India: Chennai-Kanyakumari Industrial Corridor: Power Sector Investment Project - Financial Management Assessment - Asian Development Bank
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Financial Management Assessment Project Number: 51308-001 Loan Number: XXXX October 2019 India: Chennai-Kanyakumari Industrial Corridor: Power Sector Investment Project
Asian Development Bank CURRENCY EQUIVALENTS (as of 27 May 2019) Currency unit – Indian rupee (₹) ₹1.00 = $.01441 $1.00 = ₹69.37450 ABBREVIATIONS ADB – Asian Development Bank ADF – Asian Development Fund AFS – audited financial statements APFS – audited project financial statements ARR – aggregate revenue requirement CAAA – controller of aid accounts and audit CAG – Comptroller and Auditor General of India CERC – Central Electricity Regulatory Commission CPS – country partnership strategy CWIP – capital works in progress DEA – Department of Economic Affairs, Ministry of Finance, Government of India EA – executing agency FIRR – financial internal rate of return FMA – financial management assessment FMAQ – financial management assessment questionnaire FY – Financial Year GCC – general construction circle GIS – gas insulated switchgear GOI – Government of India IA – implementing agency Ind-AS – Indian accounting standards LIBOR – London interbank offered rate PF-I – Plan Finance Division of the Department of Expenditure PFM – public financial management PIU – project implementation unit RBI – Reserve Bank of India RRP – report and recommendation of the President to the Board SOE – statement of expenditure STU – state transmission utility TA – technical assistance TANGEDCO Tamil Nadu Generation and Distribution Corporation Ltd TANTRANSCO – Tamil Nadu Transmission Corporation Ltd. TN – Tamil Nadu
TNEB Tamil Nadu Electricity Board TNERC – Tamil Nadu Electricity Regulatory Commission TOR – terms of reference WDV – written down value
CONTENTS CURRRENCY EQUIVALENTS………………………………………………………………………….i I. INTRODUCTION ................................................................................................................ 1 II. PROJECT DESCRIPTION .................................................................................................. 1 III. COUNTRY FINANCIAL MANAGEMENT ISSUES .............................................................. 1 IV. PROJECT FINANCIAL MANAGEMENT SYSTEM .............................................................. 3 A. OVERVIEW OF TANTRANSCO’S FINANCIAL MANAGEMENT SYSTEM AND INSTITUTIONAL CONTEXT ........ 3 B. STRENGTHS ........................................................................................................................................ 3 C. W EAKNESSES ..................................................................................................................................... 4 D. PERSONNEL, ACCOUNTING POLICIES AND PROCEDURES, INTERNAL CONTROL, INTERNAL AND EXTERNAL .. 4 E. DISBURSEMENT ARRANGEMENTS AND FUNDS FLOW MECHANISMS ........................................................ 9 V. PROPOSED TIME-BOUND ACTION PLAN.......................................................................13
EXECUTIVE SUMMARY 1. A financial management assessment (FMA) was conducted over the period December 2017 to November 2018 in accordance with ADB’s guidelines.1 The FMA considered the capacity of the Tamil Nadu Transmission Corporation Limited (TANTRANSCO), including funds-flow arrangements, staffing, accounting and financial reporting systems, financial information systems, and internal and external auditing arrangements. 2. TANTRANSCO’s relative strengths in the area of financial management, identified during the FMA, include governance by a robust legislative framework, periodic audit by Comptroller and Auditor General (CAG) of India, its operations and tariffs regulated by state and central electricity regulatory commissions, and experience with disbursement and procurement processes and procedures of international development agencies such as Japan International Cooperation Agency (JICA) and KfW. 3. The key weaknesses of its existing financial management systems include weak financial management capacity evidenced by (a) inadequate control over fixed assets due to the lack of a comprehensive fixed assets register, (b) large unreconciled inter-unit balances, (c) large unreconciled balances with TANGEDCO, and (d) non-adoption of Indian Accounting Standards (Ind-AS); and (iii) low levels of computerization and automation. 4. The overall pre-mitigation financial management risk of TANTRANSCO is assessed as Substantial and the following financial management action plan is proposed. Table 1: Financial Management Action Plan S.No. Action Responsibility Resources Timing 1 Implement the GoTN, GoTN Completed by 31 March comprehensive FRP TANTRANSCO, 2024 according to the Action Plan outlined in the TANGEDCO timebound action plan PAM provided in the PAM 2 TANTRANSCO shall TANTRANSCO TANTRANSCO Engage consultants by reconcile all inter-unit [December 2019]; the first balances by 31 March such inter unit 2020 and such reconciliation completed reconciliation shall by [31 March 2020] and continue to be done on a such reconciliation shall quarterly basis in continue to be done on a perpetuity quarterly basis in perpetuity 3 TANTRANSCO shall TANTRANSCO ADB TA Engage consultants by [31 (i) identify the areas and TANGEDCO December 2020]; the first leading to unreconciled such inter company balances with TANGEDCO reconciliation with as also ensure elimination TANGEDCO completed by of build-up of such [31 March 2020] and such balances by 31 March reconciliation shall 2020; and (ii) reconcile all continue to be done on a outstanding intercompany quarterly basis in account balances with perpetuity TANGEDCO by 31 March 1 ADB. 2005. Financial Management and Analysis of Projects. Manila; ADB. 2015. Financial Management Technical Guidance Note – Financial Management Assessment. Manila i
S.No. Action Responsibility Resources Timing 2021 and such reconciliation shall continue to be done on a quarterly basis in perpetuity 4 TANTRANSCO shall TANTRANSCO TANTRANSCO Engage consultants by [31 implement and populate a March 2020]; asset comprehensive company- registers implemented and wide fixed asset register populated by [31 March system by 31 March 2020 2021] This includes establishment and updating of the register, physical verification and reconciliation of all assets with the register 5 Provide training to ADB ADB By 31 March 2020 TANTRANSCO project finance and accounting staff in ADB disbursement and accounting policies and procedures 6 Ensure that TANTRANSCO TANTRANSCO By 31 December 2019 TANTRANSCO appoints two fulltime, dedicated Assistant Accounts Officers, one each at TANTRANSCO Headquarters and GCC Madurai 7 Adopt Ind-AS for entity TANTRANSCO ADB TA Grant TANTRANSCO to adopt financial accounts proceeds and Ind-AS from FY2018-2019 counterpart (ie. From 1 April 2018) resources 8 Implement online TANTRANSCO TANTRANSCO By 31 March 2020 computerized accounting system 9 Appoint Independent GoTN TANTRANSCO By 31 March 2020 Directors on its Board as required under the Companies Act, 2013 10 Prepare a Project ADB / ADB By loan effectiveness Financial Management TANTRANSCO Manual for the ADB Project 11 Appoint an Internal Auditor TANTRANSCO TANTRANSCO By 31 March 2020 as required under the Companies Act, 2013 ii
