1·~, 31/f:i-)20 1°1 t l v(J. ) >.A (' • ... FINANCIAL ATTEST AUDIT REPORT ON THE ACCOUNTS OF PUNJAB HEALTH SECTOR REFORM PROGRAM WORLD BANK & DFID PRIMARY & SECONDARY HEALTHCARE DEPARTMENT, GOVERNMENT OF THE PUNJAB FOR THE FINANCIAL YEAR 2018-19 AUDITOR GENERAL OF PAKISTAN ISLAMABAD . PART-II • ... COVERING LETTER TO THE MANAGEMENT LETTER 10 EXECUTIVE SUMMARY 11 MANAGEMENT LETTER 12 1. Introduction 13 2. Audit Objectives 13 3. Audit Scope and Methodology 13 4. AUDIT FINDINGS AND RECOMMENDATIONS 13-22 4.1 Organization and Management 4.2 Overall Assessment 23 5. CONCLUSION 24 ACKNOWLEDGEMENT 25 9 Office of the DIRECTOR GENERAL AUDIT, PUNJAB 1 6 h Floor A.G Office Building, 1 Turner Road, Lahore. " Phone No.0429210147,Exchange Nos.0429210823&0429212459 Fax No.0429210166 No. DGANAP!CD/927 Date: 26-12-2019 To The Secretary, Government of the Punjab, Health Department, Lahore. SUBJECT: Audit in respect of The Policy and Strategic Planning Unit, Punjab Health Sector Reform Program Financed by Government of The Punjab and World Bank, For The Financial Year 2018-19 We have audited the Financial Statements of PSPU, PHSRP for the financial year 2018-19. While executing the audit, International Standards of Supreme Audit Institutions as adopted by the Auditor General of Pakistan were applied to express audit opinion on the Financial Statements of the PSPU, PHSRP. During audit activity, focal areas of internal controls and other operational spheres were examined and the results are given in the Management Letter for your consideration. Audit findings and recommendations have been discussed with the PSPU, PHSRP Mangement in the meeting during August, 2019. The issues have been highlighted to facilitate the management in improving internal controls and policies of operating procedures. If you have any queries, please feel free to contact this office. _, (toe!AP ' Director General Audit Punjab Lahore 10 EXECUTIVE SUMMARY Director General Audit Punjab conducted audit of PSPU, PHSRP in August, 2019. The main objectives of audit were to express an opinion on Financial Statements of the Program and \ to assess whether the program was managed with due regard to economy, effeciency, and effectiveness, and to review performance of PSPU, PHSRP against the intended objectives, to review compliance with applicable rules, regulations and procedures. Audit was conducted in accordance with the International Standards of Supreme Audit Institutions (ISSAis). Moreover, it was observed that the PHSRP was originally approved with a cost of Rs.133.910 million which has now increased to Rs. 231.286 million till 31-12-2018 with a percentage increase of 73 %. Therefore, better financial management practices may auger well in future endeavors. In connection to the above, this report contains instances of notable increase of Rs. 98 million in the cost of PC-1, irregular charging of Performance Incentive of Rs. 3.662 million, non-deduction of taxes amounting to Rs. 1.397 million, and unauthorized payment of Project Allowance amounting to Rs.1.2 million. The financial management of PHSRP needs to be reviewed to avoid such lapses in future. MAIN FINDINGS • Non-deduction of PST amounting to Rs. 1,397 ,024-Recovery thereof (4.1.1) • Irregular management of PHNP by the Development Wing (4.1.2) • Irregular charging of Performance Incentive to World Bank amounting to Rs.3 ,662,312 (4.1.3) • Irregular operations of TA Account (4.1.4) • Non-provision of reconciliation of AG Punjab, and Treasury (4.1.5) • Non-approval of PC-I from ECNEC (4.1.6) • Amount claimed not entertained by the World Bank (4.1.7) • Non-reconciliation with World Bank (4.1.8) • Non-reconciliation Non-conduction of mandatory audits (4.1.9) • Abnormal re-appropriation amounting to Rs. 9.56 million (4.1. l 0) • Irregular payment of rent of building - Rs 3,540,000 (4.1.11) • Increase in the cost of PC-1 amounting to Rs. 98 million (4.1.12) • Non-achievement of objectives (4.1.13) • Irregular purchase of stationery amounting to Rs. 682,282 (4.1.14) • Irregular printing by MSNC amounting to Rs. 301,860 (4.1.15) • Less deduction oflncome Tax- Recovery of Rs. 31 ,00 I (4.1.16) • Unlawful payment of Project Allowance - Recovery of Rs. 1,200,000 (4.1 .17) Recommendations: The following critical areas need to be managed more efficiently: • The financial management • Procurement Process • Utilization of funds. • Deduction of taxes 11 MANAGEMENT LETTER \, 12 1. INTRODUCTION: We have audited the Financial Statements of PSPU, PHSRP for the financial year 2018-19. While executing the audit, International Standards of Supreme Audit Institutions as adopted by the Auditor General of Pakistan were applied to express audit opinion on Financial Statements of PSPU, PHSRP. The total budget is Rs. 51873. 620 million and the expenditure is Rs . 45260. 732 million for the financial year 2018-19. 