THE REPUBLIC OF

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF ROAD SECTOR SUPPORT PROJECT 3 (RSSP-3) FOR THE TWENTY TWO (22) MONTH PERIOD ENDED 20TH MAY 2016

OFFICE OF THE AUDITOR GENERAL UGANDA

TABLE OF CONTENTS 1.0 INTRODUCTION ...... 6 2.0 BACKGROUND INFORMATION ...... 6 3.0 PROJECT OBJECTIVES ...... 7 4.0 AUDIT OBJECTIVES ...... 8 5.0 AUDIT PROCEDURES PERFORMED ...... 8 6.0 CATEGORIZATION AND SUMMARY OF FINDINGS ...... 9 6.1 Categorization of findings ...... 9 6.2 Summary of Findings ...... 10 7.0 DETAILED FINDINGS...... 10 7.1 Road works on a Section Measuring 8.9 kms not undertaken ...... 10 7.2 Claim of interest for unpaid certificates ...... 11 7.3 Interim certificate and retention money certificate not paid ...... 11 7.4 Funds re- allocated to and from other projects ...... 12

ii REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE ROAD SECTOR SUPPORT PROJECT 3 (RSSP-3 FOR THE TWENTY TWO (22) MONTH PERIOD ENDED 20TH MAY 2016

THE RT. HON. SPEAKER OF PARLIAMENT

I have audited the financial statements of Road Sector Support Project 3 (RSSP 3) for the twenty two (22) month period ended 20th May 2016. The financial statements comprise of;

 Statement of receipts and expenditure;  Statement of fund balances;  Notes to the financial statements, including a summary of significant accounting policies used.

Project Management’s responsibility for the financial statements The Management of UNRA (the RSSP-3 implementing agency) are responsible for the preparation of the financial statements, in accordance with Government of Uganda and African Development Bank Guidelines. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility My responsibility is to express an opinion on the financial statements, based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that the audit is planned and performed to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the Auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the Auditor considers the internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the

iii entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimate made by management, as well as evaluating the overall presentation of the financial statements. I believe that the audit evidence obtained is sufficient and appropriate to provide a basis for my opinion.

Part “A” of this report sets out my opinion on the financial statements. Part “B” which forms an integral part of this report presents in detail all the significant audit findings made during the audit which have been brought to the attention of management.

PART “A” Opinion In my opinion, the project financial statements present fairly in all material respects the financial position of Uganda National Roads Authority Road Sector Support Project 3 as at 20th May 2016 and of its receipts and expenditure for the year then ended in accordance with the accounting policies set out under section 7.0 of the financial statements and the terms and conditions of ADF funding.

John F.S. Muwanga AUDITOR GENERAL 28th December 2016

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REPORT OF THE AUDITOR GENERAL AND SUPPLEMENTARY INFORMATION

v PART "B"

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE ROAD SECTOR SUPPORT PROJECT 3 (RSSP 3) FOR THE TWENTY TWO (22) MONTH PERIOD ENDED 20TH MAY 2016

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

1.0 INTRODUCTION Under Article 163 (3) of the Constitution of the Republic of Uganda, 1995 (as amended), and the National Audit Act, 2008, I am required to audit and report to Parliament on the public accounts of Uganda and of all public offices including the Courts, the Central and Local Government administrations, Universities and public institutions of the like nature and any Public Corporation or other bodies or organizations established by an Act of Parliament. Accordingly, I carried out the audit of the Project to enable me report to Parliament.

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

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

Expected outputs of the project are a 143-kilometre new bitumen road with a six- metre carriage way and 1.5 metres of shoulders on either sides between Nyakahita, Ibanda and Kamwenge. The project was also to produce feasibility and detailed

6 engineering design studies for Kayunga-Galiraaya – 83 kilometres, and Hoima- Butiaba-Wanseko – 111 kilometres.

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

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

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

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

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

7 4.0 AUDIT OBJECTIVES The audit was conducted in accordance with International Standards on Auditing and included a review of the accounting records, accounting policies used and agreed procedures as was considered necessary.

The audit was carried out with regard to the following objectives;

a. To express an opinion as to whether the financial statements for the year ended 30th June 2015 present fairly in all material respect the receipt and payments of the project as well as the cash position and are in conformity with generally accepted accounting principles. b. To establish whether the special account has been maintained in accordance with the provisions of the loan and grant agreements. c. To evaluate and obtain a sufficient understanding of the internal control structure of the project, assess control risk and identify reportable conditions, including material internal control weaknesses. d. To establish whether project managers are managing the project in compliance with the covenants contained in the financing agreements as well as Government of Uganda financial regulations. e. To establish whether all procurements of goods and services under the project have been undertaken in accordance with GOU procurement guidelines and procedures as specified in the PPDA Act 2003. f. To establish whether all necessary supporting documents, accounting records as well as books of account have been kept in respect of all project activities. g. Whether project activities have been implemented as stated in the work plans and budgets.

