Ministry of Water and Energy (MINEA) Second Water Sector Institutional Development Project (WSIDP II) - Angola IBRD Loan N° 8702- AO IBRD Loan N° 8876- AO AFD Loan N° CAO1026 02H Project ID N°: P151224 Audit report on the financial statements at 31 December 2018 June 2019 Ministry of Water and Energy (MINEA) Second Water Sector Institutional Development Project (WSIDP II) - Angola Rua Via S8 Condominio Dolce Vita Edificio A1, Luanda, Angola Financing IBRD Loan N° 8702- AO IBRD Loan N° 8876- AO AFD Loan N° CAO1026 02H Project ID N°: P151224 Audit report on the financial statements at 31 December 2018 June 2019 Mazars Cameroun SA BP 3791 Douala - Cameroun Téléphone (237) 22342 42 47 - Télécopie (237) 22342 91 70 SOCIETE ANONYME D'EXPERTISE COMPTABLE ET DE COMMISSARIAT AUX COMPTES AGREEE CEMAC SOUS LE N° SEC 034 PAR DECISION N°17/05 UEAC-010 C-CM-13 DU 07 FEVRIER 2005 I. Report on the Audit of the Financial Statements 1. Opinion We have audited the accompanying financial statements of the Second Water Sector Institutional Development Project (WSIDP II), which comprise as at 31 December 2018 the consolidated statement of sources and uses of funds, Summary sheets and statement of expenditures, a list of material assets, summary of significant accounting policies and other explanatory notes. In our opinion, the accompanying financial statements of the WSIDP II for the year ended 31 December 2018 are prepared, in all material respects, in accordance with the accounting principles and methods described in the accompanying notes, the guidelines of the International Development Association and the provisions of the Financing Agreement. 2. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Project in accordance with the Code of ethics and professional conduct of accounting professionals of the International Ethics Standard Board for Accountants [IESBA], and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 3. Responsibility of the Coordinator and those charged of Governance for the financial statements The project Coordinator is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting principles and methods described in the accompanying notes, the guidelines of the International Development Association, “Agence Francaise de Développement” and the provisions of the Financing Agreement and for such internal control as the Coordination determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the project coordinator is responsible for assessing the Project’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless Coordination either intends to put an end to the activities of the Project, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the project’s financial reporting process. 4. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. II. Report on other obligations required by the audit terms of reference. In line with the reporting requirements of the terms of reference we equally:  Reviewed the accuracy and propriety of expenditures withdrawn under the statement of expenditure procedures. With regard to the statements of expenditure, during the period under review, no request for reimbursement was submitted by the FCMU.  Reviewed that all funds provided to the Project have been used, accounted for and classified in accordance with the relevant financing agreements: We are of the opinion that the funds allocated to the Project for the implementation of Project activities have, in all material aspects, been used in accordance with the relevant financing agreement. 4 Ref.: 164.RAP.2019/DLA Mazars Cameroun –June 2019 Done at Douala, 28th June, 2019 MAZARS CAMEROUN: Auditing, Accounting and Advisory CEMAC Authorisation n° EC 592 ONECCA Registration n° ECP 242 Fidèle MMANDOA Partner 5 Ref.: 164.RAP.2019/DLA Mazars Cameroun –June 2019 ANNEX: AUDITOR’S RESPONBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: - Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Project’s internal control. - Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Coordination. - Conclude on the appropriateness of Coordination’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Project’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Project to cease to continue as a going concern. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 6 Ref.: 164.RAP.2019/DLA Mazars Cameroun –June 2019 1. FINANCIAL STATEMENTS 7 Ref.: 164.RAP.2019/DLA Mazars Cameroun –June 2019 STATEMENT OF SOURCES AND USES OF FUND 8 Ref.: 164.RAP.2019/DLA Mazars Cameroun –June 2019 SUMMARY 1. FINANCIAL STATEMENTS 7 2. NOTES TO THE FINANCIAL STATEMENTS 11 2.1. Accounting principles and methods Erreur ! Signet non défini. 