Performance Audit Report on Universal Service Fund Management and Utilization
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PERFORMANCE AUDIT REPORT ON UNIVERSAL SERVICE FUND MANAGEMENT AND UTILIZATION AUDIT YEAR 2016-17 AUDITOR-GENERAL OF PAKISTAN TABLE OF CONTENTS SECTIONS Page No ABBREVIATIONS AND ACRONYMS i PREFACE iii EXECUTIVE SUMMARY iv 1. INTRODUCTION 1 2. AUDIT OBJECTIVES 2 3. AUDIT SCOPE AND METHODOLOGY 2 4. AUDIT FINDINGS AND RECOMMENDATIONS 4 4.1 Organization and Human Resource Management 4 4.2 Project Planning, Monitoring and execution 13 4.3 Financial Management 24 4.4 Asset Management 30 5. CONCLUSION 37 6. ACKNOWLEDGEMENT 38 7. ANNEXURES 39 ABBREVIATIONS & ACRONYMS BOQ : Bill of Quantity BTS : Base Transmission Station CDMA : Code division multiple access CEO : Chief Executive Officer CBC : Community Broadband Center CTR : Central Telecom Region CGA : Controller General of Accounts DT log : Drive Test log ECNEC : Executive Committee of National Economic Council EIA : Environmental Impact Assessment EBC : Educational Broadband Center FTR : Faisalabad Telecom Region GM : General Manager GoP : Government of Pakistan GSM : Global System for Mobiles GSMA : GSM Association HR : Human Resources HRGC : Human Resource Governance Committee HTR : Hazara Telecom Region IFRS : International Financial Reporting Standards ITU : International Telecommunication Union ISF : Initial Spectrum Fee KPI : Key Performance Indicators Lot : Geographical area MoIT : Ministry of Information Technology MoF : Ministry of Finance MTR : Multan Telecom Region NGO : Non Governmental Organization NTR : Northern Telecom Region PCO : Public Call Office PMCL : Pakistan Mobile Communication Limited i PT&T : Post Telegraph and Telephone PTA : Pakistan Telecommunication Authority PTCL : Pakistan Telecommunication Company Limited RFP : Request for Proposal RTE’s : Rural Telecom and E-Services RTR : Rawalpindi Telecom Region SSA : Service and Subsidy Agreement SP : Service Provider TA : Technical Auditor TOR : Terms of Reference UMTS : Universal Mobile Telecommunications System USF : Universal Service Fund USFCGL : Universal Service Fund Company Guarantee Limited ii PREFACE Articles 169 & 170 of the Constitution of the Islamic Republic of Pakistan 1973, read with Sections 8 and 12 of the Auditor General’s (Functions, Powers and Terms and Conditions of Service) Ordinance 2001, require the Auditor General of Pakistan to conduct audit of receipts and expenditure out of the Federal Consolidated Fund and Public Account. Directorate General PT&T audit conducted Performance Audit of Universal Service Fund and USF Company during the month of March/April 2016. Audit examined the economy, efficiency, and effectiveness aspects in utilization of fund and execution of the projects. In addition, Audit also assessed, whether the management complied with applicable laws, rules, and regulations in managing the programme. Report indicates specific actions that, if taken, will help the management in future in economic and effective utilization of resources, planning, execution and monitoring of projects. The report has been finalized in the light of discussion and the directives issued during the DAC meeting held on 8th& 9th September, 2016. The Audit Report is submitted to the President of Pakistan in pursuance to the Article 171 of the constitution of the Islamic Republic of Pakistan 1973, for causing it to be laid before both houses of Majlis-e-Shoora (Parliament). Dated: 7th April, 2017 Rana Assad Amin Auditor-General of Pakistan iii EXECUTIVE SUMMARY Universal Service Fund (USF) was established in 2006 under Pakistan Telecommunication Re-organization Act 2006. Federal Government established USF Company under Section 42 of the Companies Ordinance 1984. Universal Service Fund is a Company with an independent Board of Directors equally balanced between four members from the Government and four members from the private sector. The CEO is the 9thmember of the Board of Directors. Fund is collected as a levy at the rate of 1.5% on annual gross revenues of all operators. All licensed operators which contribute to USF are eligible to apply for USF Contracts including Special Projects. The fund is aimed at providing country wide universal access to telecommunication services, basic telephony, broadband, fiber optic network in unserved and underserved areas. The Directorate General Audit (PT&T) conducted performance audit of Universal Service Fund and USF Company in March/ April 2016. Audit analysed that so far more than 207 billion rupees had been booked in the books of accounts as on June, 2015 but only around 100 billion were actually collected. Hardly 25% of the collected funds were spent so far which showed weak performance of the USF Company. The Initial Spectrum Fee charges of Rs 57 billion were not realized but booked