I. INTRODUCTION 1. This Financial Management Assessment (FMA) has been prepared in accordance with ADB’s guidelines2 over the period December 2017 November 2018. It aims to assess whether Tamil Nadu Transmission Corporation Limited (TANTRANSCO) has adequate capacity to satisfactorily function as executing agency (EA) and implementing agency (IA) for the proposed loan, in the areas of planning and budgeting, management and financial accounting, reporting, auditing, and internal controls. Preparation activities included reviewing documents, interviewing EA’s officials, and analyzing the EA’s response to the financial management assessment questionnaire (FMAQ). The FMA also includes a review of proposed disbursement and funds- flow arrangements and identifies measures for addressing identified deficiencies. II. PROJECT DESCRIPTION 2. The project targets investment in high voltage electricity transmission facilities to relieve capacity constraints and to evacuate electricity from generating plant to load centers. The project will also include a component to address the capacity development of TANTRANSCO, which is serving the dual roles of state’s sole transmission licensee and State Transmission Utility (STU).3 III. COUNTRY FINANCIAL MANAGEMENT ISSUES 3. The Indian Public Financial Management (PFM) system is very complex, large and has multiple layers. Relatively few PFM assessments have been prepared for the country in recent years. 4. Country level PFM risk assessment from ADB’s country partnership strategy for India. ADB’s previous (2013‒2017) Country Partnership Strategy (CPS) for India for noted that PFM at the country level is strong and India manages its financial system well. 4 The CPS concluded that given that India has robust public financial management systems and strong procurement, governance, and anticorruption arrangements and monitoring institutions, the risk to the ADB assistance program in these areas is low. 5. The risk assessment and risk management plan included in the previous CPS elaborated that the strength of the PFM system arises from: (i) a well-organized and systematic approach to budget formulation; (ii) a high level of fiscal transparency; (iii) comprehensive recording and management of cash balances, debt, and guarantees by the Government of India; and (iv) timely external audit by the comptroller and auditor general (CAG) of India of PFM systems. 2 ADB. 2005. Financial Management and Analysis of Projects. Manila; ADB. 2015. Financial Management Technical Guidance Note – Financial Management Assessment. Manila. 3 Under the Electricity Act 2003 (a parliamentary act governing the various aspects of generation, distribution, transmission, trading, usage and other functions associated with the use of electricity in India), an STU is the entity responsible for discharging all functions of planning and co-ordination relating to this system, whereas an intra-state transmission licensee is vested with the function of building, owning and operating intra-state transmission assets. A state may have multiple licensees but only one STU. 4 ADB. 2012. India – Country Partnership Strategy 2013-2017. Manila. 1
6. The current (2018–2022) CPS for India makes limited mention of financial management, although improving public financial management at the state and urban levels is deemed an important component of the strategic pillar aimed to provide inclusive infrastructure networks and services.5 Particular emphasis on improving systems and capacities for procurement, contract management, and accounting is noted. 7. Public Financial Management of Tamil Nadu. A state level fiscal analysis for Tamil Nadu was done as Government of Tamil Nadu (GoTN) is the ultimate owner of TANTRANSCO (through Tamil Nadu Electricity Board Limited (TNEB) Limited). The CAG’s report on the State Finances of Tamil Nadu for the year ended March 2017 was also reviewed. A summary of the fiscal position of GoTN for the year ended March 2018 is given below: (i) GoTN, which reported revenue surplus in 2012–13, has reported revenue deficit in all subsequent years. In 2017‒2018, revenue deficit stood at ₹184 billion; (ii) GoTN, due to its financial discipline, has been successful in containing the fiscal deficit within the 3% of Gross State Domestic Product (GSDP) target envisaged under the Tamil Nadu Fiscal Responsibility Act. 2003, as also the Medium-Term Fiscal Plan of GoTN, in all the years from 2012‒2013 to 2017‒2018, except in 2016‒2017, when it reported a fiscal deficit of 4.33% of GSDP. This increase in fiscal deficit in 2016‒2017 was due to the takeover of TANGEDCO’s deficit of ₹228 billion under the UDAY scheme of the Government of India; (iii) As per the CAG report referred to above, the maturity profile of GoTN’s debt indicates a y-on-y increase in its repayment burden and as the greater portion of repayments would happen after 5 years, Tamil Nadu could fall into a debt trap; and (iv) Based on its review of the Financial Management and Budgetary Control systems of GoTN, CAG has also recommended that GoTN should streamline the process of budget estimation to ensure accuracy in budgeting. (v) The major deficit indicators of GoTN are given below: Table 2: Major Fiscal Deficit Indicators (Indian Rupees in Billion) Financial Year 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 Major Fiscal Revised Indicators Actual Estimates GSDP 8555 9692 10728 11620 12985 15040 Revenue Receipts 988 1080 1224 1290 1402 1558 Revenue Expenditure 971 1098 1288 1410 1532 1742 Revenue Surplus/Deficit 17 -18 -64 -120 -130 -184 Revenue Surplus/Deficit to GSDP 0.20% -0.19% -0.60% -1.03% -1.00% -1.22% 5 ADB. 2012. India, 2018–2022—Accelerating Inclusive Economic Transformation. Manila. 2
Financial Year Total Revenue and Non-Debt Capital Receipts 999 1,087 1,238 1,297 1,438 1,558 Total Expenditure plus Disbursement of Loans and Advances 1,164 1,292 1,510 1,623 2,000 1,966 Fiscal Surplus/Deficit (165) (205) (272) (326) (562) (408) Fiscal Deficit to GSDP -1.93% -2.12% -2.54% -2.81% -4.33% -2.71% Source: 1. Report of the Comptroller and Auditor General of India on State Finances for the year ended March 2017 (https://cag.gov.in/content/report-no6-2017-state-finances-government-tamil-nadu) and 2. State Finances – A Study of Budgets of 2017-18 and 2018-19 by Reserve Bank of India, July 2018 IV. PROJECT FINANCIAL MANAGEMENT SYSTEM A. Overview of TANTRANSCO’s Financial Management System and Institutional Context 8. TANTRANSCO was formed with the October 2008 re-organization of the erstwhile Tamil Nadu Electricity Board (TNEB) as a subsidiary of TNEB Limited, which is state government company.6 TANTRANSCO was incorporated on 15 June 2009 and started functioning with effect from 1 November 2010, when the state government transferred the functions, undertakings, assets, properties, rights, liabilities, obligations, proceedings and personnel of TNEB to various successor entities. The company is 100% owned by the Tamil Nadu state government. 