3. SUMMARY STATEMENT OF EXPENDITURE 21 3.1. Table of Global Movement of funds 22 4. RECONCILIATION OF THE DESIGNATED ACCOUNTS 23 4.1. Statement of reconciliation of the designated accounts 24 5. FRAMEWORK OF THE ASSIGNMENT 25 5.1. Context of the assignment 26 5.2. Objectives of the assignment 27 5.3. General Methodology 28 2. NOTES TO THE FINANCIAL STATEMENTS 11 2.1. Accounting principles and methods 12 1.0 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1.1 Reporting Entity The Government of Angola (GOA) on 14 June 2017 signed a USD150milllion loan agreement with “Agence Francaise de Développement” followed by a USD 200 Million signed a loan agreement with World Bank on 14 July 2017 to support the Government in her commitment to strengthen the institutional capacity of selected water sector agencies and increase water service coverage in target. The loans became effective on 17th May 2018. An additional loan of USD150milliom was signed with World Bank on 19th July 2018 bringing the total financing to USD 500million. 1.2 Presentation of the Accounts The financial statements consist of statements and notes accompanied by schedules which are an integral part of the financial statements. A summary of significant accounting policies applied in the preparation of the financial statements are based on International Public Sector Accounting Standards (IPSAS) taking into account the specific characteristics and needs of the Project. 1.3 Basis of Preparation a) Basis of preparation The financial reports have been prepared in accordance with modified International Financial Reporting Standards (IFRS) b) Basis of measurement The financial statements have been prepared on the historical cost and cash basis, except when otherwise indicated. c) Functional currency All amounts disclosed in the financial reports have been presented in US Dollar (USD), which is the functional and reporting currency of the Project. d) Rounding Unless otherwise stated all financial figures have been rounded off to the nearest one US Dollar. 1.4 Significant Accounting Policies a) Designated and Dedicated funds Designated and Dedicated funds represent funds received from International Bank for Reconstruction and Development (IBRD) and Agence Francaise De Development (AFD) that have not been transferred to 13 the Projects’ operational account. These funds are specifically earmarked to finance projected future expenditure of the Project. b) Foreign Currency Translation The financial statements of the Project are presented in the currency which is not of the primary economic environment in which the Project operates. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In preparing the financial statements of the Project, transactions in currencies other than the functional currency (base currency-USD and other currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. Receipts in Currencies Other than the United States Dollars Funds received from the “Agence Francaise de Développement” and Government of Angola are converted into United States Dollars using the operational rate of exchange in effect on the date of receipt. Transactions in Currencies Other Than United States Dollars For purposes of accounting for transactions and maintenance of financial records, other currencies are translated into United States Dollars using the rate of exchange in effect on the date of the transaction. Where part of the expenditures has to be met from the proceeds of the subsequent drawdown from the Designated and Dedicated Accounts to the Project Kwanza Operational Accounts, foreign currency translation for income and expenditure account items are first converted using the historic exchange rate at the time of conversion from the Designated or Dedicated Account to the Project Kwanza Operational Accounts. This is done on First in First Out (FIFO) basis. Where the converted account items are in other currencies other than the United Sates Dollars, they are subsequently translated into United States Dollars at exchange rate prevailing on the date of transaction. At each reporting date, monetary items denominated in currencies other than the functional currency are retranslated at the rates prevailing on that date. Exchange differences are recognized in the comprehensive income statement. 14 c) Budget The budget is developed on the same accounting basis (cash basis) through costing all activities that are planned to be undertaken in that financial year though the Annual Work Plan. The same classification is done for the same period as the financial Reports. d) Property, plant and equipment Property, plant and equipment are expensed in the income statement in the year it is acquired. The fixed assets are then entered into an asset register in order for them to be monitored. e) Funding The original Project objectives and design had an approved budget of USD545million, which included USD200million in financing as an IBRD loan and co-financed by the French Development Agency (AFD) through a EURO denominated loan of USD150million equivalent and by the Government of Angola (GOA) through a USD 95million counterpart contribution. The Project was approved with a financing gap of USD100million. