FC 94/9


Finance Committee

Ninety-fourth Session

Rome, 8 - 12 May 2000

Request to the External Auditor for Specific Reports concerning the Emergency Farm Reconstruction Project to be executed by FAO on behalf of the United Nations Interim Administration Mission in Kosovo (UNMIK)

 

I. BACKGROUND

1. Since July 1999, FAO and the World Bank have been carrying out negotiations for the implementation by the Organization, on behalf of the United Nations Interim Administration Mission in Kosovo (UNMIK), of an Emergency Farm Reconstruction Project. The proposed project, for an approximate amount of US$ 25 Million, has two phases. It is aimed at helping to restart agricultural production over the next two cropping seasons and to improve the rural economy through investment into key farm assets (cattle and farm mechanization) and key agricultural services (veterinary services and policy analysis capacity building). Annex I hereto summarizes the proposed project's objectives and components.

2. As a condition for proceeding with the project, the World Bank has required that the FAO External Auditor undertake a special audit of the proposed project, in accordance with the terms of reference set out in Annex II hereto.

3. The request by the World Bank was considered by the concerned services of FAO. While FAO had no objection of principle to the request made, it appeared that the Organization could not, under the terms of its Financial Regulations, directly ask the External Auditor to carry out a special audit of the envisaged project. Under Financial Regulation 12.6, only the Finance Committee may request the External Auditor "to perform certain specific examinations and issue separate reports on the results". The Finance Committee may also, under Financial Regulation 12.3, give any special directions to the External Auditor regarding a particular audit.

4. On 10 February 2000, the Assistant Director-General (Administration and Finance) wrote to the Chairman of the Finance Committee asking him to request the Finance Committee, at its Ninety-fourth session, to ask the External Auditor, under the terms of Financial Regulation 12.6, to perform the special audit in accordance with the terms of reference as set out in Annex II hereto. Any costs arising therefrom would, of course, be covered by the Emergency Farm Reconstruction Project.

5. The Chairman of the Finance Committee, Ambassador Aziz Mekouar of Morocco, replied to the Assistant Director-General (Administration and Finance) on 1 March 2000. In his letter, the Chairman of the Finance Committee asked that the Director-General insert the issue in the provisional agenda for the Ninety-fourth Session of the Finance Committee.

6. The External Auditor, which was informed of the proposed audit, indicated informally that it would have no difficulties in conducting the proposed examination of the accounts of the Emergency Farm Reconstruction Project, should it receive a request to that effect by the Finance Committee.

II. SUGGESTED ACTION BY THE COMMITTEE

7. The Finance Committee is invited to review the present document, including its annexes, and, in line with the provisions of Financial Regulation 12.6, request the External Auditor to perform a special audit of the Emergency Farm Reconstruction Project in accordance with the terms of reference as set out in Annex II to the present document. All costs arising from the special audit will be covered the Emergency Farm Reconstruction Project.

 


ANNEX I

KOSOVO - AGRICULTURE

November 16. 1999

 Province of Kosovo (FY of Yugoslavia)
Proposed Emergency Farm Reconstruction Project

 

Project Objectives:

        The project aims to help jumpstart agricultural production over the next two cropping seasons and to re-launche the rural economy by investing into key farm assets (cattle and farm mechanisation) and key agricultural services (veterinary services and policy analysis capacity building). In doing so the project would contribute to preventing economic stagnation; provide on-farm employment, income and food security to rural households of which many are not in a position to rebuild their livelihood without external assistance; limit rural migration and the development of urban slums; and reduce the dependency on food aid. Time is of the essence in reaching project objectives.

Project Components:

1) Support to Re-establishing the National Cattle Herd. To assist in the restoration of food security of vulnerable farm families and in the rebuilding of the national cattle herd, the project would finance the purchase of around 3,500 heads of imported cattle (this compares to a cattle loss of some 200.000 animals). Within 5 to 8 municipalities with a high incidence of agriculture damages, animals would be distributed to families within who have lost all their cattle during the conflict and have experience in caring for them. Recipient farm families would be provided with after-delivery services (veterinary services, feed concentrate, artificial insemination) to ensure proper care of animals.