2. AUDIT OBJECTIVES: The major objectives of audit were: • To express an opinion on financial Statements. • To review performance of the Program against intended objectives. • To assess whether the Program was managed with due regard to economy, efficiency and effectiveness. • To review compliance with applicable rules, regulations, and procedures. 3. AUDIT SCOPE AND METHODOLOGY: The audit was conducted in accordance with the International Standards of Supreme Audit [nstitutions (ISSA!). Before audit execution, planning phase was undertaken. During audit execution, financial record was examined and audit observations thereon were discussed with the Program management. Focal areas of internal controls and other operational spheres were examined. 4 AUDIT FINDINGS AND RECOMENDATIONS: 4.1 Financial Management 4.1.1 Non-deduction of PST amounting to Rs. 1,397,024-Recovery thereof As per Punjab Sales Tax Act, PST is leviable on payments to consultants @ 16%. During audit of accounts of PSPU/PHSRP for the year 2018-19, it was observed that an amount of Rs . 8,731 ,400 was paid to the consultants but PST amounting to Rs. 1,397,024 was not deducted as detailed below in violation of the above stated rule. 13 Detail of Consultancy Fee Paid during the Year 2018-19 against which PST was not deducted Total Consultan PST @ l6 cy Fee Consultant Not Designation Sep-18 Oct-18 Nov-18 Dec-18 Paid Name Deducted During the (Rs.) Year 2018- 19(Rs.) Mirza Aazam Financial Management Baig Specialist 1,000,000 500,000 500,000 500,000 2,500,000 400,000 M. Ibrahim Environment Health Mughal Specialist 1,000,000 500,000 500,000 500,000 2,500,000 400,000 Mr. Ali Faisal Procurement Specialist 930,000 310,000 310,000 1,550,000 248,000 Ms. Abida Javed Research Associ ate 500,000 250,000 250,000 1,000,000 160,000 Mr. Ahsan Financi al Management Raza Specialist 393,800 787,600 1, 181 ,400 189,024 Total 3,430,000 1,560,000 1,643,800 2,097,600 8,731,400 1,397,024 The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that amount may be recovered and deposited into government treasury (Para No. I of PSPU/PHSRP for the year 2018-19) 4.1.2 Irregular management of PHNP by the Development Wing As per para 5 of the revised PC-1 of PSPU, PSPU is instrumental in formation of DLJs in consultation with all stake holders, release of funds from donors on achievement of DLJs, formation of proper business plan for disbursement of this money to various programs and timely utilization of these funds is also the mandate of PSPU. During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was informed by PSPU management that the management of Provincial Health Nutrition Program(PHNP) is now being done by the Development Wing of the Health Department by the verbal orders of the Secretary P&SHD w.e.ffrom 01-01-2019. The matter was pointed out in August, 2019. The management did not offer any reply. Audit is of the view that taking over of functions of PHNP from PSPU without any revision in PC- I and Financing Agreement is a serious violation on part of the management. (Para No. 2 of PSPU/PHSRP for the year 2018-19) 14 4.1.3 Irregular charging of Performance Incentive to World Bank amounting to Rs.3,662,312 As per section iv of the Financing Agreement, performance incentives will be charged to t the World Bank up to 50 percent of total incentive paid. During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was observed that PSPU/PHSRP paid performance incentive of an amount of Rs.7 ,324,625 to the officers/officials of PHSRP but instead of charging 50 % to World Bank i.e. Rs. 3,662,312, the whole amount was charged to the World Bank in violation of the above stated provision of the Financing Agreement. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be got regularized from the competent authority. (Para No. 3 of PSPU/PHSRP for the year 2018-19) 4.1.4 Irregular operations of TA Account As per para 4.4 of the Operational Manual of the World Bank for technical assistance for Policy and Strategic Planning Unit, it was agreed between World Bank and PSPU that a Financial Management Manual duly approved by CGA will be used for World Bank funded projects. During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was observed that no Financial Management Manual (FMM) was prepared by PSPU for managing operations of World Bank funds in absence of which all expenditure of Technical Assistance is held irregular. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be got regularized from the competent authority. (Para No. 4 of PSPU/PHSRP for the year 2018-19) 4.1.5 Non-provision of reconciliation of AG Punjab, and Treasury According to 2.33 of Punjab Financial Rules Vol-I, every government servant should realize full y and clearly that he will be held personally responsible for any loss sustained by government through negligence on his part. During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was observed that PSPU has not got its accounts reconciled from treasury and AG Punjab. The same may be provided to audit for verification. The matter was pointed out in August, 2019. The management did not offer any repl y. Audit recommends that the reconciliation may be provided for verification. (Para No. 5 of PSPU/PHSRP for the year 2018-19) 15 4.1.6 Non-approval of PC-1 from ECNEC As per Planning Commission Manual, ECNEC is the final approving authority for any provincial project as mentioned below: A • Any project involving foreign component ll • Any project of irrigation costing 1,000 billion or more During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was observed that PC-1 of PSPU/PHSRP has not been got approved from ECNEC in violation of the above stated rule. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be got regularized from the competent authority. (Para No. 6 of PSPU/PHSRP for the year 2018-19) 4.1.7 Amount claimed not entertained by the World Bank According to 2.33 of Punjab Financial Rules Vol-I, every government servant should realize fully and clearly that he will be held personally responsible for any loss sustained by government through negligence on his part. During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was observed that an amount of Rs. 17,073,689 was claimed by PSPU from World Bank vide Withdrawal Application No. 12-PSPU. That amount was not fully reimbursed by World Bank. Instead An amount of Rs. 16,112,210 was reimbursed by the World Bank. The management could not make it clear that why amount claimed was not fully reimbursed by the World Bank. Audit is of the view that non-reimbursement of amount claimed by the Development Partner is a serious concern and may be due to non-compliance by PSPU of Financing Agreement or other commitments with World Bank and needs to be enquired into. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be probed to know the reasons for the refusal of the World Bank to entertain the claims of PHSRP. (Para No. 7 of PSPU/PHSRP for the year 2018-19) 4.1.8 Non-reconciliation with World Bank As per para 2.7 of the Business Plan of the MSNC, MSNC will periodically reconcile the : accounts with the World Bank. Moreover, MSNC will submit detail of payments to Accountant General office on daily basis and carry out monthly reconciliation with Accountant General. During audit of accounts of MSNC, an implementing agency of PHSRP, for the financial year 2018-19, it was observed that MSNC did not reconcile its accounts with World Bank nor it submitted detail of expenditure to AG on daily basis. The matter was pointed out in August, 2019. The management did not offer any reply. 16 Audit recommends that the accounts of MSNC may be got reconciled with the World Bank and the report in this regard may be produced to audit for verification. (Para No. 8 of PSPU/PHSRP for the year 2018-19) 4.1.9 Non-conduction of mandatory audits As per para 2.10 of the Business Plan of MSNC, annual audit of MSNC by Chartered Accountant firms is mandatory. Moreover, Performance Audit by third party at the end of the project is also mandatory. During audit of accounts of MSNC, an implementing agency of PHSRP, for the financial year 2018 -19, it was observed that MSNC did not arrange to get its accounts audited from the Chartered Accountant firm, nor any performance audit by a third party was got conducted. Performance Audit had become mandatory because management of MSNC informed that MSNC has been closed in December, 2018. Audit is of the view that violation of provisions of Business Plan duly agreed with the World Bank is a serious concern. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be probed, mandatory audits may be got conducted and the reports may be shared with audit. (Para No. 9 of PSPU/PHSRP for the year 2018-19) 4.1.10 Abnormal re-appropriation due to weak budgetary process amounting to Rs. 9. 56 million Para 1.4 7 of Manual for Development Project of Planning Commission states that careful project preparation in advance of expenditure is best avai lable mean to ensure efficient economic use of capital funds and to increase the chance of on-schedule implementation. Unless projects are carefully planned in substantial detail, inefficient or even wasteful expenditure of money is almost sure to result, a tragic loss in capital-short nations. During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was observed that the budgetary process of PSPU was very week as evident from the fact that an amount of Rs. 9.56 million was allocated by Finance Department in head A05270-0thers. But that amount was re-appropriated by PD(PSPU) into 26 different heads. : Audit is of the view that such re-appropriations show week budgetary process and lack of planning. The matter was pointed out in August, 2019. The management did not offer any reply . Audit recommends that the budgetary process may be got strengthened. (Para No. IO of PSPU/PHSRP for the year 2018-19) 17 4.1.11 Irregular payment of rent of building - Rs 3,540,000 As per rule 3 of second schedule[see rule 3(/)]part-I powers common to all departments of Punjab Delegation of Powers Rules 2016, The Category-I Officer have full powers to - sanction expenditure on non residential buildings subject to the conditions that: 1. Hiring of buildings on rent would be subject to the conditions that (a) the accommodation is according to the scale approved by the Government, 11. the rent does not exceed the tax assessed by the Excise, Taxation and Narcotics Department for the purpose of Urban Immovable Property Tax. In case the rent exceeds as assessed by the Excise, Taxation and Narcotics Department, the Administrative Department shall give rent reasonability certificate and, iii. non-availability certificate by the C&W Department that there is no official building available for housing a particular office. 