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p. 57 of 203 BACK | NEXT Foreword 1. Introduction to the Guidelines 2. User Instructions 3. Preparing and Appraising Investment Project 4. Financial Management of Executing Agencies 4.1. Financial Management Overview 4.2. Institutions and Systems 4.2.1. Introduction to Institutions and Systems 4.2.2. Major Institutional Assessments 4.2.3. Governance 4.2.4. Financial Management and Governance Arrangement 4.2.5. Country Diagnostic Studies of Accounting and Auditing 4.2.6. Executing Agencies 4.2.7. Project Objectives 4.2.8. Revenue-Earning Projects 4.2.9. Non-Revenue-Earning Projects 4.3. Financial Analysis 4.4. Measuring Performance 5. Reporting and Auditing 6. Financial Institutions 7. Knowledge Management

Financial Management and Analysis of Projects : 4. Financial Management of Executing Agencies : 4.2. Institutions and Systems

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4.2.6. Executing Agencies

4.2.6.1. Introduction

4.2.6.1.1. ADB categorizes EAs as forms of organization that may undertake any combination of the following activities in the public and private sectors: (i) design of a project; (ii) implementation of a project; or (iii) operation of a project.

4.2.6.1.2. An efficient EA is critical to the success of implementing and, in many cases, operating a project. Therefore, it is essential that the management of an EA and its superior management (for example, a ministry or government department), be fully informed of ADB's objectives and requirements for project implementation and operation.

4.2.6.1.3. Equally important, ADB staff are required to ensure that the objectives, polices, strategies, and management of an EA are completely aligned with ADB's policies and strategies for a project before recommending its processing to loan negotiations.

4.2.6.1.4. EAs are broadly classified into the following three types:

• public sector agencies, which include country/government technical line agencies and state/provincial arms of such technical agencies, and local governments;
• statutory bodies, public sector enterprises, or government-owned bodies such as agricultural and industrial credit banks, fertilizer corporations, and the like; and
• private sector organizations like commercial banks; public utilities; oil, gas and minerals companies; telecommunications; farmers' entities and associations; etc.

4.2.6.1.5. EAs are also classified as revenue-earning and nonrevenue-earning. The term revenue-earning encompasses EAs and projects to be implemented and/or operated by it, which are commercially oriented enterprises whether in the private or public sector. Revenue-earning would also cover public sector institutions, which generate substantial revenues either by consumer charges, or forms of sector-specific local taxation (property tax-based levies for water supplies, drainage, etc.), or both. Examples are public sector enterprises, commercial and industrial enterprises, public utilities, telecommunications, industrial and agricultural credit banks, parastatal, and municipal government utility operations.

4.2.6.1.6. Nonrevenue-earning projects are usually implemented and operated by public sector EAs whose financial support derives predominantly from central, provincial, state, and/or local government budget allocations, and for whom there may be no cost or only partial cost recovery, often accomplished indirectly.

4.2.6.1.7. Nonrevenue-earning EAs include the above forms of governments' ministries and departments, and project EAs under their control in such sectors as poverty alleviation, agriculture, education, highways, population, and health. An EA may have a tiered management in the form of a Project Management Unit (PMU), with the latter having one or more Project Implementing Units (PIUs). In such cases, the EA is responsible to the borrower and ADB for the successful implementation of the project, including delivery of all financial reports and auditors' reports and opinions in accordance with agreed timetables.

4.2.6.1.8. A principal concern of ADB is the efficiency of the financial management and accounting systems of EAs, as an integral part of project preparation, appraisal and implementation, and supervision. This concern is extended to the efficient operation of the elements of the government agency charged with project implementation, even in cases where project objectives initially do not include the improvement of the agency's financial and/or management performance.

4.2.6.1.9. Some projects may have as the sole or primary objective the improvement of the operation of a government ministry (for example, a Ministry of Finance), a department or an agency, or of a segment of the economy, such as the capital markets. Such projects are normally classified as nonrevenue-earning, even though the reforms may impact significantly on revenue-earning performance of the economy.

4.2.6.1.10. Enterprises (as compared with nonrevenue-earning EAs), as project implementing and operating agencies, combine the two roles above, and embrace all the objectives, normally with better opportunities as implementation proceeds.

4.2.6.2. Determining the Status and Roles of EAs

4.2.6.2.1. An EA is likely to be subject to regulation by laws, regulations and rules that are administered by superior authorities, typically ministries or departments.

4.2.6.2.2. Departments in particular, that have forms of control over EAs, may themselves be agencies of state or provincial governments that also are the subjects of superior central administrations.

4.2.6.2.3. Therefore, extent of an EA&'s autonomy and/or control by superior authorities at all levels of a national government&'s hierarchy should be established. This in order to determine its authority and ability to formulate and implement financial policy, and to design and install financial management systems, (and thereby indirectly to determine how much time may be needed for making changes).

