACs have received job title, responsibilities, educational background professional education in accounting and have and professional experience. Attach job also obtained certificates for accounting jobs descriptions and CVs of key accounting staff. issued by local governments. The major responsibilities of accountants are to record all funds received and expenditures incurred. 3.3 Are the project financial and accounting functions Yes, the existing finance staff of the PACs are staffed adequately? also responsible for the financial and accounting functions of the proposed project. 3.4 Are the finance and accounting staff adequately Yes, the existing finance staff is qualified, but qualified and experienced? they do not have experience in the financial management of ADB project. 3.5 Are the project accounting and finance staff No. They have not received trainings in ADB’s trained in ADB procedures? procedures. 3.6 What is the duration of the contract with the The duration of the contracts with finance staff finance and accounting staff? is permanent. 3.7 Indicate key positions not contracted yet, and the All key positions have been contracted. estimated date of appointment. 3.10 Does the project have written position descriptions Not yet. But the EA will develop a set of that clearly define duties, responsibilities, lines of financial management regulations specifically supervision, and limits of authority for all the for the project before the effectiveness of the officers, managers, and staff? project. 3.11 At what frequency are personnel transferred? The current finance staff is seldom transferred.

TOPIC RESPONSE 3.12 What is training policy for the finance and Finance staff must receive at least 5 days to accounting staff? continue education on accounting policies and practice. 4. Accounting Policies and Procedures 4.1 Does the entity have an accounting system that Yes. All PACs follow the accounting system for allows for the proper recording of project financial commercial entities promulgated by the MOF. transactions, including the allocation of However, the accounting system used for the expenditures in accordance with the respective proposed project is different. It is particularly components, disbursement categories, and designed by MOF for the projects financed by sources of funds? Will the project use the entity ADB and the World Bank. The EA will develop accounting system? a detailed accounting system for the project based on accounting system designed by MOF. 4.2 Are controls in place concerning the preparation Yes, there are controls in place. Since all and approval of transactions, ensuring that all contracts have to be signed by the owners of transactions are correctly made and adequately the PACs, it is simply to have all transactions explained? under control. 4.3 Is the chart of accounts adequate to properly Yes, the chart of accounts can properly record account for and report on project activities and and report the project activities and disbursement categories? disbursement categories. 4.4 Are cost allocations to the various funding sources No. Costs are not necessary allocated to made accurately and in accordance with various funding sources. established agreements? 4.5 Are the General Ledger and subsidiary ledgers Yes, they are reconciled and in balance. reconciled and in balance? 4.6 Are all accounting and supporting documents Yes, they are retained on a permanent basis, retained on a permanent basis in a defined separately from other technical and system that allows authorized users easy access? managerial documents. Only the people getting authorization from the managers can access the accounting and supporting documents. Segregation of Duties 4.7 Are the following functional responsibilities Yes. Only the owners of the PACs can make performed by different units or persons: (i) decisions on transactions. The recording of authorization to execute a transaction; (ii) the transactions is made by accountants while recording of the transaction; and (iii) custody of the custody of assets is made by engineers, in assets involved in the transaction? general. 4.8 Are the functions of ordering, receiving, Yes. The function of ordering and receiving accounting for, and paying for goods and services goods and services are made by engineers. appropriately segregated? The accounting for goods and services is made by accountants, and the function of paying for goods and services is made by cashiers. 4.9 Are bank reconciliations prepared by someone Yes, bank reconciliations are prepared by other than those who make or approve payments? accountants. The approvals of payments are made by the owners of the PACs.