by the Fund in its books. There was a major issue of non-reconciliation of funds with PTA. Audited financial statements of the Fund were not being submitted to the National Assembly as per statutory requirement. The management failed to handle tax matters as Federal Board of Revenue (FBR) deducted Rs 12 billion (approximately) and Rs 5 billion were still pending as tax liability whereas Fund was not taxable. Project planning and design were also the grey areas as projects were being planned in an unscientific way. No financial or economic analysis was being carried out to measure the cost and reserves price of the projects. Due to non-calculation of reserve price, the management auctioned projects at uneconomical rates. Audit has benchmarked the USF projects with the similar projects executed by Special Communications Organization (SCO) and found USF projects were at higher side with a difference of billion of rupees. iv Project monitoring was the weakest area of the Company as only three or four projects were closed or completed so far. None of the projects were completed in the given time period since the creation of the company. Hence, efficiency and effectiveness aspects of projects were compromised. During physical verification of the project sites, audit found that the service providers installed pirated software at the community and educational broadband centres. A number of community broadband centres were installed inside the PTCL exchanges and few of them were not traceable at the given addresses. Service providers were not providing the hardware and services as per Bill of Quantity (BOQ) of the Contracts. Technical auditors (TA) have not reported these issues to the management. Technical auditors working with the USF have raised allegations of corruption against USF staff. The company needs to rationalise its human resources and strictly monitor its staff for ensuring that they do not indulge in any kind of malpractices. Recommendations A clear definition of financial and accounting rules for financial and economic analysis is needed in order to ensure that USF fund is put to the use for which it was intended and to achieve desired levels of economy, efficiency and effectiveness. Planning and monitoring mechanism must be strengthened to ensure that service providers provide the services as per contracts agreement and the fund is utilized in the most economic and effective manner. Fund position may be got reconciled with PTA periodically to ensure the collection of funds as per law. The financial statements must be audited by the chartered accountants and submitted to the National Assembly as required under the Act. v 1. INTRODUCTION The underlying concept of Universal Service is to ensure that telecommunication services are accessible to the widest number of people (and communities) at affordable prices. The concept of universal service is underpinned by the three following principles: • Availability: the level of service is the same for all users in their place of work or residence, at all times and without geographical discrimination. • Affordability: for all users, the price of the service should not be a factor that limits service access. • Accessibility: all telephone subscribers should be treated in a non-discriminatory manner with respect to the price, service and quality of the service, in all places, without distinction of race, sex, religion, etc. USF was established by the Federal Government (MOIT) under the provisions of section 33 (A) of Pakistan Telecommunication (Re-organization) amended Act, 2006. It aims at the development of telecommunication services in unserved and underserved areas throughout the country. The fund consists of contributions (1.5% of adjusted gross revenues) by the Telecom Operators with no Government funding involved. To utilize this fund for achievement of the targets, it was decided to follow a Corporate Model. This led to establishment of Universal Service Fund (USF) Company under Section 42 of the Companies Ordinance 1984. Ministry of Information Technology created USF Company vide SRO No. 1132(1)/2006 dated 01.11.2006. Universal Service Fund (USF) has an independent Board of Directors. The main objectives of Universal Service Fund (USF) are: • To bring the focus of telecom operators towards rural population and increase the level of telecom penetration significantly in the rural areas through effective and fair utilization of the fund. • To improve the broadband penetration in the country. • To bring significant advances towards enhancement of e-services, both in rural as well as urban areas of the country. 1 The Director General of Audit PT&T conducted Performance Audit of Universal Service Fund and USF Company in March/April 2016. The focus of the audit was to ascertain that whether fund was being utilized in an economical,