4.2.6.2.4. To resolve these concerns, answers should be sought to the following questions:

4.2.6.2.5. It is possible that an EA may not have a definitive view of related governance, particularly the actual superior levels of control. In such circumstances, it may be prudent to seek the advice of the government auditor.

4.2.6.2.6. Government auditors are often well informed on national legislation and of the powers and duties of the agencies for which they have the responsibility for auditing.

4.2.6.3. Appraising an Executing Agency

Introduction

4.2.6.3.1. This section covers the following areas:

• Overall Objectives,
• Appraisal Methodology,
• Designing the Institution Development Proposal,
• Costing of the Institutional Strengthening,
• Implementation Strategies, and
• Risks

Overall Objectives

4.2.6.3.2. The overall objective of appraising an EA is for ADB to satisfy itself that the concerned agency does in fact have the technical, managerial, and financial capacity to implement the proposed project or program efficiently and effectively. An appraisal's specific objectives, from the financial management perspective, are to:

• Develop criteria on which to decide whether to postpone loan approval until financial management arrangements are strengthened appropriately.
• Assist in identifying the institution's specific development needs (in terms of financial management), both project related as well as long term, that are to be addressed either as a project component or as an independent TA.
• Assist in arriving at appropriate project organization management and coordination arrangements, with regards to financial management and reporting.

4.2.6.3.3. The appraisal of EAs for purposes of project planning should take place during project feasibility studies. For longer term and more comprehensive institutional strengthening, the appraisal should preferably be part of periodic sector reviews normally undertaken by ADB or a discrete and independent exercise by itself undertaken at the request of the concerned agency/government. Include specific TOR for consultants for the appraisal of the concerned EAs during project feasibility studies for project-related purposes or during sector reviews for any independent assistance planned for institutional strengthening. Consultants should be from the specializations of institutional development and the technical expertise related to the operations of the agency concerned.

Appraisal Methodology

4.2.6.3.4. An agency's capacity to achieve results mainly depends on: (i) its structural and managerial ability to effectively and efficiently employ its resources; and (ii) the extent of resources mobilized in the form of financial budgets, the number and quality of staff, and the extent and type of materials and equipment. In relation to financial management, the appraisal and assessment of EAs should comprise the following four steps:

4.2.6.3.5. Step 1: Analyze the EA's Structural and Management Framework:

• Examine the organization's structure with regards financial management. This will include an analysis of how functions are distributed and distinguished, how roles, responsibilities, and authorities are delineated and apportioned both vertically and horizontally, what are the key lines of command etc. Also included should be an analysis of links with collaborating agencies also operating in the sector concerned.
• Examine the agency's main administrative and management systems and procedures, in relation to financial management. These should include operational planning and programming systems, financial management and budgetary processes, management information and monitoring systems.

4.2.6.3.6. Step 2: Assess Institutional Resources (Inputs)

• Assess the number, qualifications and experience of financial management staff at all key levels.
• Assess for all relevant periods, the extent of financial support available in terms of investment budgets and operating budgets. These should be described by major items, as well as by allocations made to various operational units, both functional as well as geographical.
• Assess the adequacy of agency accounting information systems.

4.2.6.3.7. Step 3: Assess Institutional Results (Outputs)

• Develop agency consolidated financial statements (against budgets) for each functional area, for relevant operating periods, and for geographical agency units (if these exist).
• Also develop consolidated financial statements for past operating periods (including growth trends, if possible) and compare these against similar agencies (comparator agencies may be similar agencies in other countries where the sociopolitical environment, the cultural context, the geographical dimensions of operation are similar).
• Identify financial performance shortfalls or variances by comparing current performance with targeted performance, past performance-growth trends and, if feasible, with the performance of comparator organizations.

4.2.6.3.8. Step 4: Analyze Performance Shortfalls

• Develop a diagnostic analysis of linkages between identified financial performance shortfalls/variances and deficiencies in the agency's resource availability and management framework. This should be done in collaboration with the agency's top management. These analytical findings should be agreed with the agency's management.
• Together with the agency's management, develop alternative institution-building interventions, with regards to financial management arrangements. These should be prioritized and based on an alternatives-analysis, using criteria such as cost, envisioned scope of impact, degree of risk, ease of implementation, etc.