1v. Hiring of lands subject to the condition that rent reasonability certificate is given by an officer of Revenue Department exercising powers of the Collector under Land Revenue Act 1967 During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was observed that an expenditure of Rs 3,540,000 was incurred on payment of rent of office building in violation of the above stated rules. Moreover, revised PC- I is showing location of the project at Birdwood road Lahore while project is actually located in Model Town Lahore The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be got regularized from the competent authority. (Para No. 11 of PSPU/PHSRP for the year 2018-19) 4.1.12 Increase in the cost of PC-1 amounting to Rs. 98 million Para 1.4 7 of Manual for Development Project of Planning Commission states that careful project preparation in advance of expenditure is best available mean to ensure efficient economic use of capital funds and to increase the chance of on-schedule implementation. Unless projects are carefully planned in substantial detail, inefficient or even wasteful expenditure of money is almost sure to result, a tragic loss in capital-short nations. During audit of accounts of PSPU(PHSP) for the financial year 2018-19, it was observed that the PHSRP was originally approved with a cost of Rs.133 .910 million which has now increased to Rs. 231.286 million till 31-12-2018 . .r Audit is of the view that this abnormal increase in the cost of the project is due to ill planning that caused loss to the government. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be probed to know the reasons for the increase in cost of PC-1. (Para No. 12 of PSPU/PHSRP for the year 2018-19) 18 4.1.13 Non-achievement of objectives As per Project Agreement of Multi Sectoral Nutrition Cell(MSNC), an implementing agency of PHSRP, funds ofUSD 2 million allocated to MSNC were envisioned to be utilized to ; bring sectors together, and to provide: • Technical capacity • Evidence generation • Evaluation, and • Coordination activities During audit of accounts of MSNC, an implementing agency of PHSRP, for the financial year 2018-19, it was observed that an amount ofRs.31 million only could be got released from World Bank for spending against the component "Technical Capacity" and out of this amount Rs. 20 million approximately could be utilized in 2017-18 and 2018-19 leaving a balance of Rs. 11 million approximately. No funds could be withdrawn against remaining three components. Thus, an amount of Rs. 180 million approximately remained unutilized, and accordingly the relevant DLis could also not be achieved. Audit is of the view that non-utilization of Rs. 180 million and non-achievement of objectives till close of the project raises serious questions over planning and efficiency of MSNC which needs to be enquired into. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be got regularized from the competent authority. (Para No. 13 of PSPU/PHSRP for the year 2018-19) 4.1.14 Irregular purchase of stationery amounting to Rs. 682,282 According to 2.33 of Punjab Financial Rules Vol-I, every government servant should realize fully and clearly that he will be held personally responsible for any loss sustained by government through negligence on his part. During audit of accounts of PSPU (PHSP) for the financial year 2018-19, it was observed that an amount of Rs. 682282 was spent on purchase of stationery. Following observations were noted in this regard: (!)Bid securities amounting to Rs. 28000 have still not been released to bidders. (2)Stamp duty amounting to Rs. 15000 has not been recovered from supplier. (3)No provision for late delivery was agreed with supplier. (4)Suppliers were required to provide samples but no such samples were shown provided. (5) Performance Securities were not obtained from suppliers as required by para no. 33.1 and 33.2 of bidding documents. The matter was pointed out in August, 2019. The management did not offer any reply. 19 Audit recommends that the matter may be got regularized from the competent authority . (Para No. 14 of PSPU/PHSRP for the yea r 2018-19) :- 4.1.15 Irregular printing by MSNC amounting to Rs. 301,860 ~ As per World Bank Procurement Guidelines, Shopping Method should be used when other methods are not cost effective. Moreover, according to rule 2.33 of Punjab Financial Rules Vol-I, every government servant should realize fully and clearly that he will be held personally responsible for any loss sustained by government through negligence on his part. During audit of accounts of MSNC, an implementing Agency of (PHSPR) for the financial year 2018-19, it was observed that an amount of Rs . 