9. In general, this assessment finds the company’s financial management systems are inadequate and reflect neither accepted practice nor legal requirements. There is evidence of non-compliance with the Indian Accounting Standards (Ind-AS), lack of effective internal audit arrangements, and low levels of computerization. In addition, most staff are on deputation from TANGEDCO, corporate management is weak and there are no independent directors on the board (in violation of provisions of the Companies Act). Adjustments will be required to meet ADB’s project financial management requirements and substantial capacity and resource improvements are warranted over time to build a financial management system reflecting the size and turnover of the company. B. Strengths 10. TANTRANSCO’s relative strengths in financial management are as follows: (i) Financial management of TANTRANSCO, like other public sector companies in India is governed by a robust legislative framework. Its accounts are also audited by the Comptroller and Auditor General (CAG), the supreme audit institution of India. CAG’s independence is established and protected by the Constitution of India; (ii) TANTRANSCO operates in a regulated environment, where tariffs for its intra-state 6 TNEB Limited, the holding company has two subsidiary companies: Tamil Nadu Transmission Corporation Limited (TANTRANSCO) and Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO), with a stipulation that these companies shall be fully owned by the state government. 3
and inter-state assets are approved by Tamil Nadu Electricity Regulatory Commission (TNERC) and Central Electricity Regulatory Commission (CERC) respectively, after a detailed scrutiny of its financial and operational performance; (iii) The tariff-setting process includes a comprehensive public consultation process where general public and other stakeholders (including sector and financial experts) can highlight issues linked to its performance and financial management. The public comments are formally documented and considered by the regulators for tariff setting; and (iv) The company has some experience with disbursement and procurement processes and procedures in relation to loans from development finance institutions. C. Weaknesses 11. The identified weaknesses in its financial management processes and procedure are as follows: (i) TANTRANSCO financial viability as a going concern is questionable due to allocation of disproportionate share of liabilities of TNEB to TANTRANSCO under the Transfer Scheme of 2015 which are not supported by the regulated transmission tariff, inadequate equity injections to finance capital expenditure, accumulation of additional liabilities to bridge the resultant cash deficit; (ii) The current arrangement of deputation of staff from TANGEDCO to TANTRANSCO implies overwhelming external control by TANGEDCO on matters relating to its human resource policies. Some of the functions like planning are common, and some circle offices have overlapping staff. Only the Managing Director, Director (Finance) and other executive directors responsible for operations, though they are on the payroll of TANGEDCO, are assigned exclusively to TANTRANSCO; (iii) Although accounts have been separated since 2011 from TANGEDCO, the cash flows were separated only in April 2017. Until then, TANGEDCO controlled all cash flow for TANTRANSCO and TANTRANSCO’s revenues were recognized only for accounting purposes. Doubts remain over the management, accounting and financial independence of TANTRANSCO from TADGEDCO. The financial accounts of the two companies are still substantially entangled; and (iv) Low levels of computerization and no clear roadmap for automation of finance and accounting functions. D. Personnel, accounting policies and procedures, internal control, internal and external 12. Personnel. TANTRANSCO’s Finance Division is headed by a Director (Finance) supported by a Financial Controller. Organization charts for the overall company and for the finance and accounting function are provided in Appendix A. 13. Although staff appear to be conversant with accounting and control aspects of financial management, this arrangement is far from ideal, as it poses the risk of knowledge and skill loss to TANTRANSCO should these personnel return to their parent organization.7 14. This FMA was not authorized to access staffing details necessary to carry out a detailed analysis of their staffing arrangement with TANGEDCO. 7 The personnel on deputation can be recalled by the parent organization, or the personnel can seek repatriation in their own interest. 4
15. The final and permanent transfer of staff from TANGEDCO to TANTRASCO has been under discussion between Government of Tamil Nadu and employee unions for the last 9 years. Ultimately, the transfer of staff will require a tripartite agreement between TANTRANSCO, the state government and employee unions. The primary impediment is creation of corpus for meeting pension liability. At the time of preparation of this FMA, no indicative timeframe for notification of the final transfer scheme was available. 16. Director Finance reported that getting new positions sanctioned is possible, however new staff would continue to be recruited by TANGEDCO and deputed to TANTRANSCO. Positions with total remuneration of up to Rs2.5 million can be approved by the Chairman and Managing Director, however positions with higher remuneration would need to be approved by the board of directors (but this could occur in a matter of a few weeks if recruitment was urgently required). 17. Accounting Policies and Procedures. TANTRANSCO prepares its financial statements under the historical cost convention on an accrual basis, and its financial year runs from 1 April to 31 March. The company has been following the accounting rules laid out in the Commercial Accounting System for State Electricity Boards – Electricity (supply) (annual accounts) Rules 1985 (ESAAR). The company’s external auditors have qualified the annual audited financial statements for the last 3 years due to non-adoption of Ind-AS as required by the Companies Act, 2013. While TANTRANSCO has indicated that Ind-AS will be adopted from 1 April 2018, the company however is currently reviewing the requirements of the Ind-AS for adoption. Subsequent to the adoption of Ind-AS, TANTRANSCO is required to carry out all necessary adjustments to its financial accounts, as required. The company prepares consolidated financial statements including income statement, balance sheet and cash flow statement. The company’s Chart of Accounts is also adopted from the ESAAR. This Chart of Accounts is dated and reflects the needs of a vertically integrated utility rather than an unbundled transmission entity and would need appropriate modifications. The adoption of Ind-AS will also require significant staff training. 18. TANTRANSCO’s accounting manual was prepared in the 1990s and is spread over multiple volumes. However, revisions will be required now that the company will be adopting Ind- AS, and the company has confirmed that the relevant changes will be made in the accounting manual in due course. 