2) Farm Machinery Repair and Replacement. Roughly 50% of tractors have been lost or damaged throughout the province. Under the project, repairs of all lightly damaged tractors (some estimated 6.000), motorcultivators and combine harvesters would be carried out initially in 5 to 8 municipalities. Subject to funding, this program would be expanded to further areas within the province. In villages where critical tractor deficits persist (taking into account potential repairs), some 450 new tractors would be provided, as would critical farm implements (ploughs, harrows etc.) to ensure land cultivation.

3) Veterinary Services. To rapidly restore vital animal health services in the province, the project would provide basic kits of veterinary equipment to de facto private veterinarians throughout the province. On the side of public veterinary services, the project would also equip a Central Diagnostic Laboratory and rehabilitate some five regional public animal health centers. The project would also provide equipment to support artificial insemination.

4) Capacity Building Support. To support UNMIK in analyzing and formulating a broad range of agriculture policy issues, the project would provide international and national expertise to work within the UNMIK structures. This would also include training to Kosovar professionals. It would also include establishing key capacities in collecting and maintaining agriculture statistics and databases.

Project Costs and Financing:

        Project costs are estimated in the order of US$25 million to allow for implementation in 5 to 8 municipalities most highly affected by the recent conflict (the veterinary services component would be implemented province-wide, while the capacity support would be focused at the level of UNMIK HQ). The World Bank is considering to provide a grant of US$5.0 million in support of this operation. The grant provided by the World Bank would finance the full costs of (a) the veterinary component; (b) capacity building component; and (c) project implementation arrangements. The Bank grant would also finance a small share of the activities associated with the implementation of the cattle replacement and the farm mechanization component. The project will require considerable donor co-financing in the order of US$20.0 million to fund the envisaged cattle restocking (funding gap of US$7.0 million) and the farm mechanization (funding gap of US$13.0 million) activities at a meaningful level of Kosovo. Donor support is also required to finalize project preparation.

Project Implementation Arrangements:

1) Beneficiary Selection. A participatory beneficiary selection methodology aiming at minimizing errors of inclusion and exclusion of beneficiaries will be an important feature of this project. The process will involve selection of municipalities, villages, and farm families. Distribution of cattle would largely be based on food security and vulnerability criteria; while for new farm mechanization, distribution would be geared towards technical and agriculture production criteria. Local and international NGO currently active in agriculture relief operations will be involved in carrying out the beneficiary selection process.

2) Project Implementation. The World Bank is considering to entrust overall implementation of this operation to FAO’s Emergency Coordination Unit (FAO - ECU) in Prishtina on the basis of procedures fully satisfactory to the World Bank, including (but not limited to) procurement, financial management and disbursements. The Bank is currently exploring with FAO the possibilities of such implementation arrangements. A number of international NGOs currently active in agriculture in the province have been contacted by the Bank and would also play an important role in implementation, farm advisory services and project M&E.

        The Food and Agriculture Organization of the UN (FAO) has been quick to launch activities in Kosovo since June this year. Implementing this project through the FAO - ECU is likely to ensure efficient coordination between the various agriculture relief and reconstruction initiatives being undertaken. This approach would also assist UNMIK in effectively addressing agriculture reconstruction in the province. A joint World Bank - FAO implementation of activities is also likely to provide donors with a coherent framework in which to support re-launching of the agriculture sector in Kosovo.

Further Information:

For further information on this project, please contact:

Mr. Severin Kodderitzsch
The World Bank, 1818 H-Street N.W. Washington, DC 20433
Telephone: 1-202-458.2164
Fax: 1-202-614.06.98
Email:  skodderitzsch@worldbank.org

Note: This is information on an evolving project. Certain components or implementation arrangements may not necessarily be included in the final project.

 


ANNEX II

Draft Terms of Reference for Project Audit
for the purposes of Section 4(b)i of the Grant Agreement

OBJECTIVE

1. The objective of the audit of the Project Financial Statement (PFS) is to enable the auditor to express a professional opinion on the financial position of the Kosovo Emergency Farm Reconstruction Project (the project) and of the funds received and expenditures for the accounting period starting from the commencement of the project and ending on December 31, 2000, as reported by the PFS, as well as an opinion on the project's Statements of Expenditures (SOEs).

