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Financial Management and Analysis of Projects :
4. Financial Management of Executing Agencies
4.2. Institutions and Systems
4.2.1. Introduction to Institutions and Systems
4.2.1.1.
The Operations Manual G2 sets out ADB policy with respect to the
need for the examination of the EA's financial management
systems at project preparation and appraisal. This is to form an
assessment of the financial policies and the capacity of the financial
management systems practiced or proposed by the borrower or EA to
support project implementation and operation.
4.2.1.2. The EAs should be capable
of providing correct and timely information on the progress of project
implementation and, where appropriate, on its operation. ADB has
also to be assured that the expenditures incurred on a project will,
in fact, be used for the purposes stated in the loan agreement.
4.2.1.3. The identification, preparation,
and appraisal activities to be undertaken by a financial analyst
prior to loan negotiations should be adequate to comply with the
requirements of OM G2. Identification and preparation of an investment
project require a financial analyst to obtain a detailed knowledge
of the institutions and systems that are, or will be used, for implementation
and, where appropriate, future operation. This task includes, among
other things, acquiring the knowledge and ability to determine at,
or before, appraisal and preparation of the RRP, whether the financial
management system(s) proposed by the borrower and the EA will be
sustainable from project start-up, through implementation and, where
appropriate, for the operation of the project.
4.2.1.4. The financial analyst should
make recommendations to the borrower and ADB on the minimum changes
to be made in financial governance, including financial management,
considered necessary to assure efficient and effective delivery
of the proposed project from start-up. The financial analyst should
define to the EA and ADB those elements of a financial management
system that either should be put in place before start-up, or within
a defined time after start-up. This is to enable the financial management
system to operate at full efficiency. The elements identified may
constitute components that are to be financed as part of the project,
and completed in accordance with a timetable acceptable to ADB.
4.2.1.5. The financial analyst should
advise ADB in all cases where, in their judgment, the level of financial
governance proposed by the EA would be inadequate to sustain the
proposed project or the financial viability of the entity, especially
if no defined modifications are to be set in place either before
start-up or within a reasonable period of time following start-up.
4.2.1.6. The objectives of preparing
and appraising institutions and systems are as follows: (i) to assess
the institution's capacities in regard to project implementation
(in the case of project preparation) or in regard to performing
its sectoral role (in the case of sector reviews); (ii) to understand
the role and significance of an institution within the overall political,
executive, and institutional/systems environment, including its
likely capability and capacity to influence decisions that will
be beneficial to its project implementation; (iii) to ensure that
the proposed project is likely to be acceptable at the highest decision-making
(including political) levels; (iv) to ensure that it will be tailored
to the technical and managerial capacities of the agencies; (v)
to identify the specific institutional deficiencies regarding financial
management that should be addressed prior to appraisal; (vi) to
develop specific institutional strengthening measures with regards
financial management; and (vii) to define to the EA the appropriate
project management, implementation and, where appropriate, operational
arrangements for the project.
4.2.1.7. The extent of a financial
appraisal will depend upon the extent and type of dealings ADB has
with the concerned EA, the EA's experience in implementing
projects, and the extent and nature of previous institutional strengthening.
An appraisal's scope, pertaining to financial management activities,
should include: (i) analyzing the EAs' structure and management
framework with regards financial management; (ii) assessing the
agency's resources, including the number, quality, and technical
capabilities of its staff, the extent of financial and budgetary
support it obtains, the nature of technology, equipment, software
in use; (iii) assessing the agency's operating results (preferably
for a 5-year period) and identifying specific performance shortfalls
or variances. After this, a diagnosis of performance shortfalls
should be undertaken to identify specific institutional deficiencies
and related institutional strengthening interventions. The institutional
deficiencies should be classified into those pertaining to the management
framework and those due to resource constraints.
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