19. TANTRANSCO reports that it will maintain separate project accounts and records by funding source for all expenditures incurred on the ADB-assisted project. 20. Financial statements are prepared on an annual basis (only). No periodic management accounts are prepared during the year. Project accounts are prepared using the same accounting system and on the same basis, however circle accounts are not consolidated. Each General Construction Circle (GCC) prepares and submits a monthly statement of account to head office. This report is automatically generated by the “Foxpro” accounting package used in the company. However, because consolidation of these statements is required to be undertaken manually (that is, outside of Foxpro), consolidation only occurs annually using Excel. The extent to which these monthly statements of accounts are actually used (beyond project reporting) is unclear; the impression of this assessment is that the statements are generated because the Foxpro software facilitates this process, rather than because the statements are an important management tool. However, the Finance and Administration Department reports that it reviews accounts for circle offices in September and December in each year. 21. Safeguard over assets. External audit reports have consistently highlighted 5
shortcomings in the company’s fixed asset register (discussed further below). Fixed asset registers are decentralized and maintained at the general construction circle level, but they are not updated regularly and in systematic manner; according to the company, the fixed asset registers in some GCCs have not been updated for 2‒3 years. Consolidation of the GCC registers is also not undertaken regularly as it is a cumbersome, manual process. TANTRANSCO reports that an update to fixed asset registers is underway and that the progress is mixed, but at the same time the company has requested ADB’s support for the update process to ensure that can be completed in a reasonable timeframe (in the face of significant staff shortages within the organization). Terms of reference for a full update and consolidation of the fixed asset registers are included in this FMA. 22. The auditor has also indicated that the process followed for accounting for inventory and their periodical verification is inadequate. The auditors have also indicated that reconciliation between value of inventories as per stock registers and accounts are not carried out and in their opinion systems and procedures in the maintenance of stores ledger/records and their valuation needs strengthening. 23. The company does not insure operating assets. An insurance reserve account is maintained, but it is unfunded (that is, it is an accounting reserve but not a cash reserve). 24. Asset Capitalization. Once assets are commissioned, the concerned GCC issues a certificate to the relevant operations circle. The operations circle then passes on the information to Transmission Wing at corporate headquarters. This information is reviewed by the Transmission Wing and then passed to the Finance and Accounts Department who, in turn, instructs its finance counterparts at the concerned GCC office, to capitalize the assets. The company reports that this process is reliable, and that capitalization of assets takes place in a reasonable time after asset commissioning, and in most cases before the end of the financial year. To monitor capital expenditure, TANTRANSCO has indicated that it prepares scheme-wise and project-wise capital works reports, detailing works in progress and capitalization of assets. These reports are maintained by the Superintending Engineer (Projects) and are made available to the Finance and Accounts Department as required (a hard copy of one such report was viewed by this FMA. However, the auditor has pointed out a number of issues regarding the company’s accounting of CWIP and fixed assets and has also indicated that the Company has not maintained proper records showing full particulars including quantitative details and location of fixed assets. 25. TANTRANSCO reports that, as of 1 April 2018, its IT division has implemented a new inventory management system that tracks all work. This is expected to simplify fixed asset accounting procedures. 26. Commercial. The company’s Tariff Cell is responsible for tariff filings and other periodic and ad hoc petitions to the Tamil Nadu Electricity Regulatory Commission. The head of this cell reports to the Chief Financial Controller. 27. Payments. All payments are recorded manually. To record the payments, TANTRANSCO uses a voucher system for every payment. Vouchers are created and maintained along with the supporting documents. As of date, these documents including vouchers are not digitized. Payments systems appear to be broadly satisfactory. Clear protocols around payments exist and appear to be followed, with adequate arithmetic and physical cross-checking of goods and services delivered. All steps in the preparation of the payrolls were noted as sound and reflective of internal control requirements. 28. Budgeting. The annual budgeting process is led by the Finance and Accounts 6
Department, with inputs on network capital and operational expenditure provided by the Transmission Wing. The draft budget is submitted to the Board of Directors for approval by January and the final budget is always approved by the start of each fiscal year. Quarterly budget reviews and monthly monitoring reports of capital expenditure are provided to TNERC and to the state government, but there does not appear to be any formal internal process for monitoring actual revenue and expenditure against budgets. No inter-year performance analysis appears to be undertaken. Approvals for variations from the budget are generally required in advance of expenditure and are typically attained by way of submission of revised expenditure estimates. No ceiling is applied to variations from budget. Project expenditure budgets are prepared by the superintending engineers assigned to manage each project. 29. TANTRANSCO states that its budgets include financial and physical targets, but this could not be verified. Process for counterpart funds. TANTRANSCO plans to raise its counterpart funds either through equity from State Government or through debt. When Government of Tamil Nadu provides funds to TANTRANSCO, an allocation is made in the state budget based on a 12‒month expenditure forecast provided by TANTRANSCO. Once approved, cash is released to TANTRANSCO as required, typically to cover 3‒4 months of expenditure. The company reports no particular issues with this process, however given that the company has only recently started managing its own cash flows, loan assurances or covenants around budgeting for and release of funds are considered prudent. 