TOPIC RESPONSE Budgeting System 4.10 Do budgets include physical and financial targets? No. Most of the budgets only have the financial targets. The importance of physical targets are not realized by the PACs. 4.11 Are budgets prepared for all significant activities in Yes. All significant activities have budgets sufficient detail to provide a meaningful tool with which are used as a meaningful tool for which to monitor subsequent performance? performance monitoring. 4.12 Are actual expenditures compared to the budget Yes. The actual expenditures are compared to with reasonable frequency, and explanations the budgets every month. The reasons for required for significant variations from the budget? significant variations are reviewed and further actions are taken for remaining months. 4.13 Are approvals for variations from the budget Yes. It must be approved in advance. required in advance or after the fact? 4.14 Who is responsible for preparation and approval The budgets are prepared by engineers and of budgets? consolidated by finance staff. The consolidated budgets are approved by the owners of the PACs. 4.15 Are procedures in place to plan project activities, Yes. The plans of project activities will be collect information from the units in charge of the prepared by the PACs. The EA will collect different components, and prepare the budgets? information from the different PACs and then form an overall project budgets. 4.16 Are the project plans and budgets of project Current project plans and budgets are activities realistic, based on valid assumptions, prepared by design institutes based on design and developed by knowledgeable individuals? norms issued by government. However, these norms do not reflect the market situation. The project budgets are overestimated. More accurate project budgets will be made at the early stage of project implementation. Payments 4.17 Do invoice-processing procedures provide for: (i) Yes. Copies of purchase orders and receiving reports to be obtained directly from issuing departments? (ii) Comparison of invoice quantities, prices and terms, with those indicated on the purchase order and with records of goods actually received? (iii) Comparison of invoice quantities with those indicated on the receiving reports? (iv) Checking the accuracy of calculations? 4.18 Are all invoices stamped PAID, dated, reviewed Most of the PACs do not stamp PAID on and approved, and clearly marked for account invoices. But they are approved by the owners code assignment? of the PACs. 4.19 Do controls exist for the preparation of the payroll Yes. The payrolls are prepared either by and are changes to the payroll properly Human Resource staff or by finance staff. All authorized? payrolls are approved by the owners of the PACs. Policies And Procedures 4.20 What is the basis of accounting (e.g., cash, The accrual basis is adopted for accounting. accrual)?

TOPIC RESPONSE 4.21 What accounting standards are followed? Either the Accounting Standards for Commercial Enterprises or the Accounting Standards for Small Size Commercial Enterprises are followed by the PACs. 4.22 Does the project have an adequate policies and Not yet, but the EA will develop a set of procedures manual to guide activities and ensure financial management regulations specifically staff accountability? for the project before the effectiveness of the project. 4.23 Is the accounting policy and procedure manual No. But an accounting policy and procedure updated for the project activities? will be developed by the EA based on MOF’s requirement on the project accounting and financial reporting financed by ADB and the World Bank. 4.24 Do procedures exist to ensure that only No. But the accounting principle, policy and authorized persons can alter or establish a new procedures used by the PACs cannot be accounting principle, policy or procedure to be altered. used by the entity? 4.25 Are there written policies and procedures covering No. Most of the PACs do not have written all routine financial management and related policies and procedures for their routine administrative activities? financial management. But the EA will issue a set of financial management regulations in writing, covering accounting and reporting, the ADB loan disbursement, and project financial management. 4.26 Do policies and procedures clearly define conflict No. Making profit is the only key factor to of interest and related party transactions (real and determine transactions. apparent) and provide safeguards to protect the organization from them? 4.27 Are manuals distributed to appropriate personnel? No manual exists. But when it is ready, the project financial management regulations will be distributed to appropriate personnel, such as finance staff, owners of the PACs. Cash and Bank 4.28 Indicate names and positions of authorized The owners of the PACs are the authorized signatories in the bank accounts. signatories in the bank accounts. 4.29 Does the organization maintain an adequate, up- Yes. The cashbooks are updated from time to to-date cashbook, recording receipts and time when receipts and payments incurred. payments? 4.30 Do controls exist for the collection, timely deposit Yes. and recording of receipts at each collection location? 4.31 Are bank and cash reconciled every month? Yes. 4.32 Are all unusual items on the bank reconciliation Yes. The unusual items must be approved by reviewed and approved by a responsible official? the owners of the PACs. 4.33 Are all receipts deposited on a timely basis? Yes. Safeguard over Assets 4.34 Is there a system of adequate safeguards to Yes. The PACs have simple system to protect protect assets from fraud, waste and abuse? assets from fraud and abuse.