Design the Institution Development Proposal

4.2.6.3.9. Types of Institution Development Interventions, with regards to financial management:

• When planning and designing institution development proposals (based upon project preparation), staff should keep in mind that institutional strengthening can be targeted at resource enhancement or management upgrading or both, depending on the needs identified. As a general rule, resource enhancement should be resorted to first, if this option is available, since this can be achieved more easily and quickly.
• The caveat, however, is that resource enhancement is normally only a short-term solution to institutional deficiencies and should preferably be supported by more basic institutional changes or upgrading. Changes in or upgrading of policies, strategies, structures, administrative and management systems, etc. are far more difficult to achieve, require strong institutional support and commitment, and consequently a more extended time frame. On the other hand, they have a more lasting and permanent impact on institutional efficiency and effectiveness.

4.2.6.3.10. A general checklist of the types of institutional strengthening that may be focused upon in an institution-building proposal is given below.

• Resource Enhancement
  
  

  -	Staffing: enhance staff availability; reallocate staff resources; upgrade staff skills (training);
  -	Budgets: enhance operating budgets; reallocate funds by item; and
  -	Technology: enhance availability of equipment and materials; improve quality of equipment; introduce new types of software.




• Management Upgrading
  
  

  -	Policies and Strategies: review, revise, change priorities, adjust funding allocations, adjust strategic emphasis, build research and analytic capability, enhance "market" or "sector" information system, etc.;
  -	Organization Structure: change and reassign roles and responsibilities change lines of authority, revise position descriptions and position hierarchies, establish task groups, create coordination mechanisms, strengthen linkages with collaborating agencies, etc.;
  -	Administrative and Management Systems and Procedures: revise, upgrade, simplify, reorient basic systems and procedures such as: planning and programming, financial management, operations monitoring, information feedback, personnel management and compensation, incentive systems, etc.; and
  -	Leadership Style: revise methods of communication, methods of involving staff at all levels, build openness and willingness to innovate, etc.

Costing Institutional Strengthening

4.2.6.3.11. If part of a project, the institution strengthening measures should preferably be consolidated into a discrete component to facilitate project administration. The costs relating to such a component would usually include (i) consultant services; (ii) civil works (e.g., training center), equipment, (iii) training expenses and (iv) administration overheads (e.g., for the training center). Some of these costs could be recurrent costs that will continue to be incurred even after project/TA completion.

4.2.6.3.12. In such a case careful consideration should be given to whether ADB should fund such costs during project/TA implementation: if so, to what extent; and does the government have the capacity to meet such recurrent costs after project/TA completion. Given ADB's tight TA budget, the availability of cofinancing or funding from other donors should be examined.

Implementation Strategies

4.2.6.3.13. Implementation strategies will necessarily depend on the type of institution development interventions planned. However, staff should bear in mind the following when planning and scheduling the implementation of institution development interventions with the agency concerned.

• Institutional strengthening measures, especially those which relate to the upgrading of the management framework, have to be implemented in a gradual and phased manner. Like a person, an institution takes time to learn, adopt, and adjust to new and revised forms of behavior.
• Experience has indicated that it is very useful to make use of implementation workshops. These are carefully structured discussion sessions of small groups of concerned institutional staff held periodically. Their primary objectives would be as follows: (i) creating awareness and recognition of the need to change, revise and upgrade; and developing the commitment to do something about it; (ii) action planning to ensure the active involvement of all concerned and to facilitate briefing of what is required; and (iii) reviewing implementation to assess progress and impact, and to accordingly adjust the direction, focus, schedule, etc., of the institutional strengthening program.

Risks

4.2.6.3.14. Some of the major risks that should be taken into account when planning institutional strengthening measures (in relation to financial management arrangements) are as follows:

• In the case of resource enhancement, do not create dependency.
• In the case of management upgrading, do not create disorientation by introducing too many changes too quickly.
• Do not overlap or conflict with already ongoing institutional strengthening initiatives.

4.2.6.3.15. Institutional strengthening programs should also always be proposed and undertaken by ADB with caution, care, and a great deal of responsibility. This is because the longer-term risk potential with institution-building programs is usually greater than those related to the transfer of capital and investments. Furthermore, these types of program can create dependency or result in the transfer of inappropriate technology.

4.2.6.3.16. If not done in a circumspect and phased manner, attempts to revise or upgrade the management framework can create serious institutional disorientation, especially if prior commitment at all levels has not been ensured for the changes being implemented.

4.2.6.3.17. External financing agencies tend to view "their" project as the most critical. Consequently, institution-building activities can be implemented in a parallel rather than a complementary manner. This usually confuses, rather than assists, the institution concerned. In the longer term, the results of a misguided institution-building program can consequently be quite the opposite than what was originally envisaged. It is therefore always necessary and essential to proceed cautiously and with an action-learning format that is structured to include phasing, review, and consequent program readjustments in an ongoing cyclical process.

4.2.6.3.18. The extent of an appraisal will depend upon the extent and type of dealings ADB has with the EAs concerned, the experience of the EA in implementing projects and the extent and scope of institutional strengthening previously undertaken by ADB or other external financing agencies.

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