30. Internal Audit. The company does not have a comprehensive internal audit mechanism in place. However, an internal audit department headed by a Senior Deputy Chief Officer exists, but currently only performs transaction audits (and for this reason, audit staff are stationed at GCCs where most transactions occur). The department head reports directly to the Chairman. Although the company claims that audit reports are issued, requests to view reports were unsuccessful. Other that “principles and policies laid down by the Board from time to time”, there are no apparent written terms of reference or scope of work to guide the department’s activities. The absence of a functioning internal audit department has been consistently highlighted by the company’s external auditors. The auditor has indicated that the internal control systems of the company were not operating effectively, and the company needs to strengthen implementation of financial controls and financial reporting framework. The statutory auditor has also indicated that the company’s internal auditor does not meet the requirements of the Companies Act. 2013 and that the company needs to appoint an Internal Auditor meeting the requirements of the Companies Act. 2013. 31. External audit. TANTRANSCO is audited annually by a statutory auditor appointed by the CAG. The CAG provides official comments on external audits, and company’s board of directors consider these comments, together with the audit reports and notes to accounts, before annual accounts are endorsed. 32. The most recent external audit report available is for FY2017‒2018. The auditor’s major comments in audit report for FY2017-2018 are as follows. TANTRANSCO’s responses to the auditor’s comment typically indicate that issues are being addressed, however most comments have been repeated over a number of years. a) Fixed asset register. The auditor notes that the company has not maintained proper records showing full particulars including quantitative details and physical location of fixed 7
assets; b) Land title deeds. There are no registers or records to support the value of land belonging to the company and in respect of land purchased by TANTRANSCO for establishment of substations and transmission lines. The auditor notes that in many cases title deeds relating to the same are registered in the name of TANGEDCO/TNEB and not in the name of TANTRANSCO; c) Inventory accounting and verification. The auditor’s opinion is that the process for verifying and followed for accounting of inventory and periodical verification is inadequate; d) Internal audit function. The external auditor notes that no internal auditors were appointed in the manner required under the Companies Act 2013; e) Cash book for TANTRANSCO. No separate cash book is maintained for TANTRANSCO (other than in nodal circles where separate bank accounts are operated); f) Appointment of independent director. The company has not appointed any independent directors as is required under the Companies Act 2013. 33. Foreign exchange risk management. TANTRANSCO does not have any policy regarding foreign exchange risk management. Foreign exchange exposure is indicated as a pass- through in the state’s tariff regulations and so in principle the company’s exposure to foreign exchange risk is limited to accounting only and in this context foreign currency risk management is not a priority for the company. The exact regulatory mechanism by which increases (decreases) in principal repayments on foreign currency loans are adjusted for depreciation (appreciation) of the rupee against the loan currency is unclear, however the regulation does explicitly state that the company is insulated from this risk. 34. Cash and bank. The company’s banking is largely decentralized and is handled by circle heads (superintending engineers) with delegation of power as necessary to officers in finance and accounts. One of a deputy financial controller and a superintending engineer, along with an accounts officer or assistant accounts officer are required signatories for bank transactions. The company does not collect cash from customers. According to the company, cash books are maintained at the GCC level and at headquarters however it is noted that the external auditor questions whether there is truly a cash book at headquarters. Cash on hand is reconciled daily with cash books and bank accounts are reconciled monthly. TANTRANSCO states that it is carrying-out bank account reconciliations at regular intervals. Generally, bank reconciliations take up to three months to complete (for example, the reconciliation for January would be completed by March or April). However, reconciliations for March are finalized by April or May so as to facilitate the process of annual account preparation. 35. Online payments are only permitted for tax remittances (for which it is mandatory); all other payments are made by cheque. 36. Computerization. Computerization is very limited within the company. Foxpro software was used exclusively until very recently at the GCC level for general and subsidiary ledgers. This software is capable of generating trial balances and some customized reports, however as noted above all consolidation between GCCs has to be undertaken manually. This is reported to be a time-consuming and error-prone process. All consolidated reporting is done using Microsoft Excel. The process of transferring data from Foxpro to Excel is entirely manual, and Excel is used for presentation purposes only (that is, it is not used as an analytical tool). Foxpro in inflexible, is no longer supported and is considered by TANTRANSCO to be substantially out of date. 37. Foxpro is not used for accounting and reporting under JICA and KfW projects; Excel is used exclusively. 8
38. TANTRANSCO’s in-house IT division has recently developed an online, integrated accounting software package and this is apparently effective from 1 April 2018. TANTRANSCO has indicated that accounts for FY2019–2020 will be prepared through this software (although it will not be fully implemented and functional until the start of the subsequent financial year). This system allows for online entry of all transactions, and these transactions can be viewed and verified by HQ staff. This is a significant improvement over the previous process that required manual re-entry of all circle-level financial information in summary form, with details not accessible at all except physically in the circle offices. Based on the description provided and assuming effective implementation plus the creation of sub-codes in the chart-of-accounts to enable capture of expenditure related to ADB project., this software should be sufficient for ADB’s project accounting requirements. E. Disbursement Arrangements and Funds Flow Mechanisms 39. TANTRANSCO typically executes and manages its large capital projects at the GCC level (projects are general allocated to the GCC within which the project falls geographically). Superintending engineers heading these GCCs are designated as project managers and are delegated power to ensure that they can efficiently and effectively execute the projects. Oversight is provided by two chief engineers, based in head office. Contract award, final payment approval and payments are made at head office, but all other aspects of projects are executed at the GCC level. Typically, each GCC has a Deputy Financial Controller provide accounting and finance oversight, but projects are not assigned a fulltime accountant. According to the company, a concurrent audit of payments is conducted at the GCC level by Internal Audit staff. Loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook 2017, as amended from time to time), and detailed arrangements agreed upon between the Government and ADB. The funds will be provided to India as an Ordinary Capital Resources Loan (OCR). The loan will be on lent through the state government to TANTRANSCO in foreign currency with the same interest rate, commitment charges, and tenor as the ADB loan to India. 40. The proposed fund flow mechanism is described in detail in the PAM. F. Risk Description and Rating – Including the Financial Management and Internal Control and Risk Assessment 41. A Financial Management Internal Control and Risk Management Assessment was conducted (Table 3). The overall pre-mitigation risk is assessed as “substantial” (and close to “high”). 9