5.0 AUDIT PROCEDURES PERFORMED a. Revenue/Receipts Obtained a schedule of all project funds provided by ADF and Government of Uganda and reconciled the amounts to the project’s cash books and bank statements.

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

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

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

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

e. Fixed Assets Management Reviewed use and management of project assets during the period under review.

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

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

6.0 CATEGORIZATION AND SUMMARY OF FINDINGS 6.1 Categorization of findings

The following system of profiling of the audit findings is used prioritize the implementation of audit recommendations:

Category Description 1 High significance Has a significant/material impact, has a high likelihood of reoccurrence, and in the opinion of the Auditor General, it requires urgent remedial action. It is a matter of high risk or high stakeholder interest.

9 2 Moderate significance Has a moderate impact, has a likelihood of reoccurrence, and in the opinion of the Auditor General, it requires remedial action. It is a matter of medium risk or moderate stakeholder interest. 3 Low significance Has a low impact, has a remote likelihood of reoccurrence, and in the opinion of the Auditor General, may not require much attention, though its remediation may add value to the entity. It is a matter of low risk or low stakeholder interest.

6.2 Summary of Findings

No Finding Significance 7.1 Road works on a Section Measuring 8.9 kms not undertaken High 7.2 Claim of Interest for un Paid Certificates High 7.3 Interim Certificate and Retention Money Certificate Not Paid Moderate. 7.4 Funds re- allocated to and from other projects Moderate.

7.0 DETAILED FINDINGS 7.1 Road works on a Section Measuring 8.9 kms not undertaken On 25th September 2013, an addendum No. 1 to the original contract agreement for upgrading of Nyakahita – Kazo road to paved (Bituminous) standard was signed between UNRA and China Communications Construction Company Ltd for upgrading of Rushere Access Road measuring 10 kms at a cost of UGX.15,055,196,872.

I noted that a large section of the road was not worked on. Measurement taken using car odometer revealed that the contractor only tarmacked 1.1kms of the road section starting from Rushere Trading center. The rest of 8.9 Kms of the road section was not tarmacked.

According to the Management, the contract was terminated, however, I was not provided with documentation to that effect.

In their response the Management revealed that the addendum was for 10.9kms. This was reduced to 4kms and there is no liability arising out of the adjustment. Four (4kms) were tarmacked and not only 1.1kms. The four kms comprised of Rushere town road, access to Rushere community hospital and Rushere Cathedral.

10 However, I was not able to confirm the works as stated by management since there were no certificates availed for verification.

I advised management to ensure proper documentation for the works undertaken.

7.2 Claim of interest for unpaid certificates- UGX.1,469,299,178 I noted that the contractor for Nyakahita – Kazo road had lodged a claim of UGX.1,469,299,178 for interest resulting from the delayed payments of certificates. There is a risk of incurring penalties that can be avoided by settling these obligations in time.

Management responded that delayed payments of IPCs were due to limited availability of funds and that a circular on timely payment of contractors and other providers was issued to all staff and Management is committed to reducing the challenge of delayed payments.

I advised the Management to ensure that payments are made according to contract terms in order to avoid interest charges.

7.3 Interim certificate and retention money certificate not paid- UGX.14,475,568,609 It was noted that 3 certificates totaling to UGX.14,475,568,609 in favor of China Communications Construction Company Ltd for construction of Nyakahita – Kazo road had not been paid by the close of the financial year.

A review of the defect liability certificate dated 28th February 2015 and endorsed by UNRA Executive Director certified that the contractor completed his obligation to the satisfaction of the resident engineer.

Non-payment of pending certificates attracts interest charges and may attract legal actions against UNRA. The Management in their response revealed that the budget lines were exhausted and the amounts for the pending IPCs have been prioritized in the budget for the financial year 2016/17.

11 I advised the Management to review the unpaid certificates and consider settling the obligations in order to avoid penalty arising out of interest charges.

7.4 Funds re- allocated to and from other projects I noted that UGX.44,034,264,457 was reallocation from other projects and UGX.2,159,338,158 was transferred to other projects. However, there was no evidence of any authority from the Ministry of Finance, Planning and Economic Development allowing the diversion of the RSSP3 money to other projects or use of other projects money to fund RSSP3 activities.

There was also no evidence that the funds had been paid back to the respective projects. Further the reallocations from other Projects were not reflected in the statement of fund balances as liabilities.

In the circumstances, there is a risk that the respective repayments may not have been duly effected.

Management in the response explained that in order to avoid nugatory expenditure in form of interest accrued from late payments to contractors, management made decision to settle outstanding payments. The authority to reallocate was administrative and no authority was obtained from PSST.

I advised the Management to always seek authority before re allocating funds from one project to another.

12 APPENDIX 1

FINANCIAL STATEMENTS

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