2. The project accounts (books of account) provide the basis for preparation of the PFS and are established to reflect the financial transactions in respect of the project, as maintained by the Project Management Team (PMT) of the Food and Agriculture Organization (FAO).

SCOPE

3. The audit will be carried out in accordance with International Standards of Auditing, and will include such tests and controls, as the auditor considers necessary under the circumstances. In conducting the audit, special attention should be paid to the following:

(f)     The project accounts have been prepared in accordance with consistently applied International Accounting Standards and give a true and fair view of the financial situation of the project at December 31, 2000 and of resources and expenditures for the year ended on that date.

PROJECT FINANCIAL STATEMENTS

4. The Project Financial Statements should include:

(a) a Summary of Sources & Uses of Funds showing the sources of IDA and counterpart funds separately and the uses of funds by disbursement category, both for the current fiscal year and accumulated to date; and

(b)     a Statement of Uses of Funds by Project Activity showing expenditures of the project under each of the main project component and sub-component headings, both for the current fiscal year and accumulated to date.

5. As an annex to the Project Financial Statements, the auditor should prepare a reconciliation between the amounts shown as received by the project from IDA and that confirmed as being disbursed by IDA. As part of that reconciliation, the auditor should indicate the mechanism for the disbursement e.g. SOEs, direct reimbursement, or direct expenditures.

STATEMENTS OF EXPENDITURES (SOEs)

6. In addition to the audit of the PFS, the auditor is required to audit all SOEs used as the basis for the submission of withdrawal applications. The auditor should apply such tests and controls, as the auditor considers necessary under the circumstances. These expenditures should be carefully compared for project eligibility with the relevant financing agreements and with reference to the Project Appraisal Document for guidance when considered necessary. Where ineligible expenditures are identified as having been included in withdrawal applications and reimbursed against, these should be separately noted by the auditor. Annexed to the Project Financial Statements should be a schedule listing individual SOE withdrawal applications by specific reference number and amount. The total withdrawals under the SOE procedure should be part of the overall reconciliation of IDA disbursements described above.

AUDIT OPINION

7. Besides a primary opinion on the Project Financial Statements, the annual audit report of the Project Accounts should include a separate paragraph commenting on the accuracy and propriety of expenditures withdrawn under SOE procedures and the extent to which the IDA can rely on SOEs as a basis for loan disbursement. The financial statements, including the audit report, should be received by the government of Kosovo no later than June 30, 2001. The auditor should submit the report to the designated agent of the government of Kosovo rather than to any staff member of the PMT. The agent should then promptly forward two copies of the audited accounts and report to IDA.

MANAGEMENT LETTER

8. In addition to the audit report, the auditor will prepare a "management letter", in which the auditor will:

(a)     give comments and observations on the accounting records, systems, and controls that were examined during the course of the audit;

(b)     identify specific deficiencies and areas of weakness in systems and controls and make recommendations for their improvement;

(c)     report on the degree of compliance of each of the financial covenants on the financing agreement and give comments, if any, on the internal and external matters affecting such compliance;

(d)     communicate matters that have come to attention during the audit which might have a significant impact on the implementation of the project; and

(e)     bring to the attention of the government of Kosovo and IDA any other matters that the auditors consider pertinent.

GENERAL

9. The auditor should be given access to all legal documents, correspondence, and any other information associated with the project and deemed necessary by the auditor. Confirmation should also be obtained of amounts disbursed and outstanding at IDA. The IDA Task Team Leader can assist in obtaining these confirmations..

10. It is highly desirable that the auditor becomes familiar with the Financial Accounting Reporting and Auditing Handbook and the Guidelines of Financial Reporting and Auditing of Projects Financed by the World Bank as well as with the Loan Administration Change Initiative (LACI) Implementation Handbook, Project Financial Management Manual and any other relevant handbooks and/or updates, which summarize IDA's financial reporting and auditing requirements. The auditor should also be familiar with IDA's Disbursement Handbook and the Project Appraisal Document. These documents can be provided by the IDA Task Team Leader.

11. This terms of reference will remain effective for future years unless it is terminated, amended or superseded.