Table 3: Financial Management Internal Control and Risk Assessment (FMICRA) Risk Description Risk Assessment Risk Mitigation Measures Inherent Risk 1. Country specific risks 1. Country Specific Moderate No particular mitigation measures are Strong public financial proposed. management (PFM) is one of the key elements of the Government of India’s strategy for strengthening governance, optimizing outputs from public resources and ensuring inclusive and broad-based development. The 2010 Public Financial Management Performance Assessment Report for India identified that the public financial management system is well structured but unevenly implemented. ADB’s 2018-2022 Country Partnership Strategy for India notes that public financial management at the state level needs to be improved to facilitate the strategic pillar of providing inclusive network infrastructure and services. 2. Entity-specific risks 1. TANTRANSCO financial viability Substantial A comprehensive FRP has been as a going concern is developed and agreed as part of the questionable due to allocation of loan preparation. The implementation disproportionate share of liabilities of FRP which includes (i) equity of TNEB to TANTRANSCO under injection to settle the unsustainable the Transfer Scheme of 2015 liabilities; (ii) reallocation of legacy which are not supported by the liabilities mistakenly allocated to regulated transmission tariff, TANTRANSCO and TANGEDCO inadequate equity injections to through an adjustment to the finance capital expenditure, intercompany balance; (iii) cap on accumulation of additional annual capital expenditure with a liabilities to bridge the resultant requirement of 30% of equity financing; cash deficit. (iv) rescheduling of remaining liabilities and (v) annual tariff filing will mitigate this risk. 2. Presence of large amount of Substantial unreconciled intercompany and TANTRANSCO is in the process of interunit account balances the appointment of consultants to enable accounts of TANTRANSCO. reconciliation of intercompany balances between TANTRANSCO and TANGEDCO as also the reconciliation of inter unit balances within TANTRANSCO. Reconciliation of these accounts will be supported through the proposed TA. 10
3. Absence of fixed asset registry. Substantial TANTRANSCO is required to mobilize TNERC has not fully recognized consultants to prepare a fixed asset the revaluation of fixed assets registry and establish a system for undertaken in 2015. regular updating of fixed asset registry. Overall Inherent Risk Substantial Project Risk 1. Implementing Entity. Substantial TANTRANSCO is committed to TANTRANSCO has initiated the maintain accounts as per Companies process of finalization of accounts Act 2013 and also adopt Ind-AS as per Companies Act, 2013 and accounting standards effective current adopt Ind-AS accounting financial year (2018-19). It will also be standards. It has decided to adopt required under the Loan Agreement to Ind-AS for finalization of accounts implement an integrated computerized for the financial year commencing accounting software both for 1 April 2018. The accounts are preparation of entity financial also currently maintained by using statements as also project financial the outdated Foxpro software. statements. 2. Funds Flow. Moderate The use of Advance Account The central government has ruled procedure would mitigate this risk. out the use of the direct payment modality for disbursement of loan proceeds to Indian contactors for Indian Rupee payments. The use of an advance account for disbursement of loan proceeds is considered as the preferred mechanism of disbursement. 3. Staffing. Substantial The Loan Agreement will include an While TANTRANSCO has assurance requiring appointment of adequate staff at senior levels in two fulltime, dedicated accounts its finance and accounts officers, one assigned to the EA’s department with accounting headquarters, and the other to the professionals manning the senior Madurai General Construction Circle positions, it continues to share (GCC). Training in ADB’s accounting accounting staff with TANGEDCO and reporting requirements would be at many of its field offices. Also, provided to TANTRANSCO’s as the company has not accounting staff to mitigate this risk. implemented any multilateral funded project until now, its capacity to meet ADB’s reporting requirement is inadequate. 4. Accounting Policies and Substantial TANTRANSCO’s decision to adopt Procedures. Ind-AS for finalization of accounts for The company’s ongoing use of the financial year commencing 1 April the Commercial Accounting 2018 would mitigate this risk. System for State Electricity Boards – Electricity (supply) ADB support will be made available for (annual accounts) Rules 1985 a one-time Fixed asset Register ESAAR rather than Indian preparation and verification and Accounting Standards (Ind-AS) impairment assessment. rules for entity-level financial reporting has presented the risk of project financial statements 11
being substantially different to entity level statements. 5. Internal Audit. Substantial Terms of reference for internal audit The company’s internal audit will be provided to TANTRANSCO and scope is currently limited to assurance will be included to ensure concurrent audit of large that, over time, the internal audit payments. A much broader-based function will be strengthened to meet internal audit scope is required to the company’s legal and statutory ensure integrity and improve requirements. TANTRANSCO has efficiency across the company committed to initiate steps to meet the (and to meet statutory requirements of the Companies Act, requirements). From the project’s 2013 with regard to the appointment of perspective, no reliance can be the Internal Auditor. placed on internal audit. The external auditor has also indicated that the company has to improve its internal control systems and also that the company has not appointed an Internal Auditor as required under the Companies Act 2013. 