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Based on the above stated financing arrangement the GOA made an initial counterpart contribution in January 2018 of AKZ250miilion followed by an additional AKZ882million counterpart contribution in October 2018. As a result of fiscal constraints and the desire to address urban sanitation, the GOA sought additional funding from IBRD for USD150million to replace GOA co-financing of USD95million and remaining funds for USD55million to be used to support sanitation services in peri-urban areas. The altered financing arrangement became effective in October 2018 and changed the funding plan of committed funds to 70% by loans from IBRD, in terms of loan agreements signed on 14 July 2017 and 19 July 2018 and 30% by a loan from the “Agence Francaise de Développment in terms of the loan agreement signed on 14 June 2017. The GOA is currently preparing a parallel financing project to cover the financing gap. Should the financing gap not be filled by end of second year of project implementation, the project will be restructured and activities realigned. 15 f) Related parties The related parties are the Government of Angola (GoA), the International Bank for Reconstruction and Development (World Bank) and the Agence Francaise De Development who are the co funders of the Project. 1.5 Financial Instruments Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits. These are initially and subsequently recorded at fair value. 1.6 Risk Management Financial risk factors The Project’s activities expose it to a variety of risk: liquidity risk and cash flow risk. Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding from the financiers. The Project remains confident that the available cash resources and borrowing facilities will be sufficient to meet its funding requirements. Cash flow and fair value interest rate risk As the Project has no significant interest-bearing assets, the Project’s income and operating cash flows are substantially independent of changes in market interest rates. 16 2.2. Notes to the financial statements 17 NOTES TO THE FINANCIAL STATEMENTS 2018 USD $ 2. Cash and cash equivalents Standard Bank of Angola – USD DA 484 267 Standard Bank of Angola – EUR DA- - Standard Bank of Angola AOA Account-USD Operational A/C - Standard Bank of Angola AOA Account-EUR Operational A/C - Standard Bank of Angola AOA Account -Counterpart Fund 2 446 870 Petty cash - 2 931 137 3 Designated Funds Opening balance - Comprehensive surplus/(deficit)for the period 2 931 137 Balance carried forward 2 931 137 4. Statement of Withdrawal Applications- World Bank W/A # Value Date Paid to Credit 87020 Credit Total USD 8876 USD USD WA 001, 2018 16.08.2018 PDISA 2 DA Angola 550 000 - 550 000 PD001, 2018 28.11.2018 Rui Cunha Marques 20 876 - 20 876 N/A Word Bank-Front Fee 500 000 - 500 000 N/A World Bank-Front Fee 375 000 375 000 Total 1 070 876 375 000 1 445 876 5. Statement of Withdrawal Applications- AFD W/A # Value Date Paid to Credit 1026- Rate Total EURO USD Total 18 6. Receipts from Government No. Value Date Paid to Kwanza Rate Total USD 1 15.01.2018 PDISA 2 ANGOLA 250,000,000 182.2130 1,372,020 2 11.10.2018 PDISA 2 ANGOLA 881,705,375 310.8400 2,836,526 Total 1,131,705,375 4,208,546 7 Category 1 Project costs Cumulative 2018 Cumulative To brought Forward date Management Services - 13 217 13 217 Workshop and Training - 34 063 34 063 Total - 47 280 47 280 8. Category 2 Project costs Cumulative 2018 Cumulative To brought Forward date TA/Consultancy - 24 997 24 997 Total - 24 997 24 997 9. Category 3 Project costs Cumulative 2018 Cumulative To brought Forward date TA/Consultancy - 15 831 15 831 Operating costs - 13 552 13 552 Total - 29 383 29 383 10. Category 5 Project costs Cumulative 2018 Cumulative To brought Forward date Civil Works - 104 411 104 411 Total - 104 411 104 411 11. Category 6 Project costs Cumulative 2018 Cumulative To brought Forward date Goods - 200 597 200 597 19 TA/Consultancy - 452 046 452 046 Operating Costs 437 820 437 820 Total - 1 090 463 1 090 463 12. Exchange Difference No. Value Date Paid to Kwanza Rate Total USD 1 15.01.2018 PDISA 2 ANGOLA 250,000,000 182.2130 1,372,020 2 11.10.2018 PDISA 2 ANGOLA 881,705,375 310.8400 2,836,526 Total 1,131,705,375 4,208,546 Total Payments from AKZ Account 372 789 237 308.1095 1,209,925 Balance at 31 December 2018 758 916 137 2 998 621 Translated Balance at 31 December 2018 758 916 137 310.158 2 446 870 Exchange Difference 0 (551 751) 20 3. SUMMARY STATEMENT OF EXPENDITURE 21 3.1. Table of Global Movement of funds Reconciliation table of funds received from the bank with funds disbursed by the Bank as at 31 December 2018. Designated account IBRD Loan N° 87020 Reference of the RF Amount Payment Direct Amount approved Justification on the payment Currency Reimbursement requested by the of expenses designated by the Bank account bank Date de N° DRF valeur PD 001 28/11/2018 18 376,85 EUR 20 876,00 20 876,00 WA 001 16/08/2018 550 000,00 USD 550 000,00 550 000,00 570 876,00 0,00 550 000,00 20 876,00 4. RECONCILIATION OF THE DESIGNATED ACCOUNTS 23 4.1. Statement of reconciliation of the designated accounts i. Designated account for loan IBRD Credit N° 87020-ANG Republica De Angola P151224: Projecto De Desenvolvement Institucional Do Sector De Aguas-PDISA II IBRD Credit No. 87020 AO, 88760 AO & AFD No COA 1026 02H Implementing Agency: Ministerio Da Energia E Aguas Designated