TOPIC RESPONSE 4.35 Are subsidiary records of fixed assets and stocks Yes. Fixed assets and stocks are kept to date kept up to date and reconciled with control and reconciled with control accounts at the accounts? end of each year. 4.36 Are there periodic physical inventories of fixed Yes. Annually. assets and stocks? 4.37 Are assets sufficiently covered by insurance No, except for the insurance for breeding policies? sows. Other Offices and Implementing Entities 4.38 Are there any other regional offices or executing No regional offices exist. entities participating in implementation? 4.39 Has the project established controls and No other offices or entities exist. procedures for flow of funds, financial information, accountability, and audits in relation to the other offices or entities? 4.40 Does information among the different offices No different offices and/or IAs exist. and/or IAs flow in an accurate and timely fashion? 4.41 Are periodic reconciliations performed among the No different offices and/or IAs exist. different offices and/or IAs? Other 4.42 Has the project advised employees, beneficiaries Not yet. But the EA will develop a set of and other recipients to whom to report if they financial management regulations specifically suspect fraud, waste or misuse of project for the project before the effectiveness of the resources or property? project. 5. Internal Audit 5.1 Is there an internal audit department in the entity? No. The size of the PACs is small. It is not cost effective to set up an internal audit department. 5.2 What are the qualifications and experience of No internal audit department exists. audit department staff? 5.3 To whom does the internal auditor report? No internal audit department exists. 5.4 Will the internal audit department include the No internal audit department exists. project in its work program? 5.5 Are actions taken on the internal audit findings? No internal audit department exists. 6. External Audit 6.1 Is the entity financial statement audited regularly All PACs have their financial statements from by an independent auditor? Who is the auditor? 2014 to 2016 audited by local certified public auditors (CPAs). 6.2 Are there any delays in audit of the entity? When No. All audit reports are issued on time. are the audit reports issued? 6.3 Is the audit of the entity conducted according to No. The audit follows the Chinese standards the International Standards on Auditing? on auditing. 6.4 Were there any major accountability issues All auditors gave their unqualified opinions on brought out in the audit report of the past three the PACs’ financial statements. years?

TOPIC RESPONSE 6.5 Will the entity auditor audit the project accounts or The entity auditors will audit the project will another auditor be appointed to audit the accounts, but they will not issue reports project financial statements? specifically for the project. The project account will be audited by the Shanxi Provincial Audit Office which has the authorization from the China National Audit Office, who is the official auditor of sovereign debts. 6.6 Are there any recommendations made by the No recommendations were made. auditors in prior audit reports or management letters that have not yet been implemented? 6.7 Is the project subject to any kind of audit from an The project will be audited by the Shanxi independent governmental entity (e.g., the Provincial Audit Office which has the supreme audit institution) in addition to the authorization from the China National Audit external audit? Office, who is the official auditor of sovereign debts. 6.8 Has the project prepared acceptable terms of No. The annual project audit is a mandatory reference for an annual project audit? audit. 7. Reporting and Monitoring 7.1 Are financial statements prepared for the entity? Yes. The PACs prepare financial statements in In accordance with which accounting standards? accordance with the Accounting Standards for Commercial Enterprises or Accounting Standards for Small Size Commercial Enterprises. 7.2 Are financial statements prepared for the No. Financial statements are not being implementing unit? prepared for the implementation units. 7.3 What is the frequency of preparation of financial Every month. statements? Are the reports prepared in a timely fashion so as to useful to management for decision making? 7.4 Does the reporting system need to be adapted to No. The project has its different reporting report on the project components? system which will be required by the EA. 7.5 Does the reporting system have the capacity to No. The reporting system focuses on financial link the financial information with the project's information only. physical progress? If separate systems are used to gather and compile physical data, what controls are in place to reduce the risk that the physical data may not synchronize with the financial data? 7.6 Does the project have established financial Not yet, but the EA will develop a set of management reporting responsibilities that specify financial management regulations specifically what reports are to be prepared, what they are to for the project before the effectiveness of the contain, and how they are to be used? project. 7.7 Are financial management reports used by Yes. management? 7.8 Do the financial reports compare actual No. But the project financial reports compare expenditures with budgeted and programmed the actual expenditures with budgeted allocations? allocations.

TOPIC RESPONSE 7.9 Are financial reports prepared directly by the The financial reports of most PACs are directly automated accounting system or are they prepared by automated accounting system. prepared by spreadsheets or some other means? A few PACs use spreadsheets to prepare financial reports. 8. Information Systems 8.1 Is the financial management system No. Only accounting system is computerized. computerized? 8.2 Can the system produce the necessary project No. But the EA will develop a system financial reports? specifically for the project. 8.3 Is the staff adequately trained to maintain the Yes. system? 8.4 Does the management organization and Yes. processing system safeguard the confidentiality, integrity and availability of the data?