6. External Audit Moderate Statement of Audit Needs are provided TANTRANSCO is currently in this PAM indicating additional audit subject to annual auditing assurances required and time frame conducted by a chartered for submission of Annual Project accounting firm appointed by Financial Statements (APFS). India’s Comptroller and Auditor General (CAG). During the last ADB will monitor timeliness of EA’s few years, the company has been submissions and take early actions in able to get its financial statements case of delays. audited by September/October of the concerned year, indicating its ability to finalise its accounts within a reasonable time period. The audit report for FY2018 (and the earlier audit reports included) is a qualified report with a number of audit observations including TANTRANSCO’s non adherence to the Companies Act, 2013 (i.e. not preparing financial statements in accordance with Ind-AS accounting standards), huge unreconciled balances between TANTRANSCO and TANGEDCO, absence of a Fixed Assets Register, etc. 7. Reporting and Monitoring Substantial Project financial reports will be No consolidated in-year financial generated on a quarterly basis and reporting is provided by the project budget figures will be company, even though monthly compared with actual in each quarterly “statements of account” are report. Annual audited project generated at the GCC level. Only accounts will be submitted within 6 ad-hoc project financial reporting months after the close of each financial is undertaken, mostly year to ADB. concentrating on physical 12
outcomes of major capital projects. 8. Information Systems. High An assurance will be provided through Computerization of the company’s the Loan Agreement that requires the finance and accounting function is EA to utilize a common software very limited and significant package or on-line system across its manual intervention is required to business units to adequately record, transfer information from the process and report on financial accounting software (Foxpro) to transactions for the Project. It is the reporting software (Excel). proposed to stipulate that Neither Foxpro nor Excel are TANTRANSCO implement its in-house suitable for financial reporting. accounting system to replace Foxpro However, TANTRANSCO is in the by loan effectiveness. process of implementing an in- house accounting system that would allow online recording of all transactions, substantially reducing the need for data re- entry. This system is not yet fully developed and implemented but is expected to be adequate for ADB project accounting purposes. Overall Project Risk Substantial Overall (Combined) Risk Substantial V. PROPOSED TIME-BOUND ACTION PLAN 42. Based on the risk assessment and proposed risk mitigation measures, the proposed risk action plan is provided as shown in Table 1 in the executive summary. 13
Appendix A: Current Organizational Structure of TANTRANSCO Chairman Managing Director and Joint Managing Director Director Director Company Transmission Director Finance Operation secretary projects Chief Chief Engineer/ Chief Financial Engineer/Transmi Protection and Controller ssion Communication Chief Chief Engineer/ Engineer/Civil/Tra Grid Operation nsmission Chief Chief Engineer/ Engineer/Transmi System ssion Projects- Operation/Chenn I/Chennai ai Chief Engineer/ Chief Engineer/ Transmission System Projects-II/Trichy Operation/Trichy 14
Appendix B: Current Organizational Structure of TANTRANSCO Finance Department Director (Finance) Chief Financial Controller Class-I Financial Controller Financial Controller (Finance & (Revenue & Accounts) Purchases) Deputy Deputy Deputy Deputy Deputy Deputy Deputy Financial Financial Financial Financial Financial Financial Financial Controller: Controller: Controller: Controller: Controller: GCC#- GCC#- GCC#- GCC#- GCC#- Controller Controller Tiruchirappal Coimbator Chennai Salem li Madurai e Accounts Accounts Accounts Officer Officer* Officer Assistant Assistant Assistant Assistant Assistant Accounts Accounts Accounts Accounts Accounts Class-II Officer Officer Officer Officer Officer Assistant Assistant Assistant Accounts Accounts Accounts Officer Officer* Officer Class-III employees Class-III employees Structure at head office/corporate office Structure at general construction circles *Long-term vacancy # General construction circles 15
Appendix C: Financial Management Assessment Questionnaire Topic Response 1. Executing / Implementing Agency 1.1 What is the entity’s legal status / registration? Company registered under Companies Act. 1.2 How much equity (shareholding) is owned by the 99.99% shares held by TNEB Ltd whose Government? 99.99% shares are held by GoTN. 1.3 List of beneficial owners of major blocks of shares (non- Statement enclosed governmental portion), if any 1.4 Has the entity implemented an externally-financed project Is implementing certain schemes with loan in the past? If yes, please provide details. assistance from JICA, Japan and KfW, Germany 1.5 Briefly describe the statutory reporting requirements for Annual report certified by External Auditor the entity. appointed by CAG and supplemental audit by CAG 1.6 Describe the regulatory or supervisory agency of the For intra-state transactions regulated by entity. Hon’ble TNERC and for Inter-state transactions regulated by Hon’ble CERC 1.7 What is the governing body for the project? Is the Governing body for the Project is the Board of governing body for the project independent? TANTRANSCO 1.8 Obtain current organizational structure and describe key Organization structure for Accounts wing management personnel. Is the organizational structure enclosed and governance appropriate for the needs of the project? 1.9 Does the entity have a Code of Ethics in place? Yes 1.10 Describe (if any) any historical issues report of ethics No such violations violations involving the entity and management. How were they addressed? 2. Funds Flow Arrangements 2.1 Describe the (proposed) project funds flow arrangements Fund flow will go to GoTN and from GoTN to in detail, including a funds flow diagram and explanation TANTRANSCO. of the flow of funds from ADB, government and other financiers, to the government, EA, IA, suppliers, contractors, ultimate beneficiaries, etc. as applicable. 2.2 Are the (proposed) arrangements to transfer the Yes satisfactory proceeds of the loan (from the government / Finance Ministry) to the entity and to the end-recipients satisfactory? 2.3 Are the disbursement methods appropriate? Yes appropriate 2.4 What have been the major problems in the past involving Nil the receipt, accounting and/or administration of funds by the entity? 2.5 In which bank will the Advance Account (if applicable) be established? 2.6 Is the bank in which the advance account is established capable of: • Executing foreign and local currency transactions? • Issuing and administering letters of credit (LC)? • Handling a large volume of transaction? 16
Topic Response • Issuing detailed monthly bank statements promptly? 2.7 Is the ceiling for disbursements from the advance Not required account and SOE appropriate/required? 2.8 Does the (proposed) project implementing unit (PIU) This is the first instance have experience in the management of disbursements from ADB? 2.9 Does the PIU have adequate administrative and Not applicable accounting capacity to manage the advance fund and statement of expenditure (SOE) procedures in accordance with ADB’s Loan Disbursement Handbook (LDH)? Identify any concern or uncertainty about the PIU’s administrative and accounting capability which would support the establishment of a ceiling on the use of the SOE procedure. 2.10 Is the entity exposed to foreign exchange risk? If yes, Yes describe the entity’s policy and arrangements for managing foreign exchange risk. 2.11 How are the counterpart funds accessed? GoTN will be addressed 2.12 How are payments made from the counterpart funds? Through holding company 2.13 If project funds will flow to communities or NGOs, does NA the PIU have the necessary reporting and monitoring arrangements and features built into its systems to track the use of project proceeds by such entities? 2.14 Are the beneficiaries required to contribute to project NA costs? If beneficiaries have an option to contribute in kind (in the form of labor or material), are proper guidelines and arrangements formulated to record and value the labor or material contributions at appraisal and during implementation? 3. Staffing 3.1 What is the current and/or proposed organizational Proposed organization chart attached. structure of the accounting department? Attach an organization chart. 3.2 Will existing staff be assigned to the project, or will new Existing staff will be assigned to the project staff be recruited? 3.3 Describe the existing or proposed project accounting To be furnished by CE/Transmission staff, including job title, responsibilities, educational background and professional experience. Attach job descriptions and CVs of key existing accounting staff. 3.4 Is the project finance and accounting function staffed Yes adequately? 3.5 Are the project finance and accounting staff adequately Yes qualified and experienced? 3.6 Are the project finance and accounting staff trained in No ADB procedures, including the disbursement guidelines (i.e., LDH)? 3.7 What is the duration of the contract with the project Permanent employees of the Corporation with finance and accounting staff? Superannuation age of 58 years 17
Topic Response 3.8 Identify any key positions of project finance and No accounting staff not contracted or filled yet, and the estimated date of appointment. 3.9 For new staff, describe the proposed project finance and The project finance will be handled by the accounting staff, including job title, responsibilities, existing staff educational background and professional experience. Attach job descriptions. 3.10 Does the project have written position descriptions that Yes clearly define duties, responsibilities, lines of supervision, and limits of authority for all of the officers, managers, and staff? 3.11 What is the turnover rate for finance and accounting In accordance with the situation and policies personnel (including terminations, resignations, transfers, thereof etc.)? 3.12 What is training policy for the finance and accounting There is an exclusive training wing staff? 3.13 Describe the list of training programs attended by finance Every employee is given training on rotation and accounting staff in the last 3 years. basis at least once in three years. 4. Accounting Policies and Procedures 4.1 Does the entity have an accounting system that allows for Yes the proper recording of project financial transactions, including the allocation of expenditures in accordance with the respective components, disbursement categories, and sources of funds (in particular, the legal agreements with ADB)? Will the project use the entity accounting system? If not, what accounting system will be used for the project? 4.2 Are controls in place concerning the preparation and Yes approval of transactions, ensuring that all transactions are correctly made and adequately explained? 4.3 Is the chart of accounts adequate to properly account for Chart of accounts already provided and report on project activities and disbursement categories? Obtain a copy of the chart of accounts. 4.4 Are cost allocations to the various funding sources made Yes accurately and in accordance with established agreements? 4.5 Are the General Ledger and subsidiary ledgers Ledgers maintained reconciled monthly? Are actions taken to resolve reconciliation differences? 4.6 Describe the EA’s policy for retention of accounting Accounting records are maintained for a records including supporting documents (e.g., ADB’s minimum period of 8 years. policy requires that all documents should be retained for at least 1 year after ADB receives the audited project financial statements for the final accounting period of implementation, or 2 years after the loan closing date, whichever is later). Are all accounting and supporting documents retained in a defined system that allows authorized users easy access? 4.7 Describe any previous audit findings that have not been Nil addressed. 18
Topic Response Segregation of Duties 4.8 Are the following functional responsibilities performed by Yes different units or persons: (i) authorization to execute a transaction; (ii) recording of the transaction; (iii) custody of assets involved in the transaction; and (iv) reconciliation of bank accounts and subsidiary ledgers? 4.9 Are the functions of ordering, receiving, accounting for, Yes and paying for goods and services appropriately segregated? Budgeting System 4.10 Do budgets include physical and financial targets? Yes 4.11 Are budgets prepared for all significant activities in Yes sufficient detail to allow meaningful monitoring of subsequent performance? 4.12 Are actual expenditures compared to the budget with Yes reasonable frequency? Are explanations required for significant variations against the budget? 4.13 Are approvals for variations from the budget required (i) Generally, in advance. Depending upon the in advance, or (ii) after the fact? urgency of the work., sometimes ratification obtained after execution of the work. 4.14 Is there a ceiling, up to which variations from the budget No may be incurred without obtaining prior approval? 4.15 Who is responsible for preparation, approval and Both technical and finance wing oversight/monitoring of budgets? 4.16 Describe the budget process. Are procedures in place to Yes plan project activities, collect information from the units in charge of the different components, and prepare the budgets? 4.17 Are the project plans and budgets of project activities Yes realistic, based on valid assumptions, and developed by knowledgeable individuals? Is there evidence of significant mid-year revisions, inadequate fund releases against allocations, or inability of the EA to absorb/spend released funds? No Is there evidence that government counterpart funding is not made available adequately or on a timely basis in prior projects? What is the extent of over- or under-budgeting of major heads over the last 3 years? Is there a consistent trend either way? Payments 4.18 Do invoice-processing procedures require: (i) Copies of Yes 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 19
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