301860 was spent on printing. Following observations were noted in this regard : (I) MSNC used Shopping Method but it was not clarified that why Shopping Method (three quotations method) was used in presence of more competitive methods of procurement. (2) Quotations call letters were not produced to audit for verification. (3) Stamp Duty amounting to Rs. 7547 was not paid by the supplier. (4) The evaluation/result of quotations was not uploaded on website of MSNC for transparency. (5) Contract was awarded in September, 2018 but Active Tax Payer status of supplier was obtained in October, 2018. This shows that contract was awarded without verifying Active Tax Payer status of the supplier. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the matter may be got regularized from the competent authority. (Para No. 15 of PSPU/PHSRP for the year 2018-19) 4.1.16 Less deduction of Income Tax- Recovery of Rs. 31,001 According to the Income Tax rates for individuals for the year 2018-19, an income of Rs. 2,400,000 to Rs. 4,800,000 will be taxed at the rate of Rs. 60,000+ 10% of the amount exceeding Rs. 2,400,000. During audit of accounts of PSPU/PHSRP for the year 2018-19, it was observed that income tax was less deducted from salary income of the Project Director, as given below: ,. 20 (A) (B) Gross Salary as per Sal. Exempt M. Allow. (Less than Month Slips(Rs) 10% of Running B. Pay) (Rs) Jul-18 172,965 3,118 Aug-18 112,965 3,118 Sep-18 524,275 14,282 Oct-18 112,965 3,118 Nov-18 148,938 4,124 Dec-18 116,625 3,118 Jan-19 200,625 3,118 Feb-19 128,625 3,118 Mar-19 261,932 3,118 Apr-19 128,625 3,118 May-19 128,625 3,118 Jun-19 128,625 3,118 Total 2,165,790 49,586 Taxable Salary (A-B) 2,116,204 Taxable Incentive 496,703 Total Taxable 2,612,907 Applicable Tax Slab 60,000 + 10% exceeding 2,400,000 Exceeding 240000 212,907 10% of above as per slab 21,291 Fixed amount as per slab 60,000 Annual Tax 81,291 Tax Deducted in salary slips by AG 50,290 ,. ' Less deducted Income Tax 31,001 The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the amount may be recovered and deposited into government treasury. (Para No. 16 of PSPU/PHSRP for the year 2018-19) 21 4.1.17 Unlawful payment of Project Allowance - Recovery of Rs. 1,200,000 As per finance department letter no FD.SR-I/9-20/2006 dated 27-07-2018 para No 2(a) "All types of Program/Project Allowances/ Pay packages / Market Based Salaries and any other : special dispensation, as a part of regular pay, presently admissible in subject entities/ organizations mentioned shall be discontinued with effect from July 01, 2018, and all previous notifications/orders/procedures/guidelines in this behalf including operation of Review and Rationalization Committee shall stand obviated." During audit of accounts of PSPU/PHSRP for the year 2018-19, it was observed that an amount of Rs. 1,200,000 was paid as project allowance to officers of PSPU in violation of the above stated notification of the Finance Department. The matter was pointed out in August, 2019. The management did not offer any reply. Audit recommends that the amount may be recovered from the concerned and deposited into government treasury. (Para No. 17 of PSPU/PHSRP for the year 2018-19) ,. C 22 4.2 OVERALL ASSESSMENT 4.2.1 Relevance: The project activity audited was within overall MTDF frame work and in It line with government's sectoral policies. 4.2.2 Efficiency: This could not be ascertained at this stage as the project was in progress. 4.2 .3 Economy: There have been many instances of irregular procurement which has resulted in uneconomical use of funds . 4.2.4 Effectiveness: Since the project was in progress, therefore, successful achievement of objectives targets and desired results could not be analyzed and assessed. 4.2.5 Compliance with rules: Issues of financial management, along with procurement violations are critical areas which need to be given a serious thought for improving service delivery and ensuring timely execution of quality work. 4.2 .6 Performance rating: Not possible at this stage. 4.2 .7 Risk rating: Medium l: 23 5 CONCLUSION: 5.1 Key issues for the future: There have been issues regarding finacial and procurement management causing loss to the government. The management should focus on these critical areas to avoid such lapses in future. 5.2 Lessons Identified: The following critical areas need to be managed more efficiently: • The financial management • Procurement Process • Utilization of funds. • Deduction of taxes [ 24 ACKNOWLEDGEMENT We wish to express our appreciation to the management and staff of PSPU, PHSRP for the , assistance and cooperation extended to auditors during this assignment. 4 , j l 25