Account (DA) Activity & Reconciliation Statement For the Period ended 31 December 2018 Deposit Bank: Standard Bank of Angola Acc. No: 1002047463 Currency: USD Part I $ $ 1. Cumulative advances to end of current reporting period 550 000,00 2. Cumulative expenditures to end of last reporting period 3. Outstanding Advances to be accounted (line 1minus line 2) 550 000,00 Part II 4.Opening DA balance as of 1st July 2018 0,00 5. Add/subtract: Cumulative adjustments (if any) - 6. Advances from World Bank during reporting period 550 000,00 7. Add lines 5 and 6 550 000,00 8.Outstanding advances to be accounted for (add line 4 and line 7) 550 000,00 9. Closing DA balance at of 31 December 2018 ) 484 267,09 10. Add/subtract: Cumulative adjustments (Foreign Exchange diffs) 11.Expenditures for current reporting period (only those through the DAs) 65 732,91 12. Add line 10 and line 11 65 732,91 13. Add line 9 and line 12 550 000,00 14. Variance (if any) (line 8 minus line 13) - 15. Closing DAs bank balances as per statements Standard Bank USD DA 484 267,09 Standard Bank Kwanza DA 0,00 Aggregated Closing DA's bank balances 484 267,09 16. Variance - 5. FRAMEWORK OF THE ASSIGNMENT 25 5.1. Context of the assignment 5.1.1. Presentation of the Project The Government of the republic of Angola has negotiated two loans with the International Bank for Reconstruction and Development (IBRD) for a total amount of 350 USD and an Additional Financing for a total amount of 150 million USD from the “Agence Francaise de Dévelopment” toward the cost of the Second Water Sector Institutional Development Project (WSIDP II). The project has a financing gap of 100 USD for which financing is being negotiated with the European Investment Bank. This total financing is presented as follows by components: Financing IBRD AFD Total GAP Project cost by component US US US US $million $million $million $million Water Supply Institutional Strengthening and Capacity 43,6 22,4 8 74 Development Water Resource Management 21,2 10 4 35,2 Rehabilitation and Expansion of Water Supply Production & 193 98,6 81,9 373,5 Distribution Management and Engineering Support 37,2 19 6,1 62,3 Pilote Small-Scale Sanitation Service Delivery in Peri-Urban Areas 55 55 Total baseline cost 350 150 100 600 Contigencies and Fees 0 0 0 0 0 0 0 0 Total project cost 350 150 100 600 5.1.2. Objectives of the Project The overall objective of the project is to strengthen the institutional capacity of selected water sector agencies and increase water service coverage in Target Cities. The project is made of five components as follows - Water Supply Institutional strengthening and Capacity Development - Water resources management - Rehabilitation and expansion of water supply production and distributions - Management and Engineering Support - Piloting Small-Scale Sanitation Service Delivery in Peri-Urban Areas 5.1.3. Financial and Contract Management Unit The Financial and Contract Management Unit (FCMU-WB/AFD) is responsible for the implementation of various rehabilitation and expansion projects in the water sector throughout the country regardless of the sources of financing. The government staff for the FCMU will be drawn from both the water supply and sanitation and the water resource management units within DNA. The FCMU is responsible for assisting in the coordination, implementation, monitoring, evaluation and supervision of the project. The key staff technical staff for FCMU is presented as follows: ‐ Project Executive Coordinator ‐ Finance and Administration Manager ‐ Senior Financial Management specialist ‐ Two procurement specialist ‐ Monitoring and Evaluation expert ‐ Two Procurement officer ‐ An Accountant ‐ One safeguard specialist ‐ One environmental safeguard specialist ‐ Professional and administrative staff 5.2. Objectives of the assignment The objective of this assignment is the realization of the audit of accounts and the summary of expenditures of the WSIDP II for the period 1st January to 31st December 2018. The procedures implemented aimed to present a professional opinion on: ‐ The annual financial statement of the project (Statement of sources and uses of funds and summary statement of expenditures) ; ‐ The statement of justification of the special account balance; ‐ The summary statement of expenditures; ‐ The internal control system of the project; 27 ‐ Compliance of the IDA guidelines in the execution of the assignment. 5.3. General Methodology Work focused on the following three areas : - Obtaining an understanding of internal documentation and interviews with operational managers ; - Review of internal control procedures. this has enabled us to present a management letter on internal contol procedures by formulating reccommendations for improvements in areas we deemed necessary with a view of efficiency in the processing of transactions and security of funds implemented and assets created through these funds - The review of project accounts. This work has resulted in the prosentation of a report on the financial statements of the project. 28 